=============================================================================
                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C. 20549

                                FORM 10-K/A
                              AMENDMENT NO. 1
            Annual Report Pursuant to Section 13 or 15(d) of the
                      Securities Exchange Act of 1934

                         FOR THE FISCAL YEAR ENDED
                             SEPTEMBER 30, 1998
                           Commission file number
                                   1-2918

                                ASHLAND INC.
                          (a Kentucky corporation)

                           I.R.S. No. 61-0122250
                        50 E. RiverCenter Boulevard
                         Covington, Kentucky 41012

                      Telephone Number: (606) 815-3333

              Securities Registered Pursuant to Section 12(b):

                                                     Name of each exchange
         Title of each class                          on which registered
         -------------------                         ---------------------
Common Stock, par value $1.00 per share           New York Stock Exchange
                                                   and Chicago Stock Exchange
Rights to Purchase Series A Participating         New York Stock Exchange
  Cumulative Preferred Stock                       and Chicago Stock Exchange


           Securities Registered Pursuant to Section 12(g): None

          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]
          At October 30, 1998, based on the New York Stock Exchange closing
     price,   the   aggregate   market   value  of  voting  stock  held  by
     non-affiliates of the Registrant was approximately $3,249,504,576.  In
     determining  this amount,  the Registrant has assumed that  directors,
     certain of its executive  officers,  and persons known to it to be the
     beneficial  owners of more than five  percent of its common  stock are
     affiliates.  Such  assumption  shall not be deemed  conclusive for any
     other purpose.
          At October 30, 1998, there were 75,057,315 shares of Registrant's
     common stock outstanding.


=============================================================================

<PAGE>
                                EXPLANATORY NOTE


     This  amendment to the Annual  Report on Form 10-K for the fiscal year
ended  September  30, 1998 of Ashland  Inc.  ("Ashland")  is being filed by
Ashland to include the audited  financial  statements  of Marathon  Ashland
Petroleum  LLC ("MAP") for the fiscal year ended  December 31, 1998 and the
audited  financial  statements of Arch Coal,  Inc.  ("Arch") for the fiscal
year ended  December 31, 1998 as required by Rule 3-09 of  Regulation  S-X.
Ashland has a 38% equity  interest in MAP and a 56% equity interest in Arch
and accounts for these  investments  using the equity method of accounting.
In accordance  with Rule 12b-15 under the Securities  Exchange Act of 1934,
as amended,  the text of the amended  item is set forth in its  entirety in
the pages attached hereto.

     A consent of  PricewaterhouseCoopers  LLP, independent accountants for
MAP, and a consent of Ernst & Young,  independent  auditors  for Arch,  are
being filed as exhibits hereto.


                                       2
<PAGE>

ITEM 14.  EXHIBITS,  FINANCIAL  STATEMENT  SCHEDULES AND REPORTS ON FORM 8-K 

 (a)  Documents filed as part of this Report 

     (1) and (2) Financial Statements and  Financial Schedule
        
          The consolidated  financial  statements and financial schedule of
          Ashland presented or incorporated by reference in this report are
          listed in the index on Page 19.

          Audited  financial  statements of Marathon Ashland Petroleum LLC.
          Financial  statement  schedules are omitted  because they are not
          applicable  as  the  required  information  is  contained  in the
          applicable financial statements or notes thereto.

          Audited financial statements and schedule of Arch Coal, Inc.

     (3) Exhibits

         3.1    -     Second  Restated   Articles  of  Incorporation  of
                      Ashland,  as amended to January  30,  1998  (filed as
                      Exhibit  3 to  Ashland's  Form  10-Q for the  quarter
                      ended December 31, 1997, and  incorporated  herein by
                      reference).

         3.2    -     Bylaws of  Ashland,  as amended  to March 19,  1998
                      (filed  as  Exhibit  3  to   Ashland's   Form  10-K/A
                      (Amendment No. 1) for the fiscal year ended September
                      30,  1997  filed  on May 1,  1998,  and  incorporated
                      herein by reference).
         4.1    -     Ashland  agrees to provide the SEC,  upon  request,
                      copies of instruments  defining the rights of holders
                      of  long-term  debt  of  Ashland,   and  all  of  its
                      subsidiaries for which consolidated or unconsolidated
                      financial  statements  are  required to be filed with
                      the SEC.
         4.2    -     Indenture,  dated as of August 15, 1989, as amended
                      and restated as of August 15, 1990,  between  Ashland
                      and Citibank, N.A., as Trustee (filed as Exhibit 4(a)
                      to  Ashland's  Form 10-K for the  fiscal  year  ended
                      September  30,  1991,  and  incorporated   herein  by
                      reference).
         4.3    -     Rights Agreement, dated as of May 16, 1996, between
                      Ashland  Inc.  and  Harris  Trust and  Savings  Bank,
                      together  with  Form of Right  Certificate  (filed as
                      Exhibits  4(a) and 4(c),  respectively,  to Ashland's
                      Form  8-A  filed  with the SEC on May 16,  1996,  and
                      incorporated herein by reference).

     The  following  Exhibits  10.1  through  10.18  are  compensatory  plans or
arrangements or management  contracts  required to be filed as exhibits pursuant
to Item 601(b)(10)(ii)(A) of Regulation S-K.

         10.1    -    Amended Stock  Incentive  Plan for Key Employees of
                      Ashland Inc. and its  Subsidiaries  (filed as Exhibit
                      10.1 to Ashland's Form 10-K for the fiscal year ended
                      September  30,  1996,  and  incorporated   herein  by
                      reference).
         10.2    -    Ashland  Inc.  Deferred   Compensation  and  Stock
                      Incentive Plan for Non-Employee Directors.
         10.3    -    Ashland  Inc.  Director  Retirement  Plan (filed as
                      Exhibit 10(c).3 to Ashland's Form 10-K for the fiscal
                      year  ended  September  30,  1988,  and  incorporated
                      herein by reference).
         10.4    -    Ninth   Amended   and   Restated   Ashland   Inc.
                      Supplemental  Early  Retirement  Plan for Certain Key
                      Executive Employees.
  

                                   3

<PAGE>
        10.5    -    Ashland Inc.  Amended  Performance Unit Plan (filed
                      as Exhibit 10.5 to Ashland's Form 10-K for the fiscal
                      year  ended  September  30,  1994,  and  incorporated
                      herein by reference).
         10.6    -    Ashland Inc. Incentive  Compensation Plan (filed as
                      Exhibit  10.6 to  Ashland's  Form 10-K for the fiscal
                      year  ended  September  30,  1993,  and  incorporated
                      herein by reference).
         10.7    -    Ashland Inc.  Director Death Benefit Program (filed
                      as Exhibit  10(c).10 to  Ashland's  Form 10-K for the
                      fiscal   year   ended   September   30,   1990,   and
                      incorporated herein by reference).
         10.8    -    Ashland  Inc.  Salary  Continuation  Plan (filed as
                      Exhibit  10(c).11  to  Ashland's  Form  10-K  for the
                      fiscal   year   ended   September   30,   1988,   and
                      incorporated herein by reference).
         10.9    -    Forms of Ashland Inc. Executive Employment Contract
                      between Ashland Inc. and certain  executive  officers
                      of Ashland  (filed as Exhibit  10(c).12 to  Ashland's
                      Form 10-K for the  fiscal  year ended  September  30,
                      1989, and incorporated herein by reference).
         10.10   -    Form of  Indemnification  Agreement between Ashland
                      Inc. and each member of its Board of Directors (filed
                      as Exhibit  10(c).13 to  Ashland's  Form 10-K for the
                      fiscal   year   ended   September   30,   1990,   and
                      incorporated herein by reference).
         10.11   -    Ashland Inc.  Nonqualified  Excess Benefit  Pension
                      Plan.
         10.12   -    Ashland  Inc.  Long-Term  Incentive  Plan (filed as
                      Exhibit  10.12 to Ashland's  Form 10-K for the fiscal
                      year  ended  September  30,  1996,  and  incorporated
                      herein by reference).
         10.13   -    Ashland Inc.  Directors'  Charitable  Award Program
                      (filed as Exhibit  10.13 to  Ashland's  Form 10-K for
                      the  fiscal  year  ended   September  30,  1996,  and
                      incorporated herein by reference).
         10.14   -    Ashland Inc.  1993 Stock  Incentive  Plan (filed as
                      Exhibit  10.14 to Ashland's  Form 10-K for the fiscal
                      year  ended  September  30,  1996,  and  incorporated
                      herein by reference).
         10.15   -    Ashland Inc. 1995  Performance  Unit Plan (filed as
                      Exhibit  10.15 to Ashland's  Form 10-K for the fiscal
                      year  ended  September  30,  1996,  and  incorporated
                      herein by reference).
         10.16   -    Ashland Inc.  Incentive  Compensation  Plan for Key
                      Executives  (filed as Exhibit 10.16 to Ashland's Form
                      10-K for the fiscal year ended  September  30,  1996,
                      and incorporated herein by reference).
         10.17   -    Ashland Inc.  Deferred  Compensation Plan (filed as
                      Exhibit  10.17 to Ashland's  Form 10-K for the fiscal
                      year  ended  September  30,  1997,  and  incorporated
                      herein by reference).
         10.18   -    Ashland Inc. 1997 Stock Incentive Plan.
         10.19   -    Limited  Liability  Company  Agreement  of Marathon
                      Ashland  Petroleum  LLC dated as of  January  1, 1998
                      (filed as Exhibit 10.1 to Ashland's  Form 8-K,  dated
                      January  1,   1998,   and   incorporated   herein  by
                      reference).
         10.20   -    Put/Call,   Registration   Rights  and  Standstill
                      Agreement  dated as of January 1, 1998 among Marathon
                      Oil  Company,  USX  Corporation,   Ashland  Inc.  and


                                     4
<PAGE>

                      Marathon Ashland Petroleum LLC (filed as Exhibit 10.2
                      to Ashland's  Form 8-K,  dated  January 1, 1998,  and
                      incorporated herein by reference).
         11      -    Computation  of Earnings Per Share  (appearing  on
                      Page 49 of Ashland's  Annual Report to  Shareholders,
                      incorporated by reference herein, for the fiscal year
                      ended September 30, 1998).
         13      -    Portions   of   Ashland's    Annual   Report   to
                      Shareholders,  incorporated by reference herein,  for
                      the fiscal year ended September 30, 1998.
         21      -    List of subsidiaries.
         23.1    -    Consent of Ernst & Young LLP.
         23.2    -    Consent of PricewaterhouseCoopers LLP.
         23.3    -    Consent of Ernst & Young LLP.
         24      -    Power of  Attorney,  including  resolutions  of the
                      Board of Directors.
         27.1    -    Financial  Data  Schedule for the fiscal year ended
                      September 30, 1998.
         27.2    -    Restated  Financial  Data  Schedule  for the fiscal
                      year ended September 30, 1997.
         27.3    -    Restated Financial Data Schedule for the fiscal year 
                      ended September 30, 1996.

    Upon written or oral request, a copy of the above exhibits will be 
furnished at cost.

(b) Reports on Form 8-K
    None




                                     5
<PAGE>

                                 SIGNATURES


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

                                             ASHLAND INC.
                                               (Registrant)



Date: March 17, 1999                       /s/ David L. Hausrath
                                          ----------------------------
                                          Name: David L. Hausrath
                                          Title:   Vice President and
                                                   General Counsel



                                     6


<PAGE>

              MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES



                 AUDITED CONSOLIDATED FINANCIAL STATEMENTS

                             December 31, 1998




                                  CONTENTS

                                                                         Page

REPORT OF INDEPENDENT ACCOUNTANTS:                                        1

CONSOLIDATED FINANCIAL STATEMENTS:

     CONSOLIDATED STATEMENT OF OPERATIONS ----------------------------    2
     CONSOLIDATED BALANCE SHEET --------------------------------------    3
     CONSOLIDATED STATEMENT OF CASH FLOWS ----------------------------    4
     CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL ----------------------    5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

     NOTE A     -  BUSINESS DESCRIPTION AND BASIS OF PRESENTATION ----    6
     NOTE B     -  SUMMARY OF PRINCIPAL ACCOUNTING POLICIES ----------    6
     NOTE C     -  NEW ACCOUNTING STANDARD ---------------------------    8
     NOTE D     -  RELATED PARTY TRANSACTIONS ------------------------    8
     NOTE E     -  REVENUES ------------------------------------------    9
     NOTE F     -  OTHER ITEMS ---------------------------------------    9
     NOTE G     -  PENSIONS AND OTHER POSTRETIREMENT BENEFITS --------    9
     NOTE H     -  INCOME TAXES --------------------------------------   11
     NOTE I     -  INVENTORIES ---------------------------------------   11
     NOTE J     -  INVESTMENTS AND LONG-TERM RECEIVABLES -------------   12
     NOTE K     -  PROPERTY, PLANT AND EQUIPMENT ---------------------   12
     NOTE L     -  LONG-TERM DEBT ------------------------------------   13
     NOTE M     -  SUPPLEMENTAL CASH FLOW INFORMATION ----------------   13
     NOTE N     -  LEASES --------------------------------------------   14
     NOTE O     -  DERIVATIVE INSTRUMENTS ----------------------------   15
     NOTE P     -  FAIR VALUE OF FINANCIAL INSTRUMENTS ---------------   16
     NOTE Q     -  CONTINGENCIES AND COMMITMENTS ---------------------   16
     NOTE R     -  SUBSEQUENT EVENT-----------------------------------   16


<PAGE>


                     Report of Independent Accountants




February 9, 1999, except as to Note R,
which is as of March 1, 1999

To the Board of Managers of
Marathon Ashland Petroleum LLC

In our opinion, the accompanying consolidated balance sheet and the related
consolidated  statements  of  operations,  of cash  flows  and of  members'
capital present fairly, in all material respects, the financial position of
Marathon Ashland  Petroleum LLC and its subsidiaries  (MAP) at December 31,
1998, and the results of their operations and their cash flows for the year
then ended, in conformity with generally  accepted  accounting  principles.
These financial statements are the responsibility of MAP's management;  our
responsibility is to express an opinion on these financial statements based
on our audit.  We  conducted  our audit of these  financial  statements  in
accordance with generally accepted auditing standards which 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,  assessing the accounting principles used and
significant  estimates  made by  management,  and  evaluating  the  overall
financial  statement  presentation.  We believe  that our audit  provides a
reasonable basis for the opinion expressed above.




