ASV INC /MN/ - 10-K Annual Report

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

FORM 10-K

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

For the fiscal year ended December 31, 2003

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

For the transition period from____________to____________.

Commission file number: 0-25620

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

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

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

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

NONE
Title of each class

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

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

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

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

Indicate by check mark if the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). [X] Yes [ ] No

Based on the closing sale price at June 30, 2003 of $14.54, the
aggregate market value of the registrant's Common Stock held by nonaffiliates
was $96,579,231.

As of February 27, 2004, 12,643,649 shares of the registrant's Common
Stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant's Proxy Statement for its June 4, 2004
Annual Meeting, which will be filed by April 29, 2004, are incorporated
by reference in Part III.

PART I

ITEM 1. BUSINESS

GENERAL

A.S.V., Inc. was incorporated in Minnesota in July 1983 and its
wholly-owned subsidiary, A.S.V. Distribution, Inc., was incorporated in
Minnesota in January 1989. A.S.V., Inc. and A.S.V. Distribution, Inc. are
collectively referred to herein as "ASV" or the "Company."

ASV designs, manufactures and sells track-driven all-season vehicles.
The Company has two principal product lines, the R-Series Posi-Track(TM) product
line and the Multi-Terrain Loader, or MTL, undercarriage product line. Both of
these product lines use a rubber track suspension system that takes advantage of
the benefits of both traditional rubber wheels and steel tracks. Rubber track
vehicles provide the traction, stability and low ground pressure necessary for
operation on soft, wet, muddy, rough, boggy, slippery, snowy or hilly terrain,
but, unlike steel track vehicles, can be driven on groomed, landscaped and paved
surfaces without causing damage. The Company's products are versatile machines
used in the construction, agricultural, landscaping, trail grooming and
maintenance, vineyard, military, wildlife management and other markets. The
Company's MTL undercarriages are sold to Caterpillar as a primary component on
Caterpillar's MTL product line.

CURRENT YEAR DEVELOPMENTS

New Models

In January 2003, the Company introduced three new models in its
R-Series product line, the RC-30 Turf Edition, the RC-50 Turf Edition and the
RC-100. The R-Series Turf Edition products have smooth, green, rubber tracks
that allow the equipment to leave grass virtually unharmed, while also providing
excellent traction for digging and grading. Turf Edition products became
available in the second quarter of 2003. The RC-100 is the largest model in the
R-Series product line, with more features and power than any other R-Series
product. The Company began production of the RC-100 in March 2003.

In the first quarter of 2003, the Company began manufacturing the third
and final planned undercarriage for use by Caterpillar on its MTL product line.
This undercarriage is manufactured and sold to Caterpillar pursuant to an
alliance agreement to jointly develop and manufacture a new product line of
Caterpillar rubber track skid steer loaders called Multi-Terrain Loaders, or
MTLs, which was entered into in October 2000. The product line, which includes
five new models, features Caterpillar's patented skid steer loader technology
and ASV's patented Maximum Traction Support System(TM) rubber track
undercarriage. The machines complement existing models in both ASV's and
Caterpillar's current product lines. They are being sold through the Caterpillar
dealer network. The Company began manufacturing the undercarriage for use on two
of the MTLs in the second quarter of 2001. The Company began manufacturing the
undercarriage for use on two additional MTLs in the second quarter of 2002.

In January 2004, the Company introduced two new models in its R-Series
Posi-Track product line, the RC-60 and the RC-85. The RC-60 is built on the
RC-50 platform, but features a turbo-charged 60 horsepower engine and greater
operating capacities than the RC-50. The RC-85 is built on the RC-100 platform
and features an 85 horsepower naturally aspirated engine and has fewer features
than found on the RC-100. The RC-60 has a list price $5,000 higher than the
RC-50 and the RC-85 has a list price $5,000 less than the RC-100. Both the RC-60
and RC-85 went into production in the first quarter of 2004.

Agreement with Jacobsen

In February 2003, the Company entered into a sales alliance with
Jacobsen (a Textron company). Under the alliance, Jacobsen direct dealers market
the ASV RC-30 and RC-50 Turf Edition(TM) all-surface loaders designed for the
golf and sports turf markets. The R-Series Turf Edition All-Surface Loaders are
available primarily through Jacobsen dealers. Jacobsen and ASV entered into a
formal marketing agreement in March 2003.

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Stock Repurchase Plan

In October 2003, the Company authorized a stock buy-back program under
which ASV may repurchase up to $10 million of its common stock in the open
market. Through February 27, 2004, no repurchases have been made under this
program. Under previous programs, the most recent of which expired in September
2003, the Company repurchased 195,580 shares of its own common stock at an
aggregate purchase price of approximately $1,974,000.

Caterpillar Warrant

In October 2003, the Company issued a warrant acceleration notice to
Caterpillar covering approximately one million shares of its common stock. Under
the acceleration notice, Caterpillar had 75 days from the date issued to either
purchase the number of shares subject to the acceleration notice at $21.00 per
share, or lose the ability to purchase the shares under the terms of the
warrant. On January 5, 2004, Caterpillar purchased the shares subject to the
acceleration notice.

In November 2003, the Company issued a second warrant acceleration
notice to Caterpillar covering approximately two million shares of its common
stock. Under the second acceleration notice, Caterpillar had 75 days from the
date issued to either elect to purchase the number of shares subject to the
acceleration notice at $21.00 per share, or lose the ability to purchase the
shares under the terms of the warrant. In January 2004, prior to the expiration
of the second acceleration notice, ASV repurchased the remaining warrant held by
Caterpillar for a cash payment of $7.2 million and the issuance of 500,000
shares of the Company's common stock. As of February 27, 2004, Caterpillar owned
24.8% of the Company's outstanding common stock.

Polaris Industries, Inc.

In January 2004, the Company elected to terminate its alliance with
Polaris Industries Inc. (Polaris), in accordance with the terms of its agreement
with Polaris. The termination became effective March 1, 2004.

MARKETS FOR THE COMPANY'S PRODUCTS

The Company believes its R-Series products are very versatile and can
be used in a wide variety of applications. The main markets the Company expects
these products to be sold into include the construction, landscape and
agriculture markets. The Company's products have also been used for trail
grooming and maintenance and wildlife management. In addition, the Posi-Track
model MD-70 is being sold for use in specialty military applications.

The Company also believes its R-Series products are ideal for the
rental equipment market. The design of the Company's products make them very
easy to learn how to operate, especially for those individuals not familiar with
the operation of similarly sized equipment.

The Company's MTL undercarriage products are a primary component in
Caterpillar's MTL products which are used in a wide variety of applications,
including construction, excavation, landscape, demolition and material handling.

BENEFITS OF A RUBBER TRACK UNDERCARRIAGE

The Company's products are most often compared to skid-steer vehicles.
Skid-steers are small four-wheeled vehicles that were originally designed and
used primarily as loaders, but in the last decade have become increasingly more
popular for a variety of functions and more versatile with the availability of
attachments such as backhoes, forklifts, breakers, planers, rakes and augers.

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

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Recognizing the benefits of tracked vehicles, several manufacturers
have created tracks that can be placed around a skid-steer's wheels. Add-on
tracks are generally steel; however, rubber add-on tracks are also available due
to the limitations imposed by steel tracks. Although rubber add-on tracks can
decrease a skid-steer's ground pressure somewhat, the overall design of the
Company's products gives them more versatility and less ground pressure than a
skid-steer with add-on tracks.

The Company believes its products are ideal replacements to
skid-steers, small dozers and small tractors and can perform many of the jobs
handled by these vehicles without the disadvantages they possess. The weight of
the Company's products is distributed over its two tracks, which have a ground
surface much greater than that of a wheeled skid-steer, which results in an
average ground pressure of approximately 3 pounds per square inch, compared to
approximately 35 pounds per square inch for a typical wheeled skid-steer
weighing approximately the same as the Company's products. Their low ground
pressure allows them to operate on wet, soft, slippery, rough and hilly terrain.
Conventional wheeled vehicles may not be able to operate or may be destructive
in these conditions. Low ground pressure also reduces compaction which decreases
the need for frequent tilling and conditioning of the soil.

The longer track base on the Company's products also provides for a
much smoother ride for the operator of the machine. In addition, the Company's
products have a built-in suspension in their undercarriage design, further
minimizing the effects of an uneven or rough operating surface.

The Company believes the ability of its products to operate in
conditions that would require wheeled machines to sit idle makes them a more
attractive option due to greater productivity. The ability to operate when
wheeled vehicles cannot extends the work season of those operators in areas
where climate is a factor.

PRODUCTS - R-SERIES PRODUCTS

The Company's has two primary product lines, the R-Series product line
and the MTL undercarriage product line. All of these products utilize a rubber
track suspension system that takes advantage of the benefits of traditional
rubber wheels and steel tracks, without the disadvantages possessed by each.

Features

The rubber tracks used on the Company's products are made of molded
rubber reinforced with layers of nylon and polyester cord. The Company's
R-Series products feature a maintenance-free suspension with no grease fittings.
The Company's products primarily utilize diesel engines manufactured by
Caterpillar.

All of the Company's products are ride-on machines which adds to their
safety and comfort. All of the Company's R-Series products are equipped with
pilot-operated hydraulic controls. Gauges and switches are in the heads-up
position for easy view and reach. Safety features include full ROPS/FOPS canopy
(roll over protection structure, falling object protection structure), lap bar,
seat belt and parking brake.

The following contains a summary of the Company's current R-Series
products:

*Operating capacity shown is based on 50% of tipping load.

All machines shown above have no more than 3.5 pounds per square inch
ground pressure.

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The RC-30 and RC-50 Turf Edition products have the same specifications
as the RC-30 and RC-50 listed above, but are equipped with smooth, non-treaded
rubber tracks.

