SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTION 13 OR 15 (d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

(Mark One)

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934.

                   For the fiscal year ended December 31, 1997

                                       OR

            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934.

          For the transition period from ____________ to ____________.

                           Commission File No. 1-2723

                           ATHEY PRODUCTS CORPORATION
               (Exact Name of Registrant as Specified in Charter)

                      Delaware                                  36-0753480
         (State or other jurisdiction of                    (I.R.S. Employer
          incorporation or organization)                   Identification No.)

1839 South Main Street, Wake Forest, North Carolina            27587-9289
     (Address of Principal Executive Offices)                   (Zip Code)

         Registrant's telephone number including area code: 919-556-5171

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

                                      None
                                (Title of Class)

          Securities registered pursuant to Section 12(g) of the Act:
                             Common Stock, $2 value
                                (Title of Class)

     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  and Exchange Act
of 1934  during the  preceding  12 months (or for such  shorter  period that the
registrant was required to file such reports),  and (2) has been subject to such
filing  requirements for the past 90 days. Yes __X__ No _____.

     Indicate 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 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_].

     On March 17, 1998, there were 3,805,608 shares of common stock outstanding.

     On March 17,  1998,  the  aggregate  market  value of voting  stock held by
nonaffiliates  (based  upon the  average  bid and ask price of such  stock)  was
approximately $9,015,018.

<PAGE>

Forward-Looking Statements

     The  forward-looking   statements   included  in  the  "Business",   "Legal
Proceedings" and  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations"  sections,  which reflect  management's best judgment
based on factors currently known, involve risks and uncertainties. Words such as
"expects", "anticipates", "believes", "intends", and "hopes", variations of such
words and similar  expressions  are  intended to identify  such  forward-looking
statements.  Actual results could differ  materially  from those  anticipated in
these forward-looking  statements as a result of a number of factors,  including
but not limited  to, the factors  discussed  in such  sections.  Forward-looking
information provided by the Company in such sections pursuant to the safe harbor
established under the Private Securities Litigation Reform Act of 1995 should be
evaluated in the context of these factors.

                                     PART I

Item 1.  Business.

General Development of Business. Athey Products Corporation ("Registrant" or the
"Company") was  incorporated  in the State of Illinois on September 29, 1922. In
May,  1988,  the  Registrant's  corporate  domicile was changed from Illinois by
reincorporating the Registrant in Delaware.  The Registrant is a manufacturer of
heavy duty equipment and parts.  Its principal  products include street sweepers
and force-feed  loaders.  The Registrant also  manufactures  other equipment and
replacement  parts for its  products.  The principal  users of the  Registrant's
products are municipalities,  contractors, other governmental bodies or agencies
and others who have need of heavy duty, large capacity equipment.

The following is a brief description of the principal  products  manufactured by
the Registrant.

Mobil  Street  Sweepers.  The  Mobil  street  sweepers  are  of  the  four-wheel
mechanical  bottom dump and  high-lift  type and of the  three-wheel  mechanical
high-lift type which offers  flexibility in the street cleaning  operation.  The
four-wheel   type  may  be  gasoline  or  diesel   powered   with  an  automatic
transmission. The three-wheel type is diesel powered with hydrostatic drive. All
units have variable speed, hydraulically driven brooms and elevators for cleaner
pickup of hard-to-sweep material.

Other Products

     (a)  Force-feed  loaders.  Force-feed  loaders  combine the continuous flow
          capabilities  of a belt conveyor with wheel loader  mobility,  and are
          produced with either gasoline or diesel engines. They are used to pick
          up or load  dirt,  snow  or any  flowable  material  from  windrow  or
          roadside and drop it into a trailing truck.

          Force-feed  loaders can also be used for loading sand, coal, salt, top
          soil and gravel from  stockpiles;  assisting in cleanup jobs or paving
          projects; picking up windrows on road shoulders and ditch trimming; or
          clearing  snow-choked  roads.  Optional  attachments  include a swivel
          discharge conveyor and right angle side discharge to either side.

     (b)  Graders. The grader,  called the "Maintenance Master, Model 600", is a
          small,  maneuverable maintenance machine designed to handle jobs where
          larger,  less  efficient  equipment is not required.  This unit can be
          used for site  preparation  on small  jobs  such as  parking  lots and
          driveways.  Graders  are  produced  with diesel  engines,  hydrostatic
          transmission and a wide range of attachments.

     (c)  Replacement  Parts.  The Registrant also  manufactures and distributes
          replacement parts for its product lines.

The  Registrant's  products are distributed  through an equipment dealer network
that covers the entire United States and certain foreign  countries.  Agreements
with its dealers are terminable,  by either party,  upon 30 days written notice,
except as otherwise limited by applicable law. As is common


                                      -1-
<PAGE>


in the  industry,  almost  all such  dealers  also sell  complementary  products
produced  by  other  manufacturers,  and  all of  them  operate  as  independent
contractors.

Set  forth  below,  for  each  of the  Registrant's  last  three  years,  is the
percentage of total sales  contributed  by each class of similar  products which
contributed 10% or more of total sales during any of the last three years:

                                       Year Ended December, 31
                                  ----------------------------------
Class of Product                  1997           1996           1995
----------------                  ----           ----           ----
Mobil Street Sweepers              88%            93%            84%

Raw Materials and Component Parts.  The principal  materials and components used
by the Registrant in its manufacturing  operations are steel,  paint,  castings,
axles, tires, hydraulic parts, engines,  transmissions,  small parts and welding
supplies.  These  materials and  components are available from and are purchased
from many suppliers, none of whom the Registrant is substantially dependent upon
and none of whom receive a disproportionate amount of the Registrant's business.
In the experience of the  Registrant,  it has been generally able to receive its
supplies as required, though delays in deliveries have occurred.

Patents,  Trademarks,  Licenses.  Although the Registrant owns certain  patents,
trademarks and licenses,  none is of material  importance to its business,  with
the exception of the trademark  "Mobil Sweeper" owned by the Registrant and used
in connection with its mobil street sweepers.

Seasonality.  With respect to sales of products  manufactured by the Registrant,
it has been the  experience of the  Registrant  that its heavy  shipping  period
begins in the  spring  of the year and  continues  through  the late fall of the
year.

Working Capital.  The Registrant  generates  working capital from operations and
borrowings  under a bank  line of  credit.  The  Registrant  does not  generally
provide  extended payment terms to its customers;  however,  the Company may, on
occasion, provide certain customers with alternative payment arrangements.

Customers.  In 1997, the Company's largest customer was Nixon-Egli, a dealer
selling to a local government  entity. This customer accounted for approximately
26% of the Company's net sales. No other customer accounted for more than 10% of
the Company's net sales.

The Company believes that the loss of any customer that accounts for 10% or more
of the Company's net sales would have a material adverse effect on its business.
As is customary in the industry,  the Company does not have a significant amount
of long-term sales agreements with its customers.  However,  it believes that it
enjoys excellent relationships with its customers. The Company follows customary
industry  practices  regarding  terms of sale;  however,  the Company  does,  on
occasion, provide extended payment terms to certain customers.

Backlog.  The dollar  amount of the backlog of orders  believed to be firm as of
December  31,  1997 and  December  31,  1996 was  approximately  $5,682,474  and
$4,675,524  respectively.  Mobil  street  sweepers  accounted  for 87% and  92%,
respectively,  of the  backlogs  as of such  dates.  The  Registrant  expects to
complete all orders  related to the December 31, 1997 backlog during the current
year.

Government Contracts.  The Registrant has no material contracts with the Federal
Government.


Competition.  The  Registrant  competes  in  the  street  sweeper,
force-feed  loader and grader markets with a number of other companies which are
larger and have greater financial resources than the Registrant.

To the knowledge of the Registrant,  it is one of the largest  manufacturers  of
four-wheel street sweepers; however, there is substantial competition from other
manufacturers in the functional sweeper market,  which includes  three-wheel and
vacuum type sweepers.

To the knowledge of the Registrant,  it is one of the primary  manufacturers  of
force-feed loaders.  However,  front-end loaders, which are manufactured by many
other companies,  provide substantial functional competition.  The Registrant is
not a significant manufacturer of graders.


                                      -2-
<PAGE>


Research and Development.  The Registrant spent  approximately  $78,000 in 1997,
$110,000 in 1996,  and  $418,000 in 1995,  to improve  existing  products and to
consider new product lines.

Environment. Compliance with federal, state and local provisions which have been
enacted or adopted  regulating the discharge of materials into the  environment,
or otherwise relating to the protection of the environment, have had no material
effects upon the capital  expenditures,  results of operations,  and competitive
position of the  Registrant.  Due to the nature of its business,  the Registrant
does not anticipate any material capital expenditures for environmental  control
facilities for the next fiscal year.

Employees.  As of December 31, 1997,  the  Registrant  employed 263 persons,  of
which 176  employees  are  subject to a  collective  bargaining  agreement.  The
Registrant considers its relationship with its employees to be excellent.

Export Sales. Sales to customers in foreign countries approximated $1,356,000 in
1997,  $1,355,200 in 1996 and $984,500 in 1995. During 1997, such customers were
located in North America, the Middle East and the Pacific Rim.

Item 2.  Properties.

The Registrant owns one manufacturing plant which, in the Registrant's  opinion,
is suitable and adequate for the manufacture of its products.

