<TABLE>
<CAPTION>
Ashland Inc. and Subsidiaries
Management's Discussion and Analysis

Years Ended September 30

(In millions)                                                   1997                      1996                     1995
========================================================================================================================

<S>                   <C>                                   <C>                      <C>                       <C>     
SALES AND OPERATING REVENUES
Refining and Marketing(1)                                   $  6,719                   $ 6,485                 $  5,891
Valvoline                                                      1,099                     1,199                    1,113
Chemical                                                       4,047                     3,695                    3,551
APAC                                                           1,257                     1,235                    1,123
Coal(2)                                                        1,367                       580                      610
Intersegment sales                                              (289)                     (302)                    (316)
------------------------------------------------------------------------------------------------------------------------
                                                            $ 14,200                   $12,892                  $11,972
========================================================================================================================
OPERATING INCOME
Refining and Marketing(1)                                   $    189                   $    89                  $    (1)
Valvoline                                                         67                        82                       (4)
Chemical                                                         144                       169                      159
APAC                                                              82                        83                       75
Coal(2)                                                           68                        36                       66
General corporate expenses                                       (60)                      (97)                     (91)
------------------------------------------------------------------------------------------------------------------------
                                                            $    490                   $   362                   $  204
========================================================================================================================
EQUITY INCOME
Arch Mineral Corporation(2)                                 $      -                   $    13                   $   (4)
Other                                                             15                        11                       11
-----------------------------------------------------------------------------------------------------------------------
                                                            $     15                   $    24                   $    7
========================================================================================================================
Operating information
Refining and Marketing(1)
     Refining inputs (thousand barrels per day)(3)             358.5                     368.5                    349.5
     Value of products manufactured per barrel              $  26.43                   $ 24.64                  $ 22.49
     Input cost per barrel                                     21.39                     20.50                    18.28
                                                            ------------------------------------------------------------
     Refining margin per barrel                             $   5.04                   $  4.14                  $  4.21
     Refined product sales (thousand barrels per day)
         Wholesale sales to
              Ashland brand retail jobbers                      23.0                      17.6                      1.0
              Other wholesale customers(4)                     295.3                     303.5                    309.4
         SuperAmerica retail system                             76.1                      74.2                     71.5
                                                            ------------------------------------------------------------
     Total refined product sales                               394.4                     395.3                    381.9
     SuperAmerica merchandise sales (millions)              $    600                   $   583                  $   548
Valvoline lubricant sales (thousand barrels per day)(4)         19.1                      19.5                     19.1
APAC construction backlog at September 30 (millions)        $    693                   $   647                  $   672
Coal(5)
     Tons sold (millions)                                       53.7                      50.6                     49.2
     Sales price per ton                                    $  25.46                   $ 25.85                  $ 26.93
Major revenue sources (percent of sales)
     Gasoline                                                     17%                      18%                       17%
     Coal                                                         10%                       5%                        6%
========================================================================================================================
</TABLE>

(1)   Segments  formerly  identified  as Petroleum  and  SuperAmerica  were
      combined  effective  October 1, 1996.  Prior years  amounts have been
      restated.
(2)   Ashland Coal and Arch Mineral  merged  effective  July 1, 1997,  into
      Arch Coal, Inc. Prior interim periods of fiscal 1997 were restated to
      consolidate  Ashland's  interest in Arch Mineral for the entire year.
      Prior  years were not  restated,  reflecting  Ashland's  interest  in
      Ashland Coal on a consolidated  basis and Ashland's  interest in Arch
      Mineral  on  the  equity  method  of  accounting.  See  Note C to the
      consolidated financial statements.
(3)   Includes  crude  oil and other  purchased  feedstocks.  
(4)   Includes intersegment sales.
(5)   Amounts  are  reported  on a 100% basis and prior  amounts  have been
      restated  to show pro forma  information  for Arch Coal  prior to the
      merger.

<PAGE>

RESULTS OF OPERATIONS

Ashland's net income amounted to $279 million in 1997, $211 million in 1996
and $24  million in 1995.  However,  such  earnings  include the results of
discontinued  operations,  as well as  various  unusual  items  which had a
significant  effect  on the  comparisons.  The  following  table  shows the
effects of unusual  items on  operating  income and income from  continuing
operations for the three years ended September 30, 1997.

<TABLE>
<CAPTION>
                                                                                                                 Income from
                                                                  Operating income                     continuing operations
                                                     -----------------------------         ----------------------------------

(In millions)                                          1997       1996        1995          1997          1996           1995
==============================================================================================================================
<S>                                                    <C>        <C>         <C>           <C>           <C>             <C>
Income before unusual items                            $544       $362        $320          $220          $136            $91
        Costs related to coal merger                    (39)         -           -           (13)            -              -
        Asset impairment write-downs                    (26)         -         (79)          (22)            -            (52)
        Early retirement and restructuring programs       -          -         (37)            -             -            (25)
        LIFO inventory liquidation gain                  11          -           -             7             -              -
------------------------------------------------------------------------------------------------------------------------------
Income as reported                                     $490       $362        $204          $192          $136            $14
==============================================================================================================================

</TABLE>

During  1997,  Ashland  reached  a  decision  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  addition,  Ashland has reached an  agreement  in
principle to sell its Nigerian  operations,  subject to the approval of the
Nigerian  government and other  conditions.  As a result,  Exploration  was
reclassified as a discontinued operation in Ashland's income statements and
its  investment  in  the  Nigerian   operations  is  carried  on  Ashland's
consolidated  balance sheet as net assets of  discontinued  operations held
for sale at September 30, 1997. For comparison purposes,  prior year income
statements and balance sheets have been restated.

Also during July 1997,  Ashland Coal and Arch  Mineral  merged to form Arch
Coal,  Inc.,  in which Ashland has a 54%  ownership  interest.  Previously,
Ashland consolidated its investment in Ashland Coal (in which it owned 57%)
and accounted for its investment in Arch Mineral (in which it owned 50%) on
the equity  method.  Due to the merger,  the results of Arch  Mineral  were
consolidated  in fiscal 1997, but its results for prior years remain on the
equity method. Many synergistic opportunities are being pursued as a result
of the merger,  some of which led to the charge of $39 million to write-off
duplicate  facilities  previously  owned by Arch Mineral and to 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  and a  gain  of  $11  million  from  the
liquidation of certain inventories of Refining and Marketing. While Ashland
remains  committed to expanding  Valvoline and Ashland Chemical on a global
basis,  results from certain of their  European  operations  have been 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  well  below  the  current  replacement  costs of the
liquidated inventories.

Effective   September  30,  1995,  Ashland  adopted  Financial   Accounting
Standards Board Statement No. 121 (FAS 121), "Accounting for the Impairment
of  Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of." As a
result,  Ashland  recorded  charges  of $79  million  in 1995 to write down
various  assets to their  fair  values,  including  an idle unit at Ashland
Petroleum's  Catlettsburg  refinery,  certain  unused  crude oil  gathering
pipelines of Scurlock Permian and petroleum  product  marketing  properties
which were being sold or shut down.  Fair values were based upon appraisals
or estimates of discounted  future cash flows. In addition,  charges of $37
million  related  to  early  retirement  and  restructuring  programs  were
incurred,  reflecting  efforts  by  Ashland  Petroleum  and  several  other
divisions to reduce their costs and improve their competitive positions.

Excluding unusual items, income from continuing operations amounted to $220
million in 1997,  compared to $136 million in 1996.  Refining and Marketing
results  were  up  considerably,  as  were  earnings  from  Ashland's  coal
investments.  Results from Valvoline,  Ashland Chemical and APAC would have
exceeded  their  record  levels  achieved in 1996 if they had not  incurred
higher allocations of general corporate expenses.  Ashland began allocating
more of these  expenses  in 1997 to the  segments to better  reflect  their
costs of doing business.  Income from continuing operations of $136 million
for 1996 was up from $91  million  in 1995  before  unusual  items.  Record
results  were  achieved in 1996 by  Valvoline,  Ashland  Chemical and APAC,
combined  with  increased  earnings  from  Refining and  Marketing and Arch
Mineral.  Such  improvements  more than  offset the reduced  earnings  from
Ashland Coal.

The following  table  compares  operating  income  before  unusual items by
segment for the three years ended September 30, 1997. The  consolidation of
Arch Mineral's results significantly affects the comparability of operating
income  from Coal for 1997.  In  addition,  the  increased  allocations  of
general corporate expenses reduced the operating results of the segments on
a comparative basis by $39 million,  but did not have a significant  impact
on overall operating income.
<PAGE>
<TABLE>
<CAPTION>

Ashland Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS

(In millions)                                  1997                  1996                  1995
=======================================================================================================
<S>                                            <C>                    <C>                  <C> 
Operating income
       Refining and Marketing                  $178                   $89                  $101
       Valvoline                                 77                    82                     1
       Chemical                                 160                   169                   164
       APAC                                      82                    83                    75
       Coal                                     107                    36                    66
       General corporate expenses               (60)                  (97)                  (87)
-------------------------------------------------------------------------------------------------------
                                               $544                  $362                  $320
=======================================================================================================
</TABLE>

(Bar graph  appears in the left margin  comparing  Ashland  Inc.  operating
income  for  fiscal  1995,  1996 and 1997.  The graph  shows the  breakdown
between  Ashland's  Coal,  Refining and  Marketing,  and growth  businesses
composed of Valvoline, Chemical and APAC.)



REFINING AND MARKETING

Operating  income from Refining and Marketing  before unusual items doubled
from $89 million in 1996 to $178 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 general
corporate expenses. 

During the first half of fiscal 1997,  Refining operated at near break-even
levels reflecting refining 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 began improving  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
continuing efforts by Ashland Petroleum to reduce its costs and improve its
competitive position.

(Bar graph  appears in the left  margin  comparing  operating  income  from
Refining and Marketing for fiscal 1995, 1996 and 1997.)

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. At September 30, 1997, 766 retail
locations  were  operating,  compared  to 742  locations  in  1996  and 704
locations in 1995.  Included in these totals are 641 SuperAmerica stores in
1997, 624 stores in 1996 and 609 stores in 1995,  with the remainder  being
Rich Oil outlets.

Operating  income from  Refining and  Marketing  amounted to $89 million in
1996,  compared to $101  million in 1995  before  unusual  items.  Although
earnings from Refining  increased,  SuperAmerica's  results were  adversely
affected by an extremely competitive environment.  A $7 million improvement
in earnings from Refining was achieved even though rapidly rising crude oil
prices late in 1996 led to severe margin  compression  and a weak September
1996 quarter.  Despite the modest improvement,  results for 1996 were still
disappointing  given the progress  Ashland  Petroleum made in improving its
competitive  position.  Refinery runs averaged 368,500 barrels a day, up 5%
from 1995 and refining  expenses  (other than fuel consumed in the refining
process)  were  reduced by 26 cents a barrel,  due to the  higher  level of
throughputs  and ongoing  efforts to reduce costs and increase  efficiency.
The effects of these improvements,  however,  were largely offset by higher
average crude oil costs, which could not be fully passed through in product
prices,  and associated  increases in fuel costs. For the year, input costs
increased  $2.22 a barrel,  peaking in the  September  1996 quarter with an
increase of $4.58 a barrel  compared to the September  1995  quarter.  As a
result, refining margins were compressed during what is normally the strong
summer driving season.

