ASTEC INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Act of 1933. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.

The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Certain reclassifications were made to the prior year presentation to conform to the current year presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Astec Industries, Inc. and subsidiaries annual report on Form 10-K for the year ended December 31, 2001.

Receivables are net of allowance for doubtful accounts of $2,734,000 and $1,806,000 for June 30, 2002 and December 31, 2001, respectively.

Inventories are stated at the lower of first-in, first-out cost or market and consist of the following:

Note 5. Earnings Per Share

Basic and diluted earnings per share are calculated in accordance with SFAS No. 128. Basic earnings per share exclude any dilutive effects of options, warrants and convertible securities.

The following table sets forth the computation of basic and diluted earnings (loss) per share:

The components of comprehensive income or loss for the periods indicated are set forth below:

Reconciliations of the reportable segment totals for profit or loss to the Company's consolidated totals are as follows:

(In thousands)

There have been no material developments in legal proceedings previously reported. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies" in Part I - Item 2 of this Report.

Approximately 50% - 55% of the Company's business volume typically occurs during the first half of the year. During the usual seasonal trend, the first two quarters of the year are the Company's strongest quarters for business volume, with the second quarter slightly stronger than the first quarter. The third quarter is normally weaker than the first two quarters with the fourth quarter consistently being the weakest quarter.

Effective January 1, 2001, the Company adopted SFAS No. 133, which requires the Company to recognize derivative instruments on the balance sheet at fair value. The statement also establishes new accounting rules for hedging instruments, which depend on the nature of the hedge relationship. The Company has a cash flow hedge, which requires that the effective portion of the change in the fair value of the derivative instrument be recognized in Other Comprehensive Income (OCI), a component of Shareholders' Equity, and reclassified into earnings in the same period, or periods during which the hedged transaction affects earnings. The ineffective portion of the hedge, if any, is recognized in current operating earnings during the period of change in fair value.

The Company's captive finance subsidiary, Astec Financial Services, Inc. ("AFS"), entered into an interest rate swap agreement on April 6, 2000, to fix interest rates on variable rate debt. The swap agreement is effective for five years with a notional amount of $7,500,000. The objective of the hedge is to offset the variability of cash flows relating to the interest payments on the variable rate debt outstanding under the Company's revolving credit facility. The sole source of the variability in the hedged cash flows results from changes in the benchmark market interest rate, which is three-month U.S. Dollar LIBOR. Changes in the cash flows of the interest rate swap are expected to be highly effective at offsetting the changes in overall cash flows (i.e., changes in interest rate payments) attributable to fluctuations in the benchmark market interest rate on the variable rate debt being hedged.

During the three-month period ended June 30, 2002, there was no material ineffectiveness related to the Company's derivative holdings and there was no component of the derivative instruments' gains or losses excluded from the assessment of hedge effectiveness.

The Company adopted SFAS 142 effective January 1, 2002. Application of the non-amortization provision of SFAS 142 is expected to result in an increase in net income of approximately $2,154,000, or $0.11 per share in the current year. The Company tested goodwill for impairment using the two-step process prescribed in SFAS 142. The first step is a screen for potential impairment, while the second step measures impairment, if any. The Company completed the required impairment tests of goodwill during the first quarter of 2002 and noted no impairment of goodwill. For the three-month and six-month periods ended June 30, 2001, goodwill amortization expense was $456,000 and $1,078,000, respectively.

When used in this report, press releases and elsewhere by management or the Company from time to time, the words, "believes," "anticipates," and "expects" and similar expressions are intended to identify forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that involve certain risks and uncertainties. Statements in this Form 10-Q that are forward looking include, without limitation, statements regarding the expected recovery in the economy, the Company's expected increase in net income in the current year, the Company's expected effective tax rates during 2002, the Company's expected capital expenditures in 2002, the expected benefit of financing arrangements, and the ability of the Company to meet its working capital and capital expenditure requirements through June 30, 2003. A variety of factors could cause actual results to differ materially from those anticipated in the Company's forward-looking statements, which include th e risk factors that are discussed from time to time herein and in the Company's reports filed with the SEC, most recently in the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2002. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. The Company undertakes no obligations to update the forward-looking statements.