The  Registrant's  plant is located in Wake Forest,  North Carolina.  The plant,
which was completed in 1965, is situated on  approximately  39 acres,  and is of
prestressed concrete construction with steel crane ways and supports.  The plant
is  believed  to be one of the  finest  heavy  duty  plants  of its  type in the
southeastern  part of the United States.  During 1985, the Company  completed an
addition of approximately  29,000 square feet to the assembly area of the plant.
During 1989, the Company completed an additional building as its new paint shop.
This paint shop is 4,800  square  feet,  and is designed  to be  environmentally
state-of-the-art.  It uses  filtered air both in and out of the paint room,  and
substantially  reduces the possibility of contaminants in the painting  process.
During 1995, the Company added a 1,755 square foot Inspection  Building.  Of the
approximately  206,935  square feet in the plant,  approximately  186,415 square
feet is devoted to  manufacturing  and assembly  facilities,  and to  stockroom,
shipping, and receiving facilities; approximately 16,360 square feet is used for
general  and  executive  offices;  and  approximately  4,160  square  feet is an
engineering department balcony area.

The  equipment  in the plant  includes  various  boring,  drilling  and  milling
machines,  lathes,  grinders,  punches,  shears, press brakes and other presses,
hydraulic testing  equipment,  saws,  machine shop equipment,  layout equipment,
heavy duty metal working and robotic welding equipment and  appropriately  large
material handling cranes.

Item 3.  Legal Proceedings.

Certain  proceedings  are pending  against the Company,  involving  ordinary and
routine claims incidental to the business of the Company. The ultimate legal and
financial  liability of the Company with respect to these proceedings  cannot be
estimated  with  certainty.   However,  the  Company  believes,   based  on  its
examination  of these  matters and its  experience  to date,  that the  ultimate
disposition of these matters will not materially  affect the financial  position
or results of operations of the Company.

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

No matters were submitted to a vote of shareholders, through the solicitation of
proxies or otherwise,  during the fourth  quarter of the year ended December 31,
1997.

                                    PART II

Item 5.  Market for Registrant's Common Equity and Related Shareholder Matters.

No cash dividends have been paid to shareholders during the last five years.


                                      -3-
<PAGE>

                             1997                1996                1995
                        ------------        ------------         -------------
Quarter Ended           High     Low        High     Low         High      Low
-------------           ----     ---        ----     ---         ----      ---
March 31               4 1/2    4           4 3/4    3 3/4       6 1/8    5 1/2
June 30                4 3/8    4           4 5/8    3 3/4       6 1/4    5 1/2
September 30           4 1/2    4 1/8       4 1/4    3 1/2       6 1/8    4 7/8
December 31            4 1/2    4 1/8       4 3/4    3 7/8       5 1/2    4

The  Company's  common shares are traded in the  over-the-counter  market on the
NASDAQ  National  Market  under the symbol  "ATPC".  The above  quotations  were
received from the NASDAQ  National  Market.  The number of  shareholders  of the
Company's common shares as of March 20, 1998 was 438.

On March 17,  1998 the last price of the  Company's  Common  Stock on the NASDAQ
National Market was $4.125 per share.

Item 6.  Selected Financial Data.

<TABLE>
<CAPTION>
                                                           Years Ended December 31,

Operating Data                      1997            1996             1995             1994            1993
--------------                  -----------     -----------      -----------      -----------     -----------
<S>                             <C>             <C>              <C>              <C>             <C>
Net Sales                       $29,410,863     $30,046,068      $30,424,588      $39,894,940     $32,640,257
                                -----------     -----------      -----------      -----------     -----------
Net Earnings (Loss)              (1,969,312)         45,155            2,743        1,388,194        (285,349)
Net Earnings (Loss) Per Share         (0.52)           0.01             --               0.35           (0.08)
Balance Sheet Data
Total Assets                    $27,664,993     $29,927,231      $29,325,917      $30,422,767     $28,013,857
Long-Term Obligations                  --            14,507           57,419           99,431         240,156
                                -----------     -----------      -----------      -----------     -----------
</TABLE>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.

RESULTS OF OPERATIONS

Significant Events Affecting 1997 to 1996 Comparability

The  comparability  of statement  of  operations  data has been  affected by the
following significant items that occurred in 1997 and 1996.

o  In  September,   1996,  the  Company  incurred   substantial  damage  to  its
manufacturing  facility as a result of Hurricane  Fran. The Company settled with
its insurance carrier for $664,380.  As a result of the settlement,  the Company
recognized  a pretax gain on the  involuntary  conversion  of damaged  assets of
$434,683.  Approximately $406,600 of the gain had a favorable impact on the cost
of goods  sold,  approximately  $12,740  of the gain had a  favorable  impact on
selling,  administrative  and engineering  expenses and the remaining $15,343
was included in other income.  The effect was an increase in 1996 net earnings
after tax of $286,891 or $.07 per share.

o In late  1996,  the  Company's  Board of  Directors  adopted a  resolution  to
terminate the Company's two defined  benefit pension plans and replace them with
a 401(k)  plan  which took  effect  January 1,  1997.  Under the  provisions  of
Statement of Financial Accounting  Standards No. 88, "Employers'  Accounting for
Settlements   and   Curtailments  of  Defined  Benefit  Pension  Plans  and  for
Termination  Benefits",  the Company  recognized  a pretax  curtailment  gain of
$1,016,651 in the fourth quarter of 1996 due to benefit  freezes.  Approximately
$770,160 of this  amount  resulted  in a  reduction  in cost of goods sold,  and
approximately  $246,491  of this  amount  resulted  in a  reduction  in selling,
administrative and engineering expenses.  The effect was an increase in 1996 net
earnings after tax of $670,990 or $.17 per share.

o In June, 1997, the Company  recognized pretax net periodic pension income
under FASB No. 88  of $1,308,200 on the  reversion  of  assets  due  to the
termination  of  the  pension  plan. Approximately  $565,227 of this amount
resulted in a reduction in cost of goods sold and  approximately  $742,973  of
this amount  resulted  in a  reduction  in selling, administrative and
engineering expenses. However, this favorable impact on selling,  administrative
and  engineering  expenses was offset by a $369,044 increase in excise


                                      -4-
<PAGE>

tax expense  associated with the termination of the pension plan. The effect was
a decrease in 1997 net loss after tax of $619,843 or $.16 per share.

o During 1996, as a continuation of its restructuring plan, the Company incurred
approximately  $553,701 of additional  charges.  Approximately  $326,294 of this
amount  related to the  disposal  and  write-down  to net  realizable  values of
certain assets. Approximately $227,407 of this amount was primarily attributable
to the  additional  expenses  which were  incurred  during 1996  relating to the
closure of  operations  of the  manufacturing  facility  in Sioux  Falls,  South
Dakota.  The effect of these  expenditures  was a decrease in 1996 net  earnings
after tax of $365,443 or $.09 per share.

o In  February,  1996,  the Company  sold its South  Dakota  land,  building and
certain inventory and manufacturing  equipment.  The statement of operations for
1996 included in other income a pretax gain of $234,355 in connection  with this
sale. The remaining  inventory and equipment  were  transferred to the Company's
Wake Forest,  North Carolina  manufacturing plant. The effect of this gain was
an increase in 1996 net earnings after tax of $154,674 or $.04 per share.

o In  December,  1996,  the  Company  sold its  Kolman  Aggregate  Product  Line
consisting of vibrating screens,  pugmills, ash blenders and conveyors. The sale
resulted in an inventory loss of approximately $306,943 which was included in
the cost of goods sold.  This sale reduced 1996 net earnings  after tax by
$202,582, or $ .05 per share.  As part of the sale, the Company sold its Kolman
trademark for the stated book value of $200,000.  The remaining  product lines
previously manufactured in Sioux Falls, South Dakota,  consisting of the
Force-Feed Loader, Maintenance Master and Composter continue to be manufactured
by the Company.

1997 Compared with 1996

The Company's net sales were  $29,410,863  in 1997, a 2.1% or $635,205  decrease
from the  $30,046,068  recorded  in 1996.  The  sales  decline  reflects  a 8.5%
decrease  in the number of units  shipped  during the period as  compared to the
prior year. Most of the decline in sweeper  shipments  occurred during the first
six months of 1997.  This  volume  decline was  partially  offset by a change in
product mix,  slightly higher average unit selling prices and a 9.6% increase in
replacement parts sales.

The decline in sweeper sales was attributable to several factors,  including the
severe winter weather followed by floods affecting the Company's dealers located
in the upper Midwest markets. In addition, a newly enacted tire tread weight law
in the state of Washington  disqualified  the Company from  submitting  bids for
four-wheel sweeper orders. The Company also continues to experience  competitive
pricing pressures in certain product lines.

The cost of goods sold as a percentage of net sales increased from 81.5% in 1996
to 85.5% in 1997.  The cost of goods sold was  favorably  impacted in the second
quarter of 1997 by the $565,227 net periodic pension income relating to the
termination of the pension plan. This favorable impact was reduced by a charge
to cost of goods sold of  approximately  $1,525,000  relating to various
inventory  adjustments. Approximately  $1,103,000  of this amount was
attributable  to  adjustments  in connection with the physical  inventory,
approximately  $262,000 related to the scrapping  of  obsolete  inventory  and
approximately  $160,000  related  to an increase in the reserve for inventory
obsolescence.

The 1996 cost of goods sold was favorably  impacted by the $770,160  curtailment
gain relating to the pension plans and the $406,600 insurance  settlement.  This
favorable impact was reduced by an inventory loss of  approximately  $306,943 in
connection with the sale of the Kolman Aggregate Product Line. The cost of goods
sold in 1996 included approximately $326,294 in expenditures associated with the
disposal and write-down to net realizable  values of certain  assets.  Excluding
these items,  cost of goods sold would have decreased to $24,188,444 or 82.2% of
net sales in 1997 from $25,027,414 or 83.3% of net sales in 1996.

