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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, 1998
                                       OR
       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-----
       EXCHANGE ACT OF 1934
       For the transition period from          to
       Commission file number 2-22791

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

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

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

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

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

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

      Indicate by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.
                                                   X
                                                  ---         ---
                                                  Yes         No

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

      State the  aggregate  market  value of the  voting and  non-voting  common
equity held by non-affiliates of the registrant as of August 21, 1998.

               Membership Common Stock, $25 Par Value - $2,554,000

      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 21, 1998
       -------                                    ------------------------------
Membership Common Stock, $25 Par Value                     102,160 Shares

     PAGE 1 OF 143. EXHIBIT INDEX APPEARS ON SEQUENTIALLY NUMBERED PAGE 67.
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<PAGE>



                         FORM 10-K ANNUAL REPORT - 1998
                    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
                     Lease Financing...........................................................................   6
                     Insurance.................................................................................   6
                     Competition...............................................................................   7
                     Human Resources...........................................................................   8
                     Administrative............................................................................   8
                     Regulation................................................................................   8
                     Stockholder Membership and Control of Agway...............................................   9
                     Patronage Refunds.........................................................................  10
                     Retained Margin...........................................................................  10
Item 3.          Legal Proceedings.............................................................................  10
Item 4.          Submission of Matters to a Vote of Security Holders...........................................  11

                                                      PART II

Item 5.          Market for the Registrant's Common Equity and Related Stockholder Matters.....................  12
Item 6.          Selected Financial Data.......................................................................  12
Item 7.          Management's Discussion and Analysis of Financial Condition and Results of Operations.........  13
Item 7a.         Quantitative and Qualitative Disclosures about Market Risk......................................26
Item 8.          Financial Statements and Supplementary Data...................................................  28
Item 9.          Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........  28

                                                     PART III

Item 10.         Directors and Executive Officers of the Registrant............................................  60
Item 11.         Executive Compensation........................................................................  63
Item 12.         Security Ownership of Certain Beneficial Owners and Management................................  66
Item 13.         Certain Relationships and Related Transactions................................................  66

                                                      PART IV

Item 14.         Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................  67

                 Signatures....................................................................................  77

</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
guaranteed by Agway.  This  guarantee is full and  unconditional,  and joint and
several.

In an exemptive  relief  granted  pursuant to a "no action letter" issued by the
staff of the Securities and Exchange Commission,  AFC, as a separate company, is
not required to file periodic  reports but does report  summarized AFC financial
information in the Company's financial statement footnotes.

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

AGRICULTURE

Agway Agricultural Products

Agway  Agricultural  Products  (AAP) is  comprised  of six  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 15 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.

Agronomic  Needs:  AAP  operates  110  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., a  cooperative  of which Agway is a member
eligible for patronage refunds. AAP has a significant  investment as a result of
receiving part of its patronage refund in stock.

                                        3

<PAGE>



Items 1 and 2.  Business and Properties - Continued
(Thousands of Dollars)


Agway Agricultural Products (continued)

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,  65 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 scope of research has been expanded while
reducing net  expenditures.  The research  that had been  conducted at the Agway
Research Farm in conjunction with eleven other  cooperatives  through membership
in the  Cooperative  Research  Farms  (CRF) was moved  during 1998 to a facility
owned by another  member.  All  research at the  Agway-owned  facility  has been
concluded,  and the  facility  will be sold.  This change has moved the focus on
research to the six  geographically-based  enterprise units, where various forms
of  research  are  being  conducted  in  conjunction  with  universities,  other
suppliers, and farmers. During the years ended June 30, 1998, 1997 and 1996, net
expenditures  of $400,  $700 and $600,  respectively,  were made on agricultural
research activities by the Company as a whole.

Country Products Group

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

The produce operations operated eight distribution  facilities during 1998. They
are located in DeWitt, Elba, and Chittenango,  New York; Winder and Forest Park,
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 grocery store and food service  outlets.  During 1997,  the
operations  previously handled by the Canastota and Chittenango  facilities were
consolidated to a new building in DeWitt,  New York. The Canastota  property was
sold in July 1997, and the Chittenango  property  continues limited  operations.
Country  Best  Adams,  LLC,  was  created  in 1998 and is 80%  owned by CPG.  It
operates in a newly constructed building in Winder, Georgia, and leases space at
the Atlanta Market in Forest Park,  Georgia. A truck brokerage office is located
in  Presque  Isle,  Maine,  as well as a seed and  tablestock  potato  marketing
office.

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.  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  1998,  a  major  expansion  of  the  sunflower  facility  was
completed. A pastry flour mill is located in Churchville, New York.

A  multi-walled  bag printing and  manufacturing  plant,  located in Wapakoneta,
Ohio,  supplies bags used by internal  Agway  customers and external  customers,
including  Pro-Pet,  LLC, a pet food  manufacturer in which Agway has a minority
interest  and  through  whom Agway  Retail  sources its  Agway-branded  pet food
products.

The  seed  operation  produces,  conditions,  and  markets  forage  seed.  These
facilities  are located in Nampa,  Idaho,  and a new leased  facility in Powell,
Wyoming.

                                        4

<PAGE>



Items 1 and 2.  Business and Properties - Continued
(Thousands of Dollars)


Country Products Group (continued)

During 1998,  CPG formed a new food  technology  group which  invests in various
food technologies such as the preservation of fruits and vegetables.

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,  LLC,  of which  Agway  maintained  an
ownership share, and continued to source substantially all of its pet food needs
from Pro-Pet, LLC. 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 178
Company-owned stores and 313 franchised  representative stores located in all of
Agway's  primary  states except Ohio. Of the  Agway-owned  stores,  although all
carry farm supplies,  113 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 65 Agway-  owned stores have a  significantly  heavier
emphasis on farm supplies and 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. ARS has
a long-term logistics agreement with Ryder Integrated  Logistics (RIL) to manage
its distribution of products,  which includes two distribution centers,  located
in Elizabethtown, Pennsylvania, and Westfield, Massachusetts.

During the past two years,  ARS has been executing a business plan that includes
upgrading or relocating existing store locations, store expansion, acquisitions,
construction of new store locations,  and improving merchandising and marketing.
Additionally,  ARS exited the power  equipment  lines in most  locations and has
completely exited the frozen food product line.

In 1998,  Retail initiated a reorganization  of the structure of its business to
support a strategy designed to better serve the needs of customers through three
distinct   distribution   channels:   direct,   wholesale,   and  retail.   This
reorganization  takes  effect in fiscal 1999 and allows each channel to focus on
the needs of their  particular  customer.  The direct channel focuses on serving
farmers by  shipping  basic farm  supplies  in bulk  directly  to the farm.  The
wholesale  channel serves  independent  dealers through a wholesale sales force.
The  retail  channel  serves   consumers   through   company-owned   stores  and
franchisees.  Finally,  ARS has  completed  the  development  of a new franchise
program which will be fully  implemented  in 1999 and is  anticipated  to gain a
consistent  representation of the Agway brand throughout the entire retail store
system.





                                        5

<PAGE>



Items 1 and 2.  Business and Properties - Continued
(Thousands of Dollars)


ENERGY

Energy is Agway Energy Products LLC (AEP), a Delaware limited  liability company
wholly owned by AHI. Agway Petroleum  Corporation,  a former New York subsidiary
of AHI,  merged into the newly formed AEP on July 1, 1998. AEP is a full service
energy company providing energy products and services to residential,  farm, and
business  customers.  AEP manages a portfolio of businesses in distinct regional
geographic  markets.  These geographic regions exist in New York,  Pennsylvania,
New Jersey,  and Vermont.  The  businesses  AEP is engaged in are oil  delivery;
propane  delivery;  heating,  ventilating and air conditioning  (HVAC) equipment
installation  and services;  natural gas and electricity  marketing;  power fuel
delivery;  and retail  stations.  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  1998,  AEP owned and  operated 7  terminals  with  storage  capacity  of
approximately   2.3  million   barrels  of  product.   AEP  operates  96  retail
distribution  centers,  located  throughout  its operating  territory.  AEP also
distributes   petroleum  products  through  approximately  80  distributors  and
resellers.  Facilities are sufficient to meet the current operating requirements
of the business.  In March 1997, AEP began marketing  natural gas to residential
and small commercial  customers in New York through a sister  subsidiary,  Agway
Energy Services LLC (a wholly owned subsidiary of AHI).