Most skid-steer attachments are designed to be used with an industry
standard quick-attach mechanism which allows attachments to be used on all
similarly equipped vehicles. The Company's products utilize this standard
quick-attach mechanism which enables them to operate the attachments used by
skid-steers. The Company's products are also designed for use with a dozer
attachment. The Company believes its products provide a more stable platform on
which these attachments can operate, due to their significantly longer track
base in contact with the ground, compared to the wheel base of a typical wheeled
skid-steer.

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

All of the Company's R-Series products can be equipped with various
options such as cab enclosure, heater, air conditioner, horn and back-up alarm.

PRODUCTS - MTL UNDERCARRIAGES

The Company manufactures rubber track undercarriages for use by
Caterpillar on their Multi-Terrain Loaders (MTLs). The five models of MTLs
feature Caterpillar's patented skid steer loader technology and ASV's patented
Maximum Traction Support System rubber track undercarriage. The Company began
manufacturing undercarriages for the first two MTL models in 2001. The
undercarriage for the next two MTL models went into production in the second
quarter of 2002. The undercarriage for the final MTL model went into production
in the first quarter of 2003. The MTLs are being sold through the Caterpillar
dealer network.

PRODUCTS - OTHER

The Company has also produced the following models under the Posi-Track
model name: the MD-70, the 2800 series, the HD 4500 series and the 4810. Of
these models, the MD-70 is the only model the company anticipates manufacturing
in the future. The Company anticipates future production will be devoted to
specialty applications.

The Company has also produced two models of machines primarily for
over-the-snow applications, the Track Truck(R) and the Posi-Track DX 4530. With
the increased popularity and production of the Company's R-Series products and
the MTL undercarriages, the production and sales of the over-the-snow models has
greatly decreased over the last several years such that sales of these products
accounted for less than 1.0% of the Company's net sales for 2003, 2002 and 2001.
The Company does not intend to manufacture these products in the future, but
will service the existing population of machines.

SALES AND MARKETING

The Company sells its products, other than MTL undercarriages,
primarily through independent equipment dealers in the United States, Canada,
Australia, New Zealand and Portugal and also through certain Caterpillar dealers
in the United States and Canada. As of February 27, 2004, 157 independent
dealers and 7 Caterpillar dealers sell and service the Company's products.

The MTL products, which are Caterpillar products that incorporate the
Company's undercarriages, are available only through Caterpillar dealers. In
2003, the MTL product line was available to Caterpillar dealers on a worldwide
basis. In 2002, the MTL product line was available to Caterpillar's 69 North
American dealers.

In 2003, sales to Caterpillar accounted for 54% of the Company's net
sales, while in 2002, sales to Caterpillar accounted for 32% of its net sales.

5

In October 2002, the Company began a program to market its RC-30 and
RC-50 products directly to rental facilities. Under this program, ASV identifies
rental facilities that will lease ASV machines from an unaffiliated finance
company. ASV records the sale of the machines to the finance company when they
are delivered to the rental facility and collectibility is reasonably assured.
At the end of the four-year lease, should the rental facility elect not to
purchase the leased machines from the finance company, ASV has guaranteed to pay
a residual value equal to 25% of the original selling price of the financed
equipment. At that point, ASV would take possession of the equipment. As of
December 31, 2003, the total amount of future residual payments the Company may
be required to make in the event of nonpayment by rental facilities totaled
approximately $100,000. The Company believes the value of the related equipment
will equal or exceed the amount of residual payments. Accordingly, the Company
does not anticipate any loss will be incurred should any residual payments need
to be made.

Through June 30, 2003, the lease agreement between the rental facility
and the finance company provided the rental facility a 90-day period during
which any rental income generated was split between the rental facility and ASV.
After the 90-day period expired, the rental facility had the option of
terminating the lease, in which case ASV was only responsible for the costs
associated with transferring the machines to another rental facility. If the
rental facility elected to continue the lease, ASV refunded any rental payments
received during the 90-day period.

Beginning July 1, 2003, this rental program was revised such that all
new leases between the finance company and the rental facility did not include
the lease termination option after the initial 90-day period. As of December 31,
2003, the Company was still responsible for the remarketing of approximately
$1,144,000 of machines and attachments. The Company has accrued the estimated
costs to remarket these machines and attachments as of December 31, 2003 and
does not anticipate it will incur any loss as a result of marketing these
machines and attachments.

The construction, agricultural and landscape equipment industries, in
which the Company's products compete, have historically been cyclical. Sales of
construction, agricultural and landscape equipment are generally affected by the
level of activity in the construction and agricultural industries as well as
farm production and demand, weather conditions, interest rates, construction
levels (especially housing starts) and general economic conditions. In addition,
the demand for the Company's products may be affected by the seasonal nature of
the activities in which they are used. Sales of the Company's products have
generally been greater in the spring and summer.

The Company has arrangements with several finance companies to finance
the sale of the Company's vehicles to its dealers and end purchasers. In
addition, the Company may, from time to time, offer extended payment terms on
the sale of its products to its dealers, for periods up to two years.

The Company has also agreed to assist one finance company with the
costs related to remarketing certain financed equipment should it become
necessary for the finance company to take possession of the equipment in the
event of nonpayment by the debtor. As of February 27, 2004, the Company was not
obligated to the finance company for any costs related to the remarketing of any
financed equipment due to nonpayment by the debtor.

As of February 27, 2004 and March 14, 2003, the Company had orders for
approximately $16.0 million of its products.

In 2004, the Company intends to focus its marketing efforts on
increasing the number of dealer outlets for its products and also increasing the
number of rental facilities that have the R-Series products available for rent.

AFFILIATION WITH CATERPILLAR

1998-1999 Agreements

On October 14, 1998, ASV entered into a Securities Purchase Agreement
(the "Purchase Agreement") with Caterpillar, pursuant to which Caterpillar
acquired, for an aggregate purchase price of $18,000,000, one million newly
issued shares of the Company's common stock and a warrant to purchase an
additional 10,267,127 newly issued shares of the Company's common stock at a
price of $21.00 per share.

In connection with entering into the Purchase Agreement, the Company
and Caterpillar entered into several ancillary agreements. First, the Company
and Caterpillar entered into a commercial alliance agreement (the "Commercial
Alliance Agreement") pursuant to which Caterpillar is providing the Company
access to its worldwide dealer network

6

and has made various management, financial and engineering resources available
to the Company. In addition, Caterpillar and the Company entered into various
other agreements described below.

The Commercial Alliance Agreement. The Commercial Alliance Agreement
provides that the Company and Caterpillar will enter into certain agreements,
each of which is discussed below.

Marketing Agreement. The Marketing Agreement requires Caterpillar to
provide the Company with access to its worldwide dealer network, in
part, by promoting the sale of the Company's products to Caterpillar's
dealers. Caterpillar is promoting ASV's products in North America and
may gradually extend such promotion throughout other parts of the
world. In addition, under the Marketing Agreement, Caterpillar handles
orders for the Company's products and administer its warranties. In
consideration for Caterpillar's services under the Marketing Agreement,
ASV pays Caterpillar a commission equal to 5% of the dealer net price
for complete machines (currently the 4810 model only) and 3% for
replacement parts and Company-branded attachments sold to Caterpillar
dealers plus the costs of certain services provided by Caterpillar. Any
commissions paid to Caterpillar are included in selling, general and
administrative expenses. The Marketing Agreement was entered into
between Caterpillar and the Company on January 29, 1999.

Trademark and Trade Dress License Agreement. The Marketing Agreement
provides that the Company and Caterpillar may enter into a Trademark
and Trade Dress License Agreement (the "License Agreement") at such
time as the Company's products have been evaluated by Caterpillar and
have been found to meet Caterpillar's quality and safety standards in
accordance with Caterpillar's established testing and validation
procedures. The Company and Caterpillar have currently chosen to focus
on joint product offerings with the Caterpillar trademark (i.e. the MTL
product line) rather than pursue this portion of the Marketing
Agreement at the current time.

Management Services Agreement. Under the Management Services Agreement,
Caterpillar has made available to the Company general management
support in connection with the day-to-day operation of its business,
commercial development and marketing research services, financial
planning services, such other administrative services as Caterpillar
and the Company may subsequently agree to in writing, and manufacturing
and engineering services. In consideration for Caterpillar's
obligations under the Management Services Agreement, the Company pays
Caterpillar a fee equal to Caterpillar's fully-loaded cost, as defined
in the Management Services Agreement, plus an administrative surcharge
(or such other fee as the parties may agree upon). Any amounts paid to
Caterpillar under the Management Services Agreement are included in
selling, general and administrative expenses. The Management Services
Agreement remains in effect indefinitely unless otherwise terminated by
the parties.

Other Agreements. The Commercial Alliance Agreement also provides that
the Company and Caterpillar enter into several additional agreements
relating to (i) services to be provided to the Company by Caterpillar,
(ii) the supply of components to Caterpillar by the Company and to the
Company by Caterpillar and (iii) the license of technology by the
Company to Caterpillar. None of these agreements have been entered
into, although Caterpillar has provided certain services and supplied
certain parts to the Company without the formal agreements contemplated
by the Commercial Alliance Agreement in place. The Company and
Caterpillar do not currently anticipate pursuing events that would
create the need to enter into any of these agreements.

2000 Agreements

In October 2000, the Company and Caterpillar entered into an alliance
agreement to jointly develop and manufacture a new product line of Caterpillar
rubber track skid steer loaders called Multi-Terrain Loaders (MTLs). The product
line, which currently consists of five models, features Caterpillar's patented
skid steer loader technology and ASV's patented Maximum Traction Support System
rubber track undercarriage. The MTLs are not a commissionable product under the
Commercial Alliance Agreement. The Company began manufacturing undercarriages
for the first two MTL models in 2001. The undercarriage for the next two MTL
models went into production in the second quarter of 2002. The undercarriage for
the fifth MTL model went into production in the first quarter of 2003. The MTLs
are being sold through the Caterpillar dealer network.

