OR

For the transition period from ____________________ to ____________________

(Form 10-K Cover Page - Continued)

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

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $115,957,404 based upon the closing sales price reported by the Nasdaq National Market on March 10, 2003, using beneficial ownership of stock rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting stock owned by all directors and executive officers of the registrant, some of whom may not be held to be affiliates upon judicial determination.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

As of March 10, 2003 Common Stock, par value $.20 - 19,677,440 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents have been incorporated by reference into the Parts of this Annual Report on Form 10-K indicated:

TABLE OF CONTENTS

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General

Astec Industries, Inc. (the "Company") is a Tennessee corporation and incorporated in 1972. The Company designs, engineers, manufactures and markets equipment and components used primarily in road building and related construction activities. The Company's products are used in each phase of road building, from quarrying and crushing the aggregate to testing the mix for application of the road surface. The Company also manufactures certain equipment and components unrelated to road construction, including trenching, auger boring, directional drilling, environmental remediation and industrial heat transfer equipment. The Company holds 117 United States and 86 foreign patents, has 32 patent applications pending, and has been responsible for many technological and engineering innovations in the industry. The Company's products are marketed both domestically and internationally. In addition to equipment sales, the Company manufactures and sells replacement parts for equipment in each of its product lines. The distribution and sale of replacement parts is an integral part of the Company's business.

The Company's fourteen manufacturing subsidiaries are: (i) Breaker Technology Ltd., which designs, manufactures and markets rock breaking and processing equipment and utility vehicles for mining; (ii) Johnson Crushers International, Inc., which designs, manufactures and markets portable and stationary aggregate and ore processing equipment; (iii) Kolberg-Pioneer, Inc., which designs, manufactures and markets aggregate processing equipment for the crushed stone, manufactured sand, recycle, top soil and remediation markets; (iv) Osborn Engineered Products SA (Pty) Ltd., which designs, manufactures and markets crushers, vibratory screening equipment, conveyors and turnkey plants and mills; (v) Production Engineered Products, Inc., which designs, manufactures and markets high-frequency vibrating screens for sand and gravel and asphalt operations; (vi) Superior Industries of Morris, Inc., which designs, manufactures and markets conveyors, radial stackers and idlers; (vii) Telsmith, Inc., which designs, manufactures and markets aggregate processing equipment for the production and classification of sand, gravel, and crushed stone for road and other construction applications; (viii) Astec, Inc., which designs, manufactures and markets hot-mix asphalt plants and related components and manufactures testing and sampling equipment for the asphalt mix and aggregate processing industries; (ix) CEI Enterprises, Inc., which designs, manufactures and markets heat transfer equipment, small asphalt plants for the domestic and international markets and polymer and rubber blending systems for the hot-mix asphalt industry; (x) Heatec, Inc., which designs, manufactures and markets thermal fluid heaters, asphalt heaters, polymer and rubber blending systems and other heat transfer equipment used in the Company's asphalt mixing plants and in other industries; (xi) American Augers, Inc., which designs, manufactures and markets auger boring and directional drilling equipment; (xii) Trencor, Inc., which designs, manufac tures and markets chain and wheel trenching equipment and excavating equipment; (xiii) Carlson Paving Products, Inc., which designs, manufactures and markets asphalt paver screeds, a milling machine and trench compaction equipment; and (xiv) Roadtec, Inc., which designs, manufactures and markets a line of milling machines used to recycle asphalt and concrete, asphalt paving equipment and material transfer vehicles.

On December 31, 2002, as part of a plan to focus on the core equipment manufacturing business and to further reduce operating expenses, the Company exited the equipment financing business conducted through Astec Financial Services, Inc. ("AFS"), a wholly owned subsidiary of the Company. Since December 31, 2002, AFS has sold to other financing companies, or collected from customers, payment on a substantial portion of all contracts. AFS has sufficient reserve for potentially uncollectible amounts on remaining contracts.

Astec Systems, Inc. was formed in response to market demand for a new generation of modular aggregate processing plants. Astec Systems is not a manufacturing entity but coordinates and markets modular systems using the engineering capabilities and manufactured equipment of the Aggregate and Mining Group and the manufacturing and construction expertise of Astec, Inc.

The Company's strategy is to be the cost-efficient producer in each of its product lines, while continuing to develop innovative new products and provide first class service for its customers. Management believes that the Company is the technological innovator in the markets in which it operates and is well positioned to capitalize on the need to rebuild and enhance roadway infrastructure, both in the United States and abroad.

In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.

The Company's business units have separate management teams and offer different products and services. The business units have been aggregated into four reportable business segments based upon the nature of the product or services produced, the type of customer for the products and the nature of the production process. The reportable business segments are (i) Asphalt Group, (ii) Aggregate and Mining Group, (iii) Mobile Asphalt Paving Group and (iv) Underground Group. All remaining companies and federal tax expenses for all business segments are included in the "Other Business Units" category for reporting.

Financial information in connection with the Company's financial reporting for segments of a business under SFAS 131 is included in Note 15 to "Notes to Consolidated Financial Statements - Operations by Industry Segment and Geographic Area," appearing in Appendix A of this report.

The Asphalt Group segment is made up of three business units: Astec, Inc., Heatec, Inc. and CEI Enterprises, Inc. These business units design, manufacture and market a complete line of asphalt plants and related components, heating and heat transfer processing equipment and storage tanks for the asphalt paving and other non-related industries.

Astec, Inc. ("Astec") designs, engineers, manufactures and markets a complete line of portable, stationary and relocatable hot-mix asphalt plants and related components under the ASTEC® trademark. An asphalt mixing plant typically consists of heating and storage equipment for liquid asphalt (manufactured by CEI or Heatec); cold feed bins for storing aggregates; a drum mixer (batch or Double Barrel type unit) for drying, heating and mixing; a baghouse composed of air filters and other pollution control devices, hot storage bins or silos for temporary storage of hot-mix asphalt and a control house. The Company introduced the concept of high plant portability in 1979. Its current generation of portable asphalt plants is marketed as the Six Pack^TM and consists of six portable components, which can be disassembled, moved to the construction site and reassembled, thereby reducing relocation expenses. High plant portability represents an industry innovation developed and succes sfully marketed by the Company. The Company's enhanced version of the Six Pack^TM, known as the Turbo Six Pack^TM, is a highly portable plant which is especially useful in less populated areas where plants must be moved from job to job and can be disassembled and erected without the use of cranes.

The components in Astec's asphalt mixing plants are fully automated and use both microprocessor-based and programmable logic control systems for efficient operation. The plants are manufactured to meet or exceed federal and state clean air standards.

The Company has also developed specialized asphalt recycling equipment for use with its hot-mix asphalt plants. Many of its existing products are suited for blending, vaporizing, drying and incinerating contaminated products. As a result, Astec has a line of thermal purification equipment for the remediation of petroleum-contaminated soil.

Heatec, Inc. ("Heatec") designs, engineers, manufactures and markets a variety of thermal fluid heaters, process heaters, waste heat recovery equipment, liquid storage systems and polymer and rubber blending systems under the HEATEC® trademark. For the construction industry, Heatec manufactures a complete line of asphalt heating and storage equipment to serve the hot-mix asphalt industry. In addition, Heatec builds a wide variety of industrial heaters to fit a broad range of applications, including heating equipment for marine vessels, roofing material plants, refineries, chemical processing, rubber plants and agribusiness. Heatec has the technical staff to custom design heating systems and has systems operating as large as 50,000,000 BTU's per hour.

CEI Enterprises, Inc. ("CEI"), designs, engineers, manufactures and markets heating equipment and storage tanks for the asphalt paving industry and rubber and polymer blending systems. CEI's heating equipment uses hot oil, direct fired or electric heating processes. CEI's equipment includes portable and stationary tank models with capacities up to 35,000 gallons each. In addition, CEI manufactures low cost asphalt plants for international and domestic markets.

The Company markets its hot-mix asphalt and heat transfer products both domestically and internationally. The principal purchasers of asphalt and related equipment include highway contractors. Asphalt equipment is sold directly to the customers through the Company's domestic and international sales departments, although independent agents are also used to market asphalt plants and their components in international markets.

Heatec equipment is marketed through both direct sales and dealer sales. Manufacturers' representatives sell heating products for applications in industries other than the asphalt industry. CEI equipment is marketed domestically and internationally through direct sales.

In total, the products of the Asphalt Group segment are marketed by approximately 31 direct sales employees, 20 domestic independent distributors and 27 international independent distributors.

Raw materials used in the manufacture of products include carbon steel and various types of alloy steel, which are normally purchased from distributors. Raw materials for manufacturing are readily available. Most steel is delivered on a "just-in-time" arrangement from the supplier to reduce inventory requirements at the manufacturing facilities.

This industry segment faces strong competition in price, service and product performance and competes with both large publicly-held companies with resources significantly greater than those of the Company and with various smaller manufacturers. Domestic hot-mix asphalt plant competitors include Gencor Industries, Inc. and CMI Corporation, a subsidiary of Terex Corporation. In the international market, the hot-mix asphalt plant competitors include Ammann, Marinni, Parker, Cifali and Speco. The market for the Company's heat transfer equipment is diverse because of the multiple applications for such equipment. Competitors for the construction product line of heating equipment include, among others, Gencor/Hyway Heat Systems, American Heating, Burke Heating Systems and Pearson Heating Systems, Inc. Competitors for the industrial product line of heating equipment include GTS Energy Systems, Fulton Thermal Corporation and Vapor Power International, among others.

