<PAGE>
 
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K
 
[X]       ANNUAL  REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
          ACT OF 1934
 
               For the fiscal year ended December 31, 1997
 
[_]       TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES 
          EXCHANGE ACT OF 1934
 
               For the transition period from _________ to _________

                        Commission file number: 0-25620
                                                -------

                                 A.S.V., INC.
             (Exact name of registrant as specified in its charter)

               MINNESOTA                            41-1459569
          ---------------------                ---------------------
     State or other jurisdiction of       I.R.S. Employer identification No.
     incorporation of organization

840 LILY LANE, P.O. BOX 5160, GRAND RAPIDS, MN 55744       (218) 327-3434
----------------------------------------------------   ----------------------
       Address of principal executive offices     Registrant's telephone number,
                                                      including area code

Securities registered under Section 12(b) of the Exchange Act:

                                     NONE
                        ------------------------------
                              Title of each class

Securities registered under Section 12(g) of the Exchange Act:


                          COMMON STOCK, $.01 PAR VALUE
                          ----------------------------
                              Title of each class

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.  [x] Yes  [_] No

     Check if there is no disclosure of delinquent filers in response to Items
405 of Regulation S-K in this form, and no disclosure will be contained, to the
best of the 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.[  ]

     Based on the closing  price at March 10, 1998, the aggregate market value
of the registrant's Common Stock held by nonaffiliates was $88,654,254.

     As of March 24, 1998 5,022,582 shares of the registrant's Common Stock were
issued and outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:
                      ------------------------------------

   Portions of the registrant's Proxy Statement for its June 19, 1998 Annual
Meeting which will be filed by April 30, 1998, are incorporated by reference in
Part III.
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                                    PART I

ITEM 1.          DESCRIPTION OF BUSINESS

GENERAL

     A.S.V., Inc. was incorporated in Minnesota in July 1983 and its wholly-
owned subsidiary, A.S.V. Distribution, Inc., was incorporated in Minnesota in
January 1989.  A.S.V., Inc. and A.S.V. Distribution, Inc. are collectively
referred to herein as the "Company."  Effective January 1, 1998, all the assets
and liabilities of A.S.V. Distribution, Inc. were transferred to A.S.V., Inc.

     A.S.V., Inc. designs, manufactures and sells track-driven all-season
vehicles.  The Company's two principal product lines, the Posi-Track(TM) product
line and the Track Truck(R) product line, use a rubber track suspension system
that takes advantage of the benefits of both traditional rubber wheels and steel
tracks.  Rubber track vehicles provide the traction, stability and low ground
pressure necessary for operation on soft, wet, muddy, rough, boggy, slippery,
snowy or hilly terrain, but, unlike steel track vehicles, can be driven on
groomed, landscaped and paved surfaces without causing damage.

     The Company currently offers three models in its Posi-Track product line;
the MD-70, the HD 4500 and the DX 4530.  The Company currently offers one model
in its Track Truck product line, the HPT 2800.

CURRENT YEAR DEVELOPMENTS

     In January 1997, the Company completed a 3-for-2 stock split of its common
stock.  All share and per share amounts included in this report have been
adjusted to reflect the stock split.

     In 1997, the Company introduced two new models in its Posi-Track product
line.  In the third quarter of 1997, the Company began selling the Posi-Track HD
4500.  The most significant difference between the HD 4500 and the Company's
existing Model MD-70 Posi-Track is the elimination of all of the grease fittings
on the vehicle's undercarriage, thereby significantly reducing operator
maintenance. The HD 4500 is larger than the MD-70, has greater lifting
capabilities and has a more powerful engine.  The HD 4500 serves some of the
same markets as the MD-70, but is intended for the more industrial user.  The HD
4500 is sold through the Company's existing Posi-Track dealer network.  In the
fourth quarter of 1997, the Company began selling the Posi-Track DX 4530.  The
DX 4530 is a track utility vehicle that is being sold into the trail grooming
and utility work vehicle market.  It combines the benefits of the Company's HD
4500 and the Track Truck on a larger rubber track suspension with the ability to
run attachments from the comfort of a fully enclosed operator cab. The DX 4530
features the same maintenance-free style suspension as the HD 4500 and is
powered by  a 4.5 liter turbo diesel engine, producing 125 horsepower. The DX
4530 was sold direct from the Company to the end user in 1997.  Beginning in
1998, the Company anticipates it will sell the DX 4530 through certain Posi-
Track dealers, as well as continue its direct sales efforts.

     In September 1997, the Company occupied its expanded production facility in
Grand Rapids, Minnesota.  The Company added 60,000 square feet to its production
facility increasing its total production space to approximately 95,000 square
feet.  Approximately 5,000 square feet of the existing production facility was
reallocated to the Company's sales and administrative offices.  The Company's
existing lease has been revised to included additional lease payments for the
expanded facilities.  See "Item 2. Description of Property".

     Track Truck is a registered trademark, and Posi-Track, Posi-Turn and Snow
Saver are trademarks, of ASV, Inc. This Annual Report also contains trademarks
of other companies.

MARKETS

     Construction.  The construction industry currently depends heavily on skid-
steer vehicles for a wide variety of functions.  Skid-steers are small four-
wheeled vehicles that were originally designed and used primarily as loaders,
but in the last decade have become increasingly more popular for a variety of
functions and more versatile with the availability of attachments such as
backhoes, forklifts, breakers, planers, rakes and augers.  Most skid-steer
attachments are designed for use with an industry standard quick-attach
mechanism which allows attachments used by one manufacturer to be used on
vehicles manufactured by another.  Prior to the wide-spread use of skid-steers
and the various attachments, most of the tasks performed by skid-steers were
performed by single-function vehicles.  The skid-steer's ability to perform a
number of

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functions previously performed by multiple vehicles not only reduces the number
of vehicles that must be purchased, but also makes it more convenient to
transport equipment to and from work sites.

     The primary disadvantage of skid-steer vehicles is that they are wheeled
vehicles and are not designed for operation on wet, soft, slippery or rough
ground, which means that they are inherently limited in when and where they can
function. Skid-steers often sit idle in the winter and spring or after rain
because the ground is not suitable for their operation.  A skid-steer exerts ten
times or more ground pressure than a Posi-Track MD-70 or HD 4500 which makes a
skid-steer less suitable for operation on landscaped or groomed ground.

     Recognizing the benefits of track vehicles, a few manufacturers have
created tracks that can be placed around a skid-steer's wheels.  Add-on tracks
are generally steel; however, rubber add-on tracks are now available due to the
limitations imposed by steel tracks.  Although rubber add-on tracks can decrease
a skid-steer's ground pressure to approximately 10 pounds per square inch, the
overall design of a Posi-Track gives it more versatility and less ground
pressure than a skid-steer with add-on tracks.

     In addition to the tasks performed by skid-steers, the Posi-Track MD-70 and
HD 4500 are used for construction jobs performed by small steel track dozers.  A
skid-steer's design lacks the power, traction and stability necessary for moving
dirt and other materials efficiently.  Therefore, dozers have remained single
purpose machines and, because of their steel tracks and significant ground
pressure, cannot be operated on soft, groomed, landscaped or paved surfaces.

     Landscaping.  Like the construction industry, the landscaping industry
depends heavily on small dozers and skid-steers with loaders, backhoes, rakes
and other attachments.  Landscapers have also been limited by these machines on
soft, wet, muddy, hilly or rough terrain or on groomed or paved surfaces,
thereby affecting productivity.  Skid-steers and dozers cause greater soil
compaction than the Posi-Track models, which is a concern for landscapers
because the more compact the soil, the more difficult it is for plants to grow.
The Posi-Track models can also be adapted to perform special functions in the
landscaping industry.  For example, the Company manufactured a Posi-Track
attachment which is used for laying a specially cut continuous roll of sod over
100 feet in length and weighing over 1,200 pounds.  The sod is held in front of
the vehicle and unrolls as the Posi-Track moves forward, laying the sod on the
ground.  The Posi-Track's rubber tracks then move over the sod, gently setting
it in place.  This procedure allows sod to be laid with significantly less
manual labor and on places such as sides of hills where traditional smaller sod
sections could be washed away by excessive rain.

     Agricultural.   The Posi-Track MD-70 and HD 4500 are used in the
agricultural industry to perform the functions of small tractors.  Its three-
point hitch and reversible seating allow it to be used with pull-type
attachments such as roto-tillers, plows, disks and cultivators.  The Posi-
Track's hydraulic power take off allows it to be used for farming chores such as
grinding and unloading feed.  Its low ground pressure and rubber tracks allow it
to be used on wet, soft, muddy ground that would not be possible with
traditional wheeled tractors, thereby increasing the number of productive days.
In addition, Posi-Track's low ground pressure reduces compaction of soil.  The
Posi-Track MD-70 and HD 4500 are being used in several grape vineyards in
California's Napa Valley as a replacement to four-wheel drive tractors.

     Trail Grooming and Maintenance.  Both the Posi-Track and Track Truck are
used for maintaining trails such as snowmobile, cross-country ski, biking and
hiking trails.  The Company manufactures an attachment for the Track Truck and
the Posi-Track DX 4530 which is designed to efficiently groom snowmobile trails
and can also be used to groom cross-country ski trails.  The Posi-Track is used
with a mower attachment to clear and maintain trails for biking, hiking and
other purposes.  The Company believes the Track Truck has captured a significant
portion of the United States snowmobile trail grooming equipment market since
its introduction in 1985.  The newly introduced Posi-Track DX 4530 is currently
being sold into some of the same markets and serves some of the same functions
as the Track Truck.

     Utility.  The Track Truck and Posi-Track DX 4530 are used in the utility
industry for access to off-road utility sites that would be otherwise
inaccessible with traditional vehicles.  Utility companies may need to access
remote areas to repair downed power lines, inspect gas lines or to repair or
maintain other remotely located equipment.  These areas may only be accessible
through snow, ice, mud, swamps, bogs, or rough, hilly or rocky terrain. The
Track Truck and Posi-Track DX 4530 are able to access and transport tools,
equipment and personnel to those sites.

     Wildlife Management.  All Posi-Track models and the Track Truck are used in
wildlife management by Federal agencies and the departments of natural resources
of a number of states.  The Posi-Track models are used to mow trails for
wildlife and to mow clearings so that grass, clover and other vegetation needed
for wildlife can grow.  The Posi-Track MD-70 and HD 4500 are also used to clear
cattails and other unwanted vegetation from swamps to provide access for feeding

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ducks and other waterfowl.  Both vehicles are used in the management of
controlled burning or the maintenance of fire lines to prevent the spread of
forest fires and for access to remote sites for a variety of other purposes.

     Military Applications.  The Posi-Track MD-70 is being equipped with robotic
and video equipment to enable remote operation of the machine at distances up to
three miles.  Current applications for this type of Posi-Track include
detonation and removal of land mines, clearing unexploded munitions on bomb
ranges and  clearing bomb ranges of overgrown vegetation.  For these types of
applications, the Company is selling the Posi-Track MD-70 to an unrelated party
who equips it with the necessary robotics and video equipment to provide for the
remote operation.

