Ashland Inc. and Consolidated Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Years Ended September 30
<TABLE>
<CAPTION>

(In millions)                                                       1998                 1997              1996
----------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                <C>               <C>     
SALES AND OPERATING REVENUES
Ashland Chemical                                                  $4,087             $  3,929          $  3,602
APAC                                                               1,444                1,257             1,235
Valvoline                                                          1,023                1,053             1,133
Refining and Marketing                                                 -                6,828             6,570
Intersegment sales                                                   (20)                (234)             (227)
----------------------------------------------------------------------------------------------------------------
                                                                  $6,534            $  12,833          $ 12,313
================================================================================================================
OPERATING INCOME
Ashland Chemical                                                  $  158            $     140          $    170
APAC                                                                  90                   82                83
Valvoline                                                             53                   65                79
Refining and Marketing(F1)                                           254                  209               101
    Inventory valuation adjustments(F2)                              (15)                   -                 -
Arch Coal                                                             25                   25                22
Corporate                                                           (118)                 (60)              (96)
----------------------------------------------------------------------------------------------------------------
                                                                 $   447            $     461          $    359
================================================================================================================
OPERATING INFORMATION
APAC
    Construction backlog at September 30 (millions)              $   838            $     693          $    647
    Hot mix asphalt production (million tons)                       23.1                 20.3              19.3
    Aggregate production (million tons)                             20.3                 17.0              15.8
Valvoline lubricant sales (thousand barrels per day)                16.7                 15.8              15.1
Refining and Marketing(F3)
    Refined product sold (thousand barrels per day)              1,183.7
    Crude oil refined (thousand barrels per day)                   904.6
Arch Coal(F3)
    Tons sold (millions)                                            67.3                 53.7              50.6
    Tons produced (millions)                                        61.8                 50.0              46.6
================================================================================================================

</TABLE>
[FN]
(F1)     Effective January 1, 1998,  includes  Ashland's equity income from
         Marathon  Ashland  Petroleum LLC (MAP),  amortization of Ashland's
         excess  investment  in MAP,  and  certain  retained  refining  and
         marketing activities.
(F2)     Represents  Ashland's  share of inventory  adjustments  associated
         with the  formation of MAP and changes in MAP's  inventory  market
         valuation  reserve.  The reserve  reflects  the excess of the LIFO
         cost of MAP's crude oil and refined product inventories over their
         net realizable values.
(F3)     Amounts  represent 100 percent of the volumes of MAP or Arch Coal.
         MAP commenced operations January 1, 1998.
</FN>
                                    34
<PAGE>


BASIS OF PRESENTATION

During  1998,  Ashland and  Marathon Oil Company  formed  Marathon  Ashland
Petroleum  LLC  (MAP),  combining  the  major  elements  of  the  refining,
marketing and transportation operations of the two companies.  Marathon has
a 62% interest in MAP and Ashland holds a 38% interest,  which is accounted
for using the equity method of accounting. For comparison purposes, Ashland
changed its method of accounting for the businesses  conveyed to MAP to the
equity  method as of the  beginning of fiscal 1998.  Since  restatement  of
financial  statements  for  years  prior  to  1998 is not  permitted  under
generally accepted accounting  principles,  Ashland's financial  statements
for 1998 are not  comparable to 1997 and 1996.  The change had no effect on
Ashland's  net  income or common  stockholders'  equity,  but  reduced  its
revenues, costs, assets and liabilities,  and changed certain components of
its cash flow.

RESULTS OF OPERATIONS

Ashland's net income amounted to $203 million in 1998, $279 million in 1997
and $211 million in 1996.  However,  such earnings  include various unusual
items which  significantly  affected the  comparisons.  The following table
shows the effects of unusual  items on Ashland's  operating  and net income
for the three years ended September 30, 1998.
<TABLE>
<CAPTION>


                                                                        Operating income                            Net income
                                                             ---------------------------        ------------------------------
(In millions)                                                1998        1997       1996        1998          1997        1996
==============================================================================================================================
<S>                                                          <C>         <C>        <C>         <C>           <C>         <C> 
Income before unusual items                                  $541        $489       $359        $263          $245        $163
      G&A restructuring and headquarters move                 (50)          -          -         (31)            -           -
      Environmental and severance reserves                    (43)          -          -         (26)            -           -
      LIFO inventory adjustments                              (15)          -          -          (9)            -           -
      Gain on sale of Melamine Chemicals                       14           -          -           6             -           -
      Gain on sale of Blazer Energy                             -           -          -           -            71           -
      Asset impairment write-downs                              -         (26)         -           -           (22)          -
      Costs related to coal merger                              -         (13)         -           -           (13)          -
      Inventory liquidation gains                               -          11          -           -             7           -
      Extraordinary loss on debt prepayment                     -           -          -           -            (9)          -
      Columbia Gas bankruptcy settlement                        -           -          -           -             -          48
------------------------------------------------------------------------------------------------------------------------------
Income as reported                                           $447        $461       $359        $203          $279        $211
==============================================================================================================================
</TABLE>

During 1998, Ashland  restructured its corporate general and administrative
functions and decided to move its headquarters. Costs associated with these
actions are estimated at $57 million,  of which $50 million was  recognized
in 1998. The remainder will be recognized as relocations  occur in 1999. In
addition,  when MAP was formed,  Ashland  contractually  agreed to complete
certain  voluntary  efforts  in  progress  at various  operating  locations
conveyed  to MAP,  as well as  retain  the  costs  associated  with  issues
addressed in a multi-media  inspection of former Ashland  refineries by the
Environmental  Protection Agency.  Ashland also decided to close a landfill
near its former refinery at Catlettsburg, Kentucky. Charges associated with
these issues amounted to $38 million. An additional $5 million was provided
for  severance  costs  associated  with the  consolidation  of MAP's retail
marketing headquarters.  Other unusual items included a gain of $14 million
from the sale of Ashland's stock in Melamine Chemicals, and a charge of $15
million for Ashland's  share of inventory  adjustments  associated with the
formation of MAP and changes in MAP's inventory market  valuation  reserve.
That  reserve  reflects the excess of the LIFO costs of MAP's crude oil and
refined product inventories over their net realizable values.  

During 1997,  Ashland  decided to sell Blazer Energy,  its  exploration and
production  subsidiary.  Ashland sold Blazer's domestic operations for $566
million during July 1997, resulting in an after tax gain of $71 million. In
1998,  Ashland  completed its withdrawal from the business through the sale
of its Nigerian operations with no significant gain or loss.

Ashland Coal and Arch Mineral  merged in July 1997 to form Arch Coal,  Inc.
Many  synergistic  opportunities  were  pursued,  some of which  led to the
charge of $13 million to write-off duplicate facilities previously owned by
Arch  Mineral  and  provide for  severance  and other costs  related to the
merger.  Other unusual items in 1997 included  goodwill  write-downs of $26
million by Valvoline and Ashland  Chemical,  a gain of $11 million from the
liquidation  of  certain  inventories  of  Refining  and  Marketing  and an
extraordinary  loss of $9  million  related  to the  prepayment  of certain
long-term  debt.  While  Ashland  remains  committed to  expanding  Ashland
Chemical  and  Valvoline on a global  basis,  results from certain of their
European  operations  were well below the levels which were  expected  when
they were acquired,  necessitating write-downs of the related goodwill. The
inventory  gain  resulted  from  reductions  in the crude oil and petroleum
product  inventories  of Refining and Marketing  that were accounted for on
the last-in,  first-out (LIFO) method. LIFO inventories are valued at their
costs in the  years  acquired,  and  such  costs  were  below  the  current
replacement  costs of the  inventories.  

Ashland entered into a settlement  agreement  during 1995 with Columbia Gas
Transmission to resolve claims  involving  natural gas sales contracts that
were  abrogated  by  Columbia in 1991.  The  agreement  provided  for a $78
million payment to Ashland, of which 5% would be withheld by Columbia to be
used to potentially satisfy the claims of non-settling  producers.  The net
proceeds  were  received  under this  agreement  in 1996,  resulting in net
income of $48 million.

                                    35
<PAGE>


Ashland Inc. and Consolidated Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS (CONTINUED)

Excluding  unusual  items,  net income  amounted  to $263  million in 1998,
compared to $245  million in 1997.  While the  majority of the  improvement
came from  Refining and  Marketing,  APAC also achieved  record  results in
1998. Ashland Chemical,  Valvoline and Arch Coal reported reduced earnings.
Net  income  of $245  million  for 1997 was up from $163  million  in 1996.
Refining and Marketing results were up considerably,  as were earnings from
Ashland's coal investments.  Although results from Ashland  Chemical,  APAC
and Valvoline were down from their 1996 levels,  the declines resulted from
higher  allocations  of  Corporate  expenses in most cases.  Ashland  began
allocating more of these expenses in 1997 to the segments to better reflect
their costs of doing business.

The following  table  compares  operating  income  before  unusual items by
segment  for the three  years  ended  September  30,  1998.  The  increased
allocations  of Corporate  expenses  reduced the  operating  results of the
segments on a comparative  basis by $39 million  beginning in 1997, but did
not have a significant impact on overall income.

(In millions)                           1998            1997           1996
----------------------------------------------------------------------------
Operating income
     Ashland Chemical                   $144            $156           $170
     APAC                                 90              82             83
     Valvoline                            53              75             79
     Refining and Marketing              297             198            101
     Arch Coal                            25              38             22
     Corporate                           (68)            (60)           (96)
----------------------------------------------------------------------------
                                        $541            $489           $359
============================================================================


(Bar graph  appears in the left  margin  comparing  operating  income  from
Ashland Inc. for fiscal 1996, 1997 and 1998.)

ASHLAND CHEMICAL

Excluding  unusual items,  operating income of Ashland  Chemical  decreased
from $156 million in 1997 to $144 million in 1998, reflecting lower results
from all business groups. Operating income from the distribution businesses
was down slightly, due to reduced sales volumes of industrial chemicals and
solvents.  Results from specialty chemicals declined $9 million, as reduced
earnings from  electronic  chemicals and foundry  products more than offset
the favorable effects of costs reductions by marine  chemicals.  Electronic
chemicals  felt the  adverse  effects of the Asian  crisis on the  domestic
semiconductor  industry,  as well as start-up costs associated with its new
manufacturing  plant  in  Pueblo,  Colorado.  Foundry  products  were  also
affected by the Asian crisis,  as well as the strike at General  Motors and
unfavorable  translation  effects  from  the  strong  U. S.  Dollar  on the
earnings from its foreign operations. Results from petrochemicals were down
$3 million, reflecting very weak methanol markets.

Ashland  Chemical's  operating income before unusual items amounted to $156
million  in  1997,  compared  to $170  million  in 1996.  Results  from the
distribution  businesses  were down  slightly  due to margin  declines  for
industrial   chemicals  and  solvents.   Operating  income  from  specialty
chemicals improved $5 million on the strength of higher electronic chemical
sales  volumes and margins,  but the effect was  partially  offset by lower
marine  chemical sales  volumes.  Earnings from  petrochemicals  were up $3
million,  reflecting increased methanol sales volumes and margins.  Ashland
Chemical also incurred an  additional  $11 million  allocation of Corporate
expenses,  as well as charges of $8 million for  environmental  remediation
and plant shutdown costs.

(Bar graph  appears in the left  margin  comparing  operating  income  from
Ashland Chemical for fiscal 1996, 1997 and 1998.)

APAC

The APAC  construction  companies  achieved  record  results  in 1998  with
operating  income  of  $90  million,  compared  to  $82  million  in  1997.
Reflecting newly acquired operations,  including the Masters-Jackson group,
net  revenue  (total  revenue  less  subcontract  work)  was up 17%,  while
production  of asphalt  and  crushed  aggregate  increased  13% and 19%. In
addition,  liquid  asphalt  costs  per ton were down  about  7%,  enhancing
margins.  

Operating income from APAC amounted to $82 million in 1997, compared to $83
million in 1996. Net revenue was up 4%, while production of hot mix asphalt
increased  5% and  crushed  aggregate  was up 8%.  The  favorable  effects,
however,  were more than offset by an  additional  $4 million in  Corporate
expense allocations.

(Bar graph  appears in the left  margin  comparing  operating  income  from
APAC for fiscal 1996, 1997 and 1998.)

VALVOLINE

Operating  income from  Valvoline was $53 million in 1998,  compared to $75
million in 1997 before  unusual items.  The decline  reflects a $24 million
reduction  in gross  profit from R-12,  an  automotive  refrigerant.  Ample
inventory of R-12 at the  distributor  and retail levels reduced the demand
during 1998.  Valvoline's  earnings  decline also reflects lower antifreeze
margins, as well as increased  advertising and promotional expenses related
to the introduction of Valvoline's  Synpower premium  automotive  chemicals
line  and  Eagle  One  appearance  products.  In  addition,  the  used  oil
collection  business felt the adverse  effects of soft used oil fuel prices
and costs  associated with new collection  programs.  On the positive side,
earnings  from  Valvoline's  core  lubricant and  international  operations
improved significantly, reflecting higher sales volumes and better domestic
product mix. Earnings from Valvoline Instant Oil Change (VIOC) were also up
slightly,  reflecting  higher  revenues per car serviced.  At September 30,
1998, VIOC operated 391 company-owned


                                    36
<PAGE>


outlets,  compared  to 382  outlets  in 1997 and 374  outlets  in 1996.  In
addition, the VIOC franchising program was expanded significantly, with 183
outlets  open in 1998,  compared  to 137 outlets in 1997 and 100 outlets in
1996.

Excluding  unusual  items,  Valvoline's  operating  income  amounted to $75
million in 1997,  compared  to $79  million  in 1996.  Gross  profits  from
Valvoline's  core  lubricant  business  were  up 13%,  reflecting  improved
margins,  while  gross  profits  from  antifreeze  increased  $8 million as
margins recovered from extremely depressed levels in 1996.  However,  these
improvements  were  more  than  offset  by an  increase  of $5  million  in
Corporate  expense  allocations  and by a reduction  in gross  profits from
R-12.  Due to cool summer  weather which  shortened the peak season,  sales
volumes of R-12 were down  significantly  in 1997.  The used oil collection
business  operated  profitably,  while earnings from VIOC declined slightly
due to higher operating expenses.


(Bar graph  appears in the right  margin  comparing  operating  income  from
Valvoline for fiscal 1996, 1997 and 1998.)