At December 31, 2002, the Asphalt Group segment employed 859 individuals, of which 674 were engaged in manufacturing, 71 in engineering and 114 in selling, general and administrative functions.

The backlog for the hot-mix asphalt and heat transfer equipment at December 31, 2002 and 2001 was approximately $26,629,000 and $31,318,000, respectively.

The Company's Aggregate and Mining Group is comprised of eight business units focused on the aggregate, metallic mining and recycle markets. Seven of the subsidiaries achieve their strength by distributing products into niche markets and drawing on the advantages of brand recognition in the global market. These business units are Breaker Technology Ltd., Johnson Crushers International, Inc., Kolberg-Pioneer, Inc., Osborn Engineered Products, SA (Pty) Ltd., Production Engineered Products, Inc., Superior Industries of Morris, Inc. and Telsmith, Inc. The eighth subsidiary, Astec Systems, Inc., coordinates the engineering capabilities of the subsidiaries in designing and marketing aggregate processing systems comprised of equipment manufactured by the other seven subsidiaries in this segment and from selected equipment of the Asphalt Group.

The stringent demands for quality aggregate to meet the specifications of the "Superpave" asphalt mixes has led to Telsmith's development, implementation and marketing of the Silver Bullet® Series or "SBS" narrow band cone crusher, which provides unparalleled results in producing a cubical product, as well as enhancing overall machine productivity.

In metallic mining operations, TELSMITH® equipment is used in primary crushing stages after the material has been blasted from the deposit. Secondary and tertiary crushing equipment, as well as vibrating screens, are employed in systems to reduce the material down to sizes for grinding mill feed or leech bed processes.

In 2003, Telsmith will strengthen its continuous improvement efforts by completing the scheduled upgrade to ISO 9001:2000, a more stringent international standard for quality assurance. This designation is recognition of the quality of Telsmith products and services in the worldwide marketplace.

Kolberg-Pioneer, Inc. ("KPI") designs, manufactures and supports a complete line of aggregate processing equipment for the sand and gravel, mining, quarrying and concrete recycling markets. KPI manufactures the well-known Pioneer® and Kolberg® product lines.

Pioneer® products include a complete line of primary, secondary, tertiary and quaternary crushers, including jaws, cones, horizontal shaft impactors, vertical shaft impactors and roll crushers. KPI rock crushers are used by mining, quarrying and sand and gravel producers to crush oversized aggregate to salable size. Vibrating feeders are used to convey aggregate to the primary crusher operations. The incorporation of vibrating grizzly feeders and vibrating scalpers allows small material to bypass the primary crusher. Equipment furnished by Pioneer can be purchased as individual components, as portable plants for flexibility or as completely engineered systems for both portable and stationary applications. Included in the

Kolberg® sand classifying and washing equipment is relied upon to clean, segregate and re-blend deposits to meet the size specifications for critical applications. The product line includes fine and coarse material washers, log washers, blade mills and sand classifying tanks. Screening plants are available in both stationary and highly portable models, and are complemented by a full line of radial stacking and overland belt conveyors.

KPI manufactures belt conveyors designed to move or store aggregate and other bulk materials, typically in radial cone-shaped stockpiles. Models offered include road portable, telescoping stationary and overland styles.

In addition, KPI manufactures pugmills, which are highly efficient homogenous mixing chambers consisting of twin shafts with timed, overlapping paddles used for soil remediation, cement-treated base and cold-mix asphalt. Pugmills are typically combined with either a bulk storage silo for introducing dry additives or with a pump for liquids.

Production Engineered Products, Inc. ("PEP") designs, manufactures and markets high-frequency vibrating screens for sand and gravel customers, as well as customers engaged in asphalt production. In addition, PEP incorporates the high-frequency screens into portable crushing and screening plants servicing the aggregate and industrial markets. High-frequency screens are adept in separating out small mesh particles where conventional screens are not ideally suited.

PEP's latest product development, the highly successful "Fold'n Go" plant, incorporates features that allow aggregate producers to efficiently manufacture asphalt chips and manufactured sand. This unit, with its on-plant stockpiling conveyors and its own power source, is totally self-contained.

Johnson Crushers International, Inc. ("JCI") designs, manufactures and distributes portable and stationary aggregate and ore processing equipment. This equipment is used in the aggregate, mining and recycle industries. JCI's principal products are cone crushers, three-shaft horizontal screens, portable plants, and replacement parts for competitive equipment. JCI offers completely re-manufactured cone crushers and screens from its service repair facility.

Superior Industries of Morris, Inc. ("Superior") designs and manufactures a complete line of portable and stationary conveyors. Its portable line includes 150-foot telescoping stacking conveyors, patented FD series axle assemblies and stationary conveyor systems for all types of bulk material handling, including stockpiling and overland transfer. Superior's product line also includes screening plants, wash plants, fine material washers and custom-built crushing plants. Superior's component division builds a complete line of conveyor idlers and maintains ISO 9001 certification for quality assurance.

Breaker Technology Ltd. ("BTL") designs, manufactures and markets hydraulic rock breaker systems for the aggregate, mining and recycling industries. They also design and manufacture a complete line of four-wheel drive articulated utility vehicles for underground mines and quarries.

In addition to the quarry and mining industries, BTL designs, manufactures and markets a complete line of hydraulic attachments for the North American construction and demolition markets. These attachments are sold on a variety of equipment including excavators, backhoe loaders, wheel loaders, and skid steer loaders. BTL's product line also includes hydraulic breakers and compactors for the construction market and includes crushers, pulverizers, shears and multi-processors for the demolition market.

BTL offers an extensive aftermarket sales and service program through a highly qualified and trained dealer network.

Osborn Engineered Products, SA (Pty) Ltd. ("Osborn") designs, manufactures and markets a complete line of bulk material handling and minerals processing plants and equipment. This equipment is used in the aggregate, mineral mining, metallic mining and recycle industries. Osborn has been a licensee of Telsmith's technology for over fifty years. In addition to the Telsmith line of equipment, Osborn offers rotary and roll crushers, mills, portable crushing and screening plants, conveyor systems and idlers, and a line of IFE screens.

Astec Systems, Inc. ("Astec Systems") was formed in response to market demand for a new generation of modular aggregate processing plants. Astec Systems is not a manufacturing entity but designs and markets modular systems using the engineering capabilities of and equipment manufactured by the Aggregate and Mining Group and Astec, Inc.

Aggregate processing and mining equipment is marketed by approximately 100 direct sales employees, 611 independent domestic distributors and 212 independent international distributors. The principal purchasers of aggregate processing equipment include highway and heavy equipment contractors, open mine operators, quarry operators and foreign and domestic governmental agencies.

Raw materials used in the manufacture of products include carbon steel and various types of alloy steel, which are normally purchased from distributors. Raw materials for manufacturing are readily available. BTL purchases rock breakers under a long-term purchasing contract from a Japanese supplier and also purchases crushers from an Italian supplier. Both the Japanese and Italian suppliers have sufficient capacity to meet the Company's anticipated demand; however, alternative suppliers exist for both of these components should any supply disruptions occur.

The Aggregate and Mining Group faces strong competition in price, service and product performance. Aggregate processing and mining equipment competitors include Metso (Nordberg); Sandvik (formerly Svedala Industri AB); Cedarapids, Inc., Powerscreen and Finley, subsidiaries of Terex Corporation; Deister; Continental; Eagle Iron Works; Thor; and other smaller manufacturers, both domestic and international.

At December 31, 2002, the Aggregate and Mining Group segment employed 1,227 individuals, of which 822 were engaged in manufacturing, 111 in engineering and engineering support functions, and 294 in selling, general and administrative functions.

At December 31, 2002 and 2001, the backlog for the Aggregate and Mining Group was approximately $24,441,000 and $26,528,000, respectively.

The Mobile Asphalt Paving Group is comprised of Roadtec, Inc. ("Roadtec") and Carlson Paving Products, Inc. ("Carlson"). Roadtec designs, engineers, manufactures and markets asphalt pavers, material transfer vehicles and milling machines. Carlson designs and manufactures asphalt paver screeds that attach to the asphalt paver to control the width and depth of the asphalt as it is applied to the roadbed. Carlson also manufactures a line of utility milling and trench compaction machines.

Roadtec's patented Shuttle Buggy® is a mobile, self-propelled material transfer vehicle which allows continuous paving by separating truck unloading from the paving process while remixing the asphalt. A typical asphalt paver must stop paving to permit truck unloading of asphalt mix. By permitting continuous paving, the Shuttle Buggy® allows the asphalt paver to produce a smoother road surface, as well as reduce the time required to pave the road surface. As a result of the pavement smoothness achieved with this machine, certain states are now requiring the use of the Shuttle Buggy®. Studies using infrared technology have revealed problems caused by differential cooling of the hot-mix during hauling. The Shuttle Buggy® remixes the material to a uniform temperature and gradation, thus eliminating these problems.

Asphalt pavers are used in the application of hot-mix asphalt to the road surface. Roadtec pavers have been designed to minimize maintenance costs while exceeding road surface smoothness requirements. Roadtec also manufactures a paver model designed for use with the material transfer vehicle described above, which, when used together, reduce machine operating and maintenance costs.

