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

                                    FORM 10-K
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002     COMMISSION FILE NUMBER:  0-18259

                          AG-BAG INTERNATIONAL LIMITED
             (Exact name of registrant as specified in its charter)

           DELAWARE                                      93-1143627
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

           2320 SE AG-BAG LANE
            WARRENTON, OREGON                                        97146
(Address of principal executive offices)                          (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 861-1644

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                     Common Stock, par value $.01 per share
                                (Title of Class)

     Indicate  by check mark  whether the  registrant  (1) has 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.
                                           Yes      |X|     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 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. |X|

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2)
                                           Yes       _     No  |X|

     State the aggregate  market value of the voting and non-voting  equity held
by non-affiliates  computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common  equity,  as of
the last business day of the registrant's most recently  completed second fiscal
quarter: $3,159,817.

     The  registrant  has one  class of  Common  Stock  with  11,956,991  shares
outstanding as of March 5, 2003.

                      DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of the proxy  statement  for the  Registrant's  Annual  Meeting of
Stockholders  to be held June 2, 2003, are  incorporated  by reference into Part
III of this report.
<PAGE>
                          AG-BAG INTERNATIONAL LIMITED
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                          PAGE

<S>                                                                                                        <C>
PART I            ..........................................................................................2
     Item 1.      Business..................................................................................2
     Item 2.      Properties...............................................................................10
     Item 3.      Legal Proceedings........................................................................11
     Item 4.      Submission of Matters to a Vote of Security Holders......................................11
     Executive Officers of the Registrant..................................................................12

PART II           .........................................................................................13
     Item 5.      Market for Registrant's Common Equity and Related Stockholder Matters ...................13
     Item 6.      Selected Financial Data..................................................................15
     Item 7.      Management's Discussion and Analysis of Financial Condition and Results
                  of Operations............................................................................16
     Item 7A.     Quantitative and Qualitative Disclosures about Market Risk...............................27
     Item 8.      Financial Statements and Supplemental Data...............................................27
     Item 9.      Changes in and Disagreements with Accountants on Accounting and
                  Financial Disclosure.....................................................................27

PART III          .........................................................................................28
     Items 10. and 11.  Directors and Executive Officers of Registrant and Executive
                  Compensation.............................................................................28
     Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters......................................................................28
     Item 13.     Certain Relationships and Related Transactions...........................................28
     Item 14.     Controls and Procedures..................................................................29

PART IV           .........................................................................................30
     Item 15.     Exhibits, Financial Statement Schedules and Reports on Form 8-K..........................30
</TABLE>





















                                       1
<PAGE>
                                     PART I
                                     ------

         When used in this Annual Report,  the words  "believes,"  "anticipates"
and "intends" and similar  expressions are intended to identify  forward-looking
statements.  Such statements are subject to certain risks and uncertainties that
could  cause  actual  results to differ  materially  from those  projected.  See
"Factors  Affecting  Forward-Looking  Statements."  Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof.  The Company  undertakes no obligation to publicly  release any
revisions to these forward-looking statements that may be made to reflect events
or  circumstances  after  the  date  hereof  or to  reflect  the  occurrence  of
unanticipated events.

         Forward-looking  statements  contained  in this Form 10-K relate to the
Company's plans and  expectations  as to: timing of demand for bagging  machines
and bags; reductions in U.S. milk prices;  availability of credit in the farming
sector;  potential  purchases  of  the  Company's  bagging  machines,  bags  and
composting systems; anticipated inventory production; the level of acceptance of
the Company's new pre-season  order program for 2003; the  availability of trade
credit and working capital; consumer sentiment and health of the U.S. and global
economy;  the  Company's  dependence on the dairy  industry;  and the outcome of
pending litigation against the Company.  Readers are urged,  however,  to review
the factors  set forth in reports  the Company  files from time to time with the
Securities and Exchange Commission.

ITEM 1.  BUSINESS
-----------------

GENERAL
-------

     Ag-Bag  International  Limited (the "Company" or "Ag-Bag") was incorporated
as a New York  corporation  in  1989.  The  primary  operating  company,  Ag-Bag
Corporation,  a Nebraska  corporation,  was  incorporated  in 1978.  The Company
changed its name in 1990 from AB Holding  Group,  Inc.  to Ag-Bag  International
Limited. In 1994, in an effort to streamline and save  administrative  expenses,
two of the  Company's  operating  subsidiaries,  A.B.  Rental,  Inc.  and Ag-Bag
Corporation  were merged into the Delaware  subsidiary,  ABVIN  Merging Corp. On
January 1, 1995, the Company was merged into its Delaware  subsidiary  resulting
in the  reincorporation  of the Company in Delaware  and a change in its name to
Ag-Bag International Limited.

     The  Company  has  pioneered  an  alternate  method  of  storing  feed  for
livestock.  Traditional  methods of  storing  feed have  included  placing it in
bunkers,  pits, and silos or baling and stacking it. The Company's  method is to
store the feed in huge  plastic  bags of up to 500 feet in  length  and up to 14
feet in  diameter  by  tightly  stuffing  the feed  into the  bag.  The  Company
assembles  the machines  for  stuffing  the feed into the bags.  It has the bags
manufactured  to its  specifications  and then  folds and  distributes  the bags
through  its  dealer  network  and  directly  in an area  where a dealer  is not
present.  The  benefits of bagging the feed  include  reduced  cost,  additional
flexibility  in harvesting  and storing the feed,  enhanced  feed  quality,  and
relatively small capital requirements. The Company also sells ancillary products
that complement the Company's main line of bagging machines and bags.

     The  following  table  identifies  the revenue  from each product line that
accounted for more than 15% of total revenue over the last three years:

  Product                  2000                 2001                  2002
  -------                  ----                 ----                  ----
  Bags                      53%                  48%                   48%
  Machines                  39%                  43%                   44%
  Other                      8%                   9%                    8%
                           ----                 ----                  ----
  Net Sales                100%                 100%                  100%

                                       2
<PAGE>
     The  Company  expects  the use of bagging  as a means of silage  storage to
continue  to play a major role in the future  because the quality of stored feed
is better  than other known  competitive  methods,  allowing  farmers to be more
efficient and to produce dairy,  beef, sheep and pork products at a lower price.
The Company  believes the concept of bagging is one way in which  farmers can be
more profitable by reducing, or completely eliminating, the purchase of feed and
grain from outside sources.  Bagging enables the farmer to produce and store the
feed on the farm and provides easier access to the silage,  thereby allowing the
farmer to choose  the  quality of silage to feed at any given  time.  The bagged
feed has shown high quality, allowing for higher production.

     In 1994,  the Company  shipped its first orders to dealers in Japan,  Latin
America and Germany. The Company continues to sell worldwide in Asia, Australia,
New Zealand, Western and Central Europe and the Caribbean. Export sales from the
Company's  United  States  operations  were 6.4% of net sales for the year ended
December 31, 2002.

     In 1997,  the Company  formed a German  joint  venture in which the Company
owns a 50%  interest  and its German  dealer owns the  remaining  50%. The joint
venture folds and distributes  silage bags to the Company's  German and European
dealers.

     The Company is developing other uses for its bagging  technology.  In 1993,
the  Company  adapted  its bagging  machines  to permit  bagging of  compostable
organic matter in the Company's recyclable Tri-Dura(R) plastic bags. The Company
also has developed mobile and stationary plastic recovery units which enable the
Company to bail and pick up the recyclable Tri-Dura(R) plastic bags as a service
to its customers.

SEASONAL NATURE OF BUSINESS

     The core  business  of the  Company  is  historically  seasonal  due to the
harvest seasons in North America and Europe. The Company's machinery tends to be
purchased in anticipation  of the next harvest  season,  so most of the sales of
machinery  occur in the spring and summer.  This  requires  the Company to carry
significant  amounts  of  inventory  to  meet  rapid  delivery  requirements  of
customers.  Bag sales  tend to occur as the  harvest  season  approaches  in the
summer,  and during the harvest  season in the fall.  The Company  took steps to
counteract  some of this  seasonality  by  generating  sales  in  Latin  America
beginning in 1994 and in Australia and New Zealand in 1996.  In September  2002,
the Company took  additional  steps to counteract  seasonality by developing and
introducing a pre-season ordering program,  whereby the Company's dealer's place
their next year's annual product requirements order in advance.  This allows the
Company to know in advance its production  mix which in turn allows  leveling of
production and flexibility in customer shipments.

     Approximately 95% of the Company's business is concentrated in the Northern
Hemisphere  resulting in between 65-70% of the Company's revenue being generated
during the  spring  and  summer  (2nd and 3rd  Quarters).  The  following  table
outlines the percentage of revenue over the past three years by quarter:

         Quarter                2000              2001              2002
         -------                ----              ----              ----
         1st                    21%               15%               18%
         2nd                    31%               35%               37%
         3rd                    34%               35%               32%
         4th                    14%               15%               13%

                                       3
<PAGE>
FARM EQUIPMENT AND PRODUCTS
---------------------------

     INTRODUCTION.  Silage is made using the Ag-Bag(R)  system by storing forage
crops,  such as corn,  sorghum,  or alfalfa,  under anaerobic  (without  oxygen)
conditions in sealed Ag-Bag  Tri-Dura(R)  storage bags. The traditional  methods
for  making  silage  involve  storing  it  in  bunkers,  pits  or  silos.  Using
traditional methods,  there is a nutrient loss resulting from a reduction in the
moisture  content of the forage  before  storage.  The moisture  content must be
reduced to compensate for the high oxygen  content of the forage,  which results
from the  inability to pack the forage  tightly  enough.  When the forage is not
packed  sufficiently,  the silage  fermentation  process  produces too much heat
resulting  in an even  greater  loss of  nutrient  value than would occur if the
moisture  content were not reduced.  The loss of nutrient  value  results in the
need for additional food supplements or an increased volume of feed.

     The Ag-Bag(R)  system is an  alternative  to bunkers,  pits and silos.  The
Ag-Bag(R)  bagging  machines push the forage into huge  recyclable  plastic film
Tri-Dura(R) bags with sufficient  compaction to minimize the amount of oxygen in
the bag, which is then sealed tightly when filled.  As a result,  the forage can
be stored with significantly  higher moisture content.  The ability to store the
forage in this manner also reduces the time  required to cut,  prepare and store
the forage thus reducing the loss of nutrients and providing higher quality feed
for production within the farmers' herds.

     AG-BAG(R) FARM EQUIPMENT. The Company's principal line of farm equipment is
marketed under the trade name  "Ag-Bagger(R)."  The Ag-Bagger(R) is available in
three  versions  with a number of  optional  features.  Wide  ranges of optional
features are offered by the Company on its bagging machines in order to meet the
budget needs of the farmer.

     The smallest  version  consists of machines used to load forage into Ag-Bag
Tri-Dura(R)  storage  bags ranging in size from 8 to 10 feet in diameter and 100
to 200 feet in  length.  The  Company  first  introduced  this  version in 1987.
Dairymen use it primarily in smaller dairy and cattle  feeding  operations  with
herds averaging  about 50 head and by cattlemen  feeding up to about 300 head of
feeder cattle.  Most of these machines are powered by the power take-off unit of
a farm tractor and moved by a tractor or other farm vehicle.  In late 2002,  the
Company  introduced  its most basic model of its smaller  bagging  machine,  the
"Personal Bagger".  The retail price for these machines range from approximately
$19,500 to $49,000.

     In 1992, the Company introduced a medium-sized machine that can be operated
by the power take-off unit of a farm tractor or operated  independently  with an
optional  diesel  engine made by  Caterpillar  or Deere & Company.  This machine
allows  farmers to load forage into Ag-Bag  Tri-Dura(R)  storage bags ranging in
size from 9 to 10 feet in diameter  and 100 to 250 feet in length.  This machine
is  primarily  suitable for use by dairymen  with herds  ranging from 150 to 300
head and by cattlemen  feeding  between 300 and 800 head of feeder  cattle.  The
retail price for this machine ranges from approximately $74,000 to $209,500.

     The largest  version  consists of machines  that can be used to load Ag-Bag
Tri-Dura(R)  storage  bags ranging in size from 9 to 14 feet in diameter and 150
to 500 feet in length.  Primarily dairymen use these machines with herds ranging
from 300 to 2,000 head, by cattlemen with herds ranging from 800 to 15,000 head,
and by custom operators.  A super 12-foot Ag-Bagger(R) was developed in 1989 and
enhanced in 1995. In 2002,  the Company  introduced  its 14-foot  version of the
Ag-Bagger(R)  for use by very  large  dairy and custom  operators  and by cattle
feeding  operations with herds ranging from 15,000 to 25,000 head of cattle. The
larger  machines are available with optional diesel engines made by Caterpillar.
The retail price for the larger  machines range from  approximately  $110,000 to
$310,000.

                                       4
<PAGE>
     In response to a competitor's introduction of a cable-less machine in early
1995, the Company began research and  development on its own cable-less  machine
in early 1996.  The Company began  production of its own  cable-less  machine in
1997. In 1998, the Company  introduced its own cable-less bagging machine called
the HFC (Hydraulic Finger  Controlled)  Silage Bagger.  The introduction of this
machine was in response to what the Company  felt was a change in  direction  of
the industry  towards the  cable-less  machine  design and the latest in bagging
technology. In 1999, the Company continued to develop and improve its cable-less
bagging  machine by developing the Powered  Anchor Control (PAC) system,  and in
2000  introduced  its latest  version of the  cable-less  bagging  machine,  the
HYPAC(R)  (Hydraulic  Powered  Anchor  Control)  system.  The Company offers the
HYPAC(R) model in small,  medium-sized  and large-sized  bagging  machines.  The
retail  price for the  HYPAC(R)  machines  range from  approximately  $49,000 to
$310,000.

     The Company assembles and sells a separate line of related equipment called
the Ag-Bag  Flex-a-Tuber(R) with a retail price ranging from $11,500 to $18,000.
The Flex-a-Tuber(R)  permits farmers to store round-baled alfalfa,  sorghum, and
other forage in Ag-Bag Tri-Dura(R) storage bags. The round bale Flex-a-Tubers(R)
are made in two sizes to permit the bagging of 4 and 5 foot bales. The bales can
be stored in Ag-Bag Tri-Dura(R)  storage bags up to 200 feet in length. In 2002,
the Company began manufacturing this line of equipment on a made-to-order basis.

     The Company assembles and sells a separate line of related equipment called
the Square Bale Bagger, which retails for approximately  $23,500 to $31,000. The
Square Bale Bagger permits farmers to store square bales of alfalfa, sorghum and
other forage, two bales high in Ag-Bag Tri-Dura(R) flex storage bags. The Square
Bale Bagger permits the bagging of the bales in Ag-Bag  Tri-Dura(R) flex storage
bags of 7 to 10 feet in  diameter  and up to 200 feet in  length.  In 2002,  the
Company began manufacturing this line of equipment on a made-to-order basis.

     The Company  assembles  and sells the  Ag-Bag(R)  Pro-Grain  Bagger,  which
retails  for  approximately  $31,000.  This  machine is similar in design to the
smallest  Ag-Bagger(R)  machines  but has been  adapted to permit the storage of
grains,  such as corn, rice, wheat and soybeans,  as well as other products,  in
Ag-Bag  Tri-Dura(R)  storage  bags.  The machine  permits the grain to be bagged
without  damaging  the  kernel.  After the grain is bagged and  sealed,  it will
retain the necessary quality for human consumption.

     The Company also  assembles  and sells the Mighty  Bite(R)  front-end  load
bucket.   This   revolutionary   bucket   replaces  the   conventional   bucket.
Hydraulically  operated, the Mighty Bite(R) closes tightly around material, thus
eliminating spillage and increasing load capacity due to compaction. The Company
manufactures the Mighty Bite(R) in sizes ranging from one-half cubic yard to two
cubic yards with a retail price ranging from $3,300 to $4,900.

     The Company adapted its Ag-Bag(R)  bagging  machines for use in large-scale
"in-vessel"  composting  of  organic  matter.  The  bagging  machine  is used in
conjunction with a shredder that shreds the organic material,  which is then fed
into  the  bagging  machine  that  bags  the  compostable   matter  into  Ag-Bag
Tri-Dura(R)  storage bags.  An air blower is attached to the bag and  circulates
air through the bag during the composting process. The Ag-Bag(R) compost bagging
machines retail for between $49,500 to $130,000.

     AG-BAG TRI-DURA(R) STORAGE BAGS. The Ag-Bag Tri-Dura(R)  disposable storage
bags range in size from 8 to 14 feet in  diameter  and 100 to 500 feet in length
and are made of  extruded  plastic.  Rolls of plastic  are  manufactured  to the
Company's  specifications.  The plastic contains special  stabilizers to protect
the bags from deterioration due to exposure to weather and the sun's ultraviolet
rays.  Once a  Tri-Dura(R)  bag is used,  it may be  recycled  or disposed of in
another manner, but may not be reused.

     The  Company  contracts  for the  manufacture  of,  and  sells  Tri-Dura(R)
three-ply bags with a white exterior and black interior  intended for storage of
silage up to 24 months.  The retail price of the bags ranges from  approximately
$225 to $2,100.  The  manufactured  plastic  rolls are shipped to the  Company's

                                       5
<PAGE>
plant in Blair,  Nebraska,  where  they are  folded  and  packed  for sale using
proprietary  folding  techniques.  The proprietary bag folding techniques reduce
bag folding time and allow the bags to uniformly unfold when being filled, which
thereby reduces operational delays.

     AG-BAG(R)  INOCULANT.  The  Company  markets a liquid  inoculant  and a dry
powder inoculant under the trade name Ag-Bag Plus!(R). The inoculant is added to
the  forage  or the  round or square  bales  during  bagging.  It  enhances  the
fermentation  process  for  making  silage in bags,  bunkers,  pits and silos by
substantially  shortening the time  necessary for the creation of the silage.  A
liquid inoculant was developed in 1989 by a Company supplier and introduced into
the market in 1990.  The dry inoculant is produced  from a  proprietary  formula
owned by the  Company  and  developed  by Larry R. Inman and Walter L. Jay.  See
"Executive  Officers of the  Registrant."  The Company also markets an inoculant
designed specifically for composting.

MARKET SIZE
-----------

     The market  for  Ag-Bag(R)  machinery  and  Ag-Bag  Tri-Dura(R)  recyclable
storage  bags is primarily  in the dairy and beef cattle  industries.  Silage is
used most often as dairy and beef animal  feed.  It is also used by farmers to a
lesser  extent to feed hogs and sheep.  In 2001,  over 253 million tons of corn,
alfalfa,  sorghum,  silage,  and hay were  harvested  by United  States  farmers
according to the AG IQ Handbook XIX published in 2002 by Agricom,  Inc. (the "AG
Handbook").  Based on AG Handbook  statistics,  the Company estimates that there
are approximately 150,000 dairy, beef, hog, and sheep farms in the United States
that are  potential  customers  for Ag-Bag(R)  farm  equipment  and  Tri-Dura(R)
storage bags; and that only about 8-12% of this group are actually using storage
bags made by the Company or its  competitors.  It further  estimates  that about
50-55% of the bagging industry  customers  purchase silage storage bags from the
Company.  In  addition  to the  U.S.,  the  Company  believes  there  is a large
population of such farms in Canada,  Latin America,  Western and Central Europe,
Australia,  New Zealand,  Asia, and the Caribbean,  where the Company  currently
sells and  distributes its products,  and there is a large  potential  market in
other countries into which the Company may expand.

     The  Company  also  markets a system for  "in-vessel"  composting  which is
designed to  eliminate  odors and control  leachate  inherent  with  composting.
Composting is an alternative for disposing of or eliminating the large number of
organics  from  landfills.  The Company's  primary  focus is currently  directed
towards  municipalities,  private  composters,  military  bases,  zoos  and  the
Company's dairy and beef customers.  The Company currently estimates the size of
the compost  market  within  North  America to be over $2 billion a year.  Until
further  marketing  efforts are made outside North  America,  the Company cannot
estimate  with any  certainty  the foreign  market  size.  However,  the Company
believes that there is a large potential market in other countries into which it
may expand.  No assurance can be given that the  "in-vessel"  composting  system
will be accepted in either the domestic or foreign marketplace.

MARKETING
---------

     The Company markets its Ag-Bag(R) farm equipment, Tri-Dura(R) storage bags,
Ag-Bag  Plus!(R)  and other  inoculants  primarily  through a network  of United
States, Canadian, and international dealers. As of December 31, 2002, there were
59  dealers  serviced  by a  combined  total  of  22  regional  and  territorial
Company-employed  managers and sales support  coordinators.  Most of the dealers
market the entire Ag-Bag(R) line of farm equipment and products;  however,  some
dealers  sell  only  the farm  equipment  and  others  sell  only the  Ag-Bag(R)
inoculants. The Company also sells farm equipment, Tri-Dura(R) storage bags, and
inoculant  directly  to large  customers  in  states  where  there are no nearby
Ag-Bag(R)  dealers.  Beginning in 2002, the Company began focusing its marketing
efforts more on dealer  development and expanding its dealer network rather than
a focus towards direct  selling.  In September 2002, the Company also introduced
its new  pre-season  ordering  program for its  products,  whereby the Company's
dealers place their next year's annual product requirements order in advance.

                                       6
<PAGE>
     The Company  offers  customers the  opportunity  to finance the purchase of
Ag-Bag(R)  farm  equipment   through   unaffiliated   third  parties  who  offer
lease-purchase and wholesale financing.

     The Company  rents used  Ag-Bag(R)  bagging  machines to farmers in various
areas of the United  States.  The  rental  charge is based on the number of bags
purchased and filled with forage.

     Prior to December 31, 1997, the Company  offered a custom  bagging  service
through its subsidiary Ag-Bag Europe PLC in the United Kingdom. The Company sold
its subsidiary that had not been performing at a profitable level due to the BSE
(Mad Cow) problem within the British farming industry on December 31, 1997.

     The Company markets its composting  system through a sublicense that allows
the end user to use the  Ag-Bag(R)  compost  technology.  The  Company  plans to
establish a composting  dealer  network and develop a regional  and  territorial
sales force that will have expertise in  composting.  The timing for these plans
will depend on the pace of market acceptance of the Company's composting system.

     The Company is not dependent on any single customer or a few customers. The
loss of any  single  customer  would not have a material  adverse  effect on the
Company's financial condition or results of operations.

WEBSITE
-------

     The  Company  maintains  a  website  for use by its  customers,  containing
information about the Company, its products, and educational materials regarding
their use. The website address for Ag-Bag is http://www.ag-bag.com

ASSEMBLY AND MANUFACTURING
--------------------------

     AG-BAG(R) FARM  EQUIPMENT.  The Company buys some of its components for its
bagging  machines  from  various   manufacturers,   manufactures  the  remaining
components,  and  assembles  the  machines  itself.  The medium and large  sized
machines,  composting  machines,  HYPAC(R)  (cable-less)  machines,  Square Bale
Baggers, and  Flex-a-Tubers(R)  are all assembled at the Company's  headquarters
facility  in  Warrenton,  Oregon.  The smaller  machines  are  assembled  at the
Company's Blair, Nebraska plant. In 1999, the Company licensed its German dealer
to manufacture the mid-sized bagging machines for distribution within Europe.

     The Company  assembles  all of its machines in order to better  control the
quality of the farm  equipment.  This method  also  permits the Company to offer
customized  assembly for the end user of its equipment.  The Company can acquire
and install name brand manufactured components specified by the customer in lieu
of those ordinarily installed by the Company.

     AG-BAG TRI-DURA(R)  STORAGE BAGS. All of the three-ply  Tri-Dura(R) storage
bags are  manufactured  for the Company by a single  manufacturer.  The bags are
manufactured  to the Company's  specifications  using a stabilizer that protects
the  plastic  from  becoming  brittle  due to  exposure to weather and the sun's
ultraviolet  light  rays.  The  Tri-Dura(R)  plastic  bags are  made in  various
diameters based on bag orders  received by the Company.  The bags are shipped in
roll form to the Company's plant in Blair,  Nebraska,  where they are folded and
packaged for shipment.

                                       7
<PAGE>
     AG-BAG(R)  INOCULANTS.  The Company purchases on the open market the liquid
and  compost  inoculant.  The  Company  believes  that the  liquid  and  compost
inoculant  will be reasonably  available for purchase on the open market for the
foreseeable  future.  The dry inoculant is produced by the Company at the Blair,
Nebraska  plant  pursuant  to a  proprietary  formula  owned by the  Company and
developed  by Larry R. Inman and Walter L. Jay. See  "Executive  Officers of the
Registrant."

