ASTEC INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Act of 1933. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six-month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003.

The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Certain reclassifications were made to the prior year presentation to conform to the current year presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Astec Industries, Inc. and subsidiaries annual report on Form 10-K for the year ended December 31, 2002.

Receivables are net of allowance for doubtful accounts of $2,708,000 and $2,775,000 for June 30, 2003 and December 31, 2002, respectively.

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

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

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

Total comprehensive income for the three and six-month periods ended June 30, 2003 was a loss of $873,000 and $1,544,000, respectively. Comprehensive income for the three and six-month periods ended June 30, 2002 was $3,147,000 and $7,991,000 respectively.

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

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.

Approximately 50% to 60% of the Company's business volume typically occur during the first six months of the year. During the usual seasonal trend, the first three quarters of the year are the Company's stronger quarters for business volume, with the fourth quarter normally being the weakest quarter.

Effective January 1, 2001, the Company adopted SFAS No. 133, which requires the Company to recognize derivative instruments on the balance sheet at fair value. The statement also establishes new accounting rules for hedging instruments, which depend on the nature of the hedge relationship. Until its termination on May 13, 2003, the Company had a cash flow hedge, which required that the effective portion of the change in the fair value of the derivative instrument be recognized in Other Comprehensive Income (OCI), a component of Shareholders' Equity, and reclassified into earnings in the same period, or periods during which the hedged transaction affected earnings. The ineffective portion of the hedge, if any, was recognized in current operating earnings during the period of change in fair value.

The Company's former captive finance subsidiary, Astec Financial Services, Inc. ("AFS"), entered into an interest rate swap agreement on April 6, 2000, to fix interest rates on variable rate debt. The swap agreement, originally effective for five years with a notional amount of $7,500,000, was terminated on May 13, 2003, requiring a cash payment of $881,500. The objective of the hedge was to offset the variability of cash flows relating to the interest payments on the variable rate debt outstanding under the Company's revolving credit facility. The sole source of the variability in the hedged cash flows resulted from changes in the benchmark market interest rate, which was three-month London Interbank Offered Rate.

Under guidance of SFAS 133 amended by SFAS 138 for termination of a cash flow hedge, net derivative gain or loss related to a discontinued cash flow hedge, are to be accounted for prospectively. The Company continues to pay variable rate interest under its new debt agreement and ceased to record the fair value of the hedge in OCI, fixing the amount of OCI at the date of termination. The fixed amount in OCI at the swap termination date will be amortized into earnings through interest expense over the remaining life of the original hedge, provided the variable-rate interest obligations continue to exist. From the termination date of the swap agreement through June 30, 2003, the Company had OCI amortized through interest expense of approximately $57,000. Monthly amortization of OCI through interest expense is expected to approximate $38,000 through April 2005.

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, in accordance with Statement of Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and Other Intangible Assets," goodwill is no longer being amortized, but is tested for impairment at least annually. The Company measures goodwill impairment by comparing the carrying value of its operating units, including goodwill, with the fair value of the operating unit measured by determining the present value of future cash flows. Significant declines in estimated future cash flows could indicate potential impairment and trigger an impairment assessment. The Company completed the required impairment tests of goodwill during the first quarter of 2003 and noted no impairment of goodwill. At June 30, 2003 and December 31, 2002, the Company had unamortized goodwill in the amount of $36,909,000 and $36,093,000, respectively. Accumulated goodwill amortization was approximately $7,371,000 at June 30, 2003 and approximately $7,258,000 at December 31, 2002. The change in goodwill and accumulated amortization since December 31, 2002 relates to changes in foreign currency exchange rates since December 31, 2002 used to convert the foreign currency balance sheets to the reporting currency at the balance sheet date.