Both Roadtec and Carlson manufacture milling machines designed to remove old asphalt from the road surface before new asphalt mix is applied. Roadtec's milling machine lines, for larger jobs, are manufactured with a simplified control system, wide conveyors, direct drives and a wide range of horsepower and cutting capabilities to provide versatility in product application. Additional upgrades and options are available to enhance the products and their capabilities. Carlson's milling machines are designed to grind the edges of roads that have curbs and gutters, to grind off old asphalt from around manhole covers or similarly shaped areas that the larger milling machines are unable to negotiate.

Carlson's patented screeds are part of the asphalt paving machine that lays asphalt on the roadbed at a desired thickness and width, while smoothing and compacting the surface. Carlson screeds can be configured to fit many types of asphalt paving machines. A Carlson screed uses a hydraulic powered generator to electrify elements that heat a screed plate so that asphalt will not stick to it while paving. The generator is also available to power tools or lights for night paving. Available options allow extended paving widths and the addition of a curb on the road edge.

Mobile Asphalt Paving Group equipment is marketed both domestically and internationally to highway and heavy equipment contractors, utility contractors and foreign and domestic governmental agencies. Mobile construction equipment is marketed both directly and through dealers. This segment employs 27 direct sales staff, 107 domestic independent distributors and 44 foreign independent distributors.

Raw materials used in the manufacture of products include carbon steel and various types of alloy steel, which are normally purchased from steel mills and other sources. Raw materials for manufacturing are readily available. Components used in the manufacturing process include engines, gearboxes, power transmissions and electronics systems.

At December 31, 2002, the Mobile Asphalt Paving Group segment employed 322 individuals, of which 197 were engaged in manufacturing, 26 in engineering and engineering support functions, and 99 in selling, general and administrative functions.

The backlog for the Mobile Asphalt Paving Group segment at December 31, 2002 and 2001 was approximately $2,463,000 and $1,157,000, respectively.

The Astec Underground Group consists of two manufacturing companies, Trencor, Inc., with its primary manufacturing facility located in Loudon, Tennessee and American Augers, Inc., located in West Salem, Ohio. The Astec Underground companies design, engineer and manufacture a complete line of trenching equipment and directional drills for the underground construction market.

In July of 2002, the Company formed a strategic alliance with Case Construction Equipment ("Case") for the manufacture, marketing and sale of trenchers, horizontal directional drills ("HDD") and related equipment for the utility construction market. In addition to the Trencor and American Augers product lines, under an original equipment manufacturer agreement ("OEM") with Case, the Astec Underground Group will manufacture eight Case trenchers, three HDD's, HDD fluid-mixing systems and downhole tools. As part of the same agreement, selected models of Trencor trenchers and American Augers HDD's are distributed through the Case dealer networks.

These products are manufactured in two separate locations. All trenchers are manufactured in Loudon, Tennessee and all trenchless equipment is manufactured in West Salem, Ohio. The Loudon facility produces eighteen models of trenchers and mining machines, while the West Salem facility produces twenty-eight models of trenchless equipment. In addition to these product models, each facility produces numerous attachments and tools for this equipment.

During the fourth quarter of 2002, the manufacturing operations of Trencor, Inc. relocated its primary manufacturing operations to Loudon, Tennessee. The Company currently maintains operations at the facility located in Grapevine, Texas.

Trencor's trenching equipment, with the ability to cut a trench through solid rock in a single pass, is among the toughest in the world. Utilizing a unique mechanical power train, Trencor machines are used to trench pipelines, lay fiber optic cable, cut irrigation ditches, insert highway drainage materials, and more. Trencor also makes foundation trenchers used in areas where drilling and blasting are prohibited. Trencor recently redesigned its line of hydrostatic side-shift trenchers to complement the heavy-duty hydrostatic rock saws used to install fiber optic cable. Trencor also manufactures a side-cutting rock saw, which permits trenching alongside vertical objects such as fences, guardrails, and rock wall in mountainous terrain.

Trencor canal excavators are used to make finished and trimmed trapezoidal canal excavations within close tolerances primarily for irrigation systems. The rock saw is used for laying water and gas lines, fiber optic cable, as well as constructing highway drainage systems, among other applications.

Four Road Miner® models are available with an attachment that allows them to cut a path up to twelve and a half feet wide and five feet deep on a single pass. The Road Miner® has applications in the road construction industry and in mining and aggregate processing operations.

During 2002, Trencor designed and developed the Surface Miner, a maneuverable, 1650-horsepower miner that can cut through rock 10 feet wide and up to 26 inches deep in a single pass. When equipped with a GPS unit and the automatic grade and slope system, the miner allows road construction contractors to match the exact specifications of a survey plan.

American Augers designs, manufactures, markets and sells a wide range of trenchless equipment. Today, American Augers is one of the largest manufacturers of auger boring machines in the world, designing and engineering state-of-the-art boring machines, directional drills and fluid/mud systems used in the underground construction or trenchless market. American Augers has one of the broadest product lines in the industry. American Augers has over 2,000 customers throughout the world that operate in the sewer, power, fiber-optic telecommunication, electric, oil and gas, and water industries.

Trencor and American Augers market their products domestically through direct sales representatives and the Case dealer network, as well as internationally through both direct sales, independent dealers and sales agents. The Underground Group has approximately 14 direct sales employees and 90 Case dealers with approximately 120 locations contracted to market Trencor equipment.

Both Trencor and American Augers maintain excellent relationships with suppliers and have experienced minimal turnover. The purchasing group has developed partnering relationships with many of the Company's key vendors to improve just-in-time delivery and thus lower inventory. Steel is the predominant raw material used to manufacture the products of the Astec Underground Group. Components used in the manufacturing process include engines, hydraulic motors and pumps, gearboxes, power transmissions and electronics systems.

Competition for sales of trenching, excavating, auger boring, directional drilling, and fluid/mud equipment includes Charles Machine Works (Ditch Witch), Tesmec, Vermeer and other smaller custom manufacturers.

At December 31, 2002, the Underground Group segment employed 319 individuals, of which 221 were engaged in manufacturing, 35 in engineering and 63 in selling, general and administrative functions.

The backlog for the Underground Group segment at December 31, 2002 and 2001 was approximately $7,165,000 and $11,083,000, respectively, restated to reflect the acquisition of the Case product line.

This category consists of the Company's business units that do not meet the requirements for separate disclosure as an operating segment. These other operating units include Astec Financial Services, Inc., Astec Transportation, Inc., Astec Insurance Company and Astec Industries, Inc., the parent company. Revenues in this category are derived predominantly from operating leases, installment loans and other financial products offered by Astec Financial Services, Inc. As discussed earlier, on December 31, 2002, the Company exited the equipment financing business conducted through Astec Financial Services, Inc., a wholly owned subsidiary of the Company.

During 2002, competitors of the captive finance company included General Electric Credit Corporation, The CIT Group, Inc., Citicapital (Formerly Associates), Orix Credit Alliance, Caterpillar Financial and various local, regional and national financial institutions.

At December 31, 2002, the Other Business Units segment employed 45 individuals, of which 9 were engaged in transportation operations and 36 in general and administrative functions.

Although the Company has four reportable business segments, the following information applies to all operating segments of the Company.

None of the Company's operating segments operate within highly regulated industries. However, air pollution control equipment manufactured by the Company, principally for hot-mix asphalt plants, must comply with certain performance standards promulgated by the federal Environmental Protection Agency under the Clean Air Act applicable to "new sources" or new plants. Management believes that the Company's products meet all material requirements of such regulations and of applicable state pollution standards and environmental protection laws.

In addition, due to the size and weight of certain equipment the Company manufactures, the Company and its customers sometimes confront conflicting state regulations on maximum weights transportable on highways. This problem occurs most frequently in the movement of portable asphalt mixing plants. Also, some states have regulations governing the operation of asphalt mixing plants and most states have regulations relating to the accuracy of weights and measures, which affect some of the control systems manufactured by the Company.

Compliance with these government regulations has no material effect on capital expenditures, earnings, or the Company's competitive position within the market.

At December 31, 2002, the Company and its subsidiaries employed 2,772 individuals, of which 1,923 were engaged in manufacturing or transportation operations, 243 in engineering, including support staff, and 606 in selling, administrative and management functions.

Telsmith has a labor agreement covering approximately 150 manufacturing employees, which expires on October 13, 2004. None of Telsmith's other employees are covered by a collective bargaining agreement.

On February 1, 2001, Trencor and the United States Steelworkers of America, AFL-CIO, and CLC entered into a collective bargaining agreement that covered approximately 90 of Trencor's employees. This agreement, with an original expiration date of January 31, 2004, was applicable to only the specific bargaining unit at the Grapevine, TX location. The bargaining agreement did not extend or transfer to the non-union facility after Trencor's primary manufacturing operations were relocated to Loudon, Tennessee. None of Trencor's current employees located at the Grapevine, Texas facility are covered by the agreement.

Other than Telsmith, there are no other collective bargaining agreements. The Company considers its employee relations to be good.

The Company manufactures many of the component parts and related equipment for its products, while several large components of their products are purchased "ready for use". Such items include engines, axles, tires and hydraulics. In many cases, the Company designs, engineers and manufactures custom component parts and equipment to meet the particular needs of individual customers. Manufacturing operations during 2002 took place at 18 separate locations. The Company's manufacturing operations consist primarily of fabricating steel components and the assembly and testing of its products to ensure that the Company achieves quality control standards.