PRINCIPAL SUPPLIERS AND MANUFACTURERS
-------------------------------------

     The Company  purchases its Tri-Dura(R) rolls from a company owned by Steven
G. Ross ("Supplier")  pursuant to a supply agreement.  Steven G. Ross is a 14.9%
stockholder  in the  Company  and owner of a  company  which  competes  with the
Company's  Tri-Dura(R)  bags.  The supply  agreement  provides  that the Company
purchase  all of its plastic  rolls,  with  certain  exceptions,  from  Supplier
through at least December 31, 2007.  Thereafter,  either the Company or Supplier
may terminate the Supply  Agreement  upon two years' prior written  notice.  The
Company may purchase  plastic rolls from other  suppliers to the extent Supplier
is unable to supply plastic rolls under the Supply Agreement.  The Company has a
good relationship with Supplier,  and there are alternative  suppliers available
in the event Supplier is unable to provide rolls.

     Several  manufacturing  companies  manufacture the structural components of
the Company's  farm and composting  equipment in Oregon,  Nebraska and Iowa. The
Company  believes that  alternative  sources of supply are readily  available at
competitive  prices if the present sources of supply should become  unavailable.
The Company is not aware of any raw  materials  shortages or problems with these
suppliers that would adversely affect the Company's operations.

     The Company mixes the dry  inoculant at its Blair,  Nebraska  facility.  It
purchases the ingredients for the dry inoculant from a variety of suppliers. The
Company  purchases the liquid and compost  inoculant from a supplier,  who mixes
the inoculants to the Company's  specifications.  The Company believes there are
various other alternative sources of supply.

COMPETITION
-----------

     As the Company's  corporate  slogan,  the "Complete 1(R),"  indicates,  the
Company  believes  it is the  industry  leader  in the  manufacture  and sale of
complete  sealed feed farm  bagging  systems.  Ag-Bag is the only  company  that
manufactures the full line of equipment,  bags, and other accessories for sealed
feed farm management.  There are three competitors within the United States that
manufacture  similar  silage  bagging  machines.  There  are  also a  number  of
competitors  that  manufacture  bale wrapping  machines,  which compete with the
Company's Flex-a-Tuber(R).  The Company distinguishes itself in the market place
from other  manufactures  by providing a top quality  product,  better  warranty
protection, and customer service.

     The bag  market is highly  competitive.  The  Company  competes  in the bag
market by  providing  what the  Company  believes  to be a superior  product and
better warranty protection at a competitive price. The Company is also offering,
through central pickup and fixed locations in selected  geographic  areas of the
U.S., a recycling service for used Ag-Bag Tri-Dura(R) bags.

     The Company also competes with companies constructing bunkers and pits and,
to a lesser extent,  silos.  These competitors are mostly smaller companies that
build the  bunkers  and pits for the  farmer,  which the farmer  then fills with
forage using  available or rented farm  equipment  otherwise used in the farming
operation.  While these methods do not require bags or special equipment to fill
the  bags,  the  use of  these  alternatives  involves  a  significant  loss  of
flexibility  in storing  and  harvesting  the feed and an  overall  loss of feed
quality.  Flexibility is lost since  structures  must be permanently  placed and
significant

                                       8
<PAGE>
capital  requirements are necessary to expand them. The feed quality is inferior
because of the amount of oxygen remaining after the forage is placed in the pits
or bunkers.

     The  Company  competes  primarily  with  windrow  turner  manufacturers  in
composting.  Windrow turners compost by turning and watering static piles weekly
and require  containment  of odor and leachate.  These turners are comparable in
price to the Company's  compost  machines.  However,  the  Company's  composting
systems  offer the  advantage of being  self-contained,  thus  reducing odor and
requiring no turning or watering.  There are  approximately  50 manufacturers of
turners. In addition to the windrow turner  manufacturers,  the Company competes
with several companies that manufacture "in-vessel" systems, such as burners and
incinerators for large projects, which generally cost from $1 to $15 million.

     In addition to the current competition,  national competitors may emerge if
the bagging  equipment and storage bag markets continue to grow. These potential
competitors  include  large  farm  equipment  manufacturers  and large  chemical
companies who might decide to manufacture and sell the storage bags.

     The  Company  competes  in its product  markets  primarily  on the basis of
product  quality,  warranty  protection,  and  customer  service.  Some  of  its
competitors are larger and have greater  financial,  marketing,  technical,  and
other resources than the Company.

BACKLOG
-------

     The dollar amount of backlog  orders of the Company that are believed to be
firm as of March 1, 2003, was approximately $12,400,000,  compared to $3,400,000
on March 1, 2002, a 264.71%  increase.  Backlog for 2003 is considerably  higher
than 2002 as a result of the  introduction of the Company's new pre-season order
program,  whereby the Company's  dealers place their next year's annual  product
requirements  order in advance by each October 1st. The Company  introduced this
new program in September 2002 for the 2003-ordering  season.  Backlog,  however,
may not be a meaningful  indicator of future sales. This backlog is seasonal and
is reasonably expected to be filled within the current fiscal year.

RESEARCH AND DEVELOPMENT
------------------------

     During 2002, the Company focused  research and development  expenditures on
testing a newer design of its larger-sized  silage-bagging  machine, in addition
to further  compost  machine  modification  and  development.  The Company  also
completed  research  on various  projects  undertaken  regarding  new silage and
nutritional studies of bagged feed and their effects on animal production during
the year. The Company also  continues with ongoing  research and testing in this
area as well.

ENVIRONMENTAL MATTERS
---------------------

     Compliance with federal,  state and local laws and  regulations  regulating
the discharge of materials into the  environment,  or otherwise  relating to the
protection of the environment, had no material effect upon capital expenditures,
earnings, or competitive positions of the Company during the year ended December
31, 2002.

PATENTS AND TRADEMARKS
----------------------

     The Company  has basic and  improvement  patents in the U.S.,  as well as a
number of patents pending, that encompass machines,  bags and systems for silage
bagging, grain bagging, and hay/straw bale bagging.  Corresponding  applications
have or will be filed in selected foreign  countries.  In addition,  proprietary
rights in the bagging of compost  have been and are being  developed  in the U.S
and in selected foreign countries.

                                       9
<PAGE>
     The Company's  patents on its basic  bagging  machine have been found to be
valid and have been  successfully  defended  in prior  litigation.  The  Company
believes  that it has  developed  its  position in the  industry  partially as a
result of  protection  provided  by these  patents.  The  Company  also owns the
proprietary  formula for making the dry inoculant  marketed under the trade name
Ag-Bag  Plus!(R),  which was developed by Larry R. Inman and Walter L. Jay. (See
"Executive Officers of the Registrant")

     The  names  Ag-Bag(R),  Ag-Bag  Plus!(R),   Bale-Bag(R),   Flex-a-Tuber(R),
Flex-a-Tube(R),  ABCTI System(R),  Mighty Bite(R),  Tri-Dura(R),  and the symbol
"AB"(R) are all  registered  as  trademarks  with the United  States  Patent and
Trademark Office.

     The Company believes that its color scheme and trademarks are well known in
the  industry,  are an important  part of its  business,  and give the Company a
competitive advantage.

EMPLOYEES
---------
     On December 31, 2002, the Company had 91 full-time  employees.  The Company
employs  approximately 130 people during its busy season.  None of the Company's
employees are represented by a union, and the Company believes that its employee
relations are good.

FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                             (In thousands)
                                                                         Year Ended December 31

                                                                 2000             2001              2002
                                                                 ----             ----              ----
Sales to unaffiliated customers:
<S>                                                              <C>              <C>               <C>
         United States                                           $29,421          $26,888           $25,445
         Canada                                                    1,280            1,030             1,148
         Germany                                                     441              445               275
         Latin America/Mexico                                        195               89               113
         Other foreign countries                                     109              248               202
                                                                 -------          -------           -------
                                                                 $31,446          $28,700           $27,183

Sales to affiliated customers:
         Officers and Directors                                        5                8                 6
                                                                 -------          -------           -------
Total                                                            $31,451          $28,708           $27,189
                                                                 -------          -------           -------
</TABLE>

Substantially  all the  Company's  assets  are  located  in the  United  States.
Reference is also made to the Selected Financial Data at Item 6.

ITEM 2.  PROPERTIES
-------------------

     In early 1990, the Company began  occupying its 30,000 square foot facility
located in Warrenton, Oregon. This facility serves as a warehouse and houses the
major  portion of its silage  bagging  equipment  manufacturing.  The  Company's
administrative  offices are also located  there.  Management  estimates that the
manufacturing  at the  Warrenton  plant is  currently  at  approximately  65% of
capacity.  The Company  occupies  the land  pursuant to a lease that  expires in
2015.

     The Company owns facilities in Blair,  Nebraska,  where the Company:  folds
and  packages  its  Tri-Dura(R)  feed  storage  bags;  prepares and packages its
proprietary   inoculant;   and,  assembles  its  smaller  bagging  machines  and
warehouses  products.  The Blair,  Nebraska facility consists of three buildings

                                       10
<PAGE>
comprising   approximately   70,000  square  feet.   Management  estimates  that
manufacturing  at the  Blair  facility  is  currently  at  approximately  70% of
capacity.

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     The Company is one of three  defendants named in two purported class action
lawsuits,  S&S Forage & Equipment Co., Inc. v. Up North Plastics,  et al., filed
February 5, 1998, and Mr. and Mrs. Donald L. Steward v. Up North Plastics,  Inc.
et al.,  filed  September 29, 1999,  both alleging  conspiracy to fix prices and
sales quotas involving silage bag manufacturers and vendors. Class certification
has been  denied in the S&S  Forage  case.  The  defendants  briefed  and argued
motions for summary  judgment in both cases,  which the court  denied under both
cases.  In June 2002,  the U.S.  District  Court for the  District of  Minnesota
dismissed,  in its  entirety,  the Mr.  and Mrs.  Donald L.  Steward v. Up North
Plastics,  Inc.  et al.  case based upon the  plaintiffs'  request to the court.
Furthermore, the plaintiffs in the remaining S&S Forage individual claim filed a
motion before the court  appealing  the May 2000 denial of class  certification.
The defendants  responded  accordingly to the court.  In November 2002, the U.S.
District Court for the District of Minnesota denied the plaintiffs'  motion.  If
the  plaintiffs  were to obtain a  judgment  against  the three  companies,  the
Company could be held jointly and severally  liable.  The Company  believes that
the  remaining  plaintiffs'  individual  claim has no merit,  and the Company is
vigorously defending itself against this claim. The Company continues to believe
that the outcome of the  litigation  will not have a material  adverse impact on
its  financial  condition  or results of  operations.  (See  "Factors  Affecting
Forward-Looking Statements.")

     The  Company  is one of three  defendants  named in a  purported  breach of
contract and product  warranty  lawsuit,  Kevin Sustrik v. Alberta  Ag-Bag Ltd.,
Ag-Bag  International  Ltd.,  and Jim Rakai,  filed June 7, 2000.  The plaintiff
alleged breach of contract and breach of product warranty  relating to a bagging
machine  purchased by the plaintiff  and sought  monetary  damages.  The Company
settled with the plaintiff May 1, 2002;  which  settlement is currently  pending
before the Court of Queen's Bench of Alberta,  Canada.  (See "Factors  Affecting
Forward-Looking Statements.")

     The Company is a defendant in an alleged patent infringement lawsuit, Versa
Corporation v. Ag-Bag  International  Ltd., filed October 30, 2000 in the United
States  District  Court for the  District of Oregon.  The claim  alleges  patent
infringement  upon Versa's U.S.  Patent Nos.  5,799,472;  5,894,713;  5,345,744;
5,426,910; and 5,452,562 relating to a bag pan and density control patent for an
agricultural feed bagging machine and composting method patents. Plaintiff seeks
monetary  damages.  On April 2, 2002,  the  defendant was granted its motion for
summary  judgment in the bag pan matter.  The court  concluded that there was no
infringement.  Plaintiff has appealed this decision,  which is currently  before
the United States District Court for the District of Oregon. The density control
matter currently  remains in settlement  negotiations.  In the composting method
patent matter,  the Company  counter-claimed  for a  determination  that Versa's
patents  are invalid  and for  infringement  of the  Company's  U.S.  Patent No.
5,461,843. Versa recently filed a formal stipulation with the court conceding it
cannot prove  infringement under the court's patent claim  construction,  and is
seeking  leave to appeal that  decision.  This matter is scheduled  for trial in
June 2003 and further  pre-trial  procedures  are  pending.  The Company  denies
Versa's  allegations and is vigorously  defending  itself against the claim. The
Company  believes  that the outcome of the  litigation  will not have a material
adverse  impact on its  financial  condition  or  results  of  operations.  (See
"Factors Affecting Forward-Looking Statements.")

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

     During the fourth  quarter of 2002, no matters were  submitted to a vote of
security holders.

                                       11
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------

     The executive officers of the Company, their respective ages as of March 1,
2003,  business  experience,  and the period for which they have  served are set
forth below. The Board of Directors at the first meeting  following the start of
the new calendar year elects the executive officers annually.  Officers serve at
the  discretion  of the  Board of  Directors.  Beginning  in 2003,  the Board of
Directors voted to separate the position of Chief Executive Officer and Chairman
of the Board. As a result,  Michael J. Schoville was promoted to Chief Executive
Officer from his former position of Chief Operating Officer.


      NAME                     AGE                           POSITION
      ----                     ---                           --------
Michael J. Schoville           52            Chief   Executive   Officer  (since
                                             2003);   Chief  Operating   Officer
                                             (2002); Credit Development Manager,
                                             John  Deere   Credit   (1986-2001);
                                             Sales  Manager,  John Deere Company
                                             (1973-1986).

Larry R. Inman                 52            Chairman  of the Board  (1990-2000;
                                             since   2002);   President  of  the
                                             Company    (since   1993);    Chief
                                             Executive   Officer    (1990-2002);
                                             President of Ag-Bag Corporation
                                             (1984-1989)       and      Chairman
                                             (1989-1994)  of Ag-Bag  Corporation
                                             (former subsidiary).

Michael R. Wallis              38            Chief   Financial   Officer  (since
                                             1993) and Vice President of Finance
                                             (since  1992),   Treasurer   (since
                                             1996);  Manager,  Yergen  and Meyer
                                             (regional      accounting     firm,
                                             1986-1992).

Arthur P. Schuette             63            Vice President, Sales (since 1991);
                                             Treasurer     of    the     Company
                                             (1990-1991)      and      Treasurer
                                             (1983-1991)  of Ag-Bag  Corporation
                                             (former subsidiary).

Lou Ann Tucker                 49            Secretary   (since   1996),    Vice
                                             President,   Administration  (since
                                             1989),  and Treasurer  (1991-1996);
                                             Executive Treasurer  (1988-1994) of
                                             Ag-Bag     Corporation      (former
                                             subsidiary);    co-owner   of   LGJ
                                             Livestock,  Astoria,  Oregon (horse
                                             and cattle ranch, since 1980).

Walter L. Jay                  42            Vice    President,    Manufacturing
                                             (since  1989);  Manager  of  Blair,
                                             Nebraska  Plant  (since  1980);  KW
                                             Trucking (1984-1987).

                                       12
<PAGE>
                                     PART II
                                     -------

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

         The Company's  Common Stock began trading publicly on January 17, 1990,
and was  approved for  quotation  on Nasdaq on April 24, 1990,  under the symbol
"AGBG." In 1997, the Nasdaq listing  requirements were  substantially  expanded.
The Company does not  currently  qualify under the more  stringent  requirements
because the price at which its Common Stock is trading is below the $1 per share
minimum.  The Company was formally  notified on January 13, 1999 that its Common
Stock was delisted from quotation on The Nasdaq  SmallCap  Market for failure to
meet the new listing  requirements.  The Company's Common Stock is now quoted on
the OTC Bulletin Board.

         As of March 1, 2003, there were  approximately 320 holders of record of
the Company's Common Stock. The Company estimates there are approximately  1,700
beneficial holders of the Company's Common Stock. The following table sets forth
the  range of high and low bid  prices  of the  Company's  Common  Stock for the
quarters  indicated  through  the fourth  quarter of 2002 as reported on the OTC
Bulletin Board:

Calendar Year                                         High Bid           Low Bid
-------------                                         --------           -------
2001:
----

First quarter                                             $.39              $.30
Second quarter                                            $.40              $.23
Third quarter                                             $.38              $.21
Fourth quarter                                            $.32              $.20

2002:
----

First quarter                                             $.33              $.17
Second quarter                                            $.58              $.30
Third quarter                                             $.51              $.32
Fourth quarter                                            $.32              $.18

----------------------------------

The quotations reflect inter-dealer prices,  without retail markups,  markdowns,
or commissions and do not necessarily represent actual transactions.

DIVIDENDS
---------

     The  Company  has not paid any  dividends  on its  Common  Stock  since its
inception,  and the Board of Directors  does not  anticipate  declaring any cash
dividends on its Common Stock in the foreseeable  future.  The Company currently
intends to  utilize  any  earnings  in its  business.  The  Company  may not pay
dividends on Common Stock pursuant to certain loan agreements, or while it is in
arrears in dividends on its preferred stock.



                                       13
<PAGE>
UNREGISTERED SECURITIES
-----------------------

      The Company has issued the following  unregistered  securities  during the
year ended December 31, 2002:
<TABLE>
<CAPTION>
------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
                                                                   Name of
                                  Title and Amount of             Principal
                                        Securities              Underwriter/         Name or Class of
                                  Granted/Exercise Price        Underwriting            Persons who
                                       if Applicable            Discounts or        Received Securities     Consideration
        Date of Grant                                            Commissions                                   Received
------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
<S>                               <C>                         <C>                   <C>                  <C>
      January 22, 2002              30,000 Options for               N/A              Mike Schoville              $0
                                   Common Stock/$.25 per
                                   share(1)
------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
      January 22, 2002              100,000 Options for              N/A               Non-employee               $0
                                   Common Stock/$.25 per                                 Directors
                                   share(2)
------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
        June 3, 2002                20,000 Options for               N/A               Non-employee               $0
                                   Common Stock/$.49 per                                 Directors
                                   share(2)
------------------------------ -- ------------------------ -- ------------------ -- -------------------- ---------------------
</TABLE>


     The above-unregistered  securities were granted in reliance on an exemption
from the  registration  requirements  of the  Securities Act of 1933, as amended
("Act")  under  Section 4(2) of the Act and/or under the "bonus  stock/no  sale"
interpretive position of the Securities and Exchange Commission.

















---------------------------
(1) Granted  under  Incentive  Stock  Option Plan. Option  vests  10,000  shares
    1/22/03, 10,000 shares 1/22/04 and remaining 10,000 shares 01/22/05.
(2) Granted  under   Non-employee  Director  Stock  Option  Plan.  Options  vest
    according to terms of plan.

                                       14
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

     The  following  table sets forth  financial  data  derived from the audited
financial statements of the Company for the years ended December 31, 1998, 1999,
2000, 2001 and 2002. This selected  financial data should be read in conjunction
with the audited  financial  statements  of the  Company  and the related  notes
thereto and with  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" included elsewhere in this report on Form 10-K.
<TABLE>
<CAPTION>
                                                                 (In thousands, except per share data)
                                                                       Year Ended December 31,
                                                                       -----------------------
                                                1998            1999            2000         2001          2002
Statement of Operations Data:                   ----            ----            ----         ----          ----
<S>                                          <C>            <C>             <C>            <C>           <C>
Net Sales                                        $ 27,710      $ 32,687      $ 31,451      $ 28,708       $ 27,189
Cost of Sales                                      20,800        25,085        24,800        22,947         22,121
                                                   ------        ------        ------        ------         ------

Gross Profit from Operations                        6,910         7,602         6,651         5,761          5,068

Selling and Administrative Expenses                 5,470         6,273         5,878         6,067          6,237
Research and Development Expenses                     150           324           136           214            220
                                                   ------        ------        ------        ------         ------

Income (Loss) from Operations                       1,290         1,005           637          (520)        (1,389)
Other Income (Expense)                                (64)          (30)         (123)          123            189
                                                   ------        ------        ------        ------         ------

Income (Loss) before Provision for
  Income Taxes                                      1,226           975           514          (397)        (1,200)

Provision (Benefit) for Income Taxes                  422           327            (8)         (233)          (536)
                                                   ------        ------        ------        ------         ------

Net Income (Loss)                                  $  804        $  648        $  522        $ (164)        $ (664)
                                                   ------        ------        ------        ------         ------
</TABLE>

<TABLE>
<CAPTION>
                                                                  (In thousands, except per share data)
                                                                          Year Ended December 31,
                                                                          -----------------------
                                                1998            1999            2000         2001          2002
                                                ----            ----            ----         ----          ----

Basic Earnings per Share:
<S>                                            <C>             <C>             <C>          <C>           <C>
  Net Income (Loss)                            $ .06           $ .05           $ .04        $(.02)        $(.06)
                                               -----           -----           -----        ------        ------
Diluted Earnings per Share:
  Net Income (Loss)                            $ .06           $ .05           $ .04        $(.02)        $(.06)
                                               -----           -----           -----        ------        ------

Weighted Average Shares:
  Basic                                       12,062          12,062          12,062       12,002        11,957
                                              ======          ======          ======       ======        ======
  Diluted                                     12,062          12,062          12,062       12,002        11,957
                                              ======          ======          ======       ======        ======
</TABLE>




                                       15
<PAGE>
<TABLE>
<CAPTION>
                                                              (In thousands, except per share data)
                                                                     Year Ended December 31,
                                                                     -----------------------
Balance Sheet Data:
                                                                            December 31,
                                                                           -------------
                                                1998            1999            2000            2001            2002
                                                ----            ----            ----            ----            ----
<S>                                          <C>             <C>             <C>             <C>             <C>
Working Capital                              $ 6,818         $ 7,156         $ 7,387         $ 6,456         $ 5,087

Current Assets(1)                              9,391           9,983          10,758           9,795           7,865

Total Assets(1)                               13,820          14,575          15,727          14,996          13,349

Current Liabilities(2)                         2,573           2,827           3,371           3,339           2,778

Long-term Debt(2)                              2,210           2,121           2,266           1,822           1,459

Total Stockholders' Equity(3)                  9,037           9,627          10,090           9,835           9,112
</TABLE>


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

CRITICAL ACCOUNTING POLICIES
----------------------------

     The Company's  significant  accounting  policies are described in Note 1 to
the  financial  statements  included  in Item 15 of this form 10-K.  The Company
believes its most critical  accounting  policies include inventory  obsolescence
reserves, allowance for doubtful accounts,  accounting for warranty reserves and
accounting for income taxes.

      The $731,322  estimate for inventory  obsolescence  reserves was developed
using  inventory-aging  reports for finished  goods,  combined  with  historical
usage, and forecasted usage and inventory shelf life. The Company's estimates of
market value incorporate projections of future sales volume by product class. In
estimating  the market  value of parts  inventory  items,  the  Company  reviews
current  inventory  levels  in  relation  to sales  forecasts  and  adjusts  the
valuation reserve accordingly.  For the remaining  categories of inventory,  the
Company  establishes  a  reserve  balance  based on the  aging  of the  specific
inventory items. As trends in these variables change, the percentages applied to
the inventory aging categories are updated.

     The $203,595  estimate of allowance for doubtful accounts is comprised of a
specific  account  analysis  and a  general  reserve.  Accounts  where  specific
information  indicates a potential  loss may exist are  reviewed  and a specific
reserve  against  amounts due is recorded.  As  additional  information  becomes
available such specific  account reserves are updated.  Additionally,  a general
reserve is applied based upon historical collection and write-off experience. As
trends in historical  collection and write-offs  change,  the general reserve is
updated.

     The  $177,384  estimate for  warranty  reserve is developed  based upon the
estimated  future costs to be incurred  under the  provisions  of the  Company's
warranty agreements on its bags and machines. The Company reviews its historical
warranty  expense and current  sales trends in specific  products  covered under
warranty, and reserves are updated as trends in these variables change.

--------------------------------
(1) Includes deferred taxes.
(2) Includes loans from shareholders and deferred taxes.
(3) Includes $696 of preferred stock.