     The Company has been awarded a supply contract number for its Posi-Track
MD-70 under the General Service Administration which allows Federal governmental
agencies to purchase the MD-70 and HD 4500 without going through a competitive
bidding process.

     Other.  The versatility of the Posi-Track MD-70 and HD 4500 has allowed for
their use in areas where a typical skid-steer vehicle could not operate.  A
grain export company is using Posi-Track MD-70's in the hold of grain vessels to
level the grain for proper weight distribution or before adding more cargo,
eliminating many hours of hand labor.

PRODUCTS

     The Company's principal products are contained in two primary product
lines, the Posi-Track product line and the Track Truck product line.  All
products under these two product lines utilize a rubber track suspension system
that takes advantage of the benefits of traditional rubber wheels and steel
tracks, without the disadvantages possessed by each. Wheeled vehicles have less
traction, are less stable than tracked vehicles and cannot operate on soft, wet,
slippery, rough or hilly terrain. Steel tracks damage the surfaces on which they
operate.  Also, the significant ground pressure of both wheeled and steel track
vehicles creates compacted soil.  The rubber track on the Posi-Track and Track
Truck products provides the traction, stability and mobility of tracked
vehicles, but does not damage surfaces.  In addition, the Posi-Track has
extremely low ground pressure which means it will not cause significant soil
compaction.

     The Company began manufacturing the Track Truck in 1984.  The current Track
Truck model is the HP 2800. The Company began manufacturing the Posi-Track Model
MD-70 for sale in 1991.  In July 1997, the Company began selling the Posi-Track
HD 4500 series, which is larger than the MD-70 and has additional features not
available on the current model MD-70.  In October, the Company began selling the
Posi-Track DX 4530 (previously named the HD 125), the largest of all the Posi-
Track models produced.  The DX 4530 has features not found on either the MD-70
or HD 4500 models.

     The rubber tracks used on the Company's products are made of molded rubber
reinforced with layers of nylon, Kevlar and fiberglass rods.  The HD 4500 and DX
4530 feature a maintenance-free suspension with no grease fittings, while the
MD-70 and the Track Truck are built upon a suspension that requires periodic
maintenance.  The Posi-Track model MD-70 and the Track Truck model HP 2800 each
have a 70 horsepower, 4-cylinder Isuzu diesel engine and dual hydrostatic
transmission and both can be equipped with an optional 4-cylinder Isuzu turbo
diesel engine.  The Posi-Track model HD 4500 utilizes John Deere engines
available in either an 80 horsepower 4-cylinder diesel engine or a 115
horsepower 4-cylinder turbo diesel engine.  The Posi-Track DX 4530 uses a 125
horsepower, 4-cylinder John Deere turbo diesel engine.

     Posi-Track Models MD-70 and HD 4500.

     The Company believes the MD-70 and HD 4500 Posi-Tracks are ideal
replacements to skid-steers, small dozers and small tractors and can perform
many of the jobs handled by these vehicles without the disadvantages they
possess.  Their standard quick-attach mechanism enables them to operate the
attachments used by skid-steers.  The MD-70 and HD 4500 Posi-Tracks are also
designed to be used with a dozer attachment.  In addition, their three-point
hitch and reversible seating allow them to function as a small tractor.

     The Posi-Track's weight is distributed over its two tracks, which have a
ground surface of approximately 102 x 18 inches per track, which results in an
average ground pressure of approximately 1.5 pounds per square inch for the MD-
70, compared to approximately 35 pounds per square inch for a typical wheeled
skid-steer weighing approximately the same as a Posi-Track.  The HD 4500, which
weighs approximately 2,000 pounds more than the MD-70,  exerts ground pressure
of approximately 2.6 pounds per square inch.  The Posi-Track's low ground
pressure allows it to operate on wet, soft, slippery, rough and hilly terrain.
Conventional wheeled vehicles may not be able to operate or may be destructive
in these

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conditions. The Posi-Track's low ground pressure also reduces compaction which
decreases the need for frequent tilling and conditioning of the soil.

     The Posi-Track MD-70 and HD 4500 are multi-purpose vehicles which the
Company believes are attractive to customers principally because of their:

      .    Size. The Posi-Track MD-70, with a loader, weighs approximately 6,600
           pounds and has an approximate ground pressure of less than 2 pounds
           per square inch. The Posi-Track HD 4500, with a loader, weighs
           approximately 8,500 pounds and has an approximate ground pressure of
           3 pounds per square inch.

      .    Features. The Posi-Track's loader includes a quick-attach mechanism
           which allows for use of a wide range of attachments, manufactured
           both by the Company and others such as a bucket, forklift, rake,
           mower and snowblower. The MD-70 accepts a category one three-point
           hitch, while the HD 4500 accepts a category two three-point hitch. A
           dozer blade and backhoe are also available for each model.

      .    Price. The current retail price of a Posi-Track MD-70 is
           approximately $34,700 for a base model and approximately $39,100 with
           a loader, bucket and quick-attach mechanism. Although the most common
           skid-steer vehicles have a slightly lower base price, comparably
           equipped skid-steers cost approximately the same as a Posi-Track MD-
           70. The current retail price of a Posi-Track HD 4500 is approximately
           $41,500 for a base model and approximately $46,700 with a loader,
           bucket and quick-attach mechanism.

      .    Ease of Operation. A reversible driver's seat allows an operator to
           face either end of the vehicle for better control. The Posi-Track is
           maneuverable and can easily turn in its own length.

     In addition to the attachments already available on the market from other
manufacturers, the Company also manufactures and sells attachments for the Posi-
Track for special functions not performed by other competing vehicles. Because
skid-steers are not designed for performing dozer functions, dozers have
traditionally been separate, single-function vehicles.  However, because of its
rubber track and design, the Posi-Track is able to perform dozer functions with
the dozer attachment manufactured and sold by the Company.  The Company also
modifies a mower attachment for the Posi-Track and designs, manufactures and
sells other attachments for special purposes.

     Due to the positive response the Company has received regarding the
maintenance-free suspension on the HD 4500, the Company plans to offer this same
suspension as another model under its Posi-Track product line.  The Company
anticipates it will  offer the MD-70 with either the existing suspension or the
maintenance-free suspension.  The Company expects the MD-70 with the
maintenance-free suspension will sell for approximately $3,000 more than the
existing MD-70. This optional suspension is expected to be available in the
third quarter of 1998.

     Posi-Track Model DX 4530

     In response to customer desires for a larger, rubber tracked utility
vehicle, the Company introduced the Posi-Track model DX 4530 (previously
referred to as the HD 125) in February 1997, with the first sales occurring in
the fourth quarter of 1997.  The DX 4530 incorporates certain features of the
Posi-Track and the Track Truck.  Built on a larger, maintenance-free rubber
track suspension, the DX 4530 has a roomy, two-person, fully-enclosed, steel
cab.  The DX 4530 comes standard with a quick-attach mechanism to accept a
variety of front-end attachments.  The DX 4530 is being sold into the trail
grooming and land management markets.

     The Company believes the DX 4530 will be attractive to certain markets due
to the following:

     .    Maintenance-Free Suspension. The suspension of the DX 4530 is built on
          the same concept as that of the HD 4500 which has been designed so
          that it does not require periodic greasing of the bearings.

     .    More Powerful Engine. The DX 4530 is powered by a 125 horsepower John
          Deere PowerTec turbo diesel engine.

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     .    User Friendliness.  The DX 4530 has a larger, more spacious steel cab
          with many interior features found on pickup trucks, including high-
          back bucket seats, tilt and telescopic steering wheel and stereo
          cassette radio.  The large amount of glass in the cab provides for
          good visibility.  The DX 4530 incorporates the Company's patented
          Posi-Turn steering system which utilizes a steering wheel rather than
          levers to steer the vehicle.

     .    Features. The DX 4530 comes standard with a quick-attach mechanism so
          it can accept a variety of attachments including brush cutters,
          backhoes, buckets, trenchers and dozer blades. It also has hydraulic
          controls mounted inside the cab to allow for the use of trail grooming
          attachments.

     The Company believes the DX 4530 can be sold into the snowmobile trail
grooming market as well as those seeking a vehicle to access remote work sites,
such as utilities, construction companies, real estate developers and
governmental agencies.  The  retail selling price for the DX 4530 is $74,500.
The Company's total sales of the DX 4530 and related accessories was
approximately $1,000,000 in 1997, all of which occurred in the fourth quarter.
The Company anticipates sales of the DX 4530 will be greatest during the fourth
quarter of the Company's fiscal year as a major market for the DX 4530 will be
the snowmobile trail grooming market.  All of the units sold in 1997 were sold
direct to the end user by the Company's in-house sales force, although the
Company anticipates marketing the DX 4530 through certain Posi-Track dealers
beginning in 1998.

     The Company also sells optional attachments and accessories for the DX
4530.  Certain of the options, such as a trail groomer attachment, are made and
stocked at the Company's manufacturing facility while others are manufactured by
others to the Company's specifications and integrated into the overall design of
the DX 4530.

     Track Truck Vehicle.

     The Track Truck is designed for utility use on snow, mud, swamps, sand,
brush, rocks and bogs.  The Track Truck has a body similar to a pickup truck
with two front wheels and two rear tracks similar to the Posi-Track.  The Track
Truck's wheels reduce the jarring and pitching usually experienced with other
track-driven vehicles on rough and hilly terrain, which creates a more
comfortable ride and reduces driver fatigue.  Unlike other tracked vehicles,
which use levers for steering, the Track Truck has a steering wheel.  The Track
Truck's Posi-Turn patented power steering system enables the steering wheel to
vary power to the tracks while also turning the front wheels.

     The Company believes that the Track Truck is a unique product and is
attractive to customers principally because of its:

      .    Size. The Track Truck is smaller and more maneuverable than other
           track-driven vehicles currently on the market. Each Track Truck is
           about the size of a pickup truck and weighs approximately 4,200
           pounds.

      .    Price. The current retail price of a Track Truck is approximately
           $43,000. The retail prices of other track-driven vehicles generally
           exceed $80,000.

      .    Safety. The front wheels of the Track Truck stabilize it on steep
           grades and a roll-bar provides certified roll-over protection.

      .    User Friendliness. The cab's structure and features, including a
           steering wheel instead of levers, are very similar to those of a
           pickup truck and are familiar to most users. The Track Truck is
           available with a radio and other features generally available on
           trucks. The front wheels stabilize the ride making it more
           comfortable than other tracked vehicles.

     The Company also sells options and accessories for the Track Truck.  The
options and accessories are either made and stocked at the Company's
manufacturing facility or manufactured by others to the Company's specifications
and are integrated into the overall design of the Track Truck.  For instance,
the snowmobile trail groomer option comes attached to the Track Truck with the
required controls placed in the climate controlled cab of the vehicle.  Other
options include a snow plow, trailer and van body style. The Company can also
manufacture custom-designed units for specialty purposes.  One such unit was
built for use by airport fire-fighters and was equipped with a water pump, hoses
and other fire-fighting equipment.
 