REFINING AND MARKETING

Excluding  unusual items,  operating income from Refining and Marketing was
$297  million in 1998,  up $99  million  from last year.  Results  for 1998
include the operating income of Ashland  Petroleum and SuperAmerica for the
December 1997 quarter prior to the formation of MAP, Ashland's 38% share of
MAP's earnings for the nine months ended  September 30, 1998,  amortization
of Ashland's  excess  investment  in MAP,  and results of certain  retained
refining and marketing activities.  Earnings from Ashland's former refining
and  marketing  businesses in the December 1997 quarter were up $20 million
from last year's quarter, reflecting higher refining margins, combined with
a 3.2 cent a gallon  improvement in retail  margins.  In addition,  results
from MAP for the nine  months  ended  September  30,  1998,  reflect  a $79
million  improvement  from the results  achieved by Ashland  Petroleum  and
SuperAmerica  for that period last year.  While this  improvement  resulted
principally  from more favorable  industry  conditions in 1998, a different
mix of operations  and captured  synergies were also factors in the year to
year improvement.  In addition,  results during the March 1997 quarter were
adversely  affected  by heavy  flooding in the Ohio  Valley  which  limited
Ashland Petroleum's ability to ship products on the river systems.

Operating  income from Refining and Marketing  before  unusual items nearly
doubled  from  $101  million  in 1996 to $198  million  in 1997.  Principal
factors leading to the improved results  included better refining  margins,
reduced  refining  expenses and increased  retail margins for both gasoline
and merchandise. However, these improvements were partially offset by lower
earnings from Scurlock Permian and an additional $19 million  allocation of
Corporate expenses.

During the first half of fiscal 1997,  Refining operated at near break-even
levels  reflecting  margins which averaged $3.89 a barrel.  Crude oil costs
increased rapidly in the December quarter and wholesale product prices were
slow to respond.  Although  margins  improved  during the March  quarter as
crude  oil  costs  softened,  heavy  flooding  in the Ohio  Valley  limited
Ashland's  ability to ship products on the river systems.  Refining margins
increased  dramatically  in the last  half of the year,  averaging  $6.01 a
barrel  excluding  LIFO inventory  gains,  reflecting  strong  gasoline and
asphalt demand. In addition,  refining expenses for 1997 were reduced by 25
cents a barrel, despite lower throughputs,  reflecting continued efforts by
Ashland Petroleum to improve its competitive position.

In other areas,  results from Scurlock Permian were down $12 million due to
lower margins on crude oil sales,  reflecting increased competition for the
declining  production  in  many  of  its  gathering  areas.  Earnings  from
SuperAmerica   increased   $10  million  due  to  increased   gasoline  and
merchandise  margins.  Sales  volumes  were  also  higher,   reflecting  an
increased  number  of  locations,  but the  effect  was  largely  offset by
increased operating and occupancy costs.


(Bar graph  appears in the right  margin  comparing  operating  income  from
Refining and Marketing for fiscal 1996, 1997 and 1998.)

ARCH COAL

Ashland's  equity  income  from Arch Coal  amounted to $25 million in 1998,
compared to combined  equity  income of $38 million  from Arch  Mineral and
Ashland Coal before unusual items in 1997.  Eastern coal sales declined 14%
in 1998, and margins were down reflecting costs associated with the closing
of certain mines, the scheduled  expiration of a favorable long-term supply
contract with Georgia  Power,  and costs  related to extensive  maintenance
projects undertaken during this summer's shutdown for miners' vacations. In
addition,  the newly acquired  western  operations have not yet reached the
level of earnings necessary to offset the incremental interest costs on the
debt incurred to acquire those operations. The effects of these shortfalls,
however,  were partially  offset by a gain on the sale of certain  inactive
mining assets in eastern Kentucky,  which increased Ashland's equity income
by $6 million.  

Combined  equity income from  Ashland's  coal  investments  amounted to $38
million in 1997 before unusual items, compared to $22 million in 1996. Arch
Mineral's  contributions  to such  earnings  were up  strongly  from  1996,
reflecting  increased  production and reduced  administrative  and interest
costs.  Ashland Coal's contributions to 1997 results were also up from 1996
despite the expiration of certain higher priced sales  contracts at the end
of December 1995.  Ashland Coal subsequently  reduced its average costs per
ton to record  levels,  enabling  it to more than offset the effects of the
reduced sales prices.


(Bar graph  appears in the right  margin  comparing  equity income  from
Arch Coal for fiscal 1996, 1997 and 1998.)

CORPORATE

Excluding unusual items,  Corporate  expenses were $68 million in 1998, $60
million in 1997 and $96 million in 1996. Although administrative costs were
down slightly in 1998,  amounts allocated to divisions declined $11 million
principally due to the formation of MAP. The reduction in 1997 reflects the
allocation of an additional $41 million in costs to the segments, including
$2 million to the discontinued  operations of Blazer Energy.  The remaining
changes over the three-year period result  principally from fluctuations in
incentive and deferred compensation costs.

                                    37
<PAGE>


Ashland Inc. and Consolidated Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS


INTEREST EXPENSE

Interest expense (net of interest income) amounted to $130 million in 1998,
$142 million in 1997 and $151 million in 1996.  The  reductions  since 1996
resulted principally from the redemption of certain high interest rate debt
using the proceeds from the sale of Blazer Energy during 1997. 

DISCONTINUED OPERATIONS

Net income from  discontinued  operations  (excluding the after tax gain of
$71 million on the sale of Blazer  Energy's  domestic  operations  in 1997)
amounted to $25  million in 1997 and $75 million in 1996.  Results for 1996
included an after tax gain of $48  million  from the  settlement  of claims
against Columbia Gas Transmission involving natural gas contracts that were
abrogated by Columbia in 1991.


(Bar graph  appears in the left  margin  comparing  cash flows  from
continuing operations for fiscal 1996, 1997 and 1998.)

FINANCIAL POSITION

LIQUIDITY

Ashland's  financial  position  has  enabled it to obtain  capital  for its
financing needs and to maintain investment grade ratings on its senior debt
of Baa2  from  Moody's  and BBB  from  Standard  &  Poor's.  Ashland  has a
revolving credit agreement which expires on February 9, 2000, providing for
up to $320 million in borrowings, none of which was in use at September 30,
1998. Under a shelf registration, Ashland can also issue an additional $220
million in medium-term  notes should future  opportunities  or needs arise.
Furthermore,  Ashland has access to various uncommitted lines of credit and
commercial paper markets,  under which short-term notes of $84 million were
outstanding  at September 30, 1998.  While the revolving  credit  agreement
contains  covenants  limiting new borrowings,  Ashland could have increased
its  indebtedness  (including any borrowings under that agreement) by up to
$2 billion at September 30, 1998.

Cash  flows  from  continuing  operations,  a  major  source  of  Ashland's
liquidity,  amounted to $366 million in 1998, $565 million in 1997 and $544
million  in 1996.  The  reduction  in cash flows  from  operations  in 1998
reflects increased working capital  requirements across Ashland's operating
divisions and changes  resulting  from the  formation of MAP.  Since MAP is
accounted  for on the  equity  method,  Ashland's  share of  MAP's  capital
expenditures  are now reported as a reduction of cash flows from operations
(i.e., such expenditures reduce distributions from equity affiliates). Cash
flows from  operations  exceeded  Ashland's  capital  requirements  for net
property  additions  and  dividends  since  1995 by  nearly  $275  million,
providing additional funds for debt repayment and acquisitions.

Property  additions  amounted to just over $1 billion during the last three
years and are summarized in the Information by Industry Segment on Page 61.
Although the overall  trend is down for that period,  the  reductions  were
within   Refining  and  Marketing.   Capital   expenditures   by  Ashland's
wholly-owned operations increased from $161 million in 1996 to $254 million
in  1998,  with  growth  in  each of  those  operations.  Ashland  Chemical
accounted  for 53% of the  capital  expenditures  (excluding  Refining  and
Marketing and Corporate) over that three-year period,  with APAC accounting
for 34% and Valvoline  accounting  for 13%.  Capital used for  acquisitions
(including  companies  acquired  through  the  issuance  of  common  stock)
amounted to $417 million during the last three years, of which $199 million
was invested in Ashland  Chemical,  $172 million in APAC and $28 million in
Valvoline.  A summary  of the  capital  employed  in  Ashland's  continuing
operations at the end of the last three fiscal years follows.

<TABLE>
<CAPTION>

(In millions)                      1998                 1997                 1996
----------------------------------------------------------------------------------
<S>                              <C>                  <C>                  <C>   
Ashland Chemical                 $1,034               $  904               $  871
APAC                                452                  273                  234
Valvoline                           357                  339                  363
Refining and Marketing            1,729                1,515                1,522
Arch Coal                           373                  353                  332
----------------------------------------------------------------------------------
                                 $3,945               $3,384               $3,322
==================================================================================
</TABLE>

(Bar graph  appears in the left  margin  comparing  property additions for
fiscal 1996, 1997 and 1998.)

Capital  employed in Ashland Chemical and APAC increased during the period,
as the majority of Ashland's  capital budget and acquisitions  were focused
in these areas.  Although  Valvoline's capital  expenditures have increased
over this  period,  the effects were largely  offset by  reductions  in its
working capital  requirements.  Capital  employed in Refining and Marketing
increased in 1998, reflecting the purchase of leased assets associated with
the formation of MAP.  Despite that  one-time  capital  infusion,  however,
capital employed in Ashland's wholly-owned  operations still increased from
44% of total capital employed at the end of fiscal 1996 to 47% at September
30, 1998.

(Bar graph  appears in the left  margin  comparing  capital employed   for
fiscal 1996, 1997 and 1998.)

Long-term  borrowings  provided cash flows of $304 million  during the last
three years,  including the issuance of $150 million in senior notes,  $134
million of medium-term  notes and $20 million of  pollution-control  bonds.
The proceeds from these  long-term  borrowings  were used in part to retire
$522 million of long-term debt (scheduled  maturities as well as refundings
to reduce interest costs). Cash flows were supplemented as necessary by the
issuance of short-term notes and commercial paper.


                                    38
<PAGE>


At September 30, 1998, working capital (excluding debt due within one year)
amounted to $592  million,  compared  to $741  million at the end of fiscal
1997.  Liquid  assets  (cash,  cash  equivalents  and accounts  receivable)
amounted to 84% of current  liabilities at September 30, 1998,  compared to
90% at the end of fiscal  1997.  The  reductions  principally  reflect  the
working capital conveyed to MAP.  Ashland's  working capital is affected by
its use of the LIFO method of inventory valuation, which valued inventories
$57 million below their replacement costs at September 30, 1998.

(Bar graph  appears in the right margin  comparing  debt as a percent of
capital employed for fiscal 1996, 1997 and 1998.)

CAPITAL RESOURCES

During 1998,  Ashland's Board of Directors authorized the purchase of up to
four million shares of Ashland common stock. Under this authorization,  one
million shares were purchased in 1998 at a cost of $46 million.  The number
of shares  ultimately  purchased  and the prices  Ashland  will pay for its
stock are subject to periodic review by management.

At  September  30, 1998,  Ashland's  debt level  amounted to $1.6  billion,
compared to $1.4 billion at the end of fiscal 1997.  The increase  reflects
an aggressive  acquisition  program during 1998, as well as the purchase of
leased assets  associated with the formation of MAP.  Common  stockholders'
equity  increased by $113 million during 1998 to $2.1 billion,  principally
due to earnings of $119 million  retained in the business.  Although common
stock was issued for  acquisitions  and employee stock  incentive  plans, a
nearly  equivalent  amount  was  repurchased.  Debt as a percent of capital
employed amounted to 43% at September 30, 1998,  compared to 41% at the end
of fiscal 1997.

During  fiscal  1999,   Ashland   anticipates   capital   expenditures   of
approximately $200 million.  Ashland  anticipates  meeting its 1999 capital
requirements   for  property   additions,   dividends  and  scheduled  debt
repayments  of  $41  million  from  internally  generated  funds.  However,
external  financing may be necessary to provide funds for  acquisitions  or
purchases of common stock.

ENVIRONMENTAL MATTERS

Federal, state and local laws and regulations relating to the protection of
the  environment  have  resulted  in higher  operating  costs  and  capital
investments  by the  industries in which Ashland  operates.  Because of the
continuing   trends  toward  greater   environmental   awareness  and  ever
increasing   regulations,    Ashland   believes   that   expenditures   for
environmental  compliance will continue to have a significant effect on its
businesses.  Although  it cannot  accurately  predict  how such trends will
affect  future  operations  and earnings,  Ashland  believes the nature and
significance of its ongoing compliance costs will be comparable to those of
its competitors.

Environmental  reserves  are  subject to  considerable  uncertainties  that
affect  Ashland's  ability to estimate its share of the  ultimate  costs of
required  remediation  efforts.  Such uncertainties  involve the nature and
extent of  contamination  at each  site,  the  extent of  required  cleanup
efforts under existing environmental  regulations,  widely varying costs of
alternate  cleanup  methods,  changes  in  environmental  regulations,  the
potential effect of continuing improvements in remediation technology,  and
the number and financial strength of other potentially  responsible parties
at multiparty sites.  

Ashland does not believe that any liability  resulting  from  environmental
matters, after taking into consideration its insurance coverage and amounts
already   provided  for,  will  have  a  material  adverse  effect  on  its
consolidated  financial position,  cash flows or liquidity.  However,  such
matters  could  have a  material  effect  on  results  of  operations  in a
particular  quarter  or fiscal  year as they  develop  or as new issues are
identified.

DERIVATIVE INSTRUMENTS

Ashland is exposed to various  market risks,  including  changes in certain
commodity  prices,  foreign  currency rates and interest  rates.  To manage
these natural business  exposures,  Ashland enters into various  derivative
transactions in accordance with its established policies.  Ashland does not
hold or issue derivative instruments for trading purposes.

Ashland  selectively  uses  commodity  futures  contracts or derivatives to
manage its exposure to price fluctuations for natural gas used by Ashland's
manufacturing facilities. In addition, these financial products are used to
hedge fixed price  natural gas  purchase or sales  contracts  entered  into
under Ashland's energy management  program for its suppliers and customers.
Ashland also uses forward  exchange  contracts  to hedge  foreign  currency
transaction exposures of its operations. However, the potential loss from a
hypothetical  10% adverse  change in commodity  prices or foreign  currency
rates on Ashland's open commodity futures and foreign exchange contracts at
September 30, 1998, would not significantly  affect Ashland's  consolidated
financial position, results of operations or cash flows.