On September 10, 2001, the Company and Astec Financial Services entered into a revolving credit facility with a syndicate of banks that was scheduled to expire on September 10, 2004 and an $80,000,000 note purchase agreement for senior secured notes, placed with private institutions. On May 14, 2003 the Company paid off the revolving credit facility and senior note agreement with proceeds from a new credit facility of up to $150,000,000 through General Electric Capital Corporation ("GECC") secured by the Company's assets. As reported on Form 8-K on May 19, 2003, related to the early payment of the senior note obligation, the Company issued to the former senior note holders subordinated convertible notes in the aggregate principal amount of $10,000,000 to satisfy "make-whole" obligations under the senior notes by reason of the prepayment. The subordinated convertible notes included an option whereby the Company could redeem the notes at a discount pursuant to an agreed upon schedule as set forth in the subordinated convertible notes. As of June 30, 2003 the Company expected to exercise the redemption option according to the discount schedule pursuant to the subordinated convertible notes and adjusted the related obligation and "make-whole" or termination expense to $3,837,000. On July 15, 2003, in accordance with the discount schedule, the Company exercised its right to redeem the subordinated convertible notes for $4,154,000, which included accrued interest through that date. As a result of this redemption, the Company has satisfied all of its obligations related to the early payoff and the "make-whole" provision of the senior note agreement.

As part of the GECC agreement, the Company entered into a term loan in the amount of $37,500,000 with an interest rate currently at one-percent above the Wall Street Journal prime rate. At a later date, the Company may elect an interest rate of three-percent above the London Interbank Offered Rate. The term loan requires quarterly principal payments of $1,339,286 on the first day of each quarter beginning July 1, 2003, with the final installment of the principal balance due on May 14, 2007.

The credit agreement also includes a revolving credit facility of up to $112,500,000, of which available credit under the facility is based on a percentage of the Company's eligible accounts receivable and inventories. Availability under the revolving facility is adjusted monthly and interest currently is paid in arrears at a rate of one-percent above Wall Street Journal prime. At a later date, the Company may elect an interest rate of three-percent above the London Interbank Offered Rate. The credit facility contains certain restrictive financial covenants relative to operating ratios and capital expenditures. The Company was in compliance with the financial covenants of the agreement as of June 30, 2003.

The following summary presents the Company's net income (loss) and per share earnings (loss) that would have been reported had the Company determined stock compensation cost using the fair value method of accounting set forth under SFAS 123. There is no stock-based employee compensation cost in net income (loss) as reported. The pro forma impact on net income (loss) shown below may not be representative of future effects.

Changes in the Company's product warranty liability for the six months ended June 30, 2003 are as follows:

The Company warrants its products against manufacturing defects and performance to specified standards. The warranty period and performance standards vary by market and uses of its products. The Company estimates the costs that may be incurred under its warranties and records a liability at the time product sales are recorded. The warrant liability is primarily based on historical claim rates, nature of claims and the associated cost.

When used in this report, press releases and elsewhere by management or the Company from time to time, the words, "believes," "anticipates," and "expects" and similar expressions are intended to identify forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that involve certain risks and uncertainties. Statements in this Form 10-Q that are forward looking include, without limitation, statements regarding the Company's expected increase in net income in the current year, the impact on domestic sales by the general economic slowdown and continued delays in capital expenditures, expected sales during 2003, the Company's expected effective tax rates for 2003, the Company's expected capital expenditures in 2003, the expected benefit of financing arrangements, and the ability of the Company to meet its working capital and capital expenditure requirements through June 30, 2004. A variety of factors could cause actual results to differ mate rially from those anticipated in the Company's forward-looking statements, which include the risk factors that are discussed from time to time herein and in the Company's reports filed with the SEC, most recently in the Company's Annual Report on Form 10-K for the period ended December 31, 2002. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. The Company undertakes no obligations to update the forward-looking statements.

For the three months ended June 30, 2003, net sales decreased $16,829,000, or 13%, to $109,840,000 from $126,669,000 for the three months ended June 30, 2002. Sales are generated primarily from new equipment purchases made by customers for use in construction for privately funded infrastructure development and public sector spending on infrastructure development. Asphalt Group sales decreased approximately $13,921,000 and Aggregate and Mining Group sales decreased approximately $8,406,000 for the second quarter of 2003 compared to the second quarter of 2002. Net sales for the Mobile Asphalt Group and the Underground Group increased $4,599,000 and $1,490,000, respectively, for the current quarter compared to the same prior year quarter.