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Also in October 2000, Caterpillar purchased 500,000 additional newly
issued shares of ASV common stock at $18 per share and the Company also amended
the warrant issued to Caterpillar reducing the number of shares of ASV common
stock available for purchase under the original warrant by 500,000 shares. The
amended warrant was exercisable at any time until January 29, 2009, except that
it could expire with respect to a portion of the shares in the event the Company
met certain revenue levels and certain other conditions.

Warrant Exercise and Repurchase

In October 2003, the Company issued a warrant acceleration notice to
Caterpillar covering approximately one million shares of its common stock. Under
the acceleration notice, Caterpillar had 75 days from the date issued to either
purchase the number of shares subject to the acceleration notice at $21.00 per
share, or lose the ability to purchase the shares under the terms of the
warrant. On January 5, 2004, Caterpillar purchased the shares subject to the
acceleration notice.

In November 2003, the Company issued a second warrant acceleration
notice to Caterpillar covering approximately two million shares of its common
stock. Under the second acceleration notice, Caterpillar had 75 days from the
date issued to either elect to purchase the number of shares subject to the
acceleration notice at $21.00 per share, or lose the ability to purchase the
shares under the terms of the warrant. In January 2004, prior to the expiration
of the second acceleration notice, ASV repurchased the remaining warrant held by
Caterpillar for a cash payment of $7.2 million and the issuance of 500,000
shares of the Company's common stock. As of February 27, 2004, Caterpillar owned
24.8% of the Company's outstanding common stock.

COMPETITION

The markets in which the Company's RC-50 through RC-100 products
compete are generally comprised of small to medium sized tractor-type vehicles
including skid-steers. The markets are dominated by large corporations producing
models with substantial name recognition, including Case, which manufactures the
Uniloader skid-steer, Ingersoll Rand which manufactures the Bobcat, Gehl, John
Deere and Caterpillar. The competitors primarily produce wheeled or steel track
vehicles in the markets in which the Posi-Track competes. Caterpillar, John
Deere and Case sell rubber track vehicles in the medium to large sized tractor
market. Ingersoll Rand manufactures three models of rubber track skid steers,
two of which are slightly larger than the Company's RC-50 and one of which is
comparable to the Company's RC-100. Takeuchi of Japan manufactures three models
of rubber track skid-steers, two of which are larger than the Company's RC-50
and the other of which is comparable to the Company's RC-100. Takeuchi also
private label manufactures these three models for Gehl and Mustang. Caterpillar
manufactures five models of Multi-Terrain Loaders, for which ASV provides the
rubber track undercarriage.

The markets in which the RC-30 competes are also generally comprised of
vehicles manufactured by large corporations producing models with substantial
name recognition, including Toro, which manufactures the Dingo, as well as those
companies listed above that manufacture skid-steer products.

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

WARRANTY

The Company provides a limited warranty to purchasers of its products.
The warranty covers defects in materials and workmanship for one year from the
delivery date to the first end user. The rubber tracks used on the Company's
products carry a pro-rated warranty up to 1,500 hours of usage. Those components
that are not manufactured by the Company are subject only to the warranty of the
component manufacturer and may be greater in length than the limited warranty
provided by the Company.

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The Company offers an extended warranty through an unaffiliated
company. This unaffiliated company is responsible for administering and paying
all warranty claims under the extended warranty program.

MANUFACTURING AND SUPPLIERS

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

The Company owns the tooling used by outside vendors for manufacturing
customized parts. While current vendors are meeting the Company's quality and
performance expectations, the Company believes alternative contract
manufacturers are available should the necessity arise. However, shortages of
parts or the need to change vendors could result in production delays or
reductions in product shipments that could adversely affect the Company's
business. The Company believes that a change in suppliers for the majority of
component parts could occur without material disruption of the Company's
business. However, certain parts, such as bogie wheels and rubber tracks, have a
limited number of vendors and a disruption in supply could affect the Company's
ability to deliver finished goods.

INTELLECTUAL PROPERTY RIGHTS

During 2001, the Company was granted a patent by the U.S. Patent Office
pertaining to its undercarriage and drive sprocket mechanism which expires in
2018. The Company has also applied for additional patents pertaining to its
undercarriage systems. There can be no guarantee that this patent will be a
deterrent to other manufacturers from producing similar technology.

The Company has registered the trademark Track Truck(R) with the U.S.
Patent and Trademark Office and claims common law trademark rights in the names
Posi-Track(TM), RC-30(TM), RC-50(TM), RC-60(TM), RC-85(TM), RC-100(TM), Turf
Edition(TM), Maximum Traction Support System(TM), Posi-Turn(TM) and Snow
Saver(TM). Despite these protections, it may be possible for competitors or
users to copy aspects of the Company's products.

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

RESEARCH AND DEVELOPMENT

During the years ended December 31, 2003, 2002 and 2001, the Company
spent approximately $795,000, $1,803,000 and $2,645,000, respectively, on
research and development. The Company's research and development expenses have
been incurred in connection with development of new models, enhancements to
existing products and additional products to be offered through its alliances
with Caterpillar and Polaris.

The Company's research and development expenses increased substantially
in 2002 and 2001 as it worked to develop the undercarriages for the
Multi-Terrain Loader products with Caterpillar as well as worked on extensions
of its own product line. The development of these undercarriages was completed
in 2002. The Company anticipates its research and development expenses will be
in the range of 0.5% to 1% of net sales in the future and will be focused on
improvements to its existing products and extensions of its product lines.

INSURANCE

The Company maintains product liability insurance as well as a
commercial umbrella insurance policy in amounts the Company believes are
adequate. The Company also maintains key-person life insurance in the amount of
$1,000,000 on the life of Mr. Lemke.

9

EMPLOYEES

As of February 27, 2004, the Company had 151 employees, 3 of whom are
part-time. The Company's employees include 3 in management, 23 in
administration, 10 in sales and marketing and 115 in manufacturing, engineering
and research and development. The Company believes its relations with its
employees are good. None of the Company's employees are represented by a labor
union. The Company also reimburses Caterpillar for the salary related costs of
two Caterpillar employees that work at the Company's Grand Rapids facility.

WEBSITE ACCESS TO SEC REPORTS

ASV's internet website can be found at www.asvi.com. ASV makes
available free of charge on or through its website its annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended, as well as all other reports
filed by ASV with the Securities and Exchange Commission (the "SEC"), as soon as
reasonably practicable after electronically filed with, or furnished to, the
SEC.

ITEM 2. PROPERTIES

The Company's manufacturing and office facilities are located in Grand
Rapids, Minnesota. These facilities consist of approximately 95,000 square feet
of production space and approximately 10,000 square feet of office space. The
facilities are leased under a 20-year lease from the Grand Rapids Economic
Development Authority. The lease agreement provides for monthly rental payments
until January 2018, with a balloon payment of approximately $543,000 in December
2006. The Grand Rapids facility has been the Company's primary production and
office facility since the original 40,000 square foot facility was first
occupied by the Company in May 1995. The facility was expanded to its present
size in 1997. The Company has an option to purchase the facility at any time at
the present value of the remaining lease payments plus the current purchase
price of the land on which the facility was constructed. The purchase price of
the land is currently $62,500, but can be reduced or forgiven over a remaining
period of two years if certain minimum employment levels are met and maintained
during the applicable year.

In 2003, the Company purchased a facility contiguous to its present
facility that had been occupied by an unrelated entity and consists of 7 acres
of land and a 10,000 square foot building. The Company occupied the facility in
the fourth quarter of 2003 and is using it for engineering, new product
development and research and development operations. The facility's purchase
price of $600,000 was funded with available operating cash.

The Company also owns a parcel of land located in Grand Rapids,
Minnesota consisting of 63 acres and six buildings with a total of 47,000 square
feet, which it uses for research and development testing and additional
warehousing.

In January 2004, the Company purchased a vacant manufacturing facility
in Cohasset, Minnesota, approximately six miles from the Company's manufacturing
facility. This facility contains approximately 90,000 square feet of
manufacturing space, 18,000 square feet of office and support space and
approximately 8 acres of land. The Company intends to utilize this facility in
2004 for additional manufacturing capacity. The facility's purchase price of
$1.2 million was funded with available operating cash.

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

ITEM 3. LEGAL PROCEEDINGS

None.

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

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

10

PART II

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

MARKET INFORMATION

The Company's common stock trades on the Nasdaq Stock Market(R) under
the ticker symbol ASVI. The following represents the high and low sales price
for the periods indicated:

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

HOLDERS

As of February 27, 2004, the Company had approximately 210 holders of
record of its Common Stock (not including beneficial holders). The Company
believes it has approximately 3,400 beneficial holders of its Common Stock.

DIVIDENDS

The Company has never declared or paid a cash dividend on its Common
Stock. The Company currently intends to retain earnings for use in the operation
and expansion of its business.

RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED
SECURITIES

None.

ITEM 6. SELECTED FINANCIAL DATA

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

OVERVIEW

ASV designs, manufactures and sells rubber-tracked, all-purpose
crawlers and related accessories and attachments. ASV also manufactures
rubber-tracked undercarriages, which are a primary component on Caterpillar's
Multi Terrain Loaders. ASV's products are able to traverse nearly any terrain
with minimal damage to the ground, making it effective in industries such as
construction, landscaping and agriculture. ASV distributes its products through

11

an independent dealer network in the United States, Canada, Australia, New
Zealand and Portugal. The undercarriages sold to Caterpillar are incorporated by
Caterpillar in their Multi-Terrain Loader products and sold exclusively through
the Caterpillar dealer network, primarily in North America.