On the other hand, results from SuperAmerica  declined $19 million compared
to 1995. While gasoline and merchandise volumes were both up on a per store
basis,  the effect was more than offset by a decline in gasoline margins of
1.5  cents a  gallon  and  increased  operating  costs.  Higher  labor  and
occupancy costs resulted from a continued  tight labor market,  the ongoing
roll-out of the  co-branding  partnership  program with  fast-food  chains,
initial costs  associated with the opening of new stores and rebuilds,  and
the ongoing operation of additional stores.

VALVOLINE

Excluding  unusual  items,  Valvoline's  operating  income  amounted to $77
million in 1997,  compared to a record $82 million in 1996.  Gross  profits
from Valvoline's core lubricant and antifreeze  businesses combined were up
nearly 20%, reflecting improved margins. However, this improvement was more
than  offset by an  increase  of $5 million in  general  corporate  expense
allocations  and by a reduction in gross  profits from R-12,  an automotive
refrigerant.  Due to cool summer  weather which  shortened the peak season,
sales volumes of R-12 were down  significantly  in 1997.  In addition,  the
used oil  collection  business  operated  profitably,  while  earnings from
Valvoline  Instant  Oil  Change  (VIOC)  declined  slightly  due to  higher
operating expenses.  At September 30, 1997, VIOC operated 382 company-owned
outlets,  compared  to 374  outlets  in 1996 and 365  outlets  in 1995.  In
addition, the VIOC franchising program continued to expand with 137 outlets
open in 1997, compared to 100 outlets in 1996 and 90 outlets in 1995.

(Bar graph  appears in the left  margin  comparing  operating  income  from
Valvoline for fiscal 1995, 1996 and 1997.)

<PAGE>
Operating  income from Valvoline was $82 million in 1996,  compared to near
break-even  results  before  unusual  items for 1995.  The record  earnings
reflected  improved results from nearly all of Valvoline's  business units,
including a significant  earnings  boost from the sale of R-12.  Prices for
R-12  escalated  rapidly  during 1996,  as shortages  developed  within the
market. Due to its ozone-depleting characteristics,  the U.S. Environmental
Protection  Agency banned the  production  of R-12 at the end of 1995,  but
sales of existing inventories of this refrigerant are still permitted. Even
aside from R-12  earnings,  however,  Valvoline's  results would still have
been up  significantly.  Results  from  its  lubricant  business  improved,
reflecting  increased  volumes,  higher margins on both branded and private
label sales and reduced  advertising  and  promotional  costs. In addition,
results from VIOC nearly  doubled,  while the used oil collection  business
continued to approach profitability.

CHEMICAL

Ashland  Chemical's  operating income before unusual items amounted to $160
million in 1997,  compared to a record $169 million in 1996.  Earnings from
petrochemicals  were  up  $13  million,  reflecting  increased  cumene  and
methanol  sales  volumes  and  margins.  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.  Results from the  distribution  businesses
were down $3 million due to margin  declines for  industrial  chemicals and
solvents.   Ashland  Chemical  also  incurred  an  additional  $11  million
allocation of general corporate expenses,  as well as charges of $8 million
for environmental remediation and plant shutdown costs.

(Bar graph  appears in the right  margin  comparing  operating  income from
Ashland Chemical for fiscal 1995, 1996 and 1997.)


Operating  income of Ashland  Chemical  increased  from $164 million before
unusual  items  in 1995 to $169  million  in 1996 and  represented  Ashland
Chemical's  fourth straight year of record  earnings.  Outstanding  results
from  specialty  chemicals,  a  moderate  increase  from  the  distribution
businesses and reduced  environmental  remediation costs more than offset a
decline from petrochemicals.  Results from the distribution businesses were
up 5% on the  strength of  improved  sales  volumes,  while  earnings  from
specialty  chemicals  improved by 56%. The 1995  acquisition  of Aristech's
unsaturated  polyester  resin  business  was a  major  contributor  to  the
improved  specialty  chemical results,  along with higher sales volumes and
margins  for  electronic   chemicals.   However,   operating   income  from
petrochemicals  declined by $50 million,  due largely to reduced prices for
methanol, but also due to increased natural gas prices and higher feedstock
costs for cumene and solvents.

APAC

Operating  income  from the APAC  construction  companies  amounted  to $82
million in 1997,  compared  to a record $83  million in 1996.  Net  revenue
(total revenue less  subcontract  work) was up 4%, while  production of hot
mix asphalt and crushed  aggregate  reached  record  levels.  The  effects,
however,  were more than  offset by an  additional  $4  million  in general
corporate expense allocations.

(Bar graph appears in the right margin comparing operating income from APAC
for fiscal 1995, 1996 and 1997.)

APAC  achieved  its  third  straight  year of record  results  in 1996 with
operating  income of $83 million,  compared to $75 million in 1995.  APAC's
results reflected its ongoing efforts in cost control, safety and materials
technology,  allowing the highway construction group to take full advantage
of a strong  construction  economy.  Revenues rose 10%, reflecting a higher
level of both  public and  private  sector  construction  jobs,  as well as
increased  sales  of  hot-mix  asphalt,  crushed  aggregate  and  ready-mix
concrete.

COAL

Operating  income  for Coal for 1997  reflects  the  consolidation  of Arch
Mineral results as of October 1, 1996, and includes  charges of $39 million
for costs related to the merger of Ashland Coal and Arch Mineral.  Prior to
1997,  Arch  Mineral  was  accounted  for on the  equity  method,  creating
comparability  problems. If Arch Mineral had been consolidated in all three
years, pro forma operating  income from Ashland's coal  investments  before
unusual  items would have  amounted to about $100  million for 1995 and $88
million  for  1996,  compared  to $107  million  for 1997.  Ashland  Coal's
contributions  to the 1997 results are up from 1996 despite the  expiration
of certain of its higher priced sales contracts and price  reductions under
certain other sales contracts around 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 reduced sales prices.  Arch Mineral's
contributions to these earnings are also up strongly from 1996,  reflecting
increased production and reduced administrative and interest costs.

(Bar graph appears in the right margin comparing operating income from Coal
for fiscal 1995, 1996 and 1997.)

Operating  income for 1996 and 1995 reflect only  Ashland  Coal's  results.
Ashland  Coal  had a  difficult  year  in  1996  due  largely  to  contract
expirations and other price reductions in that year. As a result, operating
income  amounted  to $36  million in 1996,  compared to $66 million in 1995
reflecting the lower sales prices.

Charges for asset  impairment  and  restructuring  costs reduced  Ashland's
equity  earnings  from Arch  Mineral by $6 million in 1995.  Adjusting  for
these unusual items, Arch Mineral generated equity income of $13 million in
1996 and $2  million  in 1995.  Arch's  results  for  1996  were  favorably
affected by increased  sales volumes and lower mining costs, as well as the
restructuring completed in 1995.

GENERAL CORPORATE EXPENSES

Excluding  unusual items,  general  corporate  expenses were $60 million in
1997,  $97 million in 1996 and $87 million in 1995.  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.
<PAGE>

Ashland Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS

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,  $75  million in 1996 and $10 million in
1995.  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.

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  providing for up to $320 million in borrowings,
under which no borrowings  were  outstanding at September 30, 1997. At that
date, Arch Coal also had revolving  credit  agreements  providing for up to
$500 million in borrowings, of which $240 million was in use. Under a shelf
registration,  Ashland can issue an additional  $220 million in medium-term
notes should  future  opportunities  or needs arise.  Ashland and Arch Coal
also have  access to various  uncommitted  lines of credit  and  commercial
paper markets,  under which Arch Coal had  short-term  notes of $35 million
outstanding at September 30, 1997.  While certain debt  agreements  contain
covenants  limiting new borrowings,  Ashland could still have increased its
indebtedness by up to $2.1 billion at September 30, 1997.

Cash  flows  from  continuing  operations,  a  major  source  of  Ashland's
liquidity,  amounted to $852 million in 1997, $651 million in 1996 and $442
million in 1995.  The  significant  improvements  in cash flows  reflects a
higher  level  of  earnings,   modest   working   capital  growth  and  the
consolidation  of Arch Coal in 1997.  Cash flows from  operations  exceeded
Ashland's  capital  requirements  for net property  additions and dividends
since 1994 by $470 million,  providing  additional funds for debt repayment
and acquisitions.

(Bar graph appears in the left margin  comparing cash flows from continuing
operations for fiscal 1995, 1996 and 1997.)

Property additions amounted to $1.3 billion during the last three years and
are  summarized in the  Information  by Industry  Segment on Page 63. While
about 40% of  Ashland's  capital  expenditures  during  this period were in
Refining and Marketing,  its percent of the total expenditures has declined
in each of those three years.  Capital  expenditures by Valvoline,  Ashland
Chemical and APAC,  Ashland's growth businesses,  also accounted for 40% of
the total  expenditures  since 1994,  increasing from 37% in 1995 to 45% in
1997.

(Bar graph  appears in the left  margin  comparing  Ashland  Inc.  property
additions for fiscal 1995, 1996 and 1997.)

Cash flows used for  acquisitions  amounted to $478 million during the last
three years. Such acquisitions  include $252 million for certain operations
of Aristech Chemical  Corporation and numerous smaller chemical  companies,
$124  million for  additional  interests in Ashland  Coal,  $47 million for
Zerex and $36  million  for various  construction  companies.  Of the total
capital invested in acquisitions since 1994, 70% was employed in Valvoline,
Ashland Chemical and APAC.

Long-term  borrowings  provided cash flows of $573 million  during the last
three years,  including the issuance of $407 million of medium-term  notes,
$75 million of  pollution-control  bonds and $88 million of Arch Coal debt.
The proceeds from these  long-term  borrowings  were used in part to retire
$778 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.

Working capital at September 30, 1997, was $734 million,  and liquid assets
(cash, cash equivalents and accounts receivable) amounted to 88% of current
liabilities  at that  date.  Ashland's  working  capital  is  significantly
affected by its use of the LIFO method of inventory valuation, which valued
inventories  $416 million  below their  replacement  costs at September 30,
1997.

CAPITAL RESOURCES

Ashland's capital employed at September 30, 1997,  consisted of debt (43%),
minority  interest (7%) and common  stockholders'  equity (50%).  Debt as a
percent of capital employed is down from 50% at the end of 1996, reflecting
strong cash flows from  operations  during 1997, as well as the sale of the
domestic  operations  of Blazer  Energy.  In  addition,  minority  interest
increased from 4% at September 30, 1996,  reflecting the  consolidation  of
Arch Mineral.  Common stockholders' equity increased from 38% at the end of
1996, due to the conversion of $290 million of preferred stock into common,
as well as the strong earnings during 1997.

(Bar  graph  appears  in the left  margin  comparing  debt as a percent  of
capital employed for fiscal 1995, 1996 and 1997.)

During  fiscal  1998,   Ashland   anticipates   capital   expenditures   of
approximately $560 million.  Capital expenditures in Refining and Marketing
are expected to amount to about $170 million,  including nearly $40 million
for SuperAmerica.  Capital expenditures of Valvoline,  Ashland Chemical and
APAC are  projected  at around  $240  million,  with most of the  remainder
invested by Arch Coal. Both Ashland and Arch Coal anticipate  meeting their
1998  capital  requirements  for  property  additions  and  dividends  from
internally generated funds.

<PAGE>

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 in the petroleum, chemical and mining industries.