For the six months ended June 30, 2003, net sales decreased $17,143,000, or 6.9%, to $231,968,000 from $249,111,000 for the six months ended June 30, 2002. Net sales for the Asphalt Group and the Aggregate and Mining Group decreased $19,713,000 and $6,147,000, respectively, for the six months ended June 30, 2003 compared to the same period of 2002. Net sales for the Mobile Asphalt Paving Group and the Underground Group increased $7,398,000 and $2,404,000, respectively, for the six months ended June 30, 2003 compared to the six months ended June 30, 2002.

For the quarter and the six months ended June 30 2003, compared to the same periods of 2002, the decrease in the Asphalt Group sales related primarily to decreased domestic market demand and related pricing pressure in the market. For the same periods of 2003 compared to 2002, the increase in Underground Group sales related primarily to sales from the new Case trencher line manufactured at the Loudon, Tennessee facility. The Case product line, acquired by the Company late in 2002, began being produced and marketed during 2003. The Aggregate and Mining Group had fewer aggregate "systems" projects during the quarter and the six months ended June 30, 2003 compared to 2002, resulting in decreased sales volume compared to the prior year. The increase in sales by the Mobile Asphalt Group for the quarter and the six-months ended June 30, 2003 compared to the same period of 2002 related primarily to increased equipment sales as opposed to operating lease arrangements through the Company's former c aptive finance company.

International sales for the second quarter of 2003 decreased $1,424,000, or 6.0%, to $22,141,000, compared to $23,565,000 for the second quarter of 2002. For the three months ended June 30, 2003 and 2002, international sales accounted for approximately 20.2% and 18.6% of net sales, respectively. Sales in Africa for the second quarter of 2003 increased approximately $2,000,000 over the same prior year period, but were offset by decreased sales in China, Japan and Central America during the same period.

International sales for the six months ended June 30, 2003 compared to the six months ended June 30, 2002 increased $3,455,000, or 8.2% to $45,775,000. A total increase of approximately $10,000,000 of sales in Africa and Europe was partially offset by decreased sales to Central America, China, Japan and the West Indies. The Company is unable to determine whether or not the increase in international sales volume for the six months ended June 30, 2003 compared to the same period of 2002 will be a trend or if the market as a whole experienced it.

Gross profit for the three months ended June 30, 2003 decreased $6,697,000, or 25.2%, to $19,928,000 from $26,625,000 for the three months ended June 30, 2002. Gross profit as a percentage of sales for the three months ended June 30, 2003 and 2002 was 18.1% and 21.0%, respectively. For the three months ended June 30, 2003 as compared to the same period of 2002, gross profit was negatively impacted by reduced sales volume, under-utilization of manufacturing capacity, negative margins on used equipment sales, expenses associated with first-time production of a high capacity double-barrel drum mixer and overall competitive price pressure.

Gross profit for the six months ended June 30, 2003 decreased $13,966,000, or 25.6%, to $40,535,000 from $54,501,000 for the six months ended June 30, 2002. Gross profit as a percentage of sales for the six months ended June 30, 2003 and 2002 was 17.5% and 21.9%, respectively. The decrease in sales volume of the Asphalt Group and related market price pressures, and expenses related to the startup of the Loudon, Tennessee facility were the primary reasons for the decrease in gross margins for the six months ended June 30, 2003 compared to the same period of 2002. To a lesser extent the decrease in gross margin for the first half of 2003 compared to the first half of 2002, related to under-utilization of production capacity, losses on the sale of used equipment, cost related to first-time production of a high capacity double barrel drum mixer and overall competitive price pressure.