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SALES AND MARKETING

     In the United States and limited areas of Canada and New Zealand, the
Company sells and distributes the MD-70 and HD 4500 Posi-Track primarily through
independent construction and farm equipment dealers.  For 1997, the Company
distributed the DX 4530 Posi-Track through in-house sales and marketing efforts.
Beginning in 1998, the Company will begin distributing the DX 4530 through
selected Posi-Track dealers in the United States.  The Company sells and
distributes the Track Truck in the United States through both independent
dealers and in-house sales and marketing efforts.  Sales of the Company's
products in geographic areas outside the above mentioned areas are made on a
direct basis through in-house sales and marketing efforts.

     The construction and farm equipment industries, in which the Posi-Track MD-
70 and HD 4500 compete, have historically been cyclical.  Sales of construction
and agricultural equipment are generally affected by the level of activity in
the construction and agricultural industries including farm production and
demand, weather conditions, interest rates and construction levels (especially
housing starts).  In addition, the demand for the Company's products may be
affected by the seasonal nature  of the activities in which they are used.
Sales of the MD-70 Posi-Tracks have generally been greater in the spring and
summer while sales of the Track Truck have generally been greater in the fall.
The Company anticipates the sales cyclicality of the HD 4500 will be similar to
the MD-70 and sales cyclicality of the DX 4530 will be similar to the Track
Truck.  The Company believes the versatility of its products and their
suitability for multiple purposes may reduce these factors.

     As of March 1998, the Company has 91 Posi-Track dealer locations and three
Track Truck dealer locations.  Of these figures, three Posi-Track dealer
locations are located in Canada and one is located in New Zealand.  As of March
1997, the Company had 48 Posi-Track dealer locations and two Track Truck dealer
locations in the United States and one Posi-Track dealer location in Canada.
The Company intends to continue its marketing efforts in an attempt to attract
more dealers in the United States for its vehicles.  The Company believes that
it may need as many as 200-250 dealers in the United States comprising
approximately 500 dealer locations in order to adequately cover the available
market.  There are currently in excess of 500 Bobcat(R) dealers in the United
States.  It is the Company's intent to establish dealers in those areas of the
United States were there are currently no Posi-Track dealers before
significantly expanding its international dealership network.  Currently, the
Company requires prospective dealers to purchase a minimum of three vehicles to
become one of the Company's dealers.  The Company's dealership agreements
require the dealer to advertise and promote the Company's products and provide
service and warranty work.  Dealership agreements may be terminated upon 30
days' notice by either party.

     In 1997, the Company had sales to two dealers which totaled approximately
27% of the Company's net sales.   In 1996, sales to these two dealers totaled
approximately 21% of the Company's total net sales.  In 1995, sales to one of
these dealers accounted for approximately 13% of  the Company's total sales.
The Company believes the loss of either of these dealers would not have a
significant effect on its future operations as the Company believes new dealers
could be obtained where these two dealers are located.

     As of March 16, 1998, the Company has pre-sold production of approximately
$8.2 million of Posi-Track units and related accessories.  The Company
anticipates these units will be produced and shipped by the end of its second
quarter 1998.  As of March 21, 1997, the Company had pre-sold production of
approximately $7 million.  The 1998 pre-sold production figure represents
primarily HD 4500 Posi-Tracks, while the 1997 figure was primarily MD-70 Posi-
Tracks.  The Company believes the reason for the shift in orders is due to the
increasing demand for the HD 4500 with its more powerful engine, greater lifting
capacities and maintenance-free suspension.

     The Company generally does not offer financing on its vehicles, but has
arrangements with several finance companies to finance the sale of the Company's
vehicles to its dealers and end purchasers.  In January 1996, the Company
entered into an agreement with John Deere Credit whereby John Deere Credit will
provide floor plan financing to the Company's Posi-Track dealers.  In 1997,
approximately 10% of the Company's sales were financed through John Deere
Credit.  In 1996, approximately 9% of the Company's sales were financed through
John Deere Credit.  Prior to 1996, the Company had an arrangement with
Bombardier Capital, Inc. (BCI), pursuant to which BCI would finance the sale of
the Company's vehicles to its dealers.  In 1995, approximately 7%, of the
Company's sales were financed through this arrangement with BCI.  Company-
related financings to the end purchasers were less than 1% of the Company's
sales for the years 1995 through 1997.

 

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     The agreement with John Deere Credit requires the Company to repurchase any
units not paid for by the purchaser within the terms of the respective
agreements.  As of February 27, 1998, the total amount owed to John Deere Credit
by dealers under the Company's agreement was approximately $1,095,000.

COMPETITION

     The markets in which the Posi-Track MD-70 and HD 4500 compete are generally
comprised of small to medium sized tractor-type vehicles including skid-steers.
The market is dominated by large corporations producing models with substantial
name recognition, including Case, which manufactures the Uniloader skid-steer,
Ingersoll Rand which manufactures the Bobcat, Deere & Co. and Caterpillar Inc.
The competitors primarily produce wheeled or steel track vehicles in the markets
in which the Posi-Track competes.  Caterpillar, John Deere and Case sell rubber
track vehicles in the medium to large sized tractor market.

     The markets in which the Posi-Track DX 4530 and Track Truck compete
generally are comprised of all-terrain vehicles, principally larger, track-
driven vehicles other than snowmobiles.  The Company believes that the principal
participants in the general all-terrain vehicle market include Bombardier, Inc.
of Canada, Tucker Corporation and LMC Corporation.  The Company believes that
the products most closely competitive with the DX 4530 and Track Truck are
larger than these two products, do not provide the same level of maneuverability
and are significantly more costly.

     The Company expects its products to compete in the market based on, among
other things:  adaptability, versatility, performance, convenience of operation,
features, size, brand loyalty, price and reputation.  Some of the Company's
competitors possess significantly greater resources than the Company, as well as
established reputations within the industry. There is no assurance that a
competitor with greater capital resources will not enter and exploit the
Company's markets to the Company's detriment.  The Company believes the
introduction of additional competitors could enhance market acceptance of rubber
track vehicles.

WARRANTY

     The Company provides a limited warranty to purchasers of its products.  The
Posi-Track MD-70 warranty covers defects in materials and workmanship for a
period of one year from the delivery date or 500 operating hours, whichever
occurs first.  The Posi-Track HD 4500 warranty covers defects in materials and
workmanship for a period of one year from the delivery date with no hour limit.
The Track Truck and DX 4530 warranty covers defects in material or workmanship
for a period of two years from the delivery date or 1,000 operating hours,
whichever occurs first.   Components which are not manufactured by the Company
are subject only to the warranty of the manufacturer of the component.

MANUFACTURING AND SUPPLIERS

     The Company manufactures and assembles its products at its facility in
Grand Rapids, Minnesota.  See "Item 2. Description of Property."  The majority
of the component parts are purchased from outside vendors.  Certain parts, such
as engines and transmissions, are standard "off-the-shelf" parts purchased by
the Company and incorporated into its vehicles. Others, such as the rubber
track, undercarriage and loader, are manufactured specifically for the Company.
The remaining parts, such as the Posi-Track and Track Truck frame, are
manufactured on site for incorporation into the vehicles.  In order to help
reduce production costs, the Company periodically reviews those parts that may
be more cost-effective to manufacture in-house.

     The Company owns the tooling used by outside vendors for manufacturing
customized parts.  While current vendors are meeting the Company's quality and
performance expectations, the Company believes alternative contract
manufacturers are available should the necessity arise.  However, shortages of
parts or the need to change vendors could result in production delays or
reductions in product shipments that could adversely affect the Company's
business.  The Company believes that a change in suppliers for component parts
could occur without material disruption of the Company's business.

INTELLECTUAL PROPERTY RIGHTS

     In 1986, a patent was issued to the Company with respect to the Posi-Turn
power steering system.  The steering system was invented by Gary Lemke,
President of the Company,  and his rights with respect to the invention were
assigned by him to the Company.  In connection with the assignment, the Company
did not pay any compensation to Mr. Lemke, but agreed that in the event the
Company licenses any of its rights under the patent to others, Mr. Lemke will
receive 25% of

                                       8
<PAGE>
 
any royalties under such license. The Company has registered the trademark
"Track Truck" with the U.S. Patent and Trademark Office and claims common law
trademark rights in the names "Posi-Track", "Posi-Turn" and "Snow Saver."
Despite these protections, it may be possible for competitors or users to copy
aspects of the Company's products.

     The Company believes that patent and trademark protection is less
significant to its competitive position than the knowledge, ability and
experience of the Company's personnel, product enhancements, new product
development and the ongoing reputation of the Company.

RESEARCH AND DEVELOPMENT

     During the years ended December 31, 1997, 1996 and 1995, the Company spent
approximately $217,000, $171,000 and $81,000, respectively, on research and
development.  The Company's research and development expenses have been incurred
in connection with development of new models and enhancements to existing
products.

INSURANCE

     The Company maintains product liability insurance in the amount of
$1,000,000 per claim and in the aggregate. The Company has a commercial umbrella
insurance policy which provides an additional $10,000,000 of coverage per claim
and in the aggregate.   The Company also maintains key-person life insurance in
the amount of $1,000,000 on the life of Mr. Lemke.

EMPLOYEES

     As of March 12, 1998, the Company had 89 employees, three of whom are part-
time, and one independent contractor who is part-time.  The Company's employees
and independent contractor include four in management, 13 in administration,
nine in sales and marketing and 63 in manufacturing and engineering.  The
Company believes its relations with its employees are good.  None of the
Company's employees is represented by a labor union.

ITEM 2.        DESCRIPTION OF PROPERTY

     The Company's manufacturing and office facilities are located in Grand
Rapids, Minnesota.  These facilities consist of approximately 95,000 square feet
of production space and approximately 10,000 square feet of office space.  The
facilities are leased under a 20 year lease from the Grand Rapids Economic
Development Authority (EDA).  The Grand Rapids facility has been the Company's
primary production and office facility since it was first occupied by the
Company in May 1995. The lease has been recorded as a capital lease for
financial statement and income tax purposes. The Company has an option to
purchase the facility at any time at the present value of the remaining lease
payments plus the current purchase price of the land on which the facility was
constructed.  The purchase price of the land is currently $160,000, but can be
reduced or forgiven over a period of eight years if certain minimum employment
levels are met and maintained during the applicable year.  These facilities were
expanded from its original 40,000 square feet to its present size in 1997.
 
     In connection with the expansion of the Company's manufacturing facility,
the EDA, on behalf of the Company, received financing for the expansion through
a construction loan with a bank.  The Company has guaranteed the repayment of
the construction loan and is responsible for payment of the related interest at
9% through the construction phase.  At December 31, 1997, advances totaling
$1,302,749 were outstanding on the construction loan and have been reflected as
a long-term liability on the Company's financial statements. After completion of
the construction phase, the construction loan will be paid and the additional
financing will be incorporated into the existing lease with the EDA.  Payments
on this additional financing will be spread over 20 years and are scheduled to
begin April 1, 1998.

     The Company's lease payments for its original 40,000 square foot facility
will remain unchanged and additional lease payments will be made for the added
space.  The original lease payments will be equal to approximately $38,000 per
year for the period June 1997 through May 1999 and approximately $81,000 per
year thereafter.