For the three months ended June 30, 2002, net sales increased $382,000 to $126,669,000 from $126,287,000 for the three months ended June 30, 2001. Domestic sales are generated primarily from equipment purchases made by customers for use in construction for privately funded infrastructure development and public sector spending on infrastructure development. While the sales volume for the second quarter of 2002 is comparable to the sales volume for the same previous year period, the Company believes domestic sales negatively impacted during 2001 are still being negatively impacted during 2002 by a general economic slowdown and delays in capital expenditures by its customers that are concerned about the slow economy.

For the six months ended June 30, 2002, net sales decreased to $249,111,000 from $269,597,000 for the six months ended June30, 2001, representing a 7.6% decrease.

Total international sales for the second quarter of 2002 decreased $725,000 to $23,563,000 from $24,288,000, or 3.0%, for the second quarter of 2001. For the three months ended June 30, 2002, international sales to European countries decreased over $4,000,000 compared to the same period in 2001, but were partially offset during the second quarter of 2002 by increased sales in the Asian countries of China, Japan and Korea. For the three months ended June 30, 2002 and 2001, international sales accounted for approximately 18.6% and 19.2% of net sales, respectively.

Total international sales for the six months ended June 30, 2002 decreased approximately $7,763,000 to $42,320,000, or 15.5%, compared to the first six months of 2001. Reduced international sales volumes in Central America, Africa, Europe and South American were offset somewhat by the increased sales volume in Asia for the first half of 2002 compared to the same period of 2001. For the six months ended June 30, 2002 and 2001, international sales accounted for approximately 17% and 18.6% of net sales, respectively.

Gross profit for the three months ended June 30, 2002 decreased to $26,625,000 from $29,422,000, or 9.5%, for the three months ended June 30, 2001, while the gross profit percentage for the three months ended June 30, 2002 decreased to 21.0% from 23.3% for the same period of 2001. The decrease in gross margin dollars and gross margin as a percent of sales for the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001 related primarily to lower than normal gross margins on various custom equipment produced by the Asphalt Group segment and deferred profits on large equipment contracts of the Asphalt Paving Group for products financed as operating leases for customers by Astec Financial Services, the Company's captive finance company.

Accounting rules require that revenues and related profits on equipment sales that are financed using operating leases through a captive finance company be deferred until those leases are sold to an unrelated financial institution. In the normal transaction flow, the deferral of revenues and profits of manufactured equipment financed as operating leases, netted against the recognition of previously deferred revenues and profits, is immaterial to the quarterly financial results. During the second quarter of 2002 compared to the same period of 2001, several operating leases were not sold to outside institutions, causing a net deferral of profit on the sale of the related equipment to be deferred until later quarters.

Gross profit for the six months ended June 30, 2002 decreased $6,244,000 to $54,501,000 from $60,745,000 or 10.3% for the same period of 2001. In addition to the reasons discussed above related to decreased gross profit margins during the second quarter of 2002, but to a lesser extent, changes in product mix also negatively impacted the margins for the first half of 2002 compared to the first half of 2001. The Company continues to experience significantly reduced levels of under-absorbed overhead and utilization of plant capacity for the three and six months ended June 30, 2002, compared to the same periods of 2001.

Selling, general, administrative and engineering expenses for the three months ended June 30, 2002 were $20,358,000, compared to $19,635,000 for the three months ended June 30, 2001, an increase of $723,000 or 3.7%. The increase in selling, general, administrative and engineering expenses for the second quarter of 2002, compared to the same period of 2001, related primarily to expenses of approximately $329,000 for the ConExpo trade show held once every three years in Las Vegas, Nevada and approximately $285,000 for legal settlements of lawsuits in the normal course of business.

For the six months ended June 30, 2002, selling, general, administrative and engineering expenses decreased $659,000 or 1.6% to $39,936,000 from $40,595,000 for the six months ended June 30, 2001. For the six months ended June 30, 2002, the Company expensed approximately $400,000 related to the ConExpo trade show in Las Vegas. In spite of the additional legal and exhibition costs described above, the Company continues to benefit in 2002 from the overall cost reduction measures initiated in 2001.

Interest expense increased to $2,939,000 for the quarter ended June 30, 2002 from $2,224,000 for the quarter ended June 30, 2001. Interest expense as a percentage of net sales was approximately 2.3% and 1.8% for the three months ended June 30, 2002 and 2001, respectively.

