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, 1998

                                       OR

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

        For the transition period from ____________ to ____________.

                           Commission File 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 Identification No.)
   incorporation or organization)

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 PAR VALUE PER SHARE
                                (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 [ ].

        On March 19, 1999, there were 3,805,608 shares of common stock
outstanding.

        On March 19, 1999, the aggregate market value of voting stock held by
nonaffiliates (based upon the average bid and ask price of such stock) was
approximately $5,472,585.

        Documents Incorporated by Reference - Portions of the Proxy Statement
for the 1999 Annual Meeting of Shareholders are incorporated by reference into
Part III.

<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 contractors, municipalities, 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 is 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, windrow or any flowable material from the
           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)High Speed Runway Sweeper. The Mobil high speed vacuum airport
           sweeper, AV445, utilizes an exclusive blow-suction system to provide
           a versatile cleaner for airports. Its one of a kind design provides
           six sweepers in a single machine: FOD removal, glycol recovery, curb
           line sweeping, jet blasting large areas, magnetic sweeping and catch
           basin cleaning. Mounted on a variety of commercial chassis the wide
           choice of options makes the AV445 one of the most versatile sweeper
           in the industry.

        (c)Regenerative Air Sweeper. The Company's RA730B regenerative air
           sweeper offers additional features beyond those previously available
           to the industry. Using a powerful vacuum system, its sweeping
           function is accomplished by a closed loop air system.

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<PAGE>

           Features such as quiet single engine designs, variable high dump,
           large hopper capacity and stainless steel designs on selected high
           wear components, provide an alternative to mechanical sweeper needs.

        (d)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 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                1998   1997   1996
----------------                ----   ----   ----
Mobil Street Sweepers            90%    88%    93%

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 1998, the Company's largest customer was Nixon-Egli, a dealer
selling to a local government entity. This customer accounted for approximately
17% 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, 1998 and December 31, 1997 was approximately $12,714,507 and
$5,682,474, respectively. Mobil street sweepers accounted for 97% and 87%,
respectively, of the backlogs as of such dates. The Registrant expects to
complete all orders related to the December 31, 1998 backlog during the current
fiscal year.

                                       3
<PAGE>

Government Contracts. The Registrant has no material contracts with the federal
government.

Competition. The Registrant competes in the street sweeper, airport sweeper and
force-feed loader 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 major manufacturers of
airport runway sweepers; however, there is substantial competition from the
other manufacturers in the regenerative air sweeper market.

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.

Research and Development. The Registrant spent approximately $98,000 in 1998,
$78,000 in 1997, and $110,000 in 1996, 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
compliance during the next fiscal year.

Employees. As of December 31, 1998, the Registrant employed 288 persons, of
which 194 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 $3,710,500 in
1998, $1,356,000 in 1997 and $1,355,200 in 1996. During 1998, 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.

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<PAGE>

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 fiscal year ended
December 31, 1998.

                                     PART II

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

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

                           1998                    1997               1996
                           ----                    ----               ----
QUARTER ENDED         HIGH       LOW          HIGH     LOW       HIGH       LOW
                     ----        ---          ----     ---       ----       ---
March 31             4 3/8      4            4 1/2    4          4 3/4     3 3/4
June 30              5 1/2      3 13/16      4 3/8    4          4 5/8     3 3/4
September 30         5 1/4      3 3/4        4 1/2    4 1/8      4 1/4     3 1/2
December 31          3 15/16    2 1/2        4 1/2    4 1/8      4 3/4     3 7/8

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 stockholders of the
Company's common stock (the "Common Stock") as of March 19, 1999 was 413.

On March 19, 1999, the last price of the Company's Common Stock on the NASDAQ
National Market was $2.50 per share.

ITEM 6.           SELECTED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                   -----------------------------------------------------------------------------
OPERATING DATA                           1998           1997            1996            1995            1994
--------------                           ----           ----            ----            ----            -----
<S>                                 <C>             <C>             <C>             <C>              <C>
Net Sales                           $ 28,042,117    $ 29,410,863    $ 30,046,068    $30,424,588      $39,894,940
Net Earnings (Loss)                   (9,806,960)     (1,969,312)         45,155          2,743        1,388,194
Net Earnings (Loss) Per Share              (2.58)          (0.52)           0.01             --             0.35
BALANCE SHEET DATA
------------------
Total Assets                         $23,335,661    $ 27,664,993    $ 29,927,231    $ 29,325,917     $ 30,422,767
Long-Term Obligations                         --              --          14,507          57,419           99,431

</TABLE>


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<PAGE>


ITEM 7.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                     RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS
SIGNIFICANT EVENTS AFFECTING 1998 TO 1997 COMPARABILITY

The comparability of statement of operations data has been affected by the
following significant items that occurred in 1998 and 1997. 

o In June, 1997, the Company recognized pretax net periodic pension income under
  FASB #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 the amount
  resulted in a reduction in selling, administrative and engineering expenses.
  However, this favorable impact on selling, administrative and engineering
  expenses was partially offset by a $369,044 increase in excise tax expense
  associated with the termination of the pension plan. The effect was a decrease
  in net loss after tax of $619,843 or $.16 per share.

1998 COMPARED WITH 1997

The Company's net sales were $28,042,117, a 4.7% or $1,368,746 decrease from the
$29,410,863 recorded in 1997. The sales decline reflects a 14.1% decrease in the
number of sweepers shipped in 1998 as compared to 1997. This volume decline in
sweeper shipments was partially offset by higher than average sales prices for
certain foreign units shipped and by a 7.0% increase in replacement parts sales.
The decline in the number of sweeper shipments in 1998 from 1997 was primarily
attributable to production inefficiencies resulting from delays in receiving
manufactured parts, supplier changes, engineering changes related to new product
development and engine and electrical system redesign, and production schedule
adjustments for smaller lot sizes.