     The lease payments for the expanded portion of the facility are equal to
the retirement of the $1.6 million debt incurred by the EDA to finance the
expansion.  The $1.6 million debt is comprised of two parts:  a $750,000 loan
with an interest rate of 4% per year and payments based upon a fully amortizing
20 year term; and an $850,000 loan with an interest rate of 9% per year and
payments based upon a 20 year amortization and a balloon payment due January 1,
2003.  Payments under the $750,000 portion will be $4,585 per month  and
payments under the $850,000 portion will be $7,725 per month,

                                       9
<PAGE>
 
each beginning April 1, 1998. The Company is responsible for all real estate
taxes, utilities and insurance on the leased property.

     With the occupancy of the facility in Grand Rapids, the Company became
eligible to receive up to $200,000 of grant monies through the State of
Minnesota over a three-year period, provided certain employment levels are
attained.  The Company received the first installment of grant monies of $50,000
in 1996 and the second installment of grant monies of $75,000 in 1997.  Should
the Company attain the employment levels specified in the grant, the Company
will be eligible to receive $75,000 in 1998.

     In August 1997, the Company began renting a parcel of land consisting of 63
acres and six buildings with a total of 47,000 square feet for its research and
development facility and for additional warehousing.  The Company purchased this
property in January 1998. The purchase price of this facility was $500,000,
which was financed, in part, by the proceeds of approximately $150,000 from the
sale of the Company's former production facility in Marcell, Minnesota.  In
addition the Company entered into a note payable with the seller for
approximately $350,000 to be paid in two equal principal installments in January
1999 and January 2000, with interest payable quarterly at 8%.

     Prior to occupying the Grand Rapids facility, the Company's production and
office facilities were located in Marcell, Minnesota.  These facilities were
sold to an unrelated party in December 1997 via a like-kind exchange. In 1996,
the Company sold its Marcell research and development facility to an unrelated
party.
 
     In addition to its facility in Marcell, the Company owns a 20-acre tract of
land near Marcell used for testing its vehicles.  The Company also owned three
acres of land and a 9,000 square foot building in Grand Rapids used for research
and development and warehousing.  This Grand Rapids property was acquired in
1990 from Company President, Gary Lemke, pursuant to a contract for deed. The
land and building on this property were under agreement for sale to an unrelated
party when the building was completely destroyed by fire in December 1997.  The
building, and its contents valued at approximately $150,000, were covered by
insurance.  The Company has constructed a new building on this site and the sale
to the same unrelated party closed in March 1998 resulting in a gain of
approximately $20,000, which will be recognized in the first quarter of 1998.

     The Company believes that its properties are adequately covered by
insurance.

ITEM 3.        LEGAL PROCEEDINGS

     During its 1997 fiscal year, the Company was not involved in any material
legal proceedings.

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

     There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.

                                    PART II

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

MARKET INFORMATION

     The Company's common stock has been traded on the Nasdaq National
Market(SM) under the ticker symbol ASVI since February 26, 1997. Prior to that
date, the Company's common stock was traded on the Nasdaq Small Cap Market(SM)
since the completion of its initial public offering, August 11, 1994. The
following table sets forth sales price information for the periods indicated, as
adjusted to reflect the Company's three-for-two stock split, effective January
21, 1997:

 
Year Ended December 31, 1996          High      Low
-----------------------------------  -------  -------
     First Quarter                    $ 5.00   $ 4.17
     Second Quarter                    14.17     4.50
     Third Quarter                     13.33     8.67
     Fourth Quarter                    19.33    11.00
 

                                       10
<PAGE>
 
Year Ended December 31, 1997           High      Low
-----------------------------------   ------   ------
     First Quarter                    $26.00   $16.25
     Second Quarter                    26.75    17.00
     Third Quarter                     33.00    24.00
     Fourth Quarter                    30.50    22.50

     The quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commissions, and may not represent actual transactions.

HOLDERS

     As of March 10, 1998, the Company had approximately 178 holders of record
of its Common Stock (not including beneficial holders).  The Company believes it
has in excess of 3,000 beneficial holders of its Common Stock.

DIVIDENDS

     The Company has never declared or paid a cash dividend on its Common Stock.
The Company currently intends to retain earnings for use in the operation and
expansion of its business and therefore does not anticipate paying any dividends
in the foreseeable future.


ITEM 6.   SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
 
(Dollar amounts in thousands,                  YEAR ENDED DECEMBER 31,
except per share data)              1997      1996     1995       1994         1993
--------------------------------  --------  --------  -------  -----------  ----------
<S>                               <C>       <C>       <C>      <C>          <C>
  Net Sales.....................   $24,316   $12,266   $8,245       $4,806      $3,995
  Net Income....................     2,324       922      440          148         160
  Net Income Per Share-Diluted..       .43       .18      .09          .04         .05
  Total Assets..................    19,215    13,410    6,322        4,885       2,663
  Long-Term Liabilities.........     7,021     5,697      643           40          93
  Shareholders' Equity..........     9,957     6,287    5,078        4,609       1,093
  Dividends Declared............         -         -        -            -           -
</TABLE>
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, certain
Statements of Earnings data as a percentage of net sales:
<TABLE>
<CAPTION>
 
                                                     YEAR ENDED DECEMBER 31,
                                                    --------------------------
                                                      1997     1996     1995
                                                    --------  -------  -------
<S>                                                 <C>       <C>      <C>
       Net sales..................................    100.0%   100.0%   100.0%
       Cost of goods sold.........................     74.5     76.2     78.2
       Gross profit...............................     25.5     23.8     21.8
       Selling, general & administrative expense..      9.2     10.8     12.4
       Operating income...........................     15.4     11.6      8.4
       Interest expense...........................      1.6      1.0      0.4
       Net income.................................      9.6      7.5      5.3
</TABLE>

     Net Sales.  Net sales for the year ended December 31, 1997 increased 98%
compared with 1996 to approximately $24,316,000.  This increase is due to the
combination of increased sales of the Company's existing model Posi-Track, sales
from the introduction of two new Posi-Track models, increased sales of parts and
used equipment, offset in part by a decrease in Track Truck sales.  Sales of the
Company's existing model Posi-Track, the MD-70, and related accessories
increased 61% in 1997, due primarily to the increase in the number of Posi-Track
dealer locations and the increased market acceptance of the Posi-Track.  At
March 1998, the Company had 91 Posi-Track dealer locations, compared with 49 at
March 1997.  In 1997, the Company introduced two new Posi-Track models, the HD
4500 and the DX 4530 (previously referred to as the

                                       11
<PAGE>
 
HD 125). The Company began selling the HD 4500 in the third quarter of 1997 and
had sales related to this product of approximately $4,047,000, the majority of
which occurred in the fourth quarter. The Company began selling the DX 4530 in
the fourth quarter of 1997 and had sales related to this product of
approximately $992,000 in 1997. Sales of parts, used equipment and other
increased 93% compared with 1996, due primarily to a 126% increase in the sale
of parts as the number of vehicles in service continues to increase. Sales of
used equipment increased 20% as the Company has a greater selection of used
equipment to sell and increased marketing efforts were devoted to the sale of
used equipment. Track Truck related sales decreased 34%, or approximately
$380,000, due to the introduction of the Posi-Track DX 4530, which serves some
of the same markets as the Track Truck.

     For the year ended December 31, 1996, net sales totaled approximately
$12,266,000, a 49% increase  over 1995. This increase is the combination of
increased sales of the Company's Posi-Track vehicle and related accessories
along with increased sales of parts and used equipment, offset by a reduction in
the sales of Track Truck vehicles.  Posi-Track related sales increased 63% over
1995 due to the continued expansion of the Posi-Track dealer network, a full
year in the Company's larger 40,000 square foot manufacturing facility and full
year sales to one large dealer which was added in mid-1995.  In March 1997, the
Company had 49 Posi-Track dealer locations compared with 43 in March 1996.  Four
of the ten largest Posi-Track dealers for 1996, based on sales volume, were
added during 1996.  These four represented total sales volume of approximately
$1,900,000.  In 1996, the Company was in a larger 40,000 square foot
manufacturing facility the entire year, compared with eight months in 1995,
thereby providing for increased production capacity.  Also in 1996, the Company
had two Posi-Track dealers that together accounted for 21% of the Company's net
sales.  In 1995, the Company had only one Posi-Track dealer with sales in excess
of 10% of the Company's net sales.  Track Truck related sales for 1996 decreased
18% as the Company did not experience, nor did it anticipate, any large foreign
shipments as was experienced in 1995.  Excluding foreign shipments, Track Truck
unit sales actually increased 24% in 1996.  Sales of parts and used equipment
increased 57% due to the greater number of vehicles in service in 1996.  Sales
of used equipment increased 90% in 1996 due to the Company devoting more of its
resources to marketing used equipment and a greater amount of used equipment.

     In connection with the expansion of its manufacturing facility and increase
in the models in its product lines, the Company is anticipating continued growth
in its net sales  in excess of 50% for the twelve months ended December 31,
1998.

     Gross Profit.  For the twelve months ended December 31, 1997, gross profit
increased to approximately $6,202,000, or 25.5% of net sales, compared with
approximately $2,925,000, or 23.8% of net sales, in 1996.  The increase in gross
profit is due to the 98% increase in net sales for 1997.  The increase in the
gross profit percentage is due to several factors.  First, the Company began
selling the model HD 4500 Posi-Track in the second half of 1997, which carries a
higher selling price than the average vehicle sold in 1997 and also a higher
gross profit margin.  Second, the Company began selling the Posi-Track DX 4530,
which also carries a higher selling price than the average vehicle sold in 1997,
but also, was primarily sold direct to the end user, rather than through the
Posi-Track dealer network.  Third, greater efficiencies have been obtained in
the production process as the number of units produced increased significantly
in 1997.

     For 1996, gross profit increased to approximately $2,925,000, or 23.8% of
net sales, compared with approximately $1,796,000, or 21.8% of net sales, in
1995.  The increased gross profit amount can be attributed to the large increase
in the Company's net sales for 1996.  The increased gross profit percentage is
due primarily to the increased efficiencies gained as the number of vehicles
produced increases.  In 1996, the Company produced approximately 42% more total
units than in 1995.  The Company also occupied a larger 40,000 square foot
manufacturing facility for the entire twelve months of 1996 compared with
approximately eight months for 1995, allowing for greater efficiencies in the
production process.  In addition, the Company was able to obtain better pricing
on its purchases of raw materials as well as negotiate volume incentive
discounts with several of its major vendors.
 
     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses increased for the twelve months ended December 31, 1997
to approximately $2,230,000 compared with $1,330,000 for 1996.  However, as a
percentage of net sales, these expenses decreased from 10.8% in 1996 to 9.2% for
1997.  The increase in the expenses is due to increased sales and marketing
efforts, increased financial and legal related costs and increased
administrative costs from increased employment levels.  The increased sales and
marketing costs are primarily from additional sales personnel hired in 1997 and
increased advertising and promotion expenditures.  The increase in financial and
legal related costs are due primarily to a full twelve months of amortization of
a financial consulting agreement in 1997 compared with one month in 1996, and
the additional legal costs incurred as the Company continues to expand its
operations.  The decreased percentage of selling, general and administrative
expenses is due to the Company closely managing its costs as  sales volume
increases.