                                       16
<PAGE>
      The  Company  accounts  for  income  taxes  under the asset and  liability
method.  Deferred tax assets and  liabilities  are recognized for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences  are expected to be recovered or settled.  Valuation  allowances are
established to reduce potential  deferred tax assets when it is more likely than
not that all or some  portion  of  potential  deferred  tax  assets  will not be
realized.

RESULTS OF OPERATIONS
---------------------

      The  following  table sets forth for the periods  indicated  certain items
reflected in the Company's statements of operations as a percentage of revenue:
<TABLE>
<CAPTION>
                                                                   Percentage of Total Revenue
                                                                     Year Ended December 31,

                                                1998            1999            2000            2001            2002
                                                ----            ----            ----            ----            ----
<S>                                             <C>             <C>             <C>             <C>             <C>
Net Sales                                       100%            100%            100%            100%            100%

Costs and Expenses:
  Cost of Sales                                  75%             77%             79%             80%             81%
  Selling and Administration                     20%             19%             19%             21%             23%
  Research and Development                       --               1%             --              --               1%
                                                ----            ----            ----            ----            ----

Income (Loss) From Operations                     5%              3%              2%            (1%)            (5%)
                                                ====            ====            ====            ====            ====
</TABLE>

YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------

      For the year  ended  December  31,  2002,  net  sales  decreased  5.29% to
$27,189,140  compared to $28,708,233 for the year ended December 31, 2001. Sales
were down for the year as a result of drought weather conditions  experienced in
much of the Midwest and upper-Midwestern  United States that greatly reduced the
summer alfalfa harvest for 2002. Additionally, milk prices continued their steep
decline,  which began during the second  quarter of 2002,  to record low levels,
causing  farmers  to become  cautious  on  purchasing  capital  equipment.  Also
contributing  to the decline was  continued  tightening in  agricultural  credit
availability, as a result of the depressed U.S. milk prices, coupled with rising
supplemental grain feed costs during the third quarter of 2002 brought on by the
drought conditions in the U.S.

      This is a shift from the  positive  trends  that could be seen moving into
the first quarter of 2002.  These  positive  trends  included  stabilizing  milk
prices,  continued  optimism that milk prices in the U.S. would remain above the
record  low  levels of the year 2000  throughout  2002 and  continued  easing of
credit by financial  institutions for the farming sector that,  coupled with the
interest rate  reductions of 2001,  allowed  farmers to be more  optimistic  and
resume capital expenditures.  Sales were down for the year despite this positive
sentiment seen during the first quarter of 2002,  which began eroding during the
second  quarter and continued  throughout  the  remainder of 2002.  Supplemental
grain feed costs  remained  low during  the first two  quarters  of 2002,  which
tended to improve the availability of farm operating funds.  However, this trend
reversed during the third quarter as discussed above.  Throughout  2002,  strong
competition  in the silage bag market  continued,  as farmers  look for the most
economical bag, with lesser  consideration to overall quality,  customer service
and recycling of the used plastic silage bags offered by the Company.

                                       17
<PAGE>
      Machine  sale  revenue for the year  declined  3.61% and bag sale  revenue
declined 5.54% compared to 2001. Machine sale revenue for the year declined as a
result of a decrease in the Company's  smaller unit bagging machine sales during
the second and third  quarters  of 2002  compared  to 2001,  resulting  from the
drought and milk price conditions previously discussed. As a percentage of total
revenue for the year 2002, machine and bag revenue was unchanged.  (See "Item 1.
Business - General.")  Machine  sales are directly  tied to farmers'  income and
therefore  their ability to purchase new equipment.  The total number of bagging
machines that are in the  marketplace  drives the Company's bag and parts sales.
However,  there is not a perfect correlation between the Company's bag sales and
machine sales, as the Company's and competitors' bags are interchangeable on all
bagging  machinery  in the  industry.  The  Company  cannot  estimate  with  any
certainty the total number of machines or bags used in the industry.

      For the year ended  December  31, 2002,  the Company sold four  composting
systems in addition to compost bag sales,  generating  approximately $592,000 in
revenue,  compared to ten systems  sold and compost bag sales for the year ended
December 31, 2001,  generating  approximately  $1.3 million in revenue.  Compost
sales  were down for the year as a result of  current  economic  conditions  and
tight budgetary constraints for the Company's potential end users in the U.S.

      Although  the Company  sells its  products  primarily  through a worldwide
dealer network, certain sales are made directly to large volume customers when a
dealer is not present in the customer's  geographic market. For each of the last
three years,  the Company  estimates that direct sales make up between 33-38% of
total  sales.  The gross  margin  realized  on the  Company's  direct  sales are
typically  within 1-3% of those sales  realized  through  the  Company's  dealer
network.  However, various economic, volume and market factors in the geographic
area impact the ultimate margin. The Company  anticipates its sales mix to begin
to favor  more  dealer  sales in the  future as a result of its  change of sales
focus during the later half of 2002. (See "Item 1. - Business - Marketing.")

      The  Company  continued   evaluating  selling  its  bagging  machines  via
e-commerce and concluded that e-commerce is not currently a viable  distribution
avenue  for  its  machinery.   This  is  due  to  the  complexity  and  required
understanding  of the end user's  needs and farming  operation,  which  requires
discussion in an individual  setting with a Company  sales  representative.  The
Company  however,  will continue to evaluate  whether to offer some of its other
products via e-commerce at some point in the future.

      International  sales for the  Company in 2002 were down in  comparison  to
2001 due to continued  economic  uncertainty  affecting the  international  farm
economy.  International  sales to Canada and Latin America saw a slight increase
in 2002,  while  sales to  Germany  saw a  decline  for the year.  In 1999,  the
Company's  German  dealer  began  manufacturing  mid-sized  bagging  machines in
Germany under a license from the Company. Therefore, the Company no longer sells
mid-sized machines directly to its German dealer.  Instead, the Company receives
a royalty fee for each  mid-sized  machine sold by its German  dealer,  which is
recorded as other income.  In 1997, the Company formed a German joint venture in
which the Company owns a 50% interest and its German  dealer owns the  remaining
50%. The joint venture  distributes  bags to the  Company's  German and European
dealers.  The  Company's  earnings  from the joint venture are reported as other
income and are accounted for using the equity method. Approximately $3.7 million
in bag sales were  distributed  through the venture  during 2002, an increase of
12%, compared to approximately $3.3 million in bag sales for 2001.

      Gross profit as a percentage of sales  decreased  1.43% for the year ended
December 31, 2002 compared to 2001.  The decrease for the year was the result of
1) lower sales volumes to cover fixed  operating  overheads,  2) higher  machine
warranty costs (related largely to the Company's  large-sized bagging machines),
3) lower margins on the Company's used  equipment sold during the year,  and, 4)
lower  margins on bags in certain  highly  competitive,  high volume  geographic
areas.  The decrease was partially  offset by improved  margins on the Company's
"core" smaller bagging machines from production  improvements  made during 2002.
Also contributing to the decline for the year was the mix of machine

                                       18
<PAGE>
models  sold  during  the year,  which saw a 16%  increase  in unit sales of the
Company's larger-sized bagging machines.  Larger-sized bagging machines generate
a lower  overall  margin for the Company  than its "core"  small  sized  bagging
machine. (See "Item 1. Business - Farm Equipment and Products.")

      Selling  expenses for the year ended December 31, 2002 increased  1.61% to
$3,496,672  compared to  $3,441,197  for the year ended  December 31, 2001.  The
increase  for the year  was the  result  of  increased  advertising,  promotion,
meeting,  and  dealer  incentive  costs,  partially  offset by lower  personnel,
benefit,  and travel costs  associated with sales  personnel  reductions made in
2002 in  connection  with the shift more towards  selling  through the Company's
dealer  network  (See  "Item 1. - Business -  Marketing."),  coupled  with lower
commissions from lower sales volumes for the year.

      Administrative  expenses for the year ended  December  31, 2002  increased
4.32% to $2,739,811 compared to $2,626,268 for the year ended December 31, 2001.
The increase for the year was the result of higher  professional fees related to
ongoing  patent  litigation  and  increases in  administrative  salary,  general
office,  annual  meeting and insurance  expense,  partially  offset by lower bad
debt, employee benefit, and director fee expenses.

      Research and  development  expenses  for the year ended  December 31, 2002
increased 2.91% to $219,980 compared to $213,757 for the year ended December 31,
2001.  The increase for the year was the result of new research and  development
on testing a newer design of the Company's larger-sized  silage-bagging machine,
in addition to further compost machine modification and development. The Company
also completed research on various projects undertaken  regarding new silage and
nutritional studies of bagged feed and their effects on animal production during
the year, and is continuing research and testing in this area as well.

      Interest  expense for the year ended December 31, 2002 decreased 11.70% to
$314,068 compared to $355,686 for the year ended December 31, 2001. The decrease
for the year was the  result of lower  interest  rates on the  Company's  credit
line,  partially offset by the Company  utilizing a larger portion of its credit
facilities through the third quarter of 2002.

      Joint venture  equity and royalty  income for the year ended  December 31,
2002  increased  5.39% to  $315,196  compared  to  $299,065  for the year  ended
December 31, 2001.  The increase for the year was the result of increased  sales
from the joint venture during the year (see the  international  sales discussion
above) coupled with a slight increase in folding  royalties,  as plastic tonnage
folded in 2002 by the German joint venture increased approximately 12% from 2001
tonnage folded. (See "Item 8. Financial Statements and Supplemental Data".)

         The Company's  effective tax rate for the year ended  December 31, 2002
was (45%).  This was due to 1) the fact the Company  incurred a net loss for the
year, 2) the recognition of research and development credits associated with its
2002 activities,  3) the fact the Company's income from its German joint venture
is not  taxable  in the  United  States,  and  4)  the  extraterritorial  income
exclusion provisions of the current United States tax code. In 2002, the Company
generated net general business tax credit benefits of approximately $9,000.

      Net loss for the year ended  December 31, 2002 was $663,988  compared to a
net loss of $164,150 for the year ended  December 31, 2001.  The decline for the
year  was  the  result  of  lower  sales,  lower  gross  profit  resulting  from
competition  and mix of bagging  machinery  sold during the year,  coupled  with
increased  selling,  administrative,  and research expense,  partially offset by
higher income from the Company's German joint venture and lower interest costs.

                                       19
<PAGE>
YEARS ENDED DECEMBER 31, 2001 AND 2000
--------------------------------------

      For the year  ended  December  31,  2001,  net  sales  decreased  8.72% to
$28,708,233  compared to $31,451,150 for the year ended December 31, 2000. Sales
were down for the year, in spite of several  positive  trends that were starting
to be seen towards the latter half of the year.  During the first quarter of the
year,  milk  prices  in the U.S.  continued  at very  low  levels  coupled  with
continued  tightening of credit,  especially in the U.S.  farming sector,  which
caused farmers to remain cautious about  purchasing farm machinery and equipment
into the first half of the year,  in spite of  declining  interest  rates during
this period.  Continued intense competition in the silage bag and machine market
was seen  during  the  year,  as  farmers  look for the most  economical  bag or
machine, without considering overall quality,  customer service and recycling of
the used bags  offered by the Company.  Positive  trends that began to emerge in
the second half of the year included stabilizing milk prices, continued optimism
that milk  prices in the U.S.  will remain  above last year's  record low levels
through 2002 and continued  easing of credit by financial  institutions  for the
farming sector that,  coupled with the interest rate reductions of 2001, allowed
farmers to be more optimistic and resume capital  expenditures and purchase farm
equipment.  Throughout  2001,  supplemental  grain feed costs also remained low,
which tends to improve the availability of farm operating funds.

      Machine  sales  for the year were  flat and bag  sales  were  down  18.43%
compared to 2000.  The positive  trends  discussed  above can be seen in machine
sales during the second half of 2001.  Machine  sales at September 30, 2001 were
down 3% for the year in comparison to 2000.  This  difference was made up during
the last quarter of 2001 to bring  machine sales flat for the year in comparison
to 2000.  As a  percentage  of total  revenue  however,  machine  sales for 2001
increased 4% and bag sales for 2001 decreased 5% compared to 2000. (See "Item 1.
Business - General.")  Machine  sales are directly  tied to farmers'  income and
therefore  their ability to purchase new equipment.  Bag sales for the year were
down largely due to intense  competition in key dairy states, as farmers utilize
the most economical bag available without  considering  quality of the Company's
products and its recycling program. The Company's bag and parts sales are driven
by the total number of bagging  machines that are in the  marketplace.  However,
there is not a perfect  correlation  between the Company's bag sales and machine
sales, as the Company's and competitors' bags are interchangeable on all bagging
machinery in the industry.  The Company  cannot  estimate with any certainty the
total  number of machines or bags used in the  industry.  In addition to compost
bag  sales,  the  Company  sold ten  composting  systems  during  the year ended
December 31, 2001 (generating approximately $1.3 million in revenue) compared to
twelve  systems  sold  for  the  year  ended   December  31,  2000   (generating
approximately $1.2 million in revenue).

      Although  the Company  sells its  products  primarily  through a worldwide
dealer network, certain sales are made directly to large volume customers when a
dealer is not present in the customer's  geographic market. For each of the last
three years,  the Company  estimates that direct sales make up between 33-38% of
total  sales.  The  Company  expects its sales mix to begin to favor more direct
sales in the future,  especially if the Company begins to offer  e-commerce as a
method for ordering the Company's  products.  The Company  continues to evaluate
methods for selling its products via  e-commerce  and  anticipates  beginning to
offer  e-commerce as a purchase  method  sometime  during 2002. The gross margin
realized on the Company's  direct sales are typically within 2-4% of those sales
realized through the Company's dealer network. However, various economic, volume
and market factors in the geographic area impact the ultimate margin.

      International  sales for the  Company in 2001 were down in  comparison  to
2000 due to continued poor economic conditions affecting the farm economy in the
Latin  American/Mexico  market.  In 1999,  the  Company's  German  dealer  began
manufacturing  mid-sized  bagging  machines in Germany  under a license from the
Company.  Therefore,  the Company no longer sells mid-sized machines directly to
its  German  dealer.  Instead,  the  Company  receives  a  royalty  fee for each
mid-sized machine sold by its German dealer,  which is recorded as other income.
In 1997,  the Company  formed a German joint venture in which the Company owns a
50% interest and its German  dealer owns the  remaining  50%.

                                       20
<PAGE>
The joint venture distributes bags to the Company's German and European dealers.
The  Company's  earnings from the joint venture are reported as other income and
are accounted  for using the equity  method.  Approximately  $3.3 million in bag
sales were  distributed  through the venture  during  2001,  an increase of 32%,
compared to approximately $2.5 million in bag sales for 2000.

      Gross profit as a percentage  of sales  declined  5.12% for the year ended
December 31, 2001 compared to the same period in 2000. The decline resulted from
lower  sales  volumes to cover fixed  operating  overheads,  coupled  with lower
margins on bags in certain highly competitive, high volume geographic areas. The
decline was also the result of lower overall margins on machinery as a result of
machine  competition  (particularly  in the  larger-sized  bagging  machines) in
certain  areas of the U.S.,  coupled with the mix of machine  models sold during
the  year,  which  saw a 12%  increase  in unit  sales of  larger-sized  bagging
machines.  Larger sized bagging machines generate a lower overall margin for the
Company than its "core" small sized  bagging  machine.  (See "Item 1. Business -
Farm Equipment and Products.")

      Selling  expenses for the year ended December 31, 2001 increased  3.34% to
$3,441,197  compared to  $3,329,880  for the year ended  December 31, 2000.  The
increase  for the  year was the  result  of  increases  in  personnel,  benefit,
commission,  advertising and  promotional  expenses,  partially  offset by lower
volume discounts due to lower sales volumes for the year.

      Administrative  expenses for the year ended  December  31, 2001  increased
3.05% to $2,626,268 compared to $2,548,446 for the year ended December 31, 2000.
The  increase  for the year was the result of  increased  depreciation  from the
Company's   implementation  of  a  new  computer  system,  coupled  with  higher
professional  fees  related to ongoing  litigation  and  increases  in  employee
benefit costs and insurance expenses,  that were offset by the Company canceling
a discretionary matching annual benefit.

      Research and  development  expenses  for the year ended  December 31, 2001
increased  56.96% to $213,757  compared to $136,186 for the year ended  December
31, 2000. The increase for the year was the result of new research on silage and
nutritional  studies  of bagged  feed and their  effects  on animal  production,
coupled with ongoing  research and testing related to silage bagging and compost
machine development.

      Interest  expense for the year ended December 31, 2001 decreased 22.03% to
$355,686 compared to $456,158 for the year ended December 31, 2000. The decrease
for the year was the result of the Company  utilizing  a smaller  portion of its
credit facilities and from lower interest rates on its borrowings.

      Joint venture  equity and royalty  income for the year ended  December 31,
2001  increased  66.42% to  $299,065  compared  to  $179,703  for the year ended
December 31, 2000.  The increase for the year was the result of increased  sales
from the joint venture during the year (see the  international  sales discussion
above) coupled with increased  folding  royalties,  as plastic tonnage folded in
2001 by the joint venture increased  approximately 46% from 2000 tonnage folded.
(See "Item 8. Financial Statements and Supplemental Data".)

      The Company's  effective tax rate for the year ended December 31, 2001 was
(59%).  This was due to the fact the  Company  incurred  a net loss for the year
coupled with the recognition of research and development credits associated with
its 2001  activities.  In 2001, the Company  generated net general  business tax
credit benefits of approximately $75,000. In 2000, the Company underwent a study
with a  consulting  firm to  determine if costs  associated  with the  Company's
research and  development  activities were eligible for research and development
tax credits in its open tax years. The Company completed the study and filed the
necessary  forms for its 1996  through  1999 tax  years  during  the year  2000,
generating net general business tax credit benefits of  approximately  $270,000.
Excluding the benefit of the general business tax credits,  the effective income
tax rate would have been (39%) for the year ended December 31, 2001.

                                       21
<PAGE>
      Net loss for the year ended December 31, 2001 was $164,150 compared to net
income of $521,814 for the year ended  December  31,  2000.  The decline for the
year  was  the  result  of  lower  sales,  lower  gross  profit  resulting  from
competition  and  product  mix sold  during  the year,  coupled  with  increased
selling, administrative, and research expense, partially offset by higher income
from the Company's German joint venture and lower interest costs.

RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------

        In December  2002,  the Financial  Accounting  Standards  Board ("FASB")
issued Statement of Financial  Accounting Standard ("SFAS") No. 148, "Accounting
for Stock-Based  Compensation--Transition  and Disclosure--an  amendment of FASB
Statement No. 123." This Statement  amends FASB  Statement No. 123,  "Accounting
for Stock-Based  Compensation," to provide alternative methods of transition for
a voluntary  change to the fair value based method of accounting for stock-based
employee  compensation.  In  addition,  this  Statement  amends  the  disclosure
requirements  of Statement 123 to require  prominent  disclosures in both annual
and interim financial  statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company's  management  intends to continue using the intrinsic  value method for
stock-based  employee  compensation  arrangements  and therefore does not expect
that the application provisions of this statement will have a material impact on
the Company's financial statements.

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs  associated with exit or disposal  activities
and  nullifies  Emerging  Issues Task Force (EITF)  Issue No.  94-3,  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity  (including Certain Costs Incurred in a Restructuring)."  The statement
is effective for exit or disposal  activities  that are initiated after December
31, 2002, with early application  encouraged.  The Company's management does not
expect that the  application  of the  provisions of this  statement  will have a
material impact on the Company's financial statements.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No.  4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from  Extinguishment  of Debt," and an amendment of that Statement,  FASB
Statement  No.  64,  "Extinguishments  of  Debt  Made  to  Satisfy  Sinking-Fund
Requirements."  This Statement also rescinds FASB Statement No. 44,  "Accounting
for Intangible  Assets of Motor  Carriers." This Statement amends FASB Statement
No. 13,  "Accounting  for  Leases," to eliminate  an  inconsistency  between the
required accounting for sale-leaseback  transactions and the required accounting
for certain lease  modifications  that have economic effects that are similar to
sale-leaseback   transactions.   This   Statement  also  amends  other  existing
authoritative  pronouncements  to make various  technical  corrections,  clarify
meanings,  or  describe  their  applicability  under  changed  conditions.   The
Company's  management  does not expect that the application of the provisions of
this  statement  will  have  a  material  impact  on  the  Company's   financial
statements.






                                       22
<PAGE>
     In July  2001,  the  FASB  issued  SFAS  No.  143,  "Accounting  for  Asset
Retirement Obligations." SFAS No. 143 addresses the accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated  asset  retirement  costs.  SFAS No.  143 will be  effective  for the
Company in the first quarter of 2003. The Company's  management  does not expect
that the  application  of the  provisions of this statement will have a material
impact on the Company's financial statements.

     In January 2003, FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities." This interpretation clarifies the application of
Accounting Research Bulletin No. 51,  "Consolidated  Financial  Statements," and
requires existing  unconsolidated  variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among  parties  involved.  The  Company's  management  does not expect  that the
application of the provisions of this interpretation will have a material impact
on the Company's financial statements.

     In November 2002, FASB issued  Interpretation No. 45 (FIN 45), "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of  Indebtedness  of Others." This  interpretation  elaborates on the
disclosures  to be made by a guarantor  in its  financial  statements  about its
obligations under certain  guarantees that it has issued. It also clarifies that
a  guarantor  is required to  recognize,  at the  inception  of a  guarantee,  a
liability  for  the  fair  value  of the  obligation  undertaken  in  issuing  a
guarantee.  The Company has complied with the disclosure requirements of FIN 45.
The initial recognition and initial measurement provisions shall be applied on a
prospective  basis to guarantees issued or modified after December 31, 2002. The
Company's  management  does not expect that the application of the provisions of
this  interpretation  will have a  material  impact on the  Company's  financial
statements.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

     The  seasonal  nature of the  northern  hemisphere  farming  industry,  the
production  time for  equipment  and the time  required to prepare  bags for use
requires the Company to  manufacture  and carry high  inventories  to meet rapid
delivery  requirements.  In particular,  the Company must maintain a significant
level of bags during the spring and summer to meet the sales demands  during the
harvest  season.  The Company uses working  capital and trade credit to increase
its inventory so that it has sufficient  inventory  levels available to meet its
sales demands.

      The Company  relies on its suppliers to provide trade credit to enable the
Company to build its inventory. The Company's suppliers have provided sufficient
trade  credit  to meet the  demand  to date and  management  believes  this will
continue.  No assurance  can be given that  suppliers  will  continue to provide
sufficient trade credit in the future.

      Accounts  receivable  decreased  52.38% at December 31, 2002 to $1,158,927
compared to $2,433,842  at December 31, 2001.  The decrease for the year was the
result of the Company changing its collection  methods during the fourth quarter
of 2002 whereby the Company's  customers no longer have open account terms.  For
new purchases, the Company's customers now have the option to pay in advance for
their  order,  utilize  their own  established  credit,  or  utilize  one of the
Company's third-party financing sources or programs offered for their purchases.
The Company has  established  adequate  reserves  ($203,595 at December 31, 2002
compared to $203,350 at December 31, 2001)  against  accounts  receivable in the
event that some of the remaining accounts become uncollectable.

      Inventory  decreased 9.62% at December 31, 2002 to $6,051,720  compared to
$6,695,894  at December 31, 2001.  The decrease in inventory  resulted  from the
Company's  continued  efforts to streamline its inventory and more closely match
its  production  with  planned  inventory  requirements.

                                       23
<PAGE>
Contributing  to these  efforts  was the  implementation  of the  Company's  new
pre-season  ordering  program  introduced  in  September  2002.  (See  Item 1. -
"Business - Marketing.")

      Other  current  assets  decreased  11.82% at December 31, 2002 to $198,877
compared to $225,544 at December  31,  2001.  The  decrease  was the result of a
decrease in deposits and prepaid expenses.

      Intangible  assets at December 31, 2002  decreased to $11,511  compared to
$18,893 at December 31, 2001. The decrease was the result of normal amortization
expense for the year.

      Other assets increased 1.85% at December 31, 2002 to $490,628  compared to
$481,704 at December  31,  2001.  The increase for the year was the result of an
increase in the cash surrender  value of life insurance  policies  maintained by
the Company under which it is the beneficiary.