Interest expense increased $599,000 or 13% to $5,162,000 for the six months ended June 30, 2002, compared to the same period of 2001. Interest expense as a percentage of sales was approximately 2.1% and 1.7% for the six months ended June 30, 2002 and 2001, respectively. The increase in interest expense for the second quarter and first six months of 2002, compared to the same periods of 2001 related primarily to interest rate increases resulting from a sliding scale of interest rates based on financial ratio covenants. In addition, the senior subordinated note agreement entered into on September 10, 2001, are at rates higher than those paid in 2001, but provides fixed rate, long-term financing which should prove beneficial in future years.

Other income, net of other expense, was $453,000 for the quarter ended June 30, 2002, compared to $464,000 for the quarter ended June 30, 2001. For the second quarter of 2002, in accordance with SFAS 142, goodwill was not amortized, while for the second quarter of 2001, other income, net of expense included amortization expense of $456,000.

For the six months ended June 30, 2002 other income, net of expense was $1,128,000, compared to $1,108,000 for the same period of 2001. Again, in accordance with SFAS 142, goodwill was not amortized during 2002 while for the six months ended June 30, 2001 the Company recorded amortization expense of $1,079,000. Significantly lower gains from the sale of smaller volume lease and loan portfolios by Astec Financial Services, Inc., the Company's captive finance company, resulted in decreased other income, net of expense for the three-month and six-month periods ended June 30, 2002 compared to the same periods of 2001.

For the three months ended June 30, 2002, income tax expense was $1,354,000, compared to income tax expense of $3,041,000 for the three months ended June 30, 2001, a decrease of $3,451,000. The effective tax rate for the three months ended June 30, 2002 and 2001 was 35.8% and 37.9%, respectively. The consolidated effective tax rate includes foreign tax expense for South Africa at an effective tax rate of approximately 33%.

Tax expense for the six months ended June 30, 2002 and 2001 was $3,451,000 and $6,378,000, respectively. The effective tax rates for the six-month periods ended June 30, 2002 and 2001 were 32.8% and 38.2%, respectively. The decrease in the effective tax rate for the first half of 2002, compared to the same period of 2001 relates to tax credits received during the first quarter of 2002. The Company expects the effective tax rate for the remaining quarters of 2002 to be comparable to historical effective rates.

Backlog of orders at June 30, 2002 was $84,191,000, compared to $59,220,000 at June 30, 2001, an increase of 42%. The increase in the backlog of orders at June 30, 2002 compared to June 30, 2001 relates primarily to increased domestic backlog for equipment of the Company's Aggregate and Mining Group. The increase in the backlog can be primarily attributed to several large system or turnkey installations currently underway consisting primarily of conveying and crushing equipment. The Company is unable to determine whether this backlog effect was experienced by the industry as a whole.

On September 10, 2001, the Company and Astec Financial Services entered into a $125,000,000 revolving credit facility with a syndicate of banks that expires on September 10, 2004. Under this agreement, interest payments on all borrowing shall be payable (a) in arrears on the first day of each March, June, September and December, (b) on any date the borrowings are prepaid due to acceleration and (c) on maturity. Advances to Astec Financial Services under this line of credit are limited to a certain percentage of "Eligible Equipment Receivables" of Astec Financial Services as defined in the credit agreement that governs the credit facility.

Under terms of the credit agreement, the Company must maintain certain financial ratio levels and abide by certain covenants. Principal covenants under the loan agreement include the maintenance of minimum levels of net worth, leverage and fixed charge coverage ratios, a limitation of capital expenditures and rental expense, a prohibition against payment of dividends and a prohibition on large acquisitions except with the consent of the lenders.

On March 12, 2002, the Company executed the first amendment to the credit facility, which decreased the maximum amount available from $125,000,000 to $100,000,000, relaxed certain financial ratio covenants for 2002, provided security for the lenders in certain situations, and added a .375% interest rate surcharge, and waived certain violations of financial ratios under the original agreement. A second amendment to the credit agreement, dated May 13, 2002, waived non-compliance of certain financial covenants for the quarter ended March 31, 2002 and amended the leverage ratio sliding scale on which interest and various fee rates are determined. Borrowings under the credit facility as amended by the second amendment to the credit agreement bear interest at a rate equal to the London Interbank Offering Rate ("LIBOR") plus from 1.0% to 3.25%, depending on the leverage ratio as defined by the credit agreement and applied to the sliding scale.