Selling, general, administrative and engineering expenses for the three months ended June 30, 2003 were $18,488,000 or 16.8% of net sales, compared to $20,358,000 or 16.1% of net sales for the three months ended June 30, 2002, a decrease of $1,870,000 or 9.2%. Selling, general, administrative and engineering expenses for the six months ended June 30, 2003 were $39,898,000 or 17.2% of net sales, compared to $39,936,000 or 16.0% of net sales for the same period of 2002. The decrease in selling, general, administrative and engineering expenses for the second quarter and the six months ended June 30, 2003, compared to the same period of 2002, related primarily to cost reduction efforts, which included headcount reductions and related expenses. The expense reductions realized during the second quarter were partially offset by legal and professional fees of approximately $369,000 incurred in negotiating with the prior lenders, primarily regarding the payoff of the senior notes and the related ma ke-whole provision. In addition, for the six months ended June 30, 2003, compared to the six months ended June 30, 2002, savings resulting from the Company's various expense reduction efforts were partially offset by non-recurring expenses of approximately $2,153,000 related to refinancing the former lending arrangements. Non-recurring expenses included legal and professional fees related to negotiations as described above, financial consultants required under the former lending arrangement and real estate recording fees.

For the quarter ended June 30, 2003 compared to the quarter ended June 30, 2002, interest expense decreased $842,000, or 28.6%, to $2,097,000 from $2,939,000. Interest expense as a percentage of net sales was 1.9% and 2.3% for the quarters ended June 30, 2003 and 2002, respectively. Interest expense for the six months ended June 30, 2003 compared to the same period of 2002, decreased to $4,438,000 from $5,162,000, or 14.0%. The decrease in interest expense for the three and six months ended June 30, 2003 compared to the same periods of 2002 related primarily to the decrease in outstanding debt. The decreased interest rate on outstanding debt under the current lending arrangement compared to the previous lending arrangement also contributed to the reduced interest expense for the three and six months ended June 30, 2003 compared to the same periods of 2002.

Other income, net of other expense, was $905,000 for the quarter ended June 30, 2003, compared to $453,000 for the quarter ended June 30, 2002, an increase of $452,000. For the three months ended June 30, 2003, compared to the three months ended June 30, 2002, the increase in other income, net of other expense, related primarily to the gain on the sale of fixed assets of approximately $946,000. The gain was partially offset by the decline of approximately $501,000 in gain on sale of lease portfolios during the current quarter compared to the same prior year quarter.

For the six months ended June 30, 2003, other income, net of other expense, decreased $41,000 to $1,087,000 from $1,128,000 for the six months ended June 30, 2002. The decrease related primarily to decreased gain on lease portfolio sales for 2003 compared to 2002, offset primarily by the gain on sale of fixed assets of approximately $968,000. The gain on the sale of fixed assets during the second quarter of 2003 was generated by the sale of the Company's large tractor-trailers used primarily for the delivery of its Asphalt Group equipment, to a local trucking company. In the future, the Company plans to contract to outside trucking companies substantially all of its equipment delivery.

As reported on Form 8-K on May 19, 2003, the Company issued to the former senior note holders subordinated convertible notes in the aggregate principal amount of $10,000,000 to satisfy "make-whole" obligations under the senior notes by reason of the prepayment. The subordinated convertible notes included an option whereby the Company could redeem the notes at a discount pursuant to an agreed upon schedule as set forth in the subordinated convertible notes. As of June 30, 2003 the Company expected to exercise the redemption option according to the discount schedule pursuant to the subordinated convertible notes and adjusted the related obligation and "make-whole" or termination expense to $3,837,000. On July 15, 2003, in accordance with the discount schedule, the Company exercised its right to redeem the subordinated convertible notes for $4,154,000, which included accrued interest through that date. As a result of this redemption, the Company has satisfied all of its obligations related to the early payoff and the "make-whole" provision of the senior note agreement.