The Company periodically conducts technical and service seminars, which are primarily for contractors, employees and owners of asphalt mixing plants. In 2002, approximately 360 representatives of contractors and owners of hot-mix asphalt plants attended seminars held by the Company in Chattanooga, Tennessee. These seminars, which are taught by Company management and employees, cover a range of subjects including technological innovations in the hot-mix asphalt, aggregate processing, paving, milling, and recycle markets.

  The Company also sponsors executive seminars for the management of the customers of Astec, Inc. Primarily, members of the Company's management conduct the various seminars, but outside speakers and discussion leaders are also utilized. In 2002, approximately 80 participants attended the executive seminars at the Company's state-of-the-art training center.

During 2002, service training seminars were also held at the Roadtec facility for approximately 302 outside customer service representatives. Also during 2002, Telsmith had technical seminars for approximately 41 customer representatives at Telsmith's facility in Wisconsin.

Product training seminars for the directional drill and auger boring product lines were held at the Trencor facility in Loudon, Tennessee for approximately 30 Case dealers who began marketing those product lines during 2002.

In addition to seminars, the Company publishes a number of technical bulletins detailing various technological and business issues relating to the asphalt industry.

The Company seeks to obtain patents to protect the novel features of its products. The Company and its subsidiaries hold 117 United States patents and 86 foreign patents. There are 32 United States and foreign patent applications pending.

The Company and its subsidiaries have approximately 70 trademarks registered in the United States including logos for Astec, Telsmith, Roadtec and Trencor, and the names ASTEC, TELSMITH, HEATEC, ROADTEC, TRENCOR, AMERICAN AUGERS, KOLBERG, JCI and PIONEER. Twenty-three trademarks are also registered in foreign countries, including Canada, Great Britain, Mexico, New Zealand, India and Italy. The Company has 7 United States and foreign trademark applications pending.

The Company dedicates substantial resources to engineering and product development. At December 31, 2002, the Company and its subsidiaries had 243 full-time individuals employed domestically in engineering and design capacities.

In the normal season trend, revenues are strongest during the first three quarters of the year with the fourth quarter consistently being the weakest of the quarters. Operations during the entire year in 2002 were significantly impacted by the various economic factors discussed in the following paragraphs.

As of December 31, 2002, the Company had a backlog for delivery of products at certain dates in the future of approximately $60,698,000. At December 31, 2001, the total backlog was approximately $70,061,000, restated to include the acquisition of the Case product line. The Company's contracts reflected in the backlog are not, by their terms, subject to termination. Management believes that the Company is in substantial compliance with all manufacturing and delivery timetables.

Each business segment operates in domestic markets that are highly competitive regarding price, service and product quality. While specific competitors are named within each business segment discussion, imports do not generally constitute significant competition for the Company in the United States. In international sales, however, the Company generally competes with foreign manufacturers that may have a local presence in the market the Company is attempting to penetrate.

In addition, asphalt and concrete are generally considered competitive products as a surface choice for new roads and highways. A portion of the interstate highway system is paved in concrete, but over 90% of all surfaced roads in the United States are paved with asphalt. Although concrete is used for some new road surfaces, asphalt is used for virtually all resurfacing, including the resurfacing of most concrete roads. Management does not believe that concrete, as a competitive surface choice, materially impacts the Company's business prospects.

Many of our customers depend substantially on government funding of highway construction and maintenance and other infrastructure projects. Any decrease or delay in government funding of highway construction and maintenance and other infrastructure projects could cause our revenues and profits to decrease. Federal government funding of infrastructure projects is usually accomplished through bills, which establish funding over a multi-year period. The most recent spending bill was signed into law in June of 1998 and covers federal spending through September 30, 2003. This legislation may be revised in future congressional sessions and federal funding of infrastructure may be decreased in the future, especially in the event of an economic recession. In addition, Congress could pass legislation in future sessions, which would allow for the diversion of highway funds for other national purposes or could restrict funding of infrastructure projects unless states comply with certain feder al policies.

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 slowdown in the U.S. economy, decreased demand for several key categories of products in 2002.

General economic downturns, including 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 and political uncertainty during 2002 has negatively affected our expected revenue growth which has increased the competitive pricing pressure in the market. 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, changes 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 December 31, 2002, the Company was not in compliance with certain financial ratio covenants contained in the credit agreement dated as of September 10, 2001, as amended, and in the note purchase agreements dated as of September 10, 2001, as amended. The Company's banking syndicate waived the covenant violations in the amended credit agreement through an amendment effective March 31, 2003 and the Company's note holders waived covenant violations in the amended note purchase agreements through an amendment effective March 31, 2003. 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 b e 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 may 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 2002 in an effort to make sales as demand in our industry slowed. As a result, we experienced price erosion and lower gross margins.

During 2002, the Company experienced negative margins on certain large, specialized aggregate systems projects. These large contracts included both existing and innovative equipment designs, on-site construction and minimum production levels. Since it can be difficult to achieve the expected production results during the project design phase, field testing and redesign may be required during project installation, resulting in added cost. In addition, due to any number of unforeseen circumstances, which can include adverse weather conditions, projects can incur extended construction and testing delays which can cause significant cost overruns. We may not be able to sufficiently predict the extent of such unforeseen cost overruns and may experience significant losses on specialized projects.

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 2002, international sales represented approximately 17% 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 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.

• execution of the Company's growth and operation strategy;
• plans for technological innovation;
• compliance with covenants in the Company's credit facility and note purchase agreement;
• liquidity and capital expenditures;
• compliance with government regulations;
• government funding and growth of highway construction;
• integration of acquisitions;
• financing plans;
• industry trends;
• pricing and availability of oil;
• competition in our business segments;
• product liability claims; and
• protection of proprietary technology.

These forward-looking statements are based largely on management's expectations which are subject to a number of known and unknown risks, uncertainties and other factors discussed in this report and in other documents filed by the Company with the Securities and Exchange Commission, which may cause actual results, financial or otherwise, to be materially different from those anticipated, expressed or implied by the forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements to reflect future events or circumstances. You can identify these statements by forward-looking words such as "expect," "believe," "goal," "plan," "intend," "estimate," "may," "will" and similar expressions.

In addition to the risks and uncertainties identified elsewhere herein and in other documents filed by the Company with the Securities and Exchange Commission, the following factors should be carefully considered when evaluating the Company's business and future prospects: rising interest rates; unexpected capital expenditures and decreases in liquidity; the timing of large contracts; production capacity; general business conditions in the industry; demand for the Company's products; and those other factors listed from time to time in the Company's reports filed with the Securities and Exchange Commission. Certain of the risks, uncertainties and other factors discussed or noted above are more fully described elsewhere in this Report, including under the caption -"Risk Factors" below.

Internet Website.

The Company's internet website can be found at world-wide-web address "astecindustries.com". The Company makes available free of charge on or through our internal website, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is filed, or furnished, to the Securities and Exchange Commission.

The location, approximate square footage, acreage occupied and principal function of the properties owned or leased by the Company are set forth below:

Management believes that each of the Company's facilities provides office or manufacturing space suitable for its current needs and considers the terms under which it leases facilities to be reasonable.

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

None.

The name, title, ages and business experience of the executive officers of the Company are listed below.

J. Don Brock, Ph.D., P.E., has been President and a Director of the Company since its incorporation in 1972 and assumed the additional position of Chairman of the Board in 1975. He was the Treasurer of the Company from 1972 until 1994. From 1969 to 1972, Dr. Brock was President of the Asphalt Division of CMI Corporation. He earned his Ph.D. degree in mechanical engineering from the Georgia Institute of Technology. Dr. Brock and Thomas R. Campbell, President of Roadtec, are first cousins. He is 64.

F. McKamy Hall, a Certified Public Accountant, became Chief Financial Officer during 1998 and has served as Vice President and Treasurer since 1997. He has served as Corporate Controller of the Company since 1987. From 1985 to 1987, Mr. Hall was Vice President of Finance at Quadel Management Corporation, a company engaged in real estate management. Mr. Hall has an undergraduate degree in accounting and a Master of Business Administration degree from the University of Tennessee at Chattanooga. He is 60.

Albert E. Guth became Vice President - Administration of Astec Industries, Inc. on January 1, 2003. He served as President of Astec Financial Services, Inc. from 1996 to December 31, 2002. He served as Chief Financial Officer of the Company from 1987 through 1996, as Senior Vice President from 1984 to 1997, Secretary of the Company from 1972 to 1997, and Treasurer from 1994 to 1997. Mr. Guth, who has been a director since 1972, was Vice President of the Company from 1972 until 1984. From 1969 to 1972, Mr. Guth was the Controller of the Asphalt Division of CMI Corporation. He is 63.

W. Norman Smith was appointed Group Vice President-Asphalt in 1998 and has served as the President of Astec, Inc. since 1994. He formerly served as President of Heatec, Inc. from 1977 to 1994. From 1972 to 1977, Mr. Smith was a Regional Sales Manager with the Company. From 1969 to 1972, Mr. Smith was an engineer with the Asphalt Division of CMI Corporation. Mr. Smith has also served as a director of the Company since 1982. He is 63.

Robert G. Stafford was appointed Group Vice President - Aggregate and Mining in 1998. From 1991 to 1998, he served as President of Telsmith, Inc., a subsidiary of the Company. Between 1987 and 1991, Mr. Stafford served as President of Telsmith, Inc., a subsidiary of Barber-Greene. From 1984 until the Company's acquisition of Barber-Greene in December 1986, Mr. Stafford was Vice President - Operations of Barber-Greene and General Manager of Telsmith. He became a director of the Company in March 1988. He is 64.