PricewaterhouseCoopers LLP

                                     1
<PAGE>


CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in millions)

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES


<TABLE>
<CAPTION>
                                                                                                       Year Ended
                                                                                                    December 31, 1998
<S>                                                                                                    <C>
Revenues:
    Sales - Note E                                                                                     $ 19,300
    Dividend and affiliate income                                                                            13
    Gain on disposal of assets                                                                                6
    Other income                                                                                             20
                                                                                                       --------

                Total revenues                                                                           19,339
                                                                                                       --------

Costs and expenses:
    Cost of sales (excludes items shown below)                                                           14,083
    Selling, general and administrative expenses                                                            387
    Depreciation and amortization                                                                           275
    Taxes other than income taxes                                                                         3,687
    Inventory market valuation charge - Note I                                                              269
                                                                                                       --------

                Total costs and expenses                                                                 18,701
                                                                                                       --------

Income from operations                                                                                      638
Net interest and other financial income - Note F                                                             17
                                                                                                       --------

Income before income taxes                                                                                  655
Provision for estimated income taxes - Note H                                                                 1
                                                                                                       --------

Net income                                                                                             $    654
                                                                                                       ========


</TABLE>


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

                                     2

<PAGE>


CONSOLIDATED BALANCE SHEET (Dollars in millions)

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES

<TABLE>
<CAPTION>

                                                                                          December 31
                                                                                             1998
                                                                                         ------------
<S>                                                                                      <C>
ASSETS
    Current assets:
       Cash and cash equivalents, including amounts invested with
         related parties of $272 - Note D                                                $     272
       Receivables, less allowance for doubtful accounts of $3                                 911
       Inventories - Note I                                                                  1,264
       Related party receivables - Note D                                                       35
       Other current assets                                                                     82
                                                                                         ----------
                Total current assets                                                         2,564

    Investments and long-term receivables - Note J                                             110
    Long-term related party receivables - Note D                                                 6
    Property, plant and equipment - net - Note K                                             3,525
    Prepaid pensions - Note G                                                                   44
    Other noncurrent assets                                                                     81
                                                                                         ----------

                Total assets                                                             $   6,330
                                                                                         ==========

LIABILITIES
    Current liabilities:
       Accounts payable                                                                  $   1,467
       Accounts payable to related parties - Note D                                             13
       Distribution payable to related parties - Note D                                        272
       Payroll and benefits payable                                                             78
       Accrued taxes                                                                            35
                                                                                         ----------
                Total current liabilities                                                    1,865

    Long-term debt - Note L                                                                      7
    Long-term deferred income taxes - Note H                                                     3
    Employee benefits - Note G                                                                 250
    Deferred credits and other liabilities                                                      22
                                                                                         ----------

                Total liabilities                                                            2,147
                                                                                         ----------

MEMBERS' CAPITAL (details on page 5)
    Members' contributed capital                                                             4,188
    Retained earnings                                                                           --
    Accumulated other comprehensive (losses)                                                    (5)
                                                                                         ----------
                Total members' capital                                                       4,183
                                                                                         ----------

                Total liabilities and members' capital                                   $   6,330
                                                                                         =========



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

                                     3

<PAGE>


CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in millions)

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES


</TABLE>
<TABLE>

                                                                                                       Year Ended
                                                                                                    December 31, 1998
                                                                                                    -----------------
<S>                                                                                                     <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

OPERATING ACTIVITIES:
Net income                                                                                              $   654
Adjustments to reconcile to net cash provided
    from operating activities:
       Depreciation and amortization                                                                        275
       Inventory market valuation charge                                                                    269
       Pensions and other postretirement benefits                                                            22
       Deferred income taxes                                                                                 (2)
       Gain on disposal of assets                                                                            (6)
       Changes in:
          Current receivables                                                                               194
          Inventories                                                                                       (19)
          Current accounts payable and accrued expenses                                                    (126)
          Net receivables and payables with related parties                                                  28
       All other - net                                                                                      (69)
                                                                                                        --------
          Net cash provided from operating activities                                                     1,220
                                                                                                        --------

INVESTING ACTIVITIES:
Capital expenditures                                                                                       (400)
Disposal of assets                                                                                           16
Affiliates - investments                                                                                    (22)
           - repayments of advances                                                                           1
                                                                                                        --------
         Net cash used in investing activities                                                             (405)
                                                                                                        --------

FINANCING ACTIVITIES:
Debt   - additions                                                                                            1
       - repayments                                                                                         (24)
Member distributions                                                                                       (555)
                                                                                                        --------
         Net cash used in financing activities                                                             (578)
                                                                                                        --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                                   237

Cash and cash equivalents at beginning of year                                                               35
                                                                                                        --------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                                                $   272
                                                                                                        ========


See Note M for supplemental cash flow information.






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

                                     4

<PAGE>


CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL (Dollars in millions)

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES

</TABLE>
<TABLE>
<CAPTION>


                                                                 Members' Capital          Comprehensive Income
                                                                  Year Ended                    Year Ended
                                                               December 31, 1998             December 31, 1998
                                                              ------------------          --------------------

<S>                                                              <C>
Members' contributed capital:
   Balance at beginning of year                                  $  4,361
   Distribution to members                                           (173)
                                                                 ---------
   Balance at end of year                                           4,188
                                                                 ---------

Retained earnings:
   Balance at beginning of year                                        --
   Net income                                                         654                       $    654
   Distributions to members                                          (654)
                                                                 ---------
   Balance at end of year                                              --
                                                                 ---------

Accumulated other comprehensive (losses):
   Minimum  pension  liability
   adjustments:
     Balance at beginning of year                                      (4)
     Changes during the year                                           (1)                            (1)
                                                                 ---------                      ---------
     Balance at end of year                                            (5)
                                                                 ---------

     Total comprehensive income                                                                 $    653
                                                                                                =========

Total members' capital                                           $  4,183
                                                                 =========




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

                                     5

<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES


NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

On  December  12, 1997  Marathon  Oil Company  (Marathon),  a wholly  owned
subsidiary of USX  Corporation  (USX),  entered into an Asset  Transfer and
Contribution  Agreement  with  Ashland  Inc.  (Ashland)  providing  for the
formation of Marathon  Ashland  Petroleum LLC (MAP).  Effective  January 1,
1998, Marathon contributed substantially all of its refining, marketing and
transportation (RM&T) operations to MAP. Also, on January 1, 1998, Marathon
acquired  certain  RM&T net  assets  from  Ashland  in  exchange  for a 38%
interest in MAP.  The purchase  price was  determined  to be $1.9  billion,
based upon an external  valuation.  The acquisition of Ashland's net assets
was accounted for under the purchase method of accounting.

In connection with the formation of MAP,  Marathon and Ashland entered into
a Limited  Liability  Company  Agreement (LLC  Agreement)  dated January 1,
1998.  The LLC Agreement  provides for an initial term expiring on December
31,  2022 (25 years from its  formation).  The term will  automatically  be
extended  for ten-year  periods,  unless a  termination  notice is given by
either party.

Also in connection  with the  formation of MAP, the parties  entered into a
Put/Call,  Registration  Rights  and  Standstill  Agreement  (the  Put/Call
Agreement). The Put/Call Agreement provides that at any time after December
31, 2004,  Ashland will have the right to sell to Marathon all of Ashland's
ownership  interest in MAP,  for an amount in cash  and/or  Marathon or USX
debt or  equity  securities  equal to the  product  of 85%  (90% if  equity
securities  are  used)  of the  fair  market  value  of MAP at  that  time,
multiplied by Ashland's  percentage  interest in MAP. Payment could be made
at closing,  or at Marathon's  option, in three equal annual  installments,
the first of which would be payable at closing.  At any time after December
31,  2004,  Marathon  will  have the  right to  purchase  all of  Ashland's
ownership  interests  in MAP, for an amount in cash equal to the product of
115% of the fair market value of MAP at that time,  multiplied by Ashland's
percentage interest in MAP.

MAP is engaged in petroleum  supply,  refining,  marketing & transportation
operations  and  includes   Speedway   SuperAmerica  LLC,  a  wholly  owned
subsidiary,  which  operates  retail  outlets for  petroleum  products.  In
addition,  MAP, through its wholly owned subsidiary,  Scurlock Permian LLC,
is actively engaged in the purchasing,  selling and trading of crude oil in
Texas, Oklahoma and Louisiana.



NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

PRINCIPLES APPLIED IN CONSOLIDATION - The consolidated financial statements
include the accounts of MAP and the  majority-owned  subsidiaries  which it
controls. Investments in undivided interest pipelines are consolidated on a
pro  rata  basis.   Investments  in  other  entities  over  which  MAP  has
significant  influence  are  accounted  for  using  the  equity  method  of
accounting  and are  carried at MAP's  share of net assets  plus  advances.
Investments  in companies  whose stocks have no readily  determinable  fair
value are carried at cost.

USE  OF  ESTIMATES  -  Generally  accepted  accounting  principles  require
management  to make  estimates  and  assumptions  that affect the  reported
amounts of assets and liabilities,  the disclosure of contingent assets and
liabilities  at year-end and the reported  amounts of revenues and expenses
during  the  year.   Significant   items  subject  to  such  estimates  and
assumptions  include the carrying  value of  long-lived  assets;  valuation
allowances for  receivables  and  inventories;  environmental  liabilities,
liabilities for potential tax deficiencies and potential  litigation claims
and settlements;  and assets and obligations  related to employee benefits.
Additionally,  certain  estimated  liabilities are recorded when management
commits  to a plan to close an  operating  facility  or to exit a  business
activity.  Actual  results could differ from the estimates and  assumptions
used.

REVENUE  RECOGNITION - Revenues  principally  include  sales,  dividend and
affiliate income and gains or losses on the disposal of assets.

Sales are recognized  when products are shipped or services are provided to
customers.  Consumer excise taxes on petroleum products and merchandise and
matching crude oil and refined products  buy/sell  transactions  settled in
cash are included in both revenues and costs and  expenses,  with no effect
on income.

                                     6
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - Continued

Dividend and affiliate income includes MAP's  proportionate share of income
from equity method  investments and dividend income from other investments.
Dividend income is recognized when dividend payments are received.

When  long-lived  assets  depreciated  on an  individual  basis are sold or
otherwise  disposed of, any gains or losses are  reflected in income.  Such
gains or losses on the disposal of long-lived  assets are  recognized  when
title passes to the buyer and, if applicable,  all  significant  regulatory
approvals  are  received.  Proceeds  from  disposal  of  long-lived  assets
depreciated on a group basis are credited to accumulated  depreciation  and
amortization with no immediate effect on income.

CASH AND CASH EQUIVALENTS - Cash and cash equivalents  include cash on hand
and on deposit and  investments  with related parties in highly liquid debt
instruments  with  maturities  of  three  months  or  less.  See Note D for
information regarding investments with related parties.

INVENTORIES - Inventories  are carried at lower of cost or market.  Cost of
inventories is determined  primarily  under the last-in,  first-out  (LIFO)
method.

DERIVATIVE   INSTRUMENTS  -  MAP  engages  in  commodity  risk   management
activities  within the normal  course of its  business  as an  end-user  of
derivative  instruments  (see Note O).  Management  is authorized to manage
exposure  to price  fluctuations  related to the  purchase or sale of crude
oil,  refined  products  and  natural  gas  through the use of a variety of
derivative  financial and nonfinancial  instruments.  Derivative  financial
instruments  require  settlement  in cash and include such  instruments  as
over-the-counter (OTC) commodity swap agreements and OTC commodity options.
Derivative  nonfinancial   instruments  require  or  permit  settlement  by
delivery of  commodities  and  include  exchange-traded  commodity  futures
contracts and options. At times,  derivative positions are closed, prior to
maturity,  simultaneous with the underlying physical  transaction,  and the
effects are  recognized  in income  accordingly.  MAP's  practice  does not
permit  derivative  positions  to remain  open if the  underlying  physical
market risk has been  removed.  Changes in the market  value of  derivative
instruments are deferred, including both closed and open positions, and are
subsequently  recognized in income,  as sales or cost of sales, in the same
period as the underlying transaction.  The effects of changes in the market
indices related to OTC swaps are recorded and recognized in income with the
underlying  transaction.  Premiums on all commodity-based  option contracts
are initially  recorded based on the amount paid or received;  the options'
market  value is  subsequently  recorded as a  receivable  or  payable,  as
appropriate.  The margin  receivable  accounts  required for open commodity
contracts reflect changes in the market prices of the underlying  commodity
and are settled on a daily basis.

Recorded deferred gains or losses are reflected within other current assets
or accounts payable. Cash flows from the use of derivative  instruments are
reported in the same  category as the hedged item in the  statement of cash
flows.

LONG-LIVED   ASSETS  -  Property,   plant  and  equipment  are  depreciated
principally  by  the  straight-line   method.   Expenditures  for  refinery
turnarounds are expensed  ratably in the calendar year in which they occur.
MAP evaluates  impairment of its assets on an individual  asset basis or by
logical groupings of assets.  Assets deemed to be impaired are written down
to their fair value,  including  any  related  goodwill,  using  discounted
future cash flows and, if available, comparable market values.

ENVIRONMENTAL   LIABILITIES  -  MAP  provides  for  remediation  costs  and
penalties when the  responsibility  to remediate is probable and the amount
of associated costs is reasonably  determinable.  Generally,  the timing of
remediation  accruals  coincides with completion of a feasibility  study or
the  commitment  to a formal plan of action.  Remediation  liabilities  are
accrued  based on  estimates of known  environmental  exposure and could be
discounted in certain  instances.  If recoveries of remediation  costs from
third parties are probable, a receivable is recorded.

INSURANCE - MAP is insured for  catastrophic  casualty and certain property
and business interruption  exposures, as well as those risks required to be
insured by law or contract.  Costs  resulting  from  noninsured  losses are
charged against income upon occurrence.

INCOME TAXES - MAP is a limited liability  company,  and therefore,  is not
subject to U.S.  federal income taxes.  Accordingly,  the taxable income or
loss  resulting from  operations of MAP is ultimately  included in the U.S.
federal income tax returns of USX and Ashland. MAP is, however,  subject to
income taxes in certain state, local and foreign jurisdictions.

                                     7
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE C - NEW ACCOUNTING STANDARD

In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial   Accounting   Standards  No.  133,  "Accounting  for  Derivative
Instruments  and Hedging  Activities"  (SFAS No.  133).  This new  Standard
requires  recognition of all derivatives as either assets or liabilities at
fair  value.  SFAS No.  133 may  result in  additional  volatility  in both
current  period  earnings  and  other  comprehensive  income as a result of
recording  recognized  and  unrecognized  gains and losses  resulting  from
changes in the fair value of  derivative  instruments.  SFAS 133 requires a
comprehensive review of all outstanding derivative instruments to determine
whether  or not  their  use meets  the  hedge  accounting  criteria.  It is
possible  that  there  will be  derivative  instruments  employed  in MAP's
businesses that do not meet all of the designated hedge criteria,  and they
will be  reflected  in income on a  mark-to-market  basis.  Based  upon the
strategies currently employed by MAP, the relatively short-term duration of
most of MAP's derivative  strategies,  and the level of activity related to
commodity-based  derivative  instruments  in recent  periods,  MAP does not
anticipate  the  effect of  adoption  to have a  material  impact on either
financial position or results of operations. MAP plans to adopt SFAS No.
133 effective January 1, 2000, as required.



NOTE D - RELATED PARTY TRANSACTIONS

MAP sales in 1998 to Ashland and its affiliates were $185 million and sales
to USX and its affiliates were $10 million.  MAP purchases from Ashland and
its  affiliates  totaled  $18  million  and  purchases  from  USX  and  its
affiliates  totaled $284 million.  Such  transactions  were in the ordinary
course of business and include the  purchase,  sale and  transportation  of
crude oil and petroleum  products.  These transactions were conducted on an
arm's-length basis.

During the year ended  December  31, 1998,  Ashland and  Marathon  provided
computer,  treasury,  accounting,  internal auditing and legal services and
facilities to MAP.  Billings to MAP for these  services and  facilities for
the year ended  December  31, 1998 from  Ashland and  Marathon  totaled $27
million and $83 million, respectively.

As of December 31, 1998,  related party receivables  include $22 million of
accounts  receivable  due from  Ashland  and its  affiliates  and  accounts
payable  to related  parties  include  $3  million  due to Ashland  and its
affiliates.  As of December 31, 1998, related party receivables include $13
million of accounts receivable due from USX and its affiliates and accounts
payable  to  related  parties  include  $10  million  due  to USX  and  its
affiliates.

As of  December  31,  1998,  the  distribution  payable to related  parties
includes $169 million due to Marathon and $103 million due to Ashland.