For the three months ended June 30, 2003 the Company had a net loss of $2,212,000 compared to net income of $2,407,000 for the three months ended June 30, 2002. For the six months ended June 30, 2003 the Company had a net loss of $4,042,000 compared to net income of $7,042,000 for the six months ended June 30, 2002. Net loss per share for the three months ended June 30, 2003 was $.11 per share and earnings per share for the three months ended June 30, 2002 was $0.12 per diluted share, based on 19,686,539 and 20,134,075 weighted average shares outstanding, respectively.

Backlog of orders at June 30, 2003 was $43,067,000, compared to $88,030,000 at June 30, 2002, a decrease of $44,963,000 or 51.1%. The decrease in the backlog of orders at June 30, 2003 compared to June 30, 2002 related primarily to domestic orders of approximately $32,620,000 for equipment of the Company's Aggregate and Mining Group. The decrease for this operating segment related to fewer aggregate systems jobs scheduled as of June 30, 2003 compared to June 30, 2002. Compared to that of June 30, 2002, the backlog of orders as of June 30, 2003 decreased by $14,169,000 for the Asphalt Group, increased by $2,236,000 for the Mobile Asphalt Paving Group and decreased $410,000 for the Underground Group. The Company is unable to determine whether the overall decrease in backlog was experienced by the industry as a whole.

On May 14, 2003 the Company refinanced its revolving credit facility and senior note agreement with new credit facilities of up to $150,000,000 through GECC secured by the Company's assets. As part of refinancing agreement, the Company entered into a term loan in the amount of $37,500,000 with an interest rate currently at one- percent above the Wall Street Journal prime rate. At a later date, the Company may elect an interest rate of three-percent above the London Interbank Offered Rate. The term loan requires quarterly principal payments of $1,339,286 on the first day of each quarter beginning July 1, 2003, with the final installment of the principal balance due on May 14, 2007.

The credit agreement also includes a revolving credit facility of up to $112,500,000, of which available credit under the facility is based on a percentage of the Company's eligible accounts receivable and inventories. Availability under the revolving facility is adjusted monthly and interest currently is paid in arrears at a rate of one-percent above Wall Street Journal prime. At a later date, the Company may elect an interest rate of three-percent above the London Interbank Offered Rate. The credit facility contains certain restrictive financial covenants relative to operating ratios and capital expenditures. Principal covenants under the loan agreement include the maintenance of minimum levels of fixed charge coverage ratios and a 2003 limitation on capital expenditures of $6,250,000. The Company was in compliance with the financial covenants of the agreement as of June 30, 2003.

Total short-term borrowings, including current maturities of long-term debt, were $9,555,000 at June 30, 2003, compared to $3,220,000 at December 31, 2002. As of June 30, 2003, the current portion of long-term debt related primarily to the current portion of the GECC term loan totaling $5,357,000 and the debt and accrued interest related to the discounted subordinated convertible notes issued to the former senior note holders was $3,881,000.

As reported on Form 8-K on May 19, 2003, the Company issued to the former senior note holders subordinated convertible notes in the aggregate principal amount of $10,000,000 to satisfy "make-whole" obligations under the senior notes by reason of the prepayment. The subordinated convertible notes included an option whereby the Company could redeem the notes at a discount pursuant to an agreed upon schedule as set forth in the subordinated convertible notes. As of June 30, 2003 the Company expected to exercise the redemption option according to the discount schedule pursuant to the subordinated convertible notes and adjusted the related obligation and "make-whole" or termination expense to $3,837,000. On July 15, 2003, in accordance with the discount schedule, the Company exercised its right to redeem the subordinated convertible notes for $4,154,000, which included accrued interest through that date. As a result of this redemption, the Company has satisfied all of its obligations related to the early payoff and the "make-whole" provision of the senior note agreement.

At December 31, 2002, short-term borrowings consisted primarily of financed insurance premiums totaling $1,783,000, a financing agreement for imported, purchased inventory items of approximately $886,000 and the current portion of Industrial Development Revenue Bonds totaling $500,000. Net cash used by operating activities for the six months ended June 30, 2003 was $1,684,000 compared to net cash provided by operating activities of $25,935,000 for the six months ended June 30, 2002. The decrease in cash from operating activities is related primarily to the 2003 loss from operations and the increase of prepaid expenses and other assets during the six months ended June 30, 2003 compared to the six months ended June 30, 2002. Also, the 2002 cash provided by operating activities included a $19,400,000 increase in accounts payable and other accrued liabilities.