Thomas R. Campbell was appointed Group Vice President - Mobile Asphalt Paving & Underground in November 2001. He has served as President of Roadtec, Inc. since 1988. He has served as President of Trencor, Carlson Paving Products and American Augers since November 2001. From 1981 to 1988, he served as Operations Manager of Roadtec. Mr. Campbell and J. Don Brock, President of the Company, are first cousins. He is 53.

James G. May has served as President of Heatec, Inc. since 1994. From 1984 until 1994, he served as Vice President of Engineering of Astec, Inc. He is 58.

Richard A. Patek became President of Telsmith, Inc. in May of 2001. He served as President of Kolberg-Pioneer, Inc. from 1997 until that time. From 1995 to 1997, he served as Director of Materials of Telsmith, Inc. From 1992 to 1995, Mr. Patek was Director of Materials and Manufacturing of the former Milwaukee plant location. From 1978 to 1992, he held various manufacturing management positions at Telsmith. Mr. Patek is a graduate of Milwaukee School of Engineering. He is 46.

Frank D. Cargould became President of Breaker Technology Ltd. and Breaker Technology, Inc. on October 18, 1999. The Breaker Technology companies were formed on August 13, 1999 when the Company purchased substantially all of the assets of Teledyne Specialty Equipment's Construction and Mining business unit from Allegheny Teledyne Inc. From 1994 to 1999, he was Director of Sales - East for Teledyne CM Products, Inc. He is 60.

Jeffery J. Elliott became President of Johnson Crushers, Inc. in December, 2001. From 1999 to 2001, he served as Senior Vice President for Cedarapids, Inc., (a Terex company), and from 1996 to 1999, he served as Vice President of the Crushing and Screening Group. From 1978 to 1996, he held various domestic and international sales and marketing positions with Cedarapids, Inc. He is 49.

Neil E. Schmidgall has been President of Superior Industries of Morris, Inc., which was acquired by the Company on November 1, 1999, since 1972. Since 1992, Mr. Schmidgall has been a director and partner of First Federal Savings Bank of Morris. He is 57.

Timothy Gonigam was appointed President of Production Engineered Products, Inc. on October 1, 2000. From 1995 to 2000, Mr. Gonigam held the position of Sales Manager for Production Engineered Products, Inc. He is 40.

Alan L. Forsyth has been Managing Director of Osborn Engineered Products SA (Pty) Ltd. since 1999. The Company purchased the materials handling and processing products division of the Boart-Longyear Division of Anglo Operations Limited on September 29, 2000. From 1998 to 1999, Mr. Forsyth was Deputy Managing Director and served as Divisional Director from 1987 to 1998. He is 50.

Joseph P. Vig was appointed President of Kolberg-Pioneer, Inc. in May of 2001. From 1994 until May 2001, he served as Engineering Manager of Kolberg-Pioneer, Inc. He is 53.

The Company's Common Stock is traded in the Nasdaq Stock Market under the symbol "ASTE." The Company has never paid any cash dividends on its Common Stock.

The high and low sales prices of the Company's Common Stock as reported on the Nasdaq Stock Market for each quarter during the last two fiscal years are as follows:

As of March 10, 2003, there were approximately 5,500 holders of the Company's Common Stock.

Selected financial data appear in Appendix "A" of this Report.

Management's discussion and analysis of financial condition and results of operations appears beginning in Appendix "A" of this Report.

Information appearing under the caption "Market Risk and Risk Management Policies" appears in Appendix "A" of this report.

Financial statements and supplementary financial information appear beginning in Appendix "A" of this Report.

None.

Information regarding the Company's directors included under the caption "Election of Directors - Certain Information Concerning Nominees and Directors" in the Company's definitive Proxy Statement to be delivered to the shareholders of the Company in connection with the Annual Meeting of Shareholders to be held on May 15, 2003 is incorporated herein by reference. Information regarding compliance with Section 16(a) of the Exchange Act is also included under Section 16(a) "Filing Requirements" in the Company's definitive Proxy Statement, which is incorporated herein by reference.

Information included under the caption, "Executive Compensation" in the Company's definitive Proxy Statement to be delivered to the shareholders of the Company in connection with the Annual Meeting of Shareholders to be held on May 15, 2003 is incorporated herein by reference.

Information included under the captions "Election of Directors - Certain Information Concerning Nominees and Directors," "Common Stock Ownership of Management" and "Common Stock Ownership of Certain Beneficial Owners" in the Company's definitive Proxy Statement to be delivered to the shareholders of the Company in connection with the Annual Meeting of Shareholders to be held on May 15, 2003 is incorporated herein by reference.

________________

1. 1992 Stock Option Plan
2. 1998 Long-term Incentive Plan
3. Executive Officer Annual Bonus Equity Election Plan
4. 1998 Non-Employee Director Stock Incentive Plan

Non-Employee Directors Stock Incentive Plan - The Company compensates its Board of Directors members who are not full time employees of the company in the form of an annual retainer, plus meeting fees. In accordance with the company's Non-Employee Directors Stock Incentive Plan, the Company's non-employee directors can elect to be paid their annual retainer fee of $10,000 ($20,000 beginning in 2003) in Common Stock, deferred stock or stock options. A copy of this plan is incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1999.

On December 14, 1998, Edna F. Brock, the mother of Dr. J. Don Brock, Chairman of the Board and President of the Company, loaned $85,000 to the Company to supplement its working capital revolving credit facility. The Company executed a demand note payable to Mrs. Brock in connection with this loan bearing interest at a rate equal to that paid to Bank One N.A. under the Company's unsecured revolving line of credit. At the time Mrs. Brock loaned these funds to the Company, the Company's outstanding balance under its $70,000,000 revolving credit facility was approximately $26,000,000. In June of 2000, Mrs. Brock loaned the Company an additional $29,670, which bears the same interest rate as the previous note. At the time these funds were loaned to the Company, the Company's outstanding balance under its $150,000,000 revolving credit facility was $95,325,000. During 2001, the Mrs. Brock loaned the Company an additional $50,000, bearing interest at the rate described above. At the ti me these funds were loaned to the Company, the Company's outstanding balance under its $150,000,000 revolving credit facility was $81,300,000. At December 31, 2002, the Company owed Mrs. Brock approximately $186,000 including interest accrued through December 31, 2002. On January 22, 2003 the Company repaid Mrs. Brock the total amount due under the demand note, including interest accrued through that date.

Within the 90-day period prior to the date of this report, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company's reports under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including the CEO and CFO, as appropriate, to allow timely decisions regarding disclosure. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date that Company management conducted its evaluation.

(a)(1) The following financial statements and other information appear in Appendix "A" to this Report and are filed as a part hereof:

. Selected Consolidated Financial Data.

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

. Report of Independent Auditors.

. Consolidated Balance Sheets at December 31, 2002 and 2001.

. Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000.

. Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000.

. Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000.

. Notes to Consolidated Financial Statements.

(a)(2) Other than as described below, Financial Statement Schedules are not filed with this Report because the Schedules are either inapplicable or the required information is presented in the Financial Statements or Notes thereto. The following Schedules appear in Appendix "A" to this Report and are filed as a part hereof:

Schedule II - Valuation and Qualifying Accounts.

(a)(3) The following Exhibits* are incorporated by reference into or are filed with this Report:

Quarterly Financial Highlights
(Unaudited)

The Company's common stock is traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) National Market under the symbol ASTE. Prices shown are the high and low bid prices as announced by NASDAQ. The Company has never paid any dividends on its common stock.

As determined by the proxy search on the record date by the Company's transfer agent, the number of common shareholders is approximately 5,500.

(1) Restated for 1998 and prior to retroactively reflect the two-for-one stock split effected in the form of a dividend on January 18, 1999.

The Company experienced a net loss for 2002 of $4,706,000, or $.24 per diluted share, a decrease of $6,698,000, compared to net income of $1,992,000, or $.10 per diluted share in 2001. The weighted average number of common shares outstanding at December 31, 2002 was 19,658,032 compared to 19,753,226 at December 31, 2001.

Net sales for 2002 were $480,590,000, an increase of $24,751,000, or 5.4%, compared to net sales of $455,839,000 in 2001.

Domestic sales increased from $364,428,000 in 2001 to $401,284,000 in 2002, an increase of $36,856,000, or 10.1%. 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. Public sector spending at the federal, state and local levels is driven in large part by federal spending under the six-year federal-aid highway program, the Transportation Equity Act for the 21st Century ("TEA-21") enacted in June 1998. TEA-21 authorized the appropriation of $217 billion in federal aid for road, highway and bridge construction, repair and improvement and other federal highway and transit projects for federal fiscal years October 1, 1998 through September 30, 2003. During 2002, domestic sales continued to be impacted by a general economic slowdown throughout the year. Sales increased in the asphalt group and the aggregate group. In the asphalt group, pa rts sales, international sales, used equipment and Systems jobs sales increased. Systems sales were the primary reason for the sales increase.

International sales decreased $12,105,000, or 13.2% in 2002, to $79,306,000, compared to 2001 international sales of $91,411,000. Sales declined by $10,740,000 in Central America. This decrease affected all segments except asphalt. The second largest decrease was in Europe with a decline in all segments totaling $6,830,000. In Central America, this change is primarily the result of one large Systems job for approximately $8,769,000 in 2001. In Europe, the primary declines are in systems, mobile paving equipment and underground drilling equipment.