Cost of goods sold as a percentage of net sales was 112.3% for 1998 as compared
to 85.5% for 1997. Cost of goods sold in 1998 was significantly impacted by the
production inefficiencies noted above and various inventory-related adjustments
as the Company's new management team continued its review of current inventory
levels in relation to future production requirements. Such inventory related
adjustments consisted of the following: (i) approximately $759,000 charged in
the third quarter of 1998 as a result of the Company's annual physical inventory
taken at the end of September; (ii) approximately $2,111,000 relating to the
production inefficiencies experienced throughout 1998 noted above; (iii)
approximately $850,000 relating to the loss on obsolete inventory, primarily in
the discontinued Composter product line, disposed of in the fourth quarter of
1998 at scrap value; (iv) approximately $210,000 relating to a net increase in
the reserve for obsolete inventories based on the Company's ongoing review of
future production requirements; and (v) approximately $830,000 relating to
reductions to net realizable value of the Company's used finished goods and
demonstration fleet, as the Company has implemented a more aggressive plan to
reduce the size of this fleet, which was comprised of approximately 34 units as
of December 31, 1998. The cost of goods sold in 1997 was favorably impacted by
the $565,227 pre-tax net periodic pension income relating to the termination of
the pension plan. Excluding this item, cost of goods sold in 1997 would have
been $25,713,394 or 87.4%.

The Company has already implemented several major upgrades to its information
systems, particularly with regard to its inventory controls, and is currently in
the process of implementing a Materials Requirements Planning ("MRP") system
which is expected to improve the Company's ability to monitor inventory movement
and reduce production order lead times. The full implementation of this MRP
system is expected to be completed in 1999.

                                       6
<PAGE>

The Company's selling, administrative and engineering expenses increased by
$1,894,197 to $8,323,230 (29.7% of net sales) in 1998 from $6,429,033 (21.8% of
net sales) in 1997. Selling, administrative and engineering expenses in 1997 had
been favorably impacted by the $742,973 pre-tax net periodic pension income
relating to the termination of the pension plan. However, this favorable impact
in 1997 was partially offset by a $369,044 increase in excise tax expense
associated with the termination of the pension plan. Excluding these items,
selling, administrative and engineering expenses would have been $6,802,962 or
23.1% of net sales for 1997. Excluding the 1997 impact of the plan termination
and related excise tax, the 1998 increase in selling, administrative, and
engineering expenses of $1,520,268 was primarily attributable to an increase in
sales and engineering salaries of approximately $200,000, as well as an increase
in warranty costs of approximately $386,000 as the Company provided additional
reserves for both its regular warranty and Campaign warranty programs based upon
its claims experience. In addition, bad debt expense increased in 1998 by
approximately $225,000 as the Company increased its allowance for doubtful
accounts after a decrease in this allowance during 1997. The Company also
experienced increased sales and marketing costs, which included a $185,000
charge related to a performance bond in connection with the shipment of units to
a foreign country. The Company also experienced other increases in its selling,
administrative and engineering expenses related to insurance and legal costs
which were approximately $225,000.

Other income for 1998 was $2,312,853 as compared to $38,109 for 1997. Included
in other income for 1998 was a gain of $2,095,965 on the sale of marketable
securities. The remaining increase in 1998 is primarily due to additional
interest income earned on the proceeds from the sale of the marketable
securities in the second quarter of 1998.

Other expenses for 1998 was $348,492 as compared to $114,907 for 1997. This
increase in other expenses for 1998 is due to (i) approximately $97,000 of
increased interest expense associated with larger borrowings under the Company's
line of credit and (ii) approximately $156,000 of losses related to the disposal
of obsolete computer equipment in connection with the Company's upgrade of its
computer systems.

Income tax expense (benefit) for both 1998 and 1997 varies from the customary
relationship of 34% primarily due to changes in the Company's valuation reserve
allowance against recorded deferred tax assets.

The net loss after income tax expense (benefit) for 1998 was $9,806,960 or $2.58
per share, as compared to a net loss after income tax (benefit) of $1,969,312 or
$.52 per share for 1997, primarily as a result of the factors noted above.

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,


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<PAGE>

  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 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 an 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


                                       8
<PAGE>

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.

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 was $15,343
from an 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


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<PAGE>

$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.

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 Company has assessed its Year 2000 exposure and determined the consequences
that any Year 2000 problems might have on the Company's business, results of
operations or financial condition, or cause the Company to incur potential
liability to third parties if its computer systems are not Year 2000 compliant.
As part of its assessment, the Company canvassed its customers and suppliers and
reviewed the Year 2000 disclosures of certain publicly-traded entities that
provide or have provided the Company with computer and financial services,
including computer equipment and software, to determine whether Year 2000 issues
will have a material effect on the Company or such third parties. Based on the
results of its assessment, the Company believes its computer software and
equipment will be Year 2000 compliant. The Company has, however, developed a
contingency plan in the event its expectations regarding the Year 2000 problem
are incorrect. Because of the uncertainly surrounding the Year 2000 problem,
however, the Company can give no assurances that its assessment or its
contingency plan will avoid potential, material effects of the Year 2000
problem.

The Company does not anticipate that any incremental expenditures it may incur
as a result of Year 2000 issues will be material. The Company uses certain
accounting, word processing and inventory management software as part of its
day-to-day operations. Although a shutdown of all its computer systems could
cause delays in production or shipments of products to customers, the Company
does not expect such an interruption. In a worst case scenario, Year 2000
problems affecting the Company, the Company's bank accounts or the business
operations of the Company's customers could materially, adversely affect the
Company's production operation or its ability to meet its obligations to third
parties.

Nevertheless, in the event that Year 2000 problems have a material effect on the
Company, its customers or service providers, the Company expects to have
sufficient cash reserves and inventory to meet its payroll and various other
obligations pending resolution of any significant Year 2000 issues.


                                       10
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998 the Company had working capital of $9,295,145; the ratio of
current assets to current liabilities was 1.9 to 1; and the debt to equity ratio
was .82 to 1. This compares to working capital of $18,208,520; a ratio of
current assets to current liabilities of 5.4 to 1; and a debt to equity ratio of
 .20 to 1 at December 31, 1997.

At December 31, 1998, cash and cash equivalents were $143,391, as compared to
$6,880 at December 31, 1997. During 1998, the Company experienced a
significantly higher level of usage of its line of credit in order to support
the Company's higher expense levels and cash flow requirements.

As part of its authorized stock repurchase program, the Company used $237,744
for financing activities in 1997 to repurchase it common stock. There were no
stock repurchases in 1998. 

The Company generally relies upon internally generated funds and short-term bank
borrowings to satisfy working capital requirements and to fund capital
expenditures.