Capital  expenditures for air, water and solid waste control facilities for
continuing  operations amounted to $26 million in 1997, $38 million in 1996
and $42  million  in 1995.  Based  on  current  environmental  regulations,
Ashland  anticipates  such  capital  expenditures  will amount to about $30
million in 1998.  Environmental  remediation  and  compliance  expenditures
amounted to $155 million in 1997,  $153 million in 1996 and $148 million in
1995,  and are  expected to be in the range of $160  million in 1998.  Such
compliance expenditures do not include the costs of additives, such as MTBE
and  ethanol,  used to  meet  reformulated  gasoline  and  oxygenated  fuel
requirements.

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.

During 1997,  the U. S.  Environmental  Protection  Agency (EPA)  completed
comprehensive inspections of compliance with federal environmental laws and
regulations at Ashland's three  refineries.  Ashland continues to cooperate
and hold discussions with the EPA concerning these inspections,  as well as
what  additional  remediation  actions  may be  required  or  costs  may be
incurred.

Ashland does not believe that any liability  resulting  from  environmental
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.

DERIVATIVE INSTRUMENTS

Ashland is exposed to various  market risks,  including  changes in certain
commodity prices,  foreign currency rates and interest rates. To manage the
volatility  relating to 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 to reduce its exposure
to certain risks inherent within its refining business.  Such contracts are
used  principally to hedge the value of intransit crude oil cargoes,  hedge
exposure under fixed-price petroleum product sales contracts, obtain higher
prices for crude oil sales,  protect against margin  compression  caused by
increasing crude oil prices,  take advantage of attractive refining margins
and  lock in costs  on a  portion  of the  natural  gas  fuel  needs of the
refineries.  Ashland also uses forward exchange  contracts to hedge certain
foreign  currency  transaction  exposures of its operations.  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, 1997,  would not  materially  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, 1997, included about $280 million of
floating-rate debt, and the interest rates on an additional $370 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 1998 will  fluctuate  based on short-term  interest  rates on about $650
million of Ashland's  consolidated  long-term debt outstanding at September
30, 1997, as well as on any short-term notes and commercial paper.

OUTLOOK

Ashland  Chemical will continue to pursue growth through  internal  efforts
and selective  acquisitions.  Ashland  Chemical 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, such as its recent entry into the distribution market for
nutritional  products.  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.   Continued   federal
infrastructure  funding and an expanding economy should continue to benefit
APAC's  efforts to build  market  position in  existing  markets and reduce
costs. APAC's  construction  backlog amounted to a record year end level of
$693 million at September 30, 1997. Such backlog includes a modest increase
in the public sector and a slight  decrease in the private  sector,  and is
expected to contain  margins  comparable  to those  included in last year's
backlog.

Valvoline  will focus on extending and  leveraging  its brand  franchise to
related products,  while pursuing  international  growth through aggressive
marketing,  joint ventures and application of domestic  competencies.  R-12
margins are expected to remain strong,  although the level of annual demand
is uncertain.  Domestic sales volumes of higher-margin  packaged lubricants
serving



<PAGE>
Ashland Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS



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 international sales of lubricants are expected to
provide continued growth opportunities.

Although margins are expected to remain volatile, key external factors look
promising  for  the  refining  and  marketing  industry.   The  economy  is
reasonably  strong,  inflation  appears to be under  control,  and economic
growth continues at a modest pace. In addition, petroleum product demand is
expected  to  continue  increasing  over 1%  annually  for the  rest of the
decade.  Such  increases  reflect  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, which should be beneficial for refining margins.

Ashland  Petroleum  continues  to  strengthen  its  position in refining by
enhancing its production of higher-value  products,  reducing its operating
expenses  and  increasing  its volumes  sold under  company  brands.  While
SuperAmerica  continues to expand its retail network,  Ashland Petroleum is
also   increasing   controlled   gasoline   sales   through   its   branded
jobber/distributor  marketing  program.  Under  that  program,  601  retail
locations were  operating at September 30, 1997,  compared to 485 locations
at the  end of  1996.  Controlled  sales  volumes  are up 21%  since  1994,
accounting for over 47% of refinery gasoline production in 1997,  providing
deeper market penetration in key Midwest markets, strengthening margins and
reducing Ashland Petroleum's dependence on wholesale markets.

During 1997,  Ashland and Marathon Oil Company signed a letter of intent to
combine the petroleum refining and marketing and most transportation assets
of the two  companies.  Ashland and  Marathon  have  resolved  all material
matters  concerning  valuation and due diligence,  and  anticipate  signing
definitive  agreements in December 1997. Ashland would have a 38% ownership
interest in the proposed joint venture.  Ashland  expects that the proposed
venture will be able to achieve substantial  synergies beginning in 1998 by
pursuing  operational  efficiencies  and  integrating  the strengths of the
business processes, management systems and administrative support functions
of the two companies.

Arch Coal's  results for 1998 are expected to benefit from  numerous  steps
which have been taken or are underway to capture  synergies  resulting from
the merger of Ashland Coal and Arch Mineral.  Arch Coal's low debt and high
cash flow provide the financial  strength to support continued  operational
improvements, acquisitions and internal expansion.

Ashland's  debt at the end of 1997 was down by $255  million from the prior
year,  despite the  addition  of $236  million in debt  resulting  from the
consolidation of Arch Coal as of October 1, 1996. As a result, net interest
costs are expected to be  significantly  lower in 1998, given the reduction
in Ashland's debt during 1997. Annualizing the interest cost on outstanding
debt at September 30, 1997,  would result in net interest  expense of about
$125  million  during  1998,  compared to $170  million in 1997.  Such debt
reduction  also  provides  Ashland with greater  financial  flexibility  to
pursue its growth goals.

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 and Outlook 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 in Note A to the  Consoldiated  Financial  Statements under risks
and uncertainties. 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,  1997,  which is on file with the  Securities  and  Exchange
Commission.

<PAGE>
<TABLE>
<CAPTION>

ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
YEARS ENDED SEPTEMBER 30

(In millions except per share data)                                                  1997                1996                 1995
===================================================================================================================================

<S>                                                                               <C>                 <C>                  <C>    
REVENUES
Sales and operating revenues (including excise taxes)                             $14,200             $12,892              $11,972
Other                                                                                 119                  76                   66
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                   14,319              12,968               12,038
COSTS AND EXPENSES
Cost of sales and operating expenses                                               10,860               9,975                9,130
Excise taxes on products and merchandise                                              992                 985                  988
Selling, general and administrative expenses                                        1,405               1,275                1,269
Depreciation, depletion and amortization                                              572                 371                  447
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                   13,829              12,606               11,834
-----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME                                                                      490                 362                  204
OTHER INCOME (EXPENSE)
Interest expense (net of interest income)                                            (170)               (169)                (171)
Equity income - Note D                                                                 15                  24                    7
-----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST           335                 217                   40
Income taxes - Note E                                                                (119)                (73)                  (3)
Minority interest in earnings of subsidiaries                                         (24)                 (8)                 (23)
-----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS                                                     192                 136                   14
Income from discontinued operations (net of income taxes) - Note B                     25                  75                   10
Gain on sale of discontinued operations (net of income taxes) - Note B                 71                   -                    -
-----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY LOSS                                                      288                 211                   24
Extraordinary loss on early retirement of debt (net of income taxes) - Note F          (9)                  -                    -
-----------------------------------------------------------------------------------------------------------------------------------
NET INCOME                                                                            279                 211                   24
Dividends on convertible preferred stock                                               (9)                (19)                 (19)
-----------------------------------------------------------------------------------------------------------------------------------
INCOME AVAILABLE TO COMMON SHARES                                               $     270             $   192              $     5
===================================================================================================================================
EARNINGS PER SHARE - Note A
Primary
       Income (loss) from continuing operations                                 $    2.57             $  1.81              $  (.08)
       Income from discontinued operations                                            .36                1.16                  .16
       Gain on sale of discontinued operations                                       1.00                   -                    -
       Extraordinary loss                                                            (.13)                  -                    -
                                                                                ---------------------------------------------------
       Net income                                                               $    3.80             $  2.97              $   .08
Assuming full dilution
       Income (loss) from continuing operations                                 $    2.52             $  1.84              $  (.08)
       Income from discontinued operations                                            .33                 .98                  .16
       Gain on sale of discontinued operations                                        .94                   -                    -
       Extraordinary loss                                                            (.12)                  -                    -
                                                                                ---------------------------------------------------
       Net income                                                               $    3.67             $  2.82              $   .08
AVERAGE COMMON SHARES AND EQUIVALENTS OUTSTANDING
Primary                                                                                71                  65                   62
Assuming full dilution                                                                 76                  77                   63
===================================================================================================================================
</TABLE>


See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>

ASHLAND INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30

(In millions)                                                                        1997                     1996
===================================================================================================================
<S>                                                                               <C>                     <C>     
ASSETS

CURRENT ASSETS
Cash and cash equivalents                                                         $   268                 $     77
Accounts receivable (less allowances for doubtful accounts of
     $24 million in 1997 and $27 million in 1996)                                   1,730                    1,621
Inventories - Note A                                                                  729                      708
Other current assets                                                                  268                      259
-------------------------------------------------------------------------------------------------------------------
                                                                                    2,995                    2,665

INVESTMENTS AND OTHER ASSETS
Investments in and advances to unconsolidated affiliates - Note D                      86                      157
Investments of captive insurance companies                                            189                      178
Cost in excess of net assets of companies acquired (less accumulated
     amortization of $70 million in 1997 and $43 million in 1996)                     120                      120
Coal supply agreements (less accumulated amortization of
     $53 million in 1997 and $44 million in 1996)                                     195                       44
Net assets of discontinued operations held for sale - Note B                           18                      326
Other noncurrent assets                                                               283                      314
-------------------------------------------------------------------------------------------------------------------
                                                                                      891                    1,139

PROPERTY, PLANT AND EQUIPMENT
Cost
     Refining and Marketing                                                         3,497                    3,395
     Valvoline                                                                        328                      312
     Chemical                                                                         904                      818
     APAC                                                                             671                      626
     Coal                                                                           1,904                      980
     Corporate                                                                        167                      154
-------------------------------------------------------------------------------------------------------------------
                                                                                    7,471                    6,285
Accumulated depreciation, depletion and amortization                               (3,580)                  (3,000)
-------------------------------------------------------------------------------------------------------------------
                                                                                    3,891                    3,285
-------------------------------------------------------------------------------------------------------------------
                                                                                   $7,777                   $7,089
===================================================================================================================

</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>
<TABLE>
<CAPTION>

(In millions)                                                                        1997                     1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                       <C>    
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Debt due within one year
     Notes payable to financial institutions                                     $     35                  $   117
     Current portion of long-term debt                                                 58                       86
Trade and other payables                                                            2,045                    1,973
Income taxes                                                                          123                       22
----------------------------------------------------------------------------------------------------------------------
                                                                                    2,261                    2,198
NONCURRENT LIABILITIES
Long-term debt (less current portion) - Notes F and G                               1,639                    1,784
Employee benefit obligations - Note M                                                 854                      613
Reserves of captive insurance companies                                               161                      166
Other long-term liabilities and deferred credits                                      565                      340
Commitments and contingencies - Notes G, I and L
----------------------------------------------------------------------------------------------------------------------
                                                                                    3,219                    2,903

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES                                        273                      174