Parts sales increased from $93,493,000 in 2001 to $99,791,000 in 2002, an increase of $6,298,000, or 6.7%. All segments focused heavily on parts sales and achieved an increase. Due to the sluggish economy, customer equipment is being repaired instead of replaced.

Gross profit decreased to $83,931,000, or 17.5% of net sales in 2002, compared to $90,924,000, or 20.0% of net sales in 2001. A lack of utilization of capacity, decreased sales volumes (except aggregate and asphalt), competitive price pressure, cost overruns on Systems jobs that were completed in 2002 and write down of used equipment resulted in a reduction in gross profits in 2002 compared to 2001 for all segments except aggregate.

In 2002, selling, general and administrative expenses increased to $72,407,000, or 15.1% of net sales, from $71,691,000, or 15.7% of net sales in 2001. Increased bank fees related to the Company's credit facility totaled $750,000, while approximately $963,000 of the increase in 2002 was due to the Con-Expo exhibition, a trade show, which is held every three years. Reduced legal and other expenses in selling, general and administrative expenses partially offset these items.

Research and development expenses increased by $183,000, or 2.5%, from $7,448,000 in 2001 to $7,631,000 in 2002. In spite of the slow economic conditions, the Company continued to enhance their current products with innovative features that benefit the customer. Product improvement and development continued in an efficient manner.

Interest expense for 2002 increased to $10,474,000 from $9,367,000, or 2.2% of net sales, from 2.1% of net sales for 2001. The increase in dollars related primarily to interest rate increases required by lenders as a result of covenant violations during this year.

For 2002, the Company had a net income tax benefit of $2,511,000, or 35.2% of the pre-tax loss, compared to an income tax expense of $1,481,000, or 41.2% of the 2001 pre-tax income. The permanent non-tax deductible items decreased the taxable loss in 2002 and increased the taxable loss in 2001.

The backlog at December 31, 2002 was $60,698,000, compared to $70,061,000 at December 31, 2001 (restated to reflect the addition of the Case New Holland trencher line). The backlog for asphalt group orders, aggregate orders and underground group orders decreased while backlog for mobile equipment increased. The Company is unable to determine whether this backlog effect was experienced by the industry as a whole. We are unable to assess the amount of the impact attributable to the TEA-21 legislation, which became effective in October 1998. While the backlog reflects a decline in sales, management believes that this is reflective of the current economic conditions in the United States and the current hesitancy of the Company's customers to commit to capital equipment purchases. The hesitancy is a result of uncertainty of our customers regarding economic conditions, concern relating to highway funding by the states, lack of sufficient TEA-21 federal funding, concern over possible war impacts and concern over the increase in the price of oil.

TEA-21 funding in 2003 has been set at $31.6 billion as compared to $31.8 billion in 2002. Unquestionably, increased funding is needed to restore the nation's highways to a quality level required for safety, fuel efficiency and mitigation of congestion.

Asphalt Group: For 2002, this segment had sales of $165,951,000, compared to $142,674,000 for 2001, an increase of $23,277,000, or 16.3%. Segment profit decreased $1,895,000, or 37.7%, to $3,127,000 for 2002 compared to a segment profit of $5,022,000 for 2001. The primary reason for the increase in sales is the increase in domestic equipment sales, parts sales, used equipment and international sales of $6,059,000. Competitive price pressure and lack of utilization of capacity significantly impacted gross profits and segment income. Negative gross margins on highly specialized and customized jobs, especially in the construction and installation phase of the jobs, impacted gross margins substantially.

Aggregate and Mining Group: For 2002 sales for this segment increased $16,492,000, or 9.0%, to $199,360,000 compared to $182,868,000 for 2001. The increase in domestic sales of $29,995,000 was primarily due to increased Systems sales. Segment profit for 2002 increased $447,000, or 6.0%, to $7,908,000 from $7,461,000 for 2001. Construction and manufacturing cost overruns on systems jobs, competitive price pressure, lack of utilization of capacity and product mix impacted gross profit and segment income. International sales declined $13,503,000.

Mobile Asphalt Paving Group: For 2002 sales in this segment decreased $6,582,000, or 8.4%, to $71,906,000 from $78,488,000 in 2001. Both domestic and international sales decreased from 2001. International sales during 2002 declined $1,771,000 from 2001. Segment profit for 2002 decreased $4,869,000 or 54.0% to $4,152,000 from $9,021,000 for 2001. Product mix, lack of utilization of capacity and increased SG&A expenses impacted the 2002 profit. SG&A included increased selling, legal and exhibition expenses.

Underground Group: For 2002 sales in this segment decreased by $9,200,000, or 18.9%, to $39,455,000 from $48,655,000 for 2001, primarily due to fewer small machine sales to the communications industry. International sales declined $2,889,000. Segment losses for 2002 increased $3,623,000, or 74.9%, to a loss of $8,460,000 from a loss of $4,837,000 during 2001, primarily from lack of utilization of capacity and expenses of approximately $3,277,000 for moving the Trencor operation from Texas to Tennessee, relocating the Case New Holland product line from Kansas to Tennessee and the associated start up costs in a new location.

Net income for 2001 was $1,992,000, or $.10 per diluted share, a decrease of $24,289,000, or 92.4%, compared to net income of $26,281,000, or $1.33 per diluted share in 2000. The weighted average number of common shares outstanding at December 31, 2001 was 19,753,226, compared to 19,721,288 at December 31, 2000.

Net sales for 2001 were $455,839,000, a decrease of $64,849,000, or 12.5%, compared to net sales of $520,688,000 in 2000. Excluding acquisitions, total sales declined $87,380,000, or 16.8%, to $433,308,000 in 2001 from $520,688,000 in 2000.

The 2001 domestic sales decreased from $457,189,000 to $364,428,000, a decrease of $92,761,000, or 20.3%, from 2000. 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. During 2001, domestic sales were negatively impacted by a general economic slowdown and delays in capital expenditures by our customers whom the Company believes were concerned as to when the economy would improve. The Company believes that the terrorist attacks somewhat paralyzed sales order activity for six to eight weeks. The negative impact from the economic slowdown was felt throughout the year.

International sales in 2001 increased $27,912,000, or 44.0%, to $91,411,000, compared to 2000 international sales of $63,499,000. Increased sales in South Africa (Osborn acquisition), Europe, Central America, China, Korea, Japan and South America comprise most of the increase over 2000. Excluding acquisitions in South Africa, international sales increased $10,875,000, or 17.1%. Sales in the asphalt, mobile asphalt paving and aggregate segments accounted for the increase in Europe. The increase in Central America was due to aggregate, underground and mobile asphalt paving segment sales.

Parts sales increased from $83,860,000 in 2000 to $93,493,000 in 2001, an increase of $9,633,000, or 11.5%. The increase was primarily due to the mobile asphalt paving and asphalt segments. Both segments have focused heavily on parts sales improvements. Excluding acquisitions, parts sales increased 4.7%.

Gross profit decreased to $90,924,000, or 20.0% of net sales in 2001, compared to $122,875,000, or 23.6% of net sales in 2000. A lack of utilization of capacity, decreased sales volumes (except mobile asphalt paving) and competitive price pressure resulted in all segments having reduced gross margins.

In 2001, selling, general and administrative expenses increased to $71,691,000, or 15.7% of net sales from $69,011,000, or 13.3% of net sales in 2000. The SG&A increase was the result of two acquisitions in the fourth quarter of 2000 being included in 2001 for a full twelve months. Excluding the increase from the acquisitions, SG&A would have decreased slightly in 2001 from 2000. Excluding increases in legal fees, legal settlements and bad debt expenses related to one large repossession, the Company's SG&A expense would have reflected the expense reductions made throughout 2001.

Research and development expenses increased by $722,000, or 10.7%, from $6,726,000 in 2000 to $7,448,000 in 2001. Excluding the increase in research and development resulting from acquisitions in 2000, research and development increased 4.3% as the Company continued developing innovative products.

Interest expense for 2001 increased to $9,367,000, or 2.1% of net sales, from 8,652,000, or 1.7% of net sales for 2000. The increased dollar amount related primarily to interest on borrowings required for acquisitions in 2000 and increased working capital. The increased percentage amount was impacted by decreased sales volume.

Income tax expense for 2001 was $1,481,000, or 41.2% of pre-tax income, compared to $16,441,000, or 38.5% in 2000. The non-tax deductible items in 2001 had a greater impact on the effective tax rate percentage relative to a smaller pre-tax income.

The backlog at December 31, 2001 was $64,934,000, compared to $89,552,000 at December 31, 2000. The backlog for asphalt plant orders, aggregate orders, aggregate systems and mobile equipment decreased. The Company is unable to determine whether this backlog effect was experienced by the industry as a whole. We are unable to assess the amount of the impact attributable to the TEA-21 legislation, which became effective in October 1998. While the backlog reflects a decline, management believes that this is reflective of the current economic conditions in the United States and the current hesitancy of the Company's customers to commit to capital equipment purchases. The hesitancy is a result of our customers awaiting improvement of economic conditions or the awarding of new contracts for jobs. The total value of highway contracts increased by $1.1 billion, or 3.6%, in 2001 as reported by the American Road and Transportation Builders Association in January 2002. The number of contracts put in p lace in 2001 declined, but the average size increased. Some contracts are multi-year contracts. Highway funding in 2002 is dependent upon funding of highway programs by the states, TEA-21 federal funding and the economy, which we expect to have a gradual recovery.