At December 31, 1998, the Company had available an unsecured line of credit of
$5,000,000, of which $4,391,000 had been utilized. There were no outstanding
borrowings under this line of credit at December 31, 1997.

This unsecured credit facility was replaced subsequent December 31, 1998 with a
secured revolving line of credit with the same financial institution. This
secured line of credit provides up to $5,000,000 for general working capital
purposes and will expire June 15, 1999. This credit facility bears interest at
the financial institution's prime rate plus one percent and is secured by a
first lien position on all accounts receivable, inventory, equipment and other
assets, as well as a security interest and deed of trust on the Company's real
estate located in Wake Forest, North Carolina.

The Company is negotiating with a new lender for a new credit facility that will
increase the Company's available credit line. On March 19, 1999, the Company
obtained an expression of interest from this new potential lender. This
expression of interest is subject to further negotiations, and no assurance can
be given that the Company will obtain a new line of credit in the future. If the
Company is unable to obtain a new line of credit, its ability to finance its day
to day operations could be adversely affected.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has exposure to interest rate risk related to certain instruments
entered into for other than trading purposes. Specifically, the Company has in
place a line of credit, which bears interest at variable rates. At December 31,
1998, the Company had $4,391,000 outstanding under an unsecured line of credit,
which was replaced by a secured line of credit after December 31, 1998.
Borrowings under the credit facility bear interest at the prime rate of the
lender plus one percent. At December 31, 1998, the interest rate was 7.36%.
While changes in the prime rate could affect the cost of funds borrowed in the
future, the Company believes the effect, if any, of reasonably possible
near-term changes in interest rates on the Company's financial position, results
of operations and cash flows would not be material.

The Company has no other exposure to market risk sensitive instruments.


ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See Financial Statements and Financial Statement Schedules Index commencing on
page 18 hereof.

                                       11
<PAGE>

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 19, 1999(2)         OF CLASS
      ---------------------------------           ----         --------        -------------------        --------
<S>                                                <C>           <C>                <C>                    <C>
John F. McCullough (3) .....................       73            1975               1,597,726              41.99%
  Chairman of the Board of the
  Company and Chairman of
  Orton/McCullough Crane Company, Inc.
  Oak Brook, Illinois
Martin W. McCullough (3) ...................       41            1985                  12,632                  *
  Director of the Company and
  President
  Orton/McCullough Crane Company, Inc.
  Huntington, Indiana
Richard A. Rosenthal .......................       66            1977                   5,691                  *
  Director of the Company and
  Retired Director of Athletics
  University of Notre Dame
  South Bend, Indiana
Thomas N. Nelson ...........................       61            1998                     325                  *
  Director,
  President and Treasurer
  of the Company
John P. Kelly (3) ..........................       45            1997                     100                  *
  Director of the Company and
  Partner
  Mountcastle, Kelly and Dyer, P.C
  Wheaton, Illinois
Wes O. Brant ...............................       45            1998                     100                  *
  Director,
  Vice-President and Chief Operating Officer
   of the Company
Executive officers and directors as
  a group (6 persons) ......................                                        1,616,574              42.48%

</TABLE>

* Less than one percent.

(1)     Each executive officer's and director's principal occupation and
        employment for the last five years has been listed above, except for Mr.
        Wes O. Brant, Mr. John F. McCullough, Mr. Martin W. McCullough and Mr.
        Thomas N. Nelson. Prior to June 1994, Mr. Brant was Product Manager and
        Manager of Product Development for Reedrill, Inc., Sherman, Texas. From
        June 1994 to November 1995, Mr. Brant was Manager-Integrated Business
        Teams for Mobile Tool International, Westminster, Colorado. From
        December 1995 to May 1998, Mr. Brant was Director of Engineering for the
        Company. Mr. Brant was elected as Vice-President and Chief Operating
        Officer of the


                                       12
<PAGE>

        Company on May 11, 1998. For the five years prior to May 1997, Mr. John
        F. McCullough was Chairman & 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 Chairman. Prior to June 1996, Mr. Nelson was Product Sales
        Manager for Bucyrus-Erie Company, South Milwaukee, Wisconsin. From June
        1996 to May 1998, Mr. Nelson was Director of Sales & Marketing for the
        Company. Mr. Nelson was elected as Vice-President, Sales & Marketing of
        the Company on May 11, 1998, and was elected President and Treasurer on
        December 16, 1998. Mr. 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 and 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. John F. McCullough disclaims beneficial ownership of such shares.
        Mr. John F. McCullough is the father of Mr. Martin W. McCullough and
        father-in-law of Mr. John P. Kelly.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

To the Company's knowledge, based solely on review of reports furnished to it,
all Section 16(a) filing requirements applicable to its executive officers,
directors and more than 10% beneficial owners were complied with, except that
Messrs. Nelson and Brant and Ms. Phyllis Pearce each inadvertently filed late
their Form 3 initial statements of beneficial ownership of securities showing
their election as officers of Company.

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 President
during 1998. No other executive officer of the Company was paid compensation for
1998 in excess of $100,000.

<TABLE>
<CAPTION>

        Name and
        Principal Positions                        Annual Compensation
        ---------------------                      -------------------
                                                                                  Other Annual
                                                             Salary        Bonus  Compensation
                                                   Year       $            $           $
                                                   -----     ------        -----  ------------
<S>                                                <C>         <C>                        <C>
Thomas N. Nelson (1)
  President, Treasurer and Director                1998        83,206        --     2,496 (2)
                                                   1997        80,000        --       --
                                                   1996        48,666        --    30,202 (3)
James H. Stumpo (6)
  Former President, CEO and Director               1998        73,264        --       --
                                                   1997       100,417        --    22,496 (4)
                                                   1996       100,000        --    38,101 (5)

</TABLE>

-------------------
(1)        Prior to being elected President of the Company on December 16, 1998,
           Mr. Nelson served as the Company's Vice-President of Sales and
           Marketing.

(2)        Payments included in this amount for the fiscal year ended December
           31, 1998 consist of:

           Company contributions of $2,496 to the Athey Products Corporation
           Employees 401(k) Plan (the 


                                       13
<PAGE>

           "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.

(3)        Mr. Thomas N. Nelson received $30,202 representing relocation
           expenses in 1996.

(4)        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.