STOCKHOLDERS'  EQUITY - Notes F, J and K 
  Preferred  stock, no par value, 30 million shares authorized
     Convertible preferred stock, 6 million shares issued in 1996,
         $300 million liquidation value                                                 -                      293

Common stockholders' equity
     Common stock, par value $1.00 per share
           Authorized - 150 million shares
           Issued - 75 million shares in 1997 and 64 million shares in 1996            75                       64
     Paid-in capital                                                                  605                      280
     Retained earnings                                                              1,379                    1,185
     Other                                                                            (35)                      (8)
----------------------------------------------------------------------------------------------------------------------
Total common stockholders' equity                                                   2,024                    1,521
----------------------------------------------------------------------------------------------------------------------
                                                                                    2,024                    1,814
----------------------------------------------------------------------------------------------------------------------
                                                                                   $7,777                   $7,089
======================================================================================================================
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

ASHLAND INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY


                                     Preferred     Common      Paid-in      Retained       Loan to
(In millions)                            stock      stock      capital      earnings         LESOP       Other          Total
------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>         <C>         <C>         <C>            <C>         <C>           <C>   

BALANCE AT OCTOBER 1, 1994                $293        $61         $159        $1,126         $(33)       $(11)         $1,595
Net income                                                                        24                                       24
Dividends
      Preferred stock                                                            (19)                                     (19)
      Common stock, $1.10 a share                                                (68)                                     (68)
Issued common stock under
      Share offering program                            2           49                                                     51
      Acquisition of operations
         of other companies                             1           40                                                     41
      Stock incentive plans                                          7                                                      7
LESOP loan repayments                                                                          22                          22
Other changes                                                        1                                      1               2
------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995              293         64          256         1,063          (11)        (10)          1,655
Net income                                                                       211                                      211
Dividends
      Preferred stock                                                            (19)                                     (19)
      Common stock, $1.10 a share                                                (70)                                     (70)
Issued common stock under
      Stock incentive plans                                         18                                                     18
      Employee savings plan                                          6                                                      6
LESOP loan repayments                                                                          11                          11
Other changes                                                                                               2               2
------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996              293         64          280         1,185            -          (8)          1,814
Net income                                                                       279                                      279
Dividends
      Preferred stock                                                             (9)                                      (9)
      Common stock, $1.10 a share                                                (76)                                     (76)
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)                                   (27)            (28)
------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997           $    -        $75         $605        $1,379        $   -        $(35)         $2,024
------------------------------------------------------------------------------------------------------------------------------


</TABLE>


See Notes to Consolidated Financial Statements.

<PAGE>
<TABLE>
<CAPTION>

Ashland Inc. and Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years Ended September 30

(In millions)                                                                  1997                  1996                 1995
===============================================================================================================================
<S>                                                                            <C>                   <C>               <C>    
CASH FLOWS FROM CONTINUING OPERATIONS
Income from continuing operations                                              $192                  $136              $    14
Expense (income) not affecting cash
       Depreciation, depletion and amortization                                 572                   371                  447
       Deferred income taxes                                                      3                   (11)                 (71)
       Other noncash items                                                       45                     1                   43
Change in operating assets and liabilities(1)                                    40                   154                    9
-------------------------------------------------------------------------------------------------------------------------------
                                                                                852                   651                  442
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt                                        175                    68                  330
Proceeds from issuance of capital stock                                          35                    16                   55
Repayment of long-term debt                                                    (621)                  (97)                 (60)
Increase (decrease) in short-term debt                                          (57)                  (84)                  38
Dividends paid                                                                  (97)                  (93)                 (92)
-------------------------------------------------------------------------------------------------------------------------------
                                                                               (565)                 (190)                 271
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment                                     (431)                 (430)                (399)
Purchase of operations - net of cash acquired                                   (96)                  (83)                (299)
Investment purchases(2)                                                        (248)                 (455)                (725)
Investment sales and maturities(2)                                              216                   491                  704
Other - net                                                                       -                     6                   32
-------------------------------------------------------------------------------------------------------------------------------
                                                                               (559)                 (471)                (687)
-------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY CONTINUING OPERATIONS                                  (272)                  (10)                  26
Cash provided (used) by discontinued operations - Note B                        436                    35                  (14)
-------------------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS                                           164                    25                   12
Cash and cash equivalents - beginning of year                                   104 (3)                52                   40
-------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR                                        $268                 $  77               $   52
===============================================================================================================================
DECREASE (INCREASE) IN OPERATING ASSETS(1)
Accounts receivable                                                            $  1                 $ (52)              $ (126)
Inventories                                                                      17                     2                  (60)
Other current assets                                                             (6)                   (6)                  11
Investments and other assets                                                     (3)                   10                   31
INCREASE (DECREASE) IN OPERATING LIABILITIES(1)
Trade and other payables                                                       (143)                  216                  176
Income taxes                                                                     80                   (12)                  (2)
Noncurrent liabilities                                                           94                    (4)                 (21)
-------------------------------------------------------------------------------------------------------------------------------
CHANGE IN OPERATING ASSETS AND LIABILITIES                                    $  40                 $ 154               $    9
===============================================================================================================================
</TABLE>

(1)   Excludes changes resulting from operations acquired or sold. 
(2)   Represents  primarily  investment  transactions of captive  insurance
      companies.
(3)   Includes  $27 million of cash and cash  equivalents  of Arch  Mineral
      Corporation  that was  presented on a  consolidated  basis  effective
      October 1, 1996 (see Note A).



See Notes to Consolidated Financial Statements.

<PAGE>

ASHLAND INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements include the accounts of Ashland and
its majority-owned  subsidiaries.  Investments in joint ventures and 20% to
50% owned affiliates are accounted for on the equity method.  Ashland Coal,
Inc.  and Arch  Mineral  Corporation  merged  on July 1,  1997,  into a new
corporation  known as Arch Coal, Inc., in which Ashland has a 54% ownership
interest.   Beginning  in  the  September  1997  quarter,   Arch  Coal  was
consolidated in Ashland's financial  statements.  Prior interim quarters in
1997 were  restated to reflect  Arch  Mineral on a  consolidated  basis for
comparison purposes. Since Arch Mineral was previously accounted for on the
equity method,  the  comparability of various amounts included in Ashland's
consolidated financial statements and the accompanying notes are affected.

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,
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 operations are affected by domestic and international  political,
legislative, regulatory and legal actions. Such 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 government of the United States in anticipation  of, or in
response to, such actions.

Domestic  and  international  economic  conditions,  such  as  recessionary
trends, inflation, interest and monetary exchange rates, as well as changes
in the availability or prices of crude oil and petroleum products, can have
a  significant  effect on Ashland's  operations.  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 environmental or
other matters.  In addition,  climate and weather can significantly  affect
Ashland in several of its operations, such as its construction, heating oil
and coal businesses.
<TABLE>
<CAPTION>

INVENTORIES

(In millions)                                                      1997                     1996
=================================================================================================
<S>                                                                <C>                      <C> 
Crude oil                                                          $277                     $316
Petroleum products                                                  289                      323
Chemicals                                                           341                      342
Other products                                                      174                      146
Materials and supplies                                               64                       55
Excess of replacement costs over LIFO carrying values              (416)                    (474)
--------------------------------------------------------------------------------------------------
                                                                   $729                     $708
==================================================================================================
</TABLE>

Crude  oil,  petroleum  products,  chemicals  and  other  products  with  a
replacement cost of $751 million at September 30, 1997, and $834 million at
September 30, 1996, 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  liquidations,  net income
was increased by $7 million  ($.09 per share) in 1997.  The effects of LIFO
inventory liquidations during 1996 and 1995 were not significant.

PROPERTY, PLANT AND EQUIPMENT

The cost of plant and equipment (other than the costs of purchasing  rights
to coal reserves and mine development costs) is principally  depreciated by
the  straight-line  method over the  estimated  useful lives of the assets.
Costs of purchasing  rights to coal reserves and mine development costs are
depleted by the  units-of-production  method over the estimated recoverable
reserves. Coal exploration costs are expensed as incurred.

Estimated  costs of major  refinery  turnarounds  are accrued,  while other
maintenance  and repair  costs are expensed as  incurred.  Maintenance  and
repair expense  amounted to $463 million in 1997,  $355 million in 1996 and
$341 million in 1995.

<PAGE>
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

Primary earnings per share is based on net income less preferred  dividends
divided by the average number of common shares and equivalents  outstanding
during the  respective  years.  Shares of common stock issuable under stock
options are treated as common stock equivalents when dilutive.

Earnings per share assuming full dilution begins with the primary  earnings
per share  computation.  Prior to 1997,  shares issuable upon conversion of
the preferred stock and 6.75% subordinated debentures were added to average
common shares and equivalents when dilutive.  In such cases, net income was
further  adjusted by adding back preferred  dividends and interest  expense
(net of tax) on these debentures.

In the  computation  of earnings per share assuming full dilution for 1997,
the preferred  shares which were  converted in March 1997 (see Note J) were
assumed to be converted to common  shares as of the  beginning of the year,
in accordance with generally accepted accounting principles.  If the shares
had been assumed  converted as of the beginning of the year for the primary
computation,  the resulting  primary earnings per share would have amounted
to $3.70.  The 6.75%  convertible  subordinated  debentures were retired in
July 1997 (see Note F) and,  therefore,  were not assumed converted for the
1997 computation.

DERIVATIVE INSTRUMENTS

Ashland selectively uses commodity futures contracts to reduce its exposure
to certain risks inherent within its refining business.  Such contracts are
used  principally to hedge the value of intransit crude oil cargoes,  hedge
exposure under fixed-price sales contracts,  obtain higher prices for crude
oil sales,  protect against margin  compression  caused by increasing crude
oil prices,  take  advantage  of  attractive  refining  margins and lock in
prices  on a  portion  of the  natural  gas fuel  needs of the  refineries.
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,  as appropriate  (the deferral  method).  In addition,
commodity futures contracts are used as an alternate method of obtaining or
selling  crude  oil and  petroleum  products  to  balance  physical  barrel
activity.  These contracts are marked-to-market  each month and included in
accounts receivable,  with the offsetting  unrealized gain or loss included
in cost of sales (the fair value 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  revenues  (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 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
related to the debt (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 related to
the debt  over the  remaining  term of the  original  contract  life of the
terminated swap agreement.

STOCK INCENTIVE PLANS

Effective October 1, 1996,  Ashland adopted 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 K).

ACCOUNTING CHANGES

Effective   September  30,  1995,  Ashland  adopted  Financial   Accounting
Standards Board Statement No. 121 (FAS 121), "Accounting for the Impairment
of  Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of." As a
result,  Ashland  recorded  charges of $83 million ($79 million included in
depreciation,   depletion  and  amortization  and  $4  million  charged  to
discontinued  operations) to write down certain  assets to their  estimated
fair  values.  These  assets  included an idle unit at Ashland  Petroleum's
Catlettsburg  refinery,  certain  unused crude oil  gathering  pipelines of
Scurlock Permian,  and petroleum  product  marketing  properties which were
being  sold or shut  down.  Fair  values  were  based  upon  appraisals  or
estimates of discounted future cash flows. Operating income was reduced for
each of the  affected  segments as follows:  Refining  and  Marketing  ($68
million);  Valvoline  ($3  million);  Chemical  ($4  million);  and general
corporate expenses ($4 million). In addition,  Arch Mineral adopted FAS 121
and  recorded a charge to write down certain  idle  facilities,  decreasing
Ashland's  equity  income by $3  million.  The  adoption of FAS 121 reduced
Ashland's net income for 1995 by $54 million or $.86 per share.