                                       12
<PAGE>
 
     For 1996, selling, general and administrative expenses increased to
approximately $1,330,000 from approximately $1,023,000 in 1995.  As a percentage
of net sales, these expenses decreased from 12.4 % of net sales in 1995 to 10.8%
of net sales in 1996.  The increased expenses were due to the following:
increased sales and marketing costs, primarily advertising and travel costs;
increased costs for administrative personnel hired to support the Company's
increased activity; and the costs associated with a full year of occupancy in
the Company's 40,000 square foot facility.  The decreased percentage of selling,
general and administrative expenses is due to the increased sales volume in
1996.

     Research and Development.  Research and development expenses increased from
approximately $171,000 in 1996 to $217,000 in 1997.  This increase was due to
the introduction of two new Posi-Track models in 1997 and the Company's desire
to invest in new products and future product enhancements.

     For 1996, research and development expenses increased to approximately
$171,000 compared with approximately $81,000 in 1995.  The increase is due to
the Company devoting more of its resources to this area in 1996 from increased
profitability and other available funds.  The research and development efforts
in 1996 focused primarily on development of new products and enhancements to
existing products.

     In order to maintain its competitive advantage over other manufacturers of
similar products, the Company believes it will increase the level of spending on
research and development activities.  It is expected the main thrust of these
activities will be directed towards extensions of the Company's current product
lines and improvements of existing products.

     Interest Expense.  Interest expense was approximately $399,000, or 1.6% of
net sales, in 1997 compared with $127,000, or 1.0% of net sales, in 1996 and
approximately $36,000, or 0.4% of net sales, in 1995.  The increase in 1997 is
due primarily to a full year of interest expense for the Company's $5,000,000
convertible debentures which were issued in October 1996.  The remaining
increase in 1997 is due to construction loan interest (net of amount
capitalized) incurred for the expansion of the Company's manufacturing facility.
The increase in 1996 was also due to the additional interest expense from the
convertible debentures.

     The Company anticipates its interest expense will increase in 1998 due to
the additional debt incurred to expand its manufacturing facility and purchase
additional facilities.

     Net Income.  Net income for the twelve months ended December 31, 1997 was
approximately $2,324,000, compared with approximately $922,000 in 1996 and
$440,000 in 1995.  The increases were due to increased sales and profitability
on those sales, offset, in part, by increased operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1997, the Company had working capital of approximately
$13,342,000, compared with approximately $10,510,000 at December 31, 1996.  This
increase is due to a combination of several factors.  Inventory increased
approximately $6,514,000 as the Company increased production of its original
model Posi-Track and introduced two new models in 1997.  Accounts receivable
increased approximately $729,000 due to increased sales volume.  The Company
used cash and short-term investments of approximately $3,740,000 to finance
these increases, along with increases in accounts payable and accrued expenses
of approximately $802,000.  The Company also funded approximately $1,079,000 of
capital expenditures through cash flow generated from operations.

     At December 31, 1996, the Company had working capital of approximately
$10,510,000, compared with approximately $4,372,000 at December 31, 1995.
Approximately $5,000,000 of the total increase of approximately $6,138,000 was
from proceeds of the Company's private placement of convertible debentures.  The
remainder of the increase was due primarily to the increase in the Company's
accounts receivable and inventories offset in part by increased levels of
accounts payable and accrued liabilities from the overall volume increase in
1996.

     In connection with the expansion of the Company's manufacturing facility,
the Grand Rapids Economic Development Authority (EDA), on behalf of the Company,
received financing for the expansion through a construction loan with a bank.
The Company has guaranteed the repayment of the construction loan and is
responsible for payment of the related interest at 9% through the construction
phase.  At December 31, 1997, advances totaling $1,302,749 were outstanding on
the construction loan and have been reflected as a long-term liability on the
Company's financial statements. After completion of the construction phase, the
construction loan will be paid and the additional financing will be

                                       13
<PAGE>
 
incorporated into the existing lease with the EDA. Payments on this additional
financing will be spread over 20 years and are scheduled to begin April 1, 1998.
 
     The Company believes its existing cash and marketable securities, together
with cash expected to be provided by operations and available, unused credit
lines, will satisfy the Company's projected working capital needs and other cash
requirements for the next twelve months.  Beyond that period, it may be
necessary to obtain additional capital resources. The Company has not determined
whether the composition of these additional resources would be in the form of
additional debt, convertible securities, equity securities or a combination.

     The Company has increased its number of employees approximately 50% in the
last twelve months.  In order to meet its anticipated sales levels for 1998, the
Company expects it will increase its employees by approximately 10-30% over the
next twelve months.  It is anticipated nearly all the additional employees will
be in the production area.  The Company believes the local work force is
adequate to supply the additional employees it needs.
 
     Impact of the Year 2000 Issue.  The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
applicable year.  Some of the Company's computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000.  This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process critical business transactions including recording of sales,
manufacture of products, inventory management and distribution, preparation of
invoices and collection of accounts receivables and many other normal business
activities.

     The Company has begun to identify all releveant software that may affect
the Company's operations through surveys and examinations.  Based on risk
assessments that have been completed for the majority of the Company's
operations, the Company must upgrade some of its existing software to ensure
that the computer systems will properly utilize dates beyond December 31, 1999.
The Company expects to convert its business operations to new Year 2000
compatible software by the end of 1998.  The cost of these conversions is not
expected to have a material impact on the Company.  However, there can be no
guarantee the software of other companies on which the Company's systems rely
will be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company.

     The statements set forth above under "Liquidity and Capital Resources" and
elsewhere in this Form 10-K which are not historical facts are forward-looking
statements and involve risks and uncertainties, many of which are outside the
Company's control and, accordingly, actual results may differ materially.
Factors that might cause such a difference include, but are not limited to, lack
of market acceptance of new or existing products, inability to attract new
dealers for the Company's products, unexpected delays in obtaining raw
materials, unexpected additional expenses or operating losses or the activities
of competitors.  Any forward-looking statements provided from time-to-time by
the Company represents only management's then-best current estimate of future
results or trends.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The disclosures required by this item are not required by the Company for
its fiscal year ended December 31, 1997.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The following financial statements and financial schedules are attached as
a separate section immediately following the signature page of the Annual Report
on Form 10-K:

     Report of Independent Certified Public Accountants
     Consolidated Balance Sheets as of December 31, 1997 and 1996
     Consolidated Statements of Earnings for the years ended December 31, 1997,
     1996 and 1995
     Consolidated Statements of Changes in Shareholders' Equity for the years
     ended December 31, 1997, 1996 and 1995
     Consolidated Statements of Cash Flows for the years ended December 31,
     1997, 1996 and 1995
     Notes to Consolidated Financial Statements
 

                                       14
<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 information required by Item 10 is incorporated by reference to the
sections entitled "Election of Directors", "Executive Officers" and "Section
16(a) Beneficial Ownership Compliance" in the Company's Proxy Statement for its
1998 Annual Meeting of Shareholders, which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days of the Company's
fiscal year end.

ITEM 11.  EXECUTIVE COMPENSATION
 
     The information required by Item 11 is incorporated by reference to the
section entitled "Executive Compensation" in the Company's Proxy Statement for
its 1998 Annual Meeting of Shareholders, which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A within 120 days of the
Company's fiscal year end.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by Item 12 is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days of the Company's fiscal year end.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by Item 13 is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days of the Company's fiscal year end.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) (1)   FINANCIAL STATEMENTS

          The financial statements filed as part of this report are listed under
Item 8.  Financial Statements and Supplementary Data.

     (a) (2) FINANCIAL STATEMENT SCHEDULES
 
          The following items are attached as a separate section immediately
following the financial statements included in this Annual Report on Form 10-K:

          Report of Independent Certified Public Accountants on the Financial
          Statement Schedules
          For the years ended December 31, 1997, 1996 and 1995
               Schedule II - Valuation and Qualifying Accounts for the years
               ended December 31, 1997, 1996 and 1995

     (a)(3)  EXHIBITS

     Exhibit
     Number    Description
     ------    -----------
       3.1     Second Restated Articles of Incorporation of the Company (a)

                                       15
<PAGE>
 
       3.1a    Amendment to Second Restated Articles of Incorporation of the
               Company (e)

       3.2     Bylaws of the Company (a)

       4.1     Specimen form of the Company's Common Stock Certificate (a)

       4.2 *   1987 Stock Option Plan (a)

       4.3 *   1994 Long-Term Incentive and Stock Option Plan (a)

       4.4     Form of Warrant issued to Summit Investment Corporation (b)

       4.5     Form of Debenture issued October 1996 (d)

       4.6     Warrant issued to Leo Partners, Inc. on December 1, 1996 (e)

       4.7 *   1996 Incentive and Stock Option Plan (f)

      10.1     Development Agreement dated July 14, 1994 among the Iron Range
               Resources and Rehabilitation Board ("IRRRB"), the Grand Rapids
               Economic Development Agency ("EDA") and the Company (b)

      10.2     Lease and Option Agreement dated July 14, 1994 between the Grand
               Rapids Economic Development Agency and the Company (b)
 
      10.3     Option Agreement dated July 14, 1994 between the EDA and the
               Company (b)

      10.4     Grant Contract dated July 1, 1994 between the Company and the
               IRRRB (b)

      10.5     Letter Credit Agreement dated June 15, 1994 between the Security
               State Bank of Hibbing and the Company (a)

      10.6     Supplemental Lease Agreement dated April 18, 1997 between the EDA
               and the Company (f)

      10.7     Supplemental Development Agreement dated April 18, 1997 between
               the EDA and the Company (f)

      10.8     Line of Credit dated May 22, 1997 between Norwest Bank Minnesota
               North, N.A. and the Company (f)

      10.9 *   Employment Agreement dated October 17, 1994 between the Company
               and Thomas R. Karges (c)

      10.10    Consulting Agreement between the Company and Leo Partners, Inc.
               dated December 1, 1996 (e)

      11       Statement re: Computation of Per Share Earnings

      22       List of Subsidiaries (a)

      23       Consent of Grant Thornton LLP, independent auditors

      24       Power of Attorney (Included on Signature Page)

      27.1     Financial Data Schedule for the year ended December 31, 1997
 
      27.2     Restated Financial Data Schedule for the nine months ended
               September 30, 1997
 

                                       16
<PAGE>
 
      27.3     Restated Financial Data Schedule for the six months ended June 
               30, 1997
 
      27.4     Restated Financial Data Schedule for the three months ended 
               March 31, 1997
 
      27.5     Restated Financial Data Schedule for the year ended December 31, 
               1996
 
      27.6     Restated Financial Data Schedule for the nine months ended 
               September 30, 1996
 
      27.7     Restated Financial Data Schedule for the six months ended June 
               30, 1996

          (a) Incorporated by reference to the Company's Registration Statement
              on Form SB-2 (File No. 33-61284C) filed July 7, 1994.

          (b) Incorporated by reference to the Company's Post-Effective
              Amendment No. 1 to Registration Statement on Form SB-2 (File No.
              33-61284C) filed August 3, 1994.