Forecasts by the Office of Management and Budget and the Treasury Department indicate a decline in funding for TEA-21 in 2003. Legislation has been introduced to restore part of the $8.6 billion projected shortfall and legislative efforts are underway to restore the entire shortfall. Unquestionably, increased funding is needed to restore the nation's highways to a quality level required for safety, fuel efficiency and mitigation of congestion.

Asphalt Group: For 2001, this segment had a decrease in sales of $45,149,000, or 24.0%, to $142,674,000 from $187,823,000 for 2000. The asphalt segment experienced a decrease in profit of $12,975,000, or 72.1%, to $5,022,000 for 2001 compared to $17,997,000 for 2000. The primary reason for the decrease in sales is the economic downturn. Competitive price pressure and lack of utilization of capacity significantly impacted gross profits and segment income.

Aggregate and Mining Group: For 2001 sales for this segment decreased $8,063,000, or 4.2%, to $182,868,000 from $190,931,000 for 2000. Excluding acquisitions, sales declined $25,102,000, or 13.1%. The decline in domestic sales, due to the weakness of the U.S. economy, was partially offset by increased international sales. For 2001 segment profit decreased $10,907,000, or 59.4%, to $7,460,000 from $18,367,000 for 2000. Competitive price pressure, lack of utilization of capacity and product mix impacted gross profit and segment income.

Mobile Asphalt Paving Group: For 2001 sales in this segment increased $15,220,000, or 24.1%, to $78,488,000 from $63,268,000 for 2000. Excluding acquisitions, sales increased $9,727,000, or 15.4%. Both domestic and international sales increased over 2000 levels. For 2001 segment profit increased $677,000, or 8.1% to $9,021,000 from $8,344,000 for 2000. Product mix, lack of utilization of capacity and increased SG&A expenses impacted the 2001 profit.

Underground Group: The 2001 sales in this segment decreased by $27,093,000, or 35.8% to $48,655,000 from $75,748,000 for 2000, primarily due to fewer small machine sales to the communications industry. Segment profit for 2002 decreased $11,673,000, or 170.8%, to a loss of $4,837,000 from a net profit of $6,836,000 for 2000, due primarily to a lack of utilization of capacity and increased selling expenses from efforts focused on generating sales to offset the negative impact of the communications industry.

Total short-term borrowings, including current maturities of long-term debt, were $3,220,000 at December 31, 2002, compared to $2,368,000 at December 31, 2001. A financing agreement for imported, purchased inventory items accounted for $886,000 and $964,000 of the short-term borrowings at December 31, 2002 and 2001, respectively, while outstanding Industrial Development Revenue Bonds accounted for $500,000 of the current maturities of long-term debt at December 31, 2002 and December 31, 2001. Net cash provided by operating activities for the twelve months ended December 31, 2002 was $32,837,000 compared to $1,452,000 for the twelve months ended December 31, 2001. The increase in net cash provided by operating activities is primarily due to decreases in inventory and trade receivables, along with increases in trade accounts payable and other accrued liabilities during 2002.

Long-term debt, less current maturities, increased to $130,645,000 at December 31, 2002 from $127,285,000 at December 31, 2001. At December 31, 2002, $80,000,000 was outstanding under the Note Purchase Agreement, $31,902,000 was outstanding under the revolving credit facility and $21,300,000 was outstanding under the long-term principal portion of Industrial Revenue Bonds. The increase in debt from December 31, 2001 related primarily to funding working capital needs for the Company.

On September 10, 2001, the Company entered into an unsecured $125,000,000 revolving loan agreement with a syndicate of banks, which expires on September 10, 2004. At December 31, 2002, the Company was utilizing $31,902,000 of the amount available under the credit facility for borrowing and an additional $21,300,000 to support outstanding letters of credit (primarily for industrial revenue bonds). At the time of entering into the credit facility, Astec Industries, Inc. was able to borrow up to $105,000,000 while Astec Financial Services, Inc., the Company's captive finance company, was able to borrow up to $50,000,000, with the total borrowing by both companies limited to $125,000,000. Advances to Astec Financial Services, Inc. under this line of credit were limited to "Eligible Receivables" of Astec Financial Services, Inc. as defined in the credit agreement that governs the credit facility.

Principal covenants under the loan agreement include (i) the maintenance of minimum levels of net worth, leverage and fixed charge coverage ratios, (ii) a limitation on capital expenditures and rental expense, (iii) a prohibition against the payment of dividends and (iv) a prohibition on large acquisitions except upon the consent of the lenders. There is a provision in the loan agreement allowing the borrowing of $10,000,000 from any source for needs beyond the revolver provisions.

As of December 31, 2001, the Company was not in compliance with two financial ratio covenants contained in its credit facility. These covenant violations were waived by a required majority of the members of the Company's banking syndicate effective December 31, 2001. 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 the violations of financial ratios under the original agreement. A second amendment to the credit agreement, dated May 13, 2002, waived non-compliance of the 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 agreem ent, 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. On August 7, 2002, the Company entered into a third amendment to the credit agreement. The third amendment waived non-compliance with the leverage and fixed charge coverage ratio covenants as of June 30, 2002.

At September 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. On October 24, 2002, the Company and Astec Financial Services entered into a forbearance agreement with its lenders under the credit agreement and Bank One, NA, as agent under the credit agreement. Under the forbearance agreement, among other things, (i) the total commitment available to the Company and Astec Financial Services under the credit agreement was reduced from $100,000,000 to $75,000,000 and (ii) the Company was prohibited from making any acquisitions, other than specified acquisitions pursuant to agreements to which the Company had already entered. On November 14, 2002, the Company entered into the fourth amendment to the credit facility, which waived the violations of financial ratios for the quarter ended September 30, 2002; decreased the maximum commitment available from $75,000,000 to $58, 200,000; relaxed through June 30, 2003 the two financial ratio covenants that were breached as of September 30, 2002; added a minimum earnings before interest expense, income tax expense, depreciation, and amortization covenant for the fourth quarter of 2002; provided additional security to the lenders in the form of real estate mortgages on certain of the Company's property; limited the amount of additional funds available for working capital purposes to $5,000,000 above the approximately $53,200,000 that was outstanding under the credit facility as of November 13, 2002; allowed the lenders to receive $19,200,000 from the sale of the Trencor facility (a sale which did not transpire) to pay off the $8,000,000 letter of credit that will be used to retire the industrial revenue bonds on the Trencor facility and to repay $11.2 million of debt that was advanced by the lenders to purchase the John Deere facility; required proceeds from sales of lease portfolio assets to be used to repay the outstanding amounts un der the credit facility; and reduced the aggregate commitment under the credit facility going forward by the amount of proceeds received by the Company for sales of assets.

At December 31, 2002, the Company was not in compliance with the leverage and fixed charge coverage ratios of the amended credit facility.

On March 31, 2003, the Company entered into a fifth amendment to the credit facility, which among other things, waived non-compliance with certain financial ratio covenants for the quarter ended December 31, 2002 and the quarter ended March 31, 2003; increased the maximum commitment available under the amended credit facility to $60,700,000; amended existing financial ratio covenants with which the Company was not in compliance as of December 31, 2002 and the quarter ended March 31, 2003 and added certain other financial covenants; added an excess cash-flow sweep that requires the funding of a $23,720,000 collateral account by May 31, 2003 with the amount of the collateral account increasing each month until its reaches $52,230,000 by December 31, 2003; limits fixed asset expenditures to certain agreed upon limits; and prohibits the Company from making additional loans to its customers for the purchase of equipment or entering into to equipment leases with its customers without the consent of the lenders.

The Company intends to enter into a new credit facility in order to refinance the obligations under the existing credit agreement and the senior secured note and is currently in active negotiations with potential lenders regarding such a facility.

In the event the Company does not enter into a new credit facility, management believes the Company will remain in compliance with the amended covenants during 2003, however, no assurances can be provided that financial ratio covenant violations under the current credit agreement 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 amended credit 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 refinancing 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 approximately $1,750,000 to finance short-term working capital needs and an additional $1,750,000 available to cover the short-term establishment of letter of credit performance guarantees. As of December 31, 2002, Osborn Engineered Products had no outstanding cash balance due under the credit facility, but had approximately $1,308,000 in performance and retention bonds guaranteed under the 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 December 31, 2002, Breaker Technology Ltd. had no outstanding amount under the credit facility.

On September 10, 2001, the Company and Astec Financial Services, Inc., entered into a note purchase agreement for $80,000,000 of senior secured notes, placed with private institutions, due September 10, 2011 at a fixed rate of interest of 7.56%. On September 10, 2005 and on each September 10 thereafter, the Company must make a principal payment of $11,428,571. 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 the 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 the 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 agreem ent dated August 14, 2002. The rate at which the senior subordinated note indebtedness accrues interest did not change from that stated in the second amendment. On November 14, 2002, the Company entered into the fourth amendment to the note purchase agreement, which relaxed through June 30, 2002 the two financial ratio covenants that were breached as of September 30, 2002; added a minimum earnings before interest expense, income tax expense, depreciation, and amortization covenant for the fourth quarter of 2002; provided additional security to the lenders in the form of real estate mortgages on certain of the Company's property; and waived the violations of financial ratios for the quarter ended September 30, 2002.