At June 30, 2002, the Company and Astec Financial Services were not in compliance with the leverage and fixed charge coverage ratio covenants of the amended revolving credit facility. These violations were waived as part of the third amendment to the credit agreement dated August 7, 2002, which amended the leverage ratio sliding scale on which interest and various fee rates are determined. The rates at which borrowings accrue interest did not change from that stated in the second amendment. At June 30, 2002, the Company was utilizing $13,100,000 of the amount available under the revolving credit facility for borrowing related to customer financing through Astec Financial Services and an additional $20,200,000 to support outstanding letters of credit (primarily for industrial revenue bonds).

The Company currently anticipates that it will satisfy the revised financial ratio covenants of the credit facility for the next four calendar quarters. No assurances can be provided that financial ratio covenant violations or other covenant violations of the credit facility will not occur in the future or, if such violations occur, that the members of the Company's banking syndicate will not elect to pursue their contractual remedies under the credit facility, including requiring the immediate repayment in full of all amounts outstanding. There can also be no assurance that the Company can secure adequate or timely replacement financing to repay its banking syndicate in the event of an unanticipated repayment demand.

The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd., has available a credit facility of $1,250,000 to finance short-term working capital needs and an additional $1,250,000 available to cover the short-term establishment of letter of credit performance guarantees. As of June 30, 2002, Osborn Engineered Products had no outstanding balance due under the credit facility. The Company's Canadian subsidiary, Breaker Technology Ltd. has available a revolving line of credit of approximately $1,000,000 to finance short-term working capital needs using their local currency. As of June 30, 2002, Breaker Technology Ltd. had no outstanding amount under the credit facility.

On September 10, 2001, the Company and Astec Financial Services entered into a note purchase agreement for $80,000,000 of senior notes, placed with private institutions, due September 11, 2011 at a fixed rate of interest of 7.56%. On September 10, 2005 and on each September 10 thereafter through the due date, the Company is required to make a principal payment of $10,714,286. Interest will be due and payable semiannually on each March 10 and September 10. As part of this agreement, the Company must maintain certain net worth and fixed charge coverage ratios. On March 12, 2002, the Company executed the first amendment to the note purchase agreement to relax certain financial ratio covenants for 2002 and to provide additional security for the note holders in certain situations. The first amendment to the note purchase agreement also added a 0.375% interest rate surcharge and waived certain violations of financial ratios under the original agreement.

The second amendment to the note purchase agreement, executed May 13, 2002 and effective April 1, 2002, waived certain financial covenant violations as of March 31, 2002. It also included a .375% to 1.375% interest rate surcharge applied on a sliding scale based on the covenant calculation each quarter if the original covenant ratios are not met. At June 30, 2002, the Company was not in compliance with the leverage and fixed charge coverage covenants of the senior note agreement. These covenant violations were waived by a majority of the note holders as part of the third amendment to the note purchase agreement dated August 6, 2002. The rate at which the senior subordinated note indebtedness accrues interest did not change from that stated in the second amendment.

The Company currently anticipates that it will satisfy the revised financial ratio covenants of the note purchase agreement for the next four calendar quarters. No assurances can be provided that financial ratio covenant violations or other covenant violations of the note purchase agreement will not occur in the future or, if such violations occur, that the note holders will not elect to pursue their contractual remedies under the note purchase agreement, including requiring the immediate repayment in full of all amounts outstanding. There can also be no assurance that the Company can secure adequate or timely replacement financing to repay its note holders in the event of an unanticipated repayment demand.

The Company entered into a security agreement dated May 13, 2002 in order to comply with the terms of the credit agreement and the note purchase agreement. The Trigger Date, as defined in the credit agreement and the note purchase agreement, occurred on March 31, 2002, requiring the Company to secure its credit facility and the senior notes with its inventory, machinery and equipment, and trade receivables.

As of June 30, 2002, the Company had working capital of $143,962,000, compared to $161,867,000 at December 31, 2001. Total short-term borrowings, including current maturities of long-term debt, were $3,114,000 at June 30, 2002, compared to $2,368,000 at December 31, 2001. A financing agreement for imported, purchased inventory items accounted for $2,110,000 of the short-term borrowings at June 30, 2002, while outstanding Industrial Development Revenue Bonds accounted for $500,000 of the current maturities of long-term debt at June 30, 2002 and December 31, 2001. Net cash provided by operating activities for the six months ended June 30, 2002 was approximately $25,935,000 compared to $2,390,000 for the six months ended June 30, 2001. Operating activities contributing to cash during 2002 were primarily (a) increased accounts payable for invoices not yet due under normal terms and under extended payment terms and (b) increased other accrued liabilities from customer deposits related to large equipment contracts and insurance reserves associated with the Company's captive insurance company. These operating activity contributions were partially offset by increased finance receivables resulting from fewer lease portfolio sales during 2002.