In connection with the formation of MAP, certain Marathon debt was assigned
to MAP. Marathon agreed to reimburse MAP for this debt and related interest
expense.  During the year,  Marathon  reimbursed  MAP $24  million for debt
repayments.  Long-term  related  party  receivables  at December  31, 1998,
included  $6  million   due  from   Marathon   for  future   debt   payment
reimbursements.

A revolving  credit agreement was entered into as of January 1, 1998, among
Ashland and Marathon  (collectively  the Lenders) and MAP (Borrower).  This
agreement  provides  that the Lenders  may loan to the  Borrower up to $500
million at defined  short-term  market rates.  At December 31, 1998,  there
were no borrowings against this facility.

On November 16, 1998,  MAP entered  into  agreements  with USX and Ashland,
which  allow MAP to invest its  surplus  cash  balances on a daily basis at
competitive  interest  rates with USX and  Ashland in  proportion  to their
ownership  interests in MAP. At December 31, 1998,  amounts held by USX and
Ashland, which are included in cash and cash equivalents, were $169 million
and $103 million,  respectively.  The agreements provide that invested cash
balances are payable upon the demand of MAP or March 15, 1999, whichever is
earlier.


                                     8
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE E - REVENUES

The items below are  included in revenues and costs and  expenses,  with no
effect on income.


</TABLE>
<TABLE>
<CAPTION>
                                                                                                       Year Ended
                                                                                                    December 31, 1998
                                                                                                    -----------------
                                                                                                       (Millions)

<S>                                                                                                    <C>
Consumer excise taxes on petroleum products and merchandise                                            $  3,581
Matching crude oil and refined product buy/sell transactions settled in cash                              3,657

</TABLE>
<TABLE>
<CAPTION>


NOTE F - OTHER ITEMS                                                                                   Year Ended
                                                                                                    December 31, 1998
                                                                                                    -----------------
                                                                                                       (Millions)
<S>                                                                                                    <C>
NET INTEREST AND OTHER FINANCIAL INCOME

    INTEREST AND OTHER FINANCIAL INCOME:
    Interest income - third parties                                                                    $     22
    Interest income - related parties                                                                         1
                                                                                                       --------
        Total                                                                                                23
                                                                                                       --------

    INTEREST AND OTHER FINANCIAL COSTS:
    Interest incurred                                                                                         1
    Other                                                                                                     5
                                                                                                       --------
        Total                                                                                                 6
                                                                                                       --------

    NET INTEREST AND OTHER FINANCIAL INCOME                                                            $     17
                                                                                                       ========


</TABLE>

NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS

MAP  has   noncontributory   defined   pension   benefit   plans   covering
substantially  all employees.  Benefits under its final pay plans are based
primarily upon years of service and the highest three years earnings during
the last ten years before  retirement.  Benefits  under its pension  equity
plan are based  primarily  upon age and  years of  service  at  retirement.
Certain  subsidiaries provide benefits for employees covered by other plans
based primarily upon employees' service and career earnings.

MAP also has defined benefit retiree health and life insurance plans (other
benefits)  covering most employees upon their  retirement.  Health benefits
are provided, for the most part, through comprehensive  hospital,  surgical
and major  medical  benefit  provisions  subject  to various  cost  sharing
features. Life insurance benefits are provided to certain nonunion and most
union  represented  retiree  beneficiaries  primarily  based on  employees'
annual base salary at retirement. Other benefits have not been prefunded.
<TABLE>
<CAPTION>

                                                                          Pension Benefits                   Other Benefits
                                                                       ---------------------                -----------------
                                                                              1998                              1998
                                                                                            (Millions)
<S>                                                                         <C>                               <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Benefit obligation at January 1                                             $      52                         $       6
Service cost                                                                       26                                 7
Interest cost                                                                      20                                10
Plan amendments                                                                   (10)                              (30)
Actuarial losses                                                                   57                                66
Acquisition and merger                                                            392                               184
Benefits paid                                                                     (12)                               (1)
                                                                            ----------                        ----------
Benefit obligations at December 31                                          $     525                         $     242
                                                                            ==========                        =========

</TABLE>

                                     9
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE G - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - Continued
<TABLE>
<CAPTION>

                                                                          Pension Benefits                   Other Benefits
                                                                       -----------------------            --------------------
                                                                              1998                              1998
                                                                                            (Millions)
<S>                                                                         <C>                               <C>
CHANGE IN PLAN ASSETS
Fair value of plan assets at January 1                                      $      24
Actual return on plan assets                                                       41
Acquisition and merger                                                            467
Employer contributions                                                              8
Benefits paid                                                                     (12)
                                                                            ----------
Fair value of plan assets at December 31                                    $     528
                                                                            ==========

FUNDED STATUS OF PLANS AT DECEMBER 31 (a)                                   $       3                         $    (242)
Unrecognized net gain from transition                                             (12)                               --
Unrecognized prior service cost (credit)                                            6                               (35)
Unrecognized actuarial (gains) losses                                              (4)                               86
Additional minimum liability (b)                                                   (6)                               --
                                                                            ----------                        ----------
Accrued benefit cost                                                        $     (13)                        $    (191)
                                                                            ==========                        ==========

(a)  Includes several small plans that have accumulated benefit obligations
     and no plan assets:
       Projected benefit obligation                                         $     (15)

(b)  Additional minimum liability recorded was offset by the following:
       Intangible asset                                                     $       1
                                                                            ---------
       Accumulated other comprehensive (losses):
          Beginning of year                                                 $      (4)
          Change during year                                                       (1)
                                                                            ----------
             Balance at end of year                                         $      (5)
                                                                            ==========

COMPONENTS OF NET PERIODIC
   BENEFIT COST (CREDIT)
Service cost                                                                $      26                       $       7
Interest cost                                                                      20                              10
Return on plan assets -  actual                                                   (41)                             --
                      -  deferred gain                                              9                              --
Other plans                                                                         2                              --
                                                                            ----------                      ----------
Net periodic benefit cost                                                   $      16                       $      17
                                                                            ==========                      ==========

ACTUARIAL ASSUMPTIONS:
Discount rate                                                                     6.5%                            6.5%
Expected annual return on plan assets                                             9.5%                            9.5%
Increase in compensation rate                                                     5.0%                            5.0%

For measurement  purposes,  an 8% annual rate of increase in the per capita
cost of covered  health care  benefits  was assumed for 1999.  The rate was
assumed  to  decrease  gradually  to 5% for 2005 and  remain at that  level
thereafter.

A one-percentage-point change in assumed health care cost trend rates would
have the following effects:

</TABLE>
<TABLE>
<CAPTION>
                                                                            1-Percentage-                     1-Percentage-
                                                                           Point Increase                    Point Decrease
                                                                           --------------                    ---------------
                                                                                            (Millions)
<S>                                                                         <C>                               <C>      
Effect on total of service and interest cost components                     $      6                          $     (4)
Effect on postretirement benefit obligation                                       47                               (36)


</TABLE>

                                    10
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE H - INCOME TAXES

The taxable income or loss  resulting from  operations of MAP is ultimately
included in the  federal  income tax  returns of USX and  Ashland.  MAP is,
however,   subject  to  taxation  in  certain  state,   local  and  foreign
jurisdictions.

<TABLE>
<CAPTION>
Provisions (credits) for estimated income taxes:
                                                                                              Year Ended December 31, 1998
                                                                                        ----------------------------------------
                                                                                        Current         Deferred       Total
                                                                                        -------        ----------      -----
                                                                                                       (Millions)

<S>                                                                                     <C>             <C>            <C>
Total state and local taxes                                                             $      3        $    (2)       $      1
                                                                                        =========       ========       ========


</TABLE>

Deferred tax liabilities of $5 million  principally  arise from differences
between  the book and tax  basis of  inventories  and  property,  plant and
equipment.  Pretax  income  included  $1  million  attributable  to foreign
sources in 1998.



NOTE I - INVENTORIES

Inventories consist of the following:
                                                                December 31,
                                                                    1998
                                                                ------------
                                                                 (Millions)

Crude oil and natural gas liquids                                $     715
Refined products and merchandise                                     1,028
Supplies and sundry items                                               73
                                                                 ---------
       Total (at cost)                                               1,816
Less inventory market valuation reserve                                552
                                                                 ---------

       Net inventory carrying value                              $   1,264
                                                                 =========

Inventories  of crude  oil and  refined  products  are  valued  by the LIFO
method.  The LIFO method  accounted for 90% of total  inventory at December
31, 1998.

The  inventory  market  valuation  reserve  reflects  the  extent  that the
recorded  LIFO cost  basis of crude oil and  refined  products  inventories
exceeds net realizable value. The reserve is decreased to reflect increases
in market prices and inventory  turnover and increased to reflect decreases
in market prices.  Changes in the inventory market valuation reserve result
in noncash charges or credits to costs and expenses.

                                    11
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE J - INVESTMENTS AND LONG-TERM RECEIVABLES
                                                             December 31,
                                                                 1998
                                                            -------------
                                                              (Millions)

Equity method investments                                     $     106
Receivables due after one year                                        4
                                                              ---------

       Total                                                  $     110
                                                              =========

The following  represents  summarized  financial  information of affiliates
accounted for by the equity method of accounting:

                                                              Year Ended
                                                              December 31
                                                                 1998
                                                             -------------
                                                               (Millions)
Income data:
    Revenues                                                   $     171
    Operating income                                                  61
    Net income                                                        31

                                                              December 31
                                                                 1998
                                                             -------------
                                                               (Millions)
Balance sheet data:
   Current assets                                              $      57
   Noncurrent assets                                                 647
   Current liabilities                                                84
   Noncurrent liabilities                                            455


Dividends and  partnership  distributions  received from equity  affiliates
were $14 million in 1998. MAP purchases from equity affiliates  totaled $63
million in 1998. MAP sales to equity affiliates were immaterial.



NOTE K - PROPERTY, PLANT AND EQUIPMENT
                                                                December 31,
                                                                   1998
                                                                -------------
                                                                  (Millions)

Refining                                                          $   2,027
Marketing                                                             1,945
Transportation                                                        1,310
Other                                                                     5
                                                                  ---------
       Total                                                          5,287
Less accumulated depreciation and amortization                        1,762
                                                                  ---------
       Net                                                        $   3,525
                                                                  =========


                                    12
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE L - LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                             1998
                                                                                        -------------
                                                                                          (Millions)

<S>                                                                                      <C>
Variable rate Michigan Underground Storage Tank Interest Rate Subsidy Loan
    due 2000 (a)                                                                         $       6
5% Promissory Note due 2009                                                                      1
Revolving Credit Facilities (b) (c)                                                             --
                                                                                         ---------
       Total long-term debt due after one year                                           $       7
                                                                                         =========
</TABLE>


(a) This program was created in  connection  with the Michigan  Underground
    Storage  Tank  Assurance  Act  to  assist  owners  in the  clean  up of
    underground storage tank systems. MAP pays interest monthly, based on a
    monthly LIBOR rate plus 5/8%. An interest subsidy is received quarterly
    from the State of Michigan  calculated at a rate of 6.1% per annum. The
    effective  rate of this loan during 1998,  including  the effect of the
    interest  subsidy was 1.6%.  Marathon is obligated to reimburse MAP for
    all payments with respect to this debt.

(b) In 1998, MAP entered into a revolving  credit facility for $100 million
    that  terminates  in July  1999  and a $400  million  revolving  credit
    facility  that  terminates  in July 2003.  Interest is based on defined
    short-term  market rates for both  facilities.  During the terms of the
    agreements,  MAP is obligated  to pay a variable  facility fee on total
    commitments.  At December 31, 1998,  the facility fee was 0.10% for the
    $100  million  facility and 0.125% for the $400  million  facility.  At
    December 31, 1998, the unused and available credit was $500 million. In
    the event MAP defaults on indebtedness (as defined in the agreement) in
    excess  of  $100  million,  USX  has  guaranteed  the  payment  of  any
    outstanding obligations.

 (c)In 1998,  MAP entered into a revolving  credit  agreement with Marathon
    and Ashland for $500 million that  terminated on December 31, 1998, and
    which was renewed on an uncommitted  basis for 1999.  Interest is based
    on defined  short-term  market rates.  At December 31, 1998, the unused
    and available credit was $500 million.



NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>

                                                                                                       Year Ended
                                                                                                    December 31, 1998
                                                                                                    -----------------
                                                                                                       (Millions)
<S>                                                                                                    <C>
CASH PROVIDED FROM OPERATING ACTIVITIES INCLUDES:
    Interest and other financial costs paid                                                            $     (1)
    Income taxes paid                                                                                        (3)



                                    13
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE N - LEASES

Future  minimum   commitments   for  operating   leases  having   remaining
noncancelable lease terms in excess of one year are as follows:

</TABLE>
<TABLE>
<CAPTION>


                                                                                        Operating
                                                                                           Leases
                                                                                        ----------
                                                                                        (Millions)

<S>                                                                                      <C>
1999                                                                                     $    53
2000                                                                                          49
2001                                                                                          34
2002                                                                                          20
2003                                                                                          11
Later years                                                                                   30
Sublease rentals                                                                             (10)
                                                                                         --------

    Total minimum lease payments                                                         $   187
                                                                                         ========



</TABLE>
<TABLE>
<CAPTION>

Operating lease rental expense:
                                                                                         Year Ended
                                                                                      December 31, 1998
                                                                                      -----------------
                                                                                         (Millions)

<S>                                                                                      <C>
Minimum rental                                                                           $   74
Contingent rental                                                                            11
Sublease rentals                                                                             (1)
                                                                                         -------
       Net rental expense                                                                $   84
                                                                                         =======

</TABLE>

MAP leases a wide  variety of  facilities  and  equipment  under  operating
leases,  including land and building space,  office  equipment,  production
facilities and  transportation  equipment.  Most  long-term  leases include
renewal options and, in certain leases, purchase options.

                                    14
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE O - DERIVATIVE INSTRUMENTS

MAP uses commodity-based derivative instruments to manage exposure to price
fluctuations  related  to the  anticipated  purchase  or sale of crude oil,
refined products, and natural gas. The derivative instruments used, as part
of an overall risk  management  program,  include  exchange-traded  futures
contracts and options,  and  instruments  which require  settlement in cash
such  as OTC  commodity  swaps  and  OTC  options.  While  risk  management
activities  generally  reduce  market  risk  exposure  due  to  unfavorable
commodity price changes for raw material  purchases and products sold, such
activities can also encompass strategies which assume certain price risk in
isolated transactions.

MAP  remains  at risk  for  possible  changes  in the  market  value of the
derivative  instrument;  however,  such risk should be  mitigated  by price
changes in the  underlying  hedged item. MAP is also exposed to credit risk
in the event of nonperformance by counterparties.  The credit worthiness of
counterparties is subject to continuing review, including the use of master
netting  agreements  to the  extent  practical,  and  full  performance  is
anticipated.


The  following  table  sets  forth  quantitative  information  by  class of
derivative instrument:
<TABLE>
<CAPTION>

                                                                   Fair          Carrying       Recorded
                                                                   Value          Amount        Deferred         Aggregate
                                                                  Assets          Assets         Gain or         Contract
                                                             (Liabilities) (a)  (Liabilities)    (Loss)          Values (b)
                                                             -------------      -------------   ---------       -----------
                                                                                           (Millions)
<S>                                                              <C>              <C>             <C>             <C>
   December 31, 1998:
     Exchange-traded commodity futures                           $   --           $  --           $   (3)         $  96
     Exchange-traded commodity options                                1  (c)          1                1            709
     OTC commodity swaps (d)                                         --  (e)         --               --            140
                                                                 -------          ------          -------         ------
        Total commodities                                        $    1           $   1           $   (2)         $ 945
                                                                 =======          ======          =======         ======
</TABLE>


(a)  The fair value amounts for OTC positions are based on various  indices
     or dealer quotes.  The  exchange-traded  futures contracts and certain
     option contracts do not have a corresponding  fair value since changes
     in the market prices are settled on a daily basis.