ASV experienced a significant increase in sales in 2003 due to several
reasons as explained below:

o The Company believes there is a greater acceptance of rubber
track machines in the marketplace as users experience the
benefits that a rubber track machine can provide over a
standard wheeled machine.

o The number of companies entering into the rubber track machine
market has increased in the last few years, thereby
contributing to the increased awareness and market acceptance
of the products.

o ASV has increased its number of product offerings over the
past few years, such that it has become easier to attract
prospective dealers to carry the R-Series Posi-Track product
line.

o Caterpillar has increased the number of MTL models it offers
to its dealers, from two models in 2001 to five in 2003. In
addition, the number of Caterpillar dealers that are able to
carry the MTL product line has increased from 16 pilot dealers
in 2001 to all North American dealers (approximately 65) in
2003.

o The current low interest rate environment has provided for
easier financing by end users.

o Recent tax legislation has provided increased depreciation
allowances allowing end users to depreciate a greater portion
of machine purchases in the first year of ownership, thereby
potentially reducing the cost of machine ownership in the
first year of operation.

CRITICAL ACCOUNTING POLICIES

The following discussion and analysis of the Company's financial
condition and results of operations is based upon its financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities and expenses, and related disclosures. On an
on-going basis, management evaluates its estimates and judgments, including
those related to accounts receivable, inventories and warranty obligations. By
their nature, these estimates and judgments are subject to an inherent degree of
uncertainty. Management bases its estimates and judgments on historical
experience, observance of trends in the industry, information provided by
customers and other outside sources and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among
others, affect its more significant judgments and estimates used in the
preparation of the Company's consolidated financial statements.

Revenue Recognition and Accounts Receivable. Revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred, the price
is fixed or determinable and collectibility is reasonably assured. The Company
generally obtains oral or written purchase authorizations from customers for a
specified amount of product at a specified price and considers delivery to have
occurred at the time of shipment. ASV maintains an allowance for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. If the financial condition of ASV's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.

Inventories. Inventories are stated at the lower of cost or market,
cost being determined on the first-in, first-out method. Adjustments to slow
moving and obsolete inventories to the lower of cost or market are provided
based on historical experience and current product demand. The Company does not
believe its inventories are subject to rapid obsolescence. The Company evaluates
the adequacy of the inventories' carrying value quarterly.

12

Warranties. ASV provides for the estimated cost of product warranties
at the time revenue is recognized. While ASV engages in extensive product
quality programs and processes, including actively monitoring and evaluating the
quality of its component suppliers, ASV's warranty obligation is affected by
product failure rates, material usage and service delivery costs incurred in
correcting a product failure. Should actual product failure rates, material
usage or service delivery costs differ from ASV's estimates, revisions to the
estimated warranty liability may be required.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
Statements of Earnings data as a percentage of net sales:

Net Sales. For the year ended December 31, 2003, net sales totaled
$96.4 million, a 118% increase over net sales for the year ended December 31,
2002 due to several factors. First, the Company had increased shipments of
undercarriages to Caterpillar for use on Caterpillar's MTL product line.
Shipments increased as Caterpillar had more models available to sell during 2003
(five) compared with 2002 (two). In addition, during 2002, Caterpillar was
unable to sell two models of its MTLs due to production issues unrelated to
ASV's undercarriages. These production issues were resolved in 2003 and these
two models were placed back into production, which resulted in increased sales
of these models by Caterpillar in 2003. Second, ASV introduced a new model to
its R-Series product line, the RC-100, in the first quarter of 2003. This model
replaced the model 4810 Posi-Track and the RC-100 experienced three times the
unit volume in 2003 that the 4810 had in 2002. Also, the Company believes the
addition of the RC-100 Posi-Track has aided the sales of the Company's other
models, the RC-30 and RC-50, as the increased number of product offerings has
attracted an increased number of dealers that wish to carry the Company's
products. Also contributing to the increased sales in 2003 was the increase in
the sale of service parts, as the number of machines and MTL undercarriages
continues to increase.

For the year ended December 31, 2002, net sales totaled $44.2 million,
an 11.7% decrease over net sales for the year ended December 31, 2001 due to
several offsetting factors. First, the Company had no machine sales of the
private label version of the RC-30 All Surface Loader under its alliance with
Polaris, the ASL-300, in 2002, which had accounted for $7.9 million of sales in
2001. Second, the Company had decreased sales of its 4810 and 2800 series
Posi-Tracks, due to the introduction of additional MTL models in 2002 and the
continued softness in the overall construction equipment sales market. Partially
offsetting these decreases were increased MTL undercarriage sales of $3.3
million, as ASV began supplying undercarriages for two additional MTL models
that were introduced by Caterpillar in 2002. The Company also experienced
increased sales of $8.0 million from its R-Series product line due to the
introduction of the RC-50 and R-50 products in the first quarter of 2002. In
addition, sales of service parts increased in 2002 as the number of machines and
undercarriages in the field continued to increase.

Gross Profit. Gross profit for the year ended December 31, 2003 was
$20.5 million, or 21.3% of net sales, compared with $8.6 million, or 19.5% of
net sales for 2002. The increase in gross profit was due to a combination of
increased sales in 2003 as discussed above and an increase in the gross profit
percentage. The increase in gross profit percentage was due to two primary
factors. First, the increased sales of ASV branded machines, which generally
carry a higher gross profit percentage than MTL undercarriages, help increase
the gross profit percentage in 2003. Second, the Company's mix of MTL
undercarriages sold in 2003 contained a greater number of higher margin
undercarriages than was sold in 2002. In 2002, the Company primarily sold one
model of MTL undercarriage to Caterpillar, which had the lowest gross profit
percentage of the MTL undercarriages.

For the year ended December 31, 2002, gross profit was $8.6 million, or
19.5% of net sales, compared with $9.1 million, or 18.1% of net sales, for 2001.
The decrease in gross profit was due primarily to the decreased sales for 2002.
The increase in the gross profit percentage was due to the following offsetting
factors. First, as discussed above,

13

the Company had no Polaris ASL-300 sales in 2002, which carry a lower gross
profit than the Company's other products, thereby causing an increase in the
gross profit percentage for 2002 compared to 2001. Second, the Company had
increased sales of service parts in 2002, which generally carry a higher gross
profit than finished goods. Offsetting these increases, the Company sold a
greater concentration of lower margin MTL undercarriages in 2002 as compared to
2001 as Caterpillar was not able to produce its two larger MTL models for the
majority of 2002 due to a production issue unrelated to ASV's undercarriage. In
addition, the Company experienced fewer sales of its higher margin model 4810
Posi-Track as discussed above.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $6.2 million for the year ended December
31, 2003, compared with $5.0 million for the year ended December 31, 2002. The
increase was due primarily to several factors. First, commissions to ASV's sales
force increased in 2003 due to the increased sales. Second, in the second
quarter of 2002, selling, general and administrative expenses were lower than
historical levels due primarily to the reversal of a portion of a remarketing
reserve during the second quarter of 2002. The Company had previously
established a remarketing reserve of $250,000 for any expected costs associated
with remarketing existing machines at one customer's locations, some of which
were ultimately returned to Company. ASV had originally anticipated these
machines would be remarketed to other dealers, but instead chose to have certain
of these machines returned to ASV for use in its new rental program which began
in the second quarter of 2002. As these machines were returned to ASV and
reflected as sales returns with a corresponding decrease in gross profit of
approximately $184,000, a portion of the remarketing reserve was no longer
needed. The Company reversed the portion of the remarketing reserve that related
to the returned machines, which decreased selling, general and administrative
expenses by approximately $184,000. Third, payroll taxes increased in 2003 due
to the exercise of non-qualified stock options by employees which required the
payment of the employer portion of payroll taxes by the Company. In 2002, there
were no non-qualified stock options exercised due to the lower price of the
Company's common stock.

For the year ended December 31, 2002, selling, general and
administrative expenses decreased 14.1% to $5.0 million compared with $5.9
million for the year ended December 31, 2001. The decreased level of expenses
was due to the following two items. First, in 2001, the Company established a
remarketing reserve of $250,000 as discussed above. The Company reversed the
portion of the remarketing reserve that related to the returned machines, which
decreased selling, general and administrative expenses by approximately $184,000
in 2002. Second, the Company had decreased commissions to Caterpillar as the
number of commissionable products sold to Caterpillar dealers decreased in 2002.

Research and Development. Research and development expenses decreased
to $795,000 for the year ended December 31, 2003 compared with $1,803,000 for
the year ended December 31, 2002. The decrease was due to the completion of the
development, testing and integration of the fifth undercarriages used in
Caterpillar's MTL product line in 2002. In 2002, ASV incurred research and
development expenses of $1 million related to the undercarriages used in
Caterpillar's MTL product line.

For the year ended December 31, 2002, research and development expenses
decreased $843,000 to $1,803,000, compared with $2,645,000 for the year ended
December 31, 2001. This decrease was due primarily to the completion of the
development, testing and integration of the fifth undercarriage used in
Caterpillar's MTL product line in the third quarter of 2002.

The Company anticipates its research and development expenses will be
in the range of 0.5% to 1% of net sales in the future and will be focused on
improvements to its existing products and extensions of its product lines.

Other Income (Expense). Interest expense remained relatively unchanged
in 2003 compared with 2002 as debt levels and interest rates were similar in
2003 and 2002.

Other income for the year ended December 31, 2003 decreased to
$178,000, compared with $264,000 for the year ended December 31, 2002. The
decrease was due to lower interest income from lower interest rates available
for the Company's cash equivalents and a reduction in royalty revenues received
from one of the Company's vendors as the royalty agreement expired in 2003.