Long-term debt, less current maturities, decreased to $111,270,000 at June 30, 2002 from $127,285,000 at December 31, 2001. At June 30, 2002, $80,000,000 was outstanding under the senior secured note agreement, $13,100,000 was outstanding under the revolving credit facility and $19,200,000 was outstanding under the long-term principal portion of Industrial Revenue Bonds.

Capital expenditures in 2002 for plant expansion and for further modernization of the Company's manufacturing processes are expected to be approximately $7,600,000. This amount includes $1,500,000 of capital additions to be made during the fourth quarter of 2002 for the manufacturing facility acquired in Loudon, Tennessee. The Company expects to finance these expenditures using internally generated funds and amounts available from its credit facilities. Net cash used by investing activities for the six months ended June 30, 2002 was approximately $9,473,000, compared to $11,492,000 for the six months ended June 30, 2001. Capital expenditures for the six months ended June 30, 2002 were $3,908,000, compared to $4,265,000 at June 30, 2001. Proceeds from the sale and repayment of lease portfolio was approximately $7,701,000 for the six months ended June 30, 2002, compared to $25,342,000 for the six months ended June 30, 2001. The decrease in proceeds from the sale and repayment of lease po rtfolio was the result of Astec Financial not selling during the first half of 2002 as large a number of the operating leases as it did during the same period of 2001. Expenditures for equipment on operating lease was approximately $14,092,000 for the six months ended June 30, 2002, compared to $32,620,000 for the same period ended June 30, 2001. The decrease in expenditures for equipment on operating lease was due to a decrease in the number of the Company's equipment sales that were financed through Astec Financial Services on operating leases.

Subject to the matters discussed above regarding the Company's ability to comply with its Senior Secured Note and revolving credit agreement covenants, or to obtain additional waivers related thereto, the Company believes that its current working capital, cash flows generated from future operations and availability remaining under its credit facility will be sufficient to meet the Company's working capital and capital expenditure requirements through June 30, 2003.

The following table discloses aggregate information about the Company's contractual obligations and the periods in which payments are due as of June 30, 2002:

On July 15, 2002, Astec announced that it has entered into an agreement to sell its Trencor facility in Grapevine, Texas through a tax-free exchange for which the Company would receive cash and property. Proceeds from the sale of the Trencor facility will be used to fund the above referenced OEM arrangement with Case, acquire a state-of-the-art manufacturing facility, make necessary capital improvements, and cover relocation expenses. On August 2, 2002, the Company announced an agreement with John Deere Commercial Worksite Products, Inc. to acquire Deere's state-of-the-art 300,000 square-feet manufacturing facility located on 108 acres in Loudon, Tennessee, which was referenced in the July 15 announcement. The land and manufacturing facility purchase transaction is scheduled to close in October 2002.

The Company is engaged in certain pending litigation involving claims or other matters arising in the ordinary course of business. Most of these claims involve product liability or other tort claims for property damage or personal injury against which the Company is insured. As a part of its litigation management program, the Company maintains adequate general liability insurance coverage for product liability and other similar tort claims. The coverage is subject to a substantial self-insured retention under the terms of which the Company has the right to coordinate and control the management of its claims and the defense of these actions.

Management has reviewed all claims and lawsuits and, upon the advice of its litigation counsel, has made provision for any estimable losses. Notwithstanding the foregoing, the Company is unable to predict the ultimate outcome of any outstanding claims and lawsuits.

Certain customers have financed purchases of the Company's products through arrangements in which the Company is contingently liable for customer debt aggregating $10,838,000 at June 30, 2002. These obligations range from 36 to 48 months in duration and have minimal risk.

In addition, the Company is contingently liable under letters of credit of approximately $20,200,000 primarily related to Industrial Revenue Bonds.