Ashland uses interest rate swap  agreements to obtain greater access to the
lower  borrowing  costs normally  available on  floating-rate  debt,  while
minimizing  refunding  risk through the issuance of  long-term,  fixed-rate
debt.  Long-term  debt at  September  30,  1998,  included  $39  million of
floating-rate debt, and the interest rates on an additional $225 million of
fixed-rate debt were converted to LIBOR floating rates through  unleveraged
interest rate swap agreements. As a result, Ashland's annual interest costs
in 1999 will fluctuate  based on short-term  interest rates on $264 million
of its long-term debt  outstanding at September 30, 1998, as well as on any
short-term notes and commercial paper.

                                    39
<PAGE>


Ashland Inc. and Consolidated Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS


OUTLOOK

Ashland  Chemical will continue to pursue growth through  internal  efforts
and selective acquisitions.  The Company will emphasize integrated products
and  services,  targeting  its  North  American  customers  and  a  growing
international  sales  base with  existing  offerings  and  extensions  into
untapped markets. With market globalization  favoring producers that have a
worldwide  presence,  investments  in  acquisitions  will also  continue as
attractive opportunities to add volume, technologies or market coverage are
identified.

APAC will pursue growth through  geographic  expansion,  enhanced materials
production  capabilities  and  product  line  extensions,  such as concrete
paving and greater site development  services.  APAC's construction backlog
amounted to a record year end level of $838 million at September  30, 1998.
Such backlog includes increases in both the public and private sectors, and
is expected to contain margins  comparable to those included in last year's
backlog. The 1998 highway funding reauthorization package increased funding
for highways by $52 billion over a six-year period.  More importantly,  the
states in which APAC  operates  should see an  average  increase  in annual
federal  funding  of 59% or  $3.3  billion,  based  on  current  estimates.


(Bar graph  appears in the left  margin  comparing  construction backlog for
fiscal 1996, 1997 and 1998.)

Valvoline will leverage its Valvoline  brand  franchise to related  premium
"below-the-hood"  products,  while  developing  the Eagle One brand  into a
master  brand for  "above-the-hood"  products.  Domestic  sales  volumes of
higher-margin  packaged lubricants serving the "do-it-yourself"  market are
expected  to  continue  to give  ground to  lower-margin  bulk sales to the
"do-it-for-me"   market.   However,   sales  of  automotive  chemicals  and
appearance  products,  as well as  international  sales of  lubricants  are
expected to provide  continued growth  opportunities.  VIOC's future growth
will focus  principally  on expanding the number of franchised  rather than
company-operated outlets.

Although margins are expected to remain volatile, key external factors look
promising  for the refining and  marketing  industry.  Demand for petroleum
products is expected to grow modestly, due to a leveling of fuel efficiency
in  the  passenger  car  fleet,   increasing   sales  of  light-truck   and
sport-utility  vehicles which average fewer miles per gallon than passenger
cars,  and  an  increasing  number  of  vehicle  miles  traveled.  Refinery
utilization rates are strong, reflecting the increased demand, which should
be beneficial  for MAP's  refining  margins.  MAP is also the largest U. S.
supplier of asphalt,  so increased  funding for highway  construction  also
benefits MAP.

MAP's initial estimate of annual efficiency savings was $200 million before
taxes,  which it expected to realize by its fourth year of  operation.  MAP
now expects to realize more than $130 million in annual,  repeatable pretax
savings  in  calendar  1998 and  another  $100  million in  calendar  1999.
Efficiencies  have been  identified  in personnel,  procurement,  crude oil
purchases and other areas.

Stricter  environmental  regulations and increasing  demand for electricity
and the  low-sulfur  coal to generate  it should  benefit  Arch Coal.  Arch
Coal's  strong  cash  flow  provides  the  financial  strength  to  support
continued debt  reductions,  operational  improvements  and acquisitions of
attractive properties.

Permits  required to conduct  operations at certain of Arch Coal's mines in
West Virginia are currently  being  challenged in third party suits against
the agencies which issue those permits.  Arch is vigorously  opposing these
claims and the affected  subsidiaries  have intervened in these lawsuits in
support of the related  agencies.  The major focus of these actions relates
to the approval of "valley fills,"  the large,  engineered works into which
excess  earth  and  rock   extracted   during  surface  mining  is  placed.
Modification  of existing or pending  permits to restrict or eliminate  the
use of valley fills would have an adverse effect on Arch.

YEAR 2000 READINESS

Ashland,  like most other companies,  is faced with the Year 2000 issue and
began developing plans in 1994 to address the possible  exposures.  Project
teams are responsible  for  coordinating  the  assessment,  remediation and
testing of the necessary  modifications to Ashland's computer applications,
including both its internal  information  systems and embedded systems,  as
well as assessing  the Year 2000  readiness of its critical  suppliers  and
developing contingency plans. The team's progress is regularly monitored by
Ashland's  senior  management  and  periodically   reported  to  the  Audit
Committee of Ashland's Board of Directors.

Ashland  has  completed  the  assessment  phase  related  to  its  internal
information  systems,  and is resolving  identified  issues  through system
modifications  or  replacement.  Although  testing will  continue,  Ashland
believes  that about 75% of its critical  systems are  currently  Year 2000
compliant,  and that the  remaining  critical  systems will be compliant by
April 1999.

Ashland is also  assessing the embedded  systems that operate such items as
its  manufacturing  systems,  laboratory  processes,  security  systems and
heating and air  conditioning.  Ashland expects to complete this assessment
by March 1999, and remediate or replace  non-compliant  embedded systems as
necessary  by June 1999.  The quality of the  responses  received  from the
manufacturers  of such  equipment,  the estimated  effect of the individual
system on Ashland,  and the ability of Ashland to perform  meaningful tests
will  determine  whether  independent  testing of embedded  systems will be
conducted.

Formal  communications  have been initiated with critical vendors to assess
the potential exposure to Ashland from their failure to remediate their own
Year  2000  issues.  A  failure  by any of  these  vendors  could  become a
significant  challenge to Ashland's  ability to operate its  facilities  at
affected   locations.   Vendors  contacted  include  Ashland's   suppliers,
financial   institutions  and  companies  providing  utilities   (electric,
telephone and water), and alternate providers of products and services will
be  established,  if deemed  necessary.  Although  Ashland  has no means of
ensuring  the Year 2000  readiness  of such  vendors,  it will  continue to
gather information and


                                    40
<PAGE>


monitor their compliance.  Based on the  representations  provided by these
vendors to date,  Ashland  has no reason to believe  that a failure of this
nature might occur.

Ashland  is also  developing  contingency  plans  related  to the Year 2000
issue,  addressing various scenarios and alternatives.  Among other things,
such plans will  likely  include  replacing  electronic  applications  with
manual  processes,   identifying  alternate  vendors,   adjusting  staffing
requirements,  and  increasing  raw material  inventory  levels,  as deemed
necessary.  Preliminary  plans are  expected to be completed by March 1999,
and will be regularly  updated as current  issues develop or new issues are
identified.

Although a full  assessment has not yet been completed,  Ashland  estimates
that its  remaining  costs  related to Year 2000 issues will not exceed $15
million.  Such  amount  is  based on  various  assumptions,  including  the
expected  availability and costs of internal and external resources and the
complexity  of the  necessary  changes.  Such estimate does not include any
costs of new  systems  for which the  principal  justification  is improved
business functionality,  rather than Year 2000 compliance.  Since Ashland's
Year 2000 compliance  program was initiated  several years ago and has been
integrated  with  other  system  enhancements,  Ashland's  total  costs  of
remediating Year 2000 issues are not readily discernible.

Ashland  believes it has an effective  program to resolve  significant Year
2000 issues in a timely manner.  However,  critical  phases of that program
have not yet been  completed and certain  exposures  are outside  Ashland's
direct  control.  If Ashland is  unsuccessful in identifying or remediating
Year 2000 issues in its critical  systems,  is affected by critical vendors
not being Year 2000 ready, or is affected by general  economic  disruptions
resulting from Year 2000 issues,  its  consolidated  financial  position or
results of operations could be materially adversely affected.  

MAP and Arch Coal also have  prepared  their own programs to deal with Year
2000 issues. Arch Coal's program is outlined in the Management's Discussion
and Analysis  section of its Quarterly  Report on Form 10-Q for the quarter
ended  September  30, 1998.  MAP's  program is covered in the  Management's
Discussion and Analysis section for the Marathon Group in USX Corporation's
Quarterly  Report on Form 10-Q for the quarter  ended  September  30, 1998.
Both of these  documents  are on file  with  the  Securities  and  Exchange
Commission.

EFFECTS OF INFLATION AND CHANGING PRICES

Ashland's  financial  statements are prepared on the historical cost method
of  accounting  and, as a result,  do not reflect  changes in the  dollar's
purchasing  power.  Although annual inflation rates have been low in recent
years, Ashland's results are still affected by the cumulative  inflationary
trend from prior years.

In the capital-intensive industries in which Ashland operates,  replacement
costs for its properties  would generally  exceed their  historical  costs.
Accordingly,  depreciation,  depletion  and  amortization  expense would be
greater if it were  based on  current  replacement  costs.  However,  since
replacement facilities would reflect technological improvements and changes
in  business  strategies,  such  facilities  would be  expected  to be more
productive than existing facilities, mitigating the increased expense.

Ashland uses the last-in,  first-out  (LIFO)  method to value a substantial
portion of its  inventories  to provide a better  matching of revenues with
current  costs.   However,   LIFO  values  such  inventories   below  their
replacement costs.

Monetary  assets (such as cash, cash  equivalents and accounts  receivable)
lose purchasing power as a result of inflation,  while monetary liabilities
(such as accounts payable and indebtedness)  result in a gain, because they
can be settled  with  dollars of  diminished  purchasing  power.  Ashland's
monetary  liabilities  exceed its  monetary  assets,  which  results in net
purchasing  power gains and provides a hedge  against the effects of future
inflation.

FORWARD-LOOKING STATEMENTS

Management's  Discussion and Analysis contains  forward-looking  statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities  Exchange Act of 1934,  including various information
within the Capital Resources, Derivative Instruments, Outlook and Year 2000
Readiness  sections.  Although  Ashland  believes that its expectations are
based on reasonable  assumptions,  it cannot  assure that the  expectations
contained in such  statements  will be achieved.  Important  factors  which
could cause actual  results to differ  materially  from those  contained in
such  statements are discussed under Risks and  Uncertainties  in Note A to
the Consolidated  Financial  Statements.  Other factors and risks affecting
Ashland's  revenues and operations are contained in Ashland's Form 10-K for
the  fiscal  year  ended  September  30,  1998,  which is on file  with the
Securities and Exchange Commission.

                                    41
<PAGE>

Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
Years Ended September 30
<TABLE>
<CAPTION>


(In millions except per share data)                                                 1998                1997               1996
================================================================================================================================
<S>                                                                               <C>                <C>                <C>    
REVENUES
Sales and operating revenues (including excise taxes)                             $6,534             $12,833            $12,313
Equity income - Note D                                                               329                  39                 33
Other income                                                                          70                  89                 66
--------------------------------------------------------------------------------------------------------------------------------
                                                                                   6,933              12,961             12,412
COSTS AND EXPENSES
Cost of sales and operating expenses                                               5,299               9,810              9,512
Excise taxes on products and merchandise                                               -                 992                985
Selling, general and administrative expenses                                       1,006               1,350              1,257
Depreciation, depletion and amortization                                             181                 348                299
--------------------------------------------------------------------------------------------------------------------------------
                                                                                   6,486              12,500             12,053
--------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME                                                                     447                 461                359
Interest expense (net of interest income)                                           (130)               (142)              (151)
--------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                                317                 319                208
Income taxes - Note E                                                               (114)               (127)               (72)
--------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS                                                    203                 192                136
Income from discontinued operations (net of income taxes) - Note B                     -                  25                 75
Gain on sale of discontinued operations (net of income taxes) - Note B                 -                  71                  -
--------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY LOSS                                                     203                 288                211
Extraordinary loss on early retirement of debt (net of income taxes) - Note F          -                  (9)                 -
--------------------------------------------------------------------------------------------------------------------------------
NET INCOME                                                                           203                 279                211
Dividends on convertible preferred stock                                               -                  (9)               (19)
--------------------------------------------------------------------------------------------------------------------------------
INCOME AVAILABLE TO COMMON SHARES                                                 $  203            $    270            $   192
================================================================================================================================
EARNINGS PER SHARE - Note A
Basic
     Income from continuing operations                                            $ 2.68            $   2.61            $  1.82
     Income from discontinued operations                                               -                 .36               1.18
     Gain on sale of discontinued operations                                           -                1.02                  -
     Extraordinary loss                                                                -                (.13)                 -
                                                                                 -----------------------------------------------
     Net income                                                                  $  2.68            $   3.86          $    3.00
Diluted
     Income from continuing operations                                           $  2.63            $   2.51          $    1.80
     Income from discontinued operations                                               -                 .33               1.16
     Gain on sale of discontinued operations                                           -                 .92                  -
     Extraordinary loss                                                                -                (.12)                 -
                                                                                 -----------------------------------------------
     Net income                                                                  $  2.63            $   3.64          $    2.96
================================================================================================================================

</TABLE>

See Notes to Consolidated Financial Statements.

                                    43
<PAGE>


<TABLE>
<CAPTION>

Ashland Inc. and Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30

(In millions)                                                                              1998                 1997
=====================================================================================================================
<S>                                                                                      <C>                  <C>   
ASSETS

CURRENT ASSETS
Cash and cash equivalents                                                                $   34               $  250
Accounts receivable (less allowances for doubtful accounts of
    $19 million in 1998 and $25 million in 1997)                                          1,110                1,585
Inventories - Note A                                                                        440                  660
Deferred income taxes                                                                       104                  103
Other current assets                                                                        140                  122
---------------------------------------------------------------------------------------------------------------------
                                                                                          1,828                2,720

INVESTMENTS AND OTHER ASSETS
Investment in MAP - Note D                                                                2,102                    -
Investment in Arch Coal - Note D                                                            422                  403
Cost in excess of net assets of companies acquired (less accumulated
    amortization of $65 million in 1998 and $70 million in 1997)                            207                  120
Other noncurrent assets                                                                     362                  541
---------------------------------------------------------------------------------------------------------------------
                                                                                          3,093                1,064

PROPERTY, PLANT AND EQUIPMENT
Cost
    Ashland Chemical                                                                      1,049                  904
    APAC                                                                                    809                  671
    Valvoline                                                                               354                  328
    Refining and Marketing                                                                    -                3,497
    Corporate                                                                               201                  167
---------------------------------------------------------------------------------------------------------------------
                                                                                          2,413                5,567
Accumulated depreciation, depletion and amortization                                     (1,252)              (2,889)
---------------------------------------------------------------------------------------------------------------------
                                                                                          1,161                2,678
---------------------------------------------------------------------------------------------------------------------
                                                                                         $6,082               $6,462
=====================================================================================================================
</TABLE>



See Notes to Consolidated Financial Statements.