LEASE FINANCING

Telmark LLC (Telmark), a Delaware limited liability company wholly owned by AHI,
and its consolidated subsidiaries finance equipment,  buildings, and vehicles to
farmers and other  customers in rural  communities.  Telmark  Inc., a former New
York  subsidiary of AHI,  merged into the newly formed  Telmark on July 1, 1998.
Telmark operates a captive sales force as its primary  distribution system in 29
states in the eastern and midwestern United States.  Telmark transacts  business
in the continental United States and Canada through a separate division, Telease
Financial  Services,  which  generates  business  directly  from farm  equipment
dealers and from brokers.  TFS Limited is a Canadian  corporation which conducts
certain lease transactions with Canadian customers. Telmark Lease Funding I, LLC
was established solely to enable a lease  securitization  financing entered into
during 1997.  Telmark  Lease Funding Corp. I was organized in 1997 as a New York
corporation,  which,  effective  July 1, 1998,  was merged  into  Telmark  Lease
Funding I, LLC, a Delaware limited liability company.

As of June 30, 1998,  Telmark had approximately  $512,700 of leases  outstanding
with persons other than Agway and its subsidiaries, net of unearned interest and
finance charges of approximately  $175,800.  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.  (See Cash Flows from Financing  Activities -
Telmark under  Management's  Discussion and Analysis of Financial  Condition and
Results of  Operations  (Item 7).) 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 1113 and 4102(c),  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.  The Agway General  Agency
(Agency)  markets medical,  long-term care, life and other products  designed by
non-affiliated companies for the agricultural  marketplace.  In addition, Agency
provides  administrative  management  services to Agway business units including
claims, risk, facilities, data processing and payroll/benefits management.


                                        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  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  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  and HVAC service  companies.  The  principal  methods of
competition  are  service,  quality,  and price.  AEP  continues to maintain its
competitive  position in the energy  industry 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 and rural 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  7,000 persons,  2,300 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.

ADMINISTRATIVE

The Company's principal  administrative office is located at 333 Butternut Drive
in DeWitt, New York. It occupies  approximately  180,000 square feet under terms
of a lease with 9 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.

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  $800 in fiscal 1998 on capital  projects.  The Company expects to
incur $600 to complete its compliance  with EPA  Underground  Storage Tank (UST)
regulations  that  become  effective  in  December  1998.  See  Note  12 to  the
consolidated financial statements.


                                        8

<PAGE>



Items 1 and 2.  Business and Properties - Continued
(Thousands of Dollars)


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
75,000 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.

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 15 persons,  all of whom are nominated
on a district  representation  basis by 90 Agway  Geographic  Member  Committees
representing members within the 15 Director Districts. At each annual meeting of
the  Company,  the  stockholders  elect  five  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.

                                        9

<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 feed,  agronomic  products,  and selected  eligible
farm  supplies  to members  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  currently  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 earnings from  non-agricultural divisions  and
      subsidiaries as well as 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 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. In March 1998, the EPA issued a unilateral  administrative order to
the PRPs, including the Company and MTS, for a removal action at the Rosen Site.
The Company and MTS have  notified  the EPA that they will comply with the order
by  cooperating  with the  other  PRPs to  assure  that the  removal  action  is
performed.  The  Company  does not believe  that  adjustments,  if any,  will be
material in relation to the consolidated financial position of Agway.


                                       10

<PAGE>



Item 3.  Legal Proceedings - Continued


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  finalized,  in  April  1998,  its  risk
characterization  and remedial action plan reports and, in July 1998, its remedy
implementation plan report.  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--predecessor to
Agway Energy  Products LLC) 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 revised
waste-in list for the site,  the EPA has attributed  approximately  1.68% 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.

While the Company is not  depending  on  contributions  from  insurance or third
parties in determining its reserves for environmental  clean-up  liability,  the
Company will determine on a site-by-site basis whether such a contribution claim
is warranted.


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, 1998.


                                       11

<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 21, 1998,  is 102,160,  of which 27,428 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  1998  and  1997. (d) Limitations  on  Ownership  and
      Availability of Net Margin to Membership Common Stockholders:
      Refer to Stockholder Membership and Control of Agway and Patronage Refunds
      under Business and Properties (Items 1 and 2).

Item 6.  Selected Financial Data

The  following   Selected   Financial  Data  of  the  Company  and  Consolidated
Subsidiaries has been derived from consolidated  financial statements audited by
PricewaterhouseCoopers LLP, whose report for the years ended June 30, 1998, 1997
and  1996  is  included  elsewhere  in the  Form  10-K,  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
                                -----------------------------------------------------------------------------------
                                    1998              1997              1996             1995              1994
                                ------------      ------------     -------------     ------------     -------------
<S>                             <C>               <C>              <C>               <C>              <C>
Net sales and revenues (1)...   $  1,562,943      $  1,671,714     $   1,663,085     $  1,592,857     $   1,695,129

Margin (loss) from
   continuing operations (2).   $     12,798      $     10,670     $      11,147     $     (7,800)    $         555

Net margin (loss) (2)(3)(4)..   $     41,754      $     10,670     $      12,662     $    (15,730)    $      (3,445)

Total assets (1).............   $  1,418,231      $  1,300,261     $   1,245,891     $  1,225,193     $   1,273,958

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

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

Cash dividends per share
   of common stock ..........   $       1.50      $       1.50     $        1.50     $       1.50     $        1.50
</TABLE>
(1) Certain amounts reported in fiscal years ended June 30, 1994-1997, have been
    reclassified to conform to the current year presentation.
(2) The  1994  data   reflects  a  $6,065  credit  before  taxes  from  business
    restructuring;  1995 data  reflects  a credit  before  taxes  from  business
    restructuring of $3,248; and 1996 data reflects a $1,943 credit before taxes
    from business restructuring.
(3) The  1994  data  reflects  an  after-tax   operating  loss  of  $4,000  from
    discontinued operations;  1995 data reflects an after-tax loss of $12,360 in
    discontinued operations related to Hood and an after-tax gain on the sale of
    Curtice  Burns of $4,430;  and 1996 data  reflects an after-tax  gain on the
    sale of Hood of $1,515, net of operating losses until the time of sale.
(4) Effective  July 1, 1997, the Company  changed its method of determining  the
    market-related  value  of its  plan  assets  under  Statement  of  Financial
    Accounting  Standards (SFAS) No. 87, "Accounting for Pensions." A cumulative
    effect adjustment, net of tax, of $28,956 increased net margin in 1998.

                                       12

<PAGE>



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


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


RESULTS OF OPERATIONS

1998 COMPARED WITH 1997

CONSOLIDATED RESULTS

The Company's net margin of $41,800 for 1998 is a $31,100 (291%) increase from a
net margin of $10,700 in 1997.  The $31,100  increase  includes a net cumulative
effect adjustment for a pension accounting change of $29,000 (see Note 14 to the
consolidated  financial  statements) and a $2,100 (20%) increase from continuing
operations  as compared  to 1997.  The  continuing  operations  margin  increase
represents an $8,600 pre-tax  increase from 1997 offset by a $6,500  increase in
tax expense as compared to 1997.

The net business  unit  pre-tax  operating  results  decreased by $6,400 and are
discussed  below by  business  segment.  Additionally,  net  corporate  expenses
increased  $1,200 as  compared  to the prior  year.  The net  corporate  expense
increase   was   principally   due  to  a  net  $2,000   increase  in  corporate
self-insurance  costs  based  on  liability  claims  outstanding  and  actuarial
estimates of reserve  development.  These declines in pre-tax  operating results
were more than offset by the growth of the net pension  asset  recognized in the
income  statement  during 1998, which was higher by $16,200 as compared to 1997.
Of the  pension-related  increase,  $15,000 was due to the change in  accounting
noted  previously.  It is  anticipated  that,  due to a pension  plan  amendment
effective July 1, 1998 (see Note 14 to the consolidated  financial  statements),
the pension income in future years would be at historical levels.

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

Consolidated  operating expenses of $1,520,300  decreased $122,600 (7%) compared
to  $1,642,900 in 1997.  The decrease is primarily due to the decreased  product
costs and the reduced variable operational costs associated with the lower sales
levels noted above.  These decreases were partially  offset by additional  costs
associated with volume growth in the lease portfolio in 1998.  Selling,  general
and administrative expenses were consistent with the prior year.

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

Income  tax  expense  of  $12,400  and  $5,900 in 1998 and  1997,  respectively,
resulted in effective tax rates of 49.2% and 35.7%,  respectively.  The increase
in the effective rate is mainly  attributable to the change in adjustments  made
in the prior years' tax liabilities  (see Note 9 to the  consolidated  financial
statements).  Tax  expense  associated  with the  cumulative  effect  adjustment
totaled $16,500 and is reflective in the net adjustment amount.

AGRICULTURE

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

                                       13

<PAGE>



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


AGRICULTURE (continued)

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

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

The  Agriculture  segment's  operating  margin  of  $7,600  increased  $4,400 as
compared to $3,200 in 1997.  AAP operating  margin  increased $700 (37%) and CPG
increased $3,700 (71%) in 1998 compared to 1997.

AAP's  operating loss of $1,300 in 1998  represents an improvement of $700 (35%)
from an  operating  loss of $2,000 in 1997.  The reduced loss as compared to the
prior year  resulted  from  improved  operating  margins in Direct  Marketing of
$9,000. The improvement in gross margins is principally due to lower unfavorable
experience with  exchange-traded  futures  ($5,600) and improved  margins in the
seed business ($2,400) as the result of growth in the commercial  vegetable seed
business.  These improved  margins were mostly offset by (1) increased losses in
Enterprise  operations of $4,900 due  principally to reduced margins in feed and
crop sales and (2) increased net support costs of $3,400.  Increased net support
costs are due to reduced  patronage  income  ($5,100),  largely  due to lower CF
Industries Inc. earnings,  offset by a non-recurring charge ($1,500) incurred in
the  first  quarter  last  year  for the  adoption  of a new  accounting  policy
regarding the improvement of long-lived assets.

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

RETAIL

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


                                       14

<PAGE>



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


RETAIL (continued)

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

ENERGY

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

Energy's  operating  margin of $15,200 in 1998  represents  a decrease of $4,300
(22%) from an  operating  margin of $19,500 in 1997.  The lower  sales  dollars,
noted above,  partially  offset by stronger gross margin rates,  reduced overall
gross margin  dollars on all  products by $6,900 as compared to 1997.  Operating
expenses  declined  by $2,000 in 1998 as compared  to 1997.  Total  distribution
costs  were  lower  in part  due to the  decline  in  volume  and in part due to
initiatives to lower its delivery costs of products and to reorganize how Energy
manages the markets it serves.

LEASE FINANCING

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

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




                                       15

<PAGE>



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


INSURANCE

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

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


1997 COMPARED WITH 1996

CONSOLIDATED RESULTS

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

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

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





                                       16

<PAGE>



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


CONSOLIDATED RESULTS (continued)

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

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

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

AGRICULTURE

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

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

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

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

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

                                       17

<PAGE>



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


AGRICULTURE (continued)

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.

RETAIL

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

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

ENERGY

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

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












                                       18

<PAGE>



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


LEASE FINANCING

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

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

INSURANCE

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

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

DISCONTINUED OPERATIONS

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

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

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

The increase in cash flow from operating  activities in 1998 as compared to 1997
is due in part ($9,100) to a lesser demand for cash to fund working  capital and
in part ($10,500) due to increased cash from earnings.  The biggest  contributor
to the  lower  demand  was from a  decline  in  receivables  during  1998  (cash
provided) as compared to increased  receivable  balances in the prior two years.
The  increase  in cash flow from  operations  in 1997  reflects a  substantially
lesser demand for cash to fund working  capital  increases  offset by a somewhat
lower amount of cash generated from earnings as compared to 1996.

                                       19

<PAGE>



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


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

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

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

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

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

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

                                       20

<PAGE>



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


Telmark

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

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

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

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

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

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



                                       21

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

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

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

Impairment of Long-Lived Assets

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


                                       22

<PAGE>



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

Environmental Issues

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

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

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

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

Year 2000

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

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



                                       23

<PAGE>



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


Year 2000 (continued)

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

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

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

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

Agricultural Economy and Other Factors

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


                                       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 (continued)

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

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

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



                                       25

<PAGE>



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

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

Interest Rate Exposure

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

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

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

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

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

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

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

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

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

                                       26

<PAGE>



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


Interest Rate Exposure (continued)

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

Commodity Price Exposure

The Company has exposure to adverse 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 formal  policies  established for this
activity.  These  policies  limit the duration to maturity of contracts  entered
into as well as the level of exposure to be hedged.  Since  November  1997,  the
Company  modified  its  practices  relating  to its  feed  business  so that all
transactions  involving derivative financial  instruments are required to have a
direct  relationship to the price risk  associated with existing  inventories or
future purchase and sales of its products.

Agriculture  commodity  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.  Energy  commodity  instrument  contracts  are entered into as a hedge
against  the price risk  associated  with the  Company's  inventories  or future
purchases and sales of commodities used in the Company's operations.

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,  1998 and 1997,  the  carrying  and fair value of the
Company's  investment in commodities futures and option contracts was $2,200 and
$3,200,  respectively,  and the total  net  deferred  gains  and  losses on open
contracts were immaterial.  At June 30, 1998, the actual open positions of these
instruments and the potential  near-term losses in earnings,  fair value, and/or
cash flows from changes in market rates or prices were not material.



                                       27

<PAGE>



Item 8.  Financial Statements and Supplementary Data


                          INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                                              Pages
                                                                                                              -----
<S>                                                                                                              <C>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES:
      Agway Inc. Report on Financial Statements............................................................      29

      Report of Independent Accountants......................................................................    30

      Consolidated Balance Sheets, June 30, 1998 and 1997....................................................    31

      Consolidated Statements of Operations, fiscal years ended June 30, 1998, 1997 and 1996.................    32

      Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended June 30,
           1998, 1997 and 1996...............................................................................    33

      Consolidated Statements of Cash Flow, fiscal years ended June 30, 1998, 1997 and 1996..................    34

      Notes to Consolidated Financial Statements.............................................................    35

</TABLE>

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

      This item is inapplicable.



                                       28

<PAGE>



                    AGWAY INC. REPORT ON FINANCIAL STATEMENTS


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

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

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

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




                                            AGWAY INC.


                                            /s/ DONALD P.CARDARELLI
                                            By DONALD P. CARDARELLI
                                            President and CEO
                                            August 21, 1998



                                            /s/ PETER J. O'NEILL
                                            By PETER J. O'NEILL
                                            Senior Vice President
                                            Finance & Control
                                            Treasurer and Controller
                                            August 21, 1998


                                       29

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors of Agway Inc.:

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





/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP

Syracuse, New York
August 21, 1998



                                       30

<PAGE>



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

<TABLE>
<CAPTION>
                                     ASSETS
                                                                                      1998                1997
                                                                                  -------------      --------------
<S>                                                                               <C>                <C>
Current assets:
     Trade accounts receivable (including notes receivable of
         $49,394 and $44,074, respectively), less allowance for
         doubtful accounts of $7,926 and $7,864, respectively...................  $     203,637      $      209,868
     Leases receivable, less unearned income of $65,048 and $58,225,
         respectively...........................................................        137,493             124,552
     Advances and other receivables.............................................         26,417              29,922
     Inventories................................................................        149,214             150,640
     Prepaid expenses and other assets..........................................         52,774              52,714
                                                                                  -------------      --------------
         Total current assets...................................................        569,535             567,696
Marketable securities...........................................................         36,412              35,586
Other security investments......................................................         51,761              49,668
Properties and equipment, net...................................................        213,795             215,095
Long-term leases receivable, less unearned income of $110,721 and
     $94,178, respectively......................................................        357,777             320,809
Net pension asset...............................................................        176,792             100,052
Other assets....................................................................         12,159              11,355
                                                                                  -------------      --------------
         Total assets...........................................................  $   1,418,231      $    1,300,261
                                                                                  =============      ==============
</TABLE>

                      LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                      1998                1997
                                                                                  -------------       -------------
<S>                                                                               <C>                 <C>
Current liabilities:
     Notes payable..............................................................  $      65,100       $      59,200
     Current installments of long-term debt.....................................         99,173             114,396
     Subordinated debt, current.................................................         75,589              62,999
     Accounts payable...........................................................        114,548             112,391
     Other current liabilities..................................................        114,452             113,927
                                                                                  -------------       -------------
         Total current liabilities..............................................        468,862             462,913
Long-term debt..................................................................        255,356             215,975
Subordinated debt...............................................................        386,607             375,128
Other liabilities...............................................................        100,568              68,494
                                                                                  -------------       -------------
         Total liabilities......................................................      1,211,393           1,122,510
Commitments and contingencies...................................................
Shareholders' equity:
     Preferred stock, less amount held in Treasury..............................         47,871              57,541
     Common stock ($25 par--300,000 shares authorized; 172,265 and 171,792
         shares issued, less amount held in Treasury)...........................          2,571               2,639
     Retained margin............................................................        156,396             117,571
                                                                                  -------------       -------------
         Total shareholders' equity.............................................        206,838             177,751
              Total liabilities and shareholders' equity........................  $   1,418,231       $   1,300,261
                                                                                  =============       =============
</TABLE>



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

                                       31

<PAGE>



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

<TABLE>
<CAPTION>
                                                                   1998               1997                1996
                                                              -------------       ------------       -------------
<S>                                                           <C>                 <C>                <C>
Net sales and revenues from:
     Product sales (including excise taxes).................  $   1,470,132       $  1,587,751       $   1,589,027
     Leasing operations.....................................         65,476             56,943              48,627
     Insurance operations...................................         27,335             27,020              25,431
                                                              -------------       ------------       -------------
         Total net sales and revenues.......................      1,562,943          1,671,714           1,663,085
                                                              -------------       ------------       -------------
Cost and expenses from:
     Products and plant operations..........................      1,345,339          1,471,885           1,451,574
     Leasing operations.....................................         26,871             23,486              20,305
     Insurance operations...................................         16,653             16,437              21,176
     Selling, general and administrative activities.........        131,413            131,116             136,240
     Restructuring credit...................................              0                  0              (1,943)
                                                              -------------       ------------       -------------
         Total operating costs and expenses.................      1,520,276          1,642,924           1,627,352
                                                              -------------       ------------       -------------
Operating margin............................................         42,667             28,790              35,733
Interest expense, net of interest income of $10,032,
     $9,976 and $10,330, respectively.......................        (30,825)           (30,970)            (33,085)
Other income, net...........................................         13,361             18,763              18,422
                                                              -------------       ------------       -------------
Margin from continuing operations before income taxes.......         25,203             16,583              21,070
Income tax expense..........................................        (12,405)            (5,913)             (9,923)
                                                              -------------       ------------       -------------

Margin from continuing operations...........................         12,798             10,670              11,147

Discontinued operations:
     Loss from operations, including tax benefit of $120....              0                  0                (595)
     Gain on disposal of Hood, net of tax expense of $1,711               0                  0               2,110
                                                              -------------       ------------       -------------
         Margin from discontinued operations................              0                  0               1,515
                                                              -------------       ------------       -------------
Margin before cumulative effect of an accounting change.....         12,798             10,670              12,662
                                                              -------------       ------------       -------------
Cumulative effect of accounting change, net of tax expense
     of $16,500.............................................         28,956                  0                   0
                                                              -------------       ------------       -------------
Net margin..................................................  $      41,754       $     10,670       $      12,662
                                                              =============       ============       =============
</TABLE>












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

                                       32

<PAGE>



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

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

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

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

     Net margin...........................                                                    41,754       41,754
     Dividends declared...................                                                    (3,634)      (3,634)
     Redeemed, net........................    (2,714)        (68)     (9,670)                              (9,738)
     Adjustment to unrealized gains
       on available-for-sale securities,
       net of tax.........................                                                       705          705
                                             -------   ---------   ---------   ---------   ---------   ----------
Balance June 30, 1998.....................   102,838   $   2,571   $  47,871   $       0   $ 156,396   $  206,838
                                             =======   =========   =========   =========   =========   ==========
</TABLE>

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











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

                                       33

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                   fiscal years ended June 30, 1998, 1997 and
                                      1996
                             (Thousands of Dollars)
<TABLE>
<CAPTION>
                                                                   1998               1997                1996
                                                              -------------       ------------       -------------
<S>                                                           <C>                 <C>                <C>
Cash flows from operating activities:
   Net margin ..............................................  $      41,754       $     10,670       $      12,662
   Adjustments to reconcile margins to net cash:
       Depreciation and amortization........................         28,797             29,831              33,422
       Restructuring credit.................................              0                  0              (1,943)
       Receivables and other asset provisions...............         11,390             10,341              10,993
       Net pension income...................................        (31,909)           (14,871)            (11,338)
       Cumulative effect of accounting change, net of tax...        (28,956)                 0                   0
       Patronage refund received in stock...................         (2,494)            (4,984)             (3,264)
       Deferred income tax expense..........................         25,955              4,795              11,474
       (Gain) loss on disposition of:
           Businesses.......................................              0               (360)             (3,799)
           Other security investments.......................              0                  0              (1,348)
           Properties and equipment.........................         (1,210)            (2,613)                891
       Changes in assets and liabilities,  net of effects of
           businesses acquired or sold:
           Receivables......................................          7,025               (210)            (14,982)
           Inventory........................................          2,042              6,048             (12,527)
           Payables.........................................            814             (3,278)            (21,802)
           Other............................................         (9,352)           (11,135)             10,910
                                                              -------------       ------------       -------------
Net cash flows from operating activities....................         43,856             24,234               9,349

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

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

                                       34

<PAGE>



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


1.  Summary of Significant Accounting Policies

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

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

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

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

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

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

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






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

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

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

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

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

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



                                       36

<PAGE>



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


1.  Summary of Significant Accounting Policies (continued)

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

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

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

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

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

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



                                       37

<PAGE>



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


1.  Summary of Significant Accounting Policies (continued)

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


2.  Agway Financial Corporation

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

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

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


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

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


                                       38

<PAGE>



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


3.  Restructuring Credit

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


4.  Leases Receivable and Allowance for Credit Losses

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

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


5.  Inventories

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




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

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

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

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

                                       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>
                                                                                      1998                1997
                                                                                  ------------       -------------
<S>                                                                               <C>                <C>
CF Industries, Inc..............................................................  $     25,260       $      22,151
CoBank, ACB.....................................................................        18,940              20,750
Other...........................................................................         7,561               6,767
                                                                                  ------------       -------------
                                                                                  $     51,761       $      49,668
                                                                                  ============       =============
</TABLE>

8.  Properties and Equipment

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

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

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

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

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

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


                                       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>
                                                                   1998               1997                1996
                                                              ------------        ------------       -------------
<S>                                                           <C>                 <C>                <C>
Continuing operations:
     Current:
         Federal............................................  $       (990)       $     (2,226)      $      (3,736)
         State..............................................         3,940               3,344               2,253
     Deferred...............................................         9,455               5,676              11,372
     (Decrease) increase in valuation allowance.............             0                (881)                 34
                                                              ------------        ------------       -------------
                                                              $     12,405        $      5,913       $       9,923
                                                              ============        ============       =============
</TABLE>

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

The  Company's  effective  income  tax rate on  margin  (loss)  from  continuing
operations  before income taxes differs from the federal  statutory  regular tax
rate as of June 30 as follows:
<TABLE>
<CAPTION>
                                                                   1998               1997                1996
                                                              ------------        ------------       -------------
<S>                                                           <C>                 <C>                <C>
Statutory federal income tax rate...........................         35.0%               35.0%               35.0%

Tax effects of:
     State income taxes, net of federal benefit (1).........         13.6                14.0                 7.4
     Items for which no federal tax effect was recognized...          2.5                 2.2                 3.0
     Adjustment to prior years' tax liabilities.............         (2.2)              (10.8)                2.7
     Other items............................................           .3                (4.7)               (1.0)
                                                              ------------        ------------       -------------
         Effective income tax rate..........................         49.2%               35.7%               47.1%
                                                              ============        ============       =============
</TABLE>

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


                                       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>
                                                                                      1998                1997
                                                                                  ------------       -------------
<S>                                                                               <C>                <C>
Deferred tax assets:
     Other liabilities and reserves.............................................  $     14,849       $      13,246
     Medical reserves...........................................................         9,477               7,682
     NOL carryforward...........................................................         8,443               3,673
     Self-insurance reserves....................................................         7,190               6,280
     Alternative minimum tax credit carryforward................................         7,147               7,135
     Deferred compensation......................................................         4,647               4,350
     Inventory..................................................................         4,250               4,391
     Environmental..............................................................         3,066               3,070
     Leases receivable..........................................................         3,043               7,752
     Accounts receivable........................................................         3,025               2,673
     ITC carryforward...........................................................         2,026               1,959
                                                                                  ------------       -------------
         Total net deferred tax asset...........................................        67,163              62,211
                                                                                  ------------       -------------
Deferred tax liabilities:
     Pension assets.............................................................        63,551              34,018
     Excess of tax over book depreciation.......................................        16,233              14,715
     Prepaid medical............................................................         6,522               6,675
     Other assets ..............................................................         2,278               2,269
                                                                                  ------------       -------------
         Total deferred tax liability...........................................        88,584              57,677
                                                                                  ------------       -------------
              Net deferred tax (liability) asset................................  $    (21,421)      $       4,534
                                                                                  ============       =============
</TABLE>

The Company's net deferred tax  (liability)  asset at June 30, 1998 and 1997, of
$(21,421) and $4,534,  respectively,  consists of a net current asset of $23,693
and $20,714  included  in prepaid  expenses  and a net  long-term  liability  of
$45,114 and $16,180 included in other  liabilities as of June 30, 1998 and 1997,
respectively.  Based  on the  Company's  history  of  taxable  earnings  and its
expectations  for the future,  management has determined  that operating  income
will likely be sufficient to recognize all of its deferred tax asset.

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


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

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

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

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

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



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

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

11.  Debt

Long-Term Debt:

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

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

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

                                       45

<PAGE>



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


11.  Debt (continued)

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

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

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



                                       46

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

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

Maturities:

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

                                       47

<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,  1998,  the
Company  has been  designated  as a PRP under  CERCLA or as a third party to the
original PRPs in several  Superfund  sites.  The liability under CERCLA is joint
and several,  meaning that the Company could be required to pay in excess of its
pro  rata  share  of  remediation  costs.  The  Company's  understanding  of the
financial  strength of other PRPs at these Superfund sites has been  considered,
where appropriate,  in the Company's  determination of its estimated  liability.
The Company  believes that its past experience  provides a reasonable  basis for
estimating its liability. As additional information becomes available, estimates
are adjusted as necessary.  While the Company does not anticipate  that any such
adjustment  would be  material to its  financial  statements,  it is  reasonably
possible that the result of ongoing and/or future environmental studies or other
factors  could alter this  expectation  and require the  recording of additional
liabilities. The extent or amount of such events, if any, cannot be estimated at
this time.  The  settlement of the reserves  established  will cause future cash
outlays over approximately  five years based upon current  estimates,  and it is
not expected that such outlays will  materially  impact the Company's  liquidity
position.

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

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

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



                                       48

<PAGE>



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


12.  Commitments and Contingencies (continued)

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

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

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

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

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



                                       49

<PAGE>



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


12.  Commitments and Contingencies (continued)

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

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

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



                                       50

<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, 1995............       283,063      225,481       19,410       127,808       2,361   $    65,635
     Issued (redeemed), net.........       (50,152)      (1,359)        (300)      (11,365)         67        (6,316)
                                        ----------   ----------   ----------    ----------   ---------   -----------
   Balance June 30, 1996............       232,911      224,122       19,110       116,443       2,428        59,319
     Issued (redeemed), net.........        (2,972)      13,105         (750)      (27,201)        126        (1,778)
                                        ----------   ----------   ----------    ----------   ---------   -----------
   Balance June 30, 1997............       229,939      237,227       18,360        89,242       2,554        57,541
     Issues (redeemed), net.........       (76,763)      (1,081)        (350)      (18,506)         27        (9,670)
                                        ----------   ----------   ----------    ----------   ---------   -----------
   Balance June 30, 1998............       153,176      236,146       18,010        70,736       2,581   $    47,871
                                        ==========   ==========   ==========    ==========   =========   ===========
</TABLE>

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

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

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

                                       51

<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 through June 30,
1998, base payment to retired employees generally upon years of credited service
and  a  percentage  of  qualifying   compensation  during  the  final  years  of
employment.  Generally,  pension  costs are funded  annually at no less than the
amount  required by law and no more than the maximum  allowed by federal  income
tax guidelines.  The vested benefit obligation is based on the actuarial present
value of the  benefits  that the  employee  would be entitled to at the expected
retirement date.

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

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

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

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

                                       52

<PAGE>



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


14.  Retirement Benefits (continued)

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

Pro forma amounts (unaudited), assuming the new accounting principle was applied
during all periods presented, follow with a comparison to actual results:
<TABLE>
<CAPTION>
                                                                                  Year ended June 30
                                                              ----------------------------------------------------
                                                                   1998               1997                1996
                                                              -------------       ------------       -------------
<S>                                                           <C>                 <C>                <C>
Margin from continuing operations:
      As reported...........................................  $      12,798       $     10,670       $      11,147
      Pro forma.............................................  $      12,798       $     18,410       $      15,625

Net margin:
      As reported...........................................  $      41,754       $     10,670       $      12,662
      Pro forma.............................................  $      12,798       $     18,410       $      17,140
</TABLE>

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

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

                                       53

<PAGE>



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


14.  Retirement Benefits (continued)

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

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

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

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

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

                                       54

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

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

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

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

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

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

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


                                       55

<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, 1998      Agriculture     Retail       Energy      Leasing    Insurance     Other(a)    Consolidated
------------------------      -----------   ----------   ---------   ----------   ---------   ----------    ------------
<S>                           <C>           <C>          <C>         <C>          <C>         <C>           <C>
Net sales and revenues to
 unaffiliated customers..     $   740,559   $  224,896   $ 504,702   $   65,445   $  27,335   $        6    $  1,562,943
Intersegment sales and
   revenues..............          29,152       26,678         398           31           0      (56,259)              0
                              -----------   ----------   ---------   ----------   ---------   -----------   ------------
   Total sales and revenues   $   769,711   $  251,574   $ 505,100   $   65,476   $  27,335   $  (56,253)   $  1,562,943
                              ===========   ==========   =========   ==========   =========   ===========   ============
Operating margin (loss)
   plus other income, net..   $     7,612   $   (2,745)  $  15,151   $   15,412   $    (263)  $   20,861    $     56,028
Interest expense, net of
   interest income.......                                                                                        (30,825)
                                                                                                            ------------
      Margin from continuing
       operations before
        income taxes                                                                                        $     25,203
                                                                                                            ============
Identifiable assets......     $   364,898   $   98,741   $ 141,894   $  516,735   $  55,939   $  240,024    $  1,418,231
Depreciation and
  amortization                     13,408        4,974       8,668          607          78        1,062          28,797
Capital expenditures.....          14,101        6,972       5,631          471         297        3,480          30,952

Year ended June 30, 1997      Agriculture     Retail       Energy      Leasing    Insurance     Other(a)    Consolidated
------------------------      -----------   ----------   ---------   ----------   ---------   ----------    ------------  
Net sales and revenues to
   unaffiliated customers     $   740,904   $  240,050   $ 606,800   $   56,908   $  27,020   $       32    $  1,671,714
Intersegment sales and
   revenues..............          30,415       27,562         305           35           0      (58,317)              0
                              -----------   ----------   ---------   ----------   ---------   ----------    ------------
   Total sales and revenues   $   771,319   $  267,612   $ 607,105   $   56,943   $  27,020   $  (58,285)   $  1,671,714
                              ===========   ==========   =========   ==========   =========   ==========    ============
Operating margin plus
   other income, net.....     $     3,219   $    5,207   $  19,537   $   13,003   $     694   $    5,893    $     47,553
Interest expense, net of
   interest income.......                                                                                        (30,970)
                                                                                                            ------------
      Margin from continuing  
        operations before
        income taxes                                                                                        $     16,583
                                                                                                            ============

Identifiable assets......     $   341,666   $  105,409   $ 166,132   $  470,699   $  53,845   $  162,510    $  1,300,261
Depreciation and
   amortization                     6,660       11,659       9,591          529          55        1,337          29,831
Capital expenditures.....           7,429       12,792       4,632          540           0          352          25,745

Year ended June 30, 1996      Agriculture     Retail       Energy      Leasing    Insurance     Other(a)    Consolidated
------------------------      -----------   ----------   ---------   ----------   ---------   ----------    ------------
Net sales and revenues to
   unaffiliated customers     $   787,815   $  253,299   $ 545,704   $   48,577   $  25,431   $    2,259    $  1,663,085
Intersegment sales and
   revenues..............          82,295       31,593         323           50           0     (114,261)              0
                              -----------   ----------   ---------   ----------   ---------   ----------    ------------
   Total sales and revenues   $   870,110   $  284,892   $ 546,027   $   48,627   $  25,431   $ (112,002)   $  1,663,085
                              ===========   ==========   =========   ==========   =========   ==========    ============
Operating margin (loss) plus  
   other income, net.....     $    23,427   $    4,868   $  16,119   $   11,589   $  (5,310)  $    3,462    $     54,155
Interest expense, net of
   interest income.......                                                                                        (33,085)
                                                                                                            ------------
     Margin from continuing
      operations before
      income taxes                                                                                          $     21,070
                                                                                                            ============

Identifiable assets......     $   361,342   $  105,220   $ 170,063   $  394,470   $  53,971   $  160,825    $  1,245,891
Depreciation and
  amortization                     10,917        9,872      10,545          450         125        1,513          33,422
Capital expenditures.....           8,624       10,796       4,332          939          13        1,321          26,025
</TABLE>

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

                                       56

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

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

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

18.  Financial and Commodity Instruments

Financial Instruments

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

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

                                       57

<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.   The  Company's  exposure  to  credit  loss  in  the  event  of
nonperformance by the other party to the financial instrument for commitments to
extend  credit is  represented  by the  contractual  amount  of the  instrument.
Telmark uses the same credit and collateral policies in making commitments as it
does for on-balance-sheet instruments.

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

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

Commodity Instruments

The Company has exposure to adverse 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 formal  policies  established for this
activity.  These  policies  limit the duration to maturity of contracts  entered
into as well as the level of exposure to be hedged.  Since  November  1997,  the
Company  modified  its  practices  relating  to its  feed  business  so that all
transactions  involving derivative financial  instruments are required to have a
direct  relationship to the price risk  associated with existing  inventories or
future purchase and sales of its products.

Agriculture  commodity  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.


                                       58

<PAGE>



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


18.  Financial and Commodity Instruments (continued)

Commodity Instruments (continued)

Energy  commodity  instrument  contracts are entered into as a hedge against the
price risk  associated  with the Company's  inventories or future  purchases and
sales of commodities used in the Company's operations.

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,  1998 and 1997,  the  carrying  and fair value of the
Company's  investment in commodities futures and option contracts was $2,200 and
$3,200,  respectively,  and the total  net  deferred  gains  and  losses on open
contracts were immaterial.  At June 30, 1998, the actual open positions of these
instruments and the potential  near-term losses in earnings,  fair value, and/or
cash flows from changes in market rates or prices were not material.


19.  Discontinued Operations

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

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




                                       59

<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)            60   Chairman of the           Jersey Acres Farms Inc.     1973      November 2000
                                    Board and Director
Gary K. Van Slyke              55   Vice Chairman of the      VanSlyke's Dairy Farm       1994      November 2000
                                    Board and Director
Kevin B. Barrett               42   Director                  Heavenly View Farm          1996      November 1999
Keith H. Carlisle              56   Director                  Carlisle Bros., Inc.        1995      November 1998
D. Gilbert Couser              57   Director                  Shawangunk View Farm        1995      November 1998
Andrew J. Gilbert              39   Director                  Adon Farms                  1995      November 1998
Peter D. Hanks                 50   Director                  Big Green Farms, Inc.       1984      November 1999
Robert L. Marshman             59   Director                  Marshman Farms              1989      November 1999
Jeffrey B. Martin              39   Director                  Martin Farms                1997      November 2000
Samuel F. Minor                60   Director                  The Spring House            1987      November 2000
Carl D. Smith                  63   Director                  Hillacre Farms              1984      November 1999
Thomas E. Smith                63   Director                  Lazy Acres Dairy            1986      November 1998
Joel L. Wenger                 67   Director                  Weng-Lea Farms              1987      November 1999
Edwin C. Whitehead             57   Director                  White Ayr Farms             1994      November 2000
William W. Young               45   Director                  Will-O-Crest Farm           1989      November 1998
</TABLE>

Ralph H. Heffner,  Chairman of the Board of Directors, was paid $56,600; Gary K.
Van Slyke,  Vice  Chairman of the Board of  Directors  from  October  22,  1997,
through the present,  was paid $32,400;  and Robert L.  Marshman,  Vice Chairman
from July 1, 1997 through  October 21, 1997,  was paid $7,200 for their services
for the year ended June 30, 1998.  All other  directors of the Company earned an
annual  retainer fee of $12,000 for  participation  on the Agway Inc.  Board. In
addition, each Board Committee Chairman earned an additional annual retainer fee
of $3,000 and each  director  of Agway  Inc.  who was also a member of the Agway
Insurance  Company or Telmark  LLC Board  earned an  additional  $400 or $1,000,
respectively.  A fee of $200 was 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.

Effective July 1, 1998, the Chairman will receive $60,000 and the  Vice-Chairman
will receive  $45,000.  All other  directors will receive $25,000 per year, paid
quarterly, for participation on the Agway Inc. Board;  additionally,  the fee of
$200 for each day  involved in business  for the company will now only be earned
on days where the full Board is not in session.

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, 1998, the present
value of accumulated benefits under this plan was approximately $500,000.

(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.

                                       60

<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, 1998:
<TABLE>
<CAPTION>
                                                                                                  Years Served
       Name                         Age      Office                                                As Officer
       ----                         ---      ------                                               ------------     
<S>                                 <C>      <C>                                                      <C> 
Donald P. Cardarelli                42       President and Chief Executive Officer                     7
Daniel J. Edinger                   47       President, Telmark LLC                                    -
Robert A. Fischer, Jr.              50       President, Agway Agricultural Products                    3
David M. Hayes                      54       Senior Vice President, General Counsel and Secretary     17
Stephen H. Hoefer                   43       Senior Vice President, Public Affairs                     4
Michael R. Hopsicker                33       President, Agway Energy Products LLC                      2
Dennis J. LaHood                    52       President, Country Products Group                         3
Peter J. O'Neill                    51       Senior Vice President, Finance & Control,
                                               Treasurer and Controller                                9
William L. Parker                   51       Vice President and Chief Information Officer              3
Donald F. Schalk                    47       President, Agway Retail Services                          3
Robert D. Sears                     57       Vice President, Membership                                4
Gerald R. Seeber                    51       Senior Vice President, Administrative Services and
                                             President, Agway Insurance Group                          -
G. Leslie Smith                     55       Vice President and Chief Investment Officer               1
</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, 1998.

Mr. Edinger served as President, Telmark LLC, from February 1988 to July 1,1998.

Mr.  Fischer has served as President,  Milford  Fertilizer  Company,  since June
1970; as Executive  Director,  Crops from October 1994 to February 1995; as Vice
President,  Agway Agricultural Products, from February 1995 to July 1, 1997; and
as President, Agway Agricultural Products, from July 1997 to July 1, 1998.

Mr. Hayes  served  as Senior  Vice President, General Counsel and Secretary from
July 1992 to July 1, 1998.

Mr.  Hoefer served as Director of  Government  Affairs/Corporate  Transportation
Services from June 1992 through June 1994; as Vice  President,  Public  Affairs,
from June 1994 to July 1997; and as Senior Vice President,  Public Affairs, from
July 1997 to July 1, 1998.

Mr. Hopsicker served 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; as Vice President, Agway Energy Products, from April
1996 to July 1997; and as President,  Agway Energy  Products LLC, from July 1997
to July 1, 1998.

Mr.  LaHood  served as President,  Country  Foods,  from October 1992 to October
1994; as Executive  Director,  Country Foods and Seed  Operations,  from October
1994 to February 1995; as Vice President,  Country Products Group, from February
1995 to July 1997; and as President,  Country Products Group,  from July 1997 to
July 1, 1998.

Mr. O'Neill  served as Senior Vice  President,  Finance & Control,  from October
1992 to  November  1994;  and as  Senior  Vice  President,  Finance  &  Control,
Treasurer and Controller, from November 1994 to July 1, 1998.

Mr.  Parker  served 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 from May 1996 to July
1, 1998.

                                       61

<PAGE>



Item 10.  Directors and Executive Officers of the Registrant - Continued

Executive Officers (continued)

Mr. Schalk served as Director of Marketing-Agriculture from January 1990 to July
1993; as Executive  Director,  Feed, from October 1994 to February 1995; as Vice
President,  Agway  Retail  Services,  from  February  1995 to July 1997;  and as
President, Agway Retail Services, from July 1997 to July 1, 1998. 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, 1998.

Mr. Seeber served as Executive Vice President,  Agway Insurance Group, from July
1992 to October 1993; as President,  Agway Insurance Group, from October 1993 to
July 1997; and as Senior Vice President,  Administrative Services and President,
Agway Insurance Group, from July 1997 to July 1, 1998.

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, 1998.  For the period  October 1989 to August 1993,  Ms. Smith was  Executive
Administrator for TWA Pilots Trust Annuity Plan.



                                       62

<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  1998,  1997 and 1996 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, 1998.
<TABLE>
<CAPTION>
                                            SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------
                                             Annual Compensation (4)
                                             -----------------------
Name and                                                                                  All Other
Principal Position              Year            Salary(1)      Bonus(1)(2)             Compensation(3)
--------------------------------------------------------------------------------------------------------
<S>                             <C>              <C>              <C>                           <C>
Donald P. Cardarelli            1998             $425,390         $327,600                      $ 11,500
   President and CEO            1997              387,024           80,000                         3,925
                                1996              336,065          330,638                         3,038

Robert A. Fischer, Jr.          1998              294,423          124,000                       116,476
   President,                   1997              220,000           44,000                       118,411
   Agway Agricultural           1996              200,000          175,090                       105,212
   Products

Michael R. Hopsicker            1998              202,312          105,000                         2,987
   President,                   1997              170,014           34,001                         2,873
   Agway Energy                 1996              102,277                0                         1,623
   Products

Dennis J. LaHood                1998              220,407          175,515                         2,998
   President,                   1997              178,293           88,000                         2,877
   Country Products             1996              165,022          132,000                         2,780
   Group

Peter J. O'Neill                1998              266,165          130,000                         4,060
   Senior Vice President,       1997              250,016           50,000                         5,185
   Finance & Control,           1996              250,016          150,000                         6,137
   Treasurer and
   Controller
</TABLE>

(1)   Salary and bonus are used in determining  the average annual  compensation
      pursuant to the Company's  Retirement  Plan,  effective July 1, 1998. 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 all officers,  except Mr. Fischer, 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.  With  respect  to Mr.
      Fischer,  amounts include  non-compete  payments,  payments to the Milford
      Fertilizer  Company  Employees' Profit Sharing and Savings Plan, term life
      insurance premiums, and reportable savings interest.
(4)   There were  no  perquisites paid by the Company in excess of the lesser of
      $50,000 or 10% of  an  executive's  total  salary  and bonus for the years
      disclosed.

                                       63

<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 was amended  effective July 1, 1998, to include a pension equity
formula,  as  well  as  to  recognize  incentive   compensation  as  pensionable
compensation for all employees. It provides for retirement benefits,  based upon
average annual compensation received during the highest 36 consecutive months in
the last 10 years of service  and credits  earned for years of service  with the
Company.  Full  credits  are earned for  service on and after July 1, 1998,  and
credits  equal to  approximately  3/4 of the full credits are earned for service
prior to July 1, 1998.  The benefit is defined as an account  balance and can be
paid out as a lump sum or an annuity.  An employee is 100% vested in his benefit
after  completing 5 years of service or attaining  age 55 after  completing  one
year of service.

The following  table shows  estimated  annual  benefits  payable upon retirement
using the credit  formula in effect for service  after June 30,  1998,  based on
certain 3-year average remuneration levels and years-of-service classifications.
The table was developed assuming a normal retirement at age 65 and using current
annuity conversion factors and current Social Security Wage Base.
<TABLE>
<CAPTION>
                                                PENSION PLAN TABLE
                                                   (New Formula)
                                             Years of Credited Service
------------------------------------------------------------------------------------------------------------------------------
   3-Year Average
    Remuneration            5             10             15             20             25              30             35
------------------------------------------------------------------------------------------------------------------------------
      <S>                  <C>            <C>            <C>            <C>            <C>             <C>            <C>
      $300,000             $20,600        $ 39,200       $ 57,800       $ 75,000       $ 92,200        $107,900       $123,700
       350,000              24,100          45,900         67,600         87,800        107,900         126,300        144,800
       400,000              27,700          52,600         77,500        100,500        123,600         144,800        165,900
       450,000              31,200          59,300         87,300        113,300        139,300         163,200        187,000
       500,000              34,700          65,900         97,200        126,100        155,000         181,600        208,100
       550,000              38,200          72,600        107,000        138,900        170,700         200,000        229,200
       600,000              41,700          79,300        116,900        151,700        186,400         218,400        250,300
       650,000              45,200          86,000        126,700        164,400        202,100         236,800        271,400
       700,000              48,800          92,700        136,600        177,200        217,800         255,200        292,500
       750,000              52,300          99,300        146,400        190,000        233,500         273,600        313,600
       800,000              55,800         106,000        156,300        202,800        249,300         292,000        334,700
       850,000              59,300         112,700        166,100        215,500        265,000         310,400        355,800
       900,000              62,800         119,400        176,000        228,300        280,700         328,800        376,900
       950,000              66,300         126,100        185,800        241,100        296,400         347,200        398,000
</TABLE>

Active  participants  are  entitled  to  receive no less than the value of their
benefits accrued under the old formula through June 30, 1998. In addition,  most
active  participants  whose age plus service totaled 55 years or more as of July
1, 1998,  will  receive  the  greater of the  benefit  determined  under the new
formula described above, or the benefit  determined had the old formula remained
in effect.

The old formula is 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 old formula 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.



                                       64

<PAGE>



Item 11.  Executive Compensation - Continued

Employees' Retirement Plan (continued)

The following table shows  estimated  annual benefits under the old formula 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 and does not reflect an offset for up to 50% of the Social
Security benefit, subject to certain minimum benefits.
<TABLE>
<CAPTION>
                                                PENSION PLAN TABLE
                                                   (Old Formula)
                                             Years of Credited Service
-----------------------------------------------------------------------------------------------------------------------------
   5-Year Average
    Remuneration           5             10             15              20             25             30             35
-----------------------------------------------------------------------------------------------------------------------------
     <S>                   <C>           <C>            <C>             <C>            <C>            <C>            <C>
     $300,000              $24,000       $ 48,000       $ 72,000        $ 96,000       $120,000       $144,000       $168,000
      350,000               28,000         56,000         84,000         112,000        140,000        168,000        196,000
      400,000               32,000         64,000         96,000         128,000        160,000        192,000        224,000
      450,000               36,000         72,000        108,000         144,000        180,000        216,000        252,000
      500,000               40,000         80,000        120,000         160,000        200,000        240,000        280,000
      550,000               44,000         88,000        132,000         176,000        220,000        264,000        308,000
      600,000               48,000         96,000        144,000         192,000        240,000        288,000        336,000
      650,000               52,000        104,000        156,000         208,000        260,000        312,000        364,000
      700,000               56,000        112,000        168,000         224,000        280,000        336,000        392,000
      750,000               60,000        120,000        180,000         240,000        300,000        360,000        420,000
      800,000               64,000        128,000        192,000         256,000        320,000        384,000        448,000
      850,000               68,000        136,000        204,000         272,000        340,000        408,000        476,000
      900,000               72,000        144,000        216,000         288,000        360,000        432,000        504,000
      950,000               76,000        152,000        228,000         304,000        380,000        456,000        532,000
</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 benefit,  subject to certain minimum
benefits. Also, the benefits are based on continuing the Plan's benefit formulas
as in effect on June 30,  1998.  As of June 30,  1998,  the  officers  and their
respective number of credited years of service under the Retirement Plan were as
follows: Messrs.  Cardarelli,  13; Hopsicker, 9; LaHood, 28; and O'Neill, 9. 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.




                                       65

<PAGE>



Item 11.  Executive Compensation - Continued

Director Compensation

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


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.




                                       66

<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 28:

              (i)   Report of Independent Accountants..........................................................  30

              (ii)  Consolidated Balance Sheets, June 30, 1998 and 1997........................................  31

              (iii) Consolidated  Statements of Operations,  fiscal years ended
                    June 30, 1998, 1997 and 1996...............................................................  32

              (iv)  Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended
                    June 30, 1998, 1997 and 1996...............................................................  33

              (v)   Consolidated Statements of Cash Flow, fiscal years ended June 30, 1998, 1997 and 1996......  34

              (vi)  Notes to Consolidated Financial Statements.................................................  35

         (2)  Financial Statement Schedules

              (i)   Report of Independent Accountants..........................................................  68

              (ii)  The following schedules are presented:

                    Schedule I       -     Condensed Financial Information of Registrant, each of the
                                           three years in the period ended June 30, 1998.......................  69

                    Schedule II      -     Valuation and Qualifying Accounts, fiscal years ended
                                           June 30, 1998, 1997 and 1996........................................  73
</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.



                                       67

<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/ PRICEWATERHOUSE LLP
PricewaterhouseCoopers LLP

Syracuse, New York
August 21, 1998



                                       68

<PAGE>



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

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

                                     ASSETS
<TABLE>
<CAPTION>
                                                                                      1998                1997
                                                                                  ------------       -------------
<S>                                                                               <C>                <C>                
Current assets:
     Cash.......................................................................  $      4,716       $           0
     Trade accounts receivable (including notes receivable of $38,630 and
         $34,251, respectively), less allowance for doubtful
         accounts of $4,432 and $4,156, respectively............................        87,371              92,262
     Inventories................................................................        47,260              50,072
     Other current assets.......................................................        58,478              53,231
                                                                                  ------------       -------------
         Total current assets...................................................       197,825             195,565

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

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

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

Other assets  ..................................................................         2,605               1,990
                                                                                  ------------      --------------
         Total assets...........................................................  $    619,889      $      550,213
                                                                                  ============      ==============


                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable...........................................................  $     25,559      $       25,006
     Operating advances payable to subsidiaries, net............................       197,052             185,464
     Other current liabilities..................................................       121,370             119,970
                                                                                  ------------      --------------
         Total current liabilities..............................................       343,981             330,440

Other liabilities...............................................................        69,070              42,022

Shareholders' equity............................................................       206,838             177,751
                                                                                  ------------      --------------
         Total liabilities and shareholders' equity.............................  $    619,889      $      550,213
                                                                                  ============      ==============
</TABLE>



                                       69

<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, 1998, 1997 and 1996
                             (Thousands of Dollars)


<TABLE>
<CAPTION>
                                                                   1998               1997                1996
                                                               ------------       -----------        ------------
<S>                                                            <C>                <C>                <C>
Net sales and revenues from:
     Product sales..........................................   $    498,363       $   506,886        $    594,188
     Other services.........................................         15,302            12,808               8,475
                                                               ------------       -----------        ------------
         Total net sales and revenues.......................        513,665           519,694             602,663
Cost and expenses from:
     Products and plant operations..........................        470,626           487,534             552,304
     Selling, general and administrative activities.........         48,938            49,611              49,512
     Restructuring credit...................................              0                 0              (1,301)
                                                               ------------       -----------        ------------
         Total operating costs and expenses.................        519,564           537,145             600,515
                                                               ------------       -----------        ------------
Operating income (loss).....................................         (5,899)          (17,451)              2,148
Interest expense, net.......................................           (723)             (876)               (786)
Other income, net...........................................         26,441            21,862              22,744
                                                               ------------       -----------        ------------
Margin from continuing operations before income taxes
     and equity in earnings of subsidiaries ................         19,819             3,535              24,106
Income tax benefit (expense)................................          6,563             7,904              (2,185)
                                                               ------------       -----------        ------------
Income (loss) before equity in earnings of subsidiaries.....         26,382            11,439              21,921
Equity in (loss) earnings of unconsolidated subsidiaries....        (13,584)             (769)            (10,774)
                                                               ------------       -----------        ------------
Margin from continuing operations...........................         12,798            10,670              11,147
Discontinued operations:
     Loss from operations, including tax benefit of $120....              0                 0                (595)
     Gain on disposal of Hood, net of tax expense of $1,711               0                 0               2,110
                                                               ------------       -----------        ------------
         Margin from discontinued operations................              0                 0               1,515

Margin before cumulative effect of an accounting change ....         12,798            10,670              12,662
Cumulative effect of accounting change, net of tax
     expense of $16,500.....................................         28,956                 0                   0
                                                               ------------       -----------        ------------
Net margin..................................................         41,754            10,670              12,662
Retained margin - beginning of year.........................        117,571           110,714             102,934
Dividends...................................................         (3,634)           (4,237)             (4,382)
Equity in net unrealized losses of marketable securities....            705               424                (500)
                                                               ------------       -----------        ------------
Retained margin - end of year...............................   $    156,396       $   117,571        $    110,714
                                                               ============       ===========        ============
</TABLE>


                                       70

<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, 1998, 1997 and 1996
                             (Thousands of Dollars)


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


                                       71

<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:
<TABLE>
<CAPTION>
                                                                                      1998                1997
                                                                                  ------------       -------------
<S>                                                                               <C>                <C>
Finished goods..................................................................  $     47,225       $      50,011
Supplies........................................................................            35                  61
                                                                                  ------------       -------------
                                                                                  $     47,260       $      50,072
                                                                                  ============       =============
</TABLE>
Debt

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



Related Party Transactions

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




                                       72

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


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



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


                                       73

<PAGE>



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

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

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

                      Articles of incorporation and by-laws

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

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

                      Instrument  defining  the  rights  of  security  holders,
                      including indentures

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

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

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

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

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

                                       74

<PAGE>

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

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

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

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

                      4(i)    -   The Supplemental Indenture dated as of October
                                  14, 1988, among AFC, Agway Inc. and   Key Bank
                                  of Central  New  York,  National  Association,
                                  Trustee, amending the Indentures  dated  as of
                                  August 23, 1988, and August 24, 1988, filed on
                                  October 18, 1988.
         
                      4(j)    -   The  Indenture  dated as  of  August 23, 1989,
                                  among AFC, Agway Inc. and Key Bank of  Central
                                  New  York  of  Syracuse,  New  York,  Trustee,
                                  including forms of Subordinated   Money Market
                                  Certificates  and  Subordinated  Member  Money
                                  Market  Certificates,  filed  by  reference to
                                  Exhibit  4 of the Registration Statement (Form
                                  S-3), File No. 33-30808,dated August 30, 1989.

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

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

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

                      Letter on change in accounting principles

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


                                       75

<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 to April 28, 1998

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

                      12     - Statement re computation of ratios

                      21     - Subsidiaries of the registrant

                      23     - Consents of experts and counsel

                      27     - Financial data schedule*

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





* Included with electronic filing only.

                                       76

<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 and Chief
                                              Executive Officer
                                        (Principal Executive Officer)

                                    Date     August 24, 1998
                                         -------------------------

      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 and Chief Executive Officer        August 24, 1998
            (Donald P. Cardarelli)                     (Principal Executive Officer)



           /s/ Peter J. O'Neill                     Senior Vice President,                       August 24, 1998
            (Peter J. O'Neill)                         Finance & Control,
                                                       Treasurer and Controller
                                                       (Principal Financial Officer
                                                       & Principal Accounting Officer)



           /s/ Ralph H. Heffner                     Chairman of the                              August 24, 1998
            (Ralph H. Heffner)                          Board and Director



           /s/ Gary K. Van Slyke                    Vice Chairman of the                         August 24, 1998
            (Gary K. Van Slyke)                         Board and Director



           /s/ Kevin B. Barrett                     Director                                     August 24, 1998
            (Kevin B. Barrett)



           /s/ Keith H. Carlisle                    Director                                     August 24, 1998
            (Keith H. Carlisle)



           /s/ D. Gilbert Couser                    Director                                     August 24, 1998
            (D. Gilbert Couser)

</TABLE>

                                       77

<PAGE>


<TABLE>
<CAPTION>
                   Signature                             Title                                       Date
                   ---------                             -----                                       ----       
             <S>                                       <C>                                      <C>

             /s/ Andrew J. Gilbert                     Director                                 August 24, 1998
              (Andrew J. Gilbert)



             /s/ Peter D. Hanks                        Director                                 August 24, 1998
               (Peter D. Hanks)



            /s/ Robert L. Marshman                     Director                                 August 24, 1998
             (Robert L. Marshman)



            /s/ Jeffrey B. Martin                      Director                                 August 24, 1998
              (Jeffrey B. Martin)



            /s/ Samuel F. Minor                        Director                                 August 24, 1998
              (Samuel F. Minor)



            /s/ Carl D. Smith                          Director                                 August 24, 1998
             (Carl D. Smith)



            /s/ Thomas E. Smith                        Director                                 August 24, 1998
             (Thomas E. Smith)



            /s/ Joel L. Wenger                         Director                                 August 24, 1998
              (Joel L. Wenger)



            /s/ Edwin C. Whitehead                     Director                                 August 24, 1998
             (Edwin C. Whitehead)



            /s/ William W. Young                       Director                                 August 24, 1998
              (William W. Young)

</TABLE>

                                       78

<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,
1998. Subsequent to the filing of the annual report on Form 10-K, the Registrant
shall furnish security holders with annual reports.




                                       79
<PAGE>

                                    AGWAY INC.
                                    FORM 10-K
                                  JUNE 30, 1998
                                  EXHIBIT INDEX


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

( 3)         Agway, Inc. By-Laws as amended to April 28, 1998

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

(12)         Statements re computation of ratios

(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, 1998 of
                  the Agway Inc. Employees' Thrift Investment Plan


*Included with electronic filing only.