      The Company has an  operating  line of credit with a limit of  $5,000,000,
secured by  accounts  receivable,  inventory,  fixed  asset  blanket and general
intangibles,  and bears  interest  at the bank's  prime  rate plus  1/4%.  As of
December  31, 2002,  $384,725 had been drawn under the credit line.  The line of
credit is  subject  to certain  net worth and  EBITDA  covenants,  and an annual
capital expenditure limit.  Subsequent to year-end, the Company reduced its line
of credit to  $2,500,000  and the interest rate was adjusted to the bank's prime
rate plus 1 1/4%.  Management  believes that funds generated from operations and
the Company's  operating line of credit will be sufficient to meet the Company's
cash  requirements  through  2003.  The  Company's  line of credit is subject to
annual renewal at June 1.

      On December 18, 2000, the Company  entered into an agreement with Dresdner
Bank to guarantee up to 511,292 Euro ($535,987 US) as security for an additional
cash credit facility of the Company's  German joint venture.  There was -0- Euro
outstanding under this additional cash credit facility at December 31, 2002.

      Accounts  payable  increased  34.31%  at  December  31,  2002 to  $903,309
compared to $672,563 at December  31,  2001.  The  increase for the year was the
result of the Company  continuing  its  manufacturing  process during the fourth
quarter  (resulting from the Company's new pre-season  order program whereby the
Company  is trying  to level  out its  production  process),  coupled  with some
extended term payables provided by some of the Company's principal suppliers.

      Accrued  expenses and other current  liabilities in total increased 16.32%
at December  31, 2002 to  $1,135,608  compared to $976,302 at December 31, 2001.
The increase in total  accrued  expenses and other current  liabilities  for the
year was the result of increased  dealer  incentives  and volume rebate  expense
resulting  from the Company's new pre-season  order program  coupled with higher
machine  warranty  costs,  which were offset by lower  payroll and benefit costs
from sales staff  reductions,  in addition to lower general  accruals  resulting
from lower sales for the year.

      In 1997, the Nasdaq listing requirements were substantially  expanded. The
Company does not currently qualify under the more stringent requirements because
the  price at which  its  Common  Stock is  trading  is below  the $1 per  share
minimum.  The Company was formally notified on January 13, 1999, that its Common
Stock was delisted from quotation on The Nasdaq  SmallCap  Market for failure to
meet the new listing  requirements.  The Company's Common Stock is now quoted on
the OTC Bulletin Board. The removal from quotation on the Nasdaq SmallCap Market
could  have  a  material  adverse  effect  on the  Company's  ability  to  raise
additional  equity  capital  in a  public  stock  offering  should  that  become
necessary.

                                       24
<PAGE>
      The following table outlines the Company's future contractual  obligations
by type:
<TABLE>
<CAPTION>
                                                        Payments due by period
                               -------------------------------------------------------------------------
Contractual                                      Less than                                More than
Obligations                         Total          1 year      1-3 years    3-5 years      5 years
                               -------------------------------------------------------------------------

<S>                                <C>             <C>          <C>          <C>             <C>
Long-term debt                     $1,773,459      $314,321     $469,197     $157,181        $832,760
Capital lease obligation               37,653        37,653
Operating leases                      277,613        18,264       40,181       43,834         175,334
Purchase obligations                        0
                               -------------------------------------------------------------------------
Total                              $2,088,725      $370,238     $509,378     $201,015      $1,008,094
                               =========================================================================
</TABLE>

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
--------------------------------------------

You should carefully  consider the following factors  regarding  forward-looking
statements and other information  included in this Annual Report.  The risks and
uncertainties  described below are not the only ones we face.  Additional  risks
and uncertainties not currently known to us or that we currently deem immaterial
also may impair our business operations.  If any of the following risks actually
occur,  our  business,  financial  condition  and  operating  results  could  be
materially adversely affected.

o    We are dependent on the Dairy Industry

         More than 75% of our revenues come from the dairy industry.

o    A downturn in the dairy industry could cause a reduction in our revenues.

         Our sales are highly  correlated  with the price of milk  products  and
         revenues of the dairy industry. When dairy farmers make money, they buy
         our  products.  When  dairy  farmers  are not making  money,  our sales
         decline.

o    A sharp  decline in the health of the  farming  sector of the U.S.  economy
     could cause a reduction in our revenue.

         If a reduction in  availability of credit in the farming sector occurs,
         or, interest rates begin to rise, our sales may decline as farmers will
         find it more  difficult to purchase  capital  equipment  and may become
         more cautious on incurring additional farm debt.

o    Our revenues are historically seasonal and dependent on weather conditions.

         Our core business is dependent on weather conditions during the harvest
         seasons in North America and Europe.  Adverse weather conditions affect
         farmers'  crops  and  reduce  demand  for our  products.  Approximately
         65%-70% of our  revenue  is  historically  generated  in the second and
         third  quarters.  In September 2002 however,  the Company took steps to
         begin to counteract some of this  seasonality  with the introduction of
         its pre-season order program.

                                       25
<PAGE>
o    We may not gain market acceptance of our new pre-season order program.

         The Company introduced a new pre-season order program in September 2002
         for use by the Company's  dealers in placing  their entire  anticipated
         next  year's  product  order.  This is the first time the  Company  has
         introduced such a  comprehensive  program and no assurance can be given
         that it will be fully accepted in the marketplace.

o    We may lose the class action lawsuit pending against us.

         A class action  lawsuit  alleging  antitrust  violations has been filed
         against  others and us. If our effort to dismiss or  favorably  resolve
         the suit fails, we could incur  additional and  significant  litigation
         costs and experience a drain on management and other resources.  If the
         plaintiffs succeed in establishing  liability and obtain a judgment for
         damages, the award could exceed our entire net worth.

o    We may lose the product warranty lawsuit pending against us.

         A product  warranty  lawsuit  was filed  against  others and us. If our
         effort to dismiss or favorably  resolve the suit fails,  we could incur
         additional and significant  litigation  costs and experience a drain on
         management and other resources.

o    We may lose the alleged Versa patent  infringement  lawsuit pending against
     us.

         An alleged  patent  infringement  lawsuit has been filed against us. If
         our effort to dismiss or  favorably  resolve the suit  fails,  we could
         incur  additional  and  significant  litigation  costs and experience a
         drain on management and other resources.

o    Our intellectual property protection may not be adequate.

         We have patents on our basic bagging  machines and patents  pending for
         additional machines, bags and systems for silage bagging, grain bagging
         and  hay/straw  bale  bagging.  We may not obtain these patents and our
         patents may not withstand litigation challenges.  If our patents do not
         withstand  litigation  challenges,   our  rights  in  bag  and  machine
         technology could be diminished or eliminated. Moreover, the issuance of
         patents  covering any of our products  may be  insufficient  to prevent
         competitors  from  duplicating  our products.  The patent laws of other
         countries  may differ from those of the United  States as to the patent
         ability of our products  and  processes,  and the degree of  protection
         afforded by foreign  patents may be  different  from that in the United
         States.

o    We rely on one principal supplier for our bags.

         We purchase  nearly all of our bags from one supplier under a long-term
         requirements  contract.  Any  disruption of the  manufacturing  process
         could  affect  that  company's  ability to supply our needs,  and could
         adversely affect our sales.





                                       26
<PAGE>
o    Our pricing is dependent on the price of resin.

         The prices that we pay for bags, which account for  approximately  half
         of our  annual  sales,  are  fixed  annually  in  advance  and are tied
         directly to the price of resin.  Resin  prices have  historically  been
         subject to significant price volatility. Increases in the price of bags
         could  adversely  affect  our  profit  margins if we are unable to pass
         along the price  increase,  and would  likely  affect our  revenues  if
         alternatives to our product become more attractive because of the price
         increases.

o    Our  stock is quoted on the OTC  Bulletin  Board,  which may make the stock
     more difficult to sell.

         We no longer satisfy the criteria for continued quotation on The Nasdaq
         SmallCap  Market.  Our stock is,  instead,  quoted on the OTC  Bulletin
         Board.  As a result,  our  shareholders  may find it more  difficult to
         dispose of, or to obtain accurate quotations as to the market value of,
         our  common  stock,  and the  market  price  for our  common  stock may
         decline.  Trading in our common stock is subject to the requirements of
         Rule 15g-9 promulgated under the Securities Exchange Act of 1934. Under
         this  rule,  broker/dealers  who  recommend  low-priced  securities  to
         persons other than established  customers and accredited investors must
         satisfy  special sales practice  requirements,  including a requirement
         that they make an individualized written suitability  determination for
         the purchaser and receive the purchaser's  written consent prior to the
         transaction. The Securities Enforcement Remedies and Penny Stock Reform
         Act of 1990 also requires additional  disclosure in connection with any
         trades involving a stock defined as a penny stock (generally any equity
         security  not  traded on an  exchange  or  quoted on Nasdaq  that has a
         market  price  of  less  than  $5.00  per  share,  subject  to  certain
         exceptions),   including  the  delivery,   prior  to  any  penny  stock
         transaction, of a disclosure schedule explaining the penny stock market
         and  the  risks   associated   with  the  penny  stock  market.   These
         requirements  could severely  limit the market  liquidity of our common
         stock and the ability of our  shareholders  to dispose of their shares,
         particularly in a declining market.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------

         Market risk is the exposure to loss  resulting from changes in interest
rates, foreign currency exchange rates,  commodity prices and equity prices. The
primary market risk to which the Company is exposed is interest rates.

         The  Company's  exposure  to  changes  in  interest  rates is  minimal.
Primarily all of the Company's  long-term debt is fixed rate. The Company's line
of  credit  is based  on the  prime  rate  plus 1 1/4%  and one  long-term  debt
instrument is based on the prime rate plus 3/4%.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
---------------------------------------------------

      Reference  is made to the  financial  statements  and  related  notes  and
supplemental data under Item 15 filed with this report.


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

      None.

                                       27
<PAGE>
                                    PART III
                                    --------

ITEMS 10 AND 11.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND
EXECUTIVE COMPENSATION
------------------------------------------------------------------------

      A definitive  proxy  statement for the 2003 Annual Meeting of Stockholders
of Ag-Bag  International  Limited  to be held on June 2, 2003 will be filed with
the Securities and Exchange  Commission not later than 120 days after the end of
the Company's fiscal year ("Proxy Statement").  The information set forth in the
Proxy  Statement under "Election of Directors,"  "Executive  Compensation,"  and
"Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein
by  reference.  Executive  officers of Ag-Bag  International  Limited are listed
under the heading "Executive Officers of the Registrant" in this Form 10-K.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
----------------------------------------------------------------------------

      Part of the information  required is set forth under the caption "Security
Ownership  of  Beneficial  Owners" in the Proxy  Statement  and is  incorporated
herein by reference.
<TABLE>
<CAPTION>
                      EQUITY COMPENSATION PLAN INFORMATION

--------------------------------- ---------------------------- ----------------------- ----------------------------------
         PLAN CATEGORY            NUMBER OF SECURITIES TO BE      WEIGHTED-AVERAGE      NUMBER OF SECURITIES REMAINING
                                    ISSUED UPON EXERCISE OF      EXERCISE PRICE OF       AVAILABLE FOR FUTURE ISSUANCE
                                     OUTSTANDING OPTIONS,       OUTSTANDING OPTIONS,    UNDER EQUITY COMPENSATION PLANS
                                      WARRANTS AND RIGHTS       WARRANTS AND RIGHTS     (EXCLUDING SECURITIES REFLECTED
                                              (A)                       (B)                     IN COLUMN (A))(C)
--------------------------------- ---------------------------- ----------------------- ----------------------------------
<S>                                         <C>                         <C>                         <C>
Equity compensation plans
approved by security holders                   -                         -                             -
--------------------------------- ---------------------------- ----------------------- ----------------------------------
Equity compensation plans not
approved by security holders                500,000                     $.64                        810,335
--------------------------------- ---------------------------- ----------------------- ----------------------------------
Total                                       500,000                     $.64                        810,335
--------------------------------- ---------------------------- ----------------------- ----------------------------------
</TABLE>

The Company has an Employee Stock Plan,  Incentive  Stock Plan and  Non-employee
Director  Stock Option Plan,  which have not been approved by security  holders.
Information  on the plans are  contained in Note 10 to the  Company's  Financial
Statements  for the year ended  December  31,  2002 and 2001.  These  plans have
previously  been filed as  exhibits  to the  Company's  public  filings.  (See -
"Exhibit Index")


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

      Information required is set forth under the caption "Certain Relationships
and Related  Transactions" in the Proxy Statement and is incorporated  herein by
reference.


                                       28
<PAGE>
ITEM 14.  CONTROLS AND PROCEDURES
---------------------------------

         (a) Evaluation of disclosure controls and procedures.

         The Company's  chief  executive  officer and chief  financial  officer,
after  evaluating the  effectiveness of the Company's  "disclosure  controls and
procedures"  (as defined in the Securities  Exchange Act of 1934 Rules 13a-14(c)
and  15d-14(c)) as of a date (the  "Evaluation  Date") within 90 days before the
filing date of this annual  report,  have  concluded  that as of the  Evaluation
Date,  the  Company's  disclosure  controls and  procedures  were  effective and
designed to ensure  that  material  information  relating to the Company and the
Company's consolidated subsidiaries would be made known to them by others within
those entities.

         (b) Changes in internal controls.

          There were no significant  changes in the Company's  internal controls
or in other factors that could significantly affect those controls subsequent to
the Evaluation Date.






































                                       29
<PAGE>
                                    PART IV
                                    -------

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
    (a) The following documents are filed as part of this report:
                                                                                                               Page

<S>                                                                                                              <C>
         1.   Index to Financial Statements..................................................................    34

              Independent Auditor's Report...................................................................   F-1

              Balance Sheets at December 31, 2002 and 2001...................................................   F-2

              Statements of Operations and Comprehensive Income (Loss) for the years ended
                  December 31, 2002, 2001 and 2000...........................................................   F-4

              Statement of Shareholders' Equity for the years ended
                  December 31, 2002, 2001 and 2000...........................................................   F-5

              Statement of Cash Flows for the years ended December 31,
                  2002, 2001 and 2000........................................................................   F-6

              Notes to Financial Statements..................................................................   F-7

         2.       Financial  statement  schedules required to be filed by Item 8
                  and paragraph (d) of this Item 15:

              Independent Auditor's Report on Supplemental Information.......................................  F-30

              Schedule of Valuation and Qualifying Accounts..................................................  F-31

              Audited Financial Statements of BAW group as of December 31, 2002, 2001 and 2000...............  F-32
                  (Considered a significant 50% owned equity investee as defined
                   under SEC Regulation S-X 3-09)

              All other schedules are omitted because they are not applicable or
                  the required  information is shown in the financial statements
                  or notes thereto.

         3.   The exhibits are listed in the index of exhibits...............................................    35
</TABLE>

    (b)       No reports on Form 8-K were  required to be filed  during the last
              quarter of the period covered by this report.












                                       30
<PAGE>
                                   SIGNATURES

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

                               AG-BAG INTERNATIONAL LIMITED,
                               a Delaware corporation

Date: March 14, 2003           By: \s\ MICHAEL J. SCHOVILLE
                                  ---------------------------------------
                                  Michael J. Schoville, Chief Executive Officer

         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
Company and in the capacities and on the dates indicated.


Date: March 14, 2003           By: \s\ LARRY R. INMAN
                                   ---------------------------------------
                                   Larry R. Inman, Chairman, Board of
                                   Directors and President

Date: March 14, 2003           By: \s\ MICHAEL J. SCHOVILLE
                                   ---------------------------------------
                                   Michael J. Schoville, Chief Executive Officer
                                   (Principal Executive Officer)

Date: March 14, 2003           By: \s\ MICHAEL R. WALLIS
                                   ---------------------------------------
                                   Michael R. Wallis, Chief Financial
                                   Officer and Vice President, Finance
                                   (Principal Financial and Accounting
                                   Officer)

Date: March 14, 2003           By: \s\ LEMUEL E. CUNNINGHAM
                                   ---------------------------------------
                                   Lemuel E. Cunningham, Director

Date: March 14, 2003           By: \s\ MICHAEL W. FOSTER
                                   ---------------------------------------
                                   Michael W. Foster, Director

Date: March 14, 2003           By: \s\ JIM DEMATTEO
                                   ---------------------------------------
                                   Jim DeMatteo, Director

Date: March 14, 2003           By: \s\ ARTHUR P. SCHUETTE
                                   ---------------------------------------
                                   Arthur P. Schuette, Director

Date: March 14, 2003           By: \s\ UDO WEBER
                                   ---------------------------------------
                                   Udo Weber, Director



                                       31
<PAGE>
                                 Certifications

I, Michael J. Schoville, certify that:

1.       I have reviewed this annual report on Form 10-K of Ag-Bag International
         Limited;

2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the  financial  condition,  results of operation and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;

4.       The registrant's  other  certifying  officers and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

         a) designed  such  disclosure  controls and  procedures  to ensure that
            material  information  relating  to the  registrant,  including  its
            consolidated  subsidiaries,  is made  known to us by  others  within
            those entities,  particularly during the period in which this annual
            report is being prepared;
         b) evaluated the effectiveness of the registrant's  disclosure controls
            and  procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and
         c) presented  in  this  annual   report  our   conclusions   about  the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed,  based
         on our most recent  evaluation,  to the  registrant's  auditors and the
         audit  committee  of  registrant's   board  of  directors  (or  persons
         performing the equivalent function):

         a) all significant  deficiencies in the design or operation of internal
            controls which could adversely  affect the  registrant's  ability to
            record,  process,  summarize  and  report  financial  data  and have
            identified for the registrant's  auditors any material weaknesses in
            internal controls; and
         b) any fraud,  whether or not  material,  that  involves  management or
            other  employees  who have a  significant  role in the  registrant's
            internal controls; and

6.       The registrant's other certifying officers and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.

Date: March 14, 2003


\s\ MICHAEL J. SCHOVILLE
----------------------------
Chief Executive Officer

                                       32
<PAGE>
I, Michael R. Wallis, certify that:

1.       I have reviewed this annual report on Form 10-K of Ag-Bag International
         Limited;

2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the  financial  condition,  results of operation and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;

4.       The registrant's  other  certifying  officers and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

         a) designed  such  disclosure  controls and  procedures  to ensure that
            material  information  relating  to the  registrant,  including  its
            consolidated  subsidiaries,  is made  known to us by  others  within
            those entities,  particularly during the period in which this annual
            report is being prepared;
         b) evaluated the effectiveness of the registrant's  disclosure controls
            and  procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and
         c) presented  in  this  annual   report  our   conclusions   about  the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed,  based
         on our most recent  evaluation,  to the  registrant's  auditors and the
         audit  committee  of  registrant's   board  of  directors  (or  persons
         performing the equivalent function):

         a) all significant  deficiencies in the design or operation of internal
            controls which could adversely  affect the  registrant's  ability to
            record,  process,  summarize  and  report  financial  data  and have
            identified for the registrant's  auditors any material weaknesses in
            internal controls; and
         b) any fraud,  whether or not  material,  that  involves  management or
            other  employees  who have a  significant  role in the  registrant's
            internal controls; and

6.       The registrant's other certifying officers and I have indicated in this
         annual report whether or not there were significant changes in internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.

Date: March 14, 2003


\s\ MICHAEL R. WALLIS
----------------------------------
Chief Financial Officer, Treasurer
and Vice President of Finance

                                       33
<PAGE>
                                TABLE OF CONTENTS


                                                                            Page

AG-BAG INTERNATIONAL LIMITED
----------------------------

Independent Auditor's Report                                                F-1

Financial Information

     Balance Sheets                                                         F-2

     Statements of Operations and Comprehensive Income (Loss)               F-4

     Statements of Shareholders' Equity                                     F-5

     Statements of Cash Flows                                               F-6

     Notes to Financial Statements                                          F-7

Supplemental Information

     Independent Auditor's Report on Supplemental Information               F-30

     Valuation and Qualifying Accounts                                      F-31


BAW
---

Independent Auditor's Report                                                F-32

Balance Sheets                                                              F-33

Statements of Income and Comprehensive Income                               F-35

Statement of Shareholders' Equity                                           F-36

Statements of Cash Flows                                                    F-38

Notes to Financial Statements                                               F-39

Reconciliation of German GAAP to U.S. GAAP                                  F-56

Exhibit I - Composition and development of tangible assets                  F-57

Exhibit 2 - Euro exchange rate table                                        F-58










                                       34
<PAGE>
                                  EXHIBIT INDEX

EXHIBIT
NUMBER        DESCRIPTION OF EXHIBIT
-------       ----------------------

3.1           Restated Certificate of Incorporation(2)

3.2           Bylaws of the Company(2)

4.1           Form of Common Stock Certificate(1)

4.3           Warrant dated February 13, 1995, to Norwood Venture Corp.(2)

10.1          Employment Contract of Larry R. Inman(1)*

10.2          Form of Change of Control  Agreement  between the Company and each
              of its executive officers and key employees(4)*

10.3          1991  Employee  Stock  Plan,  as  amended  effective  November  1,
              1996(3)*

10.4          Incentive  Stock Option  Plan,  as amended  effective  November 1,
              1996(3)*

10.5          Non-employee Director Stock Option Plan(3)*

11            Statement re computation of earnings per share

12            Statement re computation of ratios

21            Subsidiaries of Registrant

99.1          Certification of Michael J. Schoville,  Chief Executive Officer of
              Ag-Bag International  Limited, as required pursuant to Section 906
              of the Sarbanes-Oxley Act of 2002

99.2          Certification  of  Michael R.  Wallis,  Chief  Financial  Officer,
              Treasurer  and Vice  President of Finance of Ag-Bag  International
              Limited, as required pursuant to Section 906 of the Sarbanes-Oxley
              Act of 2002



*  Management contract or compensatory plan
(1)Filed as exhibit to the Form S-1 Registration No. 33-46115
(2)Filed as  exhibit to the Form 10-K for the fiscal  year  ended  December  31,
   1994
(3)Filed as  exhibit to the Form 10-K for the fiscal  year  ended  December  31,
   1996
(4)Filed as  exhibit to the Form 10-K for the fiscal  year  ended  December  31,
   2000







                                       35
<PAGE>
                                   EXHIBIT 11
                 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                                ------------------------
                                        1998            1999            2000            2001            2002
                                        ----            ----            ----            ----            ----
Basic earnings per share:
<S>                               <C>             <C>             <C>             <C>             <C>
Net income (loss)                 $  804,399      $  648,571      $  521,817      $ (164,150)     $ (663,988)
Preferred stock dividends            (59,160)        (59,160)        (59,160)        (59,160)        (59,160)
                                  -----------     -----------     -----------     -----------     -----------
                                     745,239         589,411         462,654        (223,310)       (723,148)

Basic weighted average number
  of shares outstanding        (1) 12,061,991  (1) 12,061,991  (1) 12,061,991  (1) 12,001,868  (1) 11,956,991
                                  ===========     ===========     ===========     ===========     ===========
Basic earnings per share
  Net income (loss)               $      .06      $      .05      $      .04      $     (.02)     $     (.06)
                                  -----------     -----------     -----------     -----------     -----------

Diluted earnings per share:

Net income (loss)                 $  804,399      $  648,571      $  521,817      $ (164,150)     $ (663,988)
Preferred stock dividends            (59,160)        (59,160)        (59,160)        (59,160)        (59,160)
                                  -----------     -----------     -----------     -----------     -----------
                                     745,239         589,411         462,654        (223,310)       (723,148)
                                  ===========     ===========     ===========     ===========     ===========

Diluted weighted average number
  of shares outstanding        (1) 12,061,991  (1) 12,061,991  (1) 12,061,991  (1) 12,001,868  (1) 11,956,991
                                  ===========     ===========     ===========     ===========     ===========
Diluted earnings per share
  Net income (loss)               $     .06       $     .05       $     .04       $    (.02)      $     (.06)
                                  ===========     ===========     ===========     ===========     ===========
</TABLE>



(1) See Note 1 to the financial statements

















                                       36
<PAGE>
                                   EXHIBIT 12
                       STATEMENT RE COMPUTATION OF RATIOS
<TABLE>
<CAPTION>

                                                                 Year Ended December 31,
                                                                ------------------------
                                        1998            1999            2000            2001            2002
                                        ----            ----            ----            ----            ----
<S>                              <C>             <C>             <C>             <C>             <C>
Pretax earnings (losses)         $   1,226,399   $     975,571   $     513,814   $    (397,217)  $  (1,199,778)

Interest expense                       437,803         333,170         456,158         355,686         314,068
                                --------------  --------------  --------------  --------------  --------------
Subtotal (A)                         1,664,202       1,308,741         969,972         (41,531)       (885,710)
                                --------------  --------------  --------------  --------------  --------------

Interest expense                       437,803         333,170         456,158         355,686         314,068

Preferred stock dividend
   requirements                         89,636          89,636          59,160         144,293         107,564
                                --------------  --------------  --------------  --------------  --------------

Subtotal (B)                     $     527,439   $     422,806   $     515,318   $     499,979   $     421,632
                                --------------  --------------  --------------  --------------  --------------

(A) divided by (B)                        3.16            3.10            1.88            (.83)(1)       (2.10)(1)
                                --------------  --------------  --------------  --------------  --------------
</TABLE>

(1) Due to net loss for the year



























                                       37
<PAGE>
                                   EXHIBIT 21
                           SUBSIDIARIES OF REGISTRANT


         None.





















































                                       38
<PAGE>
                                                                    EXHIBIT 99.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In  connection  with the  Annual  Report of Ag-Bag  International  Limited  (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities  and  Exchange  Commission  on the date  hereof (the  "Report"),  the
undersigned certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)    The Report fully complies with the requirements of section 13(a) or 15(d)
       of the Securities Exchange Act of 1934; and

(2)    The information  contained in the Report fairly presents, in all material
       respects,  the  financial  condition  and  results of  operations  of the
       Company.