                                    44
<PAGE>
<TABLE>
<CAPTION>


(In millions)                                                      1998                    1997
=================================================================================================
<S>                                                            <C>                      <C>    
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Debt due within one year
      Notes payable to financial institutions                  $     84                 $     -
      Current portion of long-term debt                              41                      49
Trade and other payables                                          1,199                   1,867
Income taxes                                                         37                     112
-------------------------------------------------------------------------------------------------
                                                                  1,361                   2,028
NONCURRENT LIABILITIES
Long-term debt (less current portion) - Notes F and G             1,507                   1,356
Employee benefit obligations - Note N                               458                     539
Reserves of captive insurance companies                             165                     161
Other long-term liabilities and deferred credits                    454                     354
Commitments and contingencies - Notes G, H and K
-------------------------------------------------------------------------------------------------
                                                                  2,584                   2,410

STOCKHOLDERS'  EQUITY - Notes F, I and J 
Preferred  stock, no par value, 30 million shares authorized 

Common stockholders' equity
      Common stock, par value $1.00 per share
          Authorized - 300 million shares
          Issued - 76 million shares in 1998 and 75 million 
            shares in 1997                                           76                     75
      Paid-in capital                                               602                    605
      Retained earnings                                           1,501                  1,379
      Accumulated other comprehensive income                        (42)                   (35)
-------------------------------------------------------------------------------------------------
                                                                  2,137                  2,024
-------------------------------------------------------------------------------------------------
                                                                 $6,082                 $6,462
=================================================================================================

</TABLE>


                                    45
<PAGE>


Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                            Accumulated
                                                                                                                  other
                                                  Preferred    Common    Paid-in   Retained     Loan to   comprehensive
(In millions)                                         stock     stock    capital   earnings       LESOP          income    Total
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>        <C>       <C>      <C>           <C>             <C>     <C>  
BALANCE AT OCTOBER 1, 1995                             $293       $64       $255     $1,064        $(11)           $(10)   $1,655
Total comprehensive income(F1)                                                          211                           1       212
Preferred stock cash dividends                                                          (19)                                  (19)
Common stock cash dividends, $1.10 a share                                              (70)                                  (70)
Issued common stock under
     Stock incentive plans                                                    19                                               19
     Employee savings plan                                                     6                                                6
LESOP loan repayment                                                                                 11                        11
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996                           293         64       280      1,186           -              (9)    1,814
Total comprehensive income(F1)                                                          279                         (26)      253
Preferred stock cash dividends                                                           (9)                                   (9)
Common stock cash dividends, $1.10 a share                                              (77)                                  (77)
Issued common stock under
     Preferred stock conversion                        (290)         9       281                                                -
     Stock incentive plans                                           2        44                                               46
     Employee savings plan                                                     1                                                1
Preferred stock redemption                               (3)                                                                   (3)
Other changes                                                                 (1)                                              (1)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997                             -         75       605      1,379           -             (35)    2,024
Total comprehensive income(F1)                                                          203                          (7)      196
Common stock cash dividends, $1.10 a share                                              (84)                                  (84)
Issued common stock under
     Stock incentive plans                                           1        15                                               16
     Acquisitions of other companies                                 1        29          3                                    33
Repurchase of common stock                                          (1)      (45)                                             (46)
Other changes                                                                 (2)                                              (2)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998                          $  -        $76      $602     $1,501        $  -            $(42)   $2,137
==================================================================================================================================
</TABLE>

[FN]
(F1) Reconciliations of net income to total comprehensive income follow.
<TABLE>
<CAPTION>


(In millions)                                                                                      1998            1997      1996
==================================================================================================================================
<S>                                                                                                <C>             <C>       <C> 
Net income                                                                                         $203            $279      $211
Minimum pension liability adjustment                                                                 (6)             (4)        5
     Related tax benefit (expense)                                                                    2               2        (2)
Unrealized translation adjustments                                                                   (7)            (27)       (1)
     Related tax benefit                                                                              1               -         -
Unrealized gains (losses) on securities                                                               8               5        (3)
     Related tax benefit (expense)                                                                   (3)             (2)        1
Losses (gains) on securities included in net income                                                  (3)              -         1
     Related tax expense                                                                              1               -         -
----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income                                                                         $196            $253      $212
==================================================================================================================================

</TABLE>

At September 30, 1998, accumulated other comprehensive income was a loss of
$42 million comprised of net unrealized  translation losses of $28 million,
a  minimum  pension  liability  of $18  million  and  unrealized  gains  on
securities of $4 million.

</FN>


See Notes to Consolidated Financial Statements.

                                    46
<PAGE>

Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years Ended September 30
<TABLE>
<CAPTION>

(In millions)                                                               1998                    1997                    1996
==================================================================================================================================
<S>                                                                         <C>                     <C>                     <C> 
CASH FLOWS FROM CONTINUING OPERATIONS
Income from continuing operations                                           $203                    $192                    $136
Expense (income) not affecting cash
      Depreciation, depletion and amortization                               181                     348                     299
      Deferred income taxes                                                   60                      33                      (9)
      Equity income from affiliates                                         (329)                    (39)                    (33)
      Distributions from equity affiliates                                   252                      20                      12
      Other items                                                             (6)                      -                       -
Change in operating assets and liabilities(F1)                                 5                      11                     139
----------------------------------------------------------------------------------------------------------------------------------
                                                                             366                     565                     544
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt                                     150                      87                      67
Proceeds from issuance of capital stock                                       10                      35                      15
Repayment of long-term debt                                                  (53)                   (395)                    (74)
Repurchase of capital stock                                                  (46)                     (3)                      -
Increase (decrease) in short-term debt                                        81                     (68)                    (84)
Dividends paid                                                               (84)                    (86)                    (89)
----------------------------------------------------------------------------------------------------------------------------------
                                                                              58                    (430)                   (165)
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment                                  (274)                   (356)                   (372)
Purchase of leased assets associated with the formation of MAP              (254)                      -                       -
Purchase of operations - net of cash acquired                               (194)                    (79)                    (83)
Investment purchases(F2)                                                    (215)                   (248)                   (455)
Investment sales and maturities(F2)                                          308                     216                     490
Other - net                                                                   44                      27                      25
----------------------------------------------------------------------------------------------------------------------------------
                                                                            (585)                   (440)                   (395)
----------------------------------------------------------------------------------------------------------------------------------
CASH USED BY CONTINUING OPERATIONS                                          (161)                   (305)                    (16)
Cash provided (used) by discontinued operations - Note B                     (55)                    485                      35
----------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            (216)                    180                      19
Cash and cash equivalents - beginning of year                                250                      70                      51
----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR                                    $  34                    $250                    $ 70
==================================================================================================================================
DECREASE (INCREASE) IN OPERATING ASSETS(F1)
Accounts receivable                                                        $ (54)                   $(16)                   $(60)
Inventories                                                                  (21)                     30                      (4)
Deferred income taxes                                                        (16)                      -                       5
Other current assets                                                         (36)                      6                     (12)
Investments and other assets                                                 (19)                     (5)                      3
INCREASE (DECREASE) IN OPERATING LIABILITIES(F1)
Trade and other payables                                                      33                    (117)                    228
Income taxes                                                                  (2)                     31                       5
Noncurrent liabilities                                                       120                      82                     (26)
----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN OPERATING ASSETS AND LIABILITIES                                 $   5                    $ 11                    $139
==================================================================================================================================
</TABLE>
[FN]
(F1) Excludes  changes  resulting  from  operations  acquired or sold.  
(F2) Represents   primarily   investment   transactions  of  captive  
     insurance companies.
</FN>

See Notes to Consolidated Financial Statements.

                                    47
<PAGE>


Ashland Inc. and Consolidated Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated  financial  statements include the accounts of Ashland and
its  majority-owned  subsidiaries,  except Arch Coal,  Inc.  Investments in
joint ventures, 20% to 50% owned affiliates and Arch Coal are accounted for
on the equity  method.  Ashland  Coal,  Inc. and Arch  Mineral  Corporation
merged on July 1, 1997, to form Arch Coal, Inc., in which Ashland has a 55%
ownership  interest.  In 1998,  Ashland adopted  Emerging Issues Task Force
Issue No. 96-16 (EITF 96-16),  "Investor's  Accounting for an Investee When
the  Investor  Has a  Majority  of the  Voting  Interest  but the  Minority
Shareholder  or  Shareholders  Have Certain  Approval or Veto  Rights." The
adoption of EITF 96-16 resulted in a change in the method of accounting for
Ashland's  investment in Arch Coal from consolidation to the equity method.
As a result of the accounting  change and the  restatement of prior periods
for  comparison  purposes,  all  of  Ashland's  coal  investments  are  now
accounted  for on the equity method for all periods  presented.  The change
had no effect on Ashland's net income or common  stockholders'  equity, but
reduced its revenues,  costs,  assets and liabilities,  and changed certain
components  of its cash  flow.  

Effective January 1, 1998, Ashland and Marathon Oil Company formed Marathon
Ashland Petroleum LLC (MAP),  combining the major elements of the refining,
marketing and transportation operations of the two companies.  Marathon has
a 62% interest in MAP and Ashland holds a 38% interest,  which is accounted
for using the equity method of accounting. For comparison purposes, Ashland
changed its method of accounting for the businesses  conveyed to MAP to the
equity method  effective  October 1, 1997,  the beginning of Ashland's 1998
fiscal year. Restatement of financial statements for years prior to 1998 is
not permitted under generally accepted accounting principles.  As a result,
1998 is not  comparable  to 1997 and  1996.  The  change  had no  effect on
Ashland's  net  income or common  stockholders'  equity,  but  reduced  its
revenues, costs, assets and liabilities,  and changed certain components of
its cash flow.

RISKS AND UNCERTAINTIES

The  preparation  of  Ashland's   consolidated   financial   statements  in
conformity with generally accepted accounting principles requires Ashland's
management  to make  estimates  and  assumptions  that affect the  reported
amounts of assets, liabilities,  revenues and expenses, and the disclosures
of contingent  assets and  liabilities.  Significant  items subject to such
estimates and assumptions  include the carrying value of long-lived assets,
inventory and  receivable  valuation  allowances,  environmental  reserves,
employee  benefit   obligations,   income  recognized  under   construction
contracts,  and the ultimate  realization  of deferred  tax assets.  Actual
results could differ from the estimates and assumptions used.

Ashland's  results,  including  those of MAP and Arch Coal, are affected by
domestic and international economic, political, legislative, regulatory and
legal actions, as well as weather conditions.  Economic conditions, such as
recessionary trends,  inflation,  interest and monetary exchange rates, and
changes in the prices of crude oil, petroleum products and  petrochemicals,
can have a significant effect on operations.  Political actions may include
changes  in  the  policies  of  the  Organization  of  Petroleum  Exporting
Countries  or  other  developments  involving  or  affecting  oil-producing
countries,  including military conflict, embargoes, internal instability or
actions or reactions of the United States government in anticipation of, or
in  response  to,  such  actions.  While  Ashland  maintains  reserves  for
anticipated  liabilities and carries  various levels of insurance,  Ashland
could be affected by civil, criminal, regulatory or administrative actions,
claims or proceedings  relating to the  environment  or other  matters.  In
addition,  climate and weather can  significantly  affect Ashland's results
from several of its operations, such as its construction activities,  MAP's
heating oil business and coal sales and production of Arch Coal.

INVENTORIES
<TABLE>
<CAPTION>

(In millions)                                                                  1998                     1997
==============================================================================================================
<S>                                                                            <C>                      <C> 
Chemicals                                                                      $352                     $341
Petroleum products                                                               48                      289
Crude oil                                                                         -                      277
Other products                                                                   88                      131
Materials and supplies                                                            9                       38
Excess of replacement costs over LIFO carrying values                           (57)                    (416)
--------------------------------------------------------------------------------------------------------------
                                                                               $440                     $660
==============================================================================================================
</TABLE>

Chemicals,  petroleum  products,  crude  oil  and  other  products  with  a
replacement cost of $285 million at September 30, 1998, and $751 million at
September 30, 1997, are valued using the last-in,  first-out (LIFO) method.
The remaining  inventories are stated generally at the lower of cost (using
the first-in, first-out [FIFO] or average cost method) or market.

Ashland decreased  certain LIFO inventories in 1997 for operating  reasons.
Cost of sales and operating  expenses  include costs for these  inventories
based on prior  years' LIFO  carrying  values  which were less than current
replacement costs. As a result of LIFO inventory


                                    48
<PAGE>


liquidations,  net income was  increased by $7 million  ($.09 per share) in
1997. The effects of LIFO inventory  liquidations during 1998 and 1996 were
not significant.

LONG-LIVED ASSETS

The  cost  of  plant  and  equipment  is  principally  depreciated  by  the
straight-line  method over the estimated useful lives of the assets.  Costs
in  excess  of net  assets  of  companies  acquired  are  amortized  by the
straight-line  method over periods  generally  ranging from 10 to 40 years,
with an average remaining life of 12 years. Long-lived assets with recorded
values that are not expected to be recovered  through future cash flows are
written down to current  fair value,  which is  generally  determined  from
estimated  discounted  future net cash flows  (assets  held for use) or net
realizable value (assets held for sale).

ENVIRONMENTAL COSTS

Accruals for environmental  costs are recognized when it is probable that a
liability  has  been  incurred  and the  amount  of that  liability  can be
reasonably  estimated.  Such costs are charged to expense if they relate to
the remediation of conditions caused by past operations or are not expected
to mitigate or prevent  contamination from future operations.  Accruals are
recorded at  undiscounted  amounts  based on  experience,  assessments  and
current  technology  without regard to any  third-party  recoveries and are
regularly  adjusted as  environmental  assessments and remediation  efforts
proceed.