(5)        Mr. James H. Stumpo received $38,101 representing relocation expenses
           in 1996.

(6)        Mr. James H. Stumpo resigned from his positions as President, Chief
           Executive Officer and a director of the Company effective May 7,
           1998. Mr. Stumpo beneficially owns 2,000 Common Shares, which
           constitutes less than 1% of the outstanding Common Shares.

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.

CUMULATIVE TOTAL SHAREHOLDER RETURN

The line-graph presentation comparing the cumulative shareholder return of the
Company's common stock is incorporated by reference from the Proxy Statement for
the 1999 Annual Meeting of Shareholders.


ITEM 12.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth information as of March 19, 1999 regarding each
person who was known by the Company to own beneficially more than 5% of the
outstanding Common Shares of the Company:

<TABLE>
<CAPTION>
                                                                             AMOUNT AND
                                                                             NATURE OF
                                                                             BENEFICIAL
                                                                             OWNERSHIP
        NAME AND ADDRESS OF                                                  OF COMMON           PERCENT
        BENEFICIAL OWNER                                                     STOCK (3)          OF CLASS
        ---------------------                                                ---------          ---------

<S>                                                                             <C>                 <C>
  Orton/McCullough Crane Company, Inc. (1)..................................... 1,597,726           41.99%
    1244 East Market Street
    Huntington, Indiana 46750

  David L. Babson & Company, Inc...............................................   431,110           11.33%
    One Memorial Drive
    Cambridge, Massachusetts 02142-1300

  Isometrics, Inc.(2)..........................................................   247,372            6.50%
  1266 North Scales Street
  Post Office Box 660
  Reidsville, North Carolina 27320

                                       14
<PAGE>

  Franklin Resources, Inc......................................................   200,000           5.26%
    777 Mariners Island Blvd.
    P.O. Box 7777
    San Mateo, California 94403-7777

  Executive officers and directors
  as a group (4)............................................................... 1,616,574          42.48%

</TABLE>

------------------
      (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., although he disclaims
            beneficial ownership of such shares.

      (2)   Mr. Dennis M. Bracy, the president, director and majority
            shareholder, 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., Isometrics, Inc. and Franklin Resources,
            Inc. are as reported on the latest Schedule 13D or 13G filings by
            such entities, respectively.

      (4)   Share amounts shown include those held by Orton/McCullough Crane
            Company, Inc.

The Common Stock is the only class of outstanding voting securities of the
Company.

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

ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

See "Directors and Executive Officers of the Registrant" and "Security Ownership
of Certain Beneficial Owners and Management" for a discussion of Mr. John F.
McCullough's relationship with the Company and Messrs. Martin W. McCullough and
John P. Kelly.

                                     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 18.

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

See Financial Statements and Financial Statement Schedules Index commencing on
Page 18.

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).


                                       15
<PAGE>

        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.


                                       16
<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/ THOMAS N. NELSON
                                --------------------
                                Thomas N. Nelson
                             President and Treasurer

                            By: /s/ WILLIAM H. WARDEN
                                ---------------------
                                William H. Warden
                               Director of Finance



                              Date: March 30, 1999


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/ WES O. BRANT                          /s/ JOHN P. KELLY
            ----------------                          -----------------
         Wes O. Brant, Director                    John P. Kelly, Director
             March 30, 1999                             March 30, 1999

         /s/ JOHN F. MCCULLOUGH                    /s/ MARTIN W. MCCULLOUGH
         ----------------------                    ------------------------
           John F. McCullough                   Martin W. McCullough, Director
   Chairman of the Board of Directors                   March 30, 1999
             March 30, 1999

          /s/ THOMAS N. NELSON                     /s/ RICHARD A. ROSENTHAL
          --------------------                     ------------------------
       Thomas N. Nelson, Director               Richard A. Rosenthal, Director
             March 30, 1999                             March 30, 1999



                                       17
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS
                                       AND
                         FINANCIAL STATEMENTS SCHEDULES




Independent Auditor's Report.................................................19

Balance Sheets at December 31, 1998 and 1997.................................20

Statements of Operations for the years ended
   December 31, 1998, 1997 and 1996..........................................21

Statements of Shareholders' Equity for the years ended
  December 31, 1998, 1997 and  1996....................................... ..21

Statements of Cash Flows for the years ended
  December 31, 1998, 1997 and 1996....................................... ...22

Notes to Financial Statements...........................................23 - 29

Financial Statements Schedules:
  Subsidiaries of the Registrant.............................................30
  Schedule II - Valuation and Qualifying Accounts............................31



                                       18
<PAGE>


McGladrey & Pullen, LLP
Certified Public Accountants and Consultants


                          INDEPENDENT AUDITOR'S REPORT

  To the 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, 1998 and 1997, and the related statements of
  operations, shareholders' equity and cash flows for each of the years in the
  three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its
  cash flows for each of the years in the three-year period ended December 31,
  1998, in conformity with generally accepted accounting principles.


                                                     /s/ McGladrey & Pullen, LLP


  Raleigh, North Carolina
  February 24, 1999, except for the last two paragraphs in Note 4 as to which
     the date is March 19, 1999



                                       19
<PAGE>


                           ATHEY PRODUCTS CORPORATION
                                 BALANCE SHEETS


<TABLE>
<CAPTION>

                                                                     December 31, 1998      December 31,1997
                                                                   ------------------     ----------------
<S>                                                                        <C>                    <C>

ASSETS
     CURRENT ASSETS:
            Cash and cash equivalents                                      $ 143,391              $ 6,880
            Accounts receivable (less allowance for doubtful accounts
                of $285,280 and $200,000 for 1998 and 1997, respectively)
                (Note 2)                                                   2,974,181            2,865,872
            Inventories (Notes 3 and 13)                                  16,466,109           18,108,545
            Prepaid expenses                                                  43,153              357,828
            Refundable income taxes                                                -              749,045
            Deferred income taxes (Note 6)                                   107,488              227,072
                                                                   ------------------     ----------------
                              Total current assets                        19,734,322           22,315,242
                                                                   ------------------     ----------------

     OTHER ASSETS:
             Marketable securities                                                 -            1,681,224
             Other                                                             2,230               26,586
                                                                   ------------------     ----------------
                              Total other assets                               2,230            1,707,810
                                                                   ------------------     ----------------