<PAGE>

NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

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 13 years.  Costs of acquired coal supply
agreements are capitalized and amortized over the contract sales tonnage.

Research and  development  costs are  expensed as incurred  ($29 million in
1997, $28 million in 1996 and $24 million in 1995).

Certain  prior year  amounts  have been  reclassified  in the  consolidated
financial   statements  and   accompanying   notes  to  conform  with  1997
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. Ashland has reached an agreement in principle to
sell its exploration and production  operations in Nigeria,  subject to the
approval of the  Nigerian  government  and other  conditions.  Accordingly,
results from the Exploration  segment are shown as discontinued  operations
with prior years  restated.  Components of amounts  reflected in the income
statements,  balance  sheets and cash flow  statements are presented in the
following table.
<TABLE>
<CAPTION>

(In millions)                                                         1997                  1996                1995
======================================================================================================================
<S>                                                                   <C>                   <C>                 <C> 
INCOME STATEMENT DATA
Revenues                                                              $240                  $320(1)             $204
Costs and expenses                                                    (215)                 (226)               (210)
----------------------------------------------------------------------------------------------------------------------
Operating income (loss)                                                 25                    94                  (6)
Income tax benefit (expense)                                             -                   (19)                 16
----------------------------------------------------------------------------------------------------------------------
Income from discontinued operations                                   $ 25                  $ 75(1)             $ 10
======================================================================================================================
BALANCE SHEET DATA
Current assets                                                        $ 59                  $ 76
Investments and other assets                                             1                     1
Property, plant and equipment - net                                     57                   430
Current liabilities                                                    (41)                  (81)
Noncurrent liabilities                                                 (58)                 (100)
----------------------------------------------------------------------------------------------------------------------
Net assets of discontinued operations held for sale                   $ 18                  $326
======================================================================================================================
CASH FLOW DATA
Cash flows from operations                                            $(90)                 $115                $ 58
Cash flows from investment (including sales proceeds)                  526                   (80)                (72)
----------------------------------------------------------------------------------------------------------------------
Cash provided (used) by discontinued operations                       $436                  $ 35                $(14)
======================================================================================================================

(1)    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.
</TABLE>


<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  Refining and  Marketing,
Valvoline,  Chemical,  APAC and Coal.  Information  by industry  segment is
shown on Pages 62 and 63.

Refining and Marketing  operations  are conducted by Ashland  Petroleum and
SuperAmerica.  Ashland Petroleum is a leading regional refiner and marketer
in  the   Midwest.   In  addition  to  supplying   petroleum   products  to
SuperAmerica,  Valvoline, Ashland Chemical and APAC, Ashland Petroleum is a
leading supplier of petroleum products to the transportation and commercial
fleet  industries,  other  industrial  customers and independent  marketers
(including  marketers  operating  under the Ashland  brand  name).  Ashland
Petroleum also  transports  crude oil and petroleum  products in connection
with its  refining  and  wholesale  marketing  operations  and  gathers and
markets crude oil through Scurlock Permian. SuperAmerica includes Ashland's
retail  gasoline  and  merchandise  marketing  operations,   including  the
SuperAmerica chain of high-volume  retail stores.  Gasoline and merchandise
are also sold from outlets  operated by  SuperAmerica  under the Rich brand
name.  Operations  are  conducted  primarily  in the Ohio  Valley and Upper
Midwest.

During 1997,  Ashland and Marathon Oil Company signed a letter of intent to
combine the petroleum refining and marketing and most transportation assets
of the two  companies.  Ashland would have a 38% ownership  interest in the
proposed joint venture. On October 30, 1997, Ashland and Marathon announced
that the two firms had resolved all material matters  concerning  valuation
and due diligence, and anticipate signing definitive agreements in December
1997.

Valvoline  is a marketer of  automotive  and  industrial  oils,  automotive
chemicals,  antifreeze,  filters, rust preventives and coolants, with sales
in more than 140 countries. In addition,  Valvoline is engaged in the "fast
oil change" business through outlets  operating under the Valvoline Instant
Oil Change and Valvoline Rapid Oil Change names and provides  environmental
services for the collection of used oil, antifreeze and filters.

Chemical  businesses  are managed by Ashland  Chemical,  which  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,  and  markets  cumene,   aromatic  and  aliphatic  solvents,  and
propylene   manufactured   by   Ashland   Petroleum.   Marketing   of   the
petrochemicals  manufactured  by Ashland  Petroleum  will be transferred to
Refining and Marketing in fiscal 1998.

The  APAC  group  of  companies,  which  are  located  in 13  southern  and
midwestern  states,  perform contract  construction  work including paving,
repair  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.  APAC  also
produces and sells construction materials,  such as asphaltic and ready-mix
concrete,  crushed  stone and other  aggregate  and,  in  certain  markets,
concrete   block   and   specialized   construction   materials,   such  as
architectural block.

Coal  operations  are  conducted by 54% owned,  publicly  traded Arch Coal,
Inc.,  which was  created on July 1, 1997,  by the merger of Ashland  Coal,
Inc. and Arch Mineral Corporation. Beginning in the September 1997 quarter,
Arch Coal was consolidated in Ashland's financial statements. Prior interim
quarters in 1997 were  restated to reflect Arch  Mineral on a  consolidated
basis for comparison purposes. Arch Mineral was previously accounted for on
the  equity  method.  Arch  Coal is the  largest  producer  of  bituminous,
low-sulfur coal in the eastern United States. Arch markets coal to electric
utilities and industrial customers throughout the United States, Europe and
Japan.  Coal is produced  from surface and deep mines  located in Illinois,
Kentucky, Virginia, West Virginia and Wyoming. Arch also markets coal mined
by independent producers.

On July 1, 1997,  Ashland  sold the  domestic  exploration  and  production
operations of Blazer Energy  Corporation.  Ashland has reached an agreement
in principle to sell its exploration and production  operations in Nigeria,
subject to the approval of the Nigerian  government  and other  conditions.
Accordingly, results from the Exploration segment are shown as discontinued
operations with prior years restated (see Note B).

Certain information with respect to continuing foreign operations follows.

<TABLE>
<CAPTION>

                                                                                               Income from continuing operations
                                                        Total assets                                         before income taxes
                                             ------------------------             -----------------------------------------------
(In millions)                                1997               1996               1997                 1996                1995
---------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>               <C>                 <C>                  <C>                  <C>
Foreign operations
      Refining and Marketing                 $ 63              $  70               $  2                 $  3                 $ 4
      Valvoline                               103                127                 (7)(1)                4                   3
      Chemical                                363                327                 26(1)                41                  42
---------------------------------------------------------------------------------------------------------------------------------
                                             $529              $ 524                $21                 $ 48                 $49
=================================================================================================================================

</TABLE>

(1)   Includes  charges of $10  million for  Valvoline  and $16 million for
      Chemical  to  write  down  goodwill   related  to  certain   European
      operations. 

<PAGE>

NOTE D - UNCONSOLIDATED AFFILIATES

Affiliated  companies  accounted for on the equity method  include LOOP LLC
and LOCAP INC. (18.6% and 21.4% owned corporate joint ventures  operating a
deepwater  offshore  port and related  pipeline  facilities  in the Gulf of
Mexico)  and  various  other   companies.   Prior  to  1997,  Arch  Mineral
Corporation was 50% owned and accounted for on the equity method (see Notes
A and C). Summarized financial information reported by these affiliates and
a summary of the  amounts  recorded  in  Ashland's  consolidated  financial
statements  follow.  At September  30, 1997,  Ashland's  retained  earnings
include  $55  million  of   undistributed   earnings  from   unconsolidated
affiliates accounted for on the equity method.
<TABLE>
<CAPTION>

                                              Arch Mineral              LOOP LLC and
(In millions)                                  Corporation                LOCAP INC.               Other                Total
==============================================================================================================================
<S>                                                 <C>                       <C>                  <C>                <C>
SEPTEMBER 30, 1997
Financial position
        Current assets                                                        $   30               $ 311
        Current liabilities                                                      (81)               (161)
                                                                         --------------------------------
        Working capital                                                          (51)                150
        Noncurrent assets                                                        586                 149
        Noncurrent liabilities                                                  (438)               (104)
                                                                         --------------------------------
        Stockholders' equity                                                  $   97               $ 195
                                                                         ================================
Results of operations
        Sales and operating revenues                                          $  123               $ 994
        Gross profit                                                              40                 238
        Net income                                                                27                  38
Amounts recorded by Ashland
        Investments and advances                                                  18                  68              $   86
        Equity income                                                              2                  13                  15
        Dividends received                                                         -                   9                   9
==============================================================================================================================
SEPTEMBER 30, 1996
Financial position
        Current assets                              $ 165                     $   28               $ 265
        Current liabilities                          (142)                       (82)               (151)
                                                 --------------------------------------------------------
        Working capital                                23                        (54)                114
        Noncurrent assets                             752                        613                 225
        Noncurrent liabilities                       (646)                      (489)               (107)
                                                 --------------------------------------------------------
        Stockholders' equity                        $ 129                      $  70               $ 232
                                                 ========================================================
Results of operations
        Sales and operating revenues                $ 727                      $ 117               $ 846
        Gross profit                                   98                         38                 214
        Net income                                     27                          8                  28
Amounts recorded by Ashland
        Investments and advances                       73                         13                  71              $ 157
        Equity income                                  13                          2                   9                 24
        Dividends received                              -                          -                   7                  7
==============================================================================================================================
SEPTEMBER 30, 1995
Results of operations
        Sales and operating revenues                $ 714                      $ 119               $ 775
        Gross profit                                   50                         36                 193
        Net income (loss)                              (8)(1)                      4                  29
Amounts recorded by Ashland
        Equity income (loss)                           (4)                         1                  10              $   7
        Dividends received                              3                          1                   8                 12
==============================================================================================================================

</TABLE>

(1)   Includes a charge of $12  million  resulting  from  asset  impairment
      write-downs  under FAS 121 and  provisions  for early  retirement and
      restructuring programs.
<PAGE>
<TABLE>
<CAPTION>

NOTE E - INCOME TAXES
A  summary  of  the  provision  for  income  taxes  related  to  continuing
operations follows.

(In millions)                                                                     1997                  1996                  1995
===================================================================================================================================
<S>                                                                               <C>                  <C>                 <C>
Current(1)
       Federal                                                                    $ 92                 $  60               $    52
       State                                                                         7                     7                    10
       Foreign                                                                      17                    17                    12
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                   116                    84                    74
Deferred                                                                             3                   (11)                  (71)
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                  $119                 $  73               $     3
===================================================================================================================================
</TABLE>

(1) Income tax  payments  amounted to $82 million in 1997,  $110 million in
1996 and $54 million in 1995.