EARNINGS PER SHARE

During 1998, Ashland adopted Financial Accounting Standards Board Statement
No. 128 (FAS 128),  "Earnings  per Share." FAS 128 replaced the  previously
reported  primary and fully diluted earnings per share (EPS) with basic and
diluted EPS. Unlike primary EPS, basic EPS excludes any dilutive effects of
options and  convertible  securities.  Diluted  EPS is very  similar to the
previously  reported  fully  diluted  EPS. EPS amounts for all periods have
been  presented,  and where  necessary,  restated to conform to the FAS 128
requirements.  The following  table sets forth the computation of basic and
diluted EPS from continuing operations.
<TABLE>
<CAPTION>

(In millions except per share data)                                                 1998                1997               1996
=================================================================================================================================
<S>                                                                                <C>                 <C>                <C>  
NUMERATOR
Income from continuing operations                                                  $ 203               $ 192              $ 136
Preferred stock dividends                                                              -                  (9)               (19)
---------------------------------------------------------------------------------------------------------------------------------
Numerator for basic EPS - Income available to common shares                          203                 183                117
Effect of dilutive securities
      Dividends on convertible preferred stock                                         -                   9                  -
      Interest on convertible debentures (net of income taxes)                         -                   4                  -
---------------------------------------------------------------------------------------------------------------------------------
Numerator for diluted EPS - Income available
      to common shares after assumed conversions                                   $ 203               $ 196              $ 117
=================================================================================================================================
DENOMINATOR
Denominator for basic EPS - Weighted average
      common shares outstanding                                                       76                  70                 64
Common shares issuable upon
      Exercise of stock options                                                        1                   2                  1
      Conversion of debentures                                                         -                   2                  -
      Conversion of preferred stock                                                    -                   4                  -
---------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted EPS - Adjusted weighted
      average shares and assumed conversions                                          77                  78                 65
=================================================================================================================================
BASIC EPS FROM CONTINUING OPERATIONS                                               $2.68               $2.61              $1.82
DILUTED EPS FROM CONTINUING OPERATIONS                                             $2.63               $2.51              $1.80
=================================================================================================================================
</TABLE>

DERIVATIVE INSTRUMENTS

Ashland  selectively  uses  commodity  futures  contracts or derivatives to
manage its exposure to price fluctuations for natural gas used by Ashland's
manufacturing facilities. In addition, these financial products are used to
hedge fixed price  natural gas  purchase or sales  contracts  entered  into
under Ashland's energy management  program for its suppliers and customers.
Realized gains and losses on these  contracts are included in cost of sales
in the  original  contract  month,  with  amounts paid or received on early
terminations deferred on the balance sheet in other current assets or trade
and other payables (the deferral method).

Ashland  uses  forward   exchange   contracts  to  hedge  foreign  currency
transaction   exposures   of   its   operations.    These   contracts   are
marked-to-market each month and included in trade and other payables,  with
the  offsetting  gain or loss  included  in other  income  (the fair  value
method). 

Ashland uses interest rate swap  agreements to obtain greater access to the
lower  borrowing  costs normally  available on  floating-rate  debt,  while
minimizing  refunding  risk through the issuance of  long-term,  fixed-rate
debt. Each interest rate swap agreement is designated

                                    49
<PAGE>


NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DERIVATIVE INSTRUMENTS (CONTINUED)

with all or a portion of the principal  balance and term of a specific debt
obligation.  These  agreements  involve the exchange of amounts  based on a
fixed  interest rate for amounts based on variable  interest rates over the
life of the  agreement,  without an  exchange of the  notional  amount upon
which the payments are based.  The  differential  to be paid or received as
interest  rates  change is  accrued  and  recognized  as an  adjustment  of
interest  expense (the accrual  method).  The related  amount payable to or
receivable from counterparties is included in trade and other payables. The
fair values of the swap  agreements  are not  recognized  in the  financial
statements.  Gains  and  losses  on  terminations  of  interest  rate  swap
agreements   are  deferred  on  the  balance  sheet  (in  other   long-term
liabilities)  and amortized as an  adjustment to interest  expense over the
remaining  term  of the  original  contract  life  of the  terminated  swap
agreement.

STOCK INCENTIVE PLANS

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,  Ashland 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 (see Note J).

OTHER

Cash equivalents  include highly liquid  investments  maturing within three
months  after  purchase.   Investments  of  captive   insurance   companies
(primarily  foreign  corporate and government debt obligations) are carried
at market  value plus  accrued  interest.  

Income  related to  construction  contracts is generally  recognized by the
units-of-production    method,    which    is   a    variation    of    the
percentage-of-completion  method.  Any anticipated losses on such contracts
are  charged  against  operations  as soon as such  losses  are  estimable.

Research and  development  costs are  expensed as incurred  ($28 million in
1998,  $29  million in 1997 and $28 million in 1996).  

Certain  prior year  amounts  have been  reclassified  in the  consolidated
financial   statements  and   accompanying   notes  to  conform  with  1998
classifications.

NOTE B - DISCONTINUED OPERATIONS

On July 1, 1997,  Ashland  sold the  domestic  exploration  and  production
operations of Blazer Energy  Corporation,  realizing  cash proceeds of $566
million.  The sale resulted in a pretax gain of $138 million which,  net of
$67  million  of  income  taxes,  produced  a gain on sale of  discontinued
operations of $71 million. On May 6, 1998, Ashland completed its withdrawal
from the  exploration  business  through  the sale of its  exploration  and
production  operations  in  Nigeria  with  no  significant  gain  or  loss.
Components of amounts  reflected in the income  statements,  balance sheets
and cash flow  statements  related  to these  discontinued  operations  are
presented in the following table.
<TABLE>
<CAPTION>

(In millions)                                                          1998              1997               1996
===================================================================================================================
<S>                                                                   <C>                <C>               <C>    
INCOME STATEMENT DATA
Revenues                                                              $   -              $240              $320(F1)
Costs and expenses                                                        -              (215)             (226)
-------------------------------------------------------------------------------------------------------------------
Operating income                                                          -                25                94
Income tax expense                                                        -                 -               (19)
-------------------------------------------------------------------------------------------------------------------
Income from discontinued operations                                   $   -              $ 25              $ 75(F1)
===================================================================================================================
BALANCE SHEET DATA
Current assets                                                        $   -              $ 59
Investments and other assets                                              -                 1
Property, plant and equipment - net                                       -                57
Current liabilities                                                       -               (41)
Noncurrent liabilities                                                    -               (58)
----------------------------------------------------------------------------------------------
Net assets of discontinued operations held for sale
  (other noncurrent assets)                                           $   -              $ 18
==============================================================================================
CASH FLOW DATA
Cash flows from operations                                            $ (81)             $(41)             $115
Cash flows from investment (including sales proceeds)                    26               526               (80)
-------------------------------------------------------------------------------------------------------------------
Cash provided (used) by discontinued operations                       $ (55)             $485              $ 35
===================================================================================================================
</TABLE>
[FN]
(F1)   Includes a gain of $73 million  ($48  million  after  income  taxes)
       resulting   from  the   settlement  of  claims  in  the   bankruptcy
       reorganization   of  Columbia  Gas  Transmission  and  Columbia  Gas
       Systems.

</FN>

                                    50
<PAGE>


NOTE C - INFORMATION BY INDUSTRY SEGMENT

Ashland's  operations are conducted  primarily in the United States and are
managed along industry  segments,  which include  Ashland  Chemical,  APAC,
Valvoline,  Refining and Marketing,  and Arch Coal. Information by industry
segment is shown on Pages 60 and 61.

Ashland Chemical distributes industrial chemicals, solvents, thermoplastics
and resins,  fiberglass  materials and fine  ingredients.  Ashland Chemical
also  manufactures  a wide  variety  of  specialty  chemicals  and  certain
petrochemicals.  Major specialty chemicals include foundry products,  water
treatment and marine service  chemicals,  specialty polymers and adhesives,
unsaturated  polyester  resins,  and high-purity  electronic and laboratory
chemicals.  Ashland  Chemical's  petrochemicals  division  manufactures and
markets  maleic  anhydride  and methanol.  Marketing of the  petrochemicals
manufactured by Ashland Petroleum (now MAP) was transferred to Refining and
Marketing in fiscal 1998. Prior year industry segment  information has been
restated to reflect this change.

The APAC group of companies  performs  contract  construction  work such as
paving, repairing and resurfacing highways, streets, airports,  residential
and commercial  developments,  sidewalks,  and driveways;  grading and base
work; and excavation and related  activities in the construction of bridges
and  structures,  drainage  facilities  and  underground  utilities  in  14
southern and midwestern  states.  APAC also produces and sells construction
materials,  such as hot-mix asphalt and ready-mix  concrete,  crushed stone
and other aggregate and, in certain markets, concrete block and specialized
construction materials, such as architectural block.

Valvoline  is a marketer of  automotive  and  industrial  oils,  chemicals,
appearance products and automotive and environmental  services,  with sales
in more than 140  countries.  Valvoline is engaged in the "fast oil change"
business through outlets  operating under the Valvoline  Instant Oil Change
name. 

The  Refining  and  Marketing  segment  includes  Ashland's  38%  ownership
interest  in Marathon  Ashland  Petroleum  LLC (MAP) and  certain  retained
refining  and  marketing  activities.  MAP  was  formed  January  1,  1998,
combining the major elements of the refining,  marketing and transportation
operations of Ashland and Marathon Oil Company,  which holds a 62% interest
in MAP.  MAP has  seven  refineries  with a  combined  crude  oil  refining
capacity  of  935,000  barrels  per day,  88  light  products  and  asphalt
terminals  in the  Midwest and  Southeast  United  States,  more than 5,600
retail marketing  outlets in 20 states and significant  pipeline  holdings.
Ashland  accounts  for its  interest  in MAP  using  the  equity  method of
accounting.  As a result,  1998 is not  comparable  to prior years in which
Ashland's  100%  ownership  interest in the former  Ashland  Petroleum  and
SuperAmerica was consolidated.

The  following  table  sets forth  certain  unaudited  pro forma  financial
information for Ashland assuming MAP was formed as of the beginning of both
fiscal  1998 and 1997.  This pro  forma  financial  information  may not be
indicative  of the  results  of  operations  for  Ashland  that  would have
resulted if the  transaction  had occurred as of the dates assumed or which
will be obtained in the future.
<TABLE>
<CAPTION>

(In millions except per share data)                                               1998               1997
=========================================================================================================
<S>                                                                             <C>                <C>   
Revenues                                                                        $6,864             $6,507
Income from continuing operations(F1)                                              155                196
Net income                                                                         155                283
Diluted earnings per share
    Income from continuing operations(F1)                                         2.01               2.57
    Net income                                                                    2.01               3.69
=========================================================================================================
</TABLE>
[FN]
(F1)Includes inventory adjustments associated with the formation of MAP and
    changes in MAP's inventory market valuation reserves.  Pro forma income
    from continuing  operations  excluding these items would have been $215
    million ($2.78 per share) in 1998 and $221 million ($2.89 per share) in
    1997.  Reported  income from  continuing  operations,  excluding  these
    inventory  adjustments,  was $212 million ($2.75 per share) in 1998 and
    $192 million ($2.51 per share) in 1997.
</FN>

Arch Coal,  Inc. is a publicly  traded  company  which was created  July 1,
1997,  as a result of the merger of Ashland  Coal,  Inc.  and Arch  Mineral
Corporation.  Ashland holds a 55% ownership interest in Arch Coal, which it
accounts for under the equity  method of accounting as described in Note A.
Ashland's former  ownership  interests in Ashland Coal and Arch Mineral are
also presented  using the equity method.  Arch Coal is the nation's  second
largest  coal  producer  with  subsidiary   operations  in  West  Virginia,
Kentucky,  Virginia,  Illinois,  Wyoming,  Colorado and Utah. Through these
operations, Arch Coal provides nearly 10% of the nation's coal supply.

Information  about  Ashland's  domestic  and  foreign  operations  follows.
Ashland has no material operations in any individual foreign country.
<TABLE>
<CAPTION>

                                                  Revenues from external customers*                           Long-lived assets
                                  -------------------------------------------------                 ---------------------------
(In millions)                       1998                1997                  1996                    1998                1997
===============================================================================================================================
<S>                               <C>                <C>                   <C>                      <C>                 <C>   
United States                     $5,868             $11,821               $11,490                  $1,300              $2,821
Foreign                            1,065               1,140                   922                     163                 118
-------------------------------------------------------------------------------------------------------------------------------
                                  $6,933             $12,961               $12,412                  $1,463              $2,939
===============================================================================================================================

*      Sales of gasoline  accounted for 0% in 1998,  19% in 1997 and 18% in
       1996 of Ashland's  consolidated  revenues from  external  customers,
       excluding excise taxes.
</TABLE>


                                    51

<PAGE>


NOTE D - UNCONSOLIDATED AFFILIATES

Affiliated  companies  accounted for on the equity method include  Marathon
Ashland  Petroleum LLC (MAP),  Arch Coal, Inc. and various other companies.
See  Notes A and C for a  description  of MAP and Arch  Coal,  as well as a
discussion  of the adoption of the equity  method for these two  investees.
Summarized financial information reported by these affiliates and a summary
of the amounts  recorded in  Ashland's  consolidated  financial  statements
follow. MAP is organized as a limited liability  corporation (LLC) that has
elected  to  be  taxed  as  a  partnership.   Therefore,  the  parents  are
responsible  for income taxes  applicable  to their share of MAP's  taxable
income.  The net  income  reflected  below  for MAP  does not  include  any
provision  for income  taxes which will be incurred  by MAP's  parents.  At
September 30, 1998,  Ashland's  retained  earnings  include $356 million of
undistributed earnings from unconsolidated  affiliates accounted for on the
equity method.
<TABLE>
<CAPTION>


(In millions)                                 MAP          Arch Coal              Other                Total
==============================================================================================================
<S>                                      <C>                 <C>               <C>                    <C>
SEPTEMBER 30, 1998
Financial position
      Current assets                     $  3,190            $   362           $     74
      Current liabilities                  (1,915)              (384)               (34)
                                         -----------------------------------------------
      Working capital                       1,275                (22)                40
      Noncurrent assets                     3,588              2,470                 63
      Noncurrent liabilities                 (320)            (1,826)               (15)
                                         -----------------------------------------------
      Stockholders' equity               $  4,543            $   622           $     88
                                         ===============================================
Results of operations
      Sales and operating revenues       $ 14,588 (F1)       $ 1,363           $    165
      Income from operations                  729 (F1)           103                 45
      Net income                              742 (F1)            51                 13
Amounts recorded by Ashland
      Investments and advances              2,102 (F2)           422 (F2)(F3)        45               $2,569
      Equity income                           298 (F4)            25                  6                  329
      Distributions received                  233 (F4)            10                  9                  252
==============================================================================================================
SEPTEMBER 30, 1997
Financial position
      Current assets                                         $   275           $    341
      Current liabilities                                       (233)              (242)
                                                             ---------------------------
      Working capital                                             42                 99
      Noncurrent assets                                        1,362                735
      Noncurrent liabilities                                    (809)              (542)
                                                             ---------------------------
      Stockholders' equity                                   $   595           $    292
                                                             ===========================
Results of operations
      Sales and operating revenues                           $ 1,367           $  1,117
      Income from operations                                      71                278
      Net income                                                  50                 65
Amounts recorded by Ashland
      Investments and advances                                   403                 86               $  489
      Equity income                                               25                 14                   39
      Distributions received                                      12                  8                   20
==============================================================================================================
SEPTEMBER 30, 1996
Results of operations
      Sales and operating revenues                           $ 1,307           $    963
      Income from operations                                     137                252
      Net income                                                  46                 36
Amounts recorded by Ashland
      Equity income                                               22                 11               $   33
      Distributions received                                       5                  7                   12
==============================================================================================================
</TABLE>
[FN]
(F1)Amounts  represent  results of  operations  for MAP for the nine months
    ended September 30, 1998 (since inception).