(b)  Contract or notional  amounts do not quantify risk  exposure,  but are
     used in the calculation of cash settlements  under the contracts.  The
     contract  or  notional  amounts  do not  reflect  the  extent to which
     positions may offset one another.

(c)  Includes  fair  values as of  December  31,  1998,  for  assets of $20
     million and liabilities of ($19) million, respectively.

(d)  The OTC swap  arrangements  vary in duration  with  certain  contracts
     extending into mid-1999.

(e)  Includes  fair  values as of  December  31,  1998,  for  assets of $25
     million and for liabilities of ($25) million, respectively.


                                    15
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying  value of most financial  instruments  are based on historical
costs.  The  carrying  values  of cash and cash  equivalents,  receivables,
payables, and debt approximate their fair value.

MAP's unrecognized  financial  instruments consist of financial guarantees.
It is not  practicable  to  estimate  the  fair  value  of  these  forms of
financial instrument  obligations because there are no quoted market prices
for  transactions  which are  similar in nature.  For  details  relating to
financial guarantees, see Note Q.



NOTE Q - CONTINGENCIES AND COMMITMENTS

MAP is the subject of, or party to, a number of pending or threatened legal
actions,  contingencies  and  commitments  involving  a variety of matters,
including  laws and  regulations  relating to the  environment.  Certain of
these  matters  are  discussed  below.  The  ultimate  resolution  of these
contingencies could,  individually or in the aggregate,  be material to the
MAP financial statements. However, management believes that MAP will remain
a viable and  competitive  enterprise even though it is possible that these
contingencies could be resolved unfavorably to MAP.

ENVIRONMENTAL MATTERS - MAP is subject to federal, state, local and foreign
laws and  regulations  relating to the  environment.  These laws  generally
provide for control of pollutants released into the environment and require
responsible  parties to undertake  remediation of hazardous  waste disposal
sites.  Penalties  may be imposed for  noncompliance.  Marathon and Ashland
have  retained  the  liabilities  subject to certain  thresholds  for costs
associated  with  remediating  properties  conveyed  to MAP for  conditions
existing  prior to  January  1,  1998.  The  costs  associated  with  these
thresholds are not expected to be material to the MAP financial statements.
At December 31, 1998, MAP's accrued  liabilities for remediation totaled $3
million.  It is not presently  possible to estimate the ultimate  amount of
all  remediation  costs that might be incurred or the penalties that may be
imposed.  Receivables  for  recoverable  costs from certain  states,  under
programs to assist  companies  in clean up efforts  related to  underground
storage tanks at retail marketing outlets,  were $1 million at December 31,
1998.

MAP has made substantial capital  expenditures to bring existing facilities
into  compliance  with various laws relating to the  environment.  In 1998,
such capital  expenditures for environmental  controls totaled $82 million.
MAP anticipates making additional such expenditures in the future; however,
the exact amounts and timing of such  expenditures are uncertain because of
the continuing evolution of specific regulatory requirements.

GUARANTEES - At December 31, 1998,  MAP's pro rata share of  obligations of
LOCAP  INC.  and  Southcap  Pipe Line  Company  secured by  throughput  and
deficiency  agreements  totaled $23 million.  Under the agreements,  MAP is
required to advance funds if the affiliates are unable to service debt. Any
such advances are treated as prepayments of future transportation charges.

COMMITMENTS - At December 31, 1998, MAP's contract  commitments for capital
expenditures for property, plant and equipment totaled $38 million.



NOTE R - SUBSEQUENT EVENT

On March  1,  1999,  MAP  announced  that it had  signed  a  memorandum  of
understanding  to sell Scurlock  Permian LLC, which is actively  engaged in
the purchasing, selling and trading of crude oil. The transaction,  subject
to customary closing conditions, is expected to close in the second quarter
of 1999.


                                    16
<PAGE>


                        ARCH COAL, INC. AND SUBSIDIARIES
                   AUDITIED CONSOLIDATED FINANCIAL STATEMENTS

                                    CONTENTS

                                                                         Page*

CONSOLIDATED FINANCIAL STATEMENTS:

     Report of Independent Auditors                                        40

     Consolidated  Statements  of Income -- Years Ended  December          42
     31, 1998, 1997 and 1996

     Consolidated Balance Sheets -- December 31, 1998 and 1997             43

     Consolidated  Statements  of  Stockholders'  Equity -- Years
     Ended December 31, 1998, 1997 and 1996                                44

     Consolidated   Statements  of  Cash  Flows  --  Years  Ended
     December 31, 1998, 1997 and 1996                                      45

     Notes to Consolidated Financial Statements                            46

CONSOLIDATED FINANCIAL STATEMENT SCHEDULE 

     Schedule II -- Valuation and Qualifying Accounts                      23


All  other  schedules  for  which  provision  is made in the
applicable  accounting  regulations  of the  Securities  and
Exchange  Commission  are not  required  under  the  related
instructions or are inapplicable and,  therefore,  have been
omitted.


     *Page  numbers  correspond  to  Arch  Coal's  1998  Annual  Report  to
Stockholders or Form 10-K, as appropriate.
<PAGE>



To the Stockholders and Board of Directors
Arch Coal, Inc.

     We have audited the accompanying  consolidated  balance sheets of Arch
Coal,  Inc.  and  subsidiaries  as of  December  31,  1998 and 1997 and the
related consolidated  statements of income,  stockholders' equity, and cash
flows  for  the  years  then  ended.  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.  The
consolidated  financial  statements  of Arch Coal,  Inc. as of December 31,
1996 and for the year then  ended  were  audited  by other  auditors  whose
report dated January 16, 1997,  expressed an  unqualified  opinion on those
statements.

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

     In our opinion,  the 1998 and 1997  financial  statements  referred to
above  (appearing on pages 42 to 64 of this Annual Report)  present fairly,
in all material respects, the consolidated financial position of Arch Coal,
Inc. and  subsidiaries at December 31, 1998 and 1997, and the  consolidated
results of their  operations and their cash flows for the years then ended,
in conformity with generally accepted accounting principles.


                                                 Ernst & Young LLP
Louisville, Kentucky
January 22, 1999



                                       40
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                                       Year Ended December 31
                                                                              ------------------------------------------
(In thousands of dollars except per share data)                                   1998           1997           1996
                                                                              ------------------------------------------
<S>                                                                           <C>            <C>            <C>
REVENUES
     Coal sales ...........................................................   $ 1,428,171    $ 1,034,813    $   750,123
     Income from equity investment ........................................         6,786           --             --
     Other revenues .......................................................        70,678         32,062         30,498
                                                                              -----------------------------------------
                                                                                1,505,635      1,066,875        780,621
                                                                              -----------------------------------------
COSTS AND EXPENSES

     Cost of coal sales ...................................................     1,313,400        916,802        669,295
     Selling, general and administrative expenses .........................        44,767         28,885         20,435
     Amortization of coal supply agreements ...............................        34,551         18,063         12,604
     Merger-related expenses ..............................................          --           39,132           --
     Other expenses .......................................................        25,070         22,111         22,175
                                                                              -----------------------------------------
                                                                                1,417,788      1,024,993        724,509
                                                                              -----------------------------------------
     Income from operations ...............................................        87,847         41,882         56,112
                                                                              -----------------------------------------

Interest expense, net:
     Interest expense .....................................................       (62,202)       (17,822)       (18,783)
     Interest income ......................................................           756            721          1,191
                                                                              -----------------------------------------
                                                                                  (61,446)       (17,101)       (17,592)
                                                                              -----------------------------------------
     Income before income taxes and extraordinary item ....................        26,401         24,781         38,520

Provision (benefit) for income taxes ......................................        (5,100)        (5,500)         5,500
                                                                              -----------------------------------------

     Income before extraordinary item .....................................        31,501         30,281         33,020

Extraordinary item from the extinguishment of debt ........................        (1,488)          --             --
                                                                              -----------------------------------------
     NET INCOME ...........................................................   $    30,013    $    30,281    $    33,020
                                                                              =========================================

Basic and diluted earnings per common share before extraordinary item .....   $      0.79    $      1.00    $      1.58
                                                                              =========================================
Basic and diluted earnings per common share ...............................   $      0.76    $      1.00    $      1.58
                                                                              =========================================

</TABLE>


The accompanying  notes are an integral part of the consolidated  financial
statements.



                                       42
<PAGE>
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                December 31
                                                                         --------------------------
(In thousands of dollars except share and per share data)                    1998           1997
                                                                         --------------------------
<S>                                                                      <C>            <C>
ASSETS

Current assets
     Cash and cash equivalents .......................................   $    27,414    $     9,177
     Trade accounts receivable .......................................       202,871        133,810
     Other receivables ...............................................        24,584         14,046
     Inventories .....................................................        68,455         50,419
     Prepaid royalties ...............................................        13,559         17,745
     Deferred income taxes ...........................................         8,694          8,506
     Other ...........................................................         7,757          9,475
                                                                         --------------------------
         Total current assets ........................................       353,334        243,178
                                                                         --------------------------

Property, plant and equipment

     Coal lands and mineral rights ...................................     1,476,703        853,053
     Plant and equipment .............................................     1,111,120        890,303
     Deferred mine development .......................................        80,926        102,909
                                                                         --------------------------
                                                                           2,668,749      1,846,265
     Less accumulated depreciation, depletion and amortization .......      (732,005)      (696,339)
                                                                         --------------------------
         Property, plant and equipment, net ..........................     1,936,744      1,149,926
                                                                         --------------------------

Other assets

     Prepaid royalties ...............................................        31,570         20,826
     Coal supply agreements ..........................................       201,965        185,306
     Deferred income taxes ...........................................        83,209         44,023
     Investment in Canyon Fuel .......................................       272,149           --
     Other ...........................................................        39,249         13,065
                                                                         --------------------------
         Total other assets ..........................................       628,142        263,220
                                                                         --------------------------
         Total assets ................................................   $ 2,918,220    $ 1,656,324
                                                                         ==========================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
     Accounts payable ................................................   $   129,528    $    84,692
     Accrued expenses ................................................       142,630         88,082
     Current portion of debt .........................................        61,000         29,500
                                                                         --------------------------
         Total current liabilities ...................................       333,158        202,274
Long-term debt .......................................................     1,309,087        248,425
Accrued postretirement benefits other than pension ...................       343,553        323,115
Accrued reclamation and mine closure .................................       150,636        116,199
Accrued workers' compensation ........................................       105,333         97,759
Accrued pension cost .................................................        18,524         21,730
Other noncurrent liabilities .........................................        39,713         35,324
                                                                         --------------------------
         Total liabilities ...........................................     2,300,004      1,044,826
                                                                         --------------------------

Stockholders' equity

     Common  stock,  $.01  par  value,   100,000,000   shares   authorized,
       39,371,581 issued and outstanding in 1998 and 39,657,898
       issued and outstanding in 1997 ................................           397            397
     Paid-in capital .................................................       473,116        472,425
     Retained earnings ...............................................       150,423        138,676
     Treasury stock, at cost (333,952 shares) ........................        (5,720)          --

                                                                         --------------------------
         Total stockholders' equity ..................................       618,216        611,498
                                                                         --------------------------
         Total liabilities and stockholders' equity ..................   $ 2,918,220    $ 1,656,324
                                                                         ==========================
</TABLE>



The accompanying  notes are an integral part of the consolidated  financial
statements.



                                       43



<PAGE>

CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                                    Three Years Ended December 31, 1998
                                                                    ----------------------------------------------------------------
                                                                                                            Treasury
(In thousands of dollars except share and per share data)            Common      Paid-In       Retained      Stock
                                                                      Stock      Capital       Earnings     at cost       Total
                                                                    ----------------------------------------------------------------
<S>                                                                 <C>          <C>          <C>         <C>          <C>
Balance at December 31, 1995 ....................................   $     209    $   8,392    $ 105,091   $    --      $ 113,692

     Net income .................................................                                33,020                   33,020
     Dividends paid ($.38 per share) ............................                                (8,000)                  (8,000)
     Income tax charge related to assets acquired
        from related parties ....................................                                (8,086)                  (8,086)
                                                                    ----------------------------------------------------------------
Balance at December 31, 1996 ....................................         209        8,392      122,025        --        130,626

     Net income .................................................                                30,281                   30,281
     Dividends paid ($.445 per share) ...........................                               (13,630)                 (13,630)
     Issuance of 18,660,054 shares of common stock
         to stockholders of Ashland Coal, Inc. pursuant
         to the merger agreement ................................         187      462,984                               463,171

     Issuance of 49,400 shares of common stock
         under the stock incentive plan .........................           1        1,049                                 1,050
                                                                    ----------------------------------------------------------------
Balance at December 31, 1997 ....................................         397      472,425      138,676        --        611,498

     Net income .................................................                                30,013                   30,013
     Dividends paid ($.46 per share) ............................                               (18,266)                 (18,266)
     Issuance of 47,635 shares of common stock
         under the stock incentive plan .........................                      691                                   691
     Treasury stock purchases (333,952 shares) ..................                                            (5,720)      (5,720)

                                                                    ----------------------------------------------------------------
Balance at December 31, 1998 ....................................   $     397    $ 473,116    $ 150,423   $  (5,720)   $ 618,216
                                                                    ================================================================
</TABLE>


The accompanying  notes are an integral part of the consolidated  financial
statements.



                                       44


<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                         Year Ended December 31
                                                                             ------------------------------------------
(In thousands of dollars)                                                         1998           1997           1996
                                                                             ------------------------------------------
<S>                                                                           <C>            <C>            <C>
OPERATING ACTIVITIES

Net income ................................................................   $    30,013    $    30,281    $    33,020
Adjustments to reconcile to cash provided by operating activities:
     Depreciation, depletion and amortization .............................       204,307        143,632        114,703
     Prepaid royalties expensed ...........................................        19,694          8,216          4,754
     Net gain on disposition of assets ....................................       (41,512)        (4,802)        (7,959)
     Income from equity investment ........................................        (6,786)          --             --
     Distributions from equity investment .................................        18,850           --             --
     Merger-related expenses ..............................................          --           33,096           --
     Changes in operating assets and liabilities ..........................       (24,671)       (28,842)          (551)
     Other ................................................................       (11,872)         8,682         (5,496)
                                                                              -----------------------------------------
            Cash provided by operating activities .........................       188,023        190,263        138,471
                                                                              -----------------------------------------
INVESTING ACTIVITIES

Payments for acquisition ..................................................    (1,126,706)          --             --
Additions to property, plant and equipment ................................      (141,737)       (77,309)       (62,490)
Additions to coal supply agreements .......................................          --             --           (7,150)
Additions to prepaid royalties ............................................       (26,252)        (7,967)        (7,071)
Additions to notes receivable .............................................       (10,906)          --             --
Proceeds from dispositions of property, plant and equipment ...............        34,230          5,267          4,073
                                                                              -----------------------------------------
         Cash used in investing activities ................................    (1,271,371)       (80,009)       (72,638)
                                                                              -----------------------------------------
FINANCING ACTIVITIES

Proceeds from (payments on) revolver and lines of credit ..................       176,582         78,897        (11,000)
Net proceeds from term loans ..............................................       958,441           --             --
Payments on notes .........................................................       (42,860)      (181,110)       (50,619)
Payments for debt issuance costs ..........................................       (12,725)          --             --
Proceeds from sale and leaseback of equipment .............................        45,442           --             --
Dividends paid ............................................................       (18,266)       (13,630)        (8,000)
Proceeds from sale of common stock                                                    691          1,050           --
Purchases of treasury stock ...............................................        (5,720)          --             --
                                                                              -----------------------------------------
            Cash provided (used) in financing activities ..................     1,101,585       (114,793)       (69,619)
                                                                              -----------------------------------------
            Increase (decrease) in cash and cash equivalents ..............        18,237         (4,539)        (3,786)
Cash and cash equivalents, beginning of year ..............................         9,177         13,716         17,502
                                                                              -----------------------------------------
Cash and cash equivalents, end of year ....................................   $    27,414    $     9,177    $    13,716
                                                                              =========================================

SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid during the year for interest ....................................   $    48,760    $    18,593    $    20,294
Cash paid during the year for income taxes, net of refunds ................   $    29,090    $    21,918    $    14,731

</TABLE>


The accompanying  notes are an integral part of the consolidated  financial
statements.