      PROPERTY, PLANT AND EQUIPMENT(Notes 4 and 5):
             Land and land improvements                                       47,785               47,785
             Buildings and building improvements                           3,929,722            3,777,922
             Machinery and equipment                                       5,043,278            5,606,727
                                                                   ------------------     ----------------
                                                                           9,020,785            9,432,434
             Less accumulated depreciation                                (5,421,676)          (5,790,493)
                                                                   ------------------     ----------------
                              Total property, plant and equipment,
                                net                                        3,599,109            3,641,941
                                                                   ------------------     ----------------
                                                                        $ 23,335,661         $ 27,664,993
                                                                   ==================     ================


LIABILITIES AND SHAREHOLDERS' EQUITY
         CURRENT LIABILITIES:
                 Short-term bank borrowings (Note 4)                     $ 4,391,000                  $ -
                 Excess of outstanding checks over bank balance                    -              949,800
                 Current portion of obligations under capital lease
                    (Note 5)                                                       -               14,507
                 Accounts payable                                          3,542,854            1,518,743
                 Employee compensation and amounts withheld                  438,424              217,755
                 Other accrued expenses                                      320,733              129,917
                 Warranty reserve (Note 14)                                1,746,166            1,276,000
                                                                   ------------------     ----------------
                                 Total current liabilities                10,439,177            4,106,722
                                                                   ------------------     ----------------

          NONCURRENT LIABILITIES:
                 Deferred income taxes (Note 6)                              107,488              476,904
                                                                   ------------------     ----------------
                                   Total noncurrent liabilities              107,488              476,904
                                                                   ------------------     ----------------

          SHAREHOLDERS' EQUITY (Note 10):
                 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)                             (10,541,758)            (734,798)
                 Accumulated other comprehensive
                     income (Note 7)                                               -              485,411
                 Less cost of 214,851  common shares
                     in treasury (Note 10)                                  (928,558)            (928,558)
                                                                   ------------------     ----------------
                                  Total shareholders' equity              12,788,996           23,081,367
                                                                   ------------------     ----------------
                                                                        $ 23,335,661         $ 27,664,993
                                                                   ==================     ================

</TABLE>

See notes to financial statements.



                                       20
<PAGE>

                           ATHEY PRODUCTS C0RPORATION
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                          Years  Ended December 31,
                                                        -------------------------------------------------------------
                                                            1998                   1997                    1996
                                                        --------------        ---------------          --------------

<S>                                                      <C>                    <C>                     <C>
NET SALES (Notes 2 and 16)                               $ 28,042,117           $ 29,410,863            $ 30,046,068
Cost of goods sold                                         31,490,208             25,148,167              24,483,891
                                                        --------------        ---------------          --------------
Gross profit (loss)                                        (3,448,091)             4,262,696               5,562,177

Selling, administrative and
   engineering expenses (Notes 8, 9, 13 and 14)             8,323,230              6,429,033               5,821,235
                                                        --------------        ---------------          --------------
Loss from operations                                      (11,771,321)            (2,166,337)               (259,058)

Other income                                                2,312,853                 38,109                 470,696
Other expenses (Note 4)                                      (348,492)              (114,907)                (29,546)
                                                        --------------        ---------------          --------------
Earnings (loss) before income tax expense (benefit)        (9,806,960)            (2,243,135)                182,092

Income tax expense (benefit) (Note 6)                               -               (273,823)                136,937
                                                        --------------        ---------------          --------------

NET EARNINGS (LOSS)                                      $ (9,806,960)          $ (1,969,312)               $ 45,155
                                                        ==============        ===============          ==============

NET EARNINGS (LOSS) PER SHARE                                 $ (2.58)               $ (0.52)                 $ 0.01
                                                        ==============        ===============          ==============

WEIGHTED AVERAGE SHARES
             OUTSTANDING                                    3,805,608              3,808,159               3,956,135
                                                        ==============        ===============          ==============

</TABLE>



                       STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                      Accumulated
                                      Common Stock         Additional     Retained      Other                      Treasury Stock
                                 ------------------------   Paid-in       Earnings    Comprehensive Comprehensive ----------------
                                 Shares       Par Value     Capital      (Deficit)      Income          Income    Shares      Cost
                                 -------      -----------    --------     ----------    -------         -------   -------     ----
<S>                               <C>        <C>          <C>             <C>            <C>          <C>        <C>    <C>
BALANCE, January 1,1996           4,020,459  $ 8,040,918  $ 16,218,394    $ 1,189,359    $ 3,761                  47,000 $ (204,562)
Comprehensive income:
 Net earnings for 1996                    -            -             -         45,155          -       $ 45,155        -          -
 Unrealized gain on marketable
  securites, net of tax (Note 7)          -            -             -              -    329,472        329,472         -          -
                                                                                                    -----------
     Total comprehensive income                                                                       $ 374,627
                                                                                                    ===========
Purchase of common stock
    for treasury (Note 10)                -            -             -              -          -                 111,751   (486,252)
                                 ----------  -----------  ------------  -------------   ---------                -------   --------
BALANCE, December 31,1996         4,020,459    8,040,918    16,218,394      1,234,514    333,233                 158,751   (690,814)
Comprehensive income:
  Net loss for 1997                       -            -             -     (1,969,312)         -   $ (1,969,312)       -          -
  Unrealized gain on
  marketable securites,
  net of tax (Note 7)                     -            -             -              -    152,178       152,178         -          -
                                                                                                       --------
       Total comprehensive loss                                                                    $ (1,817,134)
                                                                                                   =============
Purchase of common stock
    for treasury (Note 10)               -            -             -              -          -                  56,100    (237,744)
                                 ----------  -----------  ------------  -------------   ---------                -------   --------
BALANCE, December 31,1997         4,020,459    8,040,918    16,218,394       (734,798)   485,411                 214,851   (928,558)
Comprehensive income:
  Net loss for 1998                       -            -             -     (9,806,960)         -   $ (9,806,960)       -          -
  Unrealized gain on marketable
     securites, net of
     reclassication
     adjustment (Note 7)                  -            -             -              -   (485,411)      (485,411)       -          -
                                                                                                       ---------
       Total comprehensive loss                                                                   $ (10,292,371)
                                 ----------  -----------  ------------  -------------   --------- =============
BALANCE, December 31,1998         4,020,459  $ 8,040,918  $ 16,218,394  $ (10,541,758)       $ -                 214,851 $ (928,558)
                                 ================================================================                ===================
</TABLE>

See notes to financial statements.