          (c) Incorporated by reference to the Company's Quarterly Report on
              Form 10-QSB for the quarter ended September 30, 1994 (File No. 33-
              61284C) filed November 11, 1994.

          (d) Incorporated by reference to the Company's Quarterly Report on
              Form 10-QSB for the quarter ended September 30, 1996 (File No. 0-
              25620) filed electronically November 13, 1996.

          (e) Incorporated by reference to the Company's Annual Report on Form
              10-KSB for the year ended December 31, 1996 (File No. 0-25620)
              filed electronically March 28, 1997.

          (f) Incorporated by reference to the Company's Quarterly Report on
              Form 10-QSB for the quarter ended June 30, 1997 (File No. 0-25620)
              filed electronically August 13, 1997.

          *   Indicates management contract or compensation plan or arrangement.

     (b)  REPORTS ON FORM 8-K

     No reports on Form 8-K were filed during the quarter ended December 31,
1997.

 

                                       17
<PAGE>
 
                                   SIGNATURES

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

                              A.S.V., INC.
      /s/ Gary Lemke                              Date:  March 27, 1998
------------------------------------              ----------------------------
By:   Gary Lemke, President
------------------------------------                             
 
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.  Each person whose
signature to this report on Form 10-K appears below hereby constitutes and
appoints Gary Lemke and Thomas R. Karges, and each of them, as his or her true
and lawful attorney-in-fact and agent, with full power of substitution, to sign
on his or her behalf individually and in the capacity stated below and to
perform any acts necessary to be done in order to file all amendments to this
report on Form 10-K, and any and all instruments or documents filed as part of
or in connection with this report on Form 10-K or the amendments thereto and
each of the undersigned does hereby ratify and confirm all that said attorney-
in-fact and agent, or his substitutes, shall do or cause to be done by virtue
hereof.



      /s/ Philip C. Smaby                         Date:  March 27, 1998
------------------------------------              ----------------------------
By:  Philip C. Smaby, Chairman of the 
     Board and Director


     /s/ Jerome T. Miner                          Date: March 27, 1998
------------------------------------              ----------------------------
By:  Jerome T. Miner, Vice-Chairman 
     of the Board and Director


     /s/ Gary Lemke                               Date: March 27, 1998
------------------------------------              ----------------------------
By:  Gary Lemke, President and Director
     (Chief Executive Officer)

     /s/ Edgar E. Hetteen                         Date: March 27, 1998
------------------------------------              ----------------------------
By:  Edgar E. Hetteen, Vice President
     and Director


     /s/ James Dahl                               Date: March 27, 1998
------------------------------------              ----------------------------
By: James Dahl, Director


     /s/ Leland T. Lynch                          Date: March 27, 1998
------------------------------------              ----------------------------
By:  Leland T. Lynch, Director


     /s/ Karlin S. Symons                         Date: March 27, 1998
------------------------------------              ----------------------------
By: Karlin S. Symons, Director


     /s/ R. E. Turner, IV                         Date:  March 27, 1998
------------------------------------              ----------------------------
By: R. E. Turner, IV, Director


     /s/ Thomas R. Karges                          Date: March 27, 1998
------------------------------------              ----------------------------
By:  Thomas R. Karges, Chief 
     Financial Officer

                                       18
<PAGE>
 
                          A.S.V., INC. AND SUBSIDIARY
                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
 
 
                     BALANCE   ADDITIONS                   BALANCE
                    BEGINNING  CHARGED TO                   END OF
 ACCRUED WARRANTY   OF PERIOD   EXPENSE    DEDUCTIONS (A)   PERIOD
------------------  ---------  ----------  --------------  --------
<S>                 <C>        <C>         <C>             <C>
 
1997                 $100,000    $668,563       $568,563   $200,000
 
1996                 $      -    $194,923       $ 94,923   $100,000
 
1995                 $      -    $ 25,260       $ 25,260   $      -
 
</TABLE>

(A) Warranty credits issued

                                       19
<PAGE>
 
                           A.S.V., INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>



                ASSETS                                              1997           1996
                                                                   ------          -----
<S>                                                              <C>           <C>        
CURRENT ASSETS
   Cash and cash equivalents                                     $   316,599   $ 3,042,494
   Short-term investments                                          1,255,160     2,269,753
   Accounts receivable (net of allowance for doubtful
      accounts of $20,000)                                         1,989,906     1,261,228
   Inventories                                                    11,674,027     5,160,353
   Prepaid expenses and other                                        342,896       201,943
                                                                 -----------   -----------
                Total current assets                              15,578,588    11,935,771
                                                                 -----------   -----------
PROPERTY AND EQUIPMENT, NET                                        3,636,091     1,474,641
                                                                 -----------   -----------
                                                                 $19,214,679   $13,410,412
                                                                 ===========   ===========

                LIABILITIES AND
                  SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable                                              $ 1,474,701   $   779,609
   Accrued liabilities
     Compensation                                                    180,349        87,695
     Interest                                                         81,250        78,785
     Warranties                                                      200,000       100,000
     Other                                                            98,998       181,168
   Income taxes payable                                              201,674       198,954
                                                                 -----------   -----------

                Total current liabilities                          2,236,972     1,426,211
                                                                 -----------   -----------

LONG-TERM LIABILITIES
   Convertible debentures                                          5,000,000     5,000,000
   Capital lease obligation                                          717,859       697,068
   Construction loan                                               1,302,749          --
                                                                 -----------   -----------
                                                                   7,020,608     5,697,068
                                                                 -----------   -----------

COMMITMENTS AND CONTINGENCIES                                           --            --

SHAREHOLDERS' EQUITY Capital stock, $.01 par value:
     Preferred stock, 7,500,000 shares authorized; 
     no shares outstanding                                              --            --
     Common stock, 22,500,000 shares authorized; 
     shares issued and outstanding - 5,012,207 in 1997 
     and 4,810,659 in 1996                                            50,122        48,107
   Additional paid-in capital                                      6,545,432     5,201,038
   Retained earnings                                               3,361,545     1,037,988
                                                                 -----------   -----------
                                                                   9,957,099     6,287,133
                                                                 -----------   -----------

                                                                 $19,214,679   $13,410,412
                                                                 ===========   ===========

</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-1
<PAGE>
 
                           A.S.V., INC. AND SUBSIDIARY

                       CONSOLIDATED STATEMENTS OF EARNINGS

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995


<TABLE>
<CAPTION>


                                                            1997           1996            1995
                                                           ------         ------          -----
<S>                                                    <C>             <C>             <C>         
Net sales                                              $ 24,315,591    $ 12,266,499    $  8,244,565
Cost of goods sold                                       18,113,910       9,341,860       6,448,811
                                                       ------------    ------------    ------------
         Gross profit                                     6,201,681       2,924,639       1,795,754
                                                       ------------    ------------    ------------
Operating expenses
   Selling, general and administrative                    2,230,399       1,329,705       1,023,056
   Research and development                                 216,888         171,340          80,569
                                                       ------------    ------------    ------------
                                                          2,447,287       1,501,045       1,103,625
                                                       ------------    ------------    ------------
         Operating income                                 3,754,394       1,423,594         692,129
                                                       ------------    ------------    ------------

Other income (expense)
   Interest income                                          223,111          99,706          32,215
   Interest expense                                        (398,589)       (127,069)        (36,300)
   Other, net                                                74,641          63,278           2,808
                                                       ------------    ------------    ------------
                                                           (100,837)         35,915          (1,277)
                                                       ------------    ------------    ------------

         Income before income taxes                       3,653,557       1,459,509         690,852
Provision for income taxes                                1,330,000         538,000         251,000
                                                       ------------    ------------    ------------
         NET INCOME                                    $  2,323,557    $    921,509    $    439,852
                                                       ============    ============    ============
Net income per common share
     Basic                                             $        .47    $        .19    $        .09
                                                       ============    ============    ============
     Diluted                                           $        .43    $        .18    $        .09
                                                       ============    ============    ============
Weighted average number of common shares outstanding
     Basic                                                4,910,744       4,787,692       4,741,502
                                                       ============    ============    ============
     Diluted                                              5,933,767       5,267,170       4,964,111
                                                       ============    ============    ============
</TABLE>

The accompanying notes are an integral part of these statements.

                                       F-2
<PAGE>
 
                           A.S.V., INC. AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995



<TABLE>
<CAPTION>

                                                                                                 
                                                                            RETAINED
                                          COMMON STOCK       ADDITIONAL     EARNINGS   
                                      -------------------     PAID-IN     (ACCUMULATED
                                      SHARES      AMOUNT      CAPITAL       DEFICIT)       TOTAL
                                    ---------   --------   -----------   -------------  ------------
<S>                                 <C>         <C>        <C>           <C>            <C>        
Balance at December 31, 1994        4,733,859   $ 47,339   $ 4,884,612   $  (323,373)   $ 4,608,578

   Exercise of stock options           30,000        300        29,012          --           29,312

   Net income                            --           --            --       439,852        439,852
                                  -----------   --------   -----------   -----------    -----------

Balance at December 31, 1995        4,763,859     47,639     4,913,624       116,479      5,077,742

   Exercise of stock options           46,800        468        78,814          --           79,282

   Tax benefit from exercise of
     stock options                       --           --       196,000          --          196,000

   Warrant earned                        --           --        12,600          --           12,600

   Net income                            --           --         --          921,509        921,509
                                  -----------   --------   -----------   -----------    -----------

Balance at December 31, 1996        4,810,659     48,107     5,201,038     1,037,988      6,287,133

   EXERCISE OF STOCK OPTIONS          201,548      2,015       175,194          --          177,209

   TAX BENEFIT FROM EXERCISE OF
     STOCK OPTIONS                       --         --       1,018,000          --        1,018,000

   WARRANT EARNED                        --         --         151,200          --          151,200

   NET INCOME                            --         --           --        2,323,557      2,323,557
                                  -----------   --------   -----------   -----------    -----------

BALANCE AT DECEMBER 31, 1997        5,012,207   $ 50,122   $ 6,545,432   $ 3,361,545    $ 9,957,099
                                  ===========   ========   ===========   ===========    ===========
</TABLE>


The accompanying notes are an integral part of these statements.