                                       45

<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars except share and per share data)


1. ACCOUNTING POLICIES

Principles of Consolidation

The consolidated  financial  statements  include the accounts of Arch Coal,
Inc. and its subsidiaries ("the Company"), which operate in the coal mining
industry.  The Company operates one reportable  segment:  the production of
steam and  metallurgical  coal from surface and deep mines  throughout  the
United  States,  for sale to utility,  industrial and export  markets.  The
Company's  mines are  primarily  located  in the  central  Appalachian  and
western  regions of the United States.  All  subsidiaries  (except as noted
below) are wholly owned. Significant intercompany transactions and accounts
have been eliminated in consolidation.

     The  Company's  65%  ownership  of Canyon Fuel,  LLC (Canyon  Fuel) is
accounted for on the equity method in the consolidated financial statements
as a result of certain  super-majority  voting  rights in the joint venture
agreement.  Income  from  Canyon  Fuel  is  reflected  in the  consolidated
statements  of income as income from  equity  investment.  (See  additional
discussion in "Investment in Canyon Fuel" in Note 3).

     The  Company's  17.5%   partnership   interest  in  Dominion  Terminal
Associates  is  accounted  for on the  equity  method  in the  consolidated
balance  sheets.  Allocable  costs of the  partnership for coal loading and
storage are included in other  expenses in the  consolidated  statements of
income.


Accounting 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.

Cash and Cash Equivalents

Cash and cash equivalents are stated at cost. Cash  equivalents  consist of
highly liquid investments with an original maturity of three months or less
when purchased.


Inventories

Inventories are comprised of the following:

<TABLE>
<CAPTION>
                      December 31
                  ------------------
                   1998        1997
                  ------------------
<S>               <C>       <C>
Coal ..........   $25,789   $25,359
Supplies ......    42,666    25,060
                  -----------------
                  $68,455   $50,419
                  =================
</TABLE>


Coal and  supplies  inventories  are valued at the lower of average cost or
market. The Company has recorded a valuation  allowance for slow-moving and
obsolete  supplies  inventories  of $23.9  million  and  $17.7  million  at
December 31, 1998 and 1997, respectively.


Coal Acquisition Costs and Prepaid Royalties

Coal  lease  rights  obtained  through  acquisitions  are  capitalized  and
amortized  primarily by the  units-of-production  method over the estimated
recoverable reserves.

     Rights  to  leased  coal  lands are  often  acquired  through  royalty
payments.  Where royalty payments represent prepayments  recoupable against
production,  they are  capitalized,  and  amounts  expected  to be recouped
within one year are  classified  as a current  asset.  As mining  occurs on
these leases,  the  prepayment is offset  against  earned  royalties and is
included in the cost of coal sales.


Coal Supply Agreements

Acquisition  costs related to coal supply  agreements (sales contracts) are
capitalized  and amortized on the basis of coal to be shipped over the term
of the contract.  Accumulated  amortization  for sales  contracts was $94.8
million and $60.3 million at December 31, 1998 and 1997, respectively.



                                       46
<PAGE>


Exploration Costs

Costs  related to locating  coal  deposits  and  determining  the  economic
mineability of such deposits are expensed as incurred.


Property, Plant and Equipment

Property,  plant  and  equipment  are  recorded  at  cost.  Interest  costs
applicable to major asset additions are capitalized during the construction
period.  Expenditures  which extend the useful lives of existing  plant and
equipment are capitalized.  Costs of purchasing rights to coal reserves and
developing  new mines or  significantly  expanding the capacity of existing
mines are capitalized and amortized  using the  units-of-production  method
over  the  estimated   recoverable   reserves.   Plant  and  equipment  are
depreciated  principally  on the  straight-line  method over the  estimated
useful lives of the assets, which range from three to 20 years.


Asset Impairment

If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed.  If this review indicates that the value of
the  asset  will not be  recoverable,  as  determined  based  on  projected
undiscounted  cash flows related to the asset over its remaining life, then
the carrying value of the asset is reduced to its estimated fair value.


Revenue Recognition

Coal sales revenues  include sales to customers of coal produced at Company
operations  and  purchased  from other  companies.  The Company  recognizes
revenue from coal sales at the time title passes to the customer.  Revenues
from  sources  other  than coal  sales,  including  gains and  losses  from
dispositions  of long-term  assets,  are included in other revenues and are
recognized as services are performed or otherwise earned.


Interest Rate Swap Agreements

The  Company  enters  into  interest-rate  swap  agreements  to modify  the
interest  characteristics of outstanding  Company debt. The swap agreements
essentially convert variable-rate debt to fixed-rate debt. These agreements
require  the  exchange  of amounts  based on  variable  interest  rates for
amounts based on fixed interest  rates over the life of the agreement.  The
Company  accrues  amounts to be paid or received under  interest-rate  swap
agreements over the lives of the agreements. Such amounts are recognized as
adjustments  to  interest  expense  over the lives of  agreements,  thereby
adjusting the  effective  interest  rate on the  Company's  debt.  The fair
values  of  the  swap  agreements  are  not  recognized  in  the  financial
statements.   Gains  and  losses  on  terminations  of  interest-rate  swap
agreements  would be  deferred  on the  balance  sheet (in other  long-term
liabilities)  and amortized as an  adjustment to interest  expense over the
remaining term of the terminated swap agreement.


Income Taxes

Deferred  income  taxes  are based on  temporary  differences  between  the
financial  statement  and tax basis of assets and  liabilities  existing at
each  balance  sheet date using  enacted tax rates for years  during  which
taxes are expected to be paid or recovered.


Stock Based Compensation

These financial statements include the disclosure requirements of Financial
Accounting  Standards Board  Statement No. 123 ("FAS 123"),  Accounting for
Stock-Based Compensation. With respect to accounting for its stock options,
as permitted  under FAS 123, the Company has retained the  intrinsic  value
method prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, and related Interpretations.


Earnings Per Common Share

In 1997,  FAS 128,  Earnings  per Share,  was issued.  FAS 128 replaced the
calculation  of primary and fully  diluted  earnings per share ("EPS") with
basic and diluted  EPS.  Unlike  primary,  basic EPS  excludes any dilutive
effects of



                                       47
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars except per share and per share data)



options,  warrants and convertible securities.  Diluted EPS is very similar
to  the  previously  reported  fully  diluted  EPS.  The  adoption  of  the
provisions  of FAS 128 did not have any effect on  previously  reported EPS
amounts.


Reclassifications

Certain  amounts  in the 1997  and  1996  financial  statements  have  been
reclassified  to conform  with the  classifications  in the 1998  financial
statements   with  no  effect  on   previously   reported   net  income  or
stockholders' equity.


2. MERGER AND ACQUISITION

On June 1, 1998, the Company acquired the Colorado and Utah coal operations
of Atlantic  Richfield  Company  ("ARCO") and  simultaneously  combined the
acquired ARCO operations and the Company's  Wyoming  operations with ARCO's
Wyoming operations in a new joint venture named Arch Western Resources, LLC
("Arch Western"). The principal operating units of Arch Western are Thunder
Basin Coal Company,  L.L.C., owned 100% by Arch Western, which operates two
coal mines in the  Southern  Powder River Basin in Wyoming;  Mountain  Coal
Company,  L.L.C., owned 100% by Arch Western,  which operates one coal mine
in Colorado;  Canyon Fuel Company,  LLC ("Canyon Fuel"),  65% owned by Arch
Western and 35% by ITOCHU Coal International,  Inc., a subsidiary of ITOCHU
Corporation,  which operates three coal mines in Utah; and Arch of Wyoming,
LLC, owned 100% by Arch Western, which operates two coal mines in the Hanna
Basin of Wyoming.

     Arch  Western is 99% owned by the  Company  and 1% owned by ARCO.  The
transaction  is valued at  approximately  $1.14  billion and a wholly owned
subsidiary  of the  Company is the  managing  member of Arch  Western.  The
transaction has been accounted for under the purchase method of accounting.
Accordingly,  the cost to acquire  ARCO's  U.S.  coal  operations  has been
allocated to the assets acquired and liabilities assumed according to their
respective  estimated  fair values.  Results of  operations of the acquired
operations are included in the consolidated  statements of income effective
June 1,  1998.  The  acquired  ARCO  operations  will  continue  to produce
low-sulfur coal for sale to primarily domestic utility customers.

     On July 1, 1997,  Ashland Coal,  Inc.  ("Ashland  Coal") merged with a
subsidiary of the Company.  Under the terms of the merger,  Ashland  Coal's
stockholders  received  one share of the  Company's  common  stock for each
common  share of Ashland  Coal and 20,500  shares of the  Company's  common
stock for each share of Ashland Coal preferred stock. A total of 18,660,054
shares of Company  common  stock were issued in the merger,  resulting in a
total purchase price (including fair value of stock options and transaction
related fees) of approximately $464.8 million. The merger was accounted for
under the purchase  method of accounting.  Results of operations of Ashland
Coal are included in the  consolidated  statements of income effective July
1, 1997.

     Summarized  below are the  unaudited  pro forma  combined  results  of
operations  for the years ended  December 31, 1998 and 1997.  These results
reflect  the July 1, 1997  Ashland  Coal  merger as if it had  occurred  on
January 1, 1997 and the June 1, 1998 Arch Western  transaction as if it had
occurred on January 1, 1998 and 1997.


<TABLE>
<CAPTION>
                                   1998           1997
--------------------------------------------------------
<S>                              <C>          <C>
Revenues .....................   $1,669,824   $1,792,582
Income before
     extraordinary item ......       22,994       36,175
Net income ...................       21,506       36,175
Earnings per share before
     extraordinary item ......   $      .58   $      .91
Earnings per share ...........   $      .54   $      .91
</TABLE>


In the opinion of the management of the Company, all adjustments  necessary
to present pro forma  results of operations  have been made.  The unaudited
pro forma results of operations do not purport to be indicative of



                                       48
<PAGE>

the  results  that  would have  occurred  had these  transactions  actually
occurred  at the  beginning  of the  relevant  periods or of the results of
operations that may be achieved in the future.


3. INVESTMENT IN CANYON FUEL
The following tables present unaudited summarized financial information for
Canyon Fuel  which,  as part of the June 1, 1998 Arch  Western  transaction
(described  in Note 2), was acquired by the Company and is accounted for on
the equity method.


<TABLE>
<CAPTION>
                                           SEVEN MONTHS
                                                  ENDED
                                           DECEMBER 31,
CONDENSED INCOME STATEMENT INFORMATION             1998
-------------------------------------------------------
<S>                                        <C>
Revenues ...............................   $155,634
Total costs and expenses ...............    153,039
                                           --------
Net income .............................      2,595
Effect of purchase adjustments .........      4,191
                                           --------
Arch Coal's income from its equity
     investment in Canyon Fuel .........   $  6,786
                                           ========
</TABLE>



The Company's  income from its equity  investment in Canyon Fuel represents
65% of Canyon  Fuel's  net  income  after  adjusting  for the effect of its
investment in Canyon Fuel. The Company's investment in Canyon Fuel reflects
purchase adjustments primarily related to sales contracts, mineral reserves
and other  property,  plant and  equipment.  The  condensed  balance  sheet
information  below  reflects  Canyon Fuel Company LLC's asset and liability
values and does not reflect the Company's investment in Canyon Fuel.


<TABLE>
<CAPTION>
                                            AT DECEMBER
CONDENSED BALANCE SHEET INFORMATION            31, 1998
-------------------------------------------------------
<S>                                           <C>
Current assets .............................  $ 87,620
Noncurrent assets ..........................   532,119
Current liabilities ........................    31,459
Noncurrent liabilities .....................    19,247
Members' equity.............................   569,033
</TABLE>


4. ACCRUED EXPENSES
Accrued expenses consist of the following:


<TABLE>
<CAPTION>
                                     December 31
                                 ------------------
                                   1998       1997
---------------------------------------------------
<S>                              <C>        <C>
Accrued payroll and
     related benefits ........   $ 29,878   $17,314
Accrued taxes other than
     income taxes ............     44,665    22,259
Accrued postretirement
     benefits other than
     pension .................     15,555    14,390
Accrued workers'
     compensation ............     15,869    12,649
Accrued interest .............     17,007     3,566
Other accrued expenses .......     19,656    17,904
                                 ------------------
                                 $142,630   $88,082
                                 ==================
</TABLE>


5. INCOME TAXES

Significant  components of the provision  (benefit) for income taxes are as
follows:


<TABLE>
<CAPTION>
                            1998        1997       1996
-------------------------------------------------------
<S>                    <C>         <C>         <C>
Current:
   Federal ..........  $  8,467    $  8,250    $  9,200
   State ............      (650)       (250)      1,050
                       --------------------------------
Total current .......     7,817       8,000      10,250
Deferred:
   Federal ..........   (12,517)    (13,100)     (4,050)
   State ............      (400)       (400)       (700)
                       --------------------------------
Total deferred ......   (12,917)    (13,500)     (4,750)
                       --------------------------------
                       $ (5,100)   $ (5,500)   $  5,500
                       ================================
</TABLE>



                                       49
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars except share and per share data)


A reconciliation  of the statutory  federal income tax expense (benefit) on
the  Company's  pretax  income  before  extraordinary  item  to the  actual
provision (benefit) for income taxes follows: 


<TABLE>
<CAPTION>
                                     1998           1997            1996
---------------------------------------------------------------------------
<S>                               <C>              <C>             <C>
Income tax expense
    at statutory rate .........   $  9,240         $  8,673        $ 13,482
Percentage depletion
    allowance .................    (14,437)         (13,543)        (10,431)
State taxes, net of effect
    of federal taxes ..........       (594)            (570)            350
Non-deductible
    expenses ..................        621              236           1,000
Other, net ....................         70             (296)          1,099
                                  -----------------------------------------
                                  $ (5,100)        $ (5,500)     $    5,500
                                  =========================================

</TABLE>


The Company's federal income tax returns for the years ending 1995 and 1996
are currently under review by the Internal  Revenue  Service (IRS).  During
1996,  the IRS completed its audits for the tax years 1990 and 1991 and the
Company  and the IRS agreed to a partial  settlement  of various tax issues
for a payment of $6.5 million including  interest which was charged against
previously  recorded  reserves.  Part  of  the  settlement  related  to the
acquisition  from the  Company's  stockholders  of  certain  Illinois  coal
reserves  for $55.2  million.  The  acquisition  was valued for  accounting
purposes  at the  stockholders'  net book value of $22.8  million  with the
$32.4 million  difference  between the net book value and fair market value
less $12.3 million of deferred tax benefits  being  recorded as a reduction
to  stockholders'  equity.  As part of the  settlement  with the  IRS,  the
Company  agreed to adjust the fair market value of the coal  properties  to
$33.8 million for tax purposes  resulting in a decrease to the deferred tax
asset of $8.1 million from $12.3 million to $4.2  million.  The decrease in
the  deferred  tax asset was charged  directly to  stockholders'  equity in
1996.