                                       21
<PAGE>

                           ATHEY PRODUCTS CORPORATION
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                       Years Ended December 31,
                                                                         ------------------------------------------------
                                                                              1998            1997             1996           
                                                                         --------------   -------------- ----------------
<S>                                                                       <C>              <C>                  <C>
OPERATING ACTIVITIES:
        Net earnings (loss)                                               $ (9,806,960)    $ (1,969,312)        $ 45,155
        Adjustments to reconcile net earnings (loss) to net
                cash provided by (used in) operating activities:
              Depreciation and amortization                                    417,396          461,573          420,580
              Provision for doubtful acounts                                    85,280         (149,982)          50,000
              Provision for deferred income tax                                      -           48,397          322,912
              (Gain) loss on sale of equipment                                       -            1,512         (249,215)
              (Gain) on sale of marketable securities                       (2,095,965)               -                -
              Book value of assets disposed                                    156,471                -                -
              Other                                                                230                -                -
        Changes in operating assets and liabilities:
              Accounts receivable                                             (193,589)       1,586,593       (1,983,376)
              Inventories                                                    1,642,436          841,023       (1,927,367)
              Prepaid expenses                                                 314,675          365,706         (544,481)
              Refundable income taxes                                          749,045         (204,588)         (12,940)
              Other assets                                                      24,356           88,637          (90,865)
              Accounts payable                                               2,024,111       (1,056,461)         684,339
              Employee compensation and amounts withheld                       220,669         (139,886)         (86,475)
              Other accrued expenses                                           190,816         (150,462)        (263,256)
              Warranty reserve                                                 470,166          586,000           54,500
                                                                         --------------   -------------- ----------------
                   Net cash provided by (used in) operating activities      (5,800,863)         308,750       (3,580,489)
                                                                         --------------   -------------- ----------------

INVESTING ACTIVITIES:
        Purchase of property, plant and equipment                             (531,035)        (606,259)        (483,592)
        Proceeds from disposal of assets                                             -            4,564          950,938
        Proceeds from sale of marketable securities                          3,041,716                -          200,000
                                                                         --------------   -------------- ----------------
                   Net cash provided by (used in) investing activities       2,510,681         (601,695)         667,346
                                                                         --------------   -------------- ----------------

FINANCING ACTIVITIES:
        Proceeds from short-term borrowings                                 17,750,000      14,692,000                 -
        Repayment of short-term borrowings                                 (13,359,000)    (14,692,000)                -
        Excess of outstanding checks over bank balance                        (949,800)        573,497           376,303
        Principal paid on obligations under capital lease                      (14,507)        (42,912)          (42,012)
        Purchase of common stock for treasury                                        -        (237,744)         (486,252)
                                                                         --------------   -------------   ---------------
                   Net cash provided by (used in) financing activities       3,426,693         292,841          (151,961)
                                                                         --------------   -------------   ---------------

NET INCREASE (DECREASE) IN CASH
         AND CASH EQUIVALENTS                                                  136,511            (104)       (3,065,104)

CASH AND CASH EQUIVALENTS,
         BEGINNING OF YEAR                                                       6,880           6,984         3,072,088
                                                                         --------------   -------------   ---------------

CASH  AND CASH EQUIVALENTS
         END OF YEAR                                                         $ 143,391         $ 6,880           $ 6,984
                                                                         ==============   =============   ===============

SUPPLEMENTAL CASH FLOW DISCLOSURES:

        Income taxes recoveries                                             $ (749,045)     $ (117,632)       $ (173,035)
                                                                         ==============   =============   ===============

        Interest paid                                                        $ 175,416       $ 107,599          $ 11,445
                                                                         ==============   ==============  ================

</TABLE>

See notes to financial statements.


                                       22
<PAGE>


                          NOTES TO FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS -- Athey Products Corporation (the "Company") 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 a maturity of three
months or less at the time of purchase to be cash equivalents. At times, the
Company places temporary cash investments with high quality financial
institutions in amounts that may be in excess of FDIC insured limits.

    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 - Prior to its sale in 1998, marketable securities
consisted of an investment in equity securities which the Company has designated
as available-for-sale. Such securities, while readily marketable, were not held
solely in anticipation of short-term market gains. The securities were reported
at fair value, with unrealized holding gains and losses, net of the related
deferred tax effect, reported as accumulated other comprehensive income in
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.

     Short-term borrowings - The carrying amount approximates fair value
     because of the recent and frequent repricing based on market conditions.

    j. RECLASSIFICATIONS - Certain previously reported amounts have been
reclassified to conform with the year-end 1998 presentation with no effect on
the net earnings or loss or shareholders' equity.


                                       23
<PAGE>


        k. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT - Effective January 1, 1998,
the Company adopted Financial Accounting Standards Board Statement No. 130,
REPORTING COMPREHENSIVE INCOME, which was issued in June 1997. Statement No. 130
established new rules for the reporting and display of comprehensive income and
its components, but has no effect on the Company's net income (loss) or total
shareholders' equity. Statement No. 130 requires unrealized gains and losses on
marketable securities, which prior to adoption were reported separately in
shareholders' equity, to be included in comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
Statement No. 130. The Company has no other items of other comprehensive income.

2. MAJOR CUSTOMERS
Net sales for the years ended December 31, 1998, 1997 and 1996 include sales to
the following major customer (which accounted for 10% or more of the total net
sales of the Company for those years):

                                 1998          1997           1996
                               ----------    ----------     ----------
                  Nixon-Egli   $5,233,927    $7,568,795     $7,493,960

There were outstanding receivables from this customer of $1,005,763, $533,993
and $557,901, as of December 31, 1998, 1997 and 1996, respectively.

3. INVENTORIES

Inventories are summarized below:

                                            December 31,
                                     ----------------------------
                                         1998            1997
                                     -------------    -----------
                   Finished goods    $2,371,325       $4,181,758

                    Work-in-process   8,032,123        3,592,887

                   Raw materials      6,062,661       10,333,900
                                     -------------    -----------
                                     $ 16,466,109     $18,108,545
                                     =============    ===========

4.  FINANCING ARRANGEMENTS

At December 31, 1998, the Company had available an unsecured line of credit of
$5,000,000, of which $4,391,000 had been utilized. There were no outstanding
borrowings under this line of credit at December 31, 1997.