Deferred income taxes are provided for significant income and expense items
recognized  in different  years for tax and financial  reporting  purposes.
Temporary  differences  which give rise to significant  deferred tax assets
(liabilities)  follow.  These  amounts are  recorded  in various  asset and
liability accounts on Ashland's consolidated balance sheets.
<TABLE>
<CAPTION>

(In millions)                                                                                           1997                  1996
===================================================================================================================================
<S>                                                                                                     <C>                 <C>   
Employee benefit obligations                                                                            $365                $  251
Environmental, insurance and litigation reserves                                                         148                   118
Alternative minimum tax credit carryforwards                                                              76(1)                 77
Uncollectible accounts receivable                                                                         18                    19
Compensated absences                                                                                      16                    16
Other items                                                                                               89                    58
-----------------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets                                                                                712                   539
-----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment                                                                           (523)                 (405)
Coal supply agreements                                                                                   (38)                   (9)
Undistributed equity income                                                                              (19)                  (18)
Prepaid royalties                                                                                          2                   (18)
-----------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities                                                                          (578)                 (450)
-----------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset                                                                                  $134               $    89
===================================================================================================================================
</TABLE>

(1)  Alternative  minimum tax credit  carryforwards  at September 30, 1997,
relate entirely to Arch Coal, Inc.

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

(In millions)                                                                      1997                  1996                 1995
===================================================================================================================================
<S>                                                                                <C>                   <C>               <C>     
Income from continuing operations before income taxes and minority interest
       United States                                                               $314                  $169              $    (9)
       Foreign                                                                       21                    48                   49
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                   $335                  $217              $    40
===================================================================================================================================
Income taxes computed at U.S. statutory rates                                      $117                  $ 76              $    14
Increase (decrease) in amount computed resulting from
       Equity income                                                                 (4)                   (5)                   -
       State income taxes                                                             7                     4                    5
       Net impact of foreign results                                                 10                     -                   (4)
       Percentage depletion allowance                                               (22)                   (6)                 (14)
       Other items                                                                   11                     4                    2
-----------------------------------------------------------------------------------------------------------------------------------
Income taxes                                                                       $119                  $ 73              $     3
===================================================================================================================================
</TABLE>

The Internal Revenue Service (IRS) has examined Ashland's consolidated U.S.
income tax returns through 1993. As a result of its  examinations,  the IRS
has proposed adjustments,  certain of which are being contested by Ashland.
Ashland  believes  it has  adequately  provided  for any  income  taxes and
related interest which may ultimately be paid on contested issues. 

<PAGE>
<TABLE>
<CAPTION>

NOTE F - LONG-TERM DEBT
(In millions)                                                                                    1997                     1996
================================================================================================================================
<S>                                                                                           <C>                      <C>    
Senior debt of Ashland
     Medium-term notes, due 1998-2025, interest at an average rate
         of 8.3% at September 30, 1997 (5.8% to 10.4%)                                        $   936                  $   909
     8.80% debentures, due 2012                                                                   250                      250
     11.125% sinking fund debentures, due 2017                                                      -                      200
     Pollution control and industrial revenue bonds, due
         1998-2022, interest at an average rate of 6.4%
         at September 30, 1997 (3.5% to 7.4%)                                                     217                      227
     Other                                                                                          2                        3
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                1,405                    1,589
6.75% convertible subordinated debentures, due 2014,
     convertible into common stock at $51.34 per share                                              -                      124
Debt of Arch Coal, Inc. not guaranteed by Ashland
     9.78% senior notes, due 1997-2000                                                              -                      101
     9.66% senior notes, due 2001-2006                                                              -                       54
     7.79% senior notes, due 1998-2003                                                             43                        -
     Revolving credit agreement, due 2002, variable interest rate
         based on LIBOR, interest rate of 5.9% at September 30, 1997                              240                        -
     Other                                                                                          9                        2
-------------------------------------------------------------------------------------------------------------------------------
                                                                                                1,697                    1,870
Current portion of long-term debt                                                                 (58)                     (86)
-------------------------------------------------------------------------------------------------------------------------------
                                                                                               $1,639                   $1,784
================================================================================================================================

</TABLE>

Aggregate maturities of long-term debt are $58 million in 1998, $48 million
in 1999, $41 million in 2000, $79 million in 2001 and $328 million in 2002.
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  bondholders'  option,  but
generally  not before  October  1, 1998.  

Ashland has a revolving credit agreement which expires on February 9, 2000,
providing for up to $320 million in  borrowings,  under which no borrowings
were  outstanding  at  September  30,  1997.  In  addition,  Arch  Coal has
revolving credit agreements which expire on June 30, 2002, providing for up
to  $500  million  in  borrowings,  of  which  $240  million  was in use at
September 30, 1997.

Certain debt agreements  contain  covenants  restricting  dividends,  share
repurchases  and other  distributions  with  respect to  Ashland's  capital
stock, as well as covenants limiting new borrowings. At September 30, 1997,
distributions with respect to Ashland's capital stock were restricted to $1
billion and additional debt was limited to $2.1 billion.

Interest  payments on all  indebtedness  amounted to $191  million in 1997,
$175  million in 1996,  and $163  million  in 1995.  The  weighted  average
interest rate on short-term  borrowings  outstanding  was 6.7% at September
30, 1997, and 5.9% at September 30, 1996.

EXTRAORDINARY LOSS 

On June 3, 1997, Ashland called for redemption all of 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.

<PAGE>

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, 1997,  and 1996.  

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, 1997, Ashland had unleveraged swap agreements with a
notional  principal  amount of $370 million.  These agreements were used to
convert fixed rates on certain debt,  including  the 8.80%  debentures  and
various  medium-term  notes,  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.

At  September  30, 1997,  Ashland was  receiving a  weighted-average  fixed
interest rate of 6.0% and paying a weighted-average  variable interest rate
of 5.9%, calculated on the notional amount. Interest expense was reduced by
$2 million in 1997 and 1996 and an  insignificant  amount in 1995 resulting
from settlements under these agreements. Under its current swap agreements,
Ashland's  annual interest  expense in 1998 will change by about $4 million
for each 1% change in LIBOR.  The terms  remaining on Ashland's swaps range
from 4 to 80 months, with a weighted-average remaining life of 27 months.

The  carrying  amounts and fair values of Ashland's  significant  financial
instruments,  including  interest rate swaps,  at September  30, 1997,  and
1996,  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  difference  between  estimated  future  variable-rate  payments and
future fixed-rate receipts.

<TABLE>
<CAPTION>
                                                                        1997                                  1996
                                                       ---------------------            --------------------------
                                                         Carrying       Fair            Carrying              Fair
(In millions)                                              amount      value              amount             value
===================================================================================================================
<S>                                                       <C>        <C>                <C>               <C>     
Assets
        Cash and cash equivalents                         $   268    $   268            $     77          $     77
        Investments of captive insurance companies            189        189                 178               178
        Interest rate swaps                                     -          1
Liabilities
        Notes payable to financial institutions                35         35                 117               117
        Long-term debt (including current portion)          1,697      1,864               1,870             2,024
        Interest rate swaps                                                                    -                 4
===================================================================================================================
</TABLE>

NOTE H - ACQUISITIONS AND DIVESTITURES

ACQUISITIONS

In February 1995, Ashland purchased all of Ashland Coal's Class B Preferred
Stock for $110  million.  The  purchase  increased  Ashland's  ownership of
Ashland Coal from 39% to 54%. As a result of this transaction, Ashland Coal
was consolidated into Ashland's financial statements retroactive to October
1, 1994.  Ashland  continued  to reinvest  dividends  from  Ashland Coal in
additional shares of its common stock,  increasing its ownership in Ashland
Coal to 57% as of  July  1,  1997,  when  Ashland  Coal  and  Arch  Mineral
Corporation merged (see Notes A and C).

Also during  1995,  Ashland  acquired  the  unsaturated  polyester  resins,
polyester distribution and maleic anhydride businesses of Aristech Chemical
Corporation,  the Zerex antifreeze product line, the northern West Virginia
assets of two  natural  gas  producers,  and  various  other  chemical  and
construction  businesses.  These and several smaller acquisitions completed
in various  segments  during the last three years were generally  accounted
for as  purchases  and did  not  have a  significant  effect  on  Ashland's
consolidated financial statements.

DIVESTITURES

Ashland completed several small divestitures in various segments during the
last  three  years  which did not have a  significant  effect on  Ashland's
consolidated  financial statements.  In 1997, Ashland completed the sale of
the domestic  operations  of Blazer  Energy  Corporation.  See Note B for a
description of this  transaction  and its impact on Ashland's  consolidated
financial statements.

<PAGE>

NOTE I - LEASES AND OTHER COMMITMENTS

LEASES

Ashland  and  its  subsidiaries   are  lessees  in  noncancelable   leasing
agreements for office buildings, warehouses, pipelines,  transportation and
marine  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, 1997,
and rental expense under operating leases follow.
<TABLE>
<CAPTION>

(In millions)
-----------------------------------------------------------------------------------------------------------------------------------
Future minimum rental payments                   Rental expense                 1997                      1996                1995
==========================================       ==================================================================================
<S>                                  <C>         <C>                            <C>                       <C>                 <C>
1998                                 $  84
1999                                    74       Minimum rentals
2000                                    66         (including rentals under
2001                                    52         short-term leases)           $166                      $146                $129
2002                                    36        Contingent rentals              13                        14                  11
Later years                            174        Sublease rental income         (13)                      (16)                (18)
------------------------------------------       ----------------------------------------------------------------------------------
                                      $486                                      $166                      $144                $122
===================================================================================================================================
</TABLE>

In addition, Arch Coal has entered into various noncancelable royalty lease
agreements  under which  future  minimum  payments  are  approximately  $31
million annually through 2002 and $253 million in the aggregate thereafter.

OTHER COMMITMENTS

Under  agreements  with LOOP and LOCAP (see Note D),  Ashland is obligated,
based  upon its  equity  ownership,  to provide a portion of the total debt
service  and  defined  operating  and  administrative  costs of these joint
ventures.  This annual obligation is reduced by transportation charges paid
by Ashland  and by a pro rata  portion of  transportation  charges  paid by
third  parties who are not equity  participants.  If, after each  obligor's
requirements  have been  satisfied,  the joint  ventures are unable to meet
cash  requirements,  Ashland is  obligated to advance its pro rata share of
the  deficiency.  All funds  provided to these joint  ventures  are used as
advances  against  future  transportation  charges.  At September 30, 1997,
substantially  all  advances  made to LOOP and  LOCAP by  Ashland  had been
applied against  transportation  charges.  Transportation  charges incurred
amounted  to $16  million in 1997,  $16  million in 1996 and $21 million in
1995. At September 30, 1997,  Ashland's  contingent liability for its share
of the  indebtedness of LOOP and LOCAP secured by throughput and deficiency
agreements amounted to approximately $83 million.

Arch  Coal owns  17.5% of a joint  venture  operating  a  coal-loading  and
storage  facility at Newport News, Va. Venture partners are required to pay
their share of the  venture's  costs in relation  to their  ownership  (for
fixed  operating  costs and debt  service) or facility  usage (for variable
operating   costs).   Arch  Coal's  share  of  such  payments  amounted  to
approximately $4 million  annually in each of the last three years.  Future
payments  for fixed  operating  costs and debt  service  are  estimated  to
approximate  $3  million  annually  through  2015 and $26  million in 2016.
Additionally, Ashland is contingently liable for a guarantee relating to an
office  building  partially  occupied by Arch Coal.  At September 30, 1997,
such obligation has a present value of approximately $6 million.

NOTE J - CAPITAL STOCK

In March 1997,  Ashland  called for  redemption  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 can be  redeemed at any time prior to
becoming exercisable.

At September 30, 1997,  500,000  shares of cumulative  preferred  stock are
reserved for  potential  issuance  under the  Shareholder  Rights Plan.  At
September 30, 1997, 5 million common shares are reserved for issuance under
outstanding stock options.