Long-term debt, less current maturities, decreased to $78,155,000 at June 30, 2003 from $130,645,000 at December 31, 2002. At June 30, 2003, $32,143,000 was outstanding under the long-term principal portion of the GECC term loan, $27,782,000 was outstanding under the GECC revolving credit facility and $18,200,000 was outstanding under the long-term principal portion of Industrial Revenue Bonds. For the six months ended June 30, 2003 compared to the same period of 2002, net reduction of debt under revolving credit facilities and credit agreements was approximately $61,000,000.

The Company believes that its current working capital, cash flows generated from future operations and available capacity remaining under its credit facility will be sufficient to meet the Company's working capital and capital expenditure requirements through June 30, 2004.

Capital expenditures in 2003 are expected to total approximately $3,766,000. The Company expects to finance these expenditures using internally generated funds and amounts available from its credit facilities. Net cash provided by investing activities for the six months ended June 30, 2003 was approximately $28,377,000, compared to net cash used by investing activities of $9,473,000 for the six months ended June 30, 2002. Capital expenditures for the six months ended June 30, 2003 were $2,688,000, compared to $3,908,000 for the six months ended June 30, 2002. Proceeds from the sale and repayment of lease portfolios and loans was approximately $23,157,000 for the six months ended June 30, 2003, compared to proceeds from the sale and repayment of lease portfolios of $7,701,000 for the six months ended June 30, 2002. Since the closing of the Company's captive finance company effective December 31, 2002, it has not entered into new leasing arrangements. Expenditures for equipment on operat ing lease were approximately $14,092,000 for the six months ended June 30, 2002.

The following table discloses aggregate information about the Company's contractual obligations and the periods in which payments are due as of June 30, 2003:

Certain customers have financed purchases of the Company's products through arrangements in which the Company is contingently liable for customer debt of approximately $21,714,000 and for residual value guarantees of approximately $1,305,000 at June 30, 2003. These obligations range from 10 to 84 months in duration.

In addition, the Company is contingently liable under letters of credit of approximately $21,074,000 primarily related to Industrial Revenue Bonds.

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. On July 24, 2003, the House Appropriations Committee approved the fiscal year 2004 Transportation, Treasury and Independent Agencies Appropriations Bill with a total proposed highway investment of $33.8 billion. Previously, on April 11, 2003, the House and Senate approved a non-binding budget resolution that assumes a minimum highway funding level of $218 billion for fiscal years 2004 through 2009, which would increase current funding levels. Nevertheless, 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 federal policies.

 The Company is contingently liable for certain customer debt. If the Company must repay a significant portion of the total contingent liability, it could adversely affect the available operating liquidity of the Company.

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 and continue to affect operations during 2003.

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 and 2003 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.

We have completed numerous 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 and 2003, 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.

The Company sells equipment primarily to contractors whose demand for equipment depends greatly upon the volume of road or utility construction projects underway or to be scheduled by both government and private entities. Much of the customized equipment manufactured requires significant manufacturing lead-time and specific delivery dates, that allow the expected revenue stream to be included in the manufacturing backlog total. As a result, we may not be able to accurately forecast our expected quarterly results.

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.

We have no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2002.

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, 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 our management, including our Chief Executive Officer and our Chief Financial officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer evaluated, with the participation of management, the effectiveness of our disclosure controls and procedures. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. There were no changes in our internal control over financial r eporting that occurred during the period covered by this report that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

The Annual Meeting of the Shareholders was held on Thursday, May 15, 2003 in Chattanooga, Tennessee, at which the following matters were submitted to a vote of the shareholders:

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

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

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

* In accordance with Release No. 34-47986, this exhibit is hereby furnished to the SEC as an accompanying document and is not deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.