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


                                   FORM 10-K/A
                                 AMENDMENT NO. 1


            Annual Report Pursuant to Section 13 or 15(d) of the
                      Securities Exchange Act of 1934

                FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000

                       Commission file number 1-2918

                                ASHLAND INC.
                          (a Kentucky corporation)

                           I.R.S. No. 61-0122250
                        50 E. RiverCenter Boulevard
                               P. O. Box 391
                       Covington, Kentucky 41012-0391

                      Telephone Number: (859) 815-3333

              Securities Registered Pursuant to Section 12(b):

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

           Securities Registered Pursuant to Section 12(g): None

     Indicate  by check  mark  whether  the  Registrant  (1) has  filed all
reports  required  to be filed  by  Section  13 or 15(d) of the  Securities
Exchange  Act of 1934 during the  preceding  12 months (or for such shorter
period that the Registrant was required to file such reports),  and (2) has
been subject to such filing requirements for the past 90 days. Yes  [X] No
     Indicate by check mark if disclosure of delinquent  filers pursuant to
Item  405 of  Regulation  S-K is not  contained  herein,  and  will  not be
contained,  to the best of Registrant's  knowledge,  in definitive proxy or
information  statements  incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
     At October  31,  2000,  based on the New York Stock  Exchange  closing
price, the aggregate market value of voting stock held by non-affiliates of
the  Registrant  was  approximately  $2,268,150,178.  In  determining  this
amount,  the  Registrant  has  assumed  that its  directors  and  executive
officers are affiliates. Such assumption shall not be deemed conclusive for
any other purpose.
     At October 31,  2000,  there were  69,669,072  shares of  Registrant's
common stock outstanding.

                    Documents Incorporated by Reference

     Portions of Registrant's  Annual Report to Shareholders for the fiscal
year ended  September 30, 2000 are  incorporated by reference into Parts I,
II and IV.
     Portions of  Registrant's  definitive  Proxy Statement for its January
25, 2001 Annual Meeting of Shareholders  are incorporated by reference into
Part III.

===============================================================================
<PAGE>

                              EXPLANATORY NOTE



         This  amendment  to the Annual  Report on Form 10-K for the fiscal
year ended September 30, 2000 of Ashland Inc. ("Ashland") is being filed to
include the audited financial  statements of Marathon Ashland Petroleum LLC
("MAP")  for the  fiscal  year  ended  December  31,  2000 and the  audited
financial  statements of Arch Coal, Inc. ("Arch") for the fiscal year ended
December 31, 2000 as required by Rule 3-09 of Regulation S-X. Ashland has a
38% equity  interest in MAP and held a 58% equity interest in Arch prior to
the  spinoff  by  Ashland  of most of its Arch  Common  Stock to  Ashland's
shareholders in March 2000 and the subsequent  sale of Ashland's  remaining
shares of Arch  Common  Stock in February  2001.  In  accordance  with Rule
12b-15 under the Securities  Exchange Act of 1934, as amended,  the text of
the amended item is set forth in its entirety in the pages attached hereto.

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


<PAGE>

ITEM 14. EXHIBITS,  FINANCIAL  STATEMENT  SCHEDULES AND REPORTS ON FORM 8-K
     (A)  DOCUMENTS  FILED  AS PART OF THIS  REPORT
     (1) and (2)  Financial
     Statements and Financial Schedule
     The  consolidated  financial  statements  and  financial  schedule  of
Ashland presented or incorporated by reference in this report are listed in
the index on page 18.
     Audited  financial  statements  of  Marathon  Ashland  Petroleum  LLC.
Financial  statement  schedules are omitted because they are not applicable
as the  required  information  is  contained  in the  applicable  financial
statements or notes thereto.
     Audited financial statements and schedule of Arch Coal, Inc.
     (3) Exhibits
         3.1  -   Second Restated  Articles of  Incorporation of Ashland,
                  as  amended to January  30,  1998  (filed as Exhibit 3 to
                  Ashland's  Form 10-Q for the quarter  ended  December 31,
                  1997 and incorporated herein by reference).
         3.2  -   By-laws of  Ashland,  as amended  to January  26,  2000
                  (filed  as  Exhibit  3.2 to  Ashland's  Form 10-Q for the
                  quarter ended December 31, 1999 and  incorporated  herein
                  by reference).
         4.1  -   Ashland agrees to provide the SEC, upon request, copies
                  of   instruments   defining  the  rights  of  holders  of
                  long-term debt of Ashland and all of its subsidiaries for
                  which consolidated or unconsolidated financial statements
                  are required to be filed with the SEC.
         4.2  -   Indenture,  dated as of August 15, 1989, as amended and
                  restated  as of August  15,  1990,  between  Ashland  and
                  Citibank,  N.A.,  as Trustee  (filed as  Exhibit  4(a) to
                  Ashland's  Form 10-K for the fiscal year ended  September
                  30, 1991 and incorporated herein by reference).
         4.3  -   Rights  Agreement,  dated as of May 16,  1996,  between
                  Ashland Inc. and the Rights Agent,  together with Form of
                  Right  Certificate  (filed  as  Exhibits  4(a) and  4(c),
                  respectively, to Ashland's Form 8-A filed with the SEC on
                  May 16, 1996 and incorporated herein by reference).


     The following  Exhibits 10.1 through 10.16 are  compensatory  plans or
arrangements  or  management  contracts  required  to be filed as  exhibits
pursuant to Item 601(b)(10)(ii)(A) of Regulation S-K.


         10.1  -  Amended  Stock  Incentive  Plan for Key  Employees  of
                  Ashland Inc. and its Subsidiaries  (filed as Exhibit 10.1
                  to  Ashland's   Form  10-K  for  the  fiscal  year  ended
                  September 30, 1999 and incorporated herein by reference).
         10.2  -  Ashland   Inc.   Deferred   Compensation   Plan   for
                  Non-Employee   Directors   (filed  as  Exhibit   10.2  to
                  Ashland's  Form 10-K for the fiscal year ended  September
                  30, 1999 and incorporated herein by reference).
         10.3  -  Tenth  Amended and Restated  Ashland Inc.  Supplemental
                  Early  Retirement  Plan for Certain  Employees  (filed as
                  Exhibit 10.3 to  Ashland's  Form 10-K for the fiscal year
                  ended  September  30,  1999 and  incorporated  herein  by
                  reference).
         10.4  -  Ashland Inc. Incentive  Compensation  Program (filed as
                  Exhibit 10.6 to  Ashland's  Form 10-K for the fiscal year
                  ended  September  30,  1993 and  incorporated  herein  by
                  reference).
         10.5  -  Ashland Inc. Salary Continuation Plan (filed as Exhibit
                  10(c).11 to Ashland's Form 10-K for the fiscal year ended
                  September 30, 1988 and incorporated herein by reference).
         10.6  -  Form of  Ashland  Inc.  Executive  Employment  Contract
                  between  Ashland Inc. and certain  executive  officers of
                  Ashland (filed as Exhibit 10.6 to Ashland's Form 10-K for
                  the fiscal year ended September 30, 1999 and incorporated
                  herein by reference).
         10.7  -  Form of Indemnification  Agreement between Ashland Inc.
                  and each  member  of its  Board of  Directors  (filed  as
                  Exhibit  10(c).13 to  Ashland's  Form 10-K for the fiscal
                  year ended September 30, 1990 and incorporated  herein by
                  reference).
         10.8  -  Ashland Inc.  Nonqualified  Excess Benefit Pension Plan
                  (filed as Exhibit  10.11 to  Ashland's  Form 10-K for the
                  fiscal year ended  September  30,  1998 and  incorporated
                  herein by reference).
         10.9  -  Ashland Inc. Long-Term Incentive Plan.
         10.10 -  Ashland Inc. Directors' Charitable Award.
         10.11 -  Ashland Inc. 1993 Stock Incentive Plan.
         10.12 -  Ashland Inc. 1995 Performance Unit Plan.
         10.13 -  Ashland  Inc.  Incentive  Compensation  Plan  for  Key
                  Executives (filed as Exhibit 10.13 to Ashland's Form 10-K
                  for  the  fiscal  year  ended   September  30,  1999  and
                  incorporated herein by reference).
         10.14 -  Ashland Inc. Deferred Compensation Plan.
         10.15 -  Ashland Inc. 1997 Stock Incentive Plan.
         10.16 -  Ashland Inc.  Incentive  Plan (filed as Exhibit 10.1 to
                  Ashland's  Form 10-Q for the quarter  ended  December 31,
                  1999 and incorporated herein by reference).
         10.17 -  Amended  and  Restated   Limited   Liability   Company
                  Agreement of Marathon  Ashland  Petroleum LLC dated as of
                  December  31, 1998 (filed as Exhibit  10.17 to  Ashland's
                  Form 10-K for the fiscal  year ended  September  30, 1999
                  and incorporated herein by reference).
         10.18 -  Put/Call,  Registration Rights and Standstill Agreement
                  as amended  to  December  31,  1998  among  Marathon  Oil
                  Company,  USX  Corporation,  Ashland  Inc.  and  Marathon
                  Ashland  Petroleum  (filed as Exhibit  10.18 to Ashland's
                  Form 10-K for the fiscal  year ended  September  30, 1999
                  and incorporated herein by reference).
         11    -  Computation of Earnings Per Share (appearing on page 37
                  of Ashland's Annual Report to Shareholders,  incorporated
                  by reference herein,  for the fiscal year ended September
                  30, 2000).
         12    -  Computation  of Ratios of Earnings to Fixed Charges and
                  Earnings to Combined  Fixed Charges and  Preferred  Stock
                  Dividends.
         13    -  Portions of Ashland's  Annual  Report to  Shareholders,
                  incorporated  by  reference  herein,  for the fiscal year
                  ended September 30, 2000.
         21    -  List of subsidiaries.
         23.1  -  Consent of Ernst & Young LLP.
         23.2* -  Consent of PricewaterhouseCoopers LLP.
         23.3* -  Consent of Ernst & Young LLP.
         24    -  Power of Attorney,  including  resolutions of the Board
                  of Directors.
         27    -  Financial  Data  Schedule  for the  fiscal  year ended
                  September 30, 2000.

*Filed herewith.


     Upon written or oral  request,  a copy of the above  exhibits  will be
furnished at cost.
     (B) REPORTS ON FORM 8-K
         No reports on Form 8-K have been filed  during the last quarter of
the period covered by this report.



<PAGE>

                                 SIGNATURES



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



                                             ASHLAND INC.
                                        --------------------------
                                             (Registrant)




Date:    March 30, 2001                   /s/ David L. Hausrath
                                        ------------------------------------
                                        Name:  David L. Hausrath
                                        Title: Vice President and
                                                 General Counsel


<PAGE>



              MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES



                 AUDITED CONSOLIDATED FINANCIAL STATEMENTS

                             December 31, 2000




                                  CONTENTS

                                                                       Page

REPORT OF INDEPENDENT ACCOUNTANTS:                                       1

CONSOLIDATED FINANCIAL STATEMENTS:

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

     NOTE A     -  BUSINESS DESCRIPTION AND BASIS OF PRESENTATION ----   6
     NOTE B     -  SUMMARY OF PRINCIPAL ACCOUNTING POLICIES ----------   6
     NOTE C     -  NEW ACCOUNTING STANDARDS --------------------------   8
     NOTE D     -  RELATED PARTY TRANSACTIONS ------------------------   9
     NOTE E     -  OTHER ITEMS ---------------------------------------  10
     NOTE F     -  PENSIONS AND OTHER POSTRETIREMENT BENEFITS --------  10
     NOTE G     -  INCOME TAXES --------------------------------------  12
     NOTE H     -  INVENTORIES ---------------------------------------  13
     NOTE I     -  INVESTMENTS AND LONG-TERM RECEIVABLES -------------  13
     NOTE J     -  PROPERTY, PLANT AND EQUIPMENT ---------------------  14
     NOTE K     -  SHORT-TERM DEBT -----------------------------------  14
     NOTE L     -  LONG-TERM DEBT ------------------------------------  14
     NOTE M     -  SUPPLEMENTAL CASH FLOW INFORMATION ----------------  15
     NOTE N     -  LEASES --------------------------------------------  15
     NOTE O     -  DERIVATIVE INSTRUMENTS ----------------------------  16
     NOTE P     -  FAIR VALUE OF FINANCIAL INSTRUMENTS ---------------  17
     NOTE Q     -  CONTINGENCIES AND COMMITMENTS ---------------------  17

<PAGE>


                                               PricewaterhouseCoopers LLP
                                               600 Grant Street, Suite 5200
                                               Pittsburgh, PA  15219
                                               (412) 355-6000








                     Report of Independent Accountants



February 7, 2001

To the Board of Managers of
Marathon Ashland Petroleum LLC:

In our opinion, the accompanying consolidated balance sheet and the related
consolidated  statements  of  operations,  cash flows and members'  capital
present  fairly,  in all  material  respects,  the  financial  position  of
Marathon Ashland  Petroleum LLC and its subsidiaries  (MAP) at December 31,
2000 and 1999, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000 in conformity
with  accounting  principles  generally  accepted  in the United  States of
America.  These  financial  statements  are  the  responsibility  of  MAP's
management;  our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance  with  auditing  standards  generally  accepted in the United
States of  America,  which  require  that we plan and  perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material  misstatement.  An audit includes  examining,  on a test basis,
evidence   supporting   the  amounts  and   disclosures  in  the  financial
statements,  assessing  the  accounting  principles  used  and  significant
estimates  made  by  management,   and  evaluating  the  overall  financial
statement  presentation.  We believe  that our audits  provide a reasonable
basis for our opinion.