<PAGE>

NOTE K - 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.

Ashland  accounts for its stock  incentive plans in accordance with APB 25,
as  permitted  by FAS  123.  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,  the impact on  Ashland's  net income and  earnings per share for
1997 and 1996  would not have been  material.  A summary  of stock  options
follows.
<TABLE>
<CAPTION>

                                                                1997                          1996                          1995
                                          --------------------------     -------------------------      -------------------------
                                                    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(1)          5,247             $33.97      5,222             $32.72       4,697            $32.50
Granted                                       814              53.22        823              38.92         839             33.86
Exercised                                  (1,271)             32.94       (747)             30.45        (164)            27.47
Canceled                                      (72)             37.29        (51)             37.35        (150)            38.16
---------------------------------------------------------------------------------------------------------------------------------
Outstanding - end of year(1)                4,718             $37.52      5,247             $33.97       5,222            $32.72
=================================================================================================================================
Exercisable - end of year                   3,373             $33.78      3,820             $32.81       3,777            $32.17
=================================================================================================================================
</TABLE>

(1)   Shares of common  stock  available  for  future  grants of options or
      awards  amounted to 5,778,000 at September 30, 1997, and 3,403,000 at
      September  30,  1996.  Exercise  prices for  options  outstanding  at
      September  30,  1997,  ranged  from  $23.88 to $53.38 per share.  The
      weighted  average  remaining  contractual  life of the  options was 7
      years.

NOTE L - 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 operating  facilities,  previously owned or operated  facilities,
and Superfund or other waste sites.  Consistent with its accounting  policy
for environmental costs,  Ashland's reserves for environmental  assessments
and remediation efforts amounted to $150 million at September 30, 1997, and
$173 million at September 30, 1996.  Such amounts  reflect  Ashland's  most
likely  estimates  of the costs  which will be  incurred  over an  extended
period to remediate identified environmental conditions for which costs are
reasonably estimable.

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.

During 1997,  the U. S.  Environmental  Protection  Agency (EPA)  completed
comprehensive inspections of compliance with federal environmental laws and
regulations at Ashland's three  refineries.  Ashland continues to cooperate
and hold discussions with the EPA concerning these inspections,  as well as
what  additional  remediation  actions  may be  required  or  costs  may be
incurred.   

In addition to  environmental  matters,  Ashland and its  subsidiaries  are
parties to numerous claims and lawsuits,  some of which are 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 these matters,
after taking into consideration its insurance coverages and amounts already
provided  for,  will have a  material  adverse  effect on its  consolidated
financial position.

<PAGE>

NOTE M - EMPLOYEE BENEFIT PLANS

PENSION PLANS

Ashland and its  subsidiaries  sponsor  defined  benefit pension plans that
cover  substantially  all employees,  other than union employees covered by
multiemployer  pension  plans  under  collective   bargaining   agreements.
Benefits under Ashland's  plans generally are based on employees'  years of
service and compensation during the years immediately preceding retirement.
For certain plans, such benefits are expected to come in part from one-half
of employees'  leveraged  employee stock  ownership plan (LESOP)  accounts.
Ashland determines the level of contributions to pension plans annually and
contributes  amounts  within  allowable  limitations  imposed  by  Internal
Revenue Service regulations.  The following tables detail the funded status
of the plans and the  components  of pension  expense.  A discount  rate of
7.25%  and  an  assumed  rate  of  salary  increases  of 5%  were  used  in
determining the actuarial present value of projected benefit obligations at
September 30, 1997 (8% and 5% at September 30, 1996).

<TABLE>
<CAPTION>
                                                                                       1997                                   1996
                                                        -----------------------------------      ---------------------------------
                                                              Plans with         Plans with            Plans with       Plans with
                                                        assets in excess      ABO in excess      assets in excess    ABO in excess
(In millions)                                                     of ABO          of assets                of ABO        of assets
==================================================================================================================================
<S>                                                                 <C>                <C>                  <C>             <C>  
Plan assets at fair value (primarily listed
        stocks and bonds)                                           $433               $ 69                 $360            $   -
----------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligations (ABO)
        Vested                                                       317                 99                  284               29
        Nonvested                                                     45                 49                   35               36
----------------------------------------------------------------------------------------------------------------------------------
                                                                     362                148                  319               65
----------------------------------------------------------------------------------------------------------------------------------
Plan assets less than (in excess of) ABO                             (71)                79(1)               (41)              65(1)
Provision for future salary increases                                173                 34                  149               17
Deferred pension costs                                                (5)               (10)                 (10)             (15)
----------------------------------------------------------------------------------------------------------------------------------
Net accrued pension costs(2)                                        $ 97               $103                 $ 98            $  67
==================================================================================================================================
Components of deferred pension costs
        Unrecognized transition gain (loss)                         $  6               $ (2)                $ 10            $  (4)
        Unrecognized net loss                                          -                (33)                  (9)             (34)
        Unrecognized prior service costs                             (11)                (2)                 (11)              (1)
        Recognition of minimum liability                               -                 27                    -               24
----------------------------------------------------------------------------------------------------------------------------------
                                                                    $ (5)              $(10)                $(10)           $ (15)
==================================================================================================================================
(In millions)                                                                          1997                 1996             1995
==================================================================================================================================
Components of pension expense
        Service cost                                                                   $ 39                 $ 32            $  23
        Interest cost                                                                    48                   40               34
        Actual investment gain on plan assets                                           (86)                 (34)             (51)
        Deferred investment gain(3)                                                      50                    6               30
        Other amortization and deferral                                                   2                    3                1
        Enhanced retirement program pension cost                                          -                    -               15
----------------------------------------------------------------------------------------------------------------------------------
                                                                                       $ 53                 $ 47            $  52
==================================================================================================================================

</TABLE>

(1)   Includes  unfunded ABO of $77 million in 1997 and $65 million in 1996
      for nonqualified defined benefit plans.
(2)   Amounts  are  recorded  in various  asset and  liability  accounts on
      Ashland's consolidated balance sheets.
(3)   The expected long-term rate of return on plan assets was 9%.

OTHER POSTRETIREMENT BENEFIT PLANS

Ashland and its  subsidiaries  sponsor several  unfunded  benefit plans, as
well as participate  in  multiemployer  plans  sponsored by the United Mine
Workers of America  (UMWA),  which provide  health care and life  insurance
benefits  for  eligible  employees  who retire from  active  service or are
disabled.  The health care plans are contributory with the exception of the
UMWA  plan.  Retiree  contributions  to  Ashland's  health  care  plans are
adjusted  periodically  and contain  other  cost-sharing  features  such as
deductibles   and   coinsurance.   Life   insurance   plans  are  generally
noncontributory.  Ashland currently funds the costs of benefits as they are
paid.

Effective October 1, 1992, Ashland amended nearly all of its retiree health
care  plans to place a cap on the  company's  contributions  and to adopt a
cost-sharing  method based upon years of service.  These amendments reduced
the accumulated postretirement benefit obligation (APBO) for retiree health
care plans at that date by $197 million, which is being amortized to income
over  approximately 12 years.  The cap limits Ashland's  contributions to a
specific base year per capita health care cost, increasing thereafter by up
to 4.5% per year.  For those  plans not  capped,  various  health care cost
trend rates are  assumed.  Increasing  the  assumed  health care cost trend
rates by one  percentage  point in each  year for  non-capped  plans  would
increase  the APBO as of  September  30,  1997,  by $49 million and the net
periodic postretirement benefit cost for 1997 by $4 million.

<PAGE>

The following  tables detail the status of the plans and the  components of
postretirement  benefit  expense.  The APBO was determined using a discount
rate of 7.25% at September 30, 1997, and 8% at September 30, 1996.

<TABLE>
<CAPTION>
                                                                                  1997                                    1996
                                                   -----------------------------------       ---------------------------------
                                                          Health care                             Health care
                                                   --------------------                      -------------------
                                                   Ashland         UMWA           Life       Ashland         UMWA          Life
(In millions)                                        plans         plan      insurance         plans         plan     insurance
================================================================================================================================
<S>                                                   <C>          <C>             <C>          <C>           <C>           <C>
Accumulated postretirement benefit
             obligations (APBO)
      Retired or disabled employees                   $132         $124            $26          $113          $17           $25
      Fully eligible active plan participants           44           74              5            29            4             5
      Other active plan participants                   141           59              7           107           20             5
--------------------------------------------------------------------------------------------------------------------------------
                                                       317          257             38           249           41            35
Unrecognized net gain (loss)                           (21)           1             (4)            4           24            (2)
Unrecognized plan amendment credit                      96            -              4           110            2             5
--------------------------------------------------------------------------------------------------------------------------------
Accrued other postretirement benefit costs            $392         $258            $38          $363          $67           $38
================================================================================================================================
                                                                   1997                         1996                       1995
                                                    -------------------          --------------------      ---------------------
                                                    Health         Life          Health         Life       Health          Life
(In millions)                                         care    insurance            care    insurance         care     Insurance
================================================================================================================================
Components of other postretirement benefit expense
      Service cost                                    $ 14         $  1            $12          $  1          $12           $ 1
      Interest cost                                     37            3             21             3           20             2
      Amortization and deferral
           (principally plan amendment credit)         (21)           -            (16)           (1)         (15)           (1)
--------------------------------------------------------------------------------------------------------------------------------
                                                      $ 30         $  4            $17          $  3          $17           $ 2
================================================================================================================================

</TABLE>

OTHER PLANS

Certain union  employees are covered under  multiemployer  defined  benefit
pension plans  administered  by unions.  Amounts charged to pension expense
and contributed to the plans were $5 million in 1997 and $2 million in both
1996 and 1995.  

Ashland  and its  subsidiaries  sponsor  various  savings  plans to  assist
eligible employees in providing for retirement or other future needs. Under
the principal  plans,  Ashland  contributes  up to 4.2% of a  participating
employee's  earnings (1.2% for LESOP  participants prior to March 31, 1996)
and Arch Coal contributes up to 6%. Company  contributions  amounted to $27
million in 1997, $15 million in 1996 and $9 million in 1995.

Note N - Quarterly Financial Information (Unaudited)

The following table presents quarterly financial  information and per share
data relative to Ashland's common stock.  Sales and operating  revenues and
operating income have been restated  effective  October 1, 1996, to reflect
the merger of Ashland Coal and Arch Mineral (see Notes A and C) and for all
prior periods to present Blazer Energy as discontinued operations (see Note
B).