For the year ended December 31, 2002, interest expense decreased to
approximately $126,000, compared with approximately $146,000 for the year ended
December 31, 2001. The decrease was due to the Company refinancing approximately
$784,000 of its long-term debt from 9.0% to 6.5% for a five-year term in
December 2001.

14

Other income was approximately $264,000 for 2002, compared with
approximately $529,000 for 2001. The decrease in 2002 was due primarily to lower
interest income from lower interest rates and decreased short-term investments
as the Company used these investments to fund operations in 2002.

Net Earnings. Net earnings increased for the year ended December 31,
2003 to $8.7 million, compared with $1.4 million for the year ended December 31,
2002. The increase was due to the more than doubling of net sales in 2003,
combined with an increased gross profit percentage, offset in part by slightly
higher operating expenses, lower non-operating income and a higher effective
income tax rate.

For the year ended December 31, 2002, net earnings increased to
approximately $1,353,000, compared with approximately $756,000 in 2001. The
increase in net earnings was due to lower operating expenses and an increased
gross profit percentage, offset in part by decreased sales and an increased
effective income tax rate.

LIQUIDITY AND CAPITAL RESOURCES

For the year ended December 31, 2003, the Company generated total cash
flows of approximately $25 million, compared with a use of cash of approximately
$1 million for the year ended December 31, 2002. Approximately $19 million of
this increase related to cash flows generated from operations. Included in this
figure was the significant increase in net earnings the Company experienced in
2003 due to a 118% increase in sales. The Company also recorded a tax benefit
from the exercise of stock options and a warrant of approximately $5.6 million
in 2003. This was due to a large increase in the exercise of employee stock
options, a result of the increase in the price of the Company's common stock in
2003. The Company was also able to reduce its inventories by $5.1 million, the
majority of which resulted from increased sales of the Company's RC-30 product
in 2003. In addition, used equipment levels decreased $1.4 million as a result
of the Company holding its first used equipment auction in April 2003. The
Company used $1.7 million of cash to invest in property, plant and equipment.
Financing activities generated an additional $7.3 million as the Company
received $7 million of net proceeds from the exercise of stock options and a
warrant in 2003.

For 2004, the Company anticipates sales in the range of $130-155
million, with earnings expected to be in the range of $.95-1.15 per share on a
diluted basis. The Company anticipates its 2004 sales of MTL undercarriages to
Caterpillar could exceed $50 million. The Company's payment terms from
Caterpillar are generally net 30 days.

Table of Contractual Commitments

The following table represents the Company's contractual obligations at
December 31, 2003:

Purchase obligations represent the total value of all open purchase
orders for the purchase of raw materials and components used in the manufacture
of the Company's products as of December 31, 2003. Financing guarantee is
described in Note L to the financial statements filed in connection with this
Annual Report on Form 10-K.

Caterpillar Revenue Recognition/Gross Profit

The Company recognizes as sales its cost for the MTL undercarriages, as
defined in the alliance agreement between the Company and Caterpillar, plus a
portion of the anticipated gross profit that Caterpillar expects to recognize
upon sale of the MTLs to Caterpillar dealers, when the Company ships
undercarriages to Caterpillar. On January 1, 2005, the Company's portion of the
anticipated gross profit that Caterpillar expects to recognize upon sale of the
MTLs to Caterpillar dealers will be reduced by 33% for two of the three
undercarriages the Company currently sells to Caterpillar. On January 1, 2006,
the Company's portion of the anticipated gross profit that Caterpillar expects
to recognize upon sale of the MTLs to Caterpillar dealers will be reduced by 33%
for the other undercarriage the Company currently sells to Caterpillar. The
Company believes these revisions will not cause its overall gross profit
percentage generated on the sale of MTL undercarriages in 2005 to fall below the
overall gross profit percentage it generated on the sale of MTL undercarriages
for the year ended December 31, 2003. The MTL undercarriages are not a
commissionable product under the Company's Commercial Alliance Agreement with
Caterpillar.

15

Customer Note and Financing Arrangement

In December 2000, the Company made a sale to one customer totaling
approximately $4.0 million. During 2001, this customer did not make payments in
accordance with the terms of its agreement with the Company, including
approximately $800,000 of machines and attachments sold by the customer for
which payment was not remitted to the Company.

In January 2002, the Company and the customer entered into a note
agreement for the value of the machines that had been previously sold by the
customer for which payment was not remitted to the Company. The initial amount
of the note was $800,000 and the note was due in 48 monthly installments plus
interest at the prime rate plus 2%, beginning March 15, 2002. The customer made
payments on this note through April 2003.

In December 2003, this customer closed on a private placement of debt
and equity securities with non-affiliated investors. In connection with the
closing of the private placement, the Company was paid $285,000 which was
applied against the trade accounts receivable owed by this customer. The Company
agreed to transfer $300,000 from the customer's accounts receivable balance to a
new note. This $300,000 amount was combined with the amount owed on the existing
note owed to the Company of $566,667 for a new note of $866,667. The new note
bears interest at the prime rate plus 2% and is due in 60 monthly installments
beginning February 2004.

Also in December of 2003, this customer obtained financing from a
non-affiliated finance company to pay its remaining accounts receivable balance
owed to the Company of $589,000. The Company has guaranteed the repayment of the
$589,000 to the finance company. The Company has computed the value of the
guarantee at $35,000 and has recorded this amount as a reduction of net sales
for the year ended December 31, 2003. A similar amount has been included in
other accrued liabilities at December 31, 2003.

Rental Program

In October 2002, the Company began a program to market its RC-30 and
RC-50 products directly to rental facilities. Under this program, ASV identifies
rental facilities that will lease ASV machines from an unaffiliated finance
company. ASV records the sale of the machines to the finance company when they
are delivered to the rental facility and collectibility is reasonably assured.
At the end of the four-year lease, should the rental facility elect not to
purchase the leased machines from the finance company, ASV has guaranteed to pay
a residual value equal to 25% of the original selling price of the financed
equipment. At that point, ASV would take possession of the equipment. As of
December 31, 2003, the total amount of future residual payments the Company may
be required to make in the event of nonpayment by rental facilities totaled
approximately $100,000. The Company believes the value of the related equipment
will equal or exceed the amount of residual payment. Accordingly, the Company
does not anticipate any loss will be incurred should any residual payments need
to be made.

Through June 30, 2003, the lease agreement between the rental facility
and the finance company provided the rental facility a 90-day period during
which any rental income generated was split between the rental facility and ASV.
After the 90-day period expired, the rental facility had the option of
terminating the lease, in which case ASV was only responsible for the costs
associated with transferring the machines to another rental facility. If the
rental facility elected to continue the lease, ASV refunded any rental payments
received during the 90-day period.

Beginning July 1, 2003, this rental program was revised to eliminate
the lease termination option after the initial 90-day period. As of December 31,
2003, the Company was still responsible for the remarketing of approximately
$1.1 million of machines and attachments. The Company has accrued the estimated
costs to remarket these machines and attachments as of December 31, 2003 and
does not anticipate it will incur any loss as a result of marketing these
machines and attachments.

Relationship with Finance Company

The Company has affiliated itself with several finance companies that
finance the sale of the Company's products. By using these finance companies,
the Company receives payment for its products shortly after their shipment. The
Company pays a portion of the interest cost associated with financing these
shipments that would normally be paid by the customer, generally ranging from
three to twelve months, depending on the amount of down payment made by the
customer. The Company is also providing twelve-month terms for one machine to be
used for demonstration purposes for each qualifying dealer. In addition, the
Company does, from time to time, offer extended terms financing on the sale of
certain products to its dealers for periods ranging from 90 days to two years.

16

Stock Repurchase Program

In October 2003, the Company announced a new stock buy-back program
whereby ASV may repurchase up to $10 million of its common stock in the open
market. The Company intends to fund the repurchases with available funds. The
term of the repurchase program is through October 2004 or until such amount of
common stock is repurchased. As of February 27, 2004, the Company had not made
any repurchases of its common stock under this program. Under previous programs,
the most recent of which expired in September 2003, the Company repurchased
195,580 shares of its own common stock at an aggregate purchase price of
approximately $1,974,000.

Caterpillar Equity Transactions

In January 2004, the Company sold 1,040,069 shares of its common stock
to Caterpillar at $21.00 per share. These shares were subject to an acceleration
notice issued to Caterpillar by the Company in October 2003 in connection with
the warrant held by Caterpillar.

Also in January 2004, the Company repurchased the remaining warrant
held by Caterpillar for a cash payment of $7.2 million and the issuance of
500,000 shares of the Company's common stock. As of February 27, 2004,
Caterpillar owned 24.8% of the Company's outstanding common stock.

Cash Requirements

The Company believes cash expected to be generated from operations,
cash generated from the sale of stock to Caterpillar in January 2004, its
existing cash and short-term investments, together with its available, unused
$10 million credit line, will satisfy the Company's projected working capital
needs and other cash requirements for the next twelve months and for the
foreseeable future.

Forward-Looking Statements

The statements set forth above under "Liquidity and Capital Resources"
and elsewhere in this Form 10-K regarding ASV's future sales levels, product
mix, profitability, expense levels and liquidity are forward-looking statements
based on current expectations and assumptions, and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. Certain factors may affect whether
these anticipated events occur including ASV's ability to successfully
manufacture the machines, unanticipated delays, costs or other difficulties in
the development and manufacture of the machines, market acceptance of the
machines, general market conditions, corporate developments at ASV or
Caterpillar and ASV's ability to realize the anticipated benefits from its
alliances with Caterpillar. Any forward-looking statements provided from
time-to-time by the Company represent only management's then-best current
estimate of future results or trends. Additional information regarding these
risk factors and uncertainties is detailed in the Risk Factors filed as Exhibit
99 to its Current Report on Form 10-Q for the period ended June 30, 2003.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has the following off-balance sheet arrangement as of
December 31, 2003:

To assist one of its customers in obtaining financing from a
non-affiliated finance company to pay a portion of its accounts receivable
balance owed to the Company, the Company has guaranteed the repayment of a
$589,000 note to the finance company. The Company has computed the value of the
guarantee at $35,000 and has recorded this amount as a reduction of net sales
for the year ended December 31, 2003. A similar amount has been included in
other accrued liabilities at December 31, 2003.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments, derivative commodity instruments
or other such financial instruments. Transactions with international customers
are entered into in US dollars, precluding the need for foreign currency hedges.
Additionally, the Company invests in money market funds and fixed rate U.S.
government and corporate obligations, which experience minimal volatility. Thus,
the exposure to market risk is not material.

17

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS

The following financial statements are attached as a separate section
on pages F-1 through F-13 following the signature page of this Annual Report on
Form 10-K:

Consolidated Balance Sheets as of December 31, 2003 and 2002

Consolidated Statements of Earnings for the years ended December 31,
2003, 2002 and 2001

Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2003, 2002 and 2001

Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001

Notes to Consolidated Financial Statements

Report of Independent Certified Public Accountants

SUPPLEMENTARY FINANCIAL INFORMATION

The selected quarterly financial data is included in Note O to the
consolidated financial statements filed with this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. Under the supervision
and with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, the Company evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act
of 1934, as amended) as of the end of the period covered by this report. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were adequately designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act, is recorded, processed, summarized and
reported within the time periods specified in applicable rules and forms.

Changes in Internal Controls. During the fourth fiscal quarter of 2003,
there has been no change in the Company's internal controls over financial
reporting (as defined in Rule 13(a)-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is incorporated by reference to the
sections entitled "Election of Directors", "Directors and Executive Officers"
and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
Proxy Statement for its 2004 Annual Meeting of Shareholders, which will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days of the Company's fiscal year end.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference to the
section entitled "Executive Compensation" in the Company's Proxy Statement for
its 2004 Annual Meeting of Shareholders, which will be filed with the Securities
and Exchange Commission pursuant to Regulation 14A within 120 days of the
Company's fiscal year end.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCK HOLDER MATTERS

18

EQUITY COMPENSATION PLAN INFORMATION

The other information required by Item 12 is incorporated by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for its 2004 Annual Meeting of
Shareholders, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days of the Company's fiscal year end.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for its 2004 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days of the Company's fiscal year end.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for its 2004 Annual Meeting of Shareholders, which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days of the Company's fiscal year end.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) FINANCIAL STATEMENTS

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

(a) (2) FINANCIAL STATEMENT SCHEDULES

The following items are attached as a separate section on
pages S-1 and S-2 immediately following the financial statements
included in this Annual Report on Form 10-K:

Report of Independent Certified Public Accountants on the
Financial Statement Schedule for the years ended December 31,
2003, 2002 and 2001

19

Schedule II - Valuation and Qualifying Accounts for the years
ended December 31, 2003, 2002 and 2001

(a)(3) EXHIBITS

20

10.8 Extension of Lease Agreement dated May 13, 1998 between the
EDA and the Company (g)

10.9 First Amendment to Credit Agreement dated June 30, 1998
between Norwest Bank Minnesota North, N.A. and the Company (g)

10.10 Commercial Alliance Agreement dated October 14, 1998 between
Caterpillar Inc. and the Company (h)

10.11 Management Services Agreement dated January 29, 1999 between
Caterpillar Inc. and the Company (j)

10.12 Marketing Agreement dated January 29, 1999 between Caterpillar
Inc. and the Company (j)

10.13 Third Amendment to Credit Agreement dated June 9, 1999 between
Norwest Bank Minnesota North, N.A. and the Company (k)

10.14 Fourth Amendment to Credit Agreement dated June 1, 2000
between Norwest Bank Minnesota North, N.A. and the Company (m)

10.15** Multi-Terrain Rubber-Tracked Loader Alliance Agreement dated
October 31, 2000 between Caterpillar Inc. and the Company (n)

10.16** Manufacturing and Distribution Agreement dated January 2, 2001
between Polaris Industries Inc. and the Company (o)

10.17 Fifth Amendment to Credit Agreement dated June 1, 2001 between
Wells Fargo Bank Minnesota, N.A. and the Company (p)

10.18 Sixth Amendment to Credit Agreement dated June 1, 2002 between
Wells Fargo Bank Minnesota, N.A. and the Company (q)

10.19 Seventh Amendment to Credit Agreement dated June 1, 2002
between Wells Fargo Bank Minnesota, N.A. and the Company (r)

10.20** Marketing Agreement dated March 13, 2003 between Jacobsen, a
division of Textron, Inc., and the Company (s)

10.21 Business Loan Agreement dated July 7, 2003 between Wells Fargo
Bank Minnesota, N.A. and the Company (t)

11 Statement re: Computation of Per Share Earnings

21 Subsidiaries (a)

23 Consent of Grant Thornton LLP, independent certified public
accountants

31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

99 Risk Factors (t)

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

21

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

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

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

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

(f) Incorporated by reference to the Company's Definitive
Proxy Statement for the year ended December 31, 1997
(File No. 0-25620) filed electronically April 28,
1998.

(g) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1998 (File No. 0-25620) filed electronically August
12, 1998.

(h) Incorporated by reference to the Company's Current
Report on Form 8-K (File No. 0-25620) filed
electronically October 27, 1998.

(i) Incorporated by reference to the Company's Current
Report on Form 8-K (File No. 0-25620) filed
electronically February 11, 1999.

(j) Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
1998 (File No. 0-25620) filed electronically March
26, 1999.

(k) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1999 (File No. 0-25620) filed electronically August
9, 1999.

(l) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1999 (File No. 0-25620) filed electronically
November 12, 1999.

(m) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
2000 (File No. 0-25620) filed electronically August
10, 2000.

(n) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 2000 (File No. 0-25620) filed electronically
November 13, 2000.

(o) Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31,
2000 (File No. 0-25620) filed electronically March
30, 2001.

(p) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
2001 (File No. 0-25620) filed electronically August
13, 2001.

(q) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
2002 (File No. 0-25620) filed electronically August
14, 2002.

(r) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 2002 (File No. 0-25620) filed electronically
November 14, 2002.

(s) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
2003 (File No. 0-25620) filed electronically May 14,
2003.

(t) Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
2003 (File No. 0-25620) filed electronically August
14, 2003.

22

* Indicates management contract or compensation plan or
arrangement.

** Certain information contained in this document has
been omitted and filed separately accompanied by a
confidential request pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934.

23

(b) REPORTS ON FORM 8-K

The following Current Reports on Form 8-K were filed by the Company
during the quarter ended December 31, 2003:

Current Report on Form 8-K dated October 21, 2003 reporting under Item
9. "Regulation FD Disclosure" that on October 21, 2003 ASV issued a press
release announcing that it had issued an Acceleration Notice to Caterpillar Inc.
with respect to 1,040,069 shares of ASV's common stock issuable pursuant to the
warrant issued to Caterpillar. Under the terms of the Acceleration Notice,
Caterpillar has 75 days to exercise its rights to purchase 1,040,069 newly
issued shares of ASV common stock at $21.00 per share under its warrant with
ASV, or lose the ability to acquire those shares under the terms of warrant.

Current Report on Form 8-K dated October 22, 2003 reporting under Item
9. "Regulation FD Disclosure" that on October 22, 2003 ASV issued a press
release disclosing its financial results for the three and nine months ended
September 30, 2003. In addition, the press release contained information
regarding a conference call to be held October 22, 2003 during which ASV intends
to discuss its financial results for the three months ended September 30, 2003
and its outlook for the remainder of fiscal 2003.

Current Report on Form 8-K dated November 12, 2003 reporting under Item
9. "Regulation FD Disclosure" that on November 12, 2003 ASV issued a press
release announcing it had met the second Acceleration Goal and had issued a
second Acceleration Notice to Caterpillar Inc. with respect to 2,053,426 shares
of ASV's common stock issuable pursuant to the warrant issued to Caterpillar.
Under the terms of the Acceleration Notice, Caterpillar has 75 days to exercise
its rights to purchase 2,053,426 newly issued shares of ASV common stock at
$21.00 per share under its warrant with ASV, or lose the ability to acquire
those shares under the terms of warrant. This second Acceleration Notice is in
addition to the Acceleration Notice issued to Caterpillar on October 21, 2003
that related to 1,040,069 newly issued shares of ASV common stock at $21.00 per
share.

Current Report on Form 8-K dated December 18, 2003 reporting under Item
9. "Regulation FD Disclosure" that on December 18, 2003, ASV issued a press
release disclosing its initial financial outlook for 2004 which included a
discussion of its estimated anticipated net sales and anticipated earnings per
share for the twelve months ending December 31, 2004.

24

SIGNATURES

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

A.S.V., INC.

/s/ Gary Lemke Date: March 12, 2004
----------------------------------------------------------------- ---------------------
By: Gary Lemke, President

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

/s/ Gary Lemke Date: March 12, 2004
----------------------------------------------------------------- ---------------------
By: Gary Lemke, Chairman of the Board, President and Director
(Chief Executive Officer)

/s/ Jerome T. Miner Date: March 12, 2004
--------------------------------------------------------------- ---------------------
By: Jerome T. Miner, Vice-Chairman of the Board and Director

/s/ Edgar E. Hetteen Date: March 12, 2004
--------------------------------------------------------------- ---------------------
By: Edgar E. Hetteen, Vice President and Director

/s/ James Dahl Date: March 11, 2004
------------------------------------------------------------------ ---------------------
By: James Dahl, Director

/s/ Leland T. Lynch Date: March 9, 2004
---------------------------------------------------------------- ---------------------
By: Leland T. Lynch, Director

/s/ R. E. Turner, IV Date: March 15, 2004
----------------------------------------------------------------- ---------------------
By: R. E. Turner, IV, Director

/s/ Richard A. Benson Date: March 15, 2004
--------------------------------------------------------------- ---------------------
By: Richard A. Benson, Director

/s/ Thomas R. Karges Date: March 12, 2004
-------------------------------------------------------------- ---------------------
By: Thomas R. Karges, Chief Financial Officer

25

A.S.V., INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002

The accompanying notes are an integral part of these financial statements.