     During 1997,  the Company  settled its protest of certain  adjustments
proposed  by the IRS for  federal  income  tax  returns  for the years 1987
through  1989.  A  deposit  of  $8.0  million  was  made in  April  1997 in
anticipation  of the settlement and a final payment of  approximately  $4.0
million was made in 1998.

     During  1998,  the Company  settled  its  protest of certain  unagreed
issues with the IRS for the  federal  income tax returns for years 1990 and
1991.  A final  payment of $0.5  million  was paid in June 1998 and charged
against previously  recorded reserves.  The IRS audit of the federal income
tax  returns  for years 1992  through  1994 was  completed  during 1998 and
agreed to at the examination  level. A payment of $15.5 million was made in
December  1998 in settlement  of all issues.  A  significant  amount of the
issues  were timing in nature and the tax paid  related to these  temporary
differences  is accounted for as a deferred tax asset and the remaining tax
and interest  paid was charged  against  previously  recorded  reserves.  A
portion  of the  payment  related  to items  that were  settled in the 1987
through 1991 audits previously discussed.  Permanent differences included a
reduction in percentage  depletion and a decrease in cost depletion related
to the  settlement  for the adjustment in fair market value of the Illinois
coal reserves.

     Management  believes that the Company has adequately  provided for any
income taxes and interest  which may ultimately be paid with respect to all
open tax years.

     Significant  components  of the  Company's  deferred  tax  assets  and
liabilities that result from carry forwards and



                                       50
<PAGE>

temporary differences between the financial statement basis and tax basis of
assets and liabilities are summarized as follows:


<TABLE>
<CAPTION>
                                          December 31
                                     ---------------------
                                          1998       1997
----------------------------------------------------------
<S>                                   <C>        <C>
Deferred tax assets:
Postretirement benefits other
   than pension ...................   $136,004   $129,818
Alternative minimum tax credit
   carryforward ...................     70,897     80,441
Workers' compensation .............     29,345     30,503
Reclamation and mine closure ......     22,567     23,905
Net operating loss
   carryforwards ..................     10,232      8,214
Other .............................     17,983     28,498
                                      -------------------
Total deferred tax assets .........    287,028    301,379
                                      -------------------

Deferred tax liabilities:
Coal lands and mineral rights .....     78,869     86,471
Plant and equipment ...............     78,359     79,962
Deferred mine development .........        941      3,643
Coal supply agreements ............     17,390     38,406
Other .............................     19,566     40,368
                                      -------------------
Total deferred tax liabilities ....    195,125    248,850
                                      -------------------
Net deferred tax asset ............     91,903     52,529
Less current asset ................      8,694      8,506
                                      -------------------
Long-term deferred tax asset ......   $ 83,209   $ 44,023
                                      ===================
</TABLE>


If not used, the  carryforwards  for net operating  losses of $26.2 million
will expire in the years 2008 through  2019.  The  alternative  minimum tax
credit carryforward has no statutory expiration date.

     The Company is required  to record a  valuation  allowance  when it is
more likely than not that some  portion or all of the  deferred  tax assets
will not be realized.  It is  management's  belief that the  Company's  net
deferred  income  tax  asset  will  more  likely  than not be  realized  by
generating sufficient taxable income in the future.


6. DEBT AND FINANCING ARRANGEMENTS

Debt consists of the following:


<TABLE>
<CAPTION>
                                                 December 31
                                            ----------------------
                                               1998       1997
-------------------------------------------------------------------
<S>                                            <C>          <C>
Indebtedness to banks under lines
   of credit (weighted average rate
   at December 31,1998-5.40%;
   1997-7.05%) .........................   $   12,884    $  36,302
Indebtedness to banks under
   revolving credit agreement,
   expiring May 31, 2003
   (weighted average rate at
   December 31, 1998-6.27%) ............      390,000         --
Variable rate fully amortizing
   term loan payable quarterly
   through May 31, 2003
   (weighted average rate at
   December 31, 1998-6.16%) ............      285,000         --
Variable rate non-amortizing term
   loan due May 31, 2003
   (weighted average rate at
   December 31, 1998-6.87%) ............      675,000         --
Indebtedness to banks under
   the 1997 revolving credit
   agreement ...........................         --        190,000
7.79% senior unsecured notes ...........         --         42,860
Other ..................................        7,203        8,763
                                           -----------------------
                                            1,370,087      277,925
Less current portion ...................       61,000       29,500
                                           -----------------------
Long-term debt .........................   $1,309,087    $ 248,425
                                           =======================
</TABLE>



                                       51
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars except share and per share data)


On July 1, 1997,  concurrent  with the  Ashland  Coal  merger,  the Company
entered into a $500 million  revolving credit agreement which was repaid in
its entirety  and the facility  terminated  effective  June 1, 1998,  using
proceeds from a new Company credit facility  entered into effective June 1,
1998.

     In connection with the Arch Western  transaction,  the Company entered
into two new five-year  credit  facilities:  a $675 million  non-amortizing
term loan to Arch Western and a $900 million credit  facility to Arch Coal,
including a $300  million  fully  amortizing  term loan and a $600  million
revolver. Borrowings under the new Arch Coal credit facilities were used to
finance the acquisition of ARCO's Colorado and Utah coal operations, to pay
related fees and expenses,  to refinance  existing  corporate  debt and for
general corporate purposes.  The Company recognized an extraordinary charge
of $1.5  million  (net of a tax  benefit  of $.9  million)  related  to the
refinancing  of the July 1, 1997 credit  facility and the prepayment of its
7.79% senior  unsecured  notes.  Borrowings  under the Arch Western  credit
facility were used to fund a portion of a $700 million cash distribution by
Arch  Western to ARCO,  which  distribution  occurred  simultaneously  with
ARCO's contribution of its Wyoming coal operations and certain other assets
to Arch  Western.  The $675 million term loan is secured by Arch  Western's
membership interests in its subsidiaries.  The Arch Western credit facility
is not  guaranteed by the Company.  The rate of interest on the  borrowings
under the agreements is, at the Company's option, the PNC Bank base rate or
a rate based on LIBOR.

     The Company periodically  establishes uncommitted lines of credit with
banks.  These  agreements  generally  provide for short-term  borrowings at
market  rates.  At  December  31,  1998,  there  were $45  million  of such
agreements in effect,  of which $12.9 million were  outstanding at December
31, 1998.

     Except for  amounts  expected to be repaid in 1999,  amounts  borrowed
under the  revolving  credit  agreement  and the bank  lines of credit  are
classified  as  long-term  as the Company has the intent and the ability to
maintain these  borrowings on a long-term  basis.  Aggregate  maturities of
debt at December 31, 1998 are $61.0 million in 1999, $60.6 million in 2000,
$60.5 million in 2001, $60.5 million in 2002 and $1,127.5 million in 2003.

     Terms of the Company's credit  facilities and leases contain financial
and other  restrictive  covenants that limit the ability of the Company to,
among other things, pay dividends,  effect acquisitions or dispositions and
borrow  additional  funds,  and require the Company to, among other things,
maintain  various  financial ratios and comply with various other financial
covenants.  Failure by the  Company  to comply  with such  covenants  could
result in an event of default which,  if not cured or waived,  could have a
material adverse effect on the Company.

     The Company enters into  interest-rate  swap  agreements to modify the
interest  characteristics  of  outstanding  Arch Coal debt. At December 31,
1998, the Company had interest-rate swap agreements having a total notional
value  of  $815  million.   These  swap  agreements  are  used  to  convert
variable-rate  debt to fixed-rate debt.  Under these swap  agreements,  the
Company  pays a  weighted-average  fixed rate of 5.54%  (before  the credit
spread over LIBOR) and is receiving a weighted-average  variable rate based
upon 3 day and 90-day LIBOR.  At December 31, 1998, the remaining  terms of
the swap agreements ranged from 44 to 68 months.


7. FAIR VALUES OF FINANCIAL INSTRUMENTS

The  following  methods  and  assumptions  were  used  by  the  Company  in
estimating its fair value disclosures for financial instruments:

     Cash and cash  equivalents:  The  carrying  amounts  approximate  fair
value.

     Debt:  The  carrying  amounts of the  Company's  borrowings  under its
revolving  credit  agreement,  lines of credit and variable rate term loans
approximate their fair value. The fair values of the Company's senior notes
and other long-term debt are estimated using discounted cash flow analyses,



                                       52
<PAGE>

based on the  Company's  current  incremental  borrowing  rates for similar
types of borrowing arrangements at the end of each year presented.

     Interest rate swaps:  The fair values of interest rate swaps are based
on quoted market prices,  which reflect the present value of the difference
between estimated future amounts to be paid and received.

     The  carrying  amounts  and fair  values  of the  Company's  financial
instruments at December 31, 1998 and 1997 are as follows:


<TABLE>
<CAPTION>
                                            1998                  1997
                                   ---------------------------------------------
                                    Carrying     Fair      Carrying       Fair
                                     Amount      Value      Amount       Value
--------------------------------------------------------------------------------
<S>                                <C>        <C>          <C>        <C>
Cash and cash equivalents ......   $ 27,414   $  27,414    $  9,177   $   9,177
Lines of credit ................     12,884      12,884      36,302      36,302
Revolving credit agreements ....    390,000     390,000     190,000     190,000
Variable rate term loans .......    960,000     960,000        --          --
Senior notes ...................       --          --        42,860      44,690
Other debt .....................      7,203       7,203       8,763       8,763
Interest rate swaps ............       --       (14,151)       --           (93)
</TABLE>


8. ACCRUED WORKERS' COMPENSATION

The Company is liable under the federal Mine Safety and Health Act of 1977,
as amended, to provide for pneumoconiosis (black lung) benefits to eligible
employees, former employees, and dependents with respect to claims filed by
such  persons on or after July 1, 1973.  The Company is also  liable  under
various  states'  statutes for black lung benefits.  The Company  currently
provides for federal and state claims principally  through a self-insurance
program.  Charges are being made to operations as determined by independent
actuaries,  at the present value of the  actuarially  computed  present and
future  liabilities for such benefits over the employees'  applicable years
of service.  In addition,  the Company is liable for workers'  compensation
benefits for traumatic injuries which are accrued as injuries are incurred.
Workers' compensation costs (credits) include the following components:


<TABLE>
<CAPTION>
                                       1998        1997        1996
---------------------------------------------------------------------
<S>                                 <C>         <C>         <C>
Self-insured black lung benefits:
Service cost ...................... $  1,022    $    678    $    639
Interest cost .....................    3,173       2,353       1,735
Net amortization
   and deferral ...................      111     (10,084)     (9,766)
                                    --------------------------------
                                       4,306      (7,053)     (7,392)
Other workers' compensation
   benefits .......................   19,396      12,182      13,350
                                    --------------------------------
                                    $ 23,702    $  5,129    $  5,958
                                    ================================
</TABLE>

The actuarial  assumptions used in the determination of black lung benefits
included a discount rate of 7.0% as of December 31, 1998 (7.25% and 7.5% as
of December 31, 1997 and 1996,  respectively) and a black lung benefit cost
escalation  rate  of 4% in  1998,  1997  and  1996.  In  consultation  with
independent  actuaries,  the Company changed the discount rate,  black lung
benefit cost  escalation  rate,  rates of disability and other  assumptions
used in the actuarial determination of black lung liabilities as of January
1, 1993, to better reflect actual  experience.  The effect of these changes
was a  significant  increase in the  unrecognized  net gain.  This gain was
amortized  through  1997 and totaled  $10.8  million  (before tax) and $6.6
million (after tax) in each of the years 1997 and 1996.

     Summarized  below is information  about the amounts  recognized in the
consolidated balance sheets for workers' compensation benefits:



                                       53
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars except share and per share data)

<TABLE>
<CAPTION>
                                                             December 31,
                                                        ----------------------
                                                          1998           1997
------------------------------------------------------------------------------
<S>                                                     <C>          <C>
Actuarial present value for self-insured black lung:
Benefits contractually
   recoverable from others .........................    $   4,649    $   5,053
Benefits for
   Company employees ...............................       51,137       42,677
                                                        ----------------------
Accumulated black
   lung benefit obligation .........................       55,786       47,730
Unrecognized net loss ..............................       (1,722)      (3,004)
                                                        ----------------------


                                                           54,064       44,726
Traumatic and other
   workers' compensation ...........................       67,138       65,682
                                                        ----------------------
Accrued workers'
   compensation ....................................      121,202      110,408
Less amount included
   in accrued expenses .............................       15,869       12,649
                                                        ----------------------
                                                        $ 105,333    $  97,759
                                                        ======================
</TABLE>



Receivables  related to benefits  contractually  recoverable from others of
$4,649 in 1998 and $5,053 in 1997 are recorded in other long-term assets.


9. ACCRUED RECLAMATION AND MINE CLOSING COSTS

The federal  Surface Mining Control and Reclamation Act of 1977 and similar
state  statutes  require that mine property be restored in accordance  with
specified  standards and an approved  reclamation plan. The Company accrues
for the costs of final mine closure  reclamation  over the estimated useful
mining life of the property.  These costs relate to reclaiming  the pit and
support acreage at surface mines and sealing  portals at deep mines.  Other
costs of final mine  closure  common to both types of mining are related to
reclaiming   refuse  and  slurry  ponds.   The  Company  also  accrues  for
significant  reclamation  that is completed during the mining process prior
to  final  mine  closure.  The  establishment  of the  final  mine  closure
reclamation  liability and the other ongoing reclamation liability is based
upon permit  requirements and requires  various  estimates and assumptions,
principally  associated with costs and productivities.  The Company accrued
$12.5  million,  $10.8  million  and $6.1  million in 1998,  1997 and 1996,
respectively,  for current  and final mine  closure  reclamation  excluding
reclamation recosting adjustments identified below. Cash payments for final
mine  closure  reclamation  and  current  disturbances  approximated  $15.0
million,   $8.5  million  and  $9.8  million  for  1998,   1997  and  1996,
respectively.  Periodically,  the Company reviews its entire  environmental
liability and makes  necessary  adjustments,  including  permit  changes as
granted by state authorities and revisions to costs and productivities,  to
reflect current  experience.  These  recosting  adjustments are recorded in
cost of coal sales.  Adjustments  included an increase in the  liability of
$4.9 million in 1998,  and decreases in the liability were $4.4 million and
$4.5  million  in 1997 and 1996,  respectively.  The  Company's  management
believes it is making adequate provisions for all expected  reclamation and
other costs associated with mine closures.


10. EMPLOYEE BENEFIT PLANS

Defined Benefit Pension and Other Postretirement Benefit Plans.

     The  Company  has  non-contributory   defined  benefit  pension  plans
covering certain of its salaried and non-union hourly  employees.  Benefits
are generally  based on the employee's  years of service and  compensation.
The  Company  funds  the  plans  in an  amount  not less  than the  minimum
statutory funding requirements nor more than the maximum amount that can be
deducted for federal income tax purposes.