During 1998, 1997 and 1996, the Company incurred interest expense of $204,825,
$107,599 and $11,445, respectively.

This unsecured credit facility was replaced subsequent to December 31, 1998,
with a secured revolving line of credit with the same financial institution.
This secured line of credit provides up to $5,000,000 for general working
capital purposes and will expire June 15, 1999. This credit facility bears
interest at the financial institution's prime rate plus one percent and is
secured by a first lien position on all accounts receivable, inventory,
equipment and other assets, as well as a security interest and deed of trust on
the Company's real estate located in Wake Forest, North Carolina.

The Company is negotiating with a new lender for a new credit facility that will
increase the Company's available credit line. On March 19, 1999, the Company
obtained an expression of interest from this new potential lender. This
expression of interest is subject to further negotiations, and no assurance can
be given that the Company will obtain a new line of credit in the future. If the
Company is unable to obtain a new line of credit, its ability to finance its day
to day operations could be adversely affected.

5. LEASE COMMITMENTS

The Company was the lessee of computer equipment under a capital lease which
started in 1993 and expired 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 were depreciated over their
estimated productive lives.

Amortization of assets under the capital lease is included in depreciation
expense for 1998, 1997 and 1996. These assets which were recorded as a capital
lease were disposed of in 1998.

Amortization of assets under capital leases charged to expense was $20,720 in
1998 and $41,441 for both 1997 and 1996. Accumulated amortization under this
capital lease was none and $186,483 at December 31, 1998 and 1997, respectively.

Beginning in 1998, the Company entered into various operating lease agreements
for its computer equipment and certain other office equipment which expire at
various times through 2003. Rent expense under these operating leases was
$54,448 for 1998.


                                       24
<PAGE>



At December 31, 1998, future minimum lease payments under the non-cancelable
operating leases are as follows:

                            Year Ending
                            December 31,
                           --------------
                                1999       $113,339
                                2000        117,660
                                2001         92,558
                                2002         68,310
                                2003         46,185
                                           --------
                                           $438,052
                                           ========
6.  INCOME TAXES

At December 31, 1998, the Company has available state net economic loss
carryforwards of approximately $5,582,000 expiring as follows:

                            Year of
                     -----------------------
                     Origination  Expiration
                     -----------  ----------
                     1995         2000      $376,000
                     1996         2001       333,000
                     1997         2002       670,000
                     1998         2003     4,203,000
                                          ----------
                     TOTAL                $5,582,000
                                          ==========

Components of the income tax expense (benefit) for 1998, 1997 and 1996 are as
follows:

                               1998           1997          1996
                             ---------     -----------   -----------
              Current:
                 Federal     $ -          $ (325,186)    $(185,975)

                 State           -             2,966            -
                             ---------     -----------   -----------
              Total current      -          (322,220)     (185,975)
                             ---------     -----------   -----------
              Deferred:
                 Federal        -             48,397       322,912
                 State          -              -             -
                             ---------     -----------   -----------
              Total
              deferred          -             48,397       322,912
                             ---------     -----------   -----------

              TOTAL          $  -           $(273,823)     136,937
                             =========     ===========   ===========

Net deferred tax assets consist of the following components at December 31, 1998
and 1997:

                                                1998          1997
                                             -----------   ------------
          Deferred tax assets:
            Accounts receivable             $160,000      $ 68,000
            Inventory allowance              458,000       342,000
            Accrued vacation                 124,000        53,000
            Warranty reserve                 594,000       434,000
            Allowance for marketable
          securities                         -              89,000
            Accrued litigation                17,000         9,000
            Net economic loss and tax
             carryforwards                 3,389,000       232,000
             Other                            11,000        10,000
                                         -----------   ------------
                                           4,753,000     1,237,000
             Less valuation allowance     (4,378,000)     (864,000)
                                         -----------   ------------
                                             375,000       373,000
                                         -----------   ------------
          Deferred tax liabilities:
             Property and equipment         (375,000)     (372,832) 
             Marketable securities                -       (250,000)
                                         -----------   ------------ 
                                            (375,000)     (622,832) 
                                         -----------   ------------ 
                                                                    
          Net deferred tax assets         $       -     $ (249,832)  
         (liabilities)                   ===========   ============ 
                                         


                                       25
<PAGE>


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, 1998 and 1997 as follows:
                                               1998           1997
                                            -----------    -----------

          Current assets                    $  107,488     $  227,072
          Noncurrent liabilities              (107,488)      (476,904)
                                            -----------    -----------
          Net deferred tax assets
          (liabilities)                     $        -     $ (249,832)
                                            ===========    ===========

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 $4,378,000 and $864,000 for certain
deferred tax assets as of December 31, 1998 and 1997, 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:

                        1998                  1997                   1996
                ----------------------------------------------------------------
                Amount       %           Amount                Amount   %
                ----------------------------------------------------------------
Tax expense
  (benefit)
  computed at
  statutory
  rate          $(3,334,366)  (34.0)%   $(762,666)   (34.0)%   $ 61,911  34.0%
Research and
  development
  credit             -          -          -          -         (2,336)  (1.3)
Change in
  valuation
  allowance       3,514,000    35.8       436,000     19.4      43,000   23.6


Other              (179,634)   (1.8)       52,843      2.4      34,362   18.9
                ------------ --------- ----------- --------   -------- --------
  TOTAL         $      -          -  %  $(273,823)   (12.2)%  $136,937   75.2%
                ============ ========= =========== ========   ======== ========

7.  OTHER COMPREHENSIVE INCOME
The following is a summary of the tax effects of the components of other
comprehensive income, consisting solely of unrealized gains on marketable
securities, reported in the statements of shareholders' equity for the years
ended December 31, 1998, 1997 and 1996:

                                                       TAX
                                       PRE-TAX      (EXPENSE)    NET-OF-TAX
                                        AMOUNT       BENEFIT       AMOUNT
                                     ------------- ------------ -------------
Year Ended December 31,1998:
   Unrealized gains on marketable
   securities                         $ 1,360,492    $  (462,566)   $   897,926
   Reclassification adjustment for
   gain realized in net income         (2,095,965)       712,628     (1,383,337)
                                     ------------    -----------    -----------
   Total other comprehensive loss     $  (735,473)   $  (250,062)   $  (485,411)
                                     ============    ===========    ===========

Year Ended December 31, 1997:
   Unrealized gains on marketable
   securities included in other
   comprehensive income              $   230,574    $   (78,396)   $   152,178
                                     ===========    ===========    ===========

Year Ended December 31, 1996:
   Unrealized gains on marketable
   securities included in other
   comprehensive income              $   499,200     $(169,728)    $   329,472
                                     ===========    ===========    ===========


                                       26
<PAGE>


8.  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 1998, 1997 and 1996
were approximately $98,000, $78,000 and $110,000, respectively.