A significant portion of our revenues relates to the sale of equipment that produces asphalt mix. A major component of asphalt is oil, and asphalt prices correlate with the price and availability of oil. A rise in the price of oil or a material decrease in the availability of oil would increase the cost of producing asphalt, which would likely decrease demand for asphalt, resulting in decreased demand for our products. This would likely cause our revenues and profits to decrease. In fact, rising gasoline, diesel fuel and liquid asphalt prices significantly increased the operating and raw material costs of our contractor and aggregate producer customers, reducing their profits and causing delays in some of their capital equipment purchases. These delays, along with the general slowdown in the U.S. economy, have decreased demand for several key categories of products.

General economic downturns, including any downturns in the commercial construction industry, could result in a material decrease in our revenues and operating results. In fact, we believe that the economic downturn was the primary cause of our net losses for the third and fourth quarters of 2001. Demand for many of our products, especially in the commercial construction industry, is cyclical. Sales of our products are sensitive to the states of the U.S., foreign and regional economies in general, and in particular, change in commercial construction spending and government infrastructure spending. In addition, many of our costs are fixed and cannot be quickly reduced in response to decreased demand. We could face a downturn in the commercial construction industry based upon a number of factors, including:

-a decrease in the availability of funds for construction;
-labor disputes in the construction industry causing work stoppages;
-rising gas and fuel oil prices;
-rising interest rates;
-energy or building materials shortages; and
-inclement weather.

As of June 30, 2002, the Company was not in compliance with the leverage and fixed charge coverage ratio covenants contained in the credit facility and similar financial ratio covenants in the note purchase agreement. The covenant violations in the credit facility were waived by the Company's banking syndicate through an amendment entered into on August 7, 2002 and the covenant violations in the note purchase agreement were waived by a majority of the note holders through an amendment entered into August 6, 2002. No assurances can be provided that financial ratio covenant violations or other violations of the credit facility or note purchase agreement will not occur in the future, or if such violations occur, that the banks and/or note holders, as the case may be, will not elect to pursue their contractual remedies under the credit facility or note purchase agreement, including requiring the immediate repayment in full of all amounts outstanding. There can also be no assurance that the Company can secure adequate or timely replacement financing to repay its banks or note holders in the event of an unanticipated repayment demand.

We have completed ten acquisitions since 1994 and plan to acquire additional businesses in the future. We may be unable to achieve the benefits expected to be realized from our acquisitions. In addition, we may incur additional costs and our management's attention may be diverted because of unforeseen expenses, difficulties, complications, delays and other risks inherent in acquiring businesses, including the following:

-we may have difficulty integrating the financial and administrative functions of acquired businesses;
-acquisitions may divert management's attention from our existing operations;
-we may have difficulty in competing successfully for available acquisition candidates, completing future acquisitions or accurately estimating the financial effect of any businesses we acquire ;
-we may have delays in realizing the benefits of our strategies for an acquired business;
-we may not be able to retain key employees necessary to continue the operations of the acquired business;
-acquisition costs may deplete significant cash amounts or may decrease our operating income;
-we may choose to acquire a company that is less profitable or has lower profit margins than our Company; and future acquired companies may have unknown liabilities that could require us to spend significant amounts of additional capital.

We currently face strong competition in product performance, price and service. Some of our national competitors have greater financial, product development and marketing resources than we have. If competition in our industry intensifies or if our current competitors enhance their products or lower their prices for competing products, we may lose sales or be required to lower the prices we charge for our products. This may reduce revenue from our products and services, lower our gross margins or cause us to lose market share. In fact, some key competitors slashed prices in 2001 and 2002 in an effort to make sales as demand in our industry slowed. As a result, we continue to experience price erosion and lower gross margins.

We manufacture heavy machinery, which is used by our customers at excavation and construction sites and on high-traffic roads. Any defect in, or improper operation of, our equipment can result in personal injury and death, and damage to or destruction of property, any of which could cause product liability claims to be filed against us. The amount and scope of our insurance coverage may not be adequate to cover all losses or liabilities we may incur in the event of a product liability claim. We may not be able to maintain insurance of the types or at the levels we deem necessary or adequate or at rates we consider reasonable. Any liabilities not covered by insurance could reduce our profitability or have an adverse effect on our financial condition.

Our hot-mix asphalt plants contain air pollution control equipment that must comply with performance standards promulgated by the Environmental Protection Agency. These performance standards may increase in the future. Changes in these requirements could cause us to undertake costly measures to redesign or modify our equipment or otherwise adversely affect the manufacturing processes of our products. Such changes could have a material adverse effect on our operating results.