(F2)At September 30, 1998,  Ashland's  investment  exceeded its  underlying
    equity in net assets by $376  million  for MAP and $80 million for Arch
    Coal.  Such  excess  was being  amortized  against  equity  income on a
    straight-line  basis for MAP ($28 million annually) and on the basis of
    tons of coal produced for Arch Coal ($3 million in 1998).

(F3)The market value of Ashland's  investment  at September  30, 1998,  was
    $323 million based on the market price of Arch Coal's common stock.

(F4)Includes $36 million of equity income and $61 million in cash flow from
    Ashland's  former  Refining and  Marketing  operations  for the quarter
    ended December 31, 1997, which were restated to the equity method.


</FN>

                                    52
<PAGE>


NOTE E - INCOME TAXES

A  summary  of  the  provision  for  income  taxes  related  to  continuing
operations follows.
<TABLE>
<CAPTION>

(In millions)                                                        1998                1997                   1996
======================================================================================================================
<S>                                                                 <C>                 <C>                    <C>  
Current(F1)
     Federal                                                        $  42               $  72                  $  57
     State                                                             (1)                  5                      7
     Foreign                                                           13                  17                     17
----------------------------------------------------------------------------------------------------------------------
                                                                       54                  94                     81
Deferred                                                               60                  33                     (9)
----------------------------------------------------------------------------------------------------------------------
                                                                    $ 114               $ 127                  $  72
======================================================================================================================
</TABLE>
[FN]
(F1)Income tax payments  amounted to $109  million in 1998,  $51 million in
    1997 and $105 million in 1996.
</FN>
Deferred income taxes are provided for income and expense items  recognized
in different  years for tax and  financial  reporting  purposes.  Temporary
differences  which  give  rise  to  significant  deferred  tax  assets  and
liabilities  follow.  These  amounts  are  recorded  in  various  asset and
liability accounts on Ashland's consolidated balance sheets.
<TABLE>
<CAPTION>

(In millions)                                                                             1998                  1997
======================================================================================================================
<S>                                                                                       <C>                   <C> 
Employee benefit obligations                                                              $182                  $224
Environmental, insurance and litigation reserves                                           119                   103
Compensation accruals                                                                       49                    48
Uncollectible accounts receivable                                                           16                    19
Other items                                                                                 63                    48
----------------------------------------------------------------------------------------------------------------------
Total deferred tax assets                                                                  429                   442
----------------------------------------------------------------------------------------------------------------------
Property, plant and equipment                                                               83                   339
Investment in unconsolidated affiliates                                                    362                    51
----------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities                                                             445                   390
----------------------------------------------------------------------------------------------------------------------
Net deferred tax asset (liability)                                                        $(16)                 $ 52
======================================================================================================================
</TABLE>

The U.S. and foreign components of income from continuing operations before
income taxes and a reconciliation  of the statutory federal income tax with
the provision for income taxes follow.
<TABLE>
<CAPTION>

(In millions)                                                         1998                1997                  1996
======================================================================================================================
<S>                                                                  <C>                  <C>                   <C> 
Income from continuing operations before income taxes
     United States                                                   $274                 $298                  $160
     Foreign                                                           43                   21                    48
----------------------------------------------------------------------------------------------------------------------
                                                                     $317                 $319                  $208
======================================================================================================================
Income taxes computed at U.S. statutory rates                        $111                 $112                  $ 73
Increase (decrease) in amount computed resulting from
     Equity income                                                    (10)                 (10)                   (8)
     State income taxes                                                 5                    6                     4
     Net impact of foreign results                                      5                   10                     -
     Other items                                                        3                    9                     3
----------------------------------------------------------------------------------------------------------------------
Income taxes                                                         $114                 $127                 $  72
======================================================================================================================
</TABLE>

                                    53
<PAGE>



NOTE F - LONG-TERM DEBT
<TABLE>
<CAPTION>

(In millions)                                                                        1998                       1997
======================================================================================================================
<S>                                                                               <C>                        <C>
Medium-term notes, due 1999-2025, interest at a weighted average rate
    of 8.2% at September 30, 1998 (5.8% to 10.4%)                                 $   888                    $    936
8.80% debentures, due 2012                                                            250                         250
Pollution control and industrial revenue bonds, due
    2003-2022, interest at a weighted average rate of 6.5%
    at September 30, 1998 (3.8% to 7.4%)                                              217                         217
6.625% senior notes, due 2008                                                         150                           -
Other                                                                                  43                           2
----------------------------------------------------------------------------------------------------------------------
                                                                                    1,548                       1,405
Current portion of long-term debt                                                     (41)                        (49)
----------------------------------------------------------------------------------------------------------------------
                                                                                  $ 1,507                    $  1,356
======================================================================================================================
</TABLE>

Aggregate maturities of long-term debt are $41 million in 1999, $36 million
in 2000,  $74 million in 2001, $82 million in 2002 and $88 million in 2003.
Excluded from such  maturities are $38 million of  floating-rate  pollution
control and  industrial  revenue  bonds,  due between 2003 and 2009.  These
bonds are subject to early  redemptions  at the  holders'  option,  but not
before October 1, 1999.

Ashland has a revolving credit agreement which expires on February 9, 2000,
providing for up to $320 million in borrowings, none of which was in use at
September  30,  1998.  The  agreement   contains   covenants  limiting  new
borrowings, as well as requiring the maintenance of a minimum equity level.
Based on Ashland's  financial  position at September  30, 1998,  borrowings
(including any borrowings under this agreement) could be increased by up to
$2 billion, or stockholders' equity could be reduced by up to $1.1 billion.
Additional  permissible borrowings are reduced by 150% of any reductions in
stockholders' equity.

Interest  payments on all  indebtedness  amounted to $132  million in 1998,
$161  million  in 1997  and $155  million  in 1996.  The  weighted  average
interest rate on short-term  borrowings  outstanding  was 6.0% at September
30, 1998.

EXTRAORDINARY LOSS

On  June  3,  1997,   Ashland  called  its  outstanding  6.75%  Convertible
Subordinated  Debentures.  On July 3, 1997,  $123 million of the Debentures
were redeemed for 101.35% of the principal  amount,  plus accrued interest,
thereby  eliminating  an associated  2.4 million  shares of Ashland  Common
Stock that had been reserved for conversion.  On September 3, 1997, Ashland
announced  its intention to redeem its 11.125%  Sinking Fund  Debentures on
October 15, 1997.  The principal  amount  outstanding of $200 million had a
redemption price of 105.562%, plus accrued interest to the redemption date.
On September  23,  1997,  Ashland  delivered  to the trustee U.S.  Treasury
securities maturing on October 15, 1997, sufficient to cover the redemption
price and accrued  interest in  accordance  with the  indenture  agreement,
thereby relieving Ashland of any further  obligations under the Debentures.
The redemption  premium and writeoff of unamortized  deferred debt issuance
expenses  related  to these two  transactions  resulted  in pretax  charges
totaling  $15  million  which,  net of income tax  benefits  of $6 million,
resulted in an extraordinary  loss of $9 million on the early retirement of
debt.

NOTE G - FINANCIAL INSTRUMENTS

COMMODITY AND FOREIGN CURRENCY HEDGES

Ashland uses commodity futures contracts and forward exchange  contracts to
reduce its exposure to certain  risks  inherent  within its  businesses  as
described in Note A. The fair value of open commodity and foreign  exchange
contracts was not significant at September 30, 1998, and 1997.

INTEREST RATE SWAPS

Ashland uses interest rate swap  agreements to obtain greater access to the
lower  borrowing  costs normally  available on  floating-rate  debt,  while
minimizing  refunding  risk through the issuance of  long-term,  fixed-rate
debt. At September 30, 1998, Ashland had unleveraged swap agreements with a
notional  principal  amount of $225 million.  These agreements were used to
convert  fixed  rates  on  certain  debt,  including  $140  million  of the
medium-term  notes and $85  million of the 8.80%  debentures,  to  variable
rates. The variable rates are generally  adjusted quarterly or semiannually
based on  London  Interbank  Offered  Rates  (LIBOR),  but may be fixed for
longer  terms  using  forward  rate  agreements.  Notional  amounts  do not
quantify risk or represent  assets or liabilities of Ashland,  but are used
in the determination of cash settlements  under the agreements.  Ashland is
exposed to credit  losses from  counterparty  nonperformance,  but does not
anticipate  any  losses  from its  agreements,  all of which are with major
financial institutions.

                                    54

<PAGE>


At  September  30, 1998,  Ashland was  receiving a  weighted-average  fixed
interest rate of 6.4% and paying a weighted-average  variable interest rate
of 5.7%, calculated on the notional amount. Interest expense was reduced by
$1  million in 1998 and $2  million  in both 1997 and 1996  resulting  from
settlements  under these  agreements.  Under its current  swap  agreements,
Ashland's  annual interest  expense in 1999 will change by about $2 million
for each 1% change in LIBOR.  The terms  remaining on Ashland's swaps range
from 15 to 68 months, with a weighted-average remaining life of 27 months.

FAIR VALUES

The  carrying  amounts and fair values of Ashland's  significant  financial
instruments,  including  interest rate swaps,  at September  30, 1998,  and
1997,  are shown below.  The fair values of cash and cash  equivalents  and
notes payable to financial institutions approximate their carrying amounts.
The fair values of investments of captive insurance  companies are based on
quoted  market prices plus accrued  interest.  The fair values of long-term
debt are based on  quoted  market  prices  or,  if  market  prices  are not
available,  the present values of the underlying  cash flows  discounted at
Ashland's  incremental  borrowing  rates.  The fair values of interest rate
swaps are based on quoted market  prices,  which reflect the present values
of the differences  between  estimated  future  variable-rate  payments and
future fixed-rate receipts.

<TABLE>
<CAPTION>
                                                                                         1998                              1997
                                                                 ----------------------------         -------------------------
                                                                 Carrying                Fair         Carrying             Fair
(In millions)                                                      amount               value           amount            value
===============================================================================================================================
<S>                                                              <C>                 <C>               <C>              <C>    
Assets
    Cash and cash equivalents                                    $     34            $     34          $   250          $   250
    Investments of captive insurance companies(F1)                     98                  98              189              189
    Interest rate swaps                                                 -                   8                -                1
Liabilities
    Notes payable to financial institutions                            84                  84                -                -
    Long-term debt (including current portion)                      1,548               1,775            1,405            1,570
===============================================================================================================================
</TABLE>
[FN]
(F1)Included in other noncurrent assets in the Consolidated Balance Sheets.

</FN>
NOTE H - LEASES AND OTHER COMMITMENTS

LEASES

Ashland  and  its  subsidiaries   are  lessees  in  noncancelable   leasing
agreements  for office  buildings,  warehouses,  transportation  equipment,
storage  facilities,  retail  outlets,  manufacturing  facilities and other
equipment and properties which expire at various dates.  Capitalized  lease
obligations are not significant and are included in long-term debt.  Future
minimum  rental  payments at September 30, 1998,  and rental  expense under
operating  leases  follow.  In  December  1997 and  January  1998,  Ashland
purchased  $254 million in formerly  leased assets in  connection  with the
formation of Marathon  Ashland  Petroleum  LLC (MAP),  resulting in reduced
rental expense and future minimum rental payments.
<TABLE>
<CAPTION>

(In millions)
-------------------------------------------------------------------------------------------------------------
Future minimum rental payments        Rental expense                1998             1997               1996
==================================    =======================================================================
<S>                        <C>        <C>                           <C>              <C>                <C> 
1999                       $  37
2000                          32      Minimum rentals
2001                          27         (including rentals under
2002                          23         short-term leases)         $119             $144               $134
2003                          20      Contingent rentals               8               13                 13
Later years                  135      Sublease rental income          (6)             (13)               (16)
----------------------------------    -----------------------------------------------------------------------
                           $ 274                                    $121             $144               $131
=============================================================================================================
</TABLE>

OTHER COMMITMENTS

To obtain  mining  permits,  Arch Coal must post surety bonds  guaranteeing
that it will perform any required  reclamation upon closure of a mine. Such
bonds are  currently  included in Ashland's  corporate  surety bond program
which includes its wholly-owned  subsidiaries,  primarily the APAC group of
construction  companies.  Since Ashland has indemnity  agreements  with its
surety  companies,  Ashland was guarantor for reclamation and various other
bonds posted by Arch Coal totaling $442 million at September 30, 1998.

Ashland  and  Marathon  (collectively  the  Lenders)  have  entered  into a
revolving credit  agreement  providing for loans up to $500 million to MAP.
Loans will be funded by the  Lenders  based on their  respective  ownership
interests. No loans have been made under this agreement.

                                    55

<PAGE>


NOTE I - CAPITAL STOCK

On August 7, 1998,  Ashland's Board of Directors authorized the purchase of
up to 4 million shares of Ashland common stock in the open market, of which
1 million shares had been purchased  through  September 30, 1998, at a cost
of $46 million.

In March  1997,  Ashland  called  the 6 million  outstanding  shares of its
$3.125  Cumulative  Convertible  Preferred Stock.  Each preferred share was
convertible  into  1.546  shares of  Ashland  common  stock,  plus cash for
fractional shares. Almost 99% of the series was submitted for conversion to
common stock by the March 31 deadline.  The remaining preferred shares were
redeemed  at a price of  $51.88  per  share  plus  19.1  cents per share of
accrued and unpaid dividends.