March 14, 2003    \s\ MICHAEL J. SCHOVILLE       Chief Executive Officer
                  ------------------------
                     (Michael J. Schoville)































                                       39
<PAGE>
                                                                    EXHIBIT 99.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In  connection  with the  Annual  Report of Ag-Bag  International  Limited  (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities  and  Exchange  Commission  on the date  hereof (the  "Report"),  the
undersigned certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(3)    The Report fully complies with the requirements of section 13(a) or 15(d)
       of the Securities Exchange Act of 1934; and

(4)    The information  contained in the Report fairly presents, in all material
       respects,  the  financial  condition  and  results of  operations  of the
       Company.



March 14, 2003    \s\ MICHAEL R. WALLIS     Chief Financial Officer, Vice
                  ------------------------  President of Finance, and Treasurer
                     (Michael R. Wallis)































                                       40
<PAGE>









                          AG-BAG INTERNATIONAL LIMITED

                                 -------------

                          INDEPENDENT AUDITOR'S REPORT
                                       AND
                              FINANCIAL STATEMENTS
                         (WITH SUPPLEMENTAL INFORMATION)

                                 -------------

                     YEARS ENDED DECEMBER 31, 2002 AND 2001






































<PAGE>









CONTENTS
--------------------------------------------------------------------------------

                                                                            PAGE

INDEPENDENT AUDITOR'S REPORTS                                                F-1


FINANCIAL STATEMENTS

     Balance sheets                                                    F-2 - F-3

     Statements of operations and comprehensive income (loss)                F-4

     Statements of shareholders' equity                                      F-5

     Statements of cash flows                                                F-6

     Notes to financial statements                                    F-7 - F-29


SUPPLEMENTAL INFORMATION

     Independent auditor's report on supplemental information               F-30

     Valuation and qualifying accounts                                      F-31





















--------------------------------------------------------------------------------


<PAGE>

INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Shareholders
Ag-Bag International Limited


We have audited the accompanying balance sheets of Ag-Bag International  Limited
as of December 31, 2002 and 2001,  and the related  statements of operations and
comprehensive  income (loss),  shareholders'  equity, and cash flows for each of
the years in the  three-year  period ended  December 31, 2002.  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 audits to obtain  reasonable  assurance  about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Ag-Bag International Limited as
of December 31, 2002 and 2001,  and the results of its  operations  and its cash
flows for each of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.




\s\ Moss Adams LLP
Portland, Oregon
February 18, 2003



















                                                                             F-1
<PAGE>
AG-BAG INTERNATIONAL LIMITED
BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                     ASSETS

                                                                                     DECEMBER 31,
                                                                     -----------------------------------------------
                                                                            2002                       2001
                                                                     --------------------      ---------------------
CURRENT ASSETS
<S>                                                                             <C>                       <C>
     Cash                                                                       $ 67,526                  $ 164,526
     Accounts receivable, less allowance for doubtful
         accounts of $203,595 and $203,350
         at 2002 and 2001, respectively                                        1,158,927                  2,433,842
     Inventories                                                               6,051,720                  6,695,894
     Prepaid expenses and other current assets                                   198,877                    225,544
     Deferred income taxes                                                       388,000                    275,000
                                                                     --------------------      ---------------------

                Total current assets                                           7,865,050                  9,794,806
                                                                     --------------------      ---------------------

PROPERTY, PLANT, AND EQUIPMENT, NET                                            3,958,473                  4,227,852
                                                                     --------------------      ---------------------

OTHER ASSETS
     Deferred income taxes                                                       625,000                    200,000
     Intangible assets, net                                                       11,511                     18,893
     BAW Joint-venture                                                           397,938                    272,938
     Other assets                                                                490,628                    481,704
                                                                     --------------------      ---------------------

                Total other assets                                             1,525,077                    973,535
                                                                     --------------------      ---------------------

TOTAL ASSETS                                                                $ 13,348,600               $ 14,996,193
                                                                     ====================      =====================
</TABLE>
















F-2
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                                  BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                      LIABILITIES AND SHAREHOLDERS' EQUITY

                                                                                       DECEMBER 31,
                                                                     -----------------------------------------------
                                                                            2002                       2001
                                                                     --------------------      ---------------------
CURRENT LIABILITIES
<S>                                                                            <C>                      <C>
     Bank line of credit                                                       $ 384,725                $ 1,287,855
     Current portion of long-term debt and capital
         lease obligations                                                       351,974                    402,477
     Accounts payable                                                            903,309                    672,563
     Accrued payroll and payroll taxes                                           307,935                    420,477
     Dealer deposits                                                              78,038                     82,234
     Warranty reserve                                                            177,384                    124,482
     Accrued expenses and other current liabilities                              572,251                    349,109
     Income taxes payable                                                          2,210                          -
                                                                     --------------------      ---------------------

                Total current liabilities                                      2,777,826                  3,339,197
                                                                     --------------------      ---------------------

NONCURRENT LIABILITIES
     Long-term debt and capital lease obligations,
         less current portion                                                  1,459,138                  1,822,212
                                                                     --------------------      ---------------------

                Total liabilities                                              4,236,964                  5,161,409
                                                                     --------------------      ---------------------

COMMITMENTS AND CONTINGENCIES (NOTE 13)

SHAREHOLDERS' EQUITY
     Preferred stock, $4 liquidiation value per share, 8.5%
         cumulative dividend, nonvoting, 5,000,000 shares
         authorized, 174,000 shares issued and outstanding                       696,000                    696,000
     Common stock, $.01 par value, 25,000,000 shares
         authorized, 12,061,991 shares issued                                    120,619                    120,619
     Additional paid-in capital                                                9,210,211                  9,210,211
     Treasury stock                                                              (31,500)                   (31,500)
     Accumulated deficit                                                        (883,694)                  (160,546)
                                                                     --------------------      ---------------------

                Total shareholders' equity                                     9,111,636                  9,834,784
                                                                     --------------------      ---------------------

TOTAL LIABILITIES AND SHAREHOLDERS'
     EQUITY                                                                 $ 13,348,600               $ 14,996,193
                                                                     ====================      =====================
</TABLE>




See accompanying notes.                                                      F-3
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                          YEARS ENDED DECEMBER 31,
                                                         ----------------------------------------------------------
                                                               2002                2001                 2000
                                                         -----------------   -----------------    -----------------
<S>                                                          <C>                 <C>                  <C>
NET SALES                                                    $ 27,189,140        $ 28,708,233         $ 31,451,150
COST OF SALES                                                  22,121,346          22,947,604           24,799,690
                                                         -----------------   -----------------    -----------------

            Gross profit from operations                        5,067,794           5,760,629            6,651,460

OTHER OPERATING EXPENSES
     Selling expenses                                           3,496,672           3,441,197            3,329,880
     Administrative expenses                                    2,739,811           2,626,268            2,548,446
     Research and development expenses                            219,980             213,757              136,186
                                                         -----------------   -----------------    -----------------

     Income (loss) from operations                             (1,388,669)           (520,593)             636,948

OTHER INCOME (EXPENSE)
     Interest income                                               45,828              30,714               42,996
     Interest expense                                            (314,068)           (355,686)            (456,158)
     Joint venture equity and royalties                           315,196             299,065              179,703
     Other                                                        141,935             149,283              110,325
                                                         -----------------   -----------------    -----------------

Income (loss) before income taxes                              (1,199,778)           (397,217)             513,814

Provision (benefit) for income taxes                             (535,790)           (233,067)              (8,000)
                                                         -----------------   -----------------    -----------------
NET INCOME (LOSS) AND COMPREHENSIVE
     INCOME (LOSS)                                             $ (663,988)         $ (164,150)           $ 521,814
                                                         =================   =================    =================

Basic and diluted net income (loss) per common
     share                                                        $ (0.06)            $ (0.02)              $ 0.04
                                                         =================   =================    =================

Basic and diluted weighted average common
     shares outstanding                                        11,956,991          12,001,868           12,061,991
                                                         =================   =================    =================
</TABLE>








F-4                                                      See accompanying notes
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                              STATEMENTS OF SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                          Retained
                            Preferred Stock        Common Stock        Treasury Stock      Additional     Earnings        Total
                          ------------------- -------------------- ---------------------   Paid-In      (Accumulated   Shareholders'
                           Shares     Amount     Shares     Amount  Shares      Amount     Capital         Deficit)       Equity
                          --------- --------- ---------- --------- --------- ----------- ------------- -------------- --------------
BALANCE,
<S>                        <C>      <C>       <C>        <C>            <C>         <C>   <C>             <C>            <C>
     December 31, 1999     174,000  $ 696,000 12,061,991 $ 120,619        -         $ -   $ 9,210,211     $ (399,890)    $9,626,940

Preferred stock dividends        -          -          -         -        -           -             -        (59,160)       (59,160)

Net income                       -          -          -         -        -           -             -        521,814        521,814
                          --------- --------- ---------- --------- --------- ----------- ------------- -------------- --------------

BALANCE,
     December 31, 2000     174,000    696,000 12,061,991   120,619        -           -     9,210,211         62,764     10,089,594

Purchase of common stock         -          -          -         -  105,000     (31,500)            -              -        (31,500)

Preferred stock dividends        -          -          -         -        -           -             -        (59,160)       (59,160)

Net loss                         -          -          -         -        -           -             -       (164,150)      (164,150)
                          --------- --------- ---------- --------- --------- ----------- ------------- -------------- --------------

BALANCE,
     December 31, 2001     174,000    696,000 12,061,991   120,619  105,000     (31,500)    9,210,211       (160,546)     9,834,784

Preferred stock dividends        -          -          -         -        -           -             -        (59,160)       (59,160)

Net loss                         -          -          -         -        -           -             -       (663,988)      (663,988)
                          --------- --------- ---------- --------- --------- ----------- ------------- -------------- --------------

BALANCE,
     December 31, 2002     174,000  $ 696,000 12,061,991 $ 120,619  105,000   $ (31,500)  $ 9,210,211     $ (883,694)    $9,111,636
                          ========= ========= ========== ========= ========= =========== ============= ============== ==============
</TABLE>
















See accompanying notes.                                                      F-5
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                             -------------------------------------------------------
                                                                   2002               2001               2000
                                                             -----------------  -----------------  -----------------

CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                <C>                <C>                 <C>
     Net income (loss)                                             $ (663,988)        $ (164,150)         $ 521,814
     Adjustments to reconcile net income to net cash
            from operating activities:
         Depreciation and amortization                                816,262            762,390            612,845
         Change in inventory reserve                                   79,000             77,500            256,000
         (Gain) loss on disposition of equipment                         (500)             8,648               (100)
         Deferred income taxes                                       (538,000)          (207,000)          (154,000)
         Equity in joint venture earnings                            (125,000)          (131,200)           (65,000)

     Change in assets and liabilities:
         Accounts receivable                                        1,274,915            507,537         (1,065,602)
         Inventories                                                  233,448            397,528           (452,248)
         Prepaid expenses and other current assets                     26,667            (33,806)           113,551
         Other assets                                                  (8,924)           (82,030)           (82,443)
         Accounts payable                                             230,746             66,735           (528,166)
         Accrued expenses and other current liabilities               159,306            (47,986)          (271,457)
         Income taxes payable                                           2,210           (175,130)           162,478
                                                             -----------------  -----------------  -----------------

                Net cash from operating activities                  1,486,142            979,036           (952,328)
                                                             -----------------  -----------------  -----------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Capital expenditures                                            (207,775)          (427,984)          (330,208)
     Construction in progress                                               -                  -           (482,199)
     Acquisition of intangible assets                                       -             (4,267)                 -
     Proceeds from disposition of equipment                               500              3,750              3,000
                                                             -----------------  -----------------  -----------------

                Net cash from investing activities                   (207,275)          (428,501)          (809,407)
                                                             -----------------  -----------------  -----------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from line of credit                                  12,053,903         13,068,243         11,749,880
     Principal payments on line of credit                         (12,957,033)       (13,005,026)       (10,525,242)
     Proceeds on issuance of debt                                           -                  -            500,000
     Principal payments on debt                                      (413,577)          (382,460)          (385,236)
     Payment of shareholders' notes                                         -                  -             (6,523)
     Purchase of common stock                                               -            (31,500)                 -
     Dividends paid                                                   (59,160)           (59,160)           (59,160)
                                                             -----------------  -----------------  -----------------

                Net cash from financing activities                 (1,375,867)          (409,903)         1,273,719
                                                             -----------------  -----------------  -----------------

NET INCREASE (DECREASE) IN CASH                                       (97,000)           140,632           (488,016)

CASH, beginning of year                                               164,526             23,894            511,910
                                                             -----------------  -----------------  -----------------

CASH, end of year                                                    $ 67,526          $ 164,526           $ 23,894
                                                             =================  =================  =================
</TABLE>


F-6                                                       See accompanying notes
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
          ACCOUNTING POLICIES

DESCRIPTION  OF  BUSINESS - Ag-Bag  International  Limited  (the  Company)  is a
Delaware corporation. The Company's primary operations include the manufacturing
and sale of machines and related bags used in the agriculture  industry to store
feed for  livestock,  grain and other  products.  The Company also  manufactures
machines and bags for composting. The Company's primary market is North America;
however, it sells products worldwide.

The Company's  common stock began trading  publicly on January 17, 1990,  and is
traded on the OTC Bulletin Board, under the symbol "AGBG".

STATEMENTS  OF CASH FLOWS - For purposes of the  statements  of cash flows,  the
Company  considers all highly  liquid  investments  with original  maturities of
three months or less to be cash equivalents.

The Company transferred $476,214, and $139,432 in 2001, and 2000,  respectively,
from rental  equipment to inventory  held for sale.  In 2002,  2001 and 2000 the
Company  transferred  $331,726,  $697,849  and  $111,863,   respectively,   from
inventory held for sale to rental equipment.

ACCOUNTS RECEIVABLE - Accounts receivable are from distributors and customers of
the Company's products.  The Company performs periodic credit evaluations of its
customers and maintains  allowances for potential credit losses. Also, to reduce
the risk of credit  loss,  the Company  requires  letters of credit from foreign
customers with which no credit history has been established.

Receivables are presented at the aggregate unpaid principle balance amounts, net
of an allowance for doubtful  accounts.  The allowance for doubtful  accounts is
established  through a provision for bad debts expense.  Receivables are charged
against the allowance for bad debt when management  believes the  collectibility
of an account is unlikely.  The allowance is an amount that management  believes
will be adequate to absorb future losses on existing receivables that may become
uncollectible based upon overall receivable quality,  review of specific problem
accounts,  current economic  conditions,  and prior charge-off  experience.  The
uncollectible  portion of a customer's  unpaid principle  balance is charged-off
after  the  Company   initiates  the  collection   process,   investigates   the
circumstances  of the past due  balance,  and  determines  an amount  considered
uncollectible.   Generally,   the  Company  considers  receivables  from  import
shipments  past due after 15 days;  export and air  freight  shipments  past due
after 30 days;  and shipments  utilizing a foreign agent past due after 60 days.
The  Company  accrues  interest on past due  accounts  and  continues  to accrue
interest until the Company considers the receivable uncollectable.









                                                                             F-7
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
          ACCOUNTING POLICIES - (continued)

RECEIVABLE SALES - The Company assigns some of its trade accounts  receivable to
a third party financing  source with a 12 month rolling average discount rate of
1.50% at December  31,  2002.  The  accounts  assigned  can be assigned  with or
without recourse depending on specific accounts assigned.  At December 31, 2002,
the balance of assigned accounts with recourse was $519,727.

INVENTORIES  -  Inventories  are  stated  at the  lower of cost or  market  (net
realizable value). The Company determines cost on the first-in, first-out (FIFO)
basis. The Company's estimates of market value incorporate projections of future
sales volume by product class. In estimating the market value of parts inventory
items,  the  Company  reviews  current  inventory  levels in  relation  to sales
forecasts  and adjusts the  valuation  reserve  accordingly.  For the  remaining
categories of inventory,  the Company establishes a reserve balance based on the
aging of the specific inventory items.

PROPERTY,  PLANT,  AND  EQUIPMENT - Property,  plant and equipment are stated at
cost and are depreciated on the straight-line method over their estimated useful
lives which range from five to seven  years for  equipment  and twenty to thirty
years for buildings.

Expenditures for additions and major improvements are capitalized.  Expenditures
for repairs and maintenance are charged to expense as incurred.

INTANGIBLE ASSETS - Intangible assets consist of licenses and patents.  The cost
of the  licenses and patents are  amortized  over the lesser of the terms of the
related agreement or the estimated useful lives of the respective asset, ranging
from three to twelve years.























F-8
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
          ACCOUNTING POLICIES - (continued)

REVENUE RECOGNITION - Revenue is recognized when all of the following have taken
place.  The  customer  has  placed  an order for the  product,  the  product  is
delivered or shipped to the customer,  the sales price has been  determined  and
collection  is  reasonably  assured.  The Company  includes  revenues  earned on
shipping  costs  billed to customers  in Net Sales.  Costs to ship  products are
included in Cost of Sales.

WARRANTY  - At the  time of  sale,  the  Company  accrues  a  liability  for the
estimated  future  costs to be incurred  under the  provisions  of its  warranty
agreements.  The Company  reviews its  historical  warranty  expense and current
sales  trends in products  covered  under  warranty,  and  adjusts its  warranty
reserves accordingly.

The activity in that account for the years ended was as follows:
<TABLE>
<CAPTION>
                                                     2002                  2001
                                               -----------------     ------------------
<S>                                             <C>                   <C>
Balance, beginning of the year                  $    124,482          $    190,162
  Charged to expense                                 328,041               159,597
  Warranty costs incurred during the year           (275,139)             (225,277)
                                               -----------------     ------------------

Balance, end of year                            $    177,384          $    124,482
                                               =================     ==================
</TABLE>


STOCK  OPTION  PLAN - The  Company  applies  Accounting  Principles  Board (APB)
Opinion  No.  25,  "Accounting  for Stock  Issued  to  Employees,"  and  related
interpretations   in  accounting   for  its  stock  option  plan.   Accordingly,
compensation  expense  related to grants to  employees  would be recorded on the
date of grant only if the current market price of the underlying  stock exceeded
the exercise price.  Had  compensation  cost for the Company's stock option plan
been  determined  based upon the fair  value at grant date for awards  under the
plan  consistent with the  methodology  prescribed  under Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based  Compensation,"
additional compensation expense would have been recognized.











                                                                             F-9
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1       - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
                  ACCOUNTING POLICIES - (continued)

STOCK  OPTION  PLAN  (continued)  - The  Company  has  computed,  for pro  forma
disclosure  purposes,  the value of all options  granted during 2002,  2001, and
2000 using the  Black-Scholes  pricing model as  prescribed  under SFAS 123. The
following  assumptions were made for grants in 2002,  2001, and 2000:  risk-free
interest  rate of 4.41%,  4.41% and 6.10%  respectively,  expected life of seven
years,  seven years,  and three years  respectively,  and dividend rates of zero
percent.  For 2002,  2001,  and 2000 the expected  volatility  over the expected
lives of the grants was assumed to be 77.04%,  77.92%, and 75.64%  respectively.
The weighted  average fair value of the options granted was estimated to be $.20
in 2002, $.34 in 2001, and $.29 in 2000.

If the Company had accounted for the value of the options  granted  during 2002,
2001, and 2000, in accordance  with SFAS No. 123, the Company's net income would
have been reduced to the pro forma amounts indicated below:



                                     2002            2001            2000
                                --------------- --------------- ---------------
Net income (loss):
  As reported                     $  (663,988)    $  (164,150)    $   521,814
  Pro forma                       $  (673,278)    $  (178,023)    $   510,023

Net income (loss) per share:
  As reported                            (.06)           (.02)            .04
  Pro forma                              (.06)           (.02)            .04



The resulting pro forma  compensation  costs may not be  representative  of that
expected in future years.


INCOME  TAXES - The  Company  accounts  for  income  taxes  under  the asset and
liability  method.  Deferred tax assets and  liabilities  are recognized for the
future tax  consequences  attributable  to  differences  between  the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective  tax bases.  Deferred tax assets and  liabilities  are measured using
enacted  tax rates  expected  to apply to  taxable  income in the years in which
those temporary  differences are expected to be recovered or settled.  Valuation
allowances are  established to reduce  potential  deferred tax assets when it is
more likely than not that all or some portion of  potential  deferred tax assets
will not be realized.







F-10
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
          ACCOUNTING POLICIES - (continued)

INCOME  TAXES  (continued)  - The Company has  recorded a deferred  tax asset of
$1,013,000 and $475,000 as of December 31, 2002 and 2001, respectively. Although
the realization is not assured,  management  believes it is more likely than not
that all of the deferred tax asset will be realized.  The amount of the deferred
tax asset  considered to be  realizable,  however,  could be reduced in the near
future if facts surrounding the estimates of the deferred tax asset change.

ADVERTISING COSTS - The Company expenses advertising costs as they are incurred.
Advertising  expenses for the years ended December 31, 2002, 2001, and 2000 were
$504,060, $573,945, and $532,573, respectively.

NET INCOME PER COMMON SHARE - Basic net income per share is calculated using the
weighted average number of common shares outstanding during each year. Preferred
stock dividends were considered in the  computation.  The calculation of diluted
net income per share  excludes the effect of potentially  dilutive  common stock
equivalents  because  their impact,  when  calculated  using the treasury  stock
method, is antidilutive.

SEGMENT  INFORMATION - The Financial  Accounting  Standards  Board (FASB) issued
SFAS  No.  131,   "Disclosure  about  Segments  of  an  Enterprise  and  Related
Information,"  which establishes  annual and interim reporting  standards for an
enterprise's  operating  segments and related  disclosures  about its  products,
services,  geographic  areas and major  customers.  The Company has analyzed the
reporting  requirements  of the standard and has determined  that its operations
are within a single operating segment.

DISCLOSURE  OF FAIR VALUE OF FINANCIAL  INSTRUMENTS  - The  carrying  amounts of
financial instruments including cash and cash equivalents,  accounts receivable,
and accounts payable  approximated  fair value as of December 31, 2002 and 2001,
because of the  relatively  short  maturity of these  instruments.  The carrying
value of notes payable approximated fair value as of December 31, 2002 and 2001,
based upon interest rates and terms available for the same or similar loans.

MANAGEMENT  ESTIMATES - The  preparation  of financial  statements in conformity
with  generally  accepted  accounting  principles  requires  management  to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period. Actual results could differ from those estimates.











                                                                            F-11
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
          ACCOUNTING POLICIES - (continued)

RECLASSIFICATIONS  -  Certain  reclassifications  have  been  made  to the  2001
financial statements to conform with the 2002 presentation.