F-1

A.S.V., INC.

CONSOLIDATED STATEMENTS OF EARNINGS

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

The accompanying notes are an integral part of these financial statements.

F-2

A.S.V., INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

The accompanying notes are an integral part of these financial statements.

F-3

A.S.V., INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

The accompanying notes are an integral part of these financial statements.

F-4

A.S.V., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

DECEMBER 31, 2003, 2002 AND 2001

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company designs and manufactures track-driven, all-season vehicles and
related accessories and attachments in northern Minnesota. The Company sells
its products through Caterpillar dealers in the United States and Canada and
independent dealers in the United States, Canada, Australia, New Zealand and
Portugal.

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

Principles of Consolidation

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

Revenue Recognition

The Company generally recognizes revenue on its product sales when persuasive
evidence of an arrangement exists, delivery has occurred, the price is fixed
or determinable and collectibility is reasonably assured. The Company
generally obtains oral or written purchase authorizations from customers for
a specified amount of product at a specified price and considers delivery to
have occurred at the time of shipment.

Fair Value of Financial Instruments

The financial statements include the following financial instruments: cash
equivalents, short-term investments, accounts receivable, accounts payable
and bank debt. At December 31, 2003 and 2002, the fair values of these
financial instruments are not significantly different than their balance
sheet carrying amounts.

Cash Equivalents

All highly liquid temporary cash investments with an original maturity of
three months or less are considered to be cash equivalents. At December 31,
2003 and 2002, the Company had cash equivalents of approximately $24,828,000
and $3,992,000, which consisted of two money market accounts and various
tax-exempt cash equivalents. The fair value of these investments approximates
cost. The Company maintains cash balances at two financial institutions and,
at times, these balances may be in excess of federally insured limits.

Accounts Receivable

The Company grants credit to customers in the normal course of business.
Management performs on-going credit evaluations of customers. The Company
determines its allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, the Company's previous
loss history, the customer's current ability to pay its obligation to the
Company, and the condition of the general economy and the industry as a
whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.

Changes in the Company's allowance for doubtful accounts are as follows:

Included in accounts receivable at December 31, 2003 is a note receivable for
approximately $867,000 from a customer. The note bears interest at prime plus
2% (effective rate of 6.0% at December 31, 2003) and is due in 60 monthly
installments beginning February 2004.

Inventories

Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market. Adjustments of slow moving and obsolete
inventories to the lower of cost or market are provided based on historical
experience and current product demand.

Property and Equipment

Property and equipment are carried at cost. Depreciation is provided in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives. Buildings and improvements are
depreciated over periods of 18 to 39 years using the straight-line method.
Tooling, machinery and equipment, and vehicles are depreciated over periods
of 3 to 20 years using straight-line and accelerated methods. Accelerated
methods are used for income tax purposes.

F-5

A.S.V., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

DECEMBER 31, 2003, 2002 AND 2001

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Warranties

The Company provides a limited warranty to its customers. Provision for
estimated warranty costs are recorded when revenue is recognized based on
estimated product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual failure rates,
material usage or service delivery costs differ from the Company's estimates,
revisions to the warranty liability may be required.

Changes in the Company's warranty liability are as follows:

During the fourth quarter of 2001, ASV negotiated a warranty reimbursement
program with one of its suppliers, whereby the Company receives product at no
cost over a three-year period to compensate for warranty claims incurred
during 2001. During 2003 and 2002, ASV recognized a benefit of $47,200 and
$324,700 under this program, recorded as an offset to warranty expense.

Advertising Expense

Advertising is expensed as incurred. Advertising expenses were approximately
$388,000, $308,000 and $295,000 for 2003, 2002 and 2001.

Shipping and Handling Costs

The Company includes shipping and handling (including warehousing) costs
incurred in connection with the distribution of replacement parts in selling,
general and administrative expenses. Shipping and handling costs were
approximately $1,018,000, $838,000 and $832,000 for 2003, 2002 and 2001.

Research and Development

All research and development costs are expensed as incurred.

Employee Savings and Profit Sharing Plan

The Company has an employee savings and profit sharing plan which permits
participant salary deferrals up to certain limits set by law and provides for
discretionary Company contributions. The Plan covers employees who have
completed three months of service, as defined in the Plan, and who have
attained the age of 20 and one-half. Company contributions were approximately
$49,000, $42,000 and $41,000 for 2003, 2002 and 2001.

Stock-Based Compensation

At December 31, 2003, the Company has three stock-based compensation plans,
which are described more fully in Note I. The Company accounts for those
plans under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net earnings, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant.

The following table illustrates the effect on net earnings and earnings per
share if the Company had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation, using the
assumptions described in Note I, to its stock-based compensation plans.

F-6

A.S.V., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

DECEMBER 31, 2003, 2002 AND 2001

Net Earnings Per Common Share

Basic net earnings per share is computed by dividing net earnings by the
weighted average number of outstanding common shares. Diluted net earnings
per share is computed by dividing net earnings by the weighted average number
of outstanding common shares and common share equivalents relating to stock
options and warrants, when dilutive.

For the years ended December 31, 2003, 2002 and 2001, 966,890, 58,412 and
136,613 shares of common stock equivalents were included in the computation
of diluted net earnings per share. Options and warrants to purchase
11,166,939 and 11,229,876 shares of common stock with a weighted average
exercise price of $20.10 and $20.13 were outstanding at December 31, 2002 and
2001, but were excluded from the computation of common share equivalents
because they were anti- dilutive. There were no anti-dilutive options or
warrants outstanding at December 31, 2003.

Accounting Estimates

Preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, related revenues and expenses and disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from these estimates.

Reclassifications

Certain 2002 and 2001 amounts have been reclassified to conform to the 2003
presentation.

NOTE B - SHORT-TERM INVESTMENTS

Short-term investments consist primarily of a diversified portfolio of
taxable governmental agency bonds, which will mature in 2003. The Company
considers the investments as "available-for-sale." At December 31, 2003 and
2002, cost was equal to fair value and no amount was included as a separate
component of shareholders' equity.

NOTE C - INVENTORIES

Inventories consist of the following:

NOTE D - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

NOTE E - LINE OF CREDIT

The Company has a $10,000,000 line of credit agreement with a bank which is
due on demand or July 1, 2004. The interest rate is variable at prime less
one half percent (effective rates of 3.50% and 3.75% as of December 31, 2003
and 2002). As of December 31, 2003 and 2002, there were no advances on this
line of credit. Any advances made under this line of credit are secured by
accounts receivable and inventories. The agreement requires the Company to
maintain certain financial requirements including a minimum tangible net
worth level and a cash flow coverage ratio and restricts the Company from
paying cash dividends. Management expects to renew the agreement at
substantially the same terms and conditions.

F-7

A.S.V., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

DECEMBER 31, 2003, 2002 AND 2001

NOTE F - LONG-TERM LIABILITIES

Capital Lease Obligation

The Company leases its manufacturing and office building from the Grand
Rapids Economic Development Authority. The agreement provides for monthly
payments to 2018 and a balloon payment of approximately $543,000 in December
2006.

Future minimum lease payments under this capital lease obligation at December
31, 2003 are as follows:

2004 $ 228,134
2005 228,134
2006 766,132
2007 135,554
2008 135,554
Thereafter 986,424
------------

Total payments 2,479,932
Amounts representing interest
(weighted average 6.00%) 574,070
------------
Present value of minimum
capitalized lease payments $ 1,905,862
============

Asset cost related to the capital lease were $2,250,773 at December 31, 2003
and 2002. Accumulated amortization was $387,874 and $331,603 at December 31,
2003 and 2002.

NOTE G - PROVISION FOR INCOME TAXES

The provision for income taxes consists of the following:

Net deferred income tax assets (liabilities) relate to the tax effect of
temporary differences as follows:

The net deferred tax asset is included in other current assets in the
financial statements.

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

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

The Company generated and fully utilized research and development and foreign
tax credits during 2003, 2002 and 2001.

At December 31, 2003, the Company has federal and state net operating loss
carryforwards totaling approximately $4,488,000, which will begin to expire
in 2023.

NOTE H - TRANSACTIONS WITH CATERPILLAR

Prior to 2000, the Company entered into a Securities Purchase Agreement (the
Agreement) with Caterpillar Inc. (Caterpillar). Under the terms of the
Agreement, Caterpillar acquired, for an aggregate purchase price of
$18,000,000, one million newly issued shares of common stock and a warrant to
purchase an additional 10,267,127 newly issued shares of common stock at a
price of $21.00 per share. The warrant is exercisable at any time through
January 2009 subject to partial termination in the event the Company achieves
certain financial goals.

As a result of the Agreement, the board of directors was increased with two
members appointed by Caterpillar. In addition, the Agreement contains other
provisions which allow Caterpillar to maintain its proportionate potential
ownership and restricts acquisitions, loans and the payment of dividends,
without approval of at least one of the Caterpillar designated members of the
Board.