     The Company also currently provides certain  postretirement health and
life  insurance  coverage  for  eligible  employees.   Generally,   covered
employees  who   terminate   employment   after  meeting  the   eligibility
requirements  for pension  benefits are also  eligible  for  postretirement
coverage  for  themselves  and  their  dependents.  The  salaried  employee
postretirement medical and dental plans are contributory,



                                       54
<PAGE>

with  retiree  contributions  adjusted  periodically,   and  contain  other
cost-sharing   features   such  as   deductibles   and   coinsurance.   The
postretirement  medical  plan for  retirees who were members of the UMWA is
not contributory.  The Company's current funding policy is to fund the cost
of all postretirement  health and life insurance benefits as they are paid.
Summaries of the changes in the benefit obligations, plan assets (primarily
listed  stocks and debt  securities)  and funded status of the plans are as
follows:



<TABLE>
<CAPTION>
                                                         Pension benefits  Other postretirement benefits
                                                     ---------------------------------------------------
                                                         1998        1997        1998         1997
--------------------------------------------------------------------------------------------------------
<S>                             <C>                  <C>          <C>         <C>          <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at January 1 .................   $  84,085    $ 56,710    $ 333,908    $ 220,332
Service cost .....................................       5,841       2,788        3,715        3,717
Interest cost ....................................       8,137       4,970       23,101       19,546
Benefits paid ....................................      (8,562)     (2,769)     (13,224)     (10,442)
Plan amendments ..................................      (3,809)       --        (15,924)        --
Acquisition of ARCO Coal operations in
   1998 and the Ashland Coal merger in 1997 ......      39,674      20,015       13,625       88,841
Other-primarily actuarial (gain) loss ............      14,067       2,371       (9,378)      11,914
                                                     -----------------------------------------------
Benefit obligations at December 31 ...............   $ 139,433    $ 84,085    $ 335,823    $ 333,908
                                                     ===============================================


CHANGE IN PLAN ASSETS
Value of plan assets at January 1 ................   $  64,577    $ 45,929    $    --      $    --
Actual return on plan assets .....................      21,771       7,339         --           --
Employer contributions ...........................       8,346         499       13,224       10,442
Acquisition of ARCO Coal operations in
   1998 and the Ashland Coal merger in 1997 ......      41,142      13,579         --           --
Benefits paid ....................................      (8,562)     (2,769)     (13,224)     (10,442)
                                                     -----------------------------------------------
Value of plan assets at December 31 ..............   $ 127,274    $ 64,577    $    --      $    --
                                                     ===============================================


FUNDED STATUS OF THE PLANS
Accumulated obligations less plan assets .........   $  12,159    $ 19,508    $ 335,823    $ 333,908
Unrecognized actuarial gain (loss) ...............       6,920       3,451        6,918       (2,179)
Unrecognized net transition asset ................         887       1,085         --           --
Unrecognized prior service gain (cost) ...........       2,667        (879)      16,367        5,776
                                                     -----------------------------------------------
Net liability recognized .........................   $  22,633    $ 23,165    $ 359,108    $ 337,505
                                                     ===============================================

BALANCE SHEET LIABILITIES (ASSETS)
Prepaid benefit costs ............................   $  (1,092)   $   --      $    --      $    --
Accrued benefit liabilities ......................      23,725      23,165      359,108      337,505
                                                     -----------------------------------------------
Net liability recognized .........................   $  22,633    $ 23,165    $ 359,108    $ 337,505
                                                     ===============================================
</TABLE>


The Company's primary defined benefit pension plan was amended January 1998
to a cash balance plan,  which resulted in a $3.8 million gain.  Changes in
demographic  information  resulted in a $14.1  million  actuarial  loss for
1998. In addition,  a January 1997 amendment to the postretirement  benefit
plan  resulted  in a  $15.9  million  gain.  The  gain  resulted  from  the
implementation  of a defined  dollar benefit cap which limits the Company's
disbursements under the plan. The $9.4 million actuarial gain resulted from
favorable claims experience compared to previous projections.


                                       55
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(in thousands of dollars except share and per share data)

<TABLE>
<CAPTION>
                                                                Pension benefits       Other postretirement benefits
                                                            ---------------------------------------------------------------
                                                               1998         1997            1998            1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>               <C>           <C>             <C>
Weighted Average Assumptions as of December 31
Discount rate.............................................   7.00%             7.25%         7.00%           7.25%
Rate of compensation increase.............................   4.75%             5.00%          N/A             N/A
Expected return on plan assets............................   9.00%             9.00%          N/A             N/A
Health care cost trend on covered charges.................    N/A               N/A           4.5%        6.0% in 1998;
 ..........................................................                                                5.0% thereafter
</TABLE>


     The  following  table  details  the  components  of pension  and other
postretirement benefit costs.


<TABLE>
<CAPTION>
                                                   Pension benefits               Other postretirement benefits
                                          -------------------------------------------------------------------------
                                             1998         1997        1996         1998         1997       1996
-------------------------------------------------------------------------------------------------------------------
<S>                                        <C>         <C>           <C>       <C>          <C>           <C>
Service cost............................   $5,841      $  2,788      $2,295    $   3,715     $  3,717     $   2,246
Interest cost...........................    8,137         4,970       4,051       23,101       19,546        15,648
Expected return on plan assets..........   (7,521)       (4,391)     (3,520)         --           --           --
Other amortization and deferral.........      790          (503)        642       (2,884)      (2,573)       (1,527)
                                           ------------------------------------------------------------------------
                                           $7,247      $  2,864      $3,468      $23,932      $20,690       $16,367
                                           ========================================================================
</TABLE>


The health care cost trend rate assumption has a significant  effect on the
amounts  reported.  For example,  increasing  the assumed  health care cost
trend rate by one percentage point each year would increase the accumulated
postretirement  obligation  as of December  31, 1998 by $48.0  million,  or
14.3%,  and the net periodic  postretirement  benefit cost for 1998 by $4.2
million, or 20.0%.


Multiemployer Pension and Benefit Plans

Under the labor contract with the United Mine Workers of America  ("UMWA"),
the Company made payments of $1.3 million, $2.0 million and $1.9 million in
1998, 1997 and 1996,  respectively,  into a  multiemployer  defined benefit
pension plan trust established for the benefit of union employees. Payments
are based on hours worked and are expensed as paid. Under the Multiemployer
Pension Plan  Amendments  Act of 1980,  a  contributor  to a  multiemployer
pension  plan  may  be  liable,  under  certain   circumstances,   for  its
proportionate  share of the plan's  unfunded  vested  benefits  (withdrawal
liability).  The Company has estimated its share of such amount to be $53.4
million at December 31, 1998. The Company is not aware of any circumstances
which  would  require it to reflect its share of  unfunded  vested  pension
benefits in its financial statements.

     The Coal Industry  Retiree Health Benefit Act of 1992 ("Benefit  Act")
provides for the funding of medical and death benefits for certain  retired
members  of the UMWA  through  premiums  to be paid by  assigned  operators
(former employers), transfers of monies in 1993 and 1994 from an overfunded
pension  trust  established  for the benefit of retired UMWA  members,  and
transfers  from the  Abandoned  Mine Lands Fund (funded by a federal tax on
coal  production)  commencing in 1995.  The Company  treats its  obligation
under  the  Benefit  Act as a  participation  in a  multiemployer  plan and
recognizes  expense as  premiums  are paid.  The  Company  recognized  $3.7
million in 1998,  $3.9  million in 1997 and $2.8 million in 1996 in expense
relative to premiums paid pursuant to the Benefit Act.


                                       56
<PAGE>

Other Plans

The  Company  sponsors  savings  plans  which  were  established  to assist
eligible  employees in providing  for their future  retirement  needs.  The
Company's  contributions  to the plans  were  $6.8  million  in 1998,  $4.6
million in 1997 and $3.4 million in 1996.


11. CAPITAL STOCK

On April 4, 1997, the Company  changed its capital stock whereby the number
of authorized  shares was increased to 100,000,000  common shares,  the par
value  was  changed  to  $.01  per  share,  and a  common  stock  split  of
338.0857-for-one was effected.  All share and per share information reflect
the stock split.

     On September 29, 1998,  Arch Coal's Board of Directors  authorized the
Company to repurchase up to 2 million shares of Company  common stock.  The
timing of the  purchases  and the  number of  shares  to be  purchased  are
dependent on market  conditions.  As of December 31, 1998,  the Company has
acquired  330,200 shares under the repurchase  program at the average price
of $17.08 per share.


12. STOCK INCENTIVE PLAN

On April 22, 1998, the stockholders ratified the adoption of the 1997 Stock
Incentive Plan (the "Company Incentive Plan") reserving 6,000,000 shares of
Arch Coal  common  stock for  awards to  officers  and other  selected  key
management  employees of the Company.  The Company  Incentive Plan provides
the Board of Directors with the  flexibility to grant stock options,  stock
appreciation  rights  (SARs),  restricted  stock,  restricted  stock units,
performance stock,  performance  units, merit awards,  phantom stock awards
and rights to acquire stock through purchase under a stock purchase program
("Awards").   Stock  options  outstanding  under  the  Ashland  Coal  stock
incentive plans at the date of the merger were substituted for fully vested
stock options in the Company  Incentive  Plan (and are  exercisable  on the
same  terms and  conditions  including  per share  exercise  prices as were
applicable to such options when granted.)  Stock options  generally  become
exercisable  in full or in part  one year  from  the date of grant  and are
granted at a price equal to 100% of the fair  market  value of the stock on
the date of grant. SARs entitle employees to receive a payment equal to the
appreciation in market value of the stated number of common shares from the
SARs  exercise  price to the market  value of the shares on the date of its
exercise.  Unexercised  options  and SARs' lapse 10 years after the date of
grant.  Restricted  stock awards entitle  employees to purchase shares at a
nominal cost. Such awards entitle  employees to vote shares acquired and to
receive  any  dividends  thereon,   but  such  shares  cannot  be  sold  or
transferred  and are subject to  forfeiture  if employees  terminate  their
employment  prior to the prescribed  period,  which can be from one to five
years.  Merit  awards  are  grants of stock  without  restriction  and at a
nominal  cost.  Performance  share  or unit  awards  can be  earned  by the
recipient  if  the  Company  meets  certain   pre-established   performance
measures.  Until earned,  the performance awards are  nontransferable,  and
when earned,  performance  awards are payable in cash, stock, or restricted
stock as  determined  by the Board of  Directors.  Phantom stock awards are
based on the appreciation of hypothetical underlying shares or the earnings
performance  of such  shares  and may be paid in cash or in  shares.  As of
December 31, 1998,  performance shares and stock options were the only type
of Awards granted. As of December 31, 1998, 361,550 phantom performance


                                       57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollar except share and per share data)


shares had been granted and will be earned by participants based on Company
performance  for the years 1998 through 2001.  Information  regarding stock
options under the Company  Incentive  Plan is as follows for the year ended
December 31, 1998 and 1997:


<TABLE>
<CAPTION>
                                                           1998                     1997
                                                   -------------------------------------------------
                                                                 Weighted                  Weighted
                                                      Common      Average    Common        Average
                                                      Shares       Price     Shares         Price
----------------------------------------------------------------------------------------------------
<S>                                                   <C>          <C>        <C>           <C>
Options outstanding at January 1 .................      926      $   25.23     --         $    --
Issued in exchange for Ashland
   Coal stock options ............................     --             --        675           23.69
Granted ..........................................      360          22.88      300           27.88
Exercised ........................................      (48)         14.50      (49)          21.25
Canceled .........................................     (110)         25.88     --              --
                                                      -----                   -----
Options outstanding at December 31 ...............    1,128          24.86      926           25.23
                                                      =====                   =====
Options exercisable at December 31 ...............      600      $   25.04      626       $   23.88
Options available for grant at December 31 .......    4,413                   4,684
</TABLE>


The Company applies APB 25,  Accounting for Stock Issued to Employees,  and
related  Interpretations  in  accounting  for the Company  Incentive  Plan.
Accordingly,  no  compensation  expense has been  recognized  for the fixed
stock  option  portion of the  Company  Incentive  Plan.  Had  compensation
expense for the fixed stock option  portion of the Company  Incentive  Plan
been determined based on the fair value at the grant dates for awards under
this plan consistent with the method of FAS 123, Accounting for Stock-Based
Compensation,  the Company's net income and earnings per common share would
have been  reduced to the pro forma  amounts in the table  below.  The fair
value of options granted in 1998 and 1997 was determined to be $2.3 million
and $2.5 million,  respectively,  using the  Black-Scholes  option  pricing
model and the weighted  average  assumptions  noted below.  For purposes of
these pro forma  disclosures,  the  estimated  fair value of the options is
recognized as compensation  expense over the options'  vesting period.  The
stock options granted in 1998 and 1997 vest ratably over three years.

<TABLE>
<CAPTION>
                                                                  1998         1997
---------------------------------------------------------------------------------------
<S>                                                             <C>          <C>
Pro Forma
     Net income (in millions) ...............................   $   29.3     $   30.1
     Basic and diluted earnings per share ...................   $     .74    $     .98
                                                                ----------   ---------
Weighted average fair value per share of options granted ....   $    7.22    $    8.36
                                                                ----------   ---------
Assumptions (weighted average)
     Risk-free interest rate ................................        6.0%         6.3%
     Expected dividend yield ................................        2.0%         2.0%
     Expected volatility ....................................       31.8%        29.0%
     Expected life (in years) ...............................        5.0          5.0
</TABLE>


                                       58
<PAGE>

The pro forma effect on net income for 1998 and 1997 is not  representative
of the pro forma effect on net income in future  years  because it does not
take into  consideration pro forma  compensation  expense related to grants
issued prior to 1996.

     Exercise prices for options outstanding as of December 31, 1998, range
from $17.25 to $34.375, and the weighted average remaining contractual life
at that date was 7.2 years. The table below shows pertinent  information on
options  outstanding  at December 31, 1998,  priced below $25 per share and
priced at $25 per share or more:

<TABLE>
<CAPTION>
                                                                       Option Exercise Price
                                                                      ------------------------
                                                                       Below $25  $25 or More
----------------------------------------------------------------------------------------------
<S>                                                                     <C>       <C>
Options outstanding (in thousands) ..................................       607       521
Weighted-average exercise price .....................................   $ 22.20   $ 27.96
Weighted-average remaining contractual life (in years) ..............       7.4       6.9
Options currently exercisable (in thousands) ........................       264       336
Weighted-average exercise price of options currently exercisable ....   $ 21.33   $ 28.01
</TABLE>


13. MERGER RELATED EXPENSES AND CHANGES IN ESTIMATES

During  1997,  in  connection  with the Ashland  Coal  merger,  the Company
recorded a one-time  charge of $39.1 million  (before tax) or $23.8 million
(after tax) comprised of termination  benefits and relocation costs of $8.1
million and costs of $31.0 million  associated with the idling of duplicate
facilities.  The $8.1 million costs arising from the  termination  benefits
and  relocation  costs have been paid.  The $31.0 million costs  associated
with the  idling of  duplicate  facilities  reduced  the book  value of the
duplicate  facilities.  A  portion  of this  charge  related  to Big  Sandy
Terminal. As a result of a change in management strategy related to the Big
Sandy  Terminal,  the assets  were sold in 1998 for a pre-tax  gain of $7.5
million.

     During 1996, the Company reduced the estimated useful lives of certain
long-lived  assets  (primarily  related to  life-of-mine  assets  including
preparation   plants  and  beltlines)  for  depreciation  and  amortization
purposes.  These  changes in  estimates  were  primarily  due to  increased
productivities  and reductions in  recoverable  reserves.  As a result,  an
additional  $11.3  million  (after-tax  impact of $6.9  million or $.33 per
share) of  depreciation  and  amortization  expense was recorded in cost of
coal sales.  The assets  included a preparation  plant that had an original
life of 16 years that was adjusted to 7.5 years,  a  preparation  plant and
beltline  related to a surface  mine that  carried an  original  life of 20
years that was adjusted to 17 years and  deferred  mine  development  for a
surface mine with an original life of 5 years adjusted to 4 years.


14. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

The Company  places its cash  equivalents  in  investment-grade  short-term
investments  and limits the amount of credit exposure to any one commercial
issuer.

     The Company markets its coal principally to electric  utilities in the
United States. As of December 31, 1998 and 1997,  accounts  receivable from
electric  utilities located in the United States totaled $152.1 million and
$102.8  million,  respectively.  Generally,  credit is extended based on an
evaluation of the  customer's  financial  condition,  and collateral is not
generally  required.  Credit  losses  are  provided  for in  the  financial
statements and historically have been minimal.


                                       59
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars except share and per share data)


     The Company is committed under long-term contracts to supply coal that
meets certain quality  requirements at specified  prices.  These prices are
generally  adjusted based on indices.  Quantities  sold under some of these
contracts may vary from year to year within certain limits at the option of
the  customer.  Sales  (including  spot sales) to major  customers  were as
follows:


<TABLE>
<CAPTION>
                          1998       1997       1996
                        ------------------------------
<S>                     <C>        <C>        <C>
AEP .................   $195,682   $129,981   $ 86,756
Southern Company ....    170,452    187,800    147,567
</TABLE>


15. EARNINGS PER SHARE

The  following  table  sets  forth the  computation  of basic  and  diluted
earnings per common share:


<TABLE>
<CAPTION>
                                                                           1998       1997      1996
                                                                        -----------------------------
<S>                                                                     <C>         <C>       <C>
Numerator:
     Income before extraordinary item .............................     $ 31,501    $30,281   $33,020
     Extraordinary item ...........................................       (1,488)        --        --
                                                                        -----------------------------
     Net income ...................................................     $ 30,013    $30,281   $33,020
                                                                        =============================
Denominator:
     Weighted average shares-denominator for basic ................       39,626     30,374    20,948
     Dilutive effect of employee stock options ....................           25         34        --
                                                                        -----------------------------
     Adjusted weighted average shares-denominator for diluted             39,651     30,408    20,948
                                                                        =============================
Basic and diluted earnings per common share before
     extraordinary item ...........................................     $    .79    $  1.00   $  1.58
                                                                        =============================
Basic and diluted earnings per common share .......................     $    .76    $  1.00   $  1.58
                                                                        =============================
</TABLE>


16. SALE AND LEASEBACK

On January 29, 1998,  the Company sold mining  equipment for  approximately
$74.2 million and leased back the equipment under an operating lease with a
term of three  years.  This  included  the sale and  leaseback of equipment
purchased  under an existing  operating lease that expired on the same day.
The  proceeds of the sale were used to  purchase  the  equipment  under the
expired  lease for $28.3  million  and to pay down debt.  At the end of the
lease  term,  the  Company  has the  option  to  renew  the  lease  for two
additional  one-year  periods or purchase the equipment  for  approximately
$51.1 million.  Alternatively,  the equipment may be sold to a third party.
In the event of such a sale, the Company will be required to make a payment
to the lessor in the event, and to the extent,  that the proceeds are below
$40.0  million.  The gain on the sale and  leaseback  of $10.7  million was
deferred  and is  being  amortized  over the  base  term of the  lease as a
reduction of rental expense.


17. RELATED PARTY TRANSACTIONS

In the ordinary course of business,  the Company  receives certain services
and purchases  fuel,  oil and other  products on a  competitive  basis from
subsidiaries  of Ashland  Inc.,  which  totaled $7.2 million in 1998,  $4.7
million in 1997 and $3.8 million in 1996.  At December  31,  1998,  Ashland
Inc. owns  approximately 55% of the Company's  outstanding shares of common
stock.  Management  believes  that charges  between the Company and Ashland
Inc. for services and purchases were concluded on terms equivalent to those
prevailing among unaffiliated parties.

     As  described in Note 1, the Company has a 65%  ownership  interest in
Canyon  Fuel which is  accounted  for on the  equity  method.  The  Company
receives  administration  and production fees from Canyon Fuel for managing
the Canyon Fuel  operations.  The fees  recognized  as other income for the
Company and as expense by Canyon Fuel for the year ended  December 31, 1998
were $4.1 million.


                                       60
<PAGE>

18. COMMITMENTS AND CONTINGENCIES

The Company  leases  equipment,  land and various  other  properties  under
noncancelable  long-term leases,  expiring at various dates. Rental expense
related to these operating  leases amounted to $31.4 million in 1998, $14.9
million in 1997 and $8.5 million in 1996. The Company has also entered into
various  noncancelable  royalty  lease  agreements  and federal lease bonus
payments under which future  minimum  payments are due. On October 1, 1998,
the  Company  was the  successful  bidder in a federal  auction  of certain
mining  rights in the  3,546-acre  Thundercloud  tract in the Powder  River
Basin of Wyoming.  The  Company's  lease bonus bid amounted to $158 million
for the  tract,  of which  $31.6  million  was paid on October 1, 1998 (the
remaining  lease  bonus  payments  are  reflected  below  under the caption
"Royalties").   The  tract  contains  approximately  412  million  tons  of
demonstrated  coal  reserves and is  contiguous  with the  Company's  Black
Thunder mine.  Geological surveys performed by outside consultants indicate
that there are sufficient  reserves  relative to these properties to permit
recovery of the Company's investment.

     Minimum  payments due in future years under these agreements in effect
at December 31, 1998 are as follows:

<TABLE>
<CAPTION>
                                Leases           Royalties
----------------------------------------------------------
<S>                           <C>               <C>
1999 .....................    $  31,975         $  62,375
2000 .....................       28,092            62,151
2001 .....................       22,311            61,809
2002 .....................       16,726            61,589
2003 .....................        8,284            30,282
Thereafter ...............       10,564           225,824
                               --------------------------
                               $117,952          $504,030
                               ==========================
</TABLE>



The  Company is a party to numerous  claims and  lawsuits  with  respect to
various  matters.  The Company  provides for costs related to contingencies
when a loss is probable and the amount is  reasonably  determinable.  As of
December 31, 1998, the Company  estimates that its probable  aggregate loss
as a result of such claims is $3.8 million  (included  in other  noncurrent
liabilities) and believes that probable insurance recoveries of $.9 million
(included in other  assets)  related to these claims will be realized.  The
Company  estimates that its reasonably  possible  aggregate losses from all
currently  pending  litigation could be as much as $.4 million (before tax)
in excess of the probable loss previously recognized.  However, the Company
believes it is  probable  that  substantially  all of such  losses,  if any
occur, will be insured. After conferring with counsel, it is the opinion of
management that the ultimate  resolution of these claims, to the extent not
previously  provided  for, will not have a material  adverse  effect on the
consolidated financial condition, results of operations or liquidity of the
Company.

     A customer  of the Company has  informed  the Company  that one of the
customer's  power  plants  will no longer  provide  baseload  capacity to a
public  utility and instead will be used to provide peak demand only.  As a
result, the plant will require substantially less coal under the customer's
existing  above-market  contract with the Company.  The Company has filed a
civil action in Federal  District  Court in the  Southern  District of West
Virginia alleging breach of contract and other causes of action against the
customer in respect of the  customer's  failure to comply with the terms of
this contract.  On July 17, 1998 the court granted the customer's motion to
stay the lawsuit pending arbitration. As of December 31, 1998, the carrying
amount of acquisition  costs allocated to this coal supply contract amounts
to approximately $13.7 million.  The Company currently expects that it will
recover the carrying amount of this asset, however, the ultimate outcome of
this matter is uncertain.


                                       61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars except share and per share data)

     The Company  holds a 17.5%  general  partnership  interest in Dominion
Terminal Associates ("DTA"), which operates a ground storage-to-vessel coal
transloading  facility in Newport News,  Virginia.  DTA leases the facility
from Peninsula Ports Authority of Virginia ("PPAV") for amounts  sufficient
to meet  debt-service  requirements.  Financing is provided  through $132.8
million of tax-exempt bonds issued by PPAV which mature July 1, 2016. Under
the terms of a throughput and handling  agreement with DTA, each partner is
charged its share of cash operating and debt-service  costs in exchange for
the  right  to use its  share of the  facility's  loading  capacity  and is
required to make  periodic  cash  advances to DTA to fund such costs.  On a
cumulative basis,  costs exceeded cash advances by $9.2 million at December
31, 1998 (included in other  noncurrent  liabilities).  Future payments for
fixed  operating  costs and debt service are estimated to approximate  $3.3
million annually through 2015 and $26.0 million in 2016.




                                       62
<PAGE>

19. CASH FLOW

The  changes  in  operating   assets  and   liabilities  as  shown  in  the
consolidated statements of cash flows are comprised of the following:


<TABLE>
<CAPTION>
                                                                                1998        1997        1996
                                                                            --------------------------------
<S>                                                                         <C>         <C>          <C>
Decrease (increase) in operating assets:
     Receivables .....................................................      $(35,464)   $(12,179)    $10,857
     Inventories .....................................................         6,723      16,323       4,024
Increase (decrease) in operating liabilities:
     Accounts payable and accrued expenses ...........................        30,229       5,403      (7,464)
     Income taxes ....................................................       (35,057)    (27,448)     (1,145)
     Accrued postretirement benefits other than pension ..............         6,813       7,437       4,566
     Accrued reclamation and mine closure ............................         1,936      (9,370)    (10,492)
     Accrued workers' compensation ...................................           149      (9,008)       (897)
                                                                            --------------------------------
Changes in operating assets and liabilities ..........................      $(24,671)   $(28,842)   $   (551)
                                                                            ================================
</TABLE>


20. ACCOUNTING DEVELOPMENT

In June 1998,  the  Financial  Accounting  Standards  Board issued FAS 133,
Accounting  for Derivative  Instruments  and Hedging  Activities,  which is
required  to be adopted in years  beginning  after June 15,  1999.  FAS 133
permits early  adoption as of the beginning of any fiscal quarter after its
issuance.  FAS 133 will require the Company to recognize all derivatives on
the balance  sheet at fair value.  Derivatives  that are not hedges must be
adjusted  to fair  value  through  income.  If the  derivative  is a hedge,
depending  on the  nature of the  hedge,  changes  in the fair value of the
derivative  will  either be offset  against the change in fair value of the
hedged  assets,  liabilities,  or  firm  commitments  through  earnings  or
recognized  in  other  comprehensive   income  until  the  hedged  item  is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately  recognized in earnings. The Company has not
yet determined  what effect FAS 133 will have on the earnings and financial
position of the Company.



                                       63
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of dollars except share and per share data)


21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial data for 1998 and 1997 is summarized below:


<TABLE>
<CAPTION>
                                                                  March 31     June 30      Sept. 30        Dec. 31
                                                                 ----------------------------------------------------
<S>                                                               <C>           <C>        <C>             <C>
1998:
     Coal sales, equity income and other revenues .............   $312,564(1)   $353,238   $ 424,123(2)    $415,710
     Income from operations ...................................     22,359        27,450      23,909         14,129(3)
     Income before extraordinary item .........................     15,821        14,999         544            137
     Net income ...............................................     15,821        13,511         544            137
     Basic and diluted earnings per
          common share before extraordinary item(5) ...........       0.40          0.38        0.01           0.00
     Basic and diluted earnings per common share(5) ...........       0.40          0.34        0.01           0.00

1997:
     Coal sales and other revenues ............................   $198,461      $196,425   $ 329,475       $342,514
     Income (loss) from operations ............................     16,314        16,296     (20,468)(4)     29,740
     Net income(loss) .........................................     10,420        11,732     (13,001)        21,130
     Basic and diluted earnings (loss) per common share(5) ....       0.50          0.56       (0.33)          0.53
</TABLE>



(1)  During the first quarter of 1998,  the Company  recorded  gains on the
     sale of surplus land totaling $7.9 million.
(2)  During the third  quarter of 1998,  the  Company  sold idle assets and
     reserves in Eastern Kentucky for a gain of $18.5 million.
(3)  During the fourth quarter of 1998, the Company sold its idle Big Sandy
     Terminal for a gain of $7.5 million.  This was  partially  offset by a
     net  unfavorable  adjustment  of  $4.9  million  associated  with  the
     Company's routine, periodic review of reclamation accruals.
(4)  During the third quarter of 1997, the Company recorded a $39.1 million
     charge  in  connection  with the  Ashland  Coal  merger  comprised  of
     termination  benefits,  relocation costs and costs associated with the
     idling of duplicate facilities.
(5)  The sum of the  quarterly  earnings per common  share  amounts may not
     equal  earnings  per common  share for the full year because per share
     amounts are computed  independently  for each quarter and for the year
     based on the  weighted  average  number of common  shares  outstanding
     during each period.




                                       64
<PAGE>
                                                                     SCHEDULE II
 
                        ARCH COAL, INC. AND SUBSIDIARIES
                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                      ADDITIONS
                                         BALANCE AT   CHARGED TO                              BALANCE AT
                                         BEGINNING    COSTS AND                                 END OF
             DESCRIPTION                  OF YEAR      EXPENSES    DEDUCTIONS(1)   OTHER(2)      YEAR
             -----------                 ----------   ----------   -------------   --------   ----------
<S>                                      <C>          <C>          <C>             <C>        <C>
Year Ended December 31, 1998
     Reserves Deducted from Asset
       Accounts
          Property, Plant, and
            Equipment.................    $    --       $   --        $   --        $   --     $    --
          Other Assets -- Other Notes
               and Accounts
                 Receivable...........        471          306           195            --         582
          Current Assets -- Supplies
            Inventory.................     17,681        2,292         5,999         9,927      23,901
Year Ended December 31, 1997
     Reserves Deducted from Asset
       Accounts
          Property, Plant, and
            Equipment.................    $   100       $   --        $  100        $   --     $    --
          Other Assets -- Other Notes
               and Accounts
                 Receivable...........        410           61            --            --         471
          Current Assets -- Supplies
            Inventory.................     11,313        1,218           282         5,432      17,681
Year Ended December 31, 1996
     Reserves Deducted from Asset
       Accounts
          Property, Plant, and
            Equipment.................    $ 1,111       $   --        $1,011        $   --     $   100
          Other Assets -- Other Notes
               and Accounts
                 Receivable...........        408          150           148            --         410
          Current Assets -- Supplies
            Inventory.................     11,976          500         1,163            --      11,313
</TABLE>
 
- ---------------
 
(1) Reserves utilized, unless otherwise indicated.
 
(2) Balances acquired in the Arch Western transaction and Ashland Coal merger.
 
                                       23

<PAGE>
                                  EXHIBIT INDEX


     Exhibit No.                           Description
    ------------      -----------------------------------------------------
         10.2         Ashland   Inc.   Deferred   Compensation   and  Stock
                      Incentive Plan for Non-Employee Directors.
         10.4         Ninth Amended and Restated Ashland Inc.  Supplemental
                      Early  Retirement  Plan  for  Certain  Key  Executive
                      Employees.
         10.11        Ashland  Inc.  Nonqualified  Excess  Benefit  Pension
                      Plan.
         10.18        Ashland Inc. 1997 Stock Incentive Plan.
         13           Portions of Ashland's  Annual Report to Shareholders,
                      incorporated by reference herein, for the fiscal year
                      ended September 30, 1998.
         21           List of subsidiaries.
         23.1         Consent of Ernst & Young LLP.
         23.2         Consent of PricewaterhouseCoopers LLP.
         23.3         Consent of Ernst & Young LLP.
         24           Power of Attorney, including resolutions of the Board
                      of Directors.
         27.1         Financial  Data  Schedule  for the fiscal  year ended
                      September 30, 1998.
         27.2         Restated  Financial Data Schedule for the fiscal year
                      ended September 30, 1997.
         27.3         Restated  Financial Data Schedule for the fiscal year
                      ended September 30, 1996.