Under Ashland's  Shareholder  Rights Plan, each common share is accompanied
by one right to purchase  one-thousandth share of preferred stock for $140.
Each one-thousandth  share of preferred stock will be entitled to dividends
and to vote on an equivalent  basis with one common  share.  The rights are
neither  exercisable  nor  separately  transferable  from the common shares
unless a party  acquires or tenders for more than 15% of  Ashland's  common
stock.  If any party  acquires  more than 15% of Ashland's  common stock or
acquires  Ashland in a business  combination,  each right (other than those
held by the acquiring party) will entitle the holder to purchase  preferred
stock of Ashland or the acquiring  company at a substantial  discount.  The
rights expire on May 16, 2006,  and Ashland's  Board of Directors can amend
certain  provisions  of the Plan or redeem  the rights at any time prior to
their  becoming  exercisable.  

At September 30, 1998,  500,000  shares of cumulative  preferred  stock are
reserved for potential  issuance  under the  Shareholder  Rights Plan and 5
million  common shares are reserved for issuance  under  outstanding  stock
options.

NOTE J - STOCK INCENTIVE PLANS

Ashland has stock  incentive  plans under which key  employees or directors
can purchase shares of common stock under stock options or restricted stock
awards. Stock options are granted to employees at a price equal to the fair
market value of the stock on the date of grant and become  exercisable over
periods of one to three years. Unexercised options lapse 10 years after the
date of grant.  Restricted  stock awards entitle  employees or directors to
purchase  shares at a nominal  cost, to vote such shares and to receive any
dividends  thereon.  However,  such shares are subject to  forfeiture  upon
termination of service before the restriction period ends.

As discussed in Note A, Ashland  accounts for its stock  incentive plans in
accordance with APB 25. Ashland has not recognized compensation expense for
stock options  because the exercise  price of the options equals the market
price  of  the  underlying  stock  on  the  date  of  grant,  which  is the
measurement  date.  If the  alternative  method  of  accounting  for  stock
incentive  plans  prescribed  by FAS 123 had been  followed,  Ashland's net
income and  earnings  per share  would  have been  reduced to the pro forma
amounts in the table  below.  The  weighted  average  fair value of options
granted was determined  using the  Black-Scholes  option pricing model with
the indicated assumptions.
<TABLE>
<CAPTION>

                                                                                          1998              1997           1996
================================================================================================================================
<S>                                                                                    <C>               <C>              <C>  
Pro forma
     Net income (in millions)                                                          $   199           $   277          $ 211
     Basic earnings per share                                                             2.63              3.83           3.00
     Diluted earnings per share                                                           2.58              3.61           2.96
--------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value per share of options granted                                $11.45            $11.28          $9.63
--------------------------------------------------------------------------------------------------------------------------------
Assumptions (weighted average)
     Risk-free interest rate                                                               4.7%              4.6%           6.6%
     Expected dividend yield                                                               2.0%              2.5%           2.5%
     Expected volatility                                                                  23.8%             22.5%          22.3%
     Expected life (in years)                                                              5.0               5.0            5.0
================================================================================================================================
</TABLE>

A progression of activity and various other  information  relative to stock
options is presented in the table below.
<TABLE>
<CAPTION>

                                                              1998                          1997                              1996
                                           ------------------------    --------------------------      ----------------------------
                                                  Weighted average              Weighted average                  Weighted average
                                           Common     option price      Common      option price       Common         option price
(In thousands except per share data)       shares        per share      shares         per share       shares            per share
===================================================================================================================================
<S>                                         <C>             <C>         <C>               <C>          <C>                 <C>   
Outstanding - beginning of year(F1)         4,718           $37.52       5,247            $33.97       5,222               $32.72
Granted                                       580            48.07         814             53.22         823                38.92
Exercised                                    (282)           34.85      (1,271)            32.94        (747)               30.45
Canceled                                      (51)           45.78         (72)            37.29         (51)               37.35
-----------------------------------------------------------------------------------------------------------------------------------
Outstanding - end of year(F1)               4,965           $38.82       4,718            $37.52       5,247               $33.97
===================================================================================================================================
Exercisable - end of year                   3,836           $35.93       3,373            $33.78       3,820               $32.81
===================================================================================================================================
</TABLE>
[FN]
(F1)     Shares of common stock  available  for future grants of options or
         awards  amounted to 5,134,000 at September 30, 1998, and 5,778,000
         at  September  30,  1997.  Exercise  prices per share for  options
         outstanding  at September  30, 1998,  ranged from $23.88 to $33.88
         for 2,023,000 shares,  from $35.63 to $43.13 for 1,587,000 shares,
         and from  $48.00 to $53.38  for  1,355,000  shares.  The  weighted
         average remaining contractual life of the options was 6.5 years.

</FN>

                                    56
<PAGE>


NOTE K - LITIGATION, CLAIMS AND CONTINGENCIES

Ashland is subject to various federal,  state and local  environmental laws
and regulations  that require  remediation  efforts at multiple  locations,
including current operating  facilities,  operating  facilities conveyed to
Marathon  Ashland  Petroleum  LLC  (MAP),   previously  owned  or  operated
facilities,  and  Superfund  or other waste  sites.  During  1998,  Ashland
provided  additional  environmental  reserves  of  $38  million  associated
principally with the completion of certain voluntary efforts in progress at
various operating  facilities conveyed to MAP and the closing of a landfill
near  its  former  Catlettsburg,  Kentucky  refinery.  Consistent  with its
accounting  policy  for  environmental   costs,   Ashland's   reserves  for
environmental  assessments and remediation efforts amounted to $172 million
at September 30, 1998, and $150 million at September 30, 1997. Such amounts
reflect Ashland's estimates of the most likely costs which will be incurred
over an extended period to remediate  identified  environmental  conditions
for  which  the  costs  are  reasonably  estimable,  without  regard to any
third-party recoveries.

Environmental  reserves  are  subject to  considerable  uncertainties  that
affect  Ashland's  ability to estimate its share of the  ultimate  costs of
required  remediation  efforts.  Such uncertainties  involve the nature and
extent of  contamination  at each  site,  the  extent of  required  cleanup
efforts under existing environmental  regulations,  widely varying costs of
alternate  cleanup  methods,  changes  in  environmental  regulations,  the
potential effect of continuing improvements in remediation technology,  and
the number and financial strength of other potentially  responsible parties
at multiparty sites.

Ashland is a defendant in a series of cases  involving more than 600 former
workers  at  the  Lockheed  aircraft  manufacturing  facility  in  Burbank,
California.  The plaintiffs  allege personal injury resulting from exposure
to chemicals sold to Lockheed by Ashland,  and inadequate  labeling of such
chemicals.  The cases are being tried in the Superior Court of the State of
California for the County of Los Angeles.  To date,  five trials  involving
approximately  130 plaintiffs  have resulted in total  verdicts  adverse to
Ashland of $152 million, including $147 million of punitive damages. Nearly
all of these amounts were awarded in the most recently conducted trial. The
damage  awards have been,  or will be,  appealed.  Ashland  believes,  upon
advice of counsel, that there is a substantial likelihood that the punitive
damage awards will be reversed or substantially reduced.

In addition to these matters,  Ashland and its  subsidiaries are parties to
numerous other claims and lawsuits,  some of which are also for substantial
amounts. While these actions are being contested, the outcome of individual
matters is not predictable with assurance.

Ashland does not believe that any liability resulting from any of the above
matters,  after  taking into  consideration  its  insurance  coverages  and
amounts  already  provided for, will have a material  adverse effect on its
consolidated  financial position,  cash flows or liquidity.  However,  such
matters  could  have a  material  effect  on  results  of  operations  in a
particular  quarter  or fiscal  year as they  develop  or as new issues are
identified.

NOTE L - ACQUISITIONS AND DIVESTITURES

ACQUISITIONS

During  1998,  APAC  acquired  10  Missouri-based  companies  known  as the
Masters-Jackson   group,   strengthening  APAC's  capabilities  in  asphalt
production  and  paving,   concrete   paving,   aggregate   production  and
bridge-building, and also acquired several smaller construction businesses.
Also in 1998, Ashland Chemical acquired Gwil Industries'  Plastics Division
and made  several  smaller  acquisitions  to expand  its  distribution  and
specialty chemical  businesses.  In addition,  Valvoline acquired the Eagle
One brand of premium automotive appearance products.  Eagle One and four of
the smaller APAC  acquisitions  were acquired by the issuance of a total of
$61 million in Ashland common stock, certain of which were accounted for as
poolings of interests.  Prior  periods were not restated  since the effects
would have been insignificant.  The other acquisitions,  as well as several
smaller  acquisitions  completed in 1997 and 1996,  were  accounted  for as
purchases and did not have a significant  effect on Ashland's  consolidated
financial statements.

DIVESTITURES

During 1998,  Ashland sold its 23% interest in Melamine  Chemicals  for $26
million,  resulting in a pretax gain of $14 million ($6 million after tax).
In 1997, Ashland sold the domestic exploration and production operations of
Blazer Energy  Corporation.  In 1998, Ashland completed its withdrawal from
the business through the sale of its exploration and production  operations
in Nigeria.  See Note B for a description of these  transactions  and their
impact on Ashland's consolidated financial statements.

NOTE M - RELATED PARTY TRANSACTIONS

Ashland sells  chemicals and lubricants to Marathon  Ashland  Petroleum LLC
(MAP) and purchases  petroleum  products from MAP. Such transactions are in
the ordinary course of business at negotiated prices comparable to those of
transactions  with other  customers  and  suppliers.  In addition,  Ashland
leases certain facilities to MAP, and provides certain computer,  treasury,
accounting,  internal  auditing  and legal  services  to MAP.  For the nine
months ended  September  30, 1998,  Ashland's  sales to MAP amounted to $14
million,  its purchases  from MAP amounted to $147  million,  and its costs
charged to MAP amounted to $21 million.  Ashland's  transactions with other
affiliates and related parties were not significant.


                                    57
<PAGE>


NOTE N - EMPLOYEE BENEFIT PLANS

PENSION AND OTHER POSTRETIREMENT PLANS

Ashland and its  subsidiaries  sponsor  defined  benefit pension plans that
cover substantially all employees. Benefits under these plans are generally
based on  employees'  years of service  and  compensation  during the years
immediately   preceding  their  retirement.   For  certain  plans,  50%  of
employees'  leveraged  employee stock  ownership plan (LESOP)  accounts are
coordinated  with  and  used  to  fund  their  pension  benefits.   Ashland
determines  the level of  contributions  to its pension plans  annually and
contributes  amounts  within the  limitations  imposed by Internal  Revenue
Service regulations.

Ashland and its subsidiaries also sponsor unfunded  postretirement  benefit
plans,  which provide health care and life insurance  benefits for eligible
employees who retire or are disabled.  Retiree  contributions  to Ashland's
health care plans are adjusted  periodically,  and the plans  contain other
cost-sharing  features such as deductibles and coinsurance.  Life insurance
plans are generally noncontributory. Ashland funds the costs of benefits as
they are paid.

Summaries  of the  changes  in the  benefit  obligations  and  plan  assets
(primarily  listed stocks and debt  securities) and of the funded status of
the plans follow.
<TABLE>
<CAPTION>


                                                                                                         Other postretirement
                                                           Pension benefits                                   benefits
                                                       --------------------------                  ----------------------------
(In millions)                                           1998                1997                    1998                  1997
===============================================================================================================================
<S>                                                     <C>                 <C>                     <C>                   <C> 
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at October 1                        $635                $533                    $308                  $273
Service cost                                              28                  36                       8                    11
Interest cost                                             34                  42                      16                    21
Retiree contributions                                      -                   -                       4                     5
Benefits paid                                            (27)                (24)                    (21)                  (23)
Obligations assumed by MAP                              (153)                  -                     (66)                    -
Other-primarily actuarial loss                            86                  48                      13                    21
-------------------------------------------------------------------------------------------------------------------------------
Benefit obligations at September 30                     $603                $635                    $262                  $308
===============================================================================================================================
CHANGE IN PLAN ASSETS
Value of plan assets at October 1                       $435                $348                    $  -                  $  -
Actual return on plan assets                              19                  74                       -                     -
Employer contributions                                     4                  31                      17                    18
Retiree contributions                                      -                   -                       4                     5
Benefits paid                                            (17)                (18)                    (21)                  (23)
Assets transferred to MAP                                (72)                  -                       -                     -
-------------------------------------------------------------------------------------------------------------------------------
Value of plan assets at September 30                    $369                $435                    $  -                  $  -
===============================================================================================================================
FUNDED STATUS OF THE PLANS
Accumulated obligations less plan assets(F1)            $103                $  6                    $262                  $308
Provision for future salary increases                    131                 194                       -                     -
-------------------------------------------------------------------------------------------------------------------------------
Excess of obligations over plan assets(F1)               234                 200                     262                   308
Unrecognized actuarial loss                             (106)                (42)                    (12)                  (25)
Unrecognized transition gain                               -                   3                       -                     -
Unrecognized prior service credit (cost)                  (6)                (11)                     48                   101
-------------------------------------------------------------------------------------------------------------------------------
Net liability recognized                                $122                $150                    $298                  $384
===============================================================================================================================
BALANCE SHEET LIABILITIES (ASSETS)
Prepaid benefit costs                                   $ (2)               $ (2)                   $  -                  $  -
Accrued benefit liabilities                              156                 179                     298                   384
Intangible assets                                         (3)                 (3)                      -                     -
Accumulated other comprehensive income                   (29)                (24)                      -                     -
-------------------------------------------------------------------------------------------------------------------------------
Net liability recognized                                $122                $150                    $298                  $384
===============================================================================================================================
ASSUMPTIONS AS OF SEPTEMBER 30
Discount rate                                           7.00%               7.25%                   7.00%                 7.25%
Rate of compensation increase                           5.00                5.00                       -                     -
Expected return on plan assets                          9.00                9.00                       -                     -
===============================================================================================================================
</TABLE>
[FN]
(F1)     The projected benefit obligations, accumulated benefit obligations
         and  plan  assets  for  pension  plans  with  accumulated  benefit
         obligations  in excess of plan  assets  were  $603  million,  $472
         million  and $369  million  as of  September  30,  1998,  and $109
         million,  $88 million and $11 million as of  September  30,  1997.
         Unfunded  accumulated  benefit  obligations include $84 million in
         1998 and $77 million in 1997 associated with nonqualified  defined
         benefit plans.