<TABLE>
<CAPTION>


Quarters ended                                  December 31              March 31                  June 30            September 30
------------------------------------------------------------  --------------------   ----------------------  ----------------------
(In millions except per share data)        1996        1995(1)    1997       1996         1997        1996          1997(2)   1996
===================================================================================================================================
<S>                                    <C>           <C>        <C>        <C>          <C>         <C>           <C>       <C>   
Sales and operating revenues           $  3,545      $3,024     $3,346     $3,006       $3,643      $3,429        $3,665    $3,433
Operating income                             89          96         65         23          225         146           111        98
Income (loss) from continuing 
    operations                         $     24     $    32    $     2    $   (13)     $   119     $    76      $     48    $   41
Income from discontinued operations          12          55          5         11            9           4            71         5
Extraordinary loss                            -           -          -          -           (2)          -            (8)        -
                                       --------------------------------------------------------------------------------------------
Net income (loss)                      $     36     $    87    $     7    $    (2)     $   126     $    80       $   111    $   46
Primary earnings (loss) per share
     Continuing operations             $    .30     $   .43    $  (.05)   $  (.27)     $  1.57     $  1.10       $   .62    $  .55
     Discontinued operations                .17         .86        .08        .16          .11         .06           .94       .09
     Extraordinary loss                       -           -          -          -         (.02)          -          (.10)        -
                                       --------------------------------------------------------------------------------------------
     Net income (loss)                 $    .47     $  1.29    $   .03    $  (.11)     $  1.66     $  1.16       $  1.46    $  .64
Common dividends per share                 .275        .275       .275       .275         .275        .275          .275      .275
Market price per common share
     High                                48-7/8      36-1/2     45-1/8     39-1/2       48-1/4      44-1/8      54-15/16    40-1/4
     Low                                 39-3/8      30-3/8     39-1/4     34-1/4       40-1/8      38-1/8        46-1/2        35
===================================================================================================================================
</TABLE>

(1)   A gain  resulting  from the  settlement  of claims in the  bankruptcy
      reorganization  of Columbia Gas Transmission and Columbia Gas Systems
      increased income from discontinued operations by $48 million, or $.74
      per share, in the quarter ended December 31, 1995.
(2)   In the quarter ended September 30, 1997, unusual items reduced income
      from  continuing  operations by $28 million,  or $.38 per 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 $.94 per share (see Note
      B).

<PAGE>
<TABLE>
<CAPTION>

ASHLAND INC. AND SUBSIDIARIES
FIVE-YEAR SELECTED FINANCIAL INFORMATION

Years Ended September 30

(In millions except per share data)                              1997            1996          1995          1994           1993
=================================================================================================================================
<S>                                                           <C>             <C>           <C>           <C>           <C>     
SUMMARY OF OPERATIONS
Revenues
     Sales and operating revenues (including excise taxes)    $14,200         $12,892       $11,972       $10,140       $  9,958
     Other                                                        119              76            66            39             53
Costs and expenses
     Cost of sales and operating expenses                     (10,860)         (9,975)       (9,130)       (7,614)        (7,790)
     Excise taxes on products and merchandise                    (992)           (985)         (988)         (877)          (645)
     Selling, general and administrative expenses              (1,405)         (1,275)       (1,269)       (1,074)        (1,044)
     Depreciation, depletion and amortization                    (572)           (371)         (447)         (275)          (271)
---------------------------------------------------------------------------------------------------------------------------------
Operating income                                                  490             362           204           339            261
Other income (expense)
     Interest expense (net of interest income)                   (170)           (169)         (171)         (116)          (122)
     Equity income                                                 15              24             7            22             26
---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes
     and minority interest                                        335             217            40           245            165
Income taxes                                                     (119)            (73)           (3)          (82)           (58)
Minority interest in earnings of subsidiaries                     (24)             (8)          (23)            -              -
---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations                                 192             136            14           163            107
Income from discontinued operations                                25              75            10            34             35
Gain on sale of discontinued operations                            71               -             -             -              -
---------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss                                  288             211            24           197            142
Extraordinary loss on early retirement of debt                     (9)              -             -             -              -
---------------------------------------------------------------------------------------------------------------------------------
Net income                                                   $    279        $    211      $     24      $    197       $    142
=================================================================================================================================
BALANCE SHEET INFORMATION
Working capital
     Current assets                                          $  2,995        $  2,665      $  2,535      $  2,109       $  1,914
     Current liabilities                                        2,261           2,198         2,048         1,641          1,574
---------------------------------------------------------------------------------------------------------------------------------
                                                             $    734        $    467      $    487      $    468       $    340
---------------------------------------------------------------------------------------------------------------------------------
Total assets                                                 $  7,777        $  7,089      $  6,853      $  5,662       $  5,442
---------------------------------------------------------------------------------------------------------------------------------
Capital employed
     Debt due within one year                                $     93        $    203      $    272      $    133       $    159
     Long-term debt (less current portion)                      1,639           1,784         1,828         1,391          1,399
     Minority interest in consolidated subsidiaries               273             174           179             -              -
     Convertible preferred stock                                    -             293           293           293            293
     Common stockholders' equity                                2,024           1,521         1,362         1,302          1,162
---------------------------------------------------------------------------------------------------------------------------------
                                                             $  4,029        $  3,975      $  3,934      $  3,119       $  3,013
=================================================================================================================================
CASH FLOW INFORMATION
Cash flows from continuing operations                        $    852        $    651      $    442      $    345       $    200
Additions to property, plant and equipment                        431             430           399           335            390
Dividends                                                          97              93            92            79             66
=================================================================================================================================
Common stock information
Primary earnings per share
     Income (loss) from continuing operations               $   2.57         $   1.81       $  (.08)     $   2.37       $   1.66
     Net income                                                 3.80             2.97           .08          2.94           2.26
Dividends per share                                             1.10             1.10          1.10          1.00           1.00
=================================================================================================================================
</TABLE>

<PAGE>
<TABLE>
<CAPTION>

ASHLAND INC. AND SUBSIDIARIES
FIVE-YEAR INFORMATION BY INDUSTRY SEGMENT
YEARS ENDED SEPTEMBER 30

(In millions)                              1997                    1996                1995                 1994             1993
===================================================================================================================================
<S>                                    <C>                     <C>                 <C>                  <C>                <C>   
SALES AND OPERATING REVENUES
Refining and Marketing(1)              $  6,719                $  6,485            $  5,891             $  5,428           $5,594
Valvoline                                 1,099                   1,199               1,113                1,001              938
Chemical                                  4,047                   3,695               3,551                2,885            2,586
APAC                                      1,257                   1,235               1,123                1,101            1,116
Coal(2)                                   1,367                     580                 610                    -                -
Intersegment sales(3)
        Refining and Marketing(1)          (263)                   (276)               (280)                (249)            (251)
        Other                               (26)                    (26)                (36)                 (26)             (25)
-----------------------------------------------------------------------------------------------------------------------------------
                                       $ 14,200                $ 12,892            $ 11,972             $ 10,140           $9,958
===================================================================================================================================
OPERATING INCOME
Refining and Marketing(1)              $    189(4)             $     89            $     (1)            $    172           $  121(5)
Valvoline                                    67(6)                   82                  (4)                  52               56
Chemical                                    144(6)                  169                 159                  125              108
APAC                                         82                      83                  75                   70               53
Coal(2)                                      68(7)                   36                  66                    -                -
General corporate expenses                  (60)                    (97)                (91)                 (80)(8)          (77)
-----------------------------------------------------------------------------------------------------------------------------------
                                       $    490(9)             $    362            $    204(10)         $    339           $  261
===================================================================================================================================
IDENTIFIABLE ASSETS
Refining and Marketing(1)              $  2,669                $  2,780            $  2,659             $  2,657           $2,604
Valvoline                                   549                     557                 603                  532              430
Chemical                                  1,558                   1,458               1,372                1,122              958
APAC                                        531                     489                 433                  404              440
Coal(2)                                   1,719                     899                 928                    -                -
Discontinued operations                      18                     326                 285                  221              265
Corporate(11)                               733                     580                 573                  726              745
-----------------------------------------------------------------------------------------------------------------------------------
                                       $  7,777                $  7,089            $  6,853             $  5,662           $5,442
===================================================================================================================================

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

(In millions)                                  1997                1996               1995                  1994             1993
===================================================================================================================================
<S>                                            <C>                 <C>                <C>                   <C>              <C> 
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
Refining and Marketing(1)                      $150                $187               $183                  $194             $255
Valvoline                                        29                  19                 25                    25               21
Chemical                                        101                  80                 76                    61               51
APAC                                             62                  62                 47                    45               43
Coal(2)                                          74                  58                 58                     -                -
Corporate                                        15                  24                 10                    10               20
----------------------------------------------------------------------------------------------------------------------------------
                                               $431                $430               $399                  $335             $390
===================================================================================================================================
DEPRECIATION, DEPLETION AND AMORTIZATION
Refining and Marketing(1)                      $160                $153               $234                  $161             $155
Valvoline                                        32(6)               23                 24                    19               18
Chemical                                         94(6)               67                 58                    43               42
APAC                                             49                  44                 42                    40               44
Coal(2)                                         223(12)              72                 72                     -                -
Corporate                                        14                  12                 17                    12               12
----------------------------------------------------------------------------------------------------------------------------------
                                               $572                $371               $447(13)              $275             $271
===================================================================================================================================

</TABLE>

(1)   Segments  formerly  identified  as Petroleum  and  SuperAmerica  were
      combined  effective  October 1, 1996.  Prior year  amounts  have been
      restated.
(2)   Ashland Coal and Arch Mineral  merged  effective  July 1, 1997,  into
      Arch Coal, Inc. Prior interim periods of fiscal 1997 were restated to
      consolidate  Ashland's  interest in Arch Mineral for the entire year.
      Prior  years were not  restated,  reflecting  Ashland's  interest  in
      Ashland  Coal on a  consolidated  basis  (since  1995) and  Ashland's
      interest in Arch Mineral on the equity method of accounting. Prior to
      1995 Ashland Coal was accounted for on the equity method.  See Note C
      to the financial statements.
(3)   Intersegment  sales are  accounted  for at prices  which  approximate
      market value.
(4)   Includes  a  gain  of  $11  million  resulting  from  LIFO  inventory
      liquidations.
(5)   Includes  a gain  of $15  million  on the  sale  of  TPT,  an  inland
      waterways barge operation.
(6)   Includes  charges of $10  million for  Valvoline  and $16 million for
      Chemical  to  write  down  goodwill   related  to  certain   European
      operations.
(7)   Includes  charges of $39 million for duplicate  facility  write-offs,
      severance and other costs  resulting  from the merger of Ashland Coal
      and Arch Mineral into Arch Coal, Inc.
(8)   Includes a net gain of $11 million related to litigation matters.
(9)   Effective  October 1, 1996, the methodology for allocating  corporate
      general and  administrative  expenses  was  changed.  For purposes of
      comparison to prior year results,  segment  operating  income for the
      year ended September 30, 1997,  excluding the increased  allocations,
      amounted to:  Refining and Marketing - $208 million;  Valvoline - $72
      million;  Chemical - $155  million;  APAC - $86  million;  Coal - $68
      million; and general corporate expenses - $(101) million.
(10)  Includes charges for unusual items totaling $116 million,  consisting
      of asset  impairment  write-downs  of $79  million  under FAS 121 and
      provisions  of $37 million  for early  retirement  and  restructuring
      programs. The combined effect of these items reduced operating income
      for each of the segments as follows:  Refining  and  Marketing - $102
      million;  Valvoline - $5 million;  Chemical - $5 million; and general
      corporate expenses - $4 million.
(11)  Includes  principally  cash,  cash  equivalents,  investments  in and
      advances to  unconsolidated  affiliates  and  investments  of captive
      insurance companies.
(12)  Includes  charges of $25 million for  duplicate  facility  write-offs
      resulting  from the merger of Ashland Coal and Arch Mineral into Arch
      Coal, Inc. 
(13)  Includes  charges of $79  million  for asset  impairment  write-downs
      which increased depreciation,  depletion and amortization for each of
      the  segments  as follows:  Refining  and  Marketing  - $68  million;
      Valvoline - $3 million;  Chemical - $4  million;  and  Corporate - $4
      million.