Cost  of  goods  sold  in  1996  was  adversely impacted due to manufacturing
inefficiencies  in the  first  half of 1996  resulting  from  the introduction
of the new  regenerative  air sweeper and M9D mobil street sweeper product lines
and  commencement  of the  production  of certain  products in the Company's
Wake Forest,  North Carolina  facility that were  transferred from the former
South Dakota  facility.


                                      -5-
<PAGE>


The  cost  of  goods  sold in  1997  was  adversely  impacted  by manufacturing
inefficiencies  during the first  half of 1997,  stemming from a  substantially
lower volume of units, the shortage of certain parts and plant renovations which
impaired normal operating conditions. In addition, significant indirect labor
charges were incurred to conduct the yearly physical inventory on a
substantially  higher level of  inventory.

The Company's selling,  administrative  and engineering  expenses increased from
19.4% to 21.9% of net  sales,  while in  dollar  terms  increased  $607,798  to
$6,429,093  in 1997.  Selling,  administrative  and  engineering  expenses  were
favorably impacted in 1997 by the $742,973 net periodic pension income relating
to the pension plan. However, this favorable impact was offset by a $369,044
increase in excise tax  expense   associated   with  the   termination  of  the
pension  plan  and approximately  $406,000  increase in warranty  reserves for
the year ended 1997 related to charges for future field service campaigns.
Selling,  administrative and  engineering  expenses  in 1996  were  favorably
impacted  by the  $246,491 curtailment  gain  relating  to the  pension  plans
and the  $12,740  insurance settlement.  Approximately  $227,407 of additional
expenses were incurred during 1996 relating to the closure of the operations of
the manufacturing  facility in Sioux Falls, South Dakota.

Excluding  these  items,   selling,   administrative  and  engineering  expenses
increased from $5,853,059 in 1996 to $6,396,962 in 1997,  representing 19.5% and
21.8% of net sales, respectively.

Excluding the unusual items discussed above, the primary  reason for the
$543,903  increase in selling,  administrative  and engineering  expenses to
$6,396,962  in 1997 was an  increase in the  Company's warranty  expense due to
unfavorable  claims  experience  and  settlement of an outstanding  litigation
issue. In addition,  the Company continued to expand its domestic and
international  marketing  initiatives and increase its engineering and field
service staff. As a result, travel expenditures,  salaries and related employee
benefits were higher.  These increases were partially  offset by lower insurance
premiums and a $150,000 reduction in the Company's bad debt reserve.

Other income for 1997 was $38,109 as compared to $470,696 in 1996.  Included in
other income for 1996 was $234,355 which  represents the gain from the Company's
sale in February,  1996 of its South Dakota land,  building and certain  related
inventory and manufacturing equipment.  Also included in other income is $15,343
from the insurance settlement.

The Company also received $85,343 in 1996 representing a prorata distribution of
reorganization  proceeds  in a  bankruptcy  case  in  which  the  Company  was a
creditor.  Interest  income  declined  from  $90,802  in 1996 to $13,719 in 1997
reflecting the decrease in the Company's  average  investment  portfolio of cash
and cash equivalents.

Other  expenses  were  $114,907 for 1997 as compared to the $29,546  recorded in
1996.  Interest  expense  increased  from  $11,445 in 1996 to  $107,599  in 1997
reflecting the Company's higher inventory  levels. Higher inventory levels are
partially   attributable  to  an  increase  in  the  Company's  field  equipment
demonstration fleet.

The 12.2% income tax benefit rate for 1997 includes an increase in the Company's
valuation  reserve  allowance of $436,000 against recorded  deferred tax assets.
The  effective  income  tax  expense  rate was 75.2% in 1996 which reflects  an
increase  in the  Company's  valuation  reserve  allowance  of $43,000  against
recorded  deferred  tax assets  and a $53,611  adjustment resulting  from a tax
examination related to prior years.

The net loss for 1997 was  $1,969,312  or $0.52  per  share as  compared  to net
earnings of $45,155 or $0.01 per share for 1996.

                                   ----------

Organizational Restructuring Affecting 1996 to 1995 Comparability

The  comparability  of statement  of  operations  data has been  affected by the
following significant items that occurred in 1995.

o During 1995, plans were developed to  significantly  reduce the Company's cost
structure  and to improve  productivity.  This  restructuring  program  involved
reductions  in  the  number  of  employees,   consolidation   of   manufacturing
facilities,  and  disposition  of assets  that were no  longer  productive.  The
Company also phased-out the manufacture of nonstrategic product lines, including
Trailers, Track Assemblies and Refuse Collection Products.

The  restructuring  plan is  expected  to enable  the  Company  to  improve  its
competitive position in its core business, reduce costs, increase efficiency and
improve   profitability.   The  statement  of


                                      -6-

<PAGE>

operations   for  1995  included approximately  $1,135,000 of pretax
charges relating to the restructuring  plan. Approximately  $119,000  of
this  amount  related to  severance  and  associated benefits for staff
reductions,  approximately $452,000 of this amount related to the
disposal and  write-down to net  realizable  values of certain  assets,
and approximately  $564,000 of this amount related to the streamlining
of operations and administrative functions and the closing of the
production facility in Sioux Falls, South Dakota.

Approximately  $1,013,100 of the pretax charges  resulted in an increase in cost
of goods sold,  approximately $101,200 of this amount resulted in an increase in
selling,  administrative and engineering  expenses and the remaining $20,700 was
included in other expenses.  The effect of these  expenditures was a decrease in
1995 net earnings after tax of $749,100 or $.19 per common share.

1996 Compared with 1995

Net  sales  in  1996  declined  $378,520  or 1.2% to  $30,046,068.  The  Company
experienced a $2,707,760 reduction in sales volume primarily attributable to the
Company's  phasing out the manufacture of certain product lines and the transfer
of product  lines from the Company's  South Dakota  facility to its Wake Forest,
North Carolina plant. The Company also experienced a decline in replacement part
sales during this period.  These sales declines were partially offset by an 8.0%
increase in the number of sweepers  shipped and  slightly  higher  average  unit
selling prices.

Cost of goods sold as a percentage of net sales remained  relatively  unchanged,
increasing  slightly from 81.4% in 1995 to 81.5% in 1996. The cost of goods sold
was favorably impacted by the $770,160  curtailment gain relating to the pension
plans and the $406,600 insurance  settlement.  This favorable impact was reduced
by an inventory loss of  approximately  $306,943 in connection  with the sale of
the Kolman  Aggregate  Product Line.  Cost of goods sold in 1996 also  reflected
approximately  $326,294  in  expenditures   associated  with  the  disposal  and
write-down to net realizable values of certain assets.

Cost of goods sold in 1995 included  approximately  $1,013,100 of pretax charges
relating to the restructuring plan. Approximately $67,100 of this amount related
to  severance  and  associated  benefits  for  staff  reductions,  approximately
$430,900 of this amount related to the disposal and write-down to net realizable
values of certain assets,  and approximately  $515,100 of this amount related to
the streamlining of operations and  administrative  functions and the closing of
the production  facility in Sioux Falls,  South Dakota.  Excluding  these items,
cost of goods sold would have increased from  $23,764,457 in 1995 to $25,027,414
in 1996, representing 78.1% and 83.3% of net sales, respectively.

The  increase  in  the  cost  of  goods  sold  in  1996  was  primarily  due  to
manufacturing   inefficiencies   resulting  from  the   introduction  of  a  new
regenerative  air  sweeper  and M-9D  Mobil  Street  Sweeper  product  lines and
commencement of the production of certain products in the Company's Wake Forest,
North  Carolina  facility  that were  transferred  from the former  South Dakota
facility.

The Company's selling,  administrative  and engineering  expenses decreased from
$6,061,601 in 1995 to $5,821,235  in 1996,  representing  19.9% and 19.4% of net
sales,  respectively.  Selling,  administrative  and  engineering  expenses were
favorably  impacted by the  $246,491  curtailment  gain  relating to the pension
plans and the $12,740 insurance settlement. Approximately $227,407 of additional
expenses were incurred  during 1996 relating to the closure of operations of the
manufacturing  facility in Sioux Falls, South Dakota.  Approximately $101,200 of
expenses  incurred during 1995 related to the  restructuring and streamlining of
administrative  functions.  Excluding these items,  selling,  administrative and
engineering  expenses would have decreased from $5,960,401 in 1995 to $5,853,059
in 1996, representing 19.6% and 19.5% of net sales, respectively.

By comparison to 1995, selling,  administrative and engineering expenses in 1996
included  higher  warranty  expenses  due to  increases in the number of sweeper
shipments  during the year and  increases  in  extended  service  warranty  plan
reserves.  In addition,  the Company  expanded  its  domestic and  international
marketing initiatives and increased its sales and field service personnel.  As a
result, salaries,  related employee benefits and travel expenditures were higher
in 1996. These increases were partially  offset by lower research and
development  costs resulting  from the  Company's  phase-out  of the manufacture
of  nonstrategic product lines.

                                      -7-
<PAGE>

Other income in 1996 was  $470,696 as compared to $350,591 in 1995.  Included in
other income was $234,355  which  represents the gain from the Company's sale in
February,  1996 of its South Dakota land, building and certain related inventory
and manufacturing  equipment.  Also included in other income is $15,343 from the
insurance settlement.

The Company also received $85,343 in 1996 representing a prorata distribution of
reorganization  proceeds  in a  bankruptcy  case  in  which  the  Company  was a
creditor.  Interest income declined from $286,405 in 1995 to $90,802 in 1996 due
primarily to lower average rates of return realized on the Company's  investment
portfolio.  In  addition,  the  Company  experienced  a decrease  in the average
investment  portfolio  of cash  and  cash  equivalents,  reflecting  in part the
Company's  extended terms on certain  accounts  receivable and higher  inventory
levels.

The  effective  income  tax  expense  rate was 75.2% in 1996 which  reflects  an
increase  in the  Company's  valuation  reserve  allowance  of  $43,000  against
recorded  deferred  tax assets  and a $53,611  adjustment  resulting  from a tax
examination  related to prior years. The 102.7% income tax benefit rate for 1995
includes a 13.6%  research and  development  credit and a 35.6% credit from the
reduction in the valuation allowance.

Net  earnings  after tax for 1996 was $45,155 or $.01 per share,  as compared to
$2,743 for 1995.

Effects of Inflation

The Company  attempts to minimize  the impact of  inflation  on  production  and
operating  costs through cost control  programs and  productivity  improvements.
Over the past  three  years,  the rate of  inflation  has not had a  significant
impact on the  Company's  operations.  Prices paid for raw  materials  and other
manufacturing  inputs have remained fairly stable  throughout this period.  On a
longer-term basis, the Company has demonstrated an ability to adjust the selling
prices of its products in reaction to changing costs.

Year 2000 Issue

The Year 2000 Issue stems from the fact that many existing computer programs use
only two digits to identify a year in the date field. These programs were
designed and developed without considering the impact of the upcoming change in
the century. If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. Given the dependence by most
businesses on computer systems and the interdependence of companies, suppliers
and customers, it is likely that most companies are affected by the Year 2000
Issue.

The Company is planning to initiate a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000 Issue,
and will develop an implementation plan to resolve this issue. The Company is
dependent on computer processing in the conduct of its business activities.

Because the Company has not completed its review of the computer systems,
management is unable to estimate the cost of making its systems Year 2000
compliant.

Liquidity and Capital Resources

At December 31, 1997 the Company had working capital of  $18,208,520;  the ratio
of current  assets to current  liabilities  was 5.4 to 1; and the debt to equity
ratio was .20 to 1.

This compares to working  capital of  $20,535,588;  a ratio of current assets to
current  liabilities  of 5.8 to 1;  and a debt to  equity  ratio  of .19 to 1 at
December 31, 1996.

At December  31, 1997,  cash and cash  equivalents  were $6,880,  as compared to
$6,984 at December 31, 1996. During the course of the year, the Company
experienced a significantly higher level of usage of its line of credit in order
to finance a higher level of inventory.

Other than  utilizing the available  line of credit as needed,  the Company does
not presently plan to borrow long-term funds or sell securities.

Cash flow from operating activities improved in 1997 primarily due to a
$1,586,593 reduction in accounts receivable. This decrease was primarily due to
the fact that approximately $1,800,000 of outstanding accounts receivable on
December 31, 1996 were due from customers granted extended credit terms. In
addition, the Company experienced a $841,023 reduction in inventories which was
offset by a corresponding $1,056,461 reduction in accounts payable.


                                      -8-

<PAGE>

As part of its authorized  stock repurchase  program,  the Company used $237,744
and $486,252 for financing activities to repurchase its common stock in 1997 and
1996, respectively.

Capital  expenditures  were $606,259 in 1997 as compared to $483,592 in 1996 and
were  primarily  used to further  upgrade the Company's  management  information
system and machinery and equipment.

The Company expects capital  expenditures  in 1998 to approximate  $500,000.  In
1998,  the  Company  expects to  continue  its  capital  expenditure  program by
improving or expanding existing facilities and upgrading  equipment.  The timing
of capital  expenditures is anticipated to coincide generally with its operating
cash flow.

At December 31, 1997,  the Company had available an unsecured  line of credit of
$5,000,000.  The Company believes that existing working capital,  cash flow from
future  operations,  and the  available  bank  line of credit  provide  adequate
resources to finance the cash requirements of future capital expenditures.

Item 8.  Financial Statements and Supplementary Data.

See Financial  Statements and Financial  Statement Schedules Index commencing on
page F-1 hereof.

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

None.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.

The following table sets forth the name,  principal  occupation,  age, length of
service and  ownership  of Common  Shares  (defined  as the Common  Stock of the
Company,  par value $2 per share) of the  Company  (by number of shares and as a
percentage of the total  outstanding) of each of the Company's current executive
officers and directors as a group.

<TABLE>
<CAPTION>
                                                              Common Shares
                                                               Beneficially
                                                   Director     Owned as of      Percent
   Name and Principal Occupation (1)          Age    Since   March 17, 1998(2)   of Class
   ---------------------------------          ---    -----   -----------------   --------
<S>                                           <C>     <C>       <C>               <C>
John F. McCullough(3)......................   72      1975      1,597,726         41.99%
  Chairman of
  Orton/McCullough Crane Company, Inc.
  Oak Brook, Illinois

Martin W. McCullough.......................   40      1985         12,632          0.33%
  President
  Orton/McCullough Crane Company, Inc.
  Huntington, Indiana

Richard A. Rosenthal.......................   65      1977          5,691          0.15%
  Retired Director of Athletics
  University of Notre Dame
  South Bend, Indiana

John P. Kelly..............................   44      1997            100           --
  Partner
  Mountcastle, Kelly and Dyer, P.C.
  Wheaton, Illinois

James H. Stumpo............................   59      1995          2,000          0.05%
  President and Chief Executive Officer
  of the Company

Franz M. Ahting............................   50      1995          2,000          0.05%
  Vice President Finance
  Chief Financial Officer
  Treasurer and Secretary
  of the Company

Executive officers and directors as
  a group (6 persons)......................                     1,620,149         42.57%
</TABLE>

                                      -9-

<PAGE>

----------
(1)  Each executive officer's and director's principal occupation and employment
     for the last five years has been as listed  above,  except for Mr.  John F.
     McCullough,  Mr. Martin W. McCullough, Mr. James H. Stumpo and Mr. Franz M.
     Ahting.  From  May 1992 to May 1995 Mr.  Stumpo  served  as Vice  President
     Finance with Benton Harbor  Engineering,  Benton Harbor,  Michigan.  In May
     1995 Mr.  Stumpo was  elected  President  and Chief  Executive  Officer and
     Director of the Company.  From 1988 to 1990, Mr. Ahting served as Assistant
     Treasurer for Carolina Steel Corporation,  Greensboro, North Carolina. From
     1991 until  joining  Athey as  Controller  in November,  1993, he practiced
     public accounting in Greensboro,  North Carolina.  In May, 1994, Mr. Ahting
     became Treasurer and Assistant  Secretary of the Company.  In May, 1995 Mr.
     Ahting was elected Vice  President  Finance,  Chief  Financial  Officer and
     Director of the  Company.  In May 1996,  Mr.  Ahting was elected  Corporate
     Secretary of the Company.  For the five years prior to May,  1997, Mr. John
     F. McCullough was Chairman and President,  and Mr. Martin W. McCullough was
     Vice President and General Manager of Orton/McCullough  Crane Company, Inc.
     In May, 1997 Mr. Martin W. McCullough became President of  Orton/McCullough
     Crane Company,  Inc. and Mr. John F. McCullough  continued as the Chairman.
     Mr. Richard A. Rosenthal is a director of the following companies: Advanced
     Drainage Systems, Inc., Columbus, Ohio; Beck Corporation, Elkhart, Indiana;
     CID Equity Partners, Indianapolis, Indiana; LaCrosse Footwear, Inc.,
     LaCrosse,  Wisconsin; RFE Investment Partners, New Canaan, Connecticut; St.
     Joseph Capital Corporation, Mishawaka, Indiana.

(2)  Except as otherwise  noted, the persons named in the table have sole voting
     and investment power with respect to all shares shown as beneficially owned
     by them.

(3)  Common Shares shown as owned by Mr. John F.  McCullough are owned of record
     by Orton/  McCullough Crane Company,  Inc., of which Mr. John F. McCullough
     is an officer and principal shareholder (see "Security Ownership of Certain
     Beneficial Owners and Management" (Item 12) below. Mr. McCullough disclaims
     beneficial ownership of such shares.

     John F. McCullough is the father of Martin W. McCullough and  father-in-law
     of John P. Kelly.

Section 16(a) Beneficial Ownership Reporting Compliance

Management  of the  Company  has the  understanding  that none of its  officers,
directors and persons  holding more than 10% of the Company's  Common Shares has
failed to file  required  reports of their  ownership  of the  Company's  Common
Shares and any changes in that ownership  with the U.S.  Securities and Exchange
Commission.  In making  this  statement,  the  Company has relied on the written
representations  of its officers,  directors and holders of more than 10% of its
common stock and copies of the reports that they have filed with the Commission.

Item 11.  Executive Compensation.

Summary Compensation Table

The following  table sets forth the aggregate  compensation  paid by the Company
for services rendered in all capacities to the Company during the Company's last
three  fiscal years to all those  individuals  serving the Company as CEO during
1997. No other executive  officer of the Company was paid  compensation for 1997
in excess of $100,000.

                                     Annual Compensation
                                   -----------------------     Other Annual
        Name and                           Salary    Bonus     Compensation
    Principal Positions            Year       $        $            $
    -------------------            ----    -------   -----     ------------
James H. Stumpo
  President, CEO and Director      1997    100,417     --       22,496 (1)
                                   1996    100,000     --       38,101 (2)
                                   1995     65,257     --       11,740 (2)
----------
(1)  Payments  included in this amount for the fiscal  year ended  December  31,
     1997 consist of:

     (a)  Company  contributions  of $2,175 to the  Athey  Products  Corporation
          Employees  401(k)  Plan  (the  "401(k)  Plan"),  which  is  a  defined
          contribution  salary  reduction  401(k) Plan  qualified  under Section
          401(a) of the Internal Revenue Code of 1986, as amended.

     (b)  Company   contributions  of  $20,321  to  the  401(k)  Plan  from  the
          distribution  of excess plan assets  stemming from the  termination of
          the Company's non-contributing defined benefit pension plan.

(2)  Mr. James H. Stumpo received  $38,101 and $11,740  representing  relocation
     expenses in 1996 and 1995, respectively.

                                       -10-

<PAGE>


Director Compensation

Directors who are employees of the Company do not receive fees for attendance at
director's  meetings.  Mr. John F.  McCullough  is paid  $100,000  annually  for
serving as Chairman of the Board of  Directors.  Directors who are not employees
of the  Company  are paid  $18,000 a year for  serving  as  directors.  No other
remuneration  was paid as  director's  fees. No directors  were paid  additional
compensation for committee  participation or special assignments.  Directors are
reimbursed for their  out-of-pocket  expenses incurred in attending  meetings of
directors or shareholders.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

The following  table sets forth  information as of March 17, 1998 regarding each
person  who was known by the  Company  to own  beneficially  more than 5% of the
outstanding Common Shares of the Company:

                                                        Amount and
                                                        Nature of
                                                        Beneficial
                                                         Ownership
       Name and Address of                               of Common      Percent
        Beneficial Owner                                 Shares (3)     of Class
        ----------------                                 ----------     --------
Orton/McCullough Crane Company, Inc. (1)..............   1,597,726       41.99%
  1244 East Market Street
  Huntington, Indiana 46750

David L. Babson & Company, Inc........................     432,110       11.35%
  One Memorial Drive
  Cambridge, Massachusetts 02142-1300

Isometrics, Inc. (2)..................................     204,472        5.37%
  1266 North Scales Street
  Post Office Box 660
  Reidsville, North Carolina 27320
----------
(1)  Mr.  John  F.   McCullough,   an  officer  and  principal   shareholder  of
     Orton/McCullough  Crane Company,  Inc.,  may be deemed to share  beneficial
     ownership of the shares  shown as  beneficially  owned by  Orton/McCullough
     Crane Company,  Inc.. Mr. McCullough disclaims beneficial ownership of such
     shares.

(2)  Mr. Dennis M. Bracy, the president, director and majority shareholder, with
     approximately 98% of the outstanding common shares of Isometrics, Inc., may
     be deemed to share beneficial ownership of the shares shown as beneficially
     owned by Isometrics, Inc.

(3)  Shares shown as owned by  Orton/McCullough  Crane Company,  Inc.,  David L.
     Babson & Company,  Inc. and Isometrics,  Inc. are as reported on the latest
     Schedule 13D or 13G filings by such entities, respectively.

The Common Shares are the only class of  outstanding  voting  securities  of the
Company. Also, as of March 17, 1998, all executive officers and directors of the
Company  owned  of  record  and   beneficially,   1,620,149  Common  Shares,  or
approximately  42.57% of the outstanding Common Shares,  including the shares of
Orton/McCullough Crane Company, Inc. shown above.

See "Directors  and Executive  Officers of the  Registrant"  (Item 10) above for
information  concerning  beneficial ownership of the Company's voting securities
by management.

                                       -11-

<PAGE>

Item 13.  Certain Relationships and Related Transactions.

See Directors and Executive  Officers of the  Registrant  (Item 10) and Security
Ownership of Certain Beneficial Owners and Management (Item 12) for a discussion
of Mr. J. McCullough's relationship with the Company.

                                    PART IV

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

Item 14(a)(1).  Financial Statements.

See Financial  Statements and Financial  Statement Schedules Index commencing on
Page F-1.

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

See Financial  Statements and Financial  Statement Schedules Index commencing on
Page F-1.

Item 14(b).  Reports on Form 8-K.

None.

Item 14(c).  Exhibits.

     Exhibit
      Number                        Description
      ------                        -----------
       *3.1   Articles  of  Incorporation  of the  Registrant  (Incorporated  by
              reference to Exhibit 3 to the  Registrant's  1980 Form 10-K,  File
              No. 1-2723).

       *3.2   By-Laws of the Registrant  (Incorporated by reference to Exhibit 3
              to the Registrant's 1980 Form 10-K, File No. 1-2723).

       *4.1   Specimen   certificate   of   Common   Stock  of  the   Registrant
              (Incorporated by reference to Exhibit 7 to the  Registrant's  1970
              Form 10-K File No. 1-2723).

       21.1   Subsidiaries of the Registrant.

       27.1   Financial Data Schedule.
----------
*    Certain of the exhibits in this Annual Report on Form 10-K are indicated by
     an asterisk,  and hereby  incorporated  by reference to other  documents on
     file with the Commission  with which they are physically  filed, to be part
     hereof, as of their respective dates.


                                      -12-
<PAGE>


                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  Registrant  has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                           ATHEY PRODUCTS CORPORATION
                                  (Registrant)

                            By: /s/ James H. Stumpo
                                -------------------
                                James H. Stumpo
                     President and Chief Executive Officer

                            By: /s/ Franz M. Ahting
                                -------------------
                                Franz M. Ahting
               Vice President Finance and Chief Financial Officer

                             Date: March 30, 1998.

Pursuant to the  requirements  of the Securities and 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.

         /s/ John F. McCullough                 /s/ Martin W. McCullough
             ------------------                     --------------------
          John F. McCullough,                Martin W. McCullough, Director
   Chairman of the Board of Directors                March 30, 1998
             March 30, 1998

           /s/ John P. Kelly                    /s/ Richard A. Rosenthal
               -------------                        --------------------
        John P. Kelly, Director              Richard A. Rosenthal, Director

             March 30, 1998                          March 30, 1998

          /s/ James H. Stumpo                      /s/ Franz M. Ahting
              ---------------                          ---------------
       James H. Stumpo, Director               Franz M. Ahting , Director

             March 30, 1998                          March 30, 1998


                                      -13-
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS
                                      AND
                         FINANCIAL STATEMENTS SCHEDULES

Independent Auditor's Report.................................................F-2

Balance Sheets at December 31, 1997 and 1996.................................F-3

Statements of Operations for the years ended
  December 31, 1997, 1996 and 1995...........................................F-4

Statements of Shareholders' Equity for the years ended
  December 31, 1997, 1996 and 1995...........................................F-4

Statements of Cash Flows for the years ended
  December 31, 1997, 1996 and 1995...........................................F-5

Notes to Financial Statements.........................................F-6 to F-9

Financial Statements Schedules:
  Subsidiaries of the Registrant............................................F-10
  Schedule II - Valuation and Qualifying Accounts...........................F-11


                                     -F-1-
<PAGE>


                          INDEPENDENT AUDITOR'S REPORT

Board of Directors and Shareholders
Athey Products Corporation
Wake Forest, North Carolina

We have audited the accompanying balance sheets of Athey Products Corporation as
of December 31, 1997 and 1996, and the related statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Athey Products Corporation as
of December 31, 1997, and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.


/s/ McGladrey & Pullen, LLP

Raleigh, North Carolina
March 20, 1998


                                     -F-2-
<PAGE>


<TABLE>
<CAPTION>
                                 BALANCE SHEETS

                                                                           December 31, 1997  December 31, 1996
                                                                           -----------------  -----------------
<S>                                                                          <C>                <C>
ASSETS
  CURRENT ASSETS:
    Cash and cash equivalents                                                $      6,880       $      6,984
    Accounts receivable (less allowances for doubtful accounts
      of $200,000 and $350,000 for 1997 and 1996, respectively)
      (Note 2)                                                                  2,865,872          3,738,103
    Insurance settlement receivable (Note 3)                                         --              564,380
    Inventories (Note 4)                                                       18,108,545         18,949,568
    Prepaid expenses (Note 9)                                                     357,828            723,535
    Refundable income taxes                                                       749,045            544,457
    Deferred income taxes (Note 7)                                                227,072            331,000
                                                                             ------------       ------------
                     Total current assets                                      22,315,242         24,858,027
                                                                             ------------       ------------
  OTHER ASSETS:
    Marketable securities (Note 8)                                              1,681,224          1,450,650
    Other                                                                          26,586            115,223
                                                                             ------------       ------------
                     Total other assets                                         1,707,810          1,565,873
                                                                             ------------       ------------
  PROPERTY, PLANT AND EQUIPMENT:
    Land and land improvements                                                     47,785             47,785
    Buildings                                                                   3,777,922          3,574,941
    Machinery and equipment (Note 6)                                            5,606,727          5,270,958
                                                                             ------------       ------------
                                                                                9,432,434          8,893,684
                                                                             ------------       ------------
    Less accumulated depreciation                                              (5,790,493)        (5,390,353)
                                                                             ------------       ------------
                     Total property, plant and equipment, net                   3,641,941          3,503,331
                                                                             ------------       ------------
                                                                             $ 27,664,993       $ 29,927,231
                                                                             ============       ============

LIABILITIES AND SHAREHOLDERS' EQUITY
  CURRENT LIABILITIES:
    Excess of outstanding checks over bank balance                           $    949,800       $    376,303
    Current portion of obligations under capital lease (Note 6)                    14,507             42,912
    Accounts payable                                                            1,518,743          2,575,204
    Employee compensation and amounts withheld                                    217,755            357,641
    Other accrued expenses                                                        129,917            280,379
    Warranty reserve (Note 15)                                                  1,276,000            690,000
                                                                             ------------       ------------
        Total current liabilities                                               4,106,722          4,322,439
                                                                             ------------       ------------
  NONCURRENT LIABILITIES:
    Obligations under capital lease (Note 6)                                         --               14,507
    Deferred income taxes (Note 7)                                                476,904            454,040
                                                                             ------------       ------------
        Total noncurrent liabilities                                              476,904            468,547
                                                                             ------------       ------------
  SHAREHOLDERS' EQUITY (Note 11):
    Common stock, par value $2 per share:
      Authorized 10,000,000 shares;
      Issued 4,020,459 shares                                                   8,040,918          8,040,918
    Additional paid-in capital                                                 16,218,394         16,218,394
    Retained earnings (deficit)                                                  (734,798)         1,234,514
    Unrealized gain on marketable securities
      available-for-sale, net of related tax effect (Note 8)                      485,411            333,233
    Less cost of 214,851 and 158,751 common shares
      in treasury for 1997 and 1996, respectively (Note 11)                      (928,558)          (690,814)
                                                                             ------------       ------------
          Total shareholders' equity                                           23,081,367         25,136,245
                                                                             ------------       ------------
                                                                             $ 27,664,993       $ 29,927,231
                                                                             ============       ============
</TABLE>

See notes to financial statements.