At December 31, 2002, the Company was not in compliance with the consolidated total debt coverage covenant and the fixed charge coverage covenant of the note purchase agreements.

On March 31, 2003, the Company entered into a fifth amendment to the note purchase agreement, which among other things, waived non-compliance with certain financial ratio covenants for the quarter ended December 31, 2002 and March 31, 2003; amended existing financial ratio covenants with which the Company was not in compliance as of December 31, 2002; added an excess cash-flow sweep that requires the funding of a $23,720,000 collateral account by May 31, 2003 with the amount of the collateral account increasing each month until its reaches $52,230,000 by December 31, 2003; limits fixed asset expenditures to certain agreed upon limits; and prohibits the Company from making additional loans to its customers for the purchase of equipment or entering into to equipment leases with its customers without the consent of the lenders.

The Company intends to enter into a new credit facility in order to refinance the obligations under the senior secured note and the existing credit agreement and is currently in active negotiations with potential lenders regarding such a facility. If the Company repays the senior secured note before September 10, 2011, it will incur additional pre-payments fees.

In the event the Company does not enter into a new credit facility, management believes the Company will remain in compliance with the amended covenants during 2003, however, no assurances can be provided that financial ratio covenant violations under 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 refinancing 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 note with its inventory, machinery and equipment, and trade receivables.

Capital expenditures in 2003, budgeted at a maintenance level, are expected to be approximately $7,288,000. The Company expects to finance these expenditures using the available capacity under the Company's revolving credit facility and internally generated funds. Capital expenditures (excluding those for equipment leased to others) for 2002 were $19,274,000, compared to $8,057,000 in 2001. Capital expenditures for 2002 included the purchase of the Loudon, Tennessee facility, machinery and equipment for approximately $12,800,000.

Management has reviewed all claims and lawsuits and, upon the advice of counsel, has made adequate provision for any estimable losses. However, the Company is unable to predict the ultimate outcome of the 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 and residual value guarantees aggregating $14,749,000 and $12,137,000 at December 31, 2002 and 2001, respectively. These obligations average three years in duration and have minimal risk. Astec Financial Services, Inc. sold both finance and operating leases with limited recourse, generally not exceeding 15% of the purchase price, subject to elimination of recourse responsibilities through remarketing of equipment.

The Company is contingently liable under letters of credit of approximately $21,300,000 primarily related to Industrial Revenue Bonds.

Based on information available, management believes the Company has adequately reserved for potential environmental liabilities and does not believe the potential liability will materially impact the future financial position of the Company.

The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. Application of these principles requires the Company to make estimates and judgments that affect the amounts as reported in the consolidated financial statements. Accounting policies that are critical to aid in understanding and evaluating the results of operations and financial position of the Company include the following:

Inventory Valuation: Inventories are valued at the lower of cost or market. 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. 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, certain items in inventory may be considered obsolete, and as such, the Company may establish an allowance to reduce the carrying value of these items to their net realizable value. The amounts in these inventory allowances are determined by the Company based on certain estimates, assumptions and judgments made from the information available at that time.

Allowance for Doubtful Accounts: The Company evaluates its ability to collect accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer's inability to meet its financial obligations, a specific reserve for bad debts is recorded against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. Additionally, a general percentage of past due receivables is reserved, based on the Company's past experience of collectibility. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligations), estimates of the recoverabiltiy of amounts due could be reduced by a material amount.

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 they are 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 Note 12 of the consolidated financial statements, as of December 31, 2002, 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. Certain litigation is being addressed before juries in states where past jury awards have been significant. To the extent additional information arises or strategies change, it is possible that the Company's best estimate of the probable liability in these matters may change.

New Accounting Standards - In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. This statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. SFAS No. 148 prohibits companies from using the prospective method of transition in fiscal years beginning after December 15, 2003. However, the statement permits two transition methods, the modified perspective and retroactive restatement methods, for companies that adopt the fair value method of accounting for stock-based compensation. Although, Statement 148 does not amend Statement 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of Statement 148 are applicable to all companies with stock-based compensation, regardless of whether they account for that compensation using the fair value method of Statement 123 or the intrinsic value method of Opinion 25. We have adopted the new disclosure requirements of SFAS No. 148 for 2002.

In June 2001, the FASB issued SFAS No. 141, Business Combinations and No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after that date. SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite lives. SFAS 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with definite lives will continue to be amortized over their estimated useful lives.

The Company adopted SFAS 142 effective January 1, 2002 and ceased the amortization of goodwill and intangibles with indefinite lives. Amortization expense of goodwill was $2,154,000, or $0.07 per diluted share after tax, and $2,033,000, or $0.06 per diluted share after tax, in 2001 and 2000, respectively. The Company tested goodwill for impairment using the two-step process prescribed in SFAS 142. The first step in the process is a screen for potential impairment, while the second step measures the amount of impairment, if any. The Company completed the required impairment tests of goodwill during the first quarters of 2002 and 2003 and noted no impairment of goodwill.

Basis of Presentation - The consolidated financial statements include the accounts of Astec Industries, Inc. and its subsidiaries. The Company's wholly-owned and consolidated subsidiaries at December 31, 2002 are as follows:

All significant intercompany transactions have been eliminated in consolidation.

Until December 31, 2001, the Company's investment in a 50% owned joint venture, Pavement Technology, Inc., was accounted for on an equity basis. On December 31, 2001, the Company acquired the remaining 50% interest in Pavement Technology, Inc. and merged it into Astec, Inc.

Use of Estimates - The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents - The Company considers all highly liquid instruments purchased with a maturity of less than three months to be cash equivalents.

Inventories - Inventories (excluding used equipment) are stated at the lower of first-in, first-out cost or market. Used equipment inventories are stated at the lower of specific unit cost or market.

Property and Equipment - Property and equipment is stated at cost. Depreciation is calculated for financial reporting purposes using the straight-line method based on the estimated useful lives of the assets as follows: buildings (40 years) and equipment (3 to 10 years). Both accelerated and straight-line methods are used for tax reporting purposes.

Goodwill - Goodwill represents the excess of cost over the fair value of net identifiable assets acquired. Goodwill amounts were amortized using the straight-line method over 20 years through 2001. Effective January 1, 2002, goodwill is no longer being amortized in accordance with Statement of Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and Other Intangible Assets," but will be tested for impairment at least annually. Accumulated goodwill amortization was approximately $7,258,000 at December 31, 2002 and 2001.

Impairment of Long-lived Assets - In the event that facts and circumstances indicate that the carrying amounts of long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the carrying amount for each asset to determine if a writedown is required. If this review indicates that the assets will not be recoverable, the carrying value of the Company's assets would be reduced to their estimated market value.

Revenue Recognition - A portion of the Company's equipment sales represents equipment produced in the Company's plants under short-term contracts for a specific customer project or equipment designed to meet a customer's specific requirements. Equipment revenues are recognized in compliance with the terms and conditions of each contract, which is ordinarily at the time the equipment is shipped. Certain contracts include terms and conditions through which the Company recognizes revenues upon completion of equipment production, which is subsequently stored at the Company's plant at the customer's request. Revenue is recorded on such contracts upon the customer's assumption of title and all risks of ownership. The Company has a limited number of sales accounted for as multiple-element arrangements, whereby related revenue on each product is recognized when it is shipped, and the related service revenue is recognized when the service is performed.

Advertising Expense - The cost of advertising, other than direct response advertising, is expensed as incurred. The Company incurred approximately $2,700,000, $4,447,000 and $3,478,000 in advertising costs during 2002, 2001 and 2000, respectively.

Direct response advertising is capitalized and amortized over its expected period of future benefits. The Company participates in a weeklong industry trade show that takes place once every three years. The Company maintains customer and potential customer attendance records that are used to track the future sales revenues as a result of their advertising and customer relation efforts at the show. The costs related to the trade exhibits and show attendance are capitalized, then amortized over the period in which revenue related to the trade show is generated, which is twenty-four months. Sixty percent of costs are expensed during the first twelve months following the show and the remaining forty percent is expensed over the succeeding twelve-month period based on historical revenue patterns. The amortization method is supported by the attendance and revenue related records maintained by the Company. Prepaid trade show expenses totaled $1,472,000 and $0 as of December 31, 2002 and 2001. Amortized advertisin g expenses related to presentation and attendance at trade shows were $963,000, $257,000 and $899,000 for the years ended December 31, 2002, 2001 and 2000.

Stock-based Compensation - As permitted under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, the Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes no compensation expense for the stock option grants as long as the exercise price is equal to or more than the fair value of the shares at the date of the grant. Because all option grants for 2002, 2001 and 2000 were at or above the fair value of the shares, no stock-based employee compensation cost is reflected in net income (loss) for those years.

During 2002, the Financial Accounting Standards Board issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that statement to require prominent disclosure about the effects on the reporting of net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS 148 amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about these effects in interim financial information. The annual disclosure requirements of SFAS 148 are effective for fiscal years ending after December 15, 2002. Although Statement 148 does not amend Statement 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of Statement 148 are applicable to all companies with stock-based compensation, regardless of whether they account for that compensation using the fair value method of Statement 123 or the intrinsic value method of APB 25.

The following pro forma summary presents the Company's net income (loss) and per share earnings (loss) which would have been reported had the Company determined stock compensation cost using the fair value method of accounting set forth under SFAS 123. The pro forma impact on net income (loss) shown below may not be representative of future effects.