RECENTLY  ISSUED  ACCOUNTING   STANDARDS  -  In  December  2002,  the  Financial
Accounting  Standards  Board ("FASB") issued  Statement of Financial  Accounting
Standard ("SFAS") No. 148, "Accounting for Stock-Based  Compensation--Transition
and  Disclosure--an  amendment of FASB Statement No. 123." This Statement amends
FASB Statement No. 123,  "Accounting for Stock-Based  Compensation,"  to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee  compensation.  In addition,  this
Statement  amends  the  disclosure  requirements  of  Statement  123 to  require
prominent  disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results.  The Company's  management  intends to continue
using  the  intrinsic  value  method  for  stock-based   employee   compensation
arrangements  and therefore does not expect that the  application  provisions of
this  statement  will  have  a  material  impact  on  the  Company's   financial
statements.

In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and  reporting  for  costs  associated  with  exit or  disposal  activities  and
nullifies  Emerging  Issues  Task  Force  (EITF)  Issue  No.  94-3,   "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity  (including Certain Costs Incurred in a Restructuring)."  The statement
is effective for exit or disposal  activities  that are initiated after December
31, 2002, with early application  encouraged.  The Company's management does not
expect that the  application  of the  provisions of this  statement  will have a
material impact on the Company's financial statements.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB Statements No.
4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical  Corrections."
This Statement  rescinds FASB Statement No. 4, "Reporting  Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement,  FASB Statement No.
64,  "Extinguishments of Debt Made to Satisfy  Sinking-Fund  Requirements." This
Statement also rescinds FASB Statement No. 44.














F-12
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
          ACCOUNTING POLICIES - (continued)

RECENTLY ISSUED  ACCOUNTING  STANDARDS  (continued)  -"Accounting for Intangible
Assets  of Motor  Carriers."  This  Statement  amends  FASB  Statement  No.  13,
"Accounting  for  Leases," to eliminate  an  inconsistency  between the required
accounting  for  sale-leaseback  transactions  and the required  accounting  for
certain  lease  modifications  that have  economic  effects  that are similar to
sale-leaseback   transactions.   This   Statement  also  amends  other  existing
authoritative  pronouncements  to make various  technical  corrections,  clarify
meanings,  or  describe  their  applicability  under  changed  conditions.   The
Company's  management  does not expect that the application of the provisions of
this  statement  will  have  a  material  impact  on  the  Company's   financial
statements.

In July 2001,  the FASB issued SFAS No. 143,  "Accounting  for Asset  Retirement
Obligations."   SFAS  No.  143  addresses  the   accounting  and  reporting  for
obligations associated with the retirement of tangible long-lived assets and the
associated  asset  retirement  costs.  SFAS No.  143 will be  effective  for the
Company in the first quarter of 2003. The Company's  management  does not expect
that the  application  of the  provisions of this statement will have a material
impact on the Company's financial statements.

In January 2003, FASB issued  Interpretation No. 46 (FIN 46),  "Consolidation of
Variable Interest  Entities." This  interpretation  clarifies the application of
Accounting Research Bulletin No. 51,  "Consolidated  Financial  Statements," and
requires existing  unconsolidated  variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among  parties  involved.  The  Company's  management  does not expect  that the
application of the provisions of this interpretation will have a material impact
on the Company's financial statements.

In November  2002,  FASB  issued  Interpretation  No. 45 (FIN 45),  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of  Indebtedness  of Others." This  interpretation  elaborates on the
disclosures  to be made by a guarantor  in its  financial  statements  about its
obligations under certain  guarantees that it has issued. It also clarifies that
a  guarantor  is required to  recognize,  at the  inception  of a  guarantee,  a
liability  for  the  fair  value  of the  obligation  undertaken  in  issuing  a
guarantee.  The Company has complied with the disclosure requirements of FIN 45.
The initial recognition and initial measurement provisions shall be applied on a
prospective  basis to guarantees issued or modified after December 31, 2002. The
Company's  management  does not expect that the application of the provisions of
this  interpretation  will have a  material  impact on the  Company's  financial
statements.








                                                                            F-13
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 2 - INVENTORIES

Inventories consist of the following:


                                                2002               2001
                                          -----------------  ------------------

    Parts and subassembly                      $ 2,314,476         $ 2,565,876
    Work-in-process and raw materials            1,221,388           1,275,202
    Machines                                     1,690,710           1,655,157
    Bags and other finished goods                  825,146           1,199,659
                                          -----------------  ------------------

                                               $ 6,051,720         $ 6,695,894
                                          =================  ==================





NOTE 3 - INTANGIBLE ASSETS, NET

Intangible assets, net, consist of the following:


                                                2002               2001
                                          -----------------  ------------------

    License and patent costs                     $ 617,113           $ 617,113
    Less accumulated amortization                  605,602             598,220
                                          -----------------  ------------------

                                                  $ 11,511            $ 18,893
                                          =================  ==================


Amortization  expense for the years ended December 31, 2002, 2001, and 2000, was
$7,382, $6,880, and $14,056, respectively.














F-14
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment, consist of the following:
<TABLE>
<CAPTION>
                                                                                 2002                   2001
                                                                           -----------------      ------------------
<S>                                                                               <C>                     <C>
         Land                                                                     $ 160,826               $ 160,826
         Buildings                                                                2,853,400               2,853,400
         Vehicles                                                                   369,931                 353,928
         Office furniture, fixtures, and equipment                                2,317,425               2,263,420
         Plant equipment                                                          3,580,758               3,468,013
         Rental equipment                                                           841,948                 507,656
         Leasehold improvements                                                      80,399                  70,014
                                                                           -----------------      ------------------

                                                                                 10,204,687               9,677,257

         Less accumulated depreciation and amortization                          (6,246,214)             (5,449,405)
                                                                           -----------------      ------------------

                                                                                $ 3,958,473             $ 4,227,852
                                                                           =================      ==================
</TABLE>

Certain  property,  plant and  equipment  serve as  collateral  for  short-  and
long-term  debt  obligations.  The Company  leases  certain assets under capital
lease  agreements.  At December 31, 2002 and 2001, the gross amount of equipment
under  lease was  $84,622.  Accumulated  depreciation  related to those  capital
leases was $84,622 and $73,984 at December 31, 2002 and 2001, respectively.

Depreciation  expense for the years ended December 31, 2002,  2001, and 2000 was
$808,880, $755,510, and $598,789, respectively.



















                                                                            F-15
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 5 - LINE OF CREDIT

The Company has an operating  line of credit with a bank for up to $5,000,000 at
December  31,  2002  and  2001.  The  line of  credit  is  secured  by  accounts
receivable,  inventories, fixed asset blanket and general intangibles, and bears
interest at the bank's  prime rate plus 1/4% at December  31, 2002 and  December
31,  2001 (4.5% at  December  31, 2002 and 5.0% at  December  31,  2001).  As of
December 31, 2002 and 2001,  $384,725 and $1,287,855 were outstanding  under the
operating line of credit. The line of credit is subject to certain net worth and
EBITDA  covenants,  and an  annual  capital  expenditure  limit.  Subsequent  to
year-end,  the Company reduced its line of credit to $2,500,000 and the interest
rate was adjusted to the bank's  prime rate plus 1-1/4%.  The line is subject to
annual renewal at June 1, 2003.


NOTE 6 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
                                                                      2002            2001
                                                                 --------------  --------------
<S>                                                                   <C>             <C>
         Note payable in monthly installments of
         $2,436, including interest at 8.32%, through
         July 2005, secured by certain equipment,
         office furniture and fixtures, and personal
         guarantees of certain shareholders, sub-
         ordinate to building loan and certain equip-
         ment loans                                                   $ 68,765        $ 90,291

         Note payable, monthly payments of $6,724,
         including interest at 6.84% through August 2014,
         secured by real property                                      644,939         670,976

         Note payable in monthly installments of
         $4,969, including interest at 6.62% through
         November 2017, secured by real
         property                                                      525,041         545,136
</TABLE>













F-16
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 6 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - (continued)
<TABLE>
<CAPTION>
                                                                      2002            2001
                                                                 --------------  --------------
<S>                                                                   <C>             <C>
         Note payable in monthly principal install-
         ments of $5,833, plus interest at prime
         plus .75% (5.0% at December 31,
         2002 and 5.50% at December 31,
         2001) through April 2003, secured by
         fixed asset blanket                                          $ 23,333        $ 93,333

         Note payable in monthly installments of
         $8,333, plus interest at 8.38% through
         January 2006, secured by certain equip-
         ment                                                          308,333         408,333

         Note payable with the City of Blair,
         Nebraska, with monthly installments of
         $6,607, including interest at 3% through
         September 2004, secured by Blair plant
         and equipment                                                 134,996         209,018

         Note payable in monthly installments of
         $3,105, including interest at 8.75%
         through December 2004, secured by
         certain equipment                                              68,052          97,827
                                                                 --------------  --------------

                                                                     1,773,459       2,114,914
         Less current portion                                          314,321         335,385
                                                                 --------------  --------------

                                                                   $ 1,459,138     $ 1,779,529
                                                                 ==============  ==============
</TABLE>
















                                                                            F-17
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 6 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS - (continued)

Future maturities of long-term debt and capital lease obligations are summarized
as follows:
<TABLE>
<CAPTION>
                                                                                      Capital Lease Obligations
                                                             Long-Term       ------------------------------------------------
                                                          Debt Excluding        Minimum          Amount
                                                           Capital Lease         Lease        Representing
                                                            Obligations         Payments        Interest        Principal
                                                        -------------------- --------------- ---------------- ---------------
<S>                                       <C>                     <C>              <C>               <C>            <C>
         Year ending December 31,         2003                    $ 314,321        $ 40,729          $ 3,076        $ 37,653
                                          2004                      282,706               -                -               -
                                          2005                      186,491               -                -               -
                                          2006                       80,222               -                -               -
                                          2007                       76,959               -                -               -
                                          Thereafter                832,760               -                -               -
                                                        -------------------- --------------- ---------------- ---------------

                                                                $ 1,773,459        $ 40,729          $ 3,076        $ 37,653
                                                        ==================== =============== ================ ===============
</TABLE>

NOTE 7 - NOTE PAYABLE TO SHAREHOLDER AND RELATED PARTY

The  Company  had a note  payable  to a  shareholder  of the  Company.  The note
included interest at 10% and required monthly principal and interest payments of
$1,600  through  April 30, 2000,  at which time the note was paid off.  Interest
expense related to shareholders and related parties amounted to $135 in 2000.






















F-18
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 8 - INCOME TAXES

The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
                                                             2002                   2001                    2000
                                                       -----------------      -----------------       -----------------

         Current:
<S>                                                                 <C>                    <C>               <C>
             Federal                                                $ -                    $ -               $ 226,000
             Suspended general business
                credits utilized                                      -                (27,150)                      -
             General business credits utilized                        -                      -                 (82,000)
             State                                                2,210                  1,083                  16,000
             Net operating loss utilized                              -                      -                 (14,000)
                                                       -----------------      -----------------       -----------------

                                                                  2,210                (26,067)                146,000
                                                       -----------------      -----------------       -----------------

         Deferred:
             Federal                                           (478,000)              (195,000)               (164,000)
             State                                              (60,000)               (12,000)                 10,000
                                                       -----------------      -----------------       -----------------

                                                               (538,000)              (207,000)               (154,000)
                                                       -----------------      -----------------       -----------------

                                                              $(535,790)             $(233,067)               $ (8,000)
                                                       =================      =================       =================
</TABLE>





















                                                                            F-19
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 8 - INCOME TAXES - (continued)

Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
                                                                                 2002                   2001
                                                                           -----------------      ------------------
<S>                                                                               <C>                      <C>
         State net operating loss carryforward                                    $ 138,000                $ 80,000
         Federal net operating loss carryforward                                    660,000                 169,000
         General business credit carryforward                                       252,000                 243,000
         Alternative minimum tax credit carryforward                                 21,000                  21,000
         Capital loss carryforward                                                        -                 135,632
         Other expenses not currently deductible                                     92,000                  73,000
                                                                           -----------------      ------------------

                Gross deferred tax asset                                          1,163,000                 721,632
         Valuation allowance                                                              -                (135,632)
                                                                           -----------------      ------------------

                Net deferred tax assets                                           1,163,000                 586,000

         Gross deferred tax liability, primarily
             due to differences in depreciation                                    (150,000)               (111,000)
                                                                           -----------------      ------------------

                Net deferred tax assets                                         $ 1,013,000               $ 475,000
                                                                           =================      ==================

</TABLE>

At  December  31,  2002,  the  Company  had a  federal  net  operating  loss  of
approximately  $1,942,000  that is available to offset  future  federal  taxable
income through 2022.

At December 31, 2002,  the Company has  research  tax credit  carryforwards  for
federal  income tax purposes of  approximately  $252,000  that are  available to
offset future federal income. These credits can be carried forward through 2022.
The Company had a capital loss carryforward of $886,431, which expired unused in
2002. The $135,632 deferred tax asset and the $135,632 valuation  allowance have
been eliminated upon the expiration of this capital loss carryforward.












F-20
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 8 - INCOME TAXES - (continued)

The provision for income taxes differs from the amount of income tax  determined
by applying the  applicable  U.S.  statutory  federal  income tax rate to pretax
income as a result of the following differences:
<TABLE>
<CAPTION>
                                                             2002                   2001                    2000
                                                       -----------------      -----------------       -----------------
<S>                                                                <C>                    <C>                      <C>
         Statutory federal income tax rate                         (34%)                  (34%)                    34%
         General business credits                                    (1)                   (20)                    (35)
         Other nondeductible and nontaxable
             items                                                    -                      9                       5
         Nontaxable earnings of foreign
             joint venture                                           (4)                   (11)                     (4)
         Other                                                       (6)                    (3)                     (1)
                                                       -----------------      -----------------       -----------------
         Effective tax rates                                       (45%)                  (59%)                    (1%)
                                                       =================      =================       =================
</TABLE>

The  Company  underwent a study with a  consulting  firm to  determine  if costs
associated with the Company's research and development  activities were eligible
for  research  and  development  tax credits in its open tax years.  The Company
completed the study and filed the necessary  forms for its 1996 through 1999 tax
years during the year 2000 generating net tax credit  benefits of  approximately
$270,000.


NOTE 9 - SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS

Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
                                                             2002                   2001                    2000
                                                       -----------------      -----------------       -----------------
<S>                                                           <C>                    <C>                     <C>
         Cash paid during year for:
             Interest                                         $ 314,068              $ 355,686               $ 456,158
             Income taxes                                       $ 4,280               $ 90,800                $ 10,516
</TABLE>











                                                                            F-21
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 10 - SHAREHOLDERS' EQUITY

TREASURY  STOCK - During 2001,  the Company  repurchased  105,000  shares of its
common stock from a retiring director for $31,500.

PREFERRED STOCK - The Preferred Stock is redeemable  solely at the option of the
Company.  The Company  maintains  life  insurance on the owner of the  Preferred
Stock and, in the event of the stockholder's death, currently intends to use the
proceeds of that insurance to redeem all outstanding shares of Preferred Stock.

STOCK  AWARDS - The  Company has a 1991  Employee  Stock Plan (the Plan) and has
reserved 133,575 shares of common stock for issuance under the Plan. Under terms
of the Plan,  stock is awarded to employees at the sole  discretion of the Board
of Directors. No awards were granted under the Plan for 2002, 2001, and 2000. At
December  31,  2002,  there were 125,335  shares  available  for grant under the
Employee Stock Plan.

COMMON  STOCK  OPTIONS - The Company  has an  Incentive  Stock  Option Plan (the
Incentive  Plan) and has  reserved  185,000  shares of common stock for issuance
under the  Incentive  Plan.  Options  under the  Incentive  Plan are issuable to
officers  and  employees  of the  Company  and all option  grants will be at the
market  value of the stock at the date of grant.  Vesting  of stock  options  is
determined  for each grant by the Board of Directors.  During 2002,  the Company
granted  30,000  options and had 20,000  options  expire.  At December 31, 2002,
there were 135,000 shares  available for grant under the Incentive  Stock Option
Plan.

During 1996, the Company adopted a Non-employee  Director Stock Option Plan (the
Director  Plan) and has reserved  1,000,000  shares of common stock for issuance
under the Director  Plan. The Director Plan grants 50,000 options to each member
of the Board of Directors  who is not an employee of the Company.  Forty percent
of the 50,000  options  vest and become  exercisable  six months after the grant
date, another 40% of the options vest and become exercisable two years after the
grant date, and the remaining portion of the options vest and become exercisable
three  years after the grant date.  Beginning  with the annual  meeting in 2000,
those directors who have served a three-year period,  receive an annual grant of
10,000 options which become  exercisable six months after the grant date. During
2002, the Company  granted  100,000 in initial  options and 20,000 options under
the annual grant.  Additionally,  the Company had 60,000  options  expire during
2002. At December 31, 2002,  there were 550,000 shares available for grant under
the Non-Employee Director Stock Option Plan.












F-22
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 10 - SHAREHOLDERS' EQUITY - (continued)

Transactions and other information  relating to the Company's stock option plans
for the three years ended December 31, 2002, are summarized as follows:
<TABLE>
<CAPTION>
                                             The Incentive Plan             The Director Plan
                                         ----------------------------  ----------------------------
                                                          Weighted                      Weighted
                                                          Average                       Average
                                                          Exercise                      Exercise       Combined
                                            Shares         Price          Shares         Price          Shares
                                         -------------  -------------  -------------  -------------  --------------
<S>                                            <C>            <C>           <C>             <C>            <C>
         Options outstanding at
             December 31, 1999                 76,788         $ 1.01        350,000         $ 0.99         426,788

         Options granted                            -            $ -         50,000         $ 0.39          50,000

         Options expired                       (6,788)        $ 1.03        (50,000)        $ 1.06         (56,788)
                                         -------------                 -------------                 --------------

         Options outstanding at
             December 31, 2000                 70,000         $ 1.00        350,000         $ 0.91         420,000

         Options granted                       20,000         $ 0.33         40,000         $ 0.35          60,000

         Options expired                      (50,000)        $ 1.06              -            $ -         (50,000)
                                         -------------                 -------------                 --------------

         Options outstanding at
             December 31, 2001                 40,000         $ 0.60        390,000         $ 0.84         430,000

         Options granted                       30,000         $ 0.25        120,000         $ 0.29         150,000

         Options expired                      (20,000)        $ 0.86        (60,000)        $ 0.95         (80,000)
                                         -------------                 -------------                 --------------

         Options outstanding at
             December 31, 2002                 50,000         $ 0.28        450,000         $ 0.68         500,000
                                         =============                 =============                 ==============


         Options exercisable at
             December 31, 2000                 70,000         $ 1.00        350,000         $ 0.91         420,000
                                         =============                 =============                 ==============

         Options exercisable at
             December 31, 2001                 40,000         $ 0.60        390,000         $ 0.84         430,000
                                         =============                 =============                 ==============

         Options exercisable at
             December 31, 2002                 20,000         $ 0.33        390,000         $ 0.64         410,000
                                         =============                 =============                 ==============
</TABLE>
                                                                            F-23
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 10 - SHAREHOLDERS' EQUITY - (continued)

At December 31, 2002,  the Company had  outstanding  options for the purchase of
500,000 shares of common stock as follows:
<TABLE>
<CAPTION>
           Number of Options                Number of Options                                            Average
              Outstanding                      Exercisable                 Price Range               Remaining Life
        -------------------------       --------------------------      -------------------       ----------------------
<S>     <C>                             <C>                             <C>                              <C>
        200,000 options                 200,000 options                 $1.00 - $1.06                    4 years
        50,000 options                  50,000 options                  $0.56 - $0.69                    1 year
        60,000 options                  60,000 options                  $0.39 - $0.49                    9 years
        190,000 options                 100,000 options                 $0.25 - $0.35                    7 years
</TABLE>


NOTE 11      - FOREIGN SALES ACTIVITY

Export sales from the Company's operations are as follows:
<TABLE>
<CAPTION>
                                                             2002                   2001                    2000
                                                       -----------------      -----------------       -----------------
<S>                                                           <C>                     <C>                    <C>
         Latin America/Mexico                                 $ 112,956               $ 88,864               $ 194,947
         Canada                                               1,147,872              1,030,174               1,280,096
         Germany                                                275,415                444,767                 441,188
         Other                                                  202,008                248,183                 109,272
                                                       -----------------      -----------------       -----------------

                                                            $ 1,738,251            $ 1,811,988             $ 2,025,503
                                                       =================      =================       =================
</TABLE>



















F-24
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12 - BAW JOINT-VENTURE

On February 27, 1997,  the Company  entered into a Joint Venture  Agreement with
Budissa  Agroservice  Gesellschaft and formed BAW (Budissa  Agrodienstleistungen
und Warenhandels).  The Company has a 50% interest in BAW which is accounted for
under the  equity  method.  BAW folds and  distributes  silage  bags  throughout
Europe.
<TABLE>
<CAPTION>
                                                                                 2002                   2001
                                                                           -----------------      ------------------
<S>                                                                               <C>                     <C>
         Investment, beginning of year                                            $ 272,938               $ 141,738
         Share of income for the year                                               125,000                 131,200
                                                                           -----------------      ------------------

         Investment, end of year                                                  $ 397,938               $ 272,938
                                                                           =================      ==================
</TABLE>

On February  27,  1997,  BAW also  entered  into a lease  agreement  with Ag-Bag
International Limited for the use of a folding machine.  Royalties are earned by
the Company  based upon the  poundage  folded by BAW. In 2002,  2001,  and 2000,
income from this agreement was $190,000, $168,000 and $115,000, respectively.

On December 18, 2000,  Ag-Bag  International  Limited  entered into an agreement
with Dresdner Bank to guarantee up to 511,292 Euro ($535,987 US) as security for
an additional cash credit facility of BAW. There was -0- Euro outstanding  under
this additional  cash credit facility at December 31, 2002 and 2001,  guaranteed
by the Company.























F-26
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12 - BAW JOINT-VENTURE - (continued)

Condensed  financial  statements  for the Company's BAW Joint Venture in Germany
are as follows:
<TABLE>
<CAPTION>
                                                             2002                   2001                    2000
                                                       -----------------      -----------------       -----------------
                               (Dollars in 000's)
<S>                                                             <C>                      <C>                     <C>
         Current assets                                         $ 1,265                  $ 967                   $ 604
         Property, plant, and equipment, net                        842                    707                     262
         Other assets                                                 8                     18                      10
                                                       -----------------      -----------------       -----------------

         Total assets                                           $ 2,115                $ 1,692                   $ 876
                                                       =================      =================       =================

         Current liabilities                                      $ 377                  $ 511                   $ 380
         Long-term liabilities                                      797                    552                     191
                                                       -----------------      -----------------       -----------------

         Total liabilities                                        1,174                  1,063                     571
                                                       -----------------      -----------------       -----------------

         Shareholders' equity                                       869                    577                     291
         Minority interest                                           72                     52                      14
                                                       -----------------      -----------------       -----------------

         Total shareholders' equity                                 941                    629                     305
                                                       -----------------      -----------------       -----------------

         Total liabilities and shareholders'
             equity                                             $ 2,115                $ 1,692                   $ 876
                                                       =================      =================       =================

         Net sales                                              $ 3,758                $ 3,357                 $ 2,548
         Cost of goods sold                                      (2,591)                (2,350)                 (1,816)
                                                       -----------------      -----------------       -----------------

         Gross profit                                             1,167                  1,007                     732
         Selling and administrative
             expenses                                              (687)                  (511)                   (478)
         Other income (expense)                                     (29)                   (31)                    (14)
         Income taxes                                              (163)                  (123)                   (125)
                                                       -----------------      -----------------       -----------------

         Net income (*)                                           $ 288                  $ 342                   $ 115
                                                       =================      =================       =================

         *Attributed to other shareholders                         $ 15                   $ 36                     $ 9
</TABLE>

F-26
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 12 - BAW JOINT-VENTURE - (continued)

The  condensed  balance  sheets have been  translated  from the Euro to the U.S.
Dollar at the  exchange  rate in effect at December 31, 2002 and from the German
Mark to the U.S. dollar at the exchange rates in effect at December 31, 2001 and
2000.  The exchange  rates used at December 31, 2002,  2001,  and 2000,  for the
balance sheets were $1.05,  $.45, and $.48  respectively.  The condensed  income
statements  have been translated from the Euro to the U.S. Dollar at the average
exchange  rate in effect at  December  31,  2002 and from the German Mark to the
U.S.  dollar at the average  exchange  rates in effect at December  31, 2001 and
2000. The average  exchange rates used at December 31, 2002, 2001, and 2000, for
the income statements were $.95 $.47, and $.50, respectively.