</FN>

                                    58
<PAGE>

The  following   table   details  the   components  of  pension  and  other
postretirement benefit costs.
<TABLE>
<CAPTION>

                                                  Pension benefits                              Other postretirement benefits
                                       ---------------------------------------            --------------------------------------    
(In millions)                          1998              1997             1996            1998             1997             1996
================================================================================================================================
<S>                                    <C>                <C>             <C>             <C>              <C>            <C>
Service cost                            $28               $36              $31            $  8              $11              $11
Interest cost                            34                42               39              16               21               19
Expected return on plan assets          (30)              (31)             (27)              -                -                -
Other amortization and deferral           8                 1                2             (10)             (16)             (16)
--------------------------------------------------------------------------------------------------------------------------------
                                        $40               $48              $45            $ 14              $16              $14
================================================================================================================================
</TABLE>
Ashland  amended  nearly all of its  retiree  health  care plans in 1992 to
place a cap on its contributions  and to adopt a cost-sharing  method based
upon years of service. The cap limits Ashland's  contributions to base year
per capita  costs,  plus  annual  increases  of up to 4.5% per year.  These
amendments  reduced  Ashland's  obligations  under its retiree  health care
plans at that time by $197  million,  which was being  amortized  to income
over  approximately 12 years.  During 1998,  Marathon Ashland Petroleum LLC
(MAP) assumed certain of Ashland's postretirement benefit obligations,  and
$38 million of the unrecognized credit from this plan amendment was applied
against the carrying  value of Ashland's  investment  in MAP. The remaining
credit at September 30, 1998, will be amortized over approximately 6 years.

OTHER PLANS

Ashland  sponsors a savings plan to assist eligible  employees in providing
for retirement or other future needs. Under that plan, Ashland  contributes
up  to  4.2%  of  a  participating  employee's  earnings  (1.2%  for  LESOP
participants prior to March 31, 1996).  Company  contributions  amounted to
$15 million in 1998, $21 million in 1997 and $12 million in 1996.


NOTE O - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table presents quarterly financial  information and per share
data relative to Ashland's common stock.  Since the businesses  conveyed to
MAP are  accounted  for on the equity  method in 1998,  sales and operating
revenues are not comparable to 1997 when these businesses were consolidated
(see Note A).
<TABLE>
<CAPTION>

Quarters ended                                December 31                   March 31              June 30            September 30
----------------------------------------------------------    -----------------------    ----------------    ---------------------
(In millions except per share data)      1997        1996         1998          1997       1998      1997      1998(F1)    1997(F2)
==================================================================================================================================
<S>                                    <C>         <C>        <C>             <C>        <C>       <C>       <C>           <C>   
Sales and operating revenues           $1,598      $3,200     $  1,473        $2,991     $1,705    $3,299    $1,757        $3,342
Operating income                          114          77           80            46        226       211        26           127

Income from continuing operations      $   52      $   24     $     28        $    2     $  123    $  119    $    -        $   48
Income from discontinued operations         -          12            -             5          -         9         -            71
Extraordinary loss                          -           -            -             -          -        (2)        -            (8)
                                     ---------------------------------------------------------------------------------------------
Net income                             $   52      $   36     $     28        $    7     $  123    $  126    $    -        $  111
Basic earnings per share 
    Continuing operations              $  .69      $  .30     $    .37        $ (.05)    $ 1.61    $ 1.60    $    -        $  .63
    Discontinued operations                 -         .18            -           .08          -       .11         -           .95
    Extraordinary loss                      -           -            -             -          -      (.02)        -          (.10)
                                     ---------------------------------------------------------------------------------------------
    Net income                         $  .69      $  .48     $    .37        $  .03     $ 1.61    $ 1.69    $    -        $ 1.48
Diluted earnings per share
    Continuing operations              $  .68      $  .30     $    .37        $ (.05)    $ 1.59    $ 1.54    $    -        $  .62
    Discontinued operations                 -         .17            -           .08          -       .11         -           .93
    Extraordinary loss                      -           -            -             -          -      (.02)        -          (.10)
                                     ---------------------------------------------------------------------------------------------
    Net income                       $    .68    $    .47     $    .37        $  .03     $ 1.59    $ 1.63    $    -        $ 1.45
Common dividends per share               .275        .275         .275          .275       .275      .275      .275          .275
Market price per common share
    High                                   55      48-7/8     57-15/16        45-1/8    56-3/16    48-1/4   56-5/16      54-15/16
    Low                                44-1/8      39-3/8       49-1/2        39-1/4         48    40-1/8   45-5/16        46-1/2
==================================================================================================================================
</TABLE>
[FN]
(F1)     In the quarter  ended  September  30, 1998,  unusual items reduced
         income from  continuing  operations  by $69  million,  or $.91 per
         diluted  share.  See  Management's  Discussion  and  Analysis  and
         Information by Industry Segment for a discussion of these items.

(F2)     In the quarter  ended  September  30, 1997,  unusual items reduced
         income from  continuing  operations  by $28  million,  or $.38 per
         diluted  share.  See  Management's  Discussion  and  Analysis  and
         Information by Industry Segment for a discussion of these items. A
         gain on the  sale of the  domestic  operations  of  Blazer  Energy
         increased income from discontinued  operations by $71 million,  or
         $.93 per diluted share (see Note B).

</FN>
                                    59
<PAGE>


Ashland Inc. and Consolidated Subsidiaries
INFORMATION BY INDUSTRY SEGMENT
Years Ended September 30
<TABLE>
<CAPTION>

(In millions)                                                 1998                  1997                        1996
=====================================================================================================================
<S>                                                         <C>                  <C>                        <C>     
REVENUES
Sales and operating revenues
   Ashland Chemical                                         $4,087               $ 3,929                    $  3,602
   APAC                                                      1,444                 1,257                       1,235
   Valvoline                                                 1,023                 1,053                       1,133
   Refining and Marketing                                        -                 6,828                       6,570
   Intersegment sales(F1)
       Ashland Chemical                                         (9)                  (13)                        (14)
       Valvoline                                               (11)                  (12)                        (12)
       Refining and Marketing                                    -                  (209)                       (201)
---------------------------------------------------------------------------------------------------------------------
                                                             6,534                12,833                      12,313
Equity income
   Ashland Chemical                                              6                     9                           6
   Refining and Marketing                                      298                     5                           5
   Arch Coal                                                    25                    25                          22
---------------------------------------------------------------------------------------------------------------------
                                                               329                    39                          33
Other income
   Ashland Chemical                                             43                    26                          21
   APAC                                                          8                     6                           9
   Valvoline                                                     6                     8                          11
   Refining and Marketing                                        4                    31                          20
   Corporate                                                     9                    18                           5
---------------------------------------------------------------------------------------------------------------------
                                                                70                    89                          66
---------------------------------------------------------------------------------------------------------------------
                                                            $6,933               $12,961                    $ 12,412
=====================================================================================================================
OPERATING INCOME
Ashland Chemical                                            $  158(F2)           $   140(F3)                $    170
APAC                                                            90                    82                          83
Valvoline                                                       53                    65(F3)                      79
Refining and Marketing(F4)                                     254(F5)               209(F6)                     101
   Inventory valuation adjustments(F7)                         (15)                    -                           -
Arch Coal                                                       25                    25(F8)                      22
Corporate                                                     (118)(F9)              (60)                        (96)
---------------------------------------------------------------------------------------------------------------------
                                                            $  447               $   461                    $    359
=====================================================================================================================
ASSETS
Ashland Chemical                                            $1,776               $ 1,583                    $  1,485
APAC                                                           757                   531                         489
Valvoline                                                      581                   550                         556
Refining and Marketing                                       2,189                 2,726                       2,831
Arch Coal                                                      422                   403                         381
Corporate(F10)                                                 357                   669                         754
---------------------------------------------------------------------------------------------------------------------
                                                            $6,082               $ 6,462                    $  6,496
=====================================================================================================================

</TABLE>

                                    60
<PAGE>
<TABLE>
<CAPTION>



(In millions)                                         1998               1997                 1996
---------------------------------------------------------------------------------------------------
<S>                                               <C>                   <C>                  <C>  
INVESTMENT IN EQUITY AFFILIATES
Ashland Chemical                                  $     30              $  40                $  38
APAC                                                    10                  -                    -
Valvoline                                                5                  6                    6
Refining and Marketing                               2,102                 37                   33
Arch Coal                                              422                403                  381
Corporate                                                -                  3                    7
---------------------------------------------------------------------------------------------------
                                                  $  2,569              $ 489                $ 465
===================================================================================================
EXPENSE (INCOME) NOT AFFECTING CASH
Depreciation, depletion and amortization
    Ashland Chemical                              $     79              $  94(F3)            $  67
    APAC                                                64                 49                   44
    Valvoline                                           24                 32(F3)               23
    Refining and Marketing                               -                160                  153
    Corporate                                           14                 13                   12
---------------------------------------------------------------------------------------------------
                                                       181                348                  299
Other noncash items(F11)
    Ashland Chemical                                   (4)                  2                  (15)
    APAC                                                3                   9                    -
    Valvoline                                          (1)                 (4)                  (1)
    Refining and Marketing                             36                  22                    2
    Arch Coal                                         (15)                (11)                 (16)
    Corporate                                         (42)                 (4)                   -
---------------------------------------------------------------------------------------------------
                                                      (23)                 14                  (30)
---------------------------------------------------------------------------------------------------
                                                  $   158               $ 362                $ 269
===================================================================================================

ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
Ashland Chemical                                  $   141               $ 100                $  80
APAC                                                   81                  62                   62
Valvoline                                              32                  29                   19
Refining and Marketing                                  -                 150                  187
Corporate                                              20                  15                   24
---------------------------------------------------------------------------------------------------
                                                  $   274               $ 356                $ 372
===================================================================================================
</TABLE>
[FN]
     (F1)Intersegment  sales are accounted for at prices which  approximate
         market value.
     (F2)Includes a gain of $14 million on the sale of Ashland's 23 percent
         interest in Melamine Chemicals, Inc.
     (F3)Includes  charges of $16  million  for  Ashland  Chemical  and $10
         million for  Valvoline to write down  goodwill  related to certain
         European operations.
     (F4)Effective January 1, 1998,  includes  Ashland's equity income from
         MAP,  amortization  of  Ashland's  excess  investment  in MAP, and
         certain retained refining and marketing activities.
     (F5)Includes   charges  of  $43  million  for  reserves  for  retained
         environmental issues associated with properties contributed to MAP
         and for certain severance costs.
     (F6)Includes  a gain of $11  million  resulting  from  LIFO  inventory
         liquidations.
     (F7)Represents  Ashland's  share of inventory  adjustments  associated
         with the  formation of MAP and changes in MAP's  inventory  market
         valuation  reserve.  The reserve  reflects  the excess of the LIFO
         cost of MAP's crude oil and refined product inventories over their
         net realizable values.
     (F8)Includes charges of $13 million for duplicate facility write-offs,
         severance  and other  costs  resulting  from the merger of Ashland
         Coal and Arch Mineral into Arch Coal, Inc.
     (F9)Includes  charges of $50  million  related to a  restructuring  of
         corporate G&A  functions  and the move of Ashland's  headquarters.
         The  charge  includes  severance  costs  to be paid to  terminated
         employees,   reserves   for  excess   leased  real   estate,   and
         contributions  of cash  and  other  real  estate  committed  to be
         conveyed  to  Ashland-area  charitable  and  economic  development
         organizations.
     (F10)Includes  principally  cash,  cash  equivalents,   investments  of
         captive  insurance  companies,  and  net  assets  of  discontinued
         operations held for sale.
     (F11)Includes  deferred  taxes,  equity income from  affiliates  net of
         distributions, and other items not affecting cash.

</FN>
                                    61
<PAGE>


Ashland Inc. and Consolidated Subsidiaries
FIVE-YEAR SELECTED FINANCIAL INFORMATION
Years Ended September 30
<TABLE>
<CAPTION>


(In millions except per share data)                              1998            1997         1996        1995             1994
=================================================================================================================================
<S>                                                            <C>            <C>          <C>         <C>              <C>    
SUMMARY OF OPERATIONS
Revenues
    Sales and operating revenues (including excise taxes)      $6,534         $12,833      $12,313     $11,361          $10,140
    Equity income                                                 329              39           33          25               22
    Other income                                                   70              89           66          54               70
Costs and expenses
    Cost of sales and operating expenses                       (5,299)         (9,810)      (9,512)     (8,664)          (7,613)
    Excise taxes on products and merchandise                        -            (992)        (985)       (988)            (877)
    Selling, general and administrative expenses               (1,006)         (1,350)      (1,257)     (1,252)          (1,105)
    Depreciation, depletion and amortization                     (181)           (348)        (299)       (374)            (275)
---------------------------------------------------------------------------------------------------------------------------------
Operating income                                                  447             461          359         162              362
Interest expense (net of interest income)                        (130)           (142)        (151)       (149)            (117)
---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes             317             319          208          13              245
Income taxes                                                     (114)           (127)         (72)          1              (82)
---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations                                 203             192          136          14              163
Income from discontinued operations                                 -              25           75          10               34
Gain on sale of discontinued operations                             -              71            -           -                -
---------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss                                  203             288          211          24              197
Extraordinary loss on early retirement of debt                      -              (9)           -           -                -
---------------------------------------------------------------------------------------------------------------------------------
Net income                                                    $   203         $   279      $   211     $    24          $   197
=================================================================================================================================
BALANCE SHEET INFORMATION
Working capital
    Current assets                                            $ 1,828         $ 2,720      $ 2,539     $ 2,405          $ 2,109
    Current liabilities                                         1,361           2,028        2,067       1,908            1,641
---------------------------------------------------------------------------------------------------------------------------------
                                                              $   467         $   692      $   472     $   497          $   468
---------------------------------------------------------------------------------------------------------------------------------
Total assets                                                  $ 6,082         $ 6,462      $ 6,496     $ 6,225          $ 5,662
---------------------------------------------------------------------------------------------------------------------------------
Capital employed
    Debt due within one year                                  $   125         $    49      $   127     $   200          $   133
    Long-term debt (less current portion)                       1,507           1,356        1,653       1,672            1,391
    Convertible preferred stock                                     -               -          293         293              293
    Common stockholders' equity                                 2,137           2,024        1,521       1,362            1,302
---------------------------------------------------------------------------------------------------------------------------------
                                                              $ 3,769         $ 3,429      $ 3,594     $ 3,527          $ 3,119
=================================================================================================================================
CASH FLOW INFORMATION
Cash flows from continuing operations                         $   366         $   565      $   544     $   322          $   345
Additions to property, plant and equipment                        274             356          372         341              335
Dividends                                                          84              86           89          87               79
=================================================================================================================================
COMMON STOCK INFORMATION
Diluted earnings per share
    Income (loss) from continuing operations                  $  2.63         $  2.51      $  1.80     $  (.08)         $  2.32
    Net income                                                   2.63            3.64         2.96         .08             2.79
Dividends per share                                              1.10            1.10         1.10        1.10             1.00
=================================================================================================================================

                                    62

</TABLE>