                                     -F-3-
<PAGE>

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                              Years Ended December 31,
                                                 --------------------------------------------------
                                                     1997               1996               1995
                                                 ------------       ------------       ------------
<S>             <C>                              <C>                <C>                <C>
NET SALES (Note 2)                               $ 29,410,863       $ 30,046,068       $ 30,424,588
Cost of goods sold (Notes 3, 13 and 14)            25,148,167         24,483,891         24,777,557
                                                 ------------       ------------       ------------
Gross profit                                        4,262,696          5,562,177          5,647,031

Selling, administrative and
  engineering expenses (Notes 9, 10 and 13)         6,429,033          5,821,235          6,061,601
                                                 ------------       ------------       ------------
Loss from operations                               (2,166,337)          (259,058)          (414,570)

Other income                                           38,109            470,696            350,591
Other expenses (Note 5)                              (114,907)           (29,546)           (37,282)
                                                 ------------       ------------       ------------
Earnings (loss) before income taxes                (2,243,135)           182,092           (101,261)

Income tax expense (benefit) (Note 7)                (273,823)           136,937           (104,004)
                                                 ------------       ------------       ------------

NET EARNINGS (LOSS)                              $ (1,969,312)      $     45,155       $      2,743
                                                 ============       ============       ============

NET EARNINGS (LOSS) PER SHARE                    $      (0.52)      $       0.01       $       --
                                                 ============       ============       ============

WEIGHTED AVERAGE SHARES
  OUTSTANDING                                       3,808,159          3,956,135          3,973,459
                                                 ============       ============       ============
</TABLE>


                       STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                                         Unrealized
                                                                                                                         Gain/(Loss)
                                       Common Stock             Additional      Retained         Treasury Stock              on
                                -------------------------        Paid-In        Earnings      ---------------------      Marketable
                                  Shares       Par Value         Capital       (Deficits)     Shares         Cost        Securities
                                ---------      ----------      -----------     ----------     ------      ---------        -------
<S>                             <C>            <C>             <C>             <C>           <C>          <C>             <C>
BALANCE, January 1, 1995        4,020,459      $8,040,918      $16,218,394     $1,186,616     47,000      $(204,562)      $ 31,207
Unrealized loss on marketable
  securities (Note 8)                --              --               --             --         --             --          (27,446)
Net earnings for 1995                --              --               --            2,743       --             --             --
                                ---------      ----------      -----------     ----------    -------      ---------       --------
BALANCE, December 31, 1995      4,020,459       8,040,918       16,218,394      1,189,359     47,000       (204,562)         3,761
Unrealized gain on marketable
  securities (Note 8)                --              --               --             --         --             --          329,472
Purchase of common stock
  for treasury (Note 11)             --              --               --             --      111,751       (486,252)          --
Net earnings for 1996                --              --               --           45,155       --             --             --
                                ---------      ----------      -----------     ----------    -------      ---------       --------
BALANCE, December 31, 1996      4,020,459       8,040,918       16,218,394      1,234,514    158,751       (690,814)       333,233
Unrealized gain on marketable
  securities (Note 8)                --              --               --             --         --             --          152,178
Purchase of common stock
  for treasury (Note 11)             --              --               --             --       56,100       (237,744)          --
Net loss for 1997                    --              --               --       (1,969,312)      --             --             --
                                ---------      ----------      -----------     ----------    -------      ---------       --------
BALANCE, December 31, 1997      4,020,459      $8,040,918      $16,218,394      $(734,798)   214,851      $(928,558)      $485,411
                                =========      ==========      ===========      =========    =======      =========       ========
</TABLE>

See notes to financial statements.


                                     -F-4-
<PAGE>

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                                --------------------------------------------
                                                                    1997            1996            1995
                                                                ------------    ------------    ------------
<S>                                                             <C>             <C>             <C>
OPERATING ACTIVITIES:
  Net earnings (loss)                                           $ (1,969,312)   $     45,155    $      2,743
  Adjustments to reconcile net earnings (loss)
      to net cash provided by (used in) operating activities:
    Depreciation and amortization                                    461,573         420,580         495,135
    Provision for doubtful accounts                                 (149,982)         50,000          53,244
    Provision for deferred income taxes                               48,397         322,912         210,564
    (Gain) loss on sale of equipment                                   1,512        (249,215)         22,276
  Changes in operating assets and liabilities:
    Accounts receivable                                            1,586,593      (1,983,376)      4,056,496
    Inventories                                                      841,023      (1,927,367)     (2,266,279)
    Prepaid expenses                                                 365,706        (544,481)         26,861
    Refundable income taxes                                         (204,588)        (12,940)       (531,517)
    Other assets                                                      88,637         (90,865)          2,295
    Accounts payable                                              (1,056,461)        684,339        (522,019)
    Employee compensation and amounts withheld                      (139,886)        (86,475)       (191,539)
    Other accrued expenses                                          (150,462)       (263,256)        (88,389)
    Warranty reserves                                                586,000          54,500        (144,500)
    Income taxes payable                                                --              --          (113,500)
                                                                ------------    ------------    ------------
      Net cash provided by (used in) operating activities            308,750      (3,580,489)      1,011,871
                                                                ------------    ------------    ------------
INVESTING ACTIVITIES:
  Purchase of plant and equipment                                   (606,259)       (483,592)       (445,149)
  Proceeds from disposal of assets                                     4,564         950,938             450
  Proceeds from sale of goodwill                                        --           200,000            --
                                                                ------------    ------------    ------------
    Net cash provided by (used in) investing activities             (601,695)        667,346        (444,699)
                                                                ------------    ------------    ------------
FINANCING ACTIVITIES:
  Proceeds from line of credit                                    14,692,000            --              --
  Repayment of line of credit                                    (14,692,000)           --              --
  Excess of outstanding checks over bank balance                     573,497         376,303            --
  Principal paid on obligations under capital lease                  (42,912)        (42,012)        (41,130)
  Principal paid on debt                                                --              --           (99,595)
  Purchase of common stock for treasury                             (237,744)       (486,252)           --
                                                                ------------    ------------    ------------
    Net cash provided by (used in) financing activities              292,841        (151,961)       (140,725)
                                                                ------------    ------------    ------------
NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                                  (104)     (3,065,104)        426,447

CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD                                                  6,984       3,072,088       2,645,641
                                                                ------------    ------------    ------------
CASH AND CASH EQUIVALENTS,
  END OF PERIOD                                                 $      6,880    $      6,984    $  3,072,088
                                                                ============    ============    ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
  Income taxes paid (recoveries)                                $   (117,632)   $   (173,035)   $    329,680
                                                                ============    ============    ============
  Interest paid                                                 $    107,599    $     11,445    $      7,761
                                                                ============    ============    ============
</TABLE>

See notes to financial statements.


                                     -F-5-
<PAGE>


                         NOTES TO FINANCIAL STATEMENTS


1.   Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations-- Athey Products Corporation is a manufacturer whose
principal products are mobil street sweepers and force-feed loaders. The Company
also manufactures other equipment and replacement parts. The primary users of
the Company's products are contractors, municipalities, and other governmental
agencies. Significantly all of the Company's sales are throughout the United
States.

Significant Accounting Policies - The significant accounting policies of the
Company are summarized below:

     a. Statements of Cash Flows - For the purpose of the statements of cash
flows, the Company considers all short-term investments with an original
maturity of three months or less at the time of purchase to be cash equivalents.

     b. Inventories - Inventories are stated at the lower of cost, determined on
the first-in, first-out basis, or market. Obsolete and possible excess
quantities of inventory are reduced to estimated net realizable values.

     c. Property and Depreciation - Property, plant and equipment are carried at
cost. Depreciation is computed over estimated useful lives using the
straight-line method in the financial statements and accelerated methods for
income tax purposes.

     d. Marketable Securities - Marketable securities consist of an investment
in equity securities which the Company has designated as available-for-sale.
Such securities, while readily marketable, are not held solely in anticipation
of short-term market gains. The securities are reported at fair value, with
unrealized holding gains and losses, net of the related deferred tax effect,
reported as a separate component of shareholders' equity.

     e. Income Taxes - Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for effects of changes in tax laws and rates on the
date of enactment.

     f. Treasury Stock - Treasury stock is stated at cost.

     g. Earnings (Loss) Per Share - Earnings (loss) per share amounts are
computed on the basis of the weighted average number of shares outstanding
during the year.

     h. 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.

     i. Fair Value of Financial Instruments - The following summarizes the major
methods and assumptions used in estimating the fair values of financial
instruments:

     Cash and cash equivalents - The carrying amount approximates fair value due
     to the relatively short term period to maturity of these instruments.