Also, due to the size and weight of some of the equipment that we manufacture, we often are required to comply with conflicting state regulations on the maximum weight transportable on highways and roads. In addition, some states regulate the operation of our component equipment, including asphalt mixing plants and soil remediation equipment, and most states regulate the accuracy of weights and measures, which affect some of the control systems that we manufacture. We may incur material costs or liabilities in connection with the regulatory requirements applicable to our business.

We hold numerous patents covering technology and applications related to many of our products and systems, and numerous trademarks and trade names registered with the U.S. Patent and Trademark Office and in foreign countries. Our existing or future patents or trademarks may not adequately protect us against infringements and pending patent or trademark applications may not result in issued patents or trademarks. Our patents, registered trademarks and patent applications, if any, may not be upheld if challenged, and competitors may develop similar or superior methods or products outside the protection of our patents. This could reduce demand for our products and materially decrease our revenues. If our products are deemed to infringe upon the patents or proprietary rights of others, we could be required to modify the design of our products, change the name of our products or obtain a license for the use of some of the technologies used in our products. We may be unable to do any of the foregoing in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do so could cause us to incur additional costs or lose revenues.

Dr. J. Don Brock, our Chairman and President, is of significant importance to our business and operations. The loss of his services may adversely affect our business. In addition, our ability to attract and retain qualified engineers, skilled manufacturing personnel and other professionals, either through direct hiring or acquisition of other businesses employing such professionals, will also be an important factor in determining our future success.

In the second quarter of 2002, international sales represented approximately 18.6% of our total sales. We plan to continue to increase our presence in international markets. In connection with any increase in international sales efforts, we will need to hire, train and retain qualified personnel in countries where language, cultural or regulatory barriers may exist. Any difficulties in expanding our international sales may divert management's attention from our existing operations. In addition, international revenues are subject to the following risks:

-fluctuating currency exchange rates which can reduce the profitability of foreign sales;
-the burden of complying with a wide variety of foreign laws and regulations;
-dependence on foreign sales agents;
-political and economic instability of governments; and
-the imposition of protective legislation such as import or export barriers.

Our quarterly revenues, expenses and operating results have varied significantly in the past and are likely to vary significantly from quarter to quarter in the future. As a result, our operating results may fall below the expectations of securities analysts and investors in some quarters, which could result in a decrease in the market price of our common stock. The reasons our quarterly results may fluctuate include:

-general competitive and economic conditions;
-delays in, or uneven timing in the delivery of, customer orders;
-the introduction of new products by us or our competitors;
-product supply shortages; and
-reduced demand due to adverse weather conditions.

Period to period comparisons of such items are not should not be relied on as indications of future performance.

Our charter, bylaws and Tennessee law contain provisions that may delay, deter or inhibit a future acquisition or an attempt to obtain control of Astec. This could occur even if our shareholders are offered an attractive value for their shares or if a substantial number or even a majority of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us or obtaining control of us to negotiate with and obtain the approval of our Board of Directors in connection with the transaction. Provisions that could delay, deter or inhibit a future acquisition or an attempt to obtain control of us include the following:

-having a staggered Board of Directors;
-requiring a two-thirds vote of the total number of shares issued and outstanding to remove directors other than for cause;
-requiring advanced notice of actions proposed by shareholders for consideration at shareholder meetings;
-limiting the right of shareholders to call a special meeting of shareholders;
-requiring that all shareholders entitled to vote on an action provide written consent in order for shareholders to act without holding a shareholders meeting; and
-being governed by the Tennessee Control Share Acquisition Act.

In addition, the rights of holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of our preferred stock that may be issued in the future and that may be senior to the rights of holders of our common stock. On December 22, 1995, our Board of Directors approved a shareholder protection rights agreement, which provides for one preferred stock purchase right in respect of each share of our common stock. These rights become exercisable upon a person or group of affiliated persons acquiring 15% or more of our then-outstanding common stock by all persons other than an existing 15% shareholder. This rights agreement also could discourage bids for the shares of common stock at a premium and could have a material adverse effect on the market price of our shares.