NOTE 13 - COMMITMENTS AND CONTINGENCIES

PURCHASE  COMMITMENTS  - The  Company  purchases  its  Tri-Dura(R)  rolls from a
company  owned by Steven  G. Ross  (Supplier)  pursuant  to a supply  agreement.
Steven  G. Ross is a 14.9%  stockholder  in the  Company  and owner of a company
which  competes  with the  Company's  Tri-Dura(R)  bags.  The  supply  agreement
provides  that the Company  purchase  all of its  plastic  rolls,  with  certain
exceptions, from Supplier through at least December 31, 2007. Thereafter, either
the Company or Supplier may terminate the supply agreement upon two years' prior
written notice.  The Company may purchase  plastic rolls from other suppliers to
the  extent  Supplier  is unable  to  supply  plastic  rolls  under  the  supply
agreement.  The Company considers its relationship with Supplier to be good. The
Company believes there are adequate alternative suppliers available in the event
Supplier is unable to provide rolls.

























                                                                            F-27
--------------------------------------------------------------------------------
<PAGE>
AG-BAG INTERNATIONAL LIMITED
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 13 - COMMITMENTS AND CONTINGENCIES - (continued)

LEASE  COMMITMENTS - The Company  leases land under a  noncancellable  operating
lease. This lease requires monthly payments with terms that expire through 2014.
Total rent expense under all operating  leases for the years ended  December 31,
2002, 2001 and 2000 totaled $66,361, $59,418 and $59,773, respectively.

Future  minimum lease  payments  under  noncancellable  operating  leases are as
follows:

Years ending December 31,           2003                              $  18,264
                                    2004                                 18,264
                                    2005                                 21,917
                                    2006                                 21,917
                                    2007                                 21,917
                                    Thereafter                          175,334
                                                              ------------------
                                                                     $  277,613
                                                              ==================

CONTINGENCIES  - The Company is involved in  litigation  matters that are in the
normal course of business.  Management is of the opinion that these matters will
not  have  a  material  effect  on  the   accompanying   financial   statements.
Accordingly,  no  provision  for these  matters  is  included  in the  financial
statements for the year ended December 31, 2002.


NOTE 14 - CONCENTRATION OF CREDIT RISK

Financial  instruments  which  potentially  subject  the  Company to credit risk
consist of cash and receivables.  The Company's cash balances are with federally
insured  banks  and  periodically   exceed  insured  limits.   The  Company  has
outstanding   accounts   receivable   balances  with  three  customers  totaling
approximately  $642,000 at December 31, 2002. These three balances represent 47%
of the accounts receivable balance at December 31, 2002.


















F-28
--------------------------------------------------------------------------------
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                                   NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

NOTE 15 - 401(K) PROFIT SHARING PLAN

The Company has a qualified  401(k)  profit  sharing plan covering all full-time
personnel with at least one year of continuous service.  Employer  contributions
to the plan are at the discretion of the Company's management.  No contributions
were made by the Company to the 401(k) profit  sharing plan in 2002 or 2001. The
Company's  eligible  employees  made  contributions  to the plan of $230,652 and
$239,131 for the years ended December 31, 2002 and 2001, respectively.


NOTE 16 - QUARTERLY FINANCIAL DATA - (UNAUDITED)
<TABLE>
<CAPTION>
                                                          2002                                          2001
                                      --------------------------------------------- ---------------------------------------------
                                         Q-1        Q-2         Q-3        Q-4         Q-1        Q-2         Q-3         Q-4
                                      ---------- ----------- ---------- ----------- ---------- ----------- ----------  ----------
                                                 (Dollars in thousands)                        (Dollars in thousands)
<S>                                     <C>         <C>        <C>         <C>        <C>        <C>        <C>          <C>
 Net sales                              $ 4,807     $ 9,929    $ 8,817     $ 3,636    $ 4,149    $ 10,159   $ 10,156     $ 4,244
 Gross profit from operations             1,046       2,574      1,623        (176)       772       2,379      2,316         294
 Income (loss) before extraordinary
     items and cumulative effect
     of a change in accounting             (251)        542        124      (1,079)      (367)        461        385        (643)
                                      ---------- ----------- ---------- ----------- ---------- ----------- ----------  ----------

 Net income (loss)                       $ (251)      $ 542      $ 124    $ (1,079)    $ (367)      $ 461      $ 385      $ (643)
                                      ========== =========== ========== =========== ========== =========== ==========  ==========

 Basic and diluated net income
     (loss) per common share            $ (0.02)     $ 0.04     $ 0.01     $ (0.09)   $ (0.03)     $ 0.04     $ 0.03     $ (0.06)
                                      ========== =========== ========== =========== ========== =========== ==========  ==========
</TABLE>




















                                                                            F-29
--------------------------------------------------------------------------------
<PAGE>
























                                                        SUPPLEMENTAL INFORMATION
--------------------------------------------------------------------------------

































<PAGE>







INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL INFORMATION


To the Board of Directors and Shareholders
Ag-Bag International Limited


Under date of February  18,  2003,  we reported on the balance  sheets of Ag-Bag
International  Limited  as of  December  31,  2002  and  2001,  and the  related
statements of income,  shareholders'  equity, and cash flows for the years ended
December 31, 2002,  2001,  and 2000,  as contained in the annual  report on Form
10-K for the year 2002.  In  connection  with our  audits of the  aforementioned
financial  statements,  we also audited the related  schedule of  Valuation  and
Qualifying  Accounts.  This  schedule  is the  responsibility  of the  Company's
management.  Our  responsibility  is to  express  an  opinion  on the  financial
statement schedule based on our audit.

In our  opinion,  the  schedule  of  Valuation  and  Qualifying  Accounts,  when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly, in all material respects, the information set forth therein.




\s\ Moss Adams LLP
Portland, Oregon
February 18, 2003
























                                                                            F-30
<PAGE>
                                                    AG-BAG INTERNATIONAL LIMITED
                                               VALUATION AND QUALIFYING ACCOUNTS
--------------------------------------------------------------------------------






<TABLE>
<CAPTION>
               Column A                               Column B         Column C         Column D          Column E
---------------------------------------------       ------------     ------------     -------------     ------------
                                                     Balance at       Charged to       Write-offs,       Balance at
                                                     Beginning        Costs and          Net of           End of
      Description                                     of Year         Expenses         Recoveries          Year
---------------------------------------------       ------------     ------------     -------------     ------------
<S>                                                    <C>              <C>              <C>               <C>
Year ended December 31:
     2002:
         Allowance for doubtful accounts               $203,350         $ 73,000         $ (72,755)        $203,595
         Warranty reserve                              $124,482         $328,041        $ (275,139)        $177,384
         Inventory valuation reserve                   $652,322         $179,000        $ (100,000)        $731,322

     2001:
         Allowance for doubtful accounts               $247,690         $ 25,000         $ (69,340)        $203,350
         Warranty reserve                              $190,162         $159,597        $ (225,277)        $124,482
         Inventory valuation reserve                   $718,951         $ 77,500        $ (144,129)        $652,322

     2000:
         Allowance for doubtful accounts               $147,024         $175,000         $ (74,334)        $247,690
         Warranty reserve                              $175,000         $319,541        $ (304,379)        $190,162
         Inventory valuation reserve                   $487,591         $256,000         $ (24,640)        $718,951
</TABLE>
























                                                                            F-31
<PAGE>
                          INDEPENDENT AUDITOR'S REPORT


To the Board of Directors and Shareholders
Ag-Bag International Limited



We have audited the accompanying  balance sheets of BAW group as of December 31,
2002,  2001 and 2000 and the related  statements  of operating  results and cash
flows, for the years then ended,  which, as described in Note 1 to the financial
statements  have been prepared on the basis of accounting  principles  generally
accepted in Germany.  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 and in Germany.  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
audit provides a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of BAW group as of December 31,
2002,  2001 and 2000,  and the results of its  operations and its cash flows for
the years ended December 31, 2002,  2001 and 2000, in conformity with accounting
principles generally accepted in Germany.


                         02625 Bautzen, January 24, 2003
                              Treuhand-Gesellschaft
                          Dr. Steinebach & Partner GmbH
                         Wirtschaftsprufungsgesellschaft

                              \s\ Martin Steinebach
                              ---------------------
                           Dipl.Ing. Martin Steinebach
                                     Auditor


















                                      F-32
<PAGE>
                                    BAW GROUP
                                 BALANCE SHEETS

                                                 December 31,
                                        ----------------------------
                                           2002      2001     2000
                                            EUR      TEUR     TEUR
                                        ---------- -------- --------
A. FIXED ASSETS

 II. TANGIBLE ASSETS

  1. Real estate and buildings          570,341.29    494.3      0.0
  2. Technical equipment
     and machinery                      209,221.18    288.4    260.0
  3. Other equipment, tools,
     furniture and fixtures              21,787.76     21.3     16.4
  4. Plants under construction                -.-       0.0      1.4
                                        ----------    -----    -----
                                        801,350.23    804.0    277.8
                                        ==========    =====    =====
B. LIQUID ASSETS

  I. STOCK
  1. Raw materials and supplies          11,143.50      4.1      4.2
  3. Finished products + goods          205,931.80    245.1    108.9
  4. Advance payments made                  955.84      0.1      0.0
                                        ----------    -----    -----
                                        218,031.14    249.3    113.1
                                        ----------    -----    -----
 II. ACCOUNTS RECEIVABLE AND OTHER ASSETS
  1. Trade accounts receivable          347,329.33    446.8    243.3
  3. Accounts receivable from
     shareholders                             -.-      51.1    129.2
  4. Other assets                        18,410.01     14.1      8.7
                                        ----------    -----    -----
                                        365,739.34    512.0    381.2
                                        ----------    -----    -----
 IV. CHECKS, CASH, FEDERAL RESERVE
     BANK AND POSTBANK BALANCE,
     CASH IN BANKS                      621,327.82    336.9    147.1
                                        ----------    -----    -----
     Liquid assets total              1,205,098.30  1,098.2    641.4
                                      ============  =======    =====
C. DEFERRED ITEM                          3,345.91      9.0     11.1
                                          ========      ===     ====
D. ACTIVE DEFERRED TAXES                  4,143.97     11.2      0.0
                                          ========     ====      ===
TOTAL ASSETS                          2,013,938.41  1,922.4    930.3
                                      ============  =======    =====





                                      F-33
<PAGE>
                                    BAW GROUP
                                 BALANCE SHEETS

                                                December 31,
                                        ----------------------------
                                           2002      2001     2000
                                            EUR      TEUR     TEUR
A. EQUITY                               ---------- -------- --------

  I. SUBSCRIBED CAPITAL                  75,000.--     75.0     75.0
III. OTHER SURPLUS RESERVES             223,819.86     80.5      0.0
 IV. PROFIT CARRYFORWARD                254,685.66    116.3     69.1
  V. YEAR'S PROFIT                      287,233.54    284.3    127.7
                                        ----------    -----    -----
     Subtotal                           840,739.06    556.1    271.8
 VI. CONVERSION                    ./.   12,835.89     24.7     10.2
VII. SHARES OF OTHER SHAREHOLDERS        68,434.39     53.0     17.6
                                        ----------    -----    -----
     Equity capital total               896,337.56    633.8    299.6
                                        ==========    =====    =====

B. SPECIAL ITEM INCL RESERVES           141,711.75    134.1     51.5
                                        ==========    =====     ====
C. RESERVES

   1. Passive deferred taxes             59,755.05     61.4    177.9
   2. Tax reserves                       91,338.63    166.6      0.0
   4. Other reserves                     46,290.67     47.7     30.5
                                        ----------    -----    -----
      Reserves total                    197,384.35    275.7    208.4
                                        ==========    =====    =====
D. PAYBLES

   2. Liabilities to credit
      institutions                      433,226.54    466.6    101.9
   3. Advance payments received           9,480.79      0.0      0.0
   4. Trade accounts payable             21,412.25     29.7    220.6
   6. Liabilities to shareholders       294,196.87    344.5      0.0
   8. Other liabilities                  14,185.45     16.0     35.4
      of this from taxes EUR 5,302.79
      of this within the framework of
      social security EUR 3,101.85
                                        ----------    -----    -----
      Payables total                    772,501.90    856.8    357.9
                                        ==========    =====    =====

E. DEFERED ITEM                           6,002.85     22.0     12.9
                                          ========     ====     ====

TOTAL LIABILITIES AND EQUITY          2,013,938.41  1,922.4    930.3
                                      ============  =======    =====



                                      F-34
<PAGE>
                                    BAW GROUP
                  STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                                             Years ended December 31,
                                   ---------------------------------------
                                         2002          2001         2000
                                          EUR          TEUR         TEUR
                                   ------------- ------------ ------------
 1. Sales proceeds                  3,893,954.40      3,411.6      2,543.5
 2. Change in stock             ./.    39,166.60   +    136.2  ./.   176.6
 4. Other business proceeds           100,799.62        263.1         76.1
 5. Material costs
    a) Costs for raw materials
       + supplies               ./. 2,262,513.94  ./. 2,282.7  ./. 1,444.5
    b) Costs for services
       received                 ./.   465,212.35  ./.   425.6  ./.   246.1
                                    ------------      -------      -------
    GROSS PROFIT                    1,227,861.13      1,102.6        752.4
 6. Personnel costs
    a) Wages + salaries               160,558.18        138.9         95.8
    b) Social contributions            36,139.50         31.0         22.9
 7. Depreciation
    a) on tangible assets             144,758.89        151.5         86.1
 8. Other operating
    expenses                          381,450.74        320.0        243.4
11. Other interest and
    similar income               +      8,368.51   +      6.0   +      2.9
13. Interest and similar
    expenses                           35,414.79         39.5         17.6
                                      ----------        -----        -----
14. RESULTS OF REGULAR
    OPERATIONS                   +    477,907.54   +    427.7   +    289.5
18. Taxes from income
    and revenue                 ./.   172,044.25  ./.   107.7  ./.   149.9
19. Other taxes                         3,143.80          2.0          0.4
                                      ----------        -----        -----
20. YEAR'S PROFIT                +    302,719.49   +    318.0   +    139.2
    including for other
    shareholders                       15,485.95         33.7         11.5
                                      ----------        -----        -----
21. YEAR'S PROFIT WITHOUT
    OTHER SHAREHOLDERS                287,233.54        284.3        127.7
                                      ==========        =====        =====















                                      F-35
<PAGE>
                                    BAW GROUP
                        STATEMENT OF SHAREHOLDERS' EQUITY
                                DECEMBER 31, 2002

                  01/01/2002    additions    retirements    12/31/2002
                      EUR          EUR           EUR            EUR
                      ---          ---           ---            ---

Subscribed
capital            75,000.--         -.-           -.-       75,000.--
Revenue reserve    80,497.49   143,322.37 U        -.-      223,819.86
Profit carried
forward           116,304.94   284,283.83 U  143,322.37 U
                                               2,580.74(2)  254,685.66
Year's profit     284,283.83   287,233.54(1) 284,283.83 U   287,233.54
                  ----------   ----------    ----------     ----------
Subtotal          556,086.26   714,839.74    430,186.94     840,739.06
Shares of other    53,027.63    15,485.95(1)
shareholders                       565.99(3)     645.18(2)   68,434.39*
Balance from
conversion         24,669.85         -.-      37,505.74  ./. 12,835.89
                  ----------   ----------    ----------     ----------
Total
equity            633,783.74   730,891.68    468,337.86     896,337.56
                  ==========   ==========    ==========     ==========

 U = transfer from one account to another
(1) Year's profit EUR 302,719.49 = EUR 287,233.54 + EUR 15,485.95
(2) Capital adjustment due to exterior tax audit in Poland
(3) Adjusted value see audit report of the previous year




























                                      F-36
<PAGE>
                                    BAW GROUP
                        STATEMENT OF SHAREHOLDERS' EQUITY
                                DECEMBER 31, 2002


EQUITY OF OTHER SHAREHOLDERS'
----------------------------

                  01/01/2002    additions     retirement     12/31/2002
                      EUR          EUR           EUR             EUR
                      ---          ---           ---             ---

"AG BAG POLSKA" SP.ZO.O.
Subscribed
capital             4,254.61       565.99(1)         -,-       4,820.60
Profit carried
forward            12,467.17    33,137.77 U      645.18(2)    44,959.76
Year's profit      33,137.77    13,416.17     33,137.77 U     13,416.17
                   ---------    ---------     ---------       ---------
                   49,859.55    47,119.93     33,782.95       63,196.53
                   ---------    ---------     ---------       ---------

AG-BAG HUNGARIA KFT
Subscribed
capital             2,898.92         -,-           -,-         2,898.92
Profit carried
forward          ./.  333.54       602.70 U        -,-       +   269.16
Year's profit         602.70     2,069.78        602.70 U      2,069.78
                    --------     --------        ------        --------
                    3,168.08     2,672.48        602.70        5,237.86
                    --------     --------        ------        --------
                   53,027.63    49,792.41     34,385.65       68,434.39
                   =========    =========     =========       =========

(1) Adjustment of capital stock based on the determination of historical
    Exchange rates (see audit report of the previous year)
(2) Capital adjustment from investigation by tax authorities





















                                      F-37
<PAGE>
                                    BAW GROUP
                            STATEMENTS OF CASH FLOWS

                                   Years ended December 31,
                                   ------------------------
                                2002        2001        2000
                                TEUR        TEUR        TEUR
                                ----        ----        ----
  I. OPERATING RESULTS
     Sales proceeds            3,894.0    3,411.6     2,543.5
     Changes in stock      ./.    39.2  +   136.2  ./.  176.6
     Other operating
     results                     100.8      263.1        76.1
     Costs for material    ./. 2,727.7 ./.2,708.3  ./.1,690.6
                               -------    -------     -------
     Gross proceeds            1,227.9    1,102.6       752.4
     minus
     personel costs              196.7      169.9       118.7
     Depreciation
     (without special
     depr.for wear + tear)       144.8      151.5        86.1
     Other expenditure           381.5      320.0       243.4
     Other taxes                   3.1        2.0         0.4
                                 -----      -----       -----
     Operating results      +    501.8  +   459.2   +   303.8
                                 =====      =====       =====

II. FINANCIAL RESULT
     Income from interest          8.3  +     6.0   +     2.9
     Interest paid         ./.    35.4 ./.   39.5  ./.   17.6
                                  ----       ----        ----
                           ./.    27.1 ./.   33.5  ./.   14.7
                                  ====       ====        ====
III. TAXES FROM INCOME
         AND REVENUE       ./.   172.0 ./.  107.7  ./.  149.9
                                 =====      =====       =====

IV. SUMMARY OF THE RESULTS FOR THE YEAR
     Operating results      +    501.8  +   459.2   +   303.8
     Financial result      ./.    27.1 ./.   33.5  ./.   14.7
     Taxes from income and
     revenue               ./.   172.0 ./.  107.7  ./.  149.9
                                 -----      -----       -----
     Results for the year   +    302.7* +   318.0** +   139.2***
                                 =====      =====       =====

* Of this TEUR 15,5 are allocated to other shareholders
** Of this TEUR 33,7 are allocated to other shareholders
*** Of this TEUR 11,5 are allocated to other shareholders

DYNAMIC LIQUIDITY ANALYSIS BY CASH FLOW PRESENTATION:

                                    Years ended December 31,
                                    ------------------------
                                    2002      2001      2000
                                    TEUR      TEUR      TEUR
                                    ----      ----      ----

   Year's profit                +  302.7  +  318.0  +  139.2
   Depreciation                 +  144.8  +  151.5  +   86.1
                                   -----     -----     -----
   Cash flow (after tax)        +  447.5  +  469.5  +  225.3
   plus taxes                   +  172.0  +  107.7  +  149.9
                                   -----     -----     -----
   Cash flow (pre-tax)          +  619.5  +  577.2  +  375.2
                                   =====     =====     =====

                                      F-38
<PAGE>
                                    BAW GROUP
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
-----------------------------------------------------------

LEGAL STRUCTURE OF THE GROUP

The group  structure  complies with ss. 290 sub-clause 1 HGB. The parent company
of  the  group  is  BAW  Budissa  Agrodienstleistungen  und  Warenhandels  GmbH,
registered   office   at   Malschwitz.   The   subsidiaries   of   BAW   Budissa
Agrodienstleistungen  und  Warenhandels  GmbH,  AG-BAG  HUNGARIA KFT and "AG BAG
Polska" Sp.zo.o.  are affiliated  companies pursuant to ss. 271 sub-clause 2 HGB
and to ss. 290 sub-clause 2 HGB, respectively.

The company AG-BAG  HUNGARIA KFT was  incorporated  on February 11, 1999 in Gyor
(Hungary) by cash  subscription.  Having paid an initial  contribution of Forint
6,300,000.-- , BAW Budissa Agrodienstleistungen und Warenhandels GmbH holds 90 %
of the shares in the  Company.  Mr.  Szocs Csaba holds 10 % of the shares in the
company  having  paid an  initial  contribution  of  Forint  700,000.--.  In the
business  year the capital was  increased  from  Forint  3,000,000.--  by Forint
4,000,000.-- to Forint 7,000,000.--.

"AG BAG Polska"  Sp.zo.o.  was  incorporated  on 08/19/1999 in Szelejewo  Drugie
(Republic of Poland) by cash subscription.  Having paid an initial  contribution
of Zloty 80,000.--, BAW Budissa Agrodienstleistungen und Warenhandels GmbH holds
80 % of the shares of the company.  Mr. Karol  Benedykt  Glapiak and Mrs.  Marta
Kashyna  hold 10 % of the shares in the  company,  each,  having paid an initial
contribution of Zloty 10,000.--, each.

Both subsidiaries are registered in the corresponding  Commercial Register.  The
average number of the employees  employed during the business year was 10 people
(p.y. 8).
























                                      F-39
<PAGE>
PRINCIPLES OF CONSOLIDATION

a) Voluntary group accounts

The Company established the annual accounts of the group as of December 31, 2002
voluntarily pursuant to the shareholder resolution adopted January 29, 2002. The
limits of ss. 293 Commercial Code were not exceeded.  The annual accounts of the
group were prepared on the basis of the rules  concerning the commercial law. It
is a statement of annual  accounts  purely based on the commercial  law. Any tax
rights of choice were not exercised.

b) Cut-off Date and deferred valuation of the consolidated companies

BAW Budissa  Agrodienstleistungen und Warenhandels GmbH as the parent company of
the group as well as the  subsidiaries  AG-BAG  HUNGARIA KFT and "AG BAG Polska"
Sp.zo.o.  were included in the group accounts.  December 31, 2002 is the cut-off
date of the group  accounts.  Both the parent  company  as well as the  included
subsidiaries prepared regular annual accounts as of this cut-off date.

c) Breakdown of the group accounts and valuation principles

The  balance  sheet of the group as well as the  profit  and loss  account  were
stated and  classified  pursuant to the  provisions  of the  commercial  law for
Companies. The requirements of ss.ss. 297 ff HGB were paid due regard to.

Since the company is a joint  venture we had to come to an agreement  concerning
uniform valuation regulations in the group accounts.

Since the parent company has its registered  office and management in Germany we
agreed to use the German valuation  regulations for these group accounts without
having taken into consideration any tax privileges pursuant to German, Polish or
Hungarian tax laws.


























                                      F-40
<PAGE>
The balancing and valuation rights of choice were newly exercised, pursuant to
ss. 300 subp. 2 Commercial Code, such that they meet the accounting standards of
the United States of America, (US-GAAP).

The consequence was that for the individual accounts a trade balance II (see Tz.
26 concerning ss. 300 Commercial Law in Beck'scher Bilanzkommentar, 4th edition)
had to be established  pursuant to ss. 300 par. 2 Commercial  Law. In this trade
balance II all tax privileges were eliminated and uniform  valuation  principles
were applied.  The conversion of the  individual  accounts was made according to
the concept of the  functional  currency.  According to this concept the balance
sheet had to be  converted  on the basis of the current  rate and the profit and
loss account on the basis of the average rate.

                                Poland                Hungary

Current rate             1 PLZ = EUR 0.24840   1 HUF = EUR 0.004244
Average rate             1 PLZ = EUR 0.26631   1 HUF = EUR 0.004157

The capital  assets  were  estimated  on the basis of the initial  costs minus a
linear pro rata temporis degressive depreciation.

The stock was estimated on the basis of the  manufacturing  costs and the strict
lowest value principle.  For raw materials and supplies a fixed value was formed
pursuant  to ss.  256 HGB in  connection  with R.31  sub-clause  4 EStR  (German
Individual Income Tax Law).