                                      F-3
<PAGE>
 
                           A.S.V., INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>


                                                                          1997          1996            1995
                                                                         ------        ------          -----
<S>                                                                  <C>            <C>            <C>        
Cash flows from operating activities:
   Net income                                                        $ 2,323,557    $   921,509    $   439,852
   Adjustments to reconcile net income to net cash provided by
     (used in) operating activities:
       Depreciation and amortization                                     220,327        114,000         95,482
       Interest accrued on capital lease obligation                       20,791         46,417         29,912
       Deferred income taxes                                            (123,000)       (49,000)       (23,000)
       Effect of warrant earned                                          151,200         12,600           --
       Changes in assets and liabilities
          Accounts receivable                                           (728,678)      (523,905)      (292,811)
          Inventories                                                 (6,513,674)    (1,474,378)      (711,554)
          Prepaid expenses and other                                     (17,953)       (90,719)        66,686
          Accounts payable                                               695,092        600,227         56,179
          Accrued compensation                                            92,654         17,475         55,339
          Accrued interest                                                 2,465         78,785           --
          Accrued warranties                                             100,000        100,000           --
          Other accrued liabilities                                      (82,170)        59,095         70,634
          Income taxes payable                                             2,720        (30,637)       229,591
                                                                     -----------    -----------    -----------

              Net cash provided by (used in) operating activities     (3,856,669)      (218,531)        16,310
                                                                     -----------    -----------    -----------

Cash flows from investing activities:
   Purchase of property and equipment                                 (1,079,028)      (232,231)      (428,568)
   Purchase of short-term investments                                   (746,985)    (2,269,753)      (361,282)
   Redemption of short-term investments                                1,761,578         50,000        811,282
                                                                     -----------    -----------    -----------

              Net cash provided by (used in) investing activities        (64,435)    (2,451,984)        21,432
                                                                     -----------    -----------    -----------

Cash flows from financing activities:
   Proceeds from convertible debenture                                      --        5,000,000           --
   Principal payments on notes payable - related parties                    --             --          (63,193)
   Principal payments on long-term liabilities                              --             --          (24,114)
   Proceeds from exercise of stock options                               177,209         79,282         29,312
   Tax benefit related to exercise of options                          1,018,000        196,000           --
                                                                     -----------    -----------    -----------

              Net cash provided by (used in) financing activities      1,195,209      5,275,282        (57,995)
                                                                     -----------    -----------    -----------

              Net increase (decrease) in cash and cash equivalents    (2,725,895)     2,604,767        (20,253)

Cash and cash equivalents at beginning of period                       3,042,494        437,727        457,980
                                                                     -----------    -----------    -----------

Cash and cash equivalents at end of period                           $   316,599    $ 3,042,494    $   437,727
                                                                     ===========    ===========    ===========

Supplemental disclosure of cash flow information:
   Cash paid for interest                                            $   350,072    $     1,867    $     6,538
   Cash paid for income taxes                                            432,280        452,110         29,288
Supplemental disclosure of investing and financing activities:
   Asset acquired by incurring capital lease obligation              $ 1,302,749    $     7,444    $   613,295
</TABLE>

The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>

                           A.S.V., INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1997, 1996 AND 1995



NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   The Company designs and manufactures track-driven, all-season vehicles and
   related accessories and attachments in one facility in northern Minnesota.
   The Company sells its products through a national dealer network and also
   directly to the end user throughout the United States and internationally.

   A summary of the significant accounting policies consistently applied in the
   preparation of the accompanying consolidated financial statements follows:

   1. PRINCIPLES OF CONSOLIDATION

   The consolidated financial statements include the accounts of A.S.V., Inc.
   and its wholly-owned subsidiary. All significant intercompany accounts and
   transactions have been eliminated in consolidation.

   2. CASH EQUIVALENTS

   The Company considers all highly liquid temporary cash investments with an
   original maturity of three months or less to be cash equivalents. At December
   31, 1997 and 1996, the Company had cash equivalents of approximately $48,000
   and $2,772,000, which consisted of various highly liquid temporary cash
   investments. The fair value of these investments approximates cost.

   3. SHORT-TERM INVESTMENTS

   The Company considers its short-term investments at December 31, 1997 and
   1996 as "available for sale" and, therefore, states its short-term
   investments at fair value with unrealized gains and losses reported as a
   separate component of shareholders' equity. At December 31, 1997 and 1996,
   the fair value of all short-term investments approximated cost.

   4. ACCOUNTS RECEIVABLE

   The Company grants credit to customers in the normal course of business.
   Management performs on-going credit evaluations of customers and maintains
   allowances for potential credit losses which, when realized, have generally
   been within management expectations.



   5. INVENTORIES

   Inventories are stated at the lower of cost or market. Cost is determined
   using the first-in, first-out method.

   6. PROPERTY AND EQUIPMENT

   Property and equipment are carried at cost. Building and improvements are
   depreciated over periods of 18 to 39 years using the straight-line method.
   Tooling, machinery and equipment, and vehicles are depreciated over periods
   of 3 to 20 years using straight-line and accelerated methods. Accelerated
   methods are used for income tax purposes.

   7. WARRANTIES

   Provision for estimated warranty costs is recorded at the time of sale and
   periodically adjusted to reflect actual experience.

   8. REVENUE RECOGNITION

   The Company recognizes revenue when products are shipped.

   9. ADVERTISING EXPENSE

   The Company expenses advertising as incurred. Advertising expense was
   $320,545, $200,656 and $100,598 for 1997, 1996 and 1995.

   10. STOCK OPTIONS

   The Company accounts for the issuance of stock options using the intrinsic
   value method.

   11. ACCOUNTING ESTIMATES

   The preparation of the Company's consolidated financial statements requires
   management to make estimates and assumptions that affect the reported amounts
   of assets and liabilities, and the related amounts of revenues and expenses.
   Actual results could differ from those estimates.


                                      F-5
<PAGE>
 
                           A.S.V., INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                        DECEMBER 31, 1997, 1996 AND 1995


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   12. NET INCOME PER COMMON SHARE

   On December 31, 1997, the Company adopted Statement of Financial Accounting
   Standards ("SFAS") No. 128 - "Earnings per Share". As required by SFAS 128,
   all current and prior year net income per share data have been restated.

   The Company's basic net income per share amounts have been computed by
   dividing net income by the weighted average number of outstanding common
   shares. The Company's diluted net income per share is computed by dividing
   net income, plus the interest expense (net of tax) applicable to the
   convertible debentures in the amount $206,700 and $49,635 for 1997 and 1996,
   by the weighted average number of outstanding common shares and common share
   equivalents relating to stock options and warrants, when dilutive. For the
   years ended December 31, 1997, 1996 and 1995, 1,023,023, 479,478 and 222,610
   shares of common stock equivalents were included in the computation of
   diluted net income per share. Options to purchase 254,500 and 523,500 shares
   of common stock with a weighted average exercise price of $27.50 and $18.33
   were outstanding at December 31, 1997 and 1996, but were excluded from the
   computation of common share equivalents because their exercise prices were
   greater than the average market price of the common shares.

   13. NEW ACCOUNTING PRONOUNCEMENTS

   The Financial Accounting Standards Board has issued SFAS 130, "Reporting
   Comprehensive Income," and SFAS 131, "Disclosures about Segments of an
   Enterprise and Related Information," which are effective for fiscal 1998.
   SFAS 130 will require the Company to display an amount representing total
   comprehensive income, as defined by the statement, as part of the Company's
   basic financial statements. Comprehensive income will include items such as
   unrealized gains or losses on certain investment securities. SFAS 131 will
   require the Company to disclose financial and other information about its
   business segments, their products and services, geographic areas, major
   customers, sales, profits, assets and other information.

   The adoption of these statements is not expected to have a material effect on
   the consolidated financial statements of the Company.



NOTE B - SHORT-TERM INVESTMENTS

   Short-term investments consist primarily of a diversified portfolio of
   taxable and tax exempt governmental agency and municipal bonds as of December
   31, 1997.


   The contractual maturities of available for sale debt securities at December
   31, 1997 are as follows: $767,041 due within one year, $488,119 due after one
   year through five years.


NOTE C - INVENTORIES

   Inventories consist of the following:

                                       DECEMBER 31,
                              --------------------------
                                 1997           1996
                              ------------   -----------
     Production parts
        and materials        $ 7,776,128     $2,789,440
     Finished goods
        and service parts      2,903,257      1,475,162
     Used equipment
        held for resale          994,642        895,751
                                --------       --------

                             $11,674,027     $5,160,353


NOTE D  -  PROPERTY AND EQUIPMENT

   Property and equipment consist of the following:

                                       DECEMBER 31,
                              --------------------------
                                 1997           1996
                              ------------   -----------

     Land                       $ 32,367       $ 32,367
     Buildings and
        improvements           2,888,972      1,103,741
     Tooling                     285,314        147,563
     Machinery and
        equipment                970,289        612,510
     Vehicles                    200,908        126,748
                                --------       --------
                               4,377,850      2,022,929
     Less accumulated
        depreciation             741,759        548,288
                                --------       --------

                              $3,636,091     $1,474,641


                                      F-6
<PAGE>
 
                           A.S.V., INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                        DECEMBER 31, 1997, 1996 AND 1995


NOTE E - LINES OF CREDIT

   During 1997, the Company entered into a $2,000,000 line of credit agreement
   with a bank. This line of credit is collateralized primarily by inventories
   and accounts receivable. The interest rate is variable at prime (8.5% as of
   December 31, 1997). As of December 31, 1997, there were no outstanding
   advances under this line of credit.


NOTE F - LONG-TERM LIABILITIES

   CONVERTIBLE DEBENTURES

   During October 1996, the Company issued $5,000,000 of unsecured senior
   convertible debentures which carry interest at 6.5% and are due October 15,
   2006. The debentures are convertible at any time into the Company's common
   stock at $11.00 per share, approximately the fair market value of the stock
   at the time the debentures were sold. Interest is payable quarterly. The
   Company may redeem the debentures any time after October 15, 2001.

   CAPITAL LEASE OBLIGATION

   The Company leases its manufacturing and office building from the Grand
   Rapids Economic Development Authority ("the City") over a twenty-year period,
   which commenced May 1995. Terms of the lease agreement provide for no rent in
   the first two years, rental payments of approximately $38,000 per year in
   years three and four and approximately $81,000 per year in years five through
   twenty. The Company has an option to purchase the facility at any time during
   the lease period for the present value of the remaining lease payments plus
   the purchase price of the land. The purchase price of the land is $160,000,
   but can be reduced if certain minimum employment levels are met and
   maintained.

Future minimum lease payments under this capital lease obligation at December
31, 1997 are as follows:

     1998                                      $ 34,740
     1999                                        62,769
     2000                                        80,534
     2001                                        80,534
     2002                                        80,534
     Thereafter                                 999,960
                                               --------

     Total payments                           1,339,071
     Amounts representing interest              621,212

     Present value of minimum
        capitalized lease payments            $ 717,859
                                               ========



   Assets and accumulated amortization related to the capital lease were
   $620,739 and $41,258 at December 31, 1997 and $620,739 and $25,740 at
   December 31, 1996.

   During 1996, the Company received approval for a financing package for the
   expansion of its manufacturing facility in Grand Rapids, Minnesota. The City,
   on behalf of the Company, received financing for the expansion of the
   facility through a construction loan with a bank. The Company has guaranteed
   the loan and paid the interest at 9% through the construction phase. At
   December 31, 1997, advances totaling $1,302,749 were outstanding on the
   construction loan and have been reflected as a liability in the financial
   statements. After completion of the construction phase the construction loan
   will be paid and the additional financing will be rolled into the existing
   lease with the City. Payments will be spread over the remainder of the
   original twenty year period with the lease payments adjusted for the
   additional financing. The Company expects to close on the additional
   financing in early 1998.