     Marketable equity securities - The fair value of marketable equity
     securities are estimated based on quoted market prices.

     j. Reclassifications - Certain previously reported amounts have been
reclassified to conform with the year-end 1997 presentation with no effect on
net earnings.

2.   Major Customers

Net sales for the years ended December 31, 1997, 1996 and 1995 include sales to
the following major customer (which accounted for 10% or more of the total net
sales of the Company for those years):

                         1997            1996            1995
                     -----------     -----------     -----------
     Nixon-Egli      $ 7,568,795     $ 7,493,960     $ 7,602,597

There were outstanding receivables from this customer of $533,993, $557,901, and
$555,213, as of December 31, 1997, 1996, and 1995, respectively.

3.   Insurance Settlement

In September, 1996, the Company incurred substantial damage to its manufacturing
facility as a result of a hurricane. The Company settled with its insurance
carrier for $664,380. At December 31, 1996, $100,000 of this settlement had been
received. As a result of the settlement, the Company recognized a pretax gain on
the involuntary conversion of damaged assets of $434,683. Approximately $406,600
of the gain was included in the cost of goods sold, approximately $12,740 of the
gain was included in selling, administrative and engineering expenses and the
remaining $15,343 was included in other income. The effect was an increase in
1996 net earnings after tax of $286,891 or $ .07 per share.

4.   Inventories

Inventories are summarized below:

                                                          December 31,
                                                --------------------------------
                                                    1997                 1996
                                                --------------------------------
Finished goods                                  $ 4,181,758          $ 5,125,583
Work-in-process                                   3,592,887            4,380,095
Raw materials                                    10,333,900            9,443,890
                                                --------------------------------
                                                $18,108,545          $18,949,568
                                                ===========          ===========

5.   Financing Arrangements

At December 31, 1997, the Company had available an unsecured line of credit of
$5,000,000. There were no outstanding borrowings under the line at December 31,
1997 or 1996.

During 1997, 1996, and 1995, the Company incurred interest expense of $107,599,
$11,445, and $7,761, respectively.

6.   Lease Commitments

The Company is the lessee of computer equipment under a capital lease which
started in 1993 and expires in 1998. The assets and liabilities under the
capital lease were recorded at the present value of net minimum lease payments
at inception, approximately $207,000. The assets are depreciated over their
estimated productive lives. Depreciation of assets under the capital lease is
included in depreciation expense for 1997, 1996 and 1995.

Depreciation of assets under capital leases charged to expense was $41,441 for
each of the last three years. Accumulated amortization under this capital lease
was $186,483 and $145,042 at December 31, 1997 and 1996, respectively.


                                     -F-6-
<PAGE>


================================================================================


The future minimum lease payments under the capital lease as of December 31,
1997 for the next year are:

  Year Ended December 31,                                    Amount
  -----------------------                                    ------
          1998                                              $ 14,545
          Less: Imputed interest                                  38
          Present value of net minimum
            lease payments                                    14,507
          Less: Current portion                               14,507
                                                            --------
          Obligations under capital lease                   $   --
                                                            ========

The interest rate on the capitalized lease is 6.6% and is imputed based on the
lessor's implicit rate of return.

7.   Income Taxes

At December 31, 1997, the Company has available State net economic loss
carryforwards of approximately $1,497,000 expiring as follows:

                  Year of
       ------------------------------
       Origination         Expiration
       -----------         ----------
          1993                1998              $   119,000
          1995                2000                  374,000
          1996                2001                  335,000
          1997                2002                  669,000
                                                -----------
          TOTAL                                 $ 1,497,000
                                                ===========

Components of the income tax expense (benefit) for 1997, 1996 and 1995 are as
follows:

                                     1997             1996              1995
                                  ---------         ---------         ---------
Current:
  Federal                         $(325,186)        $(185,975)        $(314,568)
  State                               2,966              --                --
                                  ---------         ---------         ---------
Total current                      (322,220)         (185,975)         (314,568)
                                  ---------         ---------         ---------
Deferred:
  Federal                            48,397           322,912           210,564
  State                                --                --                --
                                  ---------         ---------         ---------
Total deferred                       48,397           322,912           210,564
                                  ---------         ---------         ---------
TOTAL                             $(273,823)        $ 136,937         $(104,004)
                                  =========         =========         =========

Net deferred tax assets consist of the following components at December 31, 1997
and 1996:

                                                      1997              1996
                                                  -----------       -----------
Deferred tax assets:
  Accounts receivable                             $    68,000       $   119,000
  Inventory allowance                                 342,000           274,000
  Accrued vacation                                     53,000            96,000
  Warranty reserve                                    434,000           235,000
  Allowance for marketable securities                  89,000            89,000
  Accrued litigation                                    9,000            17,000
  Net economic loss and tax
    carryforwards                                     232,000           163,000
  Other                                                10,000            44,000
                                                  -----------       -----------
                                                    1,237,000         1,037,000
  Less valuation allowance                           (864,000)         (428,000)
                                                  -----------       -----------
                                                      373,000           609,000
                                                  -----------       -----------
Deferred tax liabilities:
  Property and equipment                             (372,832)         (377,040)
  Prepaid pension                                        --            (183,000)
  Marketable securities                              (250,000)         (172,000)
                                                  -----------       -----------
                                                     (622,832)         (732,040)
                                                  -----------       -----------
Net deferred tax assets (liabilities)             $  (249,832)      $  (123,040)
                                                  ===========       ===========

The components giving rise to the net deferred tax assets (liabilities)
described above have been included in the accompanying balance sheets as of
December 31, 1997 and 1996 as follows:

                                                        1997             1996
                                                     ---------        ---------
Current assets                                       $ 227,072        $ 331,000
Noncurrent liabilities                                (476,904)        (454,040)
                                                     ---------        ---------
Net deferred tax assets (liabilities)                $(249,832)       $(123,040)
                                                     =========        =========

A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. The Company has
established a valuation allowance totaling $864,000 and $428,000 for certain
deferred tax assets as of December 31, 1997 and 1996, respectively, which
management feels meet this criteria.

A reconciliation of the provision for income taxes to income tax expense
(benefit), computed by applying the statutory federal income tax rate to pretax
income (loss), is as follows:

                          1997                 1996                 1995
                   -----------------    -----------------    ------------------
                     Amount      %       Amount       %        Amount      %
                   ---------   -----    ---------   -----    ---------   ------
Tax expense
  (benefit)
  computed at

  statutory rate   $(762,666)  (34.0)%  $  61,911    34.0%   $ (34,429)  (34.0)%
Research and
  development

  credit                --      --         (2,336)   (1.3)%    (13,807)  (13.6)%
Change in
  valuation

  allowance          436,000    19.4%      43,000    23.6%     (36,000)  (35.6)%
Other                 52,843     2.4%      34,362    18.9%     (19,768)  (19.5)%
                   ---------   -----    ---------   -----    ---------  ------
TOTAL              $(273,823)  (12.2)%  $ 136,937    75.2%   $(104,004  (102.7)%
                   =========   =====    =========   =====    =========  ======

8.   Marketable Securities

The cost, estimated market value and gross unrealized gain of the Company's
investment in available-for-sale marketable equity securities at December 31,
1997 and 1996 are as follows:

                                                    1997                 1996
                                                 ----------           ----------
Cost                                             $  945,751           $  945,751
Gross unrealized gain                               735,473              504,899
                                                 ----------           ----------
Estimated market value                           $1,681,224           $1,450,650
                                                 ==========           ==========

There were no sales of marketable securities during 1997, 1996 or 1995.

The change in net unrealized gains and losses reported as a separate component
of equity for the years ended December 31, 1997, 1996 and 1995 is shown below:

                                         1997           1996            1995
                                      ---------       ---------       ---------
Balance in equity
  component, beginning                $ 333,233       $   3,761       $  31,207
  Change in net unrealized
    gains (losses)                      230,574         499,200         (41,585)
  Change in deferred
    income taxes                        (78,396)       (169,728)         14,139
                                      ---------       ---------       ---------
Balance in equity
  component, ending                   $ 485,411       $ 333,233       $   3,761
                                      =========       =========       =========


                                     -F-7-
<PAGE>


================================================================================


9.   Pension Plans

The Company had two noncontributory defined benefit pension plans for its hourly
and salaried employees. All employees were covered by the plans upon completion
of twelve months of service with 1,000 or more hours of service, subject to a
minimum age of twenty-one. The Company's contributions to the plans were
designed to annually fund service cost derived by the plans' actuaries using the
frozen entry-age method.

In late 1996, the Company's Board of Directors adopted a resolution to terminate
the Company's two defined benefit pension plans and replaced them with a 401(k)
plan which took effect January 1, 1997. Under the provisions of Statement of
Financial Accounting Standards No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits",
the Company recognized a pretax curtailment gain of $1,016,651 in the fourth
quarter of 1996 due to benefit freezes. The effect was an increase in net
earnings after tax for 1996 of $670,990 or $.17 per share.

In the second quarter of 1997, the Company also recognized a pretax settlement
gain of $432,036 on the reversion to the Company of the plan assets. The effect
of this settlement gain was a decrease in the net loss after tax for 1997 of
$285,144 or $.07 per share.