Critical Accounting Policies

In response to the SEC's financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected our more subjective accounting estimation processes for purposes of explaining the methodology used in calculating the estimate in addition to the inherent uncertainties pertaining to the estimate and the possible effects on the Company's financial conditions. The three accounting estimation processes discussed below are inventory valuation, allowance for doubtful accounts, and litigation contingencies. These estimation processes affect current assets and are therefore critical in assessing the financial and operating status of the Company. These estimates involve certain assumption that, if materially incorrect, could create an adverse impact on the Company's operations and financial position. We believe our critical accounting policies are as follows:

Inventory Valuation: Inventories are valued at the lower of cost or market for each of the Company's business segments. The most significant component of the Company's inventories is steel. Open market prices, which are subject to volatility, determine the cost of steel for the Company. Annual pricing contracts are in place for certain of the Company's major steel suppliers to limit the steel price to an agreed upon range during the term on the contract. In addition, the Company has arranged "just-in-time" delivery agreements from its major steel suppliers to reduce the amount of on-hand steel in inventory on any given date. During periods when open market prices decline, the Company may need to provide an allowance to reduce the carrying value of the inventory.

In addition, over time, certain items in inventory may become obsolete, and as such, the Company may establish an allowance to reduce the carrying value of these items to their net realizable value. Inventories are sensitive to design and engineering changes in machines resulting from technological advances, various design enhancements and changes in production methods, among others. The initial reserve for obsolete inventories relates primarily to raw materials inventories and is determined based on a percentage write-down of the inventory value each year based on last usage. Detailed inventory listings, indicating the last date an item was sold or issued to production, are reviewed and a reserve is calculated based on: no write-down of value in the first year with no usage; one-third write-down in the second year with no usage; two-thirds write-down in the third year with no usage; and reserved at one hundred percent after the fourth year of no usage. If, prior to the time constraint s of the above analysis, it is determined that certain inventory has little or no future value, then it is reserved at one hundred percent.

Historically, finished goods inventory accounts for 40% to 50% of the Company's total inventory value. Finished goods inventory, which includes new machinery held for sale, used equipment received as trade-in on the purchase of new equipment and used equipment on short-term rental are valued at the lower of cost or market. At June 30, 2002, used and rental equipment accounted for approximately 21% of the total inventory value. The Company employs a sales force dedicated solely to the marketing of used equipment for which there exists a significant customer base. Used equipment received on trade is valued by used equipment sales personnel who inspect the equipment and value it based on assumptions of condition and current market demand for that particular equipment. Recorded market values are reviewed monthly and reserves are adjusted as necessary to record the equipment at the net realizable value.

Assumptions underlying evaluation of collectibility may be: past collection history of the individual customer, credit ratings by independent services, customer financing arrangements and total amounts currently due to the Company from the customer. Reserves are sensitive primarily to changes in the individual customer credit worthiness and to the total of past due amounts from customers on the whole.

Litigation Contingencies: As a normal course of business in the industry, the Company is named as a defendant in a number of legal proceedings associated with product liability matters. The Company does not believe it is a party to any legal proceedings that will have a material adverse effect on the consolidated financial position. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in assumptions related to these proceedings.

As discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contingencies" in Part I - Item 2 of this report, the Company has accrued its best estimate of the probable cost for the resolution of these claims. This estimate has been developed in consultation with outside counsel that is handling the defense in these matters and is based upon a combination of litigation and settlement strategies. The recorded estimates may be subject to decisions of juries or other presiding officials who can affirm or deny in appeal the amount of a judgment. Based on the various circumstances in the actual litigation process the case may be settled out of court. When a judgment has been handed down for amounts materially different than the amount of the estimated reserve, the reserve is adjusted upward or downward to that amount. Certain litigation is being addressed before juries in states where past jury awards have been significant. To the extent ad ditional information arises or strategies change, it is possible that the Company's best estimate of the probable liability in these matters may change materially.

We have no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2001.

The Annual Meeting of the Shareholders was held on Thursday, April 25, 2002, in Chattanooga, Tennessee, at which the following matters were submitted to a vote of the shareholders:

1. Votes regarding the election of three Directors for a term expiring in 2005 were as follows:

Additional Directors, whose terms of office as Directors continued after the meeting, are as follows:

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

______________________
The Exhibits are numbered in accordance with Item 601 of Regulation S-K. Inapplicable Exhibits are not included in the list.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ASTEC INDUSTRIES, INC.
(Registrant)