NOTE G  -  PROVISION FOR INCOME TAXES

   The provision for income taxes consists of the following:
   
                              YEAR ENDED DECEMBER 31,
                           ---------------------------
                            1997       1996       1995
                           ------     ------     -----
     Current
       Federal         $1,294,500   $520,500   $250,000
       State              158,500     66,500     24,000
                         --------    -------    -------
                        1,453,000    587,000    274,000
       Deferred          (123,000)   (49,000)   (23,000)
                        ---------   --------   --------

                       $1,330,000   $538,000   $251,000
                        =========    =======    =======

   Deferred income taxes relate to the tax effect of temporary differences as
follows:

                                        DECEMBER 31,
                                  ---------------------
                                    1997         1996
                                  --------      -------
       Accruals and reserves      $201,200      $67,400
       Other                        (6,200)       4,600

   The net deferred tax asset is included with prepaid expenses and other in the
financial statements.


                                      F-7
<PAGE>
 
                           A.S.V., INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                        DECEMBER 31, 1997, 1996 AND 1995


NOTE G - PROVISION FOR INCOME TAXES - Continued

   The following is a reconciliation of the Federal statutory income tax rate to
   the effective tax rate:

                             1997       1996      995
                            ------     ------    ----

   Statutory federal rate   34.0%      34.0%     34.0%
   State income taxes, net
      of federal benefit     2.6        3.0       2.3
   Research and
      development credit       -         -       (1.2)
   Other                     (.2)       (.1)      1.2
                            ----       ----      ----

                            36.4%      36.9%     36.3%
                            ====       ====      ====

   The Company realizes an income tax benefit from the exercise or early
   disposition of certain stock options. This benefit results in a decrease in
   current income taxes payable and an increase in additional capital.


NOTE H - SHAREHOLDERS' EQUITY

   STOCK OPTION PLANS

   The Company's 1994 Long-Term Incentive and Stock Option Plan (the 1994 Plan)
   provides for the granting of stock options, stock appreciation rights,
   restricted stock awards and performance awards to officers, directors,
   employees and independent contractors of the Company at an exercise price
   which is equal to the fair market value of the stock on the date of grant.
   Under the plan, the option term is fixed at the date of grant and may not
   exceed ten years for an incentive stock option or fifteen years for
   non-qualified stock options. In the year of adoption, the Company reserved
   187,500 shares of common stock for issuance under this plan. Each year
   thereafter, one and one-half percent of the number of shares of the Company's
   common stock outstanding at the previous fiscal year end are available for
   issuance under the plan with a maximum of 750,000 shares available. Options
   awarded under the 1994 Plan are generally exercisable in 25% cumulative
   amounts beginning one year from the date of issuance.

   The Company's 1996 Stock Option Plan reserved 750,000 shares of its common
   stock. This plan has similar terms and vesting requirements as the 1994 Plan.



   Option transactions under the plans during each of the three years in the
   period ended December 31, 1997 are summarized as follows:

                                                WEIGHTED
                                                AVERAGE
                                                EXERCISE
                                 SHARES          PRICE
                                --------        ---------
     Outstanding at
       December 31, 1994         382,500         $ 1.57
          Granted                 75,000           4.30
          Exercised              (30,000)           .98
                                --------           ----
     Outstanding at
       December 31, 1995         427,500           2.10
          Granted                541,500          18.07
          Exercised              (46,800)          1.69
                                --------          -----
     Outstanding at
       December 31, 1996         922,200          11.67
          Granted                309,500          26.55
          Exercised             (206,800)          1.52
          Canceled                (2,250)          4.67
                                 -------          -----
                               1,022,650         $18.11
                               =========         ======

   A total of 5,244 shares were tendered in the exercise of options in 1997.

   At December 31, 1997, 1996 and 1995, 279,275, 262,575 and 256,875 options
   were exercisable with a weighted average exercise price of $10.61, $1.78 and
   $1.55.

   The following information applies to grants that are outstanding at December
   31, 1997:

                                OPTIONS OUTSTANDING
                     ----------------------------------------
                                      WEIGHTED-
                       NUMBER         AVERAGE      WEIGHTED-
      RANGE OF       OUTSTANDING     REMAINING      AVERAGE
     EXERCISE            AT         CONTRACTUAL    EXERCISE
       PRICES        PERIOD END        LIFE          PRICE
-------------------- -----------  -------------  -----------
$  2.08 - $  3.13      107,900      2.4 years     $  2.14
   3.83 -    5.75       74,250      3.7 years        4.48
  18.25 -   27.38      586,000      5.9 years       18.69
            27.50      254,500      6.5 years       27.50
                     ----------
                     1,022,650
                     ==========
                               OPTIONS EXERCISABLE
                            -----------------------------
                              NUMBER            WEIGHTED-
       RANGE OF             EXERCISABLE          AVERAGE
      EXERCISE                  AT              EXERCISE
       PRICES               PERIOD END            PRICE
----------------------      -----------         ---------
  $  2.08 - $  3.13             98,525            $  2.14
    3.83 -     5.75             40,500               4.51
    18.25 -   27.38            140,250              18.33
                               -------
                               279,275
                               =======


                                      F-8
<PAGE>
 
                           A.S.V., INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                        DECEMBER 31, 1997, 1996 AND 1995



NOTE H - SHAREHOLDERS' EQUITY - Continued

   The weighted average fair value of the options granted during 1997 and 1996
   is $15.10 and $9.49. The fair value of each option grant is estimated on the
   date of grant using the Black-Scholes options-pricing model with the
   following weighted-average assumptions used for all grants in 1997 and 1996;
   zero dividend yield; expected volatility of 48.80%; risk-free interest rate
   of 5.90% and 6.16% and expected life of 6.56 and 5.56 years.

   The Company's pro forma net income and net income per common share for 1997
   and 1996, had the fair value based method been used, are set forth below.

                                    1997          1996
                                  ----------   -----------
   Net income      As reported    $2,323,557     $921,509
                   Pro forma         537,255      860,685

   Net income
     per common
     share
       Basic       As reported          $.47         $.19
                   Pro forma             .11          .18

       Diluted     As reported          $.43         $.18
                   Pro forma             .12          .17

   The effect was not material to the Company's 1995 pro forma net income.

   STOCK WARRANT

   In connection with the Company's public offering, a warrant was issued to the
   Underwriter to purchase up to 180,000 shares of the Company's common stock at
   the exercise price of $2.60 per share. The warrant is exercisable until
   August 11, 1999 and contains certain anti-dilution provisions. The warrant
   has not been exercised as of December 31, 1997.



NOTE I - CONSULTING AGREEMENT

   Effective December 1, 1996, the Company entered into a five-year consulting
   agreement with a consulting firm. In connection with the agreement, the
   Company issued a warrant for the purchase of 225,000 shares of the Company's
   common stock at $11.00 per share, expiring December 1, 2006, in exchange for
   consulting services to be received over the term of the agreement.
   Subsequently, an individual who contracts with the consulting firm was
   appointed a member of the Board of Directors. The warrant is exercisable and
   outstanding as of December 31, 1997.

   The fair value of the warrant granted is $3.36 per share and was calculated
   on the date of grant using the average of the Black-Scholes and Shelton
   options-pricing models with the following assumptions: zero dividend yield;
   risk-free interest rate of 6.3%; expected life of ten years; expected
   volatility of 48.8% and a marketability discount factor of 40.0%. The
   marketability discount factor was determined based upon no public market for
   the warrant and the limit on exercisability. Compensation costs are
   recognized evenly over the term of the consulting agreement.


NOTE J - COMMITMENTS AND CONTINGENCIES

   In 1996 and 1997, the Company entered into agreements with a financing
   company (the "Creditor"), whereby the Creditor extends credit to the
   Company's dealers to finance goods sold to the dealers. The agreements
   require the Company to repurchase goods and pay the Creditor for the unpaid
   balance of the credit, along with repossession costs, in the event of default
   by dealers. As of December 31, 1997 and 1996, approximately $1,197,000 and
   $690,000 was outstanding in credit that had been extended to the Company's
   dealers.

                                       F-9
<PAGE>
 
                           A.S.V., INC. AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                        DECEMBER 31, 1997, 1996 AND 1995


NOTE K - MAJOR CUSTOMER

   During 1997 and 1996, 26.8% and 21.0% of total sales were made to two
   unaffiliated customers, each accounting for over 10% of net sales. In 1995,
   one of these customers accounted for 13.3% of net sales. At December 31, 1997
   and 1996, the accounts receivable from these customers were $48,123 and
   $165,098.


NOTE L - EMPLOYEE BENEFIT PLAN

   The Company adopted a 401(k) employee savings and profit sharing plan on July
   1, 1995 which provides for employee salary deferrals of up to $9,500 and
   discretionary Company contributions. The plan covers employees who have
   completed three months of service, as defined in the plan, and who have
   attained the age of 20 and one-half. Discretionary Company contributions for
   1997, 1996 and 1995 were $22,898, $15,881 and $6,647.


NOTE M - SUBSEQUENT EVENT

   On January 22, 1998, the Company purchased property for an exchanged property
   with a value of $149,457 and a promissory note for $350,543. The note is
   payable in two equal annual installments of $175,271 beginning January 22,
   1999. Interest at 8% is payable quarterly beginning April 22, 1998.



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
A.S.V., Inc. and Subsidiary

We have audited the accompanying consolidated balance sheets of A.S.V., Inc. and
Subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of earnings, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above, present fairly in
all material respects, the consolidated financial position of A.S.V., Inc. and
Subsidiary as of December 31, 1997 and 1996, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.

GRANT THORNTON LLP


Minneapolis, Minnesota
February 19, 1998

                                      F-10
<PAGE>
 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                                   ON SCHEDULE


Board of Directors,
A.S.V., Inc.

                In connection with our audit of the consolidated financial
statements of A.S.V., Inc. and Subsidiary referred to in our report dated
February 19, 1998, which is included in the Annual Report of A.S.V., Inc. on
Form 10-K for the year ended December 31, 1997, we have also audited Schedule II
for each of the three years in the period ended December 31, 1997. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.



GRANT THORNTON LLP


Minneapolis, Minnesota
February 19, 1998


                                      F-11
<PAGE>
 
<TABLE>
<CAPTION>
                                  EXHIBIT INDEX
<S>        <C>                                                           <C>
 
EXHIBIT    METHOD OF FILING
---------  ------------------------------------------------------------
 
  11       Statement re: Computation of Per Share Earnings               Filed herewith electronically
 
  23       Consent of Grant Thornton LLP, independent auditors           Filed herewith electronically
 
  27.1     Financial Data Schedule for the year ended December 31, 1997  Filed herewith electronically

  27.2    Restated Financial Data Schedule for the nine months ended
          September 30, 1997                                             Filed herewith electronically
 
  27.3    Restated Financial Data Schedule for the six months ended
          June 30, 1997                                                  Filed herewith electronically

  27.4    Restated Financial Data Schedule for the three months ended
          March 31, 1997                                                 Filed herewith electronically

  27.5    Restated Financial Data Schedule for the year ended
          December 31, 1996                                              Filed herewith electronically

  27.6    Restated Financial Data Schedule for the nine months ended
          September 30, 1996                                             Filed herewith electronically

  27.7    Restated Financial Data Schedule for the six months ended
          June 30, 1996                                                  Filed herewith electronically
</TABLE>