The accounts  receivable  and other  assets are  estimated on the basis of their
nominal values.

The special item including reserves was shown pursuant to the recommendations of
the HFA comment  1/1984 of the  Institut  der  Wirtschaftsprufer  (Institute  of
Auditors).


























                                      F-41
<PAGE>
The reserves take into account all risks seen today. The payables were estimated
on the basis of the repayable amount.

d) Consolidation of Funds

For the consolidation of funds the book value method (ss. 301 sub-clause 1 no. 1
HGB) was, applied,  that is, the valuation of the shares in the subsidiaries was
offset  against  the   subsidiaries'   equity  falling  to  these  shares  which
corresponds  to the book  value of the assets  and debts to be  included  in the
group accounts.  The difference  amounting to EUR 4,072.28 was - not as required
by ss. 301 par. 3 Commercial Code - not activated as an enterprise value but was
written off the group  equity  since  these are only  incorporation  costs.  The
shares of the other  shareholders shown pursuant to ss. 307 Commercial Code were
taken into consideration.

e) Consolidation of Debts

According to the standard  theory the mutual  accounts  receivable  and accounts
payable  existing  between the  companies  included in the group  accounts  were
offset on the basis of ss. 303  sub-clause 1 HGB. The total amount of the mutual
accounts receivable and accounts payable that were offset is TEUR 8.1. TEUR 12.9
had to be taken out of the books as expenses.







































                                      F-42
<PAGE>
f) Interim result elimination

We carried out an  elimination of the interim  results,  as we did last year, in
the  financial  year 2002,  see ss. 304 par.  3  Commercial  Law. A total of EUR
10,359.92  was debited to the account of the  expenditure  for raw materials and
supplies. This was necessary for the conversion of the valuation of the finished
products and goods to the group-uniform manufacturing costs.

g) Expenditure and Income Consolidation

The expenses and income resulting from the transactions of mutual  deliveries of
goods and provision of services were mutually offset by an amount of TEUR 535.4.

h) Deferred taxation

a) In the trade balance II of BAW Budissa  Agrodienstleistungen und Warenhandels
   GmbH the tax  privilege  of  voting  pursuant  to ss. 7 g Income  Tax Law was
   eliminated (ss. 300 par. 2 Commercial Code).

b) The item of potential  taxes was currently  adjusted in the year under report
   starting from 01/01/2002.

c) National differences in the tax rate were maintained.



































                                      F-43
<PAGE>
LISTING OF THE SUBSIDIARIES OF THE GROUP

The following subsidiaries were included in the group accounts:

Name + reg.      share of    capital        result of the business year
 office          parent      stock          in national
                 company                    trade balance II
                   in %      in DM           currency              in EUR

AG-BAG HUNGARIA KFT
registered office at
Mosonmagyarovar
(Ungarn)           90      *56.698,--     + 4.979.012,38     HUF + 20.697,75

"AG BAG Polska" Sp.zo.o.
registered office at
Szelejewo Drugie
(Republik Polen)   80      *47.140,--     +   251.890,05     zl. + 67.080,84

* historic exchange rate

The  subsidiaries  did not acquire any shares in the parent  company in the year
under report.



































                                      F-44
<PAGE>
NOTE 2 - COMMITMENTS AND CONTINGENCIES
-----------------------------

Contingent Liabilities and other Financial Obligations:
There are no contingent liabilities and other obligations.


NOTE 3 - BREAKDOWN AND EXPLANATION OF THE ITEMS OF THE BALANCE SHEET
-----------------------------------------------------------

(1) Fixed assets - EUR 801,350.23
------------------------------------

The composition and development of the fixed assets are listed in Exhibit 1.

(2) Raw materials and supplies - EUR 11,143.50
----------------------------------------------

Breakdown:

Company                                               Valuation
                                                    EUR   p.y.EUR
BAW Budissa Agrodienstleistungen
und Warenhandels GmbH                            11,143.50    4.1
                                                 =========    ===

An  interim  profit  elimination  was  not  necessary  since  in  this  item  no
group-internal supplies are included.






























                                      F-45
<PAGE>
(3) Finished products and goods - EUR 205,931.80
------------------------------------------------

Breakdown:                               EUR         p.y.TEUR

   BAW Budissa Agrodienstleistungen
   und Warenhandels GmbH              41,148.24          28.5
   "AG BAG Polska" sp.zo.o.          154,638.63         196.8
   AG-BAG HUNGARIA KFT                10,144.93          19.8
                                     ----------         -----
                                     205,931.80         245.1
                                     ==========         =====

In the stock an interim  profit  elimination  totaling EUR 10,359.92 was carried
out.  This  includes  EUR  3,226.52  for stocks in Hungary and EUR  7,133.40 for
stocks in Poland.

(4) Trade accounts receivable - EUR 347,329.33
----------------------------------------------
Breakdown:                               EUR         p.y.TEUR

   BAW Budissa Agrodienstleistungen
   und Warenhandels GmbH              22,374.93          57.8
   "AG BAG Polska" Sp.zo.o.          229,980.16*        369.4
   AG-BAG HUNGARIA KFT                94,974.24          19.6
                                     ----------         -----
                                     347,329.33         446.8
                                     ==========         =====

* Management has established a reserve against accounts  receivable of 31.4 TEUR
  of the gross amount of  outstanding  receivables.  Management  has deemed this
  31.4 TEUR uncollectable.

(5) Receivables from shareholders - EUR zero
--------------------------------------------
These are trade accounts  receivable from BAG Budissa  Agroservice  Gesellschaft
mbH (residual amount of an invoice). It was repaid in 2002.





















                                      F-46
<PAGE>
(6) Other assets - EUR 18,410.01
--------------------------------
Breakdown:                               EUR         p.Y.TEUR

   BAW Budissa Agrodienstleistungen
   und Warenhandels GmbH               3,079.93           4.9
   "AG BAG Polska" Sp.zo.o.           15,330.08           8.0
   AG-BAG HUNGARIA KFT                     -.-            1.2
                                      ---------          ----
                                      18,410.01          14.1
                                      =========          ====
This is specified as follows:
                                                        EUR
   Refund of turnover tax (G)                         1,791.48
   Refund of turnover tax (PL)                       14,336.48
                                                     ---------
   Total refunds                                     16,127.96
   Guarantee (PL)                                       993.60
   Interest limitation premium (G)                    1,288.45
                                                     ---------
   Total                                             18,410.01
                                                     =========


(7) Checks, cash, Federal Reserve Bank and Postbank balance, cash in banks - EUR
    621,327.82
------------------------------------------------------------
Breakdown:

              BAW Budissa Agro-  "AG BAG    AG-BAG          Group
              dienstleistungen   Polska"    HUNGARIA
              und Warenhandels   sp.zo.o.   KFT
              GmbH in EUR          EUR        EUR         EUR   p.y.TEUR

                   522,311.98   74,860.51  24,155.33  621,327.82   336.9
                   ==========   =========  =========  ==========   =====






















                                      F-47
<PAGE>
(8) Deferred item - EUR 3,345.91
--------------------------------

Breakdown:                               EUR          p.yTEUR

   BAW Budissa Agrodienstleistungen
   und Warenhandels GmbH               2,010.37           7.5
   "AG BAG Polska" Sp.zo.o.              685.83           1.3
   AG-BAG HUNGARIA KFT                   649.71           0.2
                                       --------           ---
                                       3,345.91           9.0
                                       ========           ===

For all  companies  these are  financing  expenses paid in advance for technical
equipment and motor vehicles.

(9) Active deferred taxes - EUR 4,143.97
----------------------------------------
Active deferred taxes for:                              EUR

   As of 01/01/2002                                  11,153.39
   Release                                      ./.   7,009.42
                                                     ---------
   Interim result elimination
   EUR 10,359.92* (40 %)                              4,143.97
                                                      ========
* Hungary 3,226.52 Euro and Poland 7,133.40 Euro

(10) Special item including reserves - EUR 141,711.75
-----------------------------------------------------
Breakdown and development:

                           as of        addition      as of
                         12/31/2001    (release)    12/31/2002
                             EUR          EUR           EUR

Investment grants        134,135.71    32,722.68
                                      (25,146.64)   141,711.75
                         ==========    =========    ==========
These are subsidies of the Sachsische Aufbaubank (GA-Fordermittel) only for BAW.


















                                      F-48
<PAGE>
(11) Passive deferred taxes - EUR 59,755.05
-------------------------------------------
Development:                                            EUR
   As of 12/31/2001                                  61,355.05
   minus
     Transfer from one account
     to another in tax reserves               ./.     1,600.--
                                                     ---------
                                                     59,755.05
                                                     =========
The deferred  taxation of EUR  59,755.05 is  equivalent  to 40 % of the tax-free
reserve,  pursuant to ss. 7g EstG (Income Tax Law, of BAW GmbH. The formation of
this item was made in HB II.

(12) Reserves for potential taxes - EUR 91,338.63
-------------------------------------------------
Breakdown and development:

                              as of       additions      as of
                            12/31/2001  (consumption)  12/31/2002
                                          (release)*
                                EUR          EUR           EUR
Trade income tax
   2000                      26,007.88   (26,004.31)
                                              (3.57)*        -.-
   2001                      44,936.42         -.-      44,936.42
   2002                           -.-     19,032.--     19,032.--
corporate income tax
   2000                      47,721.43   (47,721.43)         -.-
   2001                      42,438.25   (38,612.76)     3,825.49
   2002                           -.-     21,569.92     21,569.92
Re-unification charge
   2000                       2,624.64    (2,624.64)         -.-
   2001                       2,912.07    (2,123.70)       788.37
   2002                           -.-      1,186.43      1,186.43
                            ----------   ----------     ---------
                            166,640.69    41,788.35
                                        (117,086.84)
                                              (3.57)*   91,338.63
                            ==========   ==========     =========

For the group accounts as of 12/31/2002  the respective  national tax rates were
used. The tax reserve applies only to BAW GmbH.















                                      F-49
<PAGE>
 (13) Other reserves - EUR 46,290.67
-----------------------------------

The other reserves  include expenses for  guaranties/warranties,  drawing up and
auditing of the annual statement of accounts, fees to IHK and trade associations
as well as backlog of vacation.  These reserves  cover all decernable  risks and
obligations.

(14) Liabilities - EUR 772,501.90
---------------------------------
                      Total      Breakdown according to periods
                      amount   up to 1 y.   1 to 5 y.  5 y.+ more
                       EUR         EUR         EUR         EUR


to credit inst.    433,226.54   90,869.73  210,655.88  131,700.93

advance payments
received             9,480.79    9,480.79        -.-         -.-

from purchases
and deliveries      21,412.25   21,412.25        -.-         -.-

to shareholders    294,196.87  222,942.65   71,254.22        -.-

Other*              14,185.45   14,185.45        -.-         -.-
                   ----------  ----------  ----------  ----------
Total amount       772,501.90  358,890.87  281,910.10  131,700.93
                   ==========  ==========  ==========  ==========


* of this from taxes DM 5.302,79
  of this within the framework
  of social security DM 3.101,85
























                                      F-50
<PAGE>
NOTE 4 - BREAKDOWN AND EXPLANATION OF THE INCOME STATEMENT ITEMS
-------------------------------------------------------------

(1) Sales proceeds - 3,893,954.40
---------------------------------

Breakdown:
               BAW Budissa Agro-    "AG BAG     AG-BAG
               Dienstleistungen     Polska"     HUNGARIA
               und Warenhandels     Sp.zo.o.    KFT              Group
               GmbH in EUR            EUR          EUR            EUR

                 2,101,606.85   1,308,323.29   484,024.26   3,893,954.40
                 ============   ============   ==========   ============

(2) Other operating results - EUR 100,799.62
--------------------------------------------

Breakdown:
                   BAW Budissa Agro-  "AG BAG    AG-BAG
                   dienstleistungen   Polska"    HUNGARIA
                   und Warenhandels   Sp.zo.o.   KFT             Group
                   GmbH in EUR          EUR         EUR           EUR

                        80,973.88    16,106.47    3,719.27    100,799.62
                        =========    =========    ========    ==========

(3) Expenses for raw materials and supplies - EUR 2,262,513.94
--------------------------------------------------------------

Breakdown:

                   BAW Budissa Agro-  "AG BAG     AG-BAG
                   dienstleistungen   Polska"     HUNGARIA
                   und Warenhandels   Sp.zo.o.    KFT              Group
                   GmbH in EUR          EUR          EUR            EUR

                     1,672,221.84   419,924.56   170,367.54   2,262,513.94
                     ============   ==========   ==========   ============



















                                      F-51
<PAGE>
(4) Expenses for services received - EUR 465,212.35
---------------------------------------------------

Breakdown:

                   BAW Budissa Agro-  "AG BAG     AG-BAG
                   dienstleistungen   Polska"     HUNGARIA
                   und Warenhandels   Sp.zo.o.    KFT              Group
                   GmbH in EUR          EUR          EUR            EUR

                       293,862.80   154,397.99    16,951.56     465,212.35
                       ==========   ==========    =========     ==========

(5) Personnel costs - EUR 196,697.68
------------------------------------

Breakdown:                               EUR         p.y.TEUR
  a) Wages + salaries
     BAW Budissa Agrodienstleistungen
     und Warenhandels GmbH            82,717.52          76.7
     "AG BAG Polska" Sp.zo.o.         55,972.92          49.1
     AG-BAG HUNGARIA KFT              21,867.74          13.1
                                     ----------         -----
     Subtotal
     Wages and salaries              160,558.18         138.9
                                     ----------         -----
  b) Social contributions
     BAW Budissa Agrodienstleistungen
     und Warenhandels GmbH            17,949.95          17.0
     "AG BAG Polska" Sp.zo.o.         10,854.55           9.4
     AG-BAG HUNGARIA KFT               7,335.--           4.6
                                      ---------          ----
     Subtotal
         Social contributions         36,139.50          31.0
                                      ---------          ----
     Total personnel costs           196,697.68         169.9
                                     ==========         =====





















                                      F-52
<PAGE>
(6) Depreciation on tangible assets - EUR 144,758.89
----------------------------------------------------

Breakdown:                               EUR         p.y.TEUR
  BAW Budissa Agrodienstleistungen
  und Warenhandels GmbH              111,539.57         122.9
  "AG BAG Polska" Sp.zo.o.            18,210.65          14.2
  AG-BAG HUNGARIA KFT                 15,008.67          14.4
                                     ----------         -----
                                     144,758.89         151.5
                                     ==========         =====

An exact specification is prepared in Exhibit 1, List of fixed assets.

(7) Other operating expenses - EUR 381,450.74
---------------------------------------------

Breakdown:
                   BAW Budissa Agro-  "AG BAG    AG-BAG
                   dienstleistungen   Polska"    HUNGARIA
                   und Warenhandels   sp.zo.o.   KFT            Group
                   GmbH in EUR          EUR         EUR          EUR

                       191,262.10   158,573.48   31,615.16   381,450.74
                       ==========   ==========   =========   ==========

(8) Other interest and similar income - EUR 8,368.51
----------------------------------------------------

Breakdown:                               EUR         p.y.TEUR
  BAW Budissa Agrodienstleistungen
  und Warenhandels GmbH                2,800.57           4.1
  "AG BAG Polska" Sp.zo.o.             4,035.20           1.4
  AG-BAG HUNGARIA KFT                  1,532.74           0.5
                                       --------           ---
                                       8,368.51           6.0
                                       ========           ===

This includes income from interest from fixed-time  deposits,  running  accounts
and other interest.


















                                      F-53
<PAGE>
(9) Interest and similar expenses - EUR 35,414.79
-------------------------------------------------

Breakdown:                               EUR          p.y.TEUR

  BAW Budissa Agrodienstleistungen
  und Warenhandels GmbH               28,128.52          30.4
  "AG BAG Polska" Sp.zo.o.             3,842.91           4.7
  AG-BAG HUNGARIA KFT                  3,443.36           4.4
                                      ---------          ----
                                      35,414.79          39.5
                                      =========          ====

(10) Taxes from income and proceeds - EUR 172,044.25
----------------------------------------------------

Breakdown:                               EUR         p.y.TEUR

  BAW Budissa Agrodienstleistungen
  und Warenhandels GmbH              130,467.70         101.8
  "AG BAG Polska" Sp.zo.o.            29,349.23          57.1
  AG-BAG HUNGARIA KFT                  6,817.90           0.1
                                     ----------         -----
  Subtotal national taxes            166,634.83         159.0
  minus
    Retirement of deferred taxes
    "AG BAG Polska" Sp.zo.o.
    in HB II                               -.-      ./.  26.4
    Retirement of deferred taxes
    BAW-GmbH because of release of
    Saving reserve (previous year
    Because of tax reduction)
    in HB II                     ./.   1,600.--     ./.  13.7
  plus
    Release of active
    deferred taxes               +     7,009.42     ./.  11.2
                                     ----------         -----
                                     172,044.25         107.7
                                     ==========         =====



















                                      F-54
<PAGE>
(11) Other taxes - EUR 3,143.80
-------------------------------

Breakdown:                               EUR         p.y.TEUR

  BAW Budissa Agrodienstleistungen
  und Warenhandels GmbH                1,598.53           1.0
  "AG BAG Polska" Sp.zo.o.             1,523.65           1.0
  AG-BAG HUNGARIA KFT                     21.62           0.0
                                       --------           ---
                                       3,143.80           2.0
                                       ========           ===

This includes property and motor vehicle tax.












































                                      F-55
<PAGE>
RECONCILIATION OF GERMAN GAAP TO U.S. GAAP
------------------------------------------

The primary  difference  between the generally  accepted  accounting  principles
(GAAP) of  Germany  and the United  States is that  German  GAAP  allows for the
special reserve for a company's economic  development  plans. This reserve,  and
related tax impact,  would not be recognized under U.S. GAAP. The following is a
reconciliation  of affected  balance sheet and profits and loss accounts for the
differences between German GAAP and U.S. GAAP:
<TABLE>
<CAPTION>
                                                                            EUR                TEUR               TEUR
BALANCE SHEET RECONCILIATION TO US GAAP                                    2002                2001               2000
---------------------------------------                                    ----                ----               ----
<S>                                                                          <C>                 <C>                   <C>
Total liabilities (non US GAAP)                                              1,117,600           1,288.6               630.7
Special item including reserves                                              (141,712)           (134.1)              (51.5)
Tax reserve                                                                     56,685              53.7                25.7
                                                                     ------------------    --------------   -----------------
Adjusted total liabilities (for US GAAP)                                     1,032,573           1,208.2               604.9
                                                                     ------------------    --------------   -----------------

Total equity (non US GAAP)                                                     896,338             633.8               299.6
Equity affect of prior year's reconcilation                                     80,500              25.8                46.9
Current year reversal of special item depreciation/income                     (25,147)              82.6              (42.2)
Current year taxes on increased/decreased net income                            10,059            (27.9)                21.1
                                                                     ------------------    --------------   -----------------
Adjusted equity capital (for US GAAP)                                          961,750             714.3               325.4
                                                                     ------------------    --------------   -----------------

PROFIT AND LOSS ACCOUNT RECONCILIATION TO US GAAP
Result of regular operations (non US GAAP)                                     477,908             427.7               289.5
(Reduction)/increase in other business proceeds                               (25,147)                 -                   -
(Reduction)/increase in other operating expenses                                     -            (82.6)                42.2
                                                                     ------------------    --------------   -----------------

Adjusted result of regular operations (for US GAAP)                            452,761             510.3               247.3
                                                                     ------------------    --------------   -----------------

Taxes from income and revenue (non US GAAP)                                  (172,044)           (107.7)             (149.9)
(Additional)/reduction in taxes from income and revenue                         10,059            (27.9)                21.1
                                                                     ------------------    --------------   -----------------
Taxes from income and revenue (for US GAAP)                                  (161,985)           (135.6)             (128.8)
                                                                     ------------------    --------------   -----------------

Year's profit (non US GAAP)                                                    302,720             318.0               139.2
(Reduction)/increase in other business proceeds                               (25,147)                 -                   -
(Reduction)/increase in other operating expenses                                     -            (82.6)                42.2
(Additional)/reduction in taxes from income and revenue                         10,059            (27.9)                21.1
                                                                     ------------------    --------------   -----------------
Year's profit (for US GAAP)                                                    287,632             372.7               202.5
                                                                     ------------------    --------------   -----------------

Year's profit including to other shareholders (non US GAAP)                     15,486              33.7                11.5
(Reduction)/increase in other business proceeds                                (1,283)                 -                   -
(Reduction)/increase in other operating expenses                                     -             (8.8)                 3.4
(Additional)/reduction in taxes from income and revenue                            513             (3.0)                 1.7
                                                                     ------------------    --------------   -----------------
Year's profit including to other shareholders (for US GAAP)                     14,716              39.5                16.6
                                                                     ------------------    --------------   -----------------

Year's profit without other shareholders (non US GAAP)                         287,234             284.3               127.7
(Reduction)/increase in other business proceeds                               (23,864)                 -                   -
(Reduction)/increase in other operating expenses                                     -            (73.8)                38.8
(Additional)/reduction in taxes from income and revenue                          9,546            (24.9)                19.4
                                                                     ------------------    --------------   -----------------
Year's profit without other shareholders (for US GAAP)                         272,916             333.2               185.9
                                                                     ------------------    --------------   -----------------
</TABLE>

                                      F-56
<PAGE>
                                    BAW GROUP

                                    EXHIBIT 1
                     GROUP ACCOUNTS AS OF DECEMBER 31, 2002
                              LIST OF FIXED ASSETS


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                        HISTORICAL ADDITIONS     HISTORICAL ACCUMULATED  DEPRECIATION ACCUMULATED  CONVERSION  NET BOOK   NET BOOK
                        COST       RETIREMENTS   COST       DEPRECIATION 2002         DEPRECIATION DIFFERENCES VALUE      VALUE
                        12/31/2001               12/31/2002 12/31/2001                12/31/2002               12/31/2002 12/31/2001
                        EUR        EUR           EUR        EUR          EUR          EUR          EUR         EUR        EUR
----------------------- ---------- ----------- ------------ ------------ ------------ ------------ ----------- ---------- ----------
<S>                     <C>        <C>         <C>          <C>          <C>          <C>          <C>         <C>        <C>
Real estate, leasehold
rights and buildings
incl. buildings on
real estate             519,823.86  107,049.10
of another                                       626,872.96    25,538.06    30,993.61    56,531.67        0.00 570,341.29 494,285.80
----------------------- ---------- ----------- ------------ ------------ ------------ ------------ ----------- ---------- ----------

Technical equipment and
machinery               645,931.76   28,868.56
                                                 674,800.32   367,342.14   104,101.93   471,444.07    5,864.93 209,221.18 288,372.41
----------------------- ---------- ----------- ------------ ------------ ------------ ------------ ----------- ---------- ----------

Tools, furniture and                  7,897.65
fittings                 36,950.44                44,848.09    16,307.49     7,773.24    24,080.73    1,020.40  21,787.76  21,358.76
----------------------- ---------- ----------- ------------ ------------ ------------ ------------ ----------- ---------- ----------

Low-value
assets                   18,005.91    1,844.81    19,850.72    18,005.91     1,890.11    19,896.02       45.30       0.00       0.00
----------------------- ---------- ----------- ------------ ------------ ------------ ------------ ----------- ---------- ----------
Advance payments made
Plants under construction     0.00        0.00         0.00         0.00         0.00         0.00        0.00       0.00       0.00
----------------------- ---------- ----------- ------------ ------------ ------------ ------------ ----------- ---------- ----------
                                    145,660.12
TOTAL FIXED ASSETS    1,220,711.97        0.00 1,366,372.09   427,193.60   144,758.89   571,952.49    6,930.63 801,350.23 804,016.97
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
















                                      F-57
<PAGE>

                                    BAW GROUP
                                    EXHIBIT 2
                               EURO EXCHANGE RATE



                             High      Low
             Rate at        During    During      Average
            December 31,     Year      Year        Rate
            ------------    ------    ------      ------
2002          1.0481        1.0497    0.8560      0.9459
2001          0.8858        0.9597    0.8344      0.9138
2000          0.9416        1.0419    0.8226      0.9728
1999          1.0040        1.1960    0.9986      1.0667
1998          1.1669        1.2324    1.0532      1.1135











































                                      F-58