F-8

A.S.V., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

DECEMBER 31, 2003, 2002 AND 2001

NOTE H - TRANSACTIONS WITH CATERPILLAR - Continued

The Company and Caterpillar also entered into a Commercial Alliance Agreement
pursuant to which Caterpillar will provide the Company with access to its
dealer network and will make various management, financial and engineering
resources available to the Company. Included in the Commercial Alliance
Agreement is a Marketing Agreement which provides, among other things, that
the Company will pay Caterpillar a commission equal to 5% of the dealer net
price for complete machines and 3% for replacement parts and Company-branded
attachments for all sales made to Caterpillar dealers. In addition, if the
Company's products are sold under the Caterpillar brand name, the Company
will pay Caterpillar a trademark license fee equal to 3% of the net sales of
these products to Caterpillar dealers. The Company and Caterpillar also
entered into other ancillary agreements for the benefit of both companies.
Total commission expense under the agreement was approximately $88,000,
$215,000 and $464,000 in 2003, 2002 and 2001.

In October 2000, the Company completed another Securities Purchase Agreement
with Caterpillar in which Caterpillar purchased 500,000 newly issued shares
of common stock at a price of $18.00 per share.

The Company also amended its original warrant issued to Caterpillar reducing
the number of shares of Company common stock available for purchase under the
original warrant by 500,000 shares.

Also in October 2000, the Company and Caterpillar entered into an alliance
agreement to jointly develop and manufacture a new product line of
Caterpillar rubber track skid steer loaders called Multi-Terrain Loaders, or
MTLs. The product line, which includes five models, will feature
Caterpillar's patented skid steer loader technology and ASV's patented
Maximum Traction Support System (TM) rubber track undercarriage. The MTLs are
being sold through the Caterpillar dealer network. The Company is
manufacturing the undercarriage for use on four of the MTLs, with the
development of the undercarriage for the remaining model continuing.

In connection with this alliance agreement, the Company has agreed to
reimburse Caterpillar for their research and development costs related to the
MTLs as it pertains to the combination of the Caterpillar portion of the
machines with the Company's undercarriages. Total research and development
costs reimbursed to Caterpillar were approximately $1,000,000 and $1,904,000
in 2002 and 2001. There were no research and development costs reimbursed to
Caterpillar in 2003.

At December 31, 2003, Caterpillar owned approximately 14% of the Company's
outstanding common stock and had the right to own up to approximately 52% of
the Company's common stock (assuming the exercise of all outstanding options
and warrants) upon exercise of the amended warrant.

See Note N for January 2004 transactions relating to Caterpillar's ownership.

The Company purchases parts used in its products from Caterpillar. The
Company also reimburses Caterpillar for the salary related costs of two
Caterpillar employees that work on the Company's behalf. In addition, the
Company utilizes Caterpillar's warranty processing system to handle warranty
claims on its machines and reimburses Caterpillar for the warranty expense
incurred by Caterpillar dealers. During 2003, 2002 and 2001, total parts
purchases, salary and warranty reimbursements were approximately $3,994,000,
$7,140,000 and $6,877,000. Also, at December 31, 2003 and 2002, accounts
payable to Caterpillar were approximately $637,000 and $1,213,000.

When the Company ships undercarriages to Caterpillar it recognizes as sales
its cost for the undercarriage, as defined in the agreement, plus a portion
of the anticipated gross profit that Caterpillar expects to recognize upon
sale of the MTL to Caterpillar dealers.

During 2003, 2002 and 2001, 54%, 32% and 18% of net sales were made to
Caterpillar. At December 31, 2003 and 2002, the accounts receivable balance
due from Caterpillar was approximately $3,800,000 and $2,000,000.

NOTE I - SHAREHOLDERS' EQUITY

Stock Option Plans

The Company has two stock option plans under which up to 3,375,000 shares of
common stock are available for issuance. Stock options may be granted to any
employee, including officers and directors of the Company, and certain
non-employees, at a price not less than the fair market value of the
Company's common stock on the date of grant. Options generally expire seven
years from the date of grant. Options granted under the plans are generally
exercisable in annual installments, beginning one year from the date of
grant.

F-9

A.S.V., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

DECEMBER 31, 2003, 2002 AND 2001

NOTE I - SHAREHOLDERS' EQUITY - Continued

Director Stock Option Plan

The Company also has a stock option plan under which 450,000 shares of common
stock are available for issuance. Stock options may be granted to directors
who are not employees of the Company at a price not less than the fair market
value of the Company's common stock on the date of grant. Options expire five
years from date of grant and are exercisable in annual installments,
beginning one year from the date of grant.

The plan, as amended, provides that each eligible director shall receive an
option to purchase 3,000 shares on the first business day of each calendar
year.

Option transactions under the plans during each of the three years in the
period ended December 31, 2003 are summarized as follows:

At December 31, 2003, 2002 and 2001, 384,250, 1,145,937 and 1,205,501 options
were exercisable with a weighted average exercise price of $16.85, $14.00 and
$14.20 .

The following information applies to grants that are outstanding at December
31, 2003:

The weighted average fair values of the options granted during 2003, 2002 and
2001 are $4.52, $5.47 and $6.34. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes options-pricing model
with the following weighted-average assumptions used for all grants in 2003,
2002 and 2001; zero dividend yield; expected volatility of 44.8%, 40.8% and
47.3%, risk-free interest rate of 3.55%, 4.71% and 4.33% and expected lives
of 6.95, 6.85 and 6.79 years.

Shares Repurchased and Retired

In October 2003, the Company authorized a new stock buy-back program under
which the Company may repurchase up to $10,000,000 of its common stock on the
open market. The Company is funding the repurchases with available funds. The
repurchase program is not expected to last more than twelve months or until
such amount of common stock is repurchased. No shares had been repurchased
under this plan at December 31, 2003.

During 2003, 2002 and 2001, in connection with previous repurchase
agreements, the Company repurchased 13,100, 159,405 and 26,554 shares of
stock for total consideration of $247,801, $1,522,318 and $270,960.

F-10

A.S.V., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

DECEMBER 31, 2003, 2002 AND 2001

NOTE J - RELATED PARTY TRANSACTION

The Company uses a public relations firm that is affiliated with one of the
Company's directors. Total fees paid to this firm in 2003, 2002 and 2001 were
approximately $157,000, $188,000 and $202,000.

NOTE K - CONSULTING AGREEMENT

The Company entered into a five year consulting agreement and issued a ten
year warrant for the purchase of 337,500 shares of the Company's common stock
at $7.33 per share, expiring December 1, 2006. Subsequently, an individual
who contracts with the consulting firm was appointed a member of the Board of
Directors. The warrant was exercised in full in December 2003.

A fair value of $2.24 per share for this warrant was calculated on the date
of grant using the average of the Black-Scholes and Shelton options-pricing
models. Compensation costs were amortized over the life of the consulting
agreement of $138,600 in 2001. The compensation cost was fully amortized in
2001.

NOTE L - COMMITMENTS AND CONTINGENCIES

Lease Residual Guarantee

The Company has guaranteed certain residual amounts of equipment financed by
customers, generally 25% of the financed amount at the end of four years.
Should the Company be required to make this payment, it will take title of
the financed equipment. As of December 31, 2003, the total amount of future
residual payments the Company may be required to make in the event of
nonpayment by the customer was approximately $100,000. The Company believes
the value of the acquired equipment will equal or exceed the amount of
residual payment. Accordingly, the Company does not anticipate any loss will
be incurred should any residual payment need to be made.

Financing Guarantee

The Company has guaranteed the repayment of a $589,000 note made by one of
its customers to a non-affiliated finance company in payment of amounts owed
to the Company by this customer. The Company has computed the value of the
guarantee at $35,000 and has recorded this amount as a reduction of net sales
for the year ended December 31, 2003. A similar amount has been included in
other accrued liabilities at December 31, 2003.

NOTE M - MAJOR CUSTOMERS AND SUPPLIERS

Other than sales to Caterpillar (see note H), the Company had sales to one
unaffiliated customer in 2001, which accounted for 16% of sales. No other
customers accounted for over 10% of sales in the years presented. At December
31, 2001, the accounts receivable balance from the unaffiliated customer was
approximately $706,000.

While current vendors are meeting the Company's quality and performance
expectations, the Company believes alternative contract manufacturers are
available should the necessity arise. However, shortages of parts or the need
to change vendors could result in production delays or reductions in product
shipments that could adversely affect the Company's business. The Company
believes that a change in suppliers for the majority of component parts could
occur without material disruption of the Company's business. However, certain
parts, such as bogie wheels and rubber tracks, have a limited number of
vendors and a disruption in supply could affect the Company's ability to
deliver finished goods.

NOTE N - SUBSEQUENT EVENTS

In January 2004, the Company sold 1,040,069 shares of its common stock to
Caterpillar at $21.00 per share. These shares were subject to an acceleration
notice issued to Caterpillar by the Company in October 2003 in connection
with the warrant held by Caterpillar. (See Note H)

Also in January 2004, the Company repurchased the remaining warrant held by
Caterpillar for a cash payment of $7.2 million and the issuance of 500,000
shares of the Company's common stock. As a result of these transactions,
Caterpillar owns 24.9% of the Company's outstanding common stock.

F-11

A.S.V., INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

DECEMBER 31, 2003, 2002 AND 2001

NOTE O - SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)

The following table summarizes quarterly, unaudited financial data for 2003
and 2002.

F-12

(GRANT THORNTON LETTERHEAD)

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of A.S.V., Inc. as
of December 31, 2003 and 2002, and the related consolidated statements of
earnings, changes in shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of A.S.V., Inc. as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Minneapolis, Minnesota
February 20, 2004

F-13

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULE

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

In connection with our audit of the consolidated financial statements
of A.S.V., Inc. referred to in our report dated February 20, 2004, which is
included in the Annual Report of A.S.V., Inc. on Form 10-K for the year ended
December 31, 2003, we have also audited Schedule II for each of the three years
in the period ended December 31, 2003. In our opinion, this schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be set
forth therein.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota
February 20, 2004

S-1

A.S.V., INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

(A) Warranty credits issued

S-2

EXHIBIT INDEX