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:

                          1998         1997           1996
                       ----------   ----------     ----------
 Service cost          $      --   $        --    $   355,953
 Interest cost                --       469,825        697,753

 Actual return on
      plan assets             --      (830,354)    (1,325,342)

 Net amortization
      and deferral            --      (515,635)       555,479

 Settlement and
      curtailment
 gain                         --      (432,036)    (1,016,651)
                       ---------   -----------    -----------
Net periodic
      pension income   $      --   $(1,308,200)   $  (732,808)
                       =========   ===========    ===========

10.   STOCK TRANSACTIONS

During 1996, the Company repurchased a total of 111,751 shares of common stock
under the November 1995 authorization to repurchase up to 200,000 shares of
common stock, 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 common stock in
1997. During 1997, the Company repurchased a total of 56,100 shares of common
stock under this authorization which expired on December 31, 1997.

11.  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.



                                       27
<PAGE>



12.  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 was developed to enable the Company to improve its competitive position in
its core business, reduce costs, increase efficiency and improve profitability.

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 of this gain 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 $306,943 which is 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 also sold its Kolman trademark for the stated book
value of $200,000.

There were no remaining organizational restructuring liabilities at December 31,
1998 or 1997.

13.  SIGNIFICANT FOURTH QUARTER ADJUSTMENTS

During the fourth quarter of 1997, the Company charged to cost of goods sold
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.

14. 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 $1,746,166 and $1,276,000, as of December
31, 1998 and 1997, respectively.

15. EMPLOYEE 401(k) 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 $123,907 and $173,049 for 1998 and 1997, respectively.

16. GEOGRAPHIC INFORMATION

Sales to foreign countries during 1998, 1997 and 1996 were as follows:

                  1998          1997          1996
               ----------    ----------   -----------
Egypt          $2,534,000   $       --   $       --
Oman              262,000           --           --
Puerto Rico       207,000           --           --
Russia             85,000       78,000           --
Canada             94,000      692,000      271,000
Saudi Arabia           --           --      447,000
Japan                  --      107,000      145,000
Guam                   --      145,000           --
Other             528,500      334,000      492,200
               ----------   ----------   ----------
TOTAL          $3,710,500   $1,356,000   $1,355,200
               ==========   ==========   ==========

                                       28
<PAGE>



17.  THE YEAR 2000 ISSUE

The Company has assessed its Year 2000 exposure and determined the consequences
that any Year 2000 problems might have on the Company's business, results of
operations or financial condition, or cause the Company to incur potential
liability to third parties if its computer systems are not Year 2000 compliant.
As part of its assessment, the Company canvassed its customers and suppliers and
reviewed the Year 2000 disclosures of certain publicly-traded entities that
provide or have provided the Company with computer and financial services,
including computer equipment and software, to determine whether Year 2000 issues
will have a material effect on the Company or such third parties. Based on the
results of its assessment, the Company believes its computer software and
equipment will be Year 2000 compliant. The Company has, however, developed a
contingency plan in the event its expectations regarding the Year 2000 problem
are incorrect. Because of the uncertainly surrounding the Year 2000 problem,
however, the Company can give no assurances that its assessment or its
contingency plan will avoid potential, material effects of the Year 2000
problem.

The Company does not anticipate that any incremental expenditures it may incur
as a result of Year 2000 issues will be material. The Company uses certain
accounting, word processing and inventory management software as part of its
day-to-day operations. Although a shutdown of all its computer systems could
cause delays in production or shipments of products to customers, the Company
does not expect such an interruption. In a worst case scenario, Year 2000
problems affecting the Company, the Company's bank accounts or the business
operations of the Company's customers could materially, adversely affect the
Company's production operation or its ability to meet its obligations to third
parties.

Nevertheless, in the event that Year 2000 problems have a material effect on the
Company, its customers or service providers, the Company expects to have
sufficient cash reserves and inventory to meet its payroll and various other
obligations pending resolution of any significant Year 2000 issues.




                                       29
<PAGE>




SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
              COLUMN A                      COLUMN B      COLUMN C      COLUMN D          COLUMN E
                                                          Additions
                                           Balance at      Charged     Deductions        Balance at
                                           Beginning      to Profit       from             End of
Description                                 of Year       and Loss      Reserves            Year
------------                               -----------    ---------    ----------       -----------
<S>                                       <C>           <C>            <C>              <C>
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful
    accounts-trade                        $ 200,000     $ 117,194      $ 31,914  (a)    $ 285,280
Provision for obsolete
    and slow moving inventory               760,000     1,050,104       839,731  (c)      970,373
Provision for lower of cost or market        80,775       829,858             -           910,633
Provision for warranty costs              1,276,000     2,481,389     2,011,223  (d)    1,746,166

YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful
    accounts-trade                        $ 350,000           $ -     $ 150,000  (a)    $ 200,000
Provision for obsolete
    and slow moving inventory               500,000       513,784       253,784  (c)      760,000
Provision for lower of cost or market             -        80,775             -            80,775
Provision 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
    receivables - other                     110,954             -       110,954  (b)            -
Provision for obsolete
    and slow moving inventory               650,000       150,689       300,689  (c)      500,000
Provision for lower of cost or market             -             -             -                 -
Provision for warranty costs                635,500       976,019       921,519  (d)      690,000

</TABLE>

(a)  Uncollected trade receivables written off.
(b)  Uncollected other receivables written off.
(c)  Deduction for obsolete inventory scrapped or sold at reduced selling price.
(d)  Warranty expenses incurred.



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