The net periodic pension cost for the plans is computed as follows:

                                      1997             1996             1995
                                  -----------      -----------      -----------
Service cost                      $      --        $   355,953      $   452,636
Interest cost                         469,825          697,753          679,492
Actual return on
  plan assets                        (830,354)      (1,325,342)        (872,472)
Net amortization
  and deferral                       (515,635)         555,479          226,231
Settlement and
  curtailment gain                   (432,036)      (1,016,651)            --
                                                   -----------      -----------
Net periodic
  pension cost (income)           $(1,308,200)     $  (732,808)     $   485,887
                                  ===========      ===========      ===========

The funded status of the Company's pension plans is as follows:

                                                   1997                1996
                                               ------------        ------------
Actuarial present value of
  benefit obligations:
    Vested benefits                            $       --          $  8,843,772
    Nonvested benefits                                 --                  --
                                               ------------        ------------
    Accumulated benefit obligation                     --             8,843,772
    Effect of assumed increase
      in compensation levels                           --                  --
                                               ------------        ------------
Projected benefit obligation                           --             8,843,772
Plan assets at fair value                              --            11,212,666
                                               ------------        ------------
Fair value of assets less  (greater)
  than projected benefit obligation                    --            (2,368,894)
Unrecognized net gain                                  --             1,831,872
Unrecognized transition obligation                     --                  --
Unrecognized prior service costs                       --                  --
                                               ------------        ------------
Accrued (prepaid) pension cost
  (asset)                                      $       --          $   (537,022)
                                               ============        ============
Major assumptions:
  Discount rate                                       7.5%                  7.5%
  Rate of increase in
    compensation levels                        Not applicable               5.0%
  Expected long-term rate of
    return on plan assets                             8.0%                  8.0%

Plan assets consisted principally of investments in United States government
securities and common stock.

10.  Research and Development

Expenditures relating to the development of new products, including significant
improvements to existing products are charged to selling, administrative and
engineering expenses as incurred. The amounts charged in 1997, 1996 and 1995
were approximately $78,000, $110,000 and $418,000, respectively.

11.  Stock Transactions

In November, 1995, the Board of Directors approved a resolution authorizing the
Company to repurchase up to 200,000 shares of the Company's common stock. As of
December 31, 1995, the Company had not repurchased any shares. During 1996, the
Company repurchased a total of 111,751 shares under the November, 1995
authorization which expired on December 31, 1996.

In December, 1996, the Board of Directors approved a resolution authorizing the
Company to repurchase up to 200,000 shares of the Company's stock in 1997.
During 1997, the Company repurchased a total of 56,100 shares under this
authorization which expired on December 31, 1997.

12.  Contingencies

Certain proceedings are pending against the Company, involving ordinary and
routine claims incidental to the business of the Company. The ultimate legal and
financial liability of the Company with respect to these proceedings cannot be
estimated with certainty. However, the Company believes, based on its
examination of these matters and its experience to date, that the ultimate
disposition of these matters will not materially affect the financial position
or results of operations of the Company.

13.  Organizational Restructuring

During 1995, plans were developed to significantly reduce the Company's cost
structure and to improve productivity. This restructuring plan involved
reductions in the number of employees, consolidation of manufacturing
facilities, and disposition of assets that were no longer productive. The
Company also phased-out the manufacture of nonstrategic product lines, including
Trailers, Track Assemblies and Refuse Collection Products. The restructuring
plan is expected to enable the Company to improve its competitive position in
its core business, reduce costs, increase efficiency and improve profitability.

The statement of operations for 1995 includes approximately $1,135,000 of pretax
charges relating to the restructuring plan. Approximately $119,000 of this
amount related to severance and associated benefits for staff reductions,
approximately $452,000 of this amount related to the disposal and write-down of
certain assets, and approximately $564,000 of this amount related to the
streamlining of operations and administrative functions and the closing of the
production facility in Sioux Falls, South Dakota. The effect of these
expenditures was a decrease in 1995 net earnings after tax of $749,000 or $.19
per common share.

During 1996, as a continuation of its restructuring plan, the Company incurred
approximately $553,701 of additional charges. Approximately $326,294 of this
amount related to the disposal and write-down to net realizable values of
certain assets. Approximately $227,407 of this amount was primarily attributable
to the additional expenses which were incurred during 1996 relating to the
closure of operations of the manufacturing facility in Sioux Falls, South
Dakota. The effect of these expenditures was a decrease in 1996 net earnings
after tax of $365,443 or $.09 per share.

In addition, in February 1996, the Company sold its South Dakota land, building
and certain inventory and manufacturing equipment. The statement of operations
for 1996 includes a pretax gain of $234,355 in connection with this sale. The
remaining inventory and equipment were transferred to the Company's Wake Forest,
North Carolina manufacturing plant. The effect was an increase in 1996 net
earnings after tax of $154,674 or $.04 per share.

In December, 1996, the Company sold its Kolman Aggregate Product Line consisting
of vibrating screens, pugmills, ash blenders and conveyors. The sale resulted in
an inventory loss of approximately $306,943 which is included


                                     -F-8-
<PAGE>

in the cost of goods sold. This sale reduced 1996 net earnings after tax by
$202,582, or $.05 per share. As part of the sale, the Company also sold its
Kolman trademark for the stated book value of $200,000.

There were no remaining organizational restructuring liabilities at December 31,
1997 and 1996, respectively.

14.  Significant Fourth Quarter Adjustments

During the fourth quarter of 1997, the Company charged to cost of sales
approximately $1,525,000 relating to various inventory adjustments.
Approximately $1,103,000 of this amount was attributable to adjustments in
connection with the physical inventory, approximately $262,000 related to the
scrapping of additional items, and approximately $160,000 related to an increase
in the reserves for obsolete inventories. The effect of these adjustments was to
decrease the fourth quarter 1997 gross profit and increase the net loss after
tax benefit by $1,525,000 and $1,006,500, respectively, and to increase the
fourth quarter net loss per share by $.26.

15.  Estimated Warranty Claims

The Company generally sells its principal products with a warranty that provides
for repairs or replacements of any defective parts and associated labor for a
one year period after the sale. At the time of the sale, the Company accrues an
estimate of providing the warranty based on prior claims experience. Actual
warranty costs incurred are charged against the warranty accrual when paid. The
estimated warranty liability totaled $1,276,000, $690,000 and $635,500, as of
December 31, 1997, 1996 and 1995, respectively.

16.  Employee Savings Plan

Effective January 1, 1997, the Company established the Athey Products
Corporation Employees' 401(k) Plan that covers substantially all of the
Company's employees. The plan provides for tax deferred employee contributions
of up to 10% of compensation and an employee matching contribution of $.50 for
each $1.00 contributed to the 401(k) Plan by the employee, with a maximum
company contribution of 3% of the employee's compensation. The Company's
contribution amounted to $173,049 in 1997.

17.  The Year 2000 Issue

The Year 2000 Issue stems from the fact that many existing computer programs use
only two digits to identify a year in the date field. These programs were
designed and developed without considering the impact of the upcoming change in
the century. If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. Given the dependence by most
businesses on computer systems and the interdependence of companies, suppliers
and customers, it is likely that most companies are affected by the Year 2000
Issue.

The Company is planning to initiate a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000 Issue,
and will develop an implementation plan to resolve this issue. The Company is
dependent on computer processing in the conduct of its business activities.

Because the Company has not completed its review of the computer systems,
management is unable to estimate the cost of making its systems Year 2000
compliant.

18.  Future Reporting Requirement

In June, 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income". Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners.

This Statement established standards for reporting and display of comprehensive
income and its components in a full set of financial statements. The Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement is effective for fiscal years beginning after
December 15, 1997 and will require that financial statements for earlier periods
presented for comparative purposes be reclassified to conform with this
standard.


                                     -F-9-
<PAGE>


                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
           Column A                      Column B       Column C        Column D          Column E
         -----------                    ----------     ----------      ---------         ----------
                                                       Additions
                                        Balance at      Charged        Deduction         Balance at
                                        Beginning      to Profit          from             End of
         Description                     of Year        and Loss        Reserves            Year
         -----------                    ----------     ----------      ---------         ----------
<S>                                     <C>            <C>              <C>              <C>
Year Ended December 31, 1997:
Allowance for doubtful
  accounts-trade                        $350,000       $     --        $   150,000      $   200,000
Allowance for doubtful
  receivable-other                          --               --               --               --
Provision for obsolete
  and slow moving inventory              500,000          513,784          253,784(c)       760,000
Provisions for warranty costs            690,000        2,263,565       $1,677,565(d)     1,276,000

Year Ended December 31, 1996:
Allowance for doubtful
  accounts-trade                        $300,000       $   50,000       $     --         $  350,000
Allowance for doubtful
  receivable-other                       110,954             --            110,954(b)          --
Provision for obsolete
  and slow moving inventory              650,000          150,689          300,689(c)       500,000
Provisions for warranty costs            635,500          976,019          921,519(d)       690,000

Year Ended December 31, 1995:
Allowance for doubtful
  accounts-trade                        $250,000       $   52,966       $    2,966(a)    $  300,000
Allowance for doubtful
  receivable-other                       110,954             --               --            110,954
Provision for obsolete
  and slow moving inventory              950,000          286,610          586,610(c)       650,000
Provisions for warranty costs            780,000          705,553          850,053(d)       635,500
</TABLE>

(a)  Uncollected trade receivables written-off.

(b)  Uncollected other receivables written-off.

(c)  Deductions for obsolete inventory scrapped and obsolete inventory sold at
     reduced selling price.

(d)  Warranty expenses incurred.


                                     -F-10-