/s/ PricewaterhouseCoopers

PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania  15219

                                       1
<PAGE>

CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in Millions)

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                                                                         Year Ended December 31
                                                                          -----------------------------------------------------
                                                                               2000               1999                1998
                                                                          -------------       -------------       -------------
<S>                                                                       <C>                 <C>                 <C>
Revenues and other income:
       Revenues - Note E                                                  $     28,775        $     20,008        $     19,027
       Dividend and investee income                                                 24                  18                  13
       Net gains (losses) on disposal of assets                                     28                  (3)                  6
       Other income                                                                 28                  24                  20
                                                                          -------------       -------------       -------------

              Total revenues and other income                                   28,855              20,047              19,066
                                                                          -------------       -------------       -------------

Costs and expenses:
       Cost of revenues (excludes items shown below)                            22,366              14,675              13,568
       Selling, general and administrative expenses                                394                 369                 387
       Depreciation and amortization                                               316                 283                 275
       Taxes other than income taxes - Note E                                    4,474               4,098               3,929
       Inventory market valuation charges (credits) - Note H                        --                (552)                269
                                                                          -------------       -------------       -------------

              Total costs and expenses                                          27,550              18,873              18,428
                                                                          ------------        -------------       -------------

Income from operations:                                                          1,305               1,174                 638
Net interest and other financial income - Note E                                    12                   5                  17
                                                                          -------------       -------------       -------------

Income before income taxes:                                                      1,317               1,179                 655
Provision for income taxes - Note G                                                  7                   2                   1
                                                                          -------------       -------------       -------------

Net income                                                                $      1,310        $      1,177        $        654
                                                                          =============       =============       =============

               The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       2

<PAGE>


CONSOLIDATED BALANCE SHEET (Dollars in Millions)

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                                         December 31
                                                                                              ---------------------------------
                                                                                                  2000                1999
                                                                                              -------------       -------------
<S>                                                                                           <C>                 <C>
Assets:
       Current assets:
              Cash and cash equivalents                                                       $         58        $         38
              Receivables, less allowance for doubtful accounts of $3
                    and $3                                                                           1,415               1,132
              Inventories - Note H                                                                   1,824               1,820
              Related party receivables - Note D                                                        43                  39
              Other current assets                                                                      44                  20
                                                                                              -------------       -------------
                           Total current assets                                                      3,384               3,049

       Investments and long-term receivables - Note I                                                  113                 108
       Property, plant and equipment - net - Note J                                                  4,022               3,711
       Other noncurrent assets                                                                          72                  89
                                                                                              -------------       -------------

                           Total assets                                                       $      7,591        $      6,957
                                                                                              =============       =============

Liabilities:
       Current liabilities:
              Accounts payable                                                                $      2,180        $      1,890
              Accounts payable to related parties - Note D                                              66                  33
              Payroll and benefits payable                                                             159                  79
              Accrued taxes                                                                             38                  33
              Long-term debt due within one year - Note L                                               --                   7
                                                                                              -------------       -------------
                           Total current liabilities                                                 2,443               2,042

       Long-term debt - Note L                                                                           8                  15
       Deferred income taxes - Note G                                                                    4                   3
       Employee benefits - Note F                                                                      288                 258
       Deferred credits and other liabilities                                                            7                  26
                                                                                              -------------       -------------

                           Total liabilities                                                         2,750               2,344
                                                                                              -------------       -------------

Members' Capital (details on page 5)
       Members' contributed capital                                                                  4,244               4,218
       Retained earnings                                                                               601                 395
       Accumulated other comprehensive income (losses)                                                  (4)                 --
                                                                                              -------------       -------------
                           Total members' capital                                                    4,841               4,613
                                                                                              -------------       -------------

                           Total liabilities and members' capital                             $      7,591        $      6,957
                                                                                              =============       =============

                        The  accompanying  notes  are an  integral  part of these consolidated financial statements.
</TABLE>

                                       3
<PAGE>


CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Millions)

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                                         Year Ended December 31
                                                                          -----------------------------------------------------
                                                                               2000               1999                1998
                                                                          -------------       -------------       -------------
<S>                                                                       <C>                 <C>                 <C>
Increase (decrease) in cash and cash equivalents

Operating activities:
Net income                                                                $      1,310        $      1,177        $        654
Adjustments to reconcile to net cash provided from
       operating activities:
       Depreciation and amortization                                               316                 283                 275
       Inventory market valuation charges (credits)                                 --                (552)                269
       Pensions and other postretirement benefits                                   30                  44                  22
       Deferred income taxes                                                        --                  (1)                 (2)
       Net (gains) losses on disposal of assets                                    (28)                  3                  (6)
       Changes in:
              Current receivables                                                 (278)               (465)                194
              Inventories                                                           (5)                (41)                (19)
              Current accounts payable and accrued expenses                        378                 749                (126)
              Net receivables and payables with related parties                     31                  22                  28
       All other - net                                                             (38)                 38                 (69)
                                                                          -------------       -------------       -------------
              Net cash provided from operating activities                        1,716               1,257               1,220
                                                                          -------------       -------------       -------------

Investing activities:
Capital expenditures                                                              (637)               (597)               (400)
Disposal of assets                                                                  70                 162                  16
Loans for Section 1031 transactions  - principal loaned                            (46)                 --                  --
                                     - principal collected                          42                  --                  --
Property exchange trust    - deposits                                              (54)                 (4)                 --
                           - withdrawals                                            53                   2                  --
Investees -  investments                                                            (1)                 --                 (22)
          -  loans and advances                                                     (5)                 --                  --
          -  returns and repayments                                                 --                  --                   1
                                                                          -------------       -------------       -------------
       Net cash used in investing activities                                      (578)               (437)               (405)
                                                                          -------------       -------------       -------------

Financing activities:
Revolving credit facilities  - borrowings - Note D                                 931                 386                  --
                             - repayments - Note D                                (931)               (386)                 --
Debt   - additions                                                                  --                  --                   1
       - repayments                                                                (14)                 --                 (24)
Member distributions                                                            (1,104)             (1,054)               (555)
                                                                         --------------       -------------       -------------
       Net cash used in financing activities                                    (1,118)             (1,054)               (578)
                                                                         --------------       -------------       -------------

Net increase (decrease) in cash and cash equivalents                                20                (234)                237

Cash and cash equivalents at beginning of year                                      38                 272                  35
                                                                          -------------       -------------       -------------

Cash and cash equivalents at end of year                                  $         58        $         38        $         272
                                                                          =============       =============       =============


See Note M for supplemental cash flow information.






                        The  accompanying  notes  are an  integral  part of these consolidated financial statements.
</TABLE>

                                       4
<PAGE>


CONSOLIDATED STATEMENT OF MEMBERS' CAPITAL (Dollars in Millions)

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES


<TABLE>
<CAPTION>
                                                      Members' Capital                          Comprehensive Income
                                                         Year Ended                                  Year Ended
                                                         December 31                                 December 31
                                            ----------------------------------------   ----------------------------------------
                                                2000          1999          1998           2000          1999          1998
                                            -----------    -----------   -----------   -----------   -----------    -----------
<S>                                         <C>            <C>           <C>           <C>           <C>            <C>
Members' contributed capital:
     Balance at beginning of year           $    4,218     $    4,188    $    4,361
     Member contributions                           26             30            --
     Distribution to members                        --             --          (173)
                                            -----------    -----------   -----------
     Balance at end of year                      4,244          4,218         4,188
                                            -----------    -----------   -----------

Retained earnings:
     Balance at beginning of year                  395             --            --
     Net income                                  1,310          1,177           654    $     1,310   $     1,177    $      654
     Distributions to members                   (1,104)          (782)         (654)
                                            ------------   -----------   -----------
     Balance at end of year                        601            395            --
                                            -----------    -----------   -----------

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

         Total comprehensive income                                                    $     1,306   $     1,182    $      653
                                                                                       ============  ============   ===========

Total members' capital                      $    4,841     $    4,613    $    4,183
                                            ===========    ===========   ===========




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

</TABLE>
                                       5

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARATHON ASHLAND PETROLEUM LLC AND SUBSIDIARIES


NOTE A - BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

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

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

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

MAP is engaged in petroleum  supply,  refining,  marketing & transportation
operations  and  includes   Speedway   SuperAmerica  LLC,  a  wholly  owned
subsidiary,  which  operates  retail  outlets for  petroleum  products  and
merchandise.  In  addition,  MAP,  through  its  wholly  owned  subsidiary,
Marathon  Ashland  Pipe Line  LLC,  is  actively  engaged  in the  pipeline
transportation of crude oil and petroleum products.

During 2000,  MAP sold 159 Speedway  SuperAmerica  non-core  stores for $48
million. MAP recorded a pretax gain of $19 million related to these sales.

In 2000 and 1999, MAP recorded  capital  contributions  from Marathon of $2
million and $2 million,  respectively,  and from Ashland of $24 million and
$28  million,   respectively,   for  environmental  improvements.  The  LLC
Agreement stipulates that ownership interest in MAP will not be adjusted as
a result of such contributions.

In 1999, MAP sold Scurlock  Permian LLC, its crude oil gathering  business,
to Plains Marketing,  L.P. for $137 million. In 1999, MAP recorded a pretax
loss of $16 million related to the sale.

In 1999,  MAP finalized the  transaction  with  Ultramar  Diamond  Shamrock
("UDS") to purchase  178 UDS owned and  operated  convenience  stores and 5
product terminals.  In addition, MAP was assigned supply contracts with UDS
branded jobbers who supplied 242 branded jobber stations in Michigan.  This
transaction was accounted for under the purchase method of accounting.


NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

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

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


                                       6
<PAGE>


NOTES TO CONSOLIDATED FINNCIAL STATEMENTS - Continued


NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - Continued

Use  of  estimates  -  Generally  accepted  accounting  principles  require
management  to make  estimates  and  assumptions  that affect the  reported
amounts of assets and liabilities,  the disclosure of contingent assets and
liabilities  at year-end and the reported  amounts of revenues and expenses
during  the  year.   Significant   items  subject  to  such  estimates  and
assumptions  include the carrying  value of  long-lived  assets;  valuation
allowances for  receivables  and  inventories;  environmental  liabilities;
liabilities for potential tax deficiencies and potential  litigation claims
and settlements; and assets and obligations related to employee benefits.

Additionally,  certain  estimated  liabilities are recorded when management
commits  to a plan to close an  operating  facility  or to exit a  business
activity.  Actual  results could differ from the estimates and  assumptions
used.

Revenue  recognition - Revenues are recognized  generally when products are
shipped or services are provided to customers, the sales price is fixed and
determinable,  and collectibility is reasonably  assured.  Costs associated
with  revenues,  including  shipping and other  transportation  costs,  are
recorded in cost of revenues.  Matching  buy/sell  transactions  settled in
cash are recorded in both  revenues and cost of revenues as separate  sales
and purchase transactions, with no net effect on income.

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

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

Derivative instruments - MAP uses commodity-based derivative instruments to
manage its exposure to price risk. Management is authorized to use futures,
forwards,  swaps and options  related to the purchase or sale of crude oil,
refined  products and natural gas. While MAP's risk  management  activities
generally  reduce market risk exposure due to unfavorable  commodity  price
changes for raw material  purchases and products sold,  such activities can
also encompass strategies which assume price risk.

     Commodity-Based  Hedging  Transactions - For transactions that qualify
     for hedge  accounting,  the resulting gains or losses are deferred and
     subsequently  recognized in income from operations,  as a component of
     revenues or cost of  revenues,  in the same  period as the  underlying
     physical  transaction.  To qualify  for hedge  accounting,  derivative
     positions  cannot remain open if the underlying  physical  market risk
     has been removed.  If such derivative  positions remain in place, they
     would be  marked-to-market  and  accounted  for as  trading  and other
     activities.  Recorded  deferred  gains or losses are reflected  within
     other current and noncurrent  assets or accounts  payable and deferred
     credits and other liabilities, as appropriate.

     Commodity-Based  Trading and Other Activities - Derivative instruments
     used for trading and other  activities  are  marked-to-market  and the
     resulting  gains or losses are recognized in the current period within
     income  from  operations.  This  category  also  includes  the  use of
     derivative  instruments  that have no offsetting  underlying  physical
     market risk.

Long-lived   assets  -  Property,   plant  and  equipment  are  depreciated
principally by the straight-line  method.  MAP evaluates  impairment of its
assets on an  individual  asset  basis or by logical  groupings  of assets.
Assets  deemed  to be  impaired  are  written  down to  their  fair  value,
including any related goodwill,  using discounted future cash flows and, if
available, comparable market values.

When  long-lived  assets  depreciated  on an  individual  basis are sold or
otherwise  disposed of, any gains or losses are reflected in income.  Gains
on disposal of  long-lived  assets are  recognized  when  earned,  which is
generally at the time of closing.  If a loss on disposal is expected,  such
losses are recognized  when  long-lived  assets are  reclassified as assets
held for sale. Proceeds from disposal of long-lived assets depreciated on a
group basis are credited to accumulated  depreciation and amortization with
no immediate effect on income.

Major  maintenance  activities  -  MAP  incurs  planned  maintenance  costs
primarily  for  refinery  turnarounds.  Such costs are expensed in the same
annual period as incurred;  however,  estimated annual turnaround costs are
recognized in income throughout the year on a pro rata basis.

                                       7
<PAGE>


NOTES TO CONSOLIDATED FINNCIAL STATEMENTS - Continued


NOTE B - SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - Continued

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

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

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

Reclassifications  - Certain  reclassifications  of prior  years' data have
been made to conform to 2000  classifications.  These changes had no impact
on previously reported results of operations or members' capital.


NOTE C - NEW ACCOUNTING STANDARDS

In the  fourth  quarter  of 2000,  MAP  adopted  the  following  accounting
pronouncements  primarily  related  to the  classification  of items in the
statement of operations.  The adoption of these new  pronouncements  had no
net effect on the  financial  position  or results  of  operations  of MAP,
although  they  required   reclassifications  of  certain  amounts  in  the
statement of operations including all prior periods presented.

o    In December 1999, the Securities and Exchange  Commission (SEC) issued
     Staff Accounting Bulletin No. 101 (SAB 101),  "Revenue  Recognition in
     Financial    Statements,"    which    summarizes   the   SEC   staff's
     interpretations of generally accepted accounting principles related to
     revenue recognition and classification.

o    In 2000,  the Emerging  Issues Task Force of the Financial  Accounting
     Standards  Board (EITF) issued EITF  Consensus  No. 99-19,  "Reporting
     Revenue Gross as a Principal  versus Net as an Agent," which addresses
     whether  certain  cost items  should be  reported  as a  reduction  of
     revenue or as a component of cost of revenues,  and EITF Consensus No.
     00-10,  "Accounting  for Shipping and Handling  Fees and Costs," which
     addresses the  classification  of costs incurred for shipping goods to
     customers.

In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial   Accounting   Standards  No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities" (SFAS No. 133), which later was amended
by SFAS  Nos.  137 and  138.  This  Standard  requires  recognition  of all
derivatives as either assets or liabilities at fair value.  Changes in fair
value  will be  reflected  in either  current  period  net  income or other
comprehensive  income,  depending  on the  designation  of  the  derivative
instrument.  MAP may elect not to  designate a derivative  instrument  as a
hedge  even  if the  strategy  would  be  expected  to  qualify  for  hedge
accounting  treatment.  The adoption of SFAS No. 133 will change the timing
of  recognition  for  derivative  gains and losses as  compared to previous
accounting standards.

MAP will adopt the  Standard  effective  January 1,  2001.  The  transition
adjustment  resulting from the adoption of SFAS No. 133 will be reported as
a cumulative  effect of a change in accounting  principle.  The unfavorable
cumulative effect on net income, net of tax, is expected to approximate $20
million. The favorable cumulative effect on other comprehensive income, net
of tax,  will  approximate  $6  million.  The  amounts  reported  as  other
comprehensive  income will be reflected in income from  operations when the
anticipated  physical  transactions are consummated.  It is not possible to
estimate  the  effect  that this  Standard  will have on future  results of
operations,  although  it is likely  that the  effects  of some  derivative
transactions  will be recognized in different  periods than would have been
the case under previous accounting standards.



                                       8
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE D - RELATED PARTY TRANSACTIONS

MAP sales in 2000,  1999 and 1998 to Ashland and its  affiliates  were $285
million, $198 million and $190 million,  respectively; and sales to USX and
its   affiliates   were  $145   million,   $50  million  and  $10  million,
respectively.  MAP  purchases  in 2000,  1999 and 1998 from Ashland and its
affiliates totaled $19 million,  $9 million and $20 million,  respectively;
and  purchases  from USX and its  affiliates  totaled  $540  million,  $297
million  and $284  million,  respectively.  Such  transactions  were in the
ordinary   course  of  business  and  included  the   purchase,   sale  and
transportation of crude oil and petroleum products. These transactions were
conducted under terms comparable to those with unrelated parties.

During the years ended  December 31, 2000,  1999 and 1998,  Ashland and its
affiliates,  and  USX  and  its  affiliates  provided  certain  information
technology and  administrative  services and facilities to MAP. Billings to
MAP for these  services  and  facilities  for the years ended  December 31,
2000, 1999 and 1998 from Ashland and its affiliates totaled $7 million, $13
million and $27 million,  respectively.  Billings to MAP for these services
and facilities  for the years ended  December 31, 2000,  1999 and 1998 from
USX and its  affiliates  totaled $48 million,  $47 million and $83 million,
respectively.

As of December 31, 2000 and 1999,  related party  receivables  included $35
million and $26  million,  respectively,  of accounts  receivable  due from
Ashland  and its  affiliates;  and  accounts  payable  to  related  parties
included $2 million and $2  million,  respectively,  due to Ashland and its
affiliates.  As of December 31, 2000 and 1999,  related  party  receivables
included $8 million and $13 million,  respectively,  of accounts receivable
due from USX and its  affiliates;  and accounts  payable to related parties
included  $64 million  and $31  million,  respectively,  due to USX and its
affiliates.

In connection with the formation of MAP, certain Marathon debt was assigned
to MAP. Marathon agreed to reimburse MAP for this debt and related interest
expense. During 2000, 1999 and 1998, Marathon reimbursed MAP $6 million, $0
million and $24 million,  respectively,  for debt repayments. Related party
receivables at December 31, 1999, included $6 million due from Marathon for
future  debt  payment   reimbursements.   For  details   relating  to  debt
repayments, see Note L.

A revolving  credit agreement was entered into as of January 1, 1998, among
Ashland and Marathon  (collectively  the Lenders) and MAP (Borrower).  This
agreement  provides  that the Lenders  may loan to the  Borrower up to $500
million at defined  short-term market rates. At December 31, 2000 and 1999,
there were no borrowings  against this facility.  During 2000 and 1999, MAP
borrowed and repaid $931 million and $386 million, respectively, under this
revolving credit  facility.  The weighted  average  borrowings  outstanding
under this revolving  credit  facility  during the years 2000 and 1999 were
$14 million and $4 million,  respectively.  During the year ended  December
31,  2000,  interest  expense  paid on these  borrowings  was $1 million to
Marathon.

On November 16, 1998,  MAP entered  into  agreements  with USX and Ashland,
which  allow MAP to invest its  surplus  cash  balances on a daily basis at
competitive  interest  rates with USX and Ashland in proportion up to their
ownership  interests in MAP.  These  agreements,  as  previously  extended,
expired on March 15, 2000 and have been  subsequently  amended and extended
with an  expiration  date of March 15, 2001. At December 31, 2000 and 1999,
there was no cash invested under these  agreements.  During the years ended
December  31,  2000,  1999 and 1998,  interest  income  earned  from  these
investments was $6 million, $4 million and $1 million,  respectively,  from
Ashland and $7 million, $5 million and $0 million, respectively, from USX.


                                       9
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE E - OTHER ITEMS
<TABLE>
<CAPTION>

                                                                                               Year Ended December 31
                                                                                      ------------------------------------------
                                                                                                     (Millions)
                                                                                          2000           1999           1998
                                                                                      -----------    -----------     -----------

<S>                                                                                   <C>            <C>             <C>
Net interest and other financial income

       Interest and other financial income:
       Interest income - third parties                                                $        9     $        3      $       22
       Interest income - related parties                                                      13              9               1
                                                                                      -----------    -----------     -----------
              Total                                                                           22             12              23
                                                                                      -----------    -----------     -----------

       Interest and other financial costs:
       Interest incurred                                                                       3              2               1
       Other                                                                                   7              5               5
                                                                                      -----------    -----------     -----------
              Total                                                                           10              7               6
                                                                                      -----------    -----------     -----------

       Net interest and other financial income                                        $       12     $        5      $       17
                                                                                      ===========    ===========     ===========



</TABLE>


Consumer excise tax - Included in revenues and costs and expenses for 2000,
1999 and 1998 were  $4,344  million,  $3,973  million  and $3,824  million,
respectively,  representing consumer excise taxes on petroleum products and
merchandise.


NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS

MAP has a noncontributory  defined benefit pension plan and several related
excess benefit plans covering  substantially all employees.  Benefits under
its final pay formula are based  primarily  upon age,  years of service and
the  highest  three  years  earnings  during  the  last  ten  years  before
retirement.  Benefits under its pension equity formula are based  primarily
upon  age,  years of  service  and the final  three  years of  earnings  at
retirement.

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

<TABLE>
<CAPTION>
                                                                      Pension Benefits                        Other Benefits
                                                                  ----------------------                   ---------------------
                                                                                             (Millions)
                                                                     2000        1999                        2000        1999
                                                                  ---------   ---------                    ---------   ---------
<S>                                                               <C>         <C>                          <C>         <C>
Change in projected benefit obligation:
Benefit obligation at January 1                                   $    482    $    525                     $    152    $    242
Service cost                                                            36          41                            8          10
Interest cost                                                           38          33                           12          13
Plan amendments                                                          4          19                            1         (44)
Actuarial (gains) losses                                                64        (110)                          14         (71)
Acquisition and merger                                                  --          14                           --           4
Benefits paid                                                          (56)        (38)                          (3)         (1)
Settlement, curtailment and termination benefits                        --          (2)                          --          (1)
                                                                  ---------   ---------                    ---------   ---------
Benefit obligations at December 31                                $    568    $    482                     $    184    $    152
                                                                  =========   =========                    =========   =========

</TABLE>


                                       10
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE F - PENSIONS AND OTHER POSTRETIREMENT BENEFITS - Continued

<TABLE>
<CAPTION>
                                                                      Pension Benefits                        Other Benefits
                                                                  ----------------------                   ---------------------
                                                                                             (Millions)
                                                                     2000        1999                        2000        1999
                                                                  ---------   ---------                    ---------   ---------


<S>                                                               <C>         <C>                         <C>          <C>
Change in plan assets:
Fair value of plan assets at January 1                            $    560    $    528
Actual return on plan assets                                            (4)         55
Acquisition and merger                                                  --          13
Employer contributions                                                   1           2
Benefits paid                                                          (55)        (38)
                                                                  ---------   ---------
Fair value of plan assets at December 31                          $    502    $    560
                                                                  =========   =========

Funded status of plans at December 31: (a)                        $    (66)   $     78                     $   (184)   $   (152)
Unrecognized net gain from transition                                   (9)        (10)                          --          --
Unrecognized prior service costs (credits)                              25          24                          (54)        (64)
Unrecognized actuarial (gains) losses                                   (5)       (127)                          17           4
Additional minimum liability (b)                                        (6)         (1)                          --          --
                                                                  ---------   ---------                    ---------   ---------
Accrued benefit cost                                              $    (61)   $    (36)                    $   (221)   $   (212)
                                                                  =========   =========                    =========   =========

(a)    Includes   several  small  plans  that  have   accumulated   benefit
       obligations and no plan assets:
          Accumulated benefit obligation                          $    (12)   $     (6)
          Projected benefit obligation                                 (17)        (14)
(b)    Additional minimum liability recorded
       was offset by the following:
          Intangible asset                                        $      2    $      1
                                                                  ---------   ---------
          Accumulated other comprehensive income (loss):
             Beginning of year                                    $     --    $     (5)
             Change during year                                         (4)          5
                                                                  ---------   ---------
                Balance at end of year                            $     (4)   $     --
                                                                  =========   =========

</TABLE>
<TABLE>

                                                                 Pension Benefits                       Other Benefits
                                                      ----------------------------------       ---------------------------------
                                                                                       (Millions)
                                                         2000        1999        1998            2000        1999        1998
                                                      ---------   ---------   ---------        ---------   ---------   ---------
<S>                                                   <C>         <C>         <C>              <C>         <C>         <C>
Components of net periodic benefit cost:
Service cost                                          $     36    $     41    $     26         $      8    $     10    $      7
Interest cost                                               38          33          20               12          13          10
Expected return on plan assets                             (51)        (46)        (32)              --          --          --
Amortization of prior service costs                          2           1          --               (8)         (6)         --
Amortization of actuarial losses                            (4)          1          --               --           3          --
Amortization of transition gain                             (2)         (2)         --               --          --          --
Other plans                                                  1           2           2               --          --          --
Settlement, curtailment and termination benefits             3           2          --               --          (1)         --
                                                      ---------   ---------   ---------        ---------   ---------   ---------
Net periodic benefit cost                             $     23    $     32    $     16         $     12    $     19    $     17
                                                      =========   =========   =========        =========   =========   =========

</TABLE>

                                       11
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


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

                                                                     Pension Benefits                          Other Benefits
                                                                  ---------------------                    ---------------------
Actuarial assumptions at December 31:                                2000        1999                        2000        1999
                                                                  ---------   ---------                    ---------   ---------

<S>                                                                    <C>         <C>                          <C>         <C>
Discount rate                                                          7.5%        8.0%                         7.5%        8.0%
Expected annual return on plan assets                                  9.5%        9.5%                         N/A         N/A
Increase in compensation rate                                          5.0%        5.0%                         5.0%        5.0%

For measurement  purposes,  an 8% annual rate of increase in the per capita
cost of covered  health care  benefits  was assumed for 2001.  The rate was
assumed  to  decrease  gradually  to 5% for 2007 and  remain at that  level
thereafter.

A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
</TABLE>
<TABLE>
<CAPTION>

                                                                       1-Percentage                            1-Percentage
                                                                      Point Increase                          Point Decrease
                                                                  ----------------------                  ----------------------
                                                                                            (Millions)
<S>                                                                    <C>                                    <C>
Effect on total of service and interest
   cost components                                                     $          4                           $         (3)
Effect on postretirement benefit obligation                                      28                                    (23)

</TABLE>

NOTE G - INCOME TAXES

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

Provisions (credits) for income taxes:
<TABLE>
<CAPTION>

                                                                     Year Ended December 31
                               -------------------------------------------------------------------------------------------------
                                                                           (Millions)
                                             2000                             1999                            1998
                               ----------------------------     -------------------------------  -------------------------------
                               Current    Deferred   Total      Current    Deferred   Total      Current    Deferred   Total
                               --------   --------   --------   --------   --------   ---------  --------   --------   ---------
<S>                            <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Federal                        $     --   $     --   $     --   $     --   $     (1)  $     (1)  $     --   $     --   $     --
State and local                       5         --          5          1         --          1          3         (2)         1
Foreign                               2         --          2          2         --          2         --         --         --
                               ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
Total                          $      7   $     --   $      7   $      3   $     (1)  $      2   $      3   $     (2)  $      1
                               =========   ========  =========  =========  =========  =========  =========  =========  =========

</TABLE>

Deferred tax liabilities at December 31, 2000 and 1999 of $4 million and $5
million, respectively,  principally arise from differences between the book
and tax basis of  inventories  and property,  plant and  equipment.  Pretax
income in 2000,  1999 and 1998  included  $0  million,  $3  million  and $1
million, respectively, attributable to foreign sources.

                                       12
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE H - INVENTORIES

Inventories consist of the following:
<TABLE>
<CAPTION>
                                                         December 31
                                                  ---------------------------
                                                          (Millions)
                                                     2000           1999
                                                  -----------     -----------

<S>                                               <C>            <C>
Crude oil and natural gas liquids                 $      674     $       688
Refined products and merchandise                       1,074           1,051
Supplies and sundry items                                 76              81
                                                  -----------    ------------
              Total (at cost)                          1,824           1,820
Less inventory market valuation reserve                   --              --
                                                  -----------    ------------
              Net inventory carrying value        $    1,824     $     1,820
                                                  ===========    ============

</TABLE>

Inventories  of crude  oil and  refined  products  are  valued  by the LIFO
method.  The LIFO method  accounted  for 95% and 93% of total  inventory at
December 31, 2000 and 1999,  respectively.  Current  acquisition costs were
estimated  to  exceed  the  above  inventory   values  at  December  31  by
approximately $476 million and $194 million in 2000 and 1999, respectively.
Cost of revenues was reduced and income from  operations  was  increased by
$14 million in 2000 as a result of liquidations of LIFO inventories.

The  inventory  market  valuation  reserve  reflects  the  extent  that the
recorded  LIFO cost  basis of crude oil and  refined  products  inventories
exceeds net realizable value. The reserve is decreased to reflect increases
in market prices and inventory  turnover and increased to reflect decreases
in market prices.  Changes in the inventory market valuation reserve result
in noncash  charges or credits to costs and  expenses.  During 2000,  there
were no charges or credits to costs and expenses.


NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES
                                                  December 31
                                           ---------------------------
                                                  (Millions)
                                                2000           1999
                                           -----------     -----------

Equity method investments                  $      104      $      101
Receivables due after one year                      6               5
Property exchange trust                             3               2
                                           -----------     -----------

              Total                        $      113      $      108
                                           ===========     ===========

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

                                               Year Ended December 31
                                     ------------------------------------------
                                                   (Millions)
                                         2000           1999           1998
                                     -----------    -----------     -----------
Income data:
       Revenues                      $      239     $      207      $      171
       Operating income                      95             78              61
       Net income                            57             44              31

                                                   December 31
                                          ---------------------------
                                                   (Millions)
                                              2000           1999
                                          -----------     -----------
Balance sheet data:
       Current assets                     $       99      $       76
       Noncurrent assets                         605             614
       Current liabilities                        93              76
       Noncurrent liabilities                    418             441


                                       13
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE I - INVESTMENTS AND LONG-TERM RECEIVABLES - Continued

Dividends and partnership distributions received from equity investees were
$25  million,  $18  million  and  $14  million  in  2000,  1999  and  1998,
respectively.  MAP purchases from equity investees totaled $61 million, $50
million and $63 million in 2000, 1999 and 1998, respectively.  MAP sales to
equity investees were immaterial in each year.


NOTE J - PROPERTY, PLANT AND EQUIPMENT
                                                    December 31
                                             ---------------------------
                                                    (Millions)
                                                  2000           1999
                                             -----------     -----------

Refining                                     $    2,555      $    2,208
Marketing                                         2,270           2,184
Transportation                                    1,296           1,271
Other                                                20              11
                                             -----------     -----------
              Total                               6,141           5,674
Less accumulated depreciation and amortization    2,119           1,963
                                             -----------     -----------
              Net                            $    4,022      $    3,711
                                             ===========     ===========


Property, plant and equipment at December 31, 2000 and 1999, includes gross
assets  acquired  under  capital  leases  of $8  million  and $20  million,
respectively,  with no related material amounts in accumulated depreciation
and amortization.


NOTE K - SHORT-TERM DEBT

MAP has a $100 million short-term revolving credit facility with a group of
banks that terminates in July 2001. Interest is based on defined short-term
market rates.  During the term of the  agreement,  MAP is required to pay a
variable facility fee on total commitments,  which at December 31, 2000 was
0.11%.  At  December  31,  2000,  there  were no  borrowings  against  this
facility.


NOTE L - LONG-TERM DEBT
                                                     December 31
                                             ---------------------------
                                                     (Millions)
                                                 2000           1999
                                             -----------     -----------

Capital lease obligations                    $        7      $       15
Variable rate Michigan Underground Storage
    Tank Interest Rate Subsidy Loan due
    2000 (a)                                         --               6
5% Promissory Note due 2009                           1               1
Revolving credit facilities (b) (c)                  --              --
                                             -----------     -----------
         Total (d)                                    8              22
   Less amount due within one year                   --               7
                                             -----------     -----------

         Long-term debt due after one year   $        8      $       15
                                             ===========     ===========



(a) This program was created in  connection  with the Michigan  Underground
    Storage  Tank  Assurance  Act  to  assist  owners  in the  clean  up of
    underground storage tank systems. MAP paid interest monthly, based on a
    monthly LIBOR rate plus 5/8%. An interest subsidy is received quarterly
    from the State of Michigan  calculated at a rate of 6.1% per annum. The
    effective rate of this loan during 2000 and 1999,  including the effect
    of the interest subsidy, was 5.7% and 3.3%, respectively.  Marathon was
    obligated to reimburse  MAP for all payments  with respect to this debt
    and the debt was repaid during 2000.


                                       14
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE L - LONG-TERM DEBT - Continued

(b) MAP has a $400 million  revolving credit facility with a group of banks
    that terminates in July 2003.  Interest is based on defined  short-term
    market rates. During the term of the agreement,  MAP is required to pay
    a variable  facility  fee on total  commitments,  which at December 31,
    2000, was 0.125%. At December 31, 2000, the unused and available credit
    was $352 million,  which reflects reductions for outstanding letters of
    credit.  In the event that MAP defaults on indebtedness  (as defined in
    the  agreement)  in  excess of $100  million,  USX has  guaranteed  the
    payment of any outstanding obligations.

(c) In 1998,  MAP entered into a revolving  credit  agreement with Marathon
    and Ashland for $500 million that  terminated on December 31, 1998, and
    which was  renewed on an  uncommitted  basis for 1999.  This  agreement
    expired on December 31, 1999,  but has been extended with an expiration
    date of March 15, 2001.  Interest is based on defined short-term market
    rates.  At December 31, 2000, the unused and available  credit was $500
    million.

(d) Required payment of long-term debt for the year 2005 is $1 million.  No
    other  significant  payments of  long-term  debt are  required in other
    years.



NOTE M - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
                                                                                                 Year Ended December 31
                                                                                      ------------------------------------------
                                                                                                       (Millions)
                                                                                          2000           1999           1998
                                                                                      -----------    -----------     -----------
<S>                                                                                   <C>            <C>             <C>
Cash provided from operating activities includes:
       Interest and other financial costs paid                                        $       (3)    $       (2)     $       (1)
       Income taxes paid                                                                      (5)            (5)             (3)
Non-cash investing and financing activities:
       Liabilities assumed in acquisitions                                                    --             16              --

</TABLE>

NOTE N - LEASES

Future  minimum   commitments  for  capital  and  operating  leases  having
noncancelable lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>

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

<S>                                                                  <C>              <C>
2001                                                                 $        1       $       43
2002                                                                          1               34
2003                                                                          1               23
2004                                                                          1               17
2005                                                                          1                9
Later years                                                                   5               13
Sublease rentals                                                             --               (2)
                                                                     -----------      -----------

       Total minimum lease payments                                          10       $      137
                                                                                      ===========

Less imputed interest costs:                                                 (3)
                                                                     -----------
       Present value of minimum lease payments
       included in long-term debt                                    $        7
                                                                     ===========

</TABLE>

                                       15
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE N - LEASES - Continued

Operating lease rental expense:
                                              Year Ended December 31
                                    ------------------------------------------
                                                    (Millions)
                                        2000           1999           1998
                                    -----------    -----------     -----------

Minimum rental                      $       73     $       66      $       74
Contingent rental                           10             11              11
Sublease rentals                            (6)            (6)             (1)
                                    -----------    -----------     -----------
         Net rental expense         $       77     $       71      $       84
                                    ===========    ===========     ===========

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


NOTE O - DERIVATIVE INSTRUMENTS

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

The  following  table  sets  forth  quantitative  information  by  class of
derivative instrument:

<TABLE>
<CAPTION>

                                                                                         Recognized
                                                  Fair               Carrying              Trading       Recorded
                                                  Value                Amount              Gain or       Deferred       Aggregate
                                                 Assets                Assets            (Loss) for      Gain or        Contract
(Millions)                                    (Liabilities)(a)(b)  (Liabilities)           the Year       (Loss)         Values(c)
----------                                    -----------------    -------------         -----------     ----------     ---------
<S>                                           <C>                  <C>                   <C>             <C>            <C>
December 31, 2000:
   Exchange-traded commodity futures:
      Trading                                 $       --           $       --             $      (19)    $       --      $       --
      Other than trading                              --                   --                     --             27             678
   Exchange-traded commodity options:
      Trading                                         --                   --                     --             --              --
      Other than trading                             (6) (d)               (6)                    --             (1)            971
   OTC commodity swaps (e):
      Trading                                        --                    --                     --             --              --
      Other than trading                             --                    --                     --             --               4
   OTC commodity options:
      Trading                                        --                    --                     --             --              --
      Other than trading                            (20) (f)              (20)                    --            (20)             42
                                              -----------          -----------            -----------    -----------     -----------
             Total commodities                $     (26)           $      (26)            $      (19)    $        6      $    1,695
                                              ===========          ===========            ===========    ===========     ===========


                                    16
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE O - DERIVATIVE INSTRUMENTS - Continued

December 31, 1999:
   Exchange-traded commodity futures:
      Trading                                 $       --           $       --             $        4     $       --      $        8
      Other than trading                              --                   --                     --             18             243
   Exchange-traded commodity options:
      Trading                                         --                   --                      4             --             179
      Other than trading                             (6) (d)               (6)                    --             (9)            793
   OTC commodity swaps (e):
      Trading                                         --                   --                     --             --              --
      Other than trading                             (3) (g)               (3)                    --             (3)             69
   OTC commodity options:
      Trading                                         --                   --                     --             --              --
      Other than trading                              --                   --                     --             --               7
                                                ---------          -----------            -----------    -----------     -----------
             Total commodities               $       (9)           $       (9)            $        8     $        6      $    1,299
                                              ===========          ===========            ===========    ===========     ===========

</TABLE>

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

(b)  The aggregate  average fair values of all trading  activities for 2000
     and 1999 were $(5) million and $3 million, respectively.

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

(d)  Includes  fair values as of December 31, 2000 and 1999,  for assets of
     $10 million and $7 million and for  liabilities  of $(16)  million and
     $(13) million, respectively.

(e)  The OTC swap  arrangements  vary in duration  with  certain  contracts
     extending into mid-2001.

(f)  Includes fair value as of December 31, 2000,  for assets of $1 million
     and for liabilities of $(21) million.

(g)  Includes fair values as of December 31, 1999, for assets of $0 million
     and for liabilities of $(3) million.



NOTE P - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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


NOTE Q - CONTINGENCIES AND COMMITMENTS

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

                                       17
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued


NOTE Q - CONTINGENCIES AND COMMITMENTS - Continued

Environmental matters - MAP is subject to federal, state, local and foreign
laws and  regulations  relating to the  environment.  These laws  generally
provide for control of pollutants released into the environment and require
responsible  parties to undertake  remediation of hazardous  waste disposal
sites.  Penalties  may be imposed for  noncompliance.  Marathon and Ashland
have retained the  liabilities,  subject to certain  thresholds,  for costs
associated  with  remediating  properties  conveyed  to MAP for  conditions
existing  prior to  January  1,  1998.  The  costs  associated  with  these
thresholds are not expected to be material to the MAP financial statements.
At December 31, 2000 and 1999,  MAP's accrued  liabilities  for remediation
totaled  $10  million and $6  million,  respectively.  It is not  presently
possible to estimate  the  ultimate  amount of all  remediation  costs that
might be incurred or the  penalties  that may be imposed.  Receivables  for
recoverable  costs from certain states,  under programs to assist companies
in clean  up  efforts  related  to  underground  storage  tanks  at  retail
marketing outlets,  were $4 million and $3 million at December 31, 2000 and
1999, respectively.

MAP has made substantial capital  expenditures to bring existing facilities
into  compliance  with various laws relating to the  environment.  In 2000,
1999 and 1998, such capital expenditures for environmental controls totaled
$47 million,  $24 million and $42 million,  respectively.  MAP  anticipates
making  additional  such  expenditures  in the future;  however,  the exact
amounts  and  timing of such  expenditures  are  uncertain  because  of the
continuing evolution of specific regulatory requirements.

Guarantees  - At  December  31,  2000 and  1999,  MAP's  pro rata  share of
obligations  of LOCAP  INC.  and  Southcap  Pipe Line  Company  secured  by
throughput and deficiency  agreements  totaled $14 million and $19 million,
respectively. Under the agreements, MAP is required to advance funds if the
investees  are unable to service  debt.  Any such  advances  are treated as
prepayments of future transportation charges.

Commitments - At December 31, 2000 and 1999, MAP's contract commitments for
capital expenditures for property,  plant and equipment totaled $89 million
and $14 million, respectively.

                                       18
<PAGE>

                   ARCH COAL, INC. AND SUBSIDIARIES

                 AUDITED CONSOLIDATED FINANCIAL STATEMENTS

                                  CONTENTS

                                                                       Page*

[S]                                                                      [C]
REPORT OF INDEPENDENT AUDITORS:                                          1
CONSOLIDATED FINANCIAL STATEMENTS:

     CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------  2
     CONSOLIDATED BALANCE SHEETS --------------------------------------  3
     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY-------------------  4
     CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------  5
     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -----------------------  6

CONSOLIDATED FINANCIAL STATEMENT SCHEDULE

     SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ----------------- 30


ALL  OTHER  SCHEDULES  FOR  WHICH  PROVISION  IS  MADE  IN  THE  APPLICABLE
ACCOUNTING  REGULATIONS OF THE  SECURITIES AND EXCHANGE  COMMISSION ARE NOT
REQUIRED UNDER THE RELATED  INSTRUCTIONS OR ARE INAPPLICABLE AND,THEREFORE,
HAVE BEEN OMITTED.



<PAGE>


REPORT OF INDEPENDENT AUDITORS


TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
ARCH COAL, INC.

We have audited the accompanying  consolidated balance sheets of Arch Coal,
Inc.  and  subsidiaries  as of  December  31, 2000 and 1999 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended  December  31, 2000.  These
financial  statements are the  responsibility of the Company's  management.
Our  responsibility is to express an opinion on these financial  statements
based on our audits.

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

In our opinion,  the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Arch Coal,
Inc. and  subsidiaries at December 31, 2000 and 1999, and the  consolidated
results  of their  operations  and their  cash  flows for each of the three
years in the period ended December 31, 2000, in conformity  with accounting
principles generally accepted in the United States.

As discussed in Note 3 to the financial  statements,  in 1999,  the Company
changed its method of accounting for depreciation of its preparation plants
and loadouts.


/s/ Ernst & Young LLP
St. Louis, Missouri
January 24, 2001

                                     1
<PAGE>

     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
     Year ended December 31
     (in thousands of dollars except per share data)                                             2000         1999         1998
     =============================================================================================================================
     <S>                                                                                     <C>          <C>          <C>
     REVENUES
       Coal sales                                                                            $ 1,342,171  $ 1,509,596  $ 1,428,171
       Income from equity investment                                                              12,837       11,129        6,786
       Other revenues                                                                             49,613       46,657       70,678
     -----------------------------------------------------------------------------------------------------------------------------
                                                                                               1,404,621    1,567,382    1,505,635
     -----------------------------------------------------------------------------------------------------------------------------
     COSTS AND EXPENSES
       Cost of coal sales                                                                      1,237,378    1,426,105    1,313,400
       Selling, general and administrative expenses                                               38,887       46,357       44,767
       Amortization of coal supply agreements                                                     39,803       36,532       34,551
       Write-down of impaired assets                                                                   -      364,579            -
       Other expenses                                                                             14,569       20,835       25,070
     -----------------------------------------------------------------------------------------------------------------------------
                                                                                               1,330,637    1,894,408    1,417,788
     -----------------------------------------------------------------------------------------------------------------------------
         Income (loss) from operations                                                            73,984     (327,026)      87,847
     -----------------------------------------------------------------------------------------------------------------------------

       Interest expense, net:
         Interest expense                                                                        (92,132)     (90,058)     (62,202)
         Interest income                                                                           1,412        1,291          756
     -----------------------------------------------------------------------------------------------------------------------------
                                                                                                 (90,720)     (88,767)     (61,446)
     -----------------------------------------------------------------------------------------------------------------------------
         Income (loss) before income taxes, extraordinary loss and
           cumulative effect of accounting change                                                (16,736)    (415,793)      26,401
      Benefit from income taxes                                                                   (4,000)     (65,700)      (5,100)
     -----------------------------------------------------------------------------------------------------------------------------

         Income (loss) before extraordinary loss and cumulative effect of accounting change      (12,736)    (350,093)      31,501
      Extraordinary loss from the extinguishment of debt, net of taxes                                 -            -       (1,488)
      Cumulative effect of accounting change, net of taxes                                             -        3,813            -
     -----------------------------------------------------------------------------------------------------------------------------
     NET INCOME (LOSS)                                                                       $   (12,736) $  (346,280) $    30,013
     =============================================================================================================================

     Basic and diluted earnings (loss) per common share:
     Income (loss) before extraordinary item and cumulative effect of accounting change      $      (.33) $     (9.12) $       .79
       Extraordinary loss from the extinguishment of debt, net of taxes                                -            -         (.03)
       Cumulative effect of accounting change, net of taxes                                            -          .10            -
     -----------------------------------------------------------------------------------------------------------------------------
     Basic and diluted earnings (loss) per common share                                      $      (.33) $     (9.02) $       .76
     =============================================================================================================================
</TABLE>

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

                                     2
<PAGE>

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31
(in thousands of dollars except share and per share data)         2000           1999
=========================================================================================
<S>                                                            <C>            <C>
ASSETS
Current assets
   Cash and cash equivalents                                   $      6,028   $     3,283
   Trade accounts receivable                                        141,727       162,802
   Other receivables                                                 38,540        25,659
   Inventories                                                       47,930        62,382
   Prepaid royalties                                                  2,262         1,310
   Deferred income taxes                                             27,440        21,600
   Other                                                             13,963         8,916
-----------------------------------------------------------------------------------------
     Total current assets                                           277,890       285,952
-----------------------------------------------------------------------------------------
Property, plant and equipment
   Coal lands and mineral rights                                  1,106,547     1,170,956
   Plant and equipment                                            1,006,452     1,042,128
   Deferred mine development                                        104,579        92,265
-----------------------------------------------------------------------------------------
                                                                  2,217,578     2,305,349
   Less accumulated depreciation, depletion and amortization       (787,525)     (826,178)
-----------------------------------------------------------------------------------------
     Property, plant and equipment, net                           1,430,053     1,479,171
-----------------------------------------------------------------------------------------
Other assets
   Prepaid royalties                                                 17,500            --
   Coal supply agreements                                           108,884       151,978
   Deferred income taxes                                            179,343       182,500
   Investment in Canyon Fuel                                        188,700       199,760
   Other                                                             30,244        33,013
-----------------------------------------------------------------------------------------
     Total other assets                                             524,671       567,251
-----------------------------------------------------------------------------------------
     Total assets                                              $  2,232,614   $ 2,332,374
=========================================================================================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
   Accounts payable                                            $    103,014   $   109,359
   Accrued expenses                                                 152,303       145,561
   Current portion of debt                                           60,129        86,000
-----------------------------------------------------------------------------------------
     Total current liabilities                                      315,446       340,920
Long-term debt                                                    1,090,666     1,094,993
Accrued postretirement benefits other than pension                  336,663       343,993
Accrued reclamation and mine closure                                118,928       129,869
Accrued workers' compensation                                        78,593       105,190
Accrued pension cost                                                 19,287        22,445
Obligations under capital leases                                     11,348             -
Other noncurrent liabilities                                         41,809        53,669
-----------------------------------------------------------------------------------------
     Total liabilities                                            2,012,740     2,091,079
-----------------------------------------------------------------------------------------
Stockholders' equity
   Common stock, $.01 par value, authorized 100,000,000 shares,
     issued 39,714,333 and 39,705,628 shares                            397           397
   Paid-in capital                                                  473,428       473,335
   Retained deficit                                                (234,980)     (213,466)
   Less treasury stock, at cost, 1,541,146 shares                   (18,971)      (18,971)
-----------------------------------------------------------------------------------------
     Total stockholders' equity                                     219,874       241,295
-----------------------------------------------------------------------------------------
     Total liabilities and stockholders' equity                $  2,232,614   $ 2,332,374
=========================================================================================
</TABLE>

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


                                     3
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                             Retained       Treasury
Three years ended December 31, 2000                               Common        Paid-In      Earnings          Stock
(in thousands of dollars except share and per share data)          Stock        Capital      (Deficit)      at Cost         Total
==================================================================================================================================
<S>                                                              <C>         <C>           <C>
<C>          <C>
BALANCE AT DECEMBER 31, 1997                                     $   397     $  472,425    $  138,676     $       -    $  611,498
==================================================================================================================================
  Net income                                                                                   30,013                      30,013
  Dividends paid ($.46 per share)                                                             (18,266)                    (18,266)
  Issuance of 47,635 shares of common
     stock under the stock incentive plan                                           691                                       691
  Treasury stock purchases (333,952 shares)                                                                  (5,720)       (5,720)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998                                         397        473,116       150,423        (5,720)      618,216
==================================================================================================================================
  Net loss                                                                                   (346,280)                   (346,280)
  Dividends paid ($.46 per share)                                                             (17,609)                    (17,609)
  Issuance of 95 shares of common
     stock under the stock incentive plan                                             1                                         1
  Treasury stock purchases (1,396,700 shares)
     net of issuances (189,506 shares)                                              218                     (13,251)      (13,033)
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999                                         397        473,335      (213,466)      (18,971)      241,295
==================================================================================================================================
  Net loss                                                                                    (12,736)                    (12,736)
  Dividends paid ($.23 per share)                                                              (8,778)                     (8,778)
  Issuance of 8,705 shares of common stock
     under the stock incentive plan                                                  93                                        93
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000                                     $   397     $  473,428    $ (234,980)     $(18,971)   $  219,874
==================================================================================================================================
</TABLE>

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

                                     4
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year ended December 31
(in thousands of dollars)                                                       2000                1999                1998
============================================================================================================================
<S>                                                                      <C>               <C>
<C>
OPERATING ACTIVITIES
Net income (loss)                                                        $   (12,736)      $    (346,280)       $     30,013
Adjustments to reconcile to cash provided by operating activities:
  Depreciation, depletion and amortization                                   201,512             235,658             204,307
  Prepaid royalties expensed                                                   7,322              14,217              19,694
  Net gain on disposition of assets                                          (20,444)             (7,459)            (41,512)
  Income from equity investment                                              (12,837)            (11,129)             (6,786)
  Net distributions from equity investment                                    23,897              83,178              18,850
  Cumulative effect of accounting change                                           -              (3,813)                  -
  Write-down of impaired assets                                                    -             364,579                   -
  Changes in operating assets and liabilities                                (29,420)            (69,471)            (24,671)
  Other                                                                      (21,522)             20,483             (11,872)
----------------------------------------------------------------------------------------------------------------------------
  Cash provided by operating activities                                      135,772             279,963             188,023
----------------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
Payments for acquisition                                                           -                   -          (1,126,706)
Addition to property, plant and equipment                                   (115,080)            (98,715)           (141,737)
Proceeds from coal supply agreements                                           8,512              14,067                   -
Additions to prepaid royalties                                               (25,774)            (26,057)            (26,252)
Additions to notes receivable                                                      -                   -             (10,906)
Proceeds from disposition of property, plant and equipment                    24,846              26,347              34,230
----------------------------------------------------------------------------------------------------------------------------
  Cash used in investing activities                                         (107,496)            (84,358)         (1,271,371)
----------------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
Proceeds from (payments on) revolver and lines of credit                     (30,198)            (37,884)            176,582
Net proceeds from (payments on) term loans                                         -            (151,210)            958,441
Payments on notes                                                                  -                   -             (42,860)
Payments for debt issuance costs                                                   -                   -             (12,725)
Proceeds from sale and leaseback of equipment                                 13,352                   -              45,442
Dividends paid                                                                (8,778)            (17,609)            (18,266)
Proceeds from sale of common stock                                                93                   -                 691
Proceeds from sale of treasury stock                                               -               2,549                   -
Purchases of treasury stock                                                        -             (15,582)             (5,720)
----------------------------------------------------------------------------------------------------------------------------
  Cash provided by (used in) financing activities                            (25,531)           (219,736)          1,101,585
----------------------------------------------------------------------------------------------------------------------------
  Increase (decrease) in cash and cash equivalents                             2,745             (24,131)             18,237
Cash and cash equivalents, beginning of year                                   3,283              27,414               9,177
----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                                   $     6,028       $       3,283        $     27,414
============================================================================================================================

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest                                   $    85,339       $     100,781        $     48,760
Cash paid (received) during the year for income taxes (refunds)          $    (1,316)      $      11,251        $     29,090
</TABLE>

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

                                     5
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.   ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

The membership  interest in Canyon Fuel, LLC ("Canyon  Fuel") are owned 65%
by the Company and 35% by a subsidiary  of ITOCHU  Corporation,  a Japanese
corporation.  The agreement  which governs the management and operations of
Canyon Fuel  provides  for a  Management  Board to manage its  business and
affairs.  Generally,  the Management  Board acts by affirmative vote of the
representatives  of the  members  holding  more than 50% of the  membership
interests.  However,  significant  participation  rights require either the
unanimous  approval of the members or the  approval of  representatives  of
members  holding more than 70% of the membership  interests.  Those matters
which  are  considered   significant   participation   rights  include  the
following:

 .    approval of the Annual Business Plan;

 .    approval of significant capital expenditures;

 .    approval of significant coal sales contracts;

 .    approval of the institution of or the settlement of litigation;

 .    approval of incurrence of indebtedness;

 .    approval of significant mineral reserve leases;

 .    selection and removal of the CEO, CFO, or General Counsel;

 .    approval of any material change in the business of Canyon Fuel;

 .    approval  of  any  disposition  whether  by  sale,  exchange,  merger,
     consolidation,   license  or  otherwise,   and  whether   directly  or
     indirectly,  of all or any  portion of the assets of Canyon Fuel other
     than in the ordinary course of business; and

 .    approval of a request  that a member  provide  additional  services to
     Canyon Fuel.

The  Canyon  Fuel  agreement  also  contains  various  restrictions  on the
transfer  of  membership  interest  in  Canyon  Fuel.  As a result of these
super-majority voting rights, the Company's 65% ownership of Canyon Fuel is
accounted  for  on  the  equity  method  in  the   consolidated   financial
statements.  Income  from  Canyon  Fuel is  reflected  in the  consolidated
statements of operations as income from equity investments. (See additional
discussion in "Investment in Canyon Fuel" in Note 5.)

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


                                     6
<PAGE>

ACCOUNTING ESTIMATES

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

CASH AND CASH EQUIVALENTS

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

INVENTORIES

Inventories are comprised of the following:


December 31 (in thousands)                                        2000      1999
--------------------------------------------------------------------------------

Coal                                                          $ 21,185  $ 28,183
Supplies, net of allowance                                      26,745    34,199
--------------------------------------------------------------------------------
                                                              $ 47,930  $ 62,382
================================================================================

Coal and  supplies  inventories  are valued at the lower of average cost or
market. Coal inventory costs include labor,  supplies,  equipment costs and
operating  overhead.  The Company has  recorded a valuation  allowance  for
slow-moving  and obsolete  supplies  inventories of $19.8 million and $23.5
million at December 31, 2000 and 1999, respectively.

COAL ACQUISITION AND PREPAID ROYALTIES

Coal  lease  rights  obtained  through  acquisitions  are  capitalized  and
amortized  primarily by the  units-of-production  method over the estimated
recoverable  reserves.  Amortization  occurs either as the Company mines on
the  property  or  as  others  mine  on  the  property  through  subleasing
transactions.

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

COAL SUPPLY AGREEMENTS

Acquisition costs allocated to coal supply agreements (sales contracts) are
capitalized  and amortized on the basis of coal to be shipped over the term
of the  contract.  Value is  allocated to coal supply  agreements  based on
discounted  cash flows  attributable  to the  difference  between the above
market  contract price and the  then-prevailing  market price.  Accumulated
amortization  for sales  contracts was $171.2 million and $131.4 million at
December 31, 2000 and 1999, respectively.



                                     7
<PAGE>

EXPLORATION COSTS

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

PROPERTY, PLANT AND EQUIPMENT

Property,  plant  and  equipment  are  recorded  at  cost.  Interest  costs
applicable to major asset additions are capitalized during the construction
period.  Expenditures  which extend the useful lives of existing  plant and
equipment are capitalized.  Costs of purchasing rights to coal reserves and
developing  new mines or  significantly  expanding the capacity of existing
mines   are   capitalized.    These   costs   are   amortized   using   the
units-of-production method over the estimated recoverable reserves that are
associated  with the property  being  benefited.  At December 31, 2000, all
mineral reserves of the Company that are capitalized are being amortized on
the  units-of-production  method  through  Company  operations  or  through
sublease  transactions  (for which the Company  receives  royalty  revenue)
except for a block of 197  million  tons  located  adjacent to its Hobet 21
operations.  The  current  value  associated  with this  property is $177.8
million  which the Company  plans to recover via mining  operations  in the
future. Except for preparation plants and loadouts, plant and equipment are
depreciated  principally  on the  straight-line  method over the  estimated
useful lives of the assets,  which range from three to 20 years.  Effective
January 1, 1999,  preparation plants and loadouts are depreciated using the
units-of-production  method over the estimated recoverable reserves subject
to a minimum level of depreciation  (see  additional  discussion in Note 3,
"Change in  Accounting  Method").  Prior to  January  1, 1999,  preparation
plants and loadouts were  depreciated on a  straight-line  basis over their
estimated useful lives.

Leased  property  meeting  certain  criteria is capitalized and the present
value  of  the  related   lease   payments  is  recorded  as  a  liability.
Amortization of capitalized  leased assets is computed on the straight-line
method over the term of the lease.

ASSET IMPAIRMENT

If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed.  If this review indicates that the value of
the  asset  will not be  recoverable,  as  determined  based  on  projected
undiscounted  cash flows related to the asset over its remaining life, then
the  carrying  value of the asset is reduced to its  estimated  fair value.
(See  additional  discussion  in Note 2,  "Changes in  Estimates  and Other
Non-Recurring Revenues and Expenses.")

REVENUE RECOGNITION

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

INTEREST-RATE SWAP AGREEMENTS

The  Company  enters  into  interest-rate  swap  agreements  to modify  the
interest  characteristics of outstanding  Company debt. The swap agreements
essentially convert variable-rate debt to fixed-rate debt. These agreements
require  the  exchange  of amounts  based on  variable  interest  rates for
amounts based on fixed interest  rates over the life of the agreement.  The
Company  accrues  amounts to be paid or received under  interest-rate  swap
agreements over the lives of the agreements. Such amounts are recognized as
adjustments  to  interest  expense  over the lives of  agreements,  thereby
adjusting the  effective  interest  rate on the  Company's  debt.  The fair
values of



                                     8
<PAGE>

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  sheets (in other  long-term  liabilities)  and amortized as an
adjustment  to interest  expense over the  remaining  original  term of the
terminated swap agreement.


INCOME TAXES

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

STOCK-BASED COMPENSATION

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


2. CHANGES IN ESTIMATES AND OTHER NON-RECURRING REVENUES AND EXPENSES

The Company's operating results in 2000 include income from the recovery of
$31.0 million in partial insurance settlements under the Company's property
and business  interruption  insurance policy. The payments offset a portion
of the loss  incurred  at the West Elk mine in Gunnison  County,  Colorado,
which was idled  from  January  28,  2000 to July 12,  2000  following  the
detection  of  combustion-  related  gases in a portion  of the  mine.  The
Company expects to receive additional insurance payments under its property
and business  interruption policy. Any additional recovery,  however,  will
depend on resolution of the claim with the insurance carrier, the timing of
which is  uncertain.  As a result  of  permit  revisions  at its idle  mine
properties in Illinois,  the Company reduced its  reclamation  liability at
Arch of Illinois by $7.8  million  during 2000.  In addition,  the Internal
Revenue   Service  ("IRS")  issued  a  notice  during  2000  outlining  the
procedures  for obtaining  tax refunds on certain  excise taxes paid by the
industry on export sales tonnage.  The notice is a result of a 1998 federal
district court decision that found such taxes to be  unconstitutional.  The
Company  recorded  $12.7  million  of income  related  to these  excise tax
recoveries.  As a result of adjustments to employee  postretirement medical
benefits,  the  Company  was able to  recognize  $9.8  million  of  pre-tax
curtailment  gains  resulting from previously  unrecognized  postretirement
benefit changes which occurred from plan amendments in previous years.  The
Company also settled certain  workers'  compensation  liabilities  with the
State of West Virginia  resulting in pre-tax gains of $21.8  million.  This
was  partially  offset  by  adjustments  to  other  workers'   compensation
liabilities  resulting from changes in estimates which caused  increases to
the liability of $13.5 million.

In 1999, the Company  recorded  pre-tax charges of $23.1 million related to
(i) the restructuring of its administrative  workforce; (ii) the closure of
its Dal-Tex  mining  operation  in West  Virginia  due to the  inability to
secure the  necessary  permits to continue  ongoing  mining;  and (iii) the
closure of  several  mines in  Kentucky  (Coal-Mac)  and the one  remaining
underground  mine in Illinois  (Arch of  Illinois)  due to  depressed  coal
prices, caused in part by increased competition from western coal mines. Of
the $23.1 million charge, $20.3 million was recorded in cost of coal sales,
$2.3 million was recorded in selling,  general and administrative  expenses
and  $0.5  million  was  recorded  in  other   expenses  in  the  Company's
consolidated   statement   of   operations.   The   restructuring   of  the
administrative workforce


                                     9
<PAGE>

included  the  elimination  of 81  administrative  jobs which was part of a
corporate-wide  effort to reduce general and administrative  expenses.  The
mine closures included the termination of 161 employees. As of December 31,
1999, 74 administrative and 65 mine employees had been terminated, with the
remainder being terminated during 2000. The following are the components of
severance and other exit costs included in the  restructuring  charge along
with related 1999 and 2000 activity:

<TABLE>
<CAPTION>
                                                                                 Balance                        Balance
                                                      1999       Utilized    December 31,      Utilized    December 31,
(in thousands)                                      Charge        in 1999            1999       in 2000            2000
=======================================================================================================================
<S>                                                 <C>          <C>         <C>               <C>         <C>
Employee costs                                      $ 7,354      $    704       $  6,650       $  5,184        $  1,466
Obligations for non-cancelable lease payments         9,858           484          9,374          9,374               -
Reclamation liabilities                               3,667         1,200          2,467          2,467               -
Depreciation acceleration                             2,172         2,172              -              -               -
-----------------------------------------------------------------------------------------------------------------------
                                                    $23,051      $  4,560      $  18,491      $  17,025        $  1,466
=======================================================================================================================
</TABLE>


Except for the charge related to depreciation acceleration, all of the 1999
restructuring charge will require the Company to use cash. Also, except for
amounts  attributable  to retiree  healthcare,  the  Company  utilized  the
balance of the amounts reserved for employee costs in 2000.

In addition, during the fourth quarter of 1999, the Company determined that
significant  changes  were  necessary  in the  manner  and  extent in which
certain central  Appalachia coal assets would be deployed.  The anticipated
changes were determined  during the Company's  annual planning  process and
were  necessitated  by the adverse legal and regulatory  rulings related to
surface mining techniques, as well as the continued negative pricing trends
related to central  Appalachia coal production  experienced by the Company.
As a result of the  planned  changes in the  deployment  of its  long-lived
assets in the central Appalachia region and pursuant to FAS 121, Accounting
for the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be
Disposed Of, the Company evaluated the  recoverability of its active mining
operations  and its coal reserves for which no future mining plans existed.
This evaluation  indicated that the future undiscounted cash flows of three
mining  operations,  Dal-Tex,  Hobet  21 and  Coal-Mac,  and  certain  coal
reserves with no future mining plans were below the carrying  value of such
long-lived  assets.  Accordingly,  during the fourth  quarter of 1999,  the
Company  adjusted the operating assets and coal reserves to their estimated
fair  value  of  approximately  $99.7  million,  resulting  in  a  non-cash
impairment  charge of $364.6 million  (including  $50.6 million relating to
operating  assets  and  $314.0  million  relating  to coal  reserves).  The
estimated  fair  value  for  the  three  mining  operations  was  based  on
anticipated  future cash flows discounted at a rate  commensurate  with the
risk  involved.  The  estimated  fair value for the coal  reserves  with no
future mining plans was based upon the fair value of these properties to be
derived from subleased operations. The impairment loss has been recorded as
a  loss  from  the  write-down  of  impaired  assets  in  the  consolidated
statements of operations.

3. CHANGE IN ACCOUNTING METHOD

Through  December  31,  1998,  plant and  equipment  had  principally  been
depreciated on the straight-line  method over the estimated useful lives of
the assets, which ranged from three to 20 years. Effective January 1, 1999,
depreciation on the Company's  preparation plants and loadouts was computed
using the  units-of-production  method, which is based upon units produced,
subject to a minimum level of  depreciation.  These assets are  usage-based
assets,  and their economic lives are typically  based and measured on coal
throughput.   The  Company  believes  the  units-of-production   method  is
preferable to the method previously used because the new method recognizes



                                       10
<PAGE>

that  depreciation of this equipment is related  substantially  to physical
wear due to usage and also to the passage of time. This method,  therefore,
more  appropriately   matches  production  costs  over  the  lives  of  the
preparation  plants and loadouts  with coal sales  revenue and results in a
more accurate  allocation of the cost of the physical assets to the periods
in which the assets are consumed. The cumulative effect of applying the new
method for years  prior to 1999 is an  increase  to income of $3.8  million
net-of-tax  ($6.3  million  pre-tax)  reported  as a  cumulative  effect of
accounting change in the consolidated  statement of operations for the year
ended  December  31,  1999.  In  addition,  the net  loss  of the  Company,
excluding the cumulative  effect of accounting  change,  for the year ended
December 31, 1999 is $0.2  million  less,  or $.01 per share less,  than it
would have been if the Company had  continued  to follow the  straight-line
method of depreciation of equipment for preparation plants and loadouts.


4. ACQUISITION

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

Arch  Western  is 99%  owned by the  Company  and 1%  owned  by  ARCO.  The
transaction  was valued at  approximately  $1.14 billion and a wholly owned
subsidiary  of the  Company is the  managing  member of Arch  Western.  The
transaction was accounted for under the purchase method of accounting.

Results of  operations  of the  acquired  operations  are  included  in the
consolidated  statements of operations effective June 1, 1998. The acquired
ARCO operations  continue to produce  low-sulfur coal for sale to primarily
domestic utility customers.


5. INVESTMENT IN CANYON FUEL

The following tables present unaudited summarized financial information for
Canyon Fuel  which,  as part of the June 1, 1998 Arch  Western  transaction
(described  in Note 4), was acquired by the Company and is accounted for on
the equity method.

CONDENSED INCOME STATEMENT INFORMATION

<TABLE>
<CAPTION>

                                                                                                               Seven
                                                                        Year Ended          Year Ended     Months Ended
                                                                      December 31,        December 31,      December 31,
(in thousands)                                                            2000                 1999              1998
------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                  <C>               <C>
Revenues                                                             $     259,101        $    241,062      $    155,634
Total costs and expenses                                                   243,226             232,296           156,196
------------------------------------------------------------------------------------------------------------------------
Net income                                                                  15,875               8,766              (562)
========================================================================================================================
65% of Canyon Fuel net income                                               10,319               5,698              (365)

Effect of purchase adjustments                                               2,518               5,431             7,151
------------------------------------------------------------------------------------------------------------------------
Arch Coal's income from its equity investment in Canyon Fuel         $      12,837        $     11,129      $      6,786
========================================================================================================================
</TABLE>



                                    11
<PAGE>

CONDENSED BALANCE SHEET INFORMATION


<TABLE>
<CAPTION>
                                                                 Arch
                                              Canyon     Ownership of
                                                Fuel      Canyon Fuel      Arch Purchase
December 31, 2000 (in thousands)               Basis            Basis        Adjustments       Arch Basis
=========================================================================================================
<S>                                       <C>            <C>               <C>                 <C>
Current assets                            $   67,075        $  43,599         $  (3,614)        $  39,985

Noncurrent assets                            411,146          267,245           (84,765)          182,480

Current liabilities                           33,766           21,948                 -            21,948

Noncurrent liabilities                        20,658           13,428            (1,611)           11,817
---------------------------------------------------------------------------------------------------------
Members' equity                           $  423,797        $ 275,468         $ (86,768)        $ 188,700
=========================================================================================================

<CAPTION>
December 31, 1999
---------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>               <C>                 <C>
Current assets                            $   61,212        $  39,788         $  (3,615)        $  36,173

Noncurrent assets                            441,330          286,865           (83,511)          203,354

Current liabilities                           37,065           24,092                 -            24,092

Noncurrent liabilities                        20,789           13,513             2,162            15,675
---------------------------------------------------------------------------------------------------------
Members' equity                           $  444,688        $ 289,048         $ (89,288)        $ 199,760
=========================================================================================================
</TABLE>

The Company's  income from its equity  investment in Canyon Fuel represents
65% of Canyon  Fuel's  net  income  after  adjusting  for the effect of its
investment in Canyon Fuel. The Company's investment in Canyon Fuel reflects
purchase adjustments primarily related to the reduction in amounts assigned
to  sales  contracts,  mineral  reserves  and  other  property,  plant  and
equipment.  The purchase  adjustments  are  amortized  consistent  with the
underlying assets of the joint venture.

6. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
December 31 (in thousands)                                          2000          1999
======================================================================================
<S>                                                            <C>           <C>
Accrued payroll and related benefits                           $  22,500     $  27,830

Accrued taxes other than income taxes                             50,267        47,727

Accrued postretirement benefits other than pension                16,629        14,755

Accrued workers' compensation                                     10,438        11,144

Accrued interest                                                  13,078         6,285

Accrued reclamation and mine closure                              16,126        26,540

Other accrued expenses                                            23,265        11,280
--------------------------------------------------------------------------------------
                                                               $ 152,303     $ 145,561
======================================================================================
</TABLE>



                                    12
<PAGE>

7. INCOME TAXES

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

<TABLE>
<CAPTION>
December 31 (in thousands)                                   2000         1999          1998
============================================================================================
<S>                                                      <C>         <C>           <C>
Current:
  Federal                                                $ (4,882)   $   6,796     $   8,077
  State                                                         -            -          (260)
--------------------------------------------------------------------------------------------
    Total current                                          (4,882)       6,796         7,817
--------------------------------------------------------------------------------------------
Deferred:
  Federal                                                   3,067      (54,135)      (12,583)
  State                                                    (2,185)     (18,361)         (334)
--------------------------------------------------------------------------------------------
    Total deferred                                            882      (72,496)      (12,917)
--------------------------------------------------------------------------------------------
                                                         $ (4,000)   $ (65,700)    $  (5,100)
============================================================================================
</TABLE>

A reconciliation  of the statutory  federal income tax expense (benefit) on
the Company's pretax income (loss) before extraordinary loss and cumulative
effect of accounting  change to the actual  provision  (benefit) for income
taxes follows:


<TABLE>
<CAPTION>
Year ended December 31 (in thousands)                        2000         1999          1998
============================================================================================
<S>                                                      <C>         <C>           <C>
Income tax expense (benefit) at statutory rate           $ (5,858)   $(145,526)    $   9,240
Percentage depletion allowance                             (9,063)     (15,000)      (14,437)
State taxes, net of effect of federal taxes                (1,797)     (18,361)         (594)
Change in valuation allowance                               5,515      112,345             -
AMT credit adjustment due to IRS exam                       6,704            -             -
Other, net                                                    499          842           691
--------------------------------------------------------------------------------------------
                                                         $ (4,000)   $ (65,700)    $  (5,100)
============================================================================================
</TABLE>


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

During 1999, the Company  settled an audit of former Ashland Coal, Inc. for
the years  January  1995  through  June 1997. A payment of $0.1 million was
made in January 1999 in settlement of all issues.



                                    13
<PAGE>

On January  10,  2000,  the  Company  received  notice  from the IRS of its
proposed adjustments for tax years 1995 and 1996. The Company has agreed to
pay $6.0 million  including  accrued interest to partially settle the audit
but will continue to contest  additional  tax  adjustments  of $0.8 million
with the IRS. The Company  expects to pay the $6.0 million during the first
quarter  of  2001,  which  will  be  charged  against  previously  recorded
reserves.

The following is a summary of additional  taxes paid for IRS audits and the
related financial  statement  impact,  none of which resulted in additional
expense in the  statements  of  operations  subsequent  to the tax years to
which they relate:

<TABLE>
<CAPTION>
                            Net Deferred        Taxes  Income Tax        Cash
(in millions)                   Tax Asset      Payable    Reserves        Paid
=============================================================================
<S>                         <C>               <C>      <C>             <C>
1998                              $  6.1       $  4.6      $  5.3      $ 16.0
1999                                 0.2            -        (0.1)        0.1
2000                                   -            -           -           -
-----------------------------------------------------------------------------
     Totals                       $  6.3       $  4.6      $  5.2      $ 16.1
=============================================================================
</TABLE>

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

Significant components of the Company's deferred tax assets and liabilities
that result  from carry  forwards  and  temporary  differences  between the
financial  statement  basis  and tax basis of assets  and  liabilities  are
summarized as follows:

<TABLE>
<CAPTION>
December 31 (in thousands)                                   2000        1999
=============================================================================
<S>                                                    <C>         <C>
DEFERRED TAX ASSETS:
-----------------------------------------------------------------------------
  Postretirement benefits other than pension           $  136,268  $  139,796
  Alternative minimum tax credit carryforward              80,017      91,604
  Workers' compensation                                    30,301      43,029
  Reclamation and mine closure                             25,019      30,016
  Net operating loss carryforwards                         28,338      11,507
  Plant, equipment, coal lands and mineral rights          17,784      40,104
  Advance royalties                                        15,976      24,064
  Other                                                    55,035      25,514
-----------------------------------------------------------------------------
     Gross deferred tax assets                            388,738     405,634
  Valuation allowance                                    (117,860)   (112,345)
-----------------------------------------------------------------------------
     Total deferred tax assets                            270,878     293,289
-----------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
-----------------------------------------------------------------------------
  Leases                                                   20,371      21,990
  Coal supply agreements                                   19,796      36,750
  Other                                                    23,928      30,449
-----------------------------------------------------------------------------
     Total deferred tax liabilities                        64,095      89,189
-----------------------------------------------------------------------------
     Net deferred tax asset                               206,783     204,100
  Less current asset                                       27,440      21,600
-----------------------------------------------------------------------------
     Long-term deferred tax asset                      $  179,343  $  182,500
=============================================================================
</TABLE>



                                    14
<PAGE>

The Company has a net operating  loss  carryforward  for regular income tax
purposes of $28.3 million which will expire in the years 2008 to 2014.  The
Company has an alternative minimum tax credit carryforward of $80.0 million
which may carry forward indefinitely to offset future regular tax in excess
of alternative minimum tax.

During 1999,  the Company  recorded a valuation  allowance for a portion of
its deferred  tax assets that  management  believes,  more likely than not,
will not be realized.  These  deferred tax assets  include a portion of the
alternative  minimum  tax  credits  and  some of the  deductible  temporary
differences  that will likely not be realized at the maximum  effective tax
rate.  Such valuation  allowance  consisted of the following  components at
December 31 on the years indicated:

December 31 (in thousands)                                    2000         1999
===============================================================================

Unrealized future deductible temporary differences      $   85,372   $   66,992
Unutilized alternative minimum tax credits                  32,488       45,353
-------------------------------------------------------------------------------
Valuation allowance at December 31                      $  117,860   $  112,345
===============================================================================


8.   DEBT AND FINANCING ARRANGEMENTS

Debt consists of the following:

<TABLE>
<CAPTION>
December 31 (in thousands)                                                                2000          1999
============================================================================================================
<S>                                                                                 <C>           <C>
Indebtedness to banks under revolving credit agreement, expiring May 31, 2003
   (weighted average rate at December 31, 2000-8.00%, December 31, 1999-7.61%)      $  332,100    $  365,000
Variable rate fully amortizing term loan payable quarterly from July 1, 2001
   through May 31, 2003 (weighted average rate at December 31, 2000-8.29%,
   December 31, 1999-7.49%)                                                            135,000       135,000
Variable rate non-amortizing term loan due May 31, 2003
   (weighted average rate at December 31, 2000-8.03%, December 31, 1999-7.85%)         675,000       675,000
Other                                                                                    8,695         5,993
------------------------------------------------------------------------------------------------------------
                                                                                     1,150,795     1,180,993
Less current portion                                                                    60,129        86,000
------------------------------------------------------------------------------------------------------------
Long-term debt                                                                      $1,090,666    $1,094,993
============================================================================================================
</TABLE>

The  Company  has  two  five-year   credit   facilities:   a  $675  million
non-amortizing term loan in the name of Arch Western, the entity owning the
right  to the coal  reserves  and  operating  assets  acquired  in the Arch
Western transaction,  and a $900 million credit facility in the name of the
Company,  including a $300 million  fully  amortizing  term loan and a $600
million  revolver.  The $675 million term loan is secured by Arch Western's
membership interests in its subsidiaries.  The Arch Western credit facility
is not  guaranteed by the Company.  The rate of interest on the  borrowings
under the agreements is, at the Company's option, the PNC Bank base rate or
a rate based on LIBOR. The revolving credit agreement provides borrowing up
to $600 million  less any  outstanding  letters of credit.  At December 31,
2000, the Company had $32.3 million in letters of credit  outstanding which
when combined with borrowings under the revolver allowed for $235.6 million
of available borrowings under the revolver.

On August 23, 1999,  the Company  prepaid $105 million,  or seven  required
quarterly installments, on the $300 million fully amortizing term loan. The
next required  quarterly  installment will be July 1, 2001. The prepayments
were funded by additional borrowings under the $600 million revolver.


                                    15
<PAGE>

The  Company  periodically  establishes  uncommitted  lines of credit  with
banks.  These  agreements  generally  provide for short-term  borrowings at
market  rates.  At  December  31,  2000,  there  were $20  million  of such
agreements in effect, of which no borrowings were outstanding.

Except for amounts  expected to be repaid in 2001,  amounts  borrowed under
the revolving  credit agreement and the bank lines of credit are classified
as  long-term  as the  Company  has the intent and the  ability to maintain
these borrowings on a long-term  basis.  Aggregate  required  maturities of
debt at  December  31,  2000 for the next five  years are $33.6  million in
2001,  $60.5 million in 2002,  $1.1 billion in 2003,  $0.6 million in 2004,
$0.6 million in 2005 and $2.9 million thereafter.

Terms of the Company's credit  facilities and leases contain  financial and
other  covenants  that limit the  ability of the  Company  to,  among other
things, effect acquisitions or dispositions and borrow additional funds and
require the Company to,  among other  things,  maintain  various  financial
ratios and comply with various other financial covenants.  In addition, the
covenants  required the pledging of assets to  collateralize  the term loan
and the $600 million revolver.  The assets pledged include equity interests
wholly  owned  subsidiaries,   certain  real  property  interest,  accounts
receivable  and inventory of the Company.  Failure by the Company to comply
with such covenants could result in an event of default which, if not cured
or waived, could have a material adverse effect on the Company. The Company
was in compliance with these financial covenants at December 31, 2000.

The  Company  enters  into  interest-rate  swap  agreements  to modify  the
interest characteristics of the Company's outstanding debt. At December 31,
2000, the Company had interest-rate swap agreements having a total notional
value  of  $767.5  million.  These  swap  agreements  are  used to  convert
variable-rate  debt to fixed-rate debt.  Under these swap  agreements,  the
Company  pays a  weighted-average  fixed rate of 6.16%  (before  the credit
spread over LIBOR) and is receiving a weighted-average  variable rate based
upon 30-day and 90-day LIBOR.  At December 31, 2000, the remaining terms of
the swap agreements ranged from 20 to 54 months.

9. FAIR VALUES OF FINANCIAL INSTRUMENTS

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

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

Debt: The carrying amounts of the Company's  borrowings under its revolving
credit  agreement,  lines of  credit,  variable  rate term  loans and other
long-term debt approximate their fair value.

Interest  rate swaps:  The fair values of interest  rate swaps are based on
quoted prices,  which reflect the present value of the  difference  between
estimated future amounts to be paid and received.  At December 31, 2000 and
1999,  the fair value of these  swaps is a  liability  and an asset of $7.9
million and $27.4 million respectively.

10.  ACCRUED WORKERS' COMPENSATION

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


                                    16
<PAGE>

service.  In  addition,  the  Company is liable for  workers'  compensation
benefits for traumatic injuries which are accrued as injuries are incurred.
Workers' compensation costs (credits) include the following components:


Year ended December 31 (in thousands)     2000         1999          1998
===========================================================================

Self-insured black lung benefits:
   Service cost                         $  1,273     $  1,671      $  1,022
   Interest cost                           3,620        3,522         3,173
   Net amortization and deferral          (1,486)         327           111
---------------------------------------------------------------------------
                                           3,407        5,520         4,306
Other workers' compensation benefits       6,942       13,241        19,396
---------------------------------------------------------------------------
                                        $ 10,349     $ 18,761      $ 23,702
===========================================================================

The actuarial  assumptions used in the determination of black lung benefits
included a discount  rate of 7.75% as of December 31, 2000 (7.50% and 7.00%
as of December  31, 1999 and 1998,  respectively)  and a black lung benefit
cost  escalation  rate of 4% in 2000,  1999 and 1998. In 2000,  the Company
settled   several  of  its   mining   operations'   self-insured   workers'
compensation  and black lung  liabilities  with the State of West Virginia,
resulting in pre-tax gains of $21.8 million.  This was partially  offset by
adjustments  to other  workers'  compensation  liabilities  resulting  from
changes in  estimates  which  caused  increases  to the  liability of $13.5
million.

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

December 31 (in thousands)                                   2000        1999
================================================================================

Actuarial present value for self-insured black lung:
   Benefits contractually recoverable from others         $   2,144   $    3,254
   Benefits for Company employees                            35,710       48,267
--------------------------------------------------------------------------------
   Accumulated black lung benefit obligation                 37,854       51,521
   Unrecognized net gain (loss)                               6,252        4,890
--------------------------------------------------------------------------------
                                                             44,106       56,411
Traumatic and other workers' compensation                    44,925       59,923
--------------------------------------------------------------------------------
Accrued workers' compensation                                89,031      116,334
Less amount included in accrued expenses                     10,438       11,144
--------------------------------------------------------------------------------
                                                          $  78,593   $  105,190
================================================================================

Receivables  related to benefits  contractually  recoverable from others of
$2.1  million  in 2000  and $3.3  million  in 1999  are  recorded  in other
long-term assets.


                                    17
<PAGE>

11. ACCRUED RECLAMATION AND MINE CLOSING COSTS

The federal  Surface Mining Control and Reclamation Act of 1977 and similar
state  statutes  require that mine property be restored in accordance  with
specified  standards and an approved  reclamation plan. The Company accrues
for the costs of final mine closure  reclamation  over the estimated useful
mining life of the property.  These costs relate to reclaiming  the pit and
support acreage at surface mines and sealing  portals at deep mines.  Other
costs of final mine  closure  common to both types of mining are related to
reclaiming   refuse  and  slurry  ponds.   The  Company  also  accrues  for
significant  reclamation  that is completed during the mining process prior
to  final  mine  closure.  The  establishment  of the  final  mine  closure
reclamation  liability and the other ongoing reclamation liability is based
upon permit  requirements and requires  various  estimates and assumptions,
principally  associated with costs and productivities.  The Company accrued
$10.4  million,  $12.9  million and $12.5  million in 2000,  1999 and 1998,
respectively,  for current and final mine  closure  reclamation,  excluding
reclamation recosting adjustments identified below. Cash payments for final
mine  closure  reclamation  and  current  disturbances  approximated  $18.2
million,   $15.8  million  and  $15.0  million  for  2000,  1999  and  1998
respectively.  Periodically,  the Company reviews its entire  environmental
liability and makes necessary  adjustments for permit changes as granted by
state  authorities,   additional  costs  resulting  from  accelerated  mine
closures,  and revisions to costs and  productivities,  to reflect  current
experience. These recosting adjustments are recorded in cost of coal sales.
Adjustments  included a net  decrease in the  liability  of $9.2 million in
2000 and a net  increase in the  liability of $4.3 million and $4.9 million
in 1999 and 1998,  respectively.  The Company's  management  believes it is
making  adequate  provisions for all expected  reclamation  and other costs
associated with mine closures.

12. EMPLOYEE BENEFIT PLANS

DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT  BENEFIT PLANS

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

The Company also currently  provides  certain  postretirement  medical/life
insurance coverage for eligible employees. Generally, covered employees who
terminate  employment after meeting  eligibility  requirements are eligible
for  postretirement  coverage  for  themselves  and their  dependents.  The
salaried employee postretirement medical/life plans are contributory,  with
retiree contributions adjusted periodically, and contain other cost-sharing
features such as deductibles and coinsurance.  The  postretirement  medical
plan for  retirees  who were  members of the United Mine Workers of America
("UMWA") is not  contributory.  The Company's  current funding policy is to
fund the cost of all postretirement medical/life insurance benefits as they
are paid. Summaries of the changes in the benefit obligations,  plan assets
(primarily  listed  stocks and debt  securities)  and funded  status of the
plans are as follows:

                                    18
<PAGE>

<TABLE>
<CAPTION>
                                                                                                    Other
                                                            Pension Benefits              Postretirement Benefits
(in thousands)                                            2000            1999             2000               1999
=====================================================================================================================
<S>                                                   <C>            <C>                <C>                <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at January 1                      $ 131,783      $ 139,433          $ 330,846          $ 335,823
Service cost                                              6,817          7,118              1,901              2,424
Interest cost                                             9,546          8,980             24,416             21,580
Benefits paid                                           (15,111)       (13,462)           (16,636)           (14,736)
Plan amendments                                             642           (435)           (13,658)                 -
Other-primarily actuarial (gain) loss                     5,387         (9,851)           (27,437)           (14,245)
--------------------------------------------------------------------------------------------------------------------
Benefit obligations at December 31                    $ 139,064      $ 131,783          $ 299,432          $ 330,846
--------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Value of plan assets at January 1                     $ 147,217      $ 127,274          $       -          $       -
Actual return on plan assets                             (2,915)        31,308                  -                  -
Employer contributions                                    9,673          2,097             16,636             14,736
Benefits paid                                           (15,111)       (13,462)           (16,636)           (14,736)
--------------------------------------------------------------------------------------------------------------------
Value of plan assets at December 31                   $ 138,864      $ 147,217          $       -          $       -
--------------------------------------------------------------------------------------------------------------------
FUNDED STATUS OF THE PLANS
Accumulated obligations less plan assets              $     200      $ (15,434)         $ 299,432          $ 330,846
Unrecognized actuarial gain                              16,908         37,513             41,304             16,341
Unrecognized net transition asset                           491            689                  -                  -
Unrecognized prior service gain                           1,886          2,815             12,556             11,561
--------------------------------------------------------------------------------------------------------------------
Net liability recognized                              $  19,485      $  25,583          $ 353,292          $ 358,748
--------------------------------------------------------------------------------------------------------------------
BALANCE SHEET LIABILITIES
Prepaid benefit costs                                 $       -      $       -          $       -          $       -
Accrued benefit liabilities                              19,485         25,583            353,292            358,748
--------------------------------------------------------------------------------------------------------------------
Net liability recognized                                 19,485         25,583            353,292            358,748
Less current portion                                        198          3,138             16,629             14,755
--------------------------------------------------------------------------------------------------------------------
Long term liability                                   $  19,287      $  22,445          $ 336,663          $ 343,993
--------------------------------------------------------------------------------------------------------------------
</TABLE>

The reduction in the  postretirement  benefit obligation in 2000 associated
with the  $13.7  million  plan  amendment  resulted  from:  the  July  2000
amendment  changing  some of the cost  sharing  provisions  of the plan for
salaried  and  non-union  hourly  participants;  and an  October  2000 plan
amendment  changing  eligibility  requirements to 10 years of service after
reaching age 45 for salaried and non- union hourly participants. The latter
plan change  triggered a curtailment  that resulted in the  recognition  of
$9.8  million in  previously  unrecognized  prior  service  gains.  The $25
million increase in the 2000 unrecognized actuarial gain from 1999 resulted
from plan assumption changes.



                                     19
<PAGE>

The actuarial  loss in the 2000 pension  benefit  obligation  resulted from
changes in plan  assumptions.  The  decrease in funded  status in year 2000
resulted from decreased earnings on plan assets during the year, which also
contributed to the reduction in the unrecognized actuarial gain as compared
to the prior year.

<TABLE>
<CAPTION>
                                                                                                                Other
                                                                           Pension Benefits            Postretirement Benefits
December 31                                                              2000            1999          2000               1999
==============================================================================================================================
<S>                                                                      <C>             <C>           <C>                <C>
Weighted average assumptions
Discount rate                                                            7.75%           7.50%         7.75%              7.50%
Rate of compensation increase                                            4.75%           5.25%          N/A                N/A
Expected return on plan assets                                           9.00%           9.00%          N/A                N/A
Health care cost trend on covered charges                                 N/A             N/A          5.00%              5.00%
</TABLE>

The following table details the components of pension and other post-retirement
benefit costs.

<TABLE>
<CAPTION>
                                                     Pension Benefits                       Other Postretirement Benefits
Year ended December 31 (in thousands)           2000         1999         1998            2000            1999            1998
==============================================================================================================================
<S>                                         <C>          <C>          <C>             <C>             <C>             <C>
Service cost                                $  6,817     $  7,118     $  5,841        $  1,901        $  2,424        $  3,715
Interest cost                                  9,546        8,980        8,137          24,416          21,580          23,101
Expected return on plan assets               (10,915)      (9,929)      (7,521)              -               -               -
Other amortization and deferral               (3,047)      (1,122)         790          (5,382)         (9,628)         (2,884)
Curtailments                                       -            -            -          (9,756)              -               -
------------------------------------------------------------------------------------------------------------------------------
                                            $  2,401     $  5,047     $  7,247        $ 11,179        $ 14,376        $ 23,932
==============================================================================================================================
</TABLE>


The health care cost trend rate assumption has a significant  effect on the
amounts  reported.  For example,  increasing  the assumed  health care cost
trend rate by one percentage point each year would increase the accumulated
postretirement  obligation  as of December  31, 2000 by $35.7  million,  or
11.9%,  and the net periodic  postretirement  benefit cost for 2000 by $2.7
million, or 24.2%.

MULTI-EMPLOYER PENSION AND BENEFIT PLANS

Under the labor  contract with the UMWA,  the Company made payments of $0.1
million,   $0.2  million  and  $1.3   million  in  2000,   1999  and  1998,
respectively,  into a  multi-employer  defined  benefit  pension plan trust
established for the benefit of union employees. Payments are based on hours
worked and are  expensed as paid.  Under the  Multi-employer  Pension  Plan
Amendments Act of 1980, a contributor to a milti-employer  pension plan may
be liable, under certain circumstances,  for its proportionate share of the
plan's  unfunded  vested benefit  (withdrawal  liability).  At December 31,
2000, the Company has been informed by the UMWA Health and Retirement Funds
that the UMWA 1950 and 1974 Pension  Plans do not have any unfunded  vested
benefits.  Therefore,  there is no withdrawal liability to the Company. The
Company is not aware of any circumstances which would require it to reflect
its share of unfunded vested pension benefits in its financial  statements.
At December 31, 2000,  approximately  17% of the  Company's  workforce  was
represented by the UMWA. The current UMWA collective  bargaining  agreement
expires at December 31, 2002.

The Coal  Industry  Retiree  Health  Benefit  Act of 1992  ("Benefit  Act")
provides for the funding of medical and death benefits for certain  retired
members  of the UMWA  through  premiums  to be paid by  assigned  operators
(former employers), transfers of monies in 1993 and




                                    20
<PAGE>

1994 from an  overfunded  pension  trust  established  for the  benefit  of
retired UMWA  members,  and transfers  from the  Abandoned  Mine Lands Fund
(funded  by a  federal  tax on coal  production)  commencing  in 1995.  The
Company treats its obligation under the Benefit Act as a participation in a
multi-employer  plan and  recognizes  expense  as  premiums  are paid.  The
Company  recognized  $3.3  million in 2000,  $2.7  million in 1999 and $3.7
million in 1998,  in expense  relative  to  premiums  paid  pursuant to the
Benefit Act.


OTHER PLANS

The  Company  sponsors  savings  plans  which  were  established  to assist
eligible  employees in providing  for their future  retirement  needs.  The
Company's  contributions  to the plans  were  $8.0  million  in 2000,  $8.4
million in 1999 and $6.8 million in 1998.

13. CAPITAL STOCK

Subsequent to the end of the year, the Company  completed a public offering
of  9,927,765  shares  of its  common  stock.  The  offering  consisted  of
5,170,797 shares sold directly by the Company  (including  1,541,146 shares
held in the Company's  treasury) and the remaining 4,756,968 shares held by
its then  largest  stockholder,  Ashland  Inc.  The net  proceeds  of $93.2
million from the shares sold  directly by the Company were used to pay down
debt.

On September 29, 1998,  the  Company's  Board of Directors  authorized  the
Company to repurchase up to 2 million shares of Company  common stock.  The
timing of the  purchases  and the  number of  shares  to be  purchased  are
dependent on market conditions.  Through December 31, 1999, the Company had
acquired  1,726,900 shares under the repurchase program at an average price
of $12.29 per share. There were no treasury share purchases during 2000.

On February 25, 1999,  the  Company's  Board of  Directors  authorized  the
Company to amend its Automatic Dividend Reinvestment Plan to provide, among
other things,  that  dividends  may be  reinvested in the Company's  common
stock by purchasing  authorized  but unissued  shares  (including  treasury
shares) directly from the Company,  as well as by purchasing  shares in the
open  market.  On May 4,  1999,  the  Company  filed a Form  S-3  with  the
Securities  and Exchange  Commission  to register  2,000,000  shares of the
Company's common stock for issuance under the amended Plan. As reflected in
the Prospectus filed therewith,  the amended Plan provides that the Company
determines  whether the Plan's  administrator  should reinvest dividends in
shares purchased in the open market or in shares acquired directly from the
Company.  The Company  authorized and directed its Plan  administrator (for
all  shareholders  who had elected to reinvest  their  dividends in Company
stock) to reinvest the June 15, 1999 and  September  15, 1999  dividends in
the  Company's   treasury   stock.  As  of  December  31,  2000  and  1999,
approximately  $2.5 million of the Company's  dividends were  reinvested in
189,506  shares of  treasury  stock.  In  accordance  with the terms of the
amended Plan, the treasury stock was reissued by the Company at the average
of the high and low per  share  sales  prices as  reported  by the New York
Stock  Exchange on the date of the  dividend,  which  averaged  $13.446 per
share.  The Company  accounts for the issuance of the treasury  stock using
the average cost method.


14. STOCKHOLDER RIGHTS PLAN

On March 3, 2000, the Board of Directors adopted a stockholder  rights plan
under which preferred share purchase rights were  distributed as a dividend
to the Company's  stockholders  of record on March 20, 2000. The rights are
exercisable only if a person or group acquires 20% or more of the Company's
common  stock (an  "Acquiring  Person")  or  announces a tender or exchange
offer the  consummation  of which would  result in ownership by a person or
group of 20% or more of the Company's common stock. Each right entitles the
holder  to  buy  one  one-hundredth  of a  share  of  a  series  of  junior
participating  preferred  stock at an  exercise  price of $42 or in certain
circumstances  allows  the  holder  (expect  for the  Acquiring  Person) to
purchase the Company's common stock or voting stock of the


                                    21
<PAGE>

Acquiring Person at a discount. At its option, the Board of Directors may allow
some or all holders (except for the Acquiring Person) to exchange their rights
for Company common stock. The rights will expire on March 20, 2010, subject
to
earlier redemption or exchange by the Company as described in the plan.


15.  STOCK INCENTIVE PLAN

On April 22, 1998, the stockholders ratified the adoption of the 1997 Stock
Incentive Plan (the "Company Incentive Plan"),  reserving  6,000,000 shares
of Arch Coal common  stock for awards to officers  and other  selected  key
management  employees of the Company.  The Company  Incentive Plan provides
the Board of Directors with the  flexibility to grant stock options,  stock
appreciation  rights  (SARs),  restricted  stock awards,  restricted  stock
units,  performance stock or units, merit awards,  phantom stock awards and
rights to acquire stock through  purchase  under a stock  purchase  program
("Awards").  Awards the Board of Directors  elect to pay out in cash do not
count against the 6,000,000  shares  authorized in the 1997 Stock Incentive
Plan.

Stock options generally become exercisable in full or in part one year from
the  date of grant  and are  granted  at a price  equal to 100% of the fair
market value of the stock on the date of grant.  SARs entitle  employees to
receive a payment equal to the  appreciation  in market value of the stated
number of common shares from the SARs'  exercise  price to the market value
of the shares on the date of its  exercise.  Unexercised  options  and SARs
lapse 10 years  after  the  date of  grant.  Restricted  stock  awards  and
restricted stock units entitle  employees to purchase shares or stock units
at a nominal cost.  Such awards entitle  employees to vote shares  acquired
and to receive any  dividends  thereon,  but such shares  cannot be sold or
transferred  and are subject to  forfeiture  if employees  terminate  their
employment  prior to the prescribed  period,  which can be from one to five
years.  Restricted  stock units generally carry the same  restrictions  and
potential  forfeiture,  but are generally paid in cash upon vesting.  Merit
awards  are  grants of stock  without  restriction  and at a nominal  cost.
Performance  stock or unit  awards  can be earned by the  recipient  if the
Company meets certain pre-established  performance measures.  Until earned,
the performance awards are  nontransferable,  and when earned,  performance
awards are payable in cash, stock, or restricted stock as determined by the
Company's  Board  of  Directors.  Phantom  stock  awards  are  based on the
appreciation of hypothetical  underlying shares or the earnings performance
of such shares and may be paid in cash or in shares of common stock.

As of December 31, 2000,  performance units and stock options were the only
types of awards granted.  As of December 31, 2000, 2.1 million  performance
units had been  granted  under the plan.  The  performance  awards  will be
earned by participants based on Company  performance for .4 million and 1.7
million  performance units for the years 1998 through 2001 and 2000 through
2003,  respectively.  The Company accrues for anticipated awards to be paid
out in cash over the life of the award. Information regarding stock options
under the Company Incentive Plan is as follows for the years ended December
31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                2000                      1999                        1998
                                                            Weighted                  Weighted                    Weighted
                                                  Common     Average       Common      Average       Common        Average
(in thousands except per share data)              Shares       Price       Shares        Price       Shares          Price
==========================================================================================================================
<S>                                               <C>       <C>            <C>        <C>            <C>          <C>
Options outstanding at January 1                   1,809     $ 19.33        1,128      $ 24.86          926        $ 25.23
Granted                                               62        9.44          744        10.69          360          22.88
Exercised                                             (9)      10.69            -            -          (48)         14.50
Canceled                                            (273)      18.61          (63)       16.28         (110)         25.88
--------------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31                 1,589       19.11        1,809        19.33        1,128          24.86
==========================================================================================================================
Options exercisable at December 31                   965     $ 23.57          837      $ 24.77          600        $ 25.04
Options available for grant at December 31         4,305                    4,094                     4,775
</TABLE>

                                    22
<PAGE>

The Company applies APB 25,  Accounting for Stock Issued to Employees,  and
related  Interpretations  in  accounting  for the Company  Incentive  Plan.
Accordingly,  no  compensation  expense has been  recognized  for the fixed
stock  option  portion of the  Company  Incentive  Plan.  Had  compensation
expense for the fixed stock option  portion of the Company  Incentive  Plan
been determined based on the fair value at the grant dates for awards under
this plan consistent with the method of FAS 123, Accounting for Stock-Based
Compensation,  the  Company's  net income  (loss) and  earnings  (loss) per
common share would have been changed to the pro forma  amounts as indicated
in the table below.  The after-tax  fair value of options  granted in 2000,
1999 and 1998 was  determined  to be $0.2  million,  $2.9  million and $2.3
million, respectively, using the Black-Scholes option pricing model and the
weighted average  assumptions  noted below. For purposes of these pro forma
disclosures,  the  estimated  fair value of the  options is  recognized  as
compensation  expense over the options'  vesting period.  The stock options
granted in 2000,  1999 and 1998 vest  ratably  over  three,  four and three
years, respectively.

<TABLE>
<CAPTION>
Year ended December 31 (in millions except per share data)               2000      1999      1998
=================================================================================================
<S>                                                                   <C>       <C>        <C>
As reported
   Net income (loss)                                                  $ (12.7)  $(346.3)   $ 30.0
   Basic and diluted earnings (loss) per share                           (.33)    (9.02)      .76
Pro forma (unaudited)
   Net income (loss)                                                  $ (14.1)  $(347.7)   $ 29.3
   Basic and diluted earnings (loss) per share                           (.37)    (9.06)      .74
Weighted average fair value per share of options granted              $  4.06   $  4.13    $ 7.22
Assumptions (weighted average)
   Risk-free interest rate                                                5.1%      6.6%      6.0%
   Expected dividend yield                                                2.0%      2.0%      2.0%
   Expected volatility                                                   51.2%     41.4%     31.8%
   Expected life (in years)                                               5.0       5.0       5.0
</TABLE>

The table below shows pertinent information on options outstanding at December
31, 2000:

<TABLE>
<CAPTION>
(Options in thousands)                   Options Outstanding                                      Options Exercisable

                                          Weighted Average                                                   Weighted
                                                 Remaining         Weighted                                   Average
Range of                          Number       Contractual          Average                     Number       Exercise
Exercise Prices              Outstanding      Life (Years)   Exercise Price                Exercisable          Price
=====================================================================================================================
<S>                          <C>          <C>                <C>                           <C>               <C>
$ 8 - $11                            662              8.29           $10.58                        122         $10.67
$22 - $23                            479              5.68            22.56                        395          22.49
$25 - $35                            448              4.57            28.05                        448          28.05
---------------------------------------------------------------------------------------------------------------------
$ 8 - $35                          1,589              6.46           $19.11                        965         $23.57
</TABLE>


                                    23
<PAGE>

16.  CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS

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

The Company  markets its coal  principally  to  electric  utilities  in the
United States.  Sales to foreign  countries are immaterial.  As of December
31, 2000 and 1999,  accounts  receivable from electric utilities located in
the United States totaled $112.2 million and $120.2 million,  respectively.
Generally,  credit is extended  based on an  evaluation  of the  customer's
financial  condition,  and  collateral  is not generally  required.  Credit
losses are provided for in the financial  statements and historically  have
been minimal.

The Company is  committed  under  long-term  contracts  to supply coal that
meets certain quality  requirements at specified  prices.  These prices are
generally  adjusted based on indices.  Quantities  sold under some of these
contracts may vary from year to year within certain limits at the option of
the customer. The Company and its operating subsidiaries sold approximately
105.5 million tons of coal in 2000.  Approximately  79% of this tonnage was
sold under long-term contracts (contracts having a term of greater than one
year)  accounting for 78% of the Company's  total revenue.  Prices for coal
sold  under  long-term  contracts  ranged  from  $3.45 to  $52.95  per ton.
Long-term  contracts ranged in remaining life from one to 18 years. Some of
these  contracts  include  pricing  which  is  above  and,  in some  cases,
materially above current market prices. The Company currently supplies coal
under  long-term  coal supply  contracts with one customer which have price
renegotiation or modification  provisions that take effect in mid-2001. The
prices for coal shipped  under these  contracts  are  materially  above the
current market price for similar type coal. For the year ended December 31,
2000, approximately $18.4 million of the Company's operating income related
to these  contracts.  The  Company  expects  income from  operations  to be
reduced by approximately  one-half of the operating income  attributable to
these contracts in 2001 and by the full amount of this operating  income in
2002.  These  amounts are  predicated  on current  market  pricing and will
change  with  market  conditions.  Sales  (including  spot  sales) to major
customers were as follows:

Year ended December 31 (in thousands)                   2000      1999      1998
--------------------------------------------------------------------------------

AEP                                                 $188,129  $157,278  $195,682

Southern Company                                     161,553   163,826   170,452



                                    24
<PAGE>

17. EARNINGS (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
Year ended December 31 (in thousands except per share data)                                 2000           1999          1998
===============================================================================================================================
<S>                                                                                     <C>           <C>            <C>
Numerator:
  Income (loss) before extraordinary loss and cumulative effect of accounting change    $  (12,736)   $  (350,093)   $   31,501
  Extraordinary loss from the extinguishment of debt, net of taxes                               -              -        (1,488)
  Cumulative effect of accounting change, net of taxes                                           -          3,813             -
-------------------------------------------------------------------------------------------------------------------------------
  Net income (loss)                                                                     $  (12,736)   $  (346,280)   $   30,013
===============================================================================================================================
Denominator:
  Weighted average shares-denominator for basic                                             38,164         38,392        39,626
  Dilutive effect of employee stock options                                                      -              -            25
-------------------------------------------------------------------------------------------------------------------------------
  Adjusted weighted average shares-denominator for diluted                                  38,164         38,392        39,651
===============================================================================================================================
Basic and diluted earnings (loss) per common share before
  extraordinary loss and cumulative effect of accounting change                         $     (.33)   $     (9.12)   $      .79
===============================================================================================================================
Basic and diluted earnings (loss) per common share                                      $     (.33)   $     (9.02)   $      .76
===============================================================================================================================
</TABLE>

At December  31,  2000,  1999 and 1998,  1.6  million,  1.8 million and 1.1
million  shares,  respectively,  were not included in the diluted per share
calculation  since the exercise  price is greater  than the average  market
price.


18. SALE AND LEASEBACK

On June 30, 2000, the Company sold several  shovels and  continuous  miners
for $14.9 million and leased back the equipment under operating and capital
leases.  The  proceeds  of the  sales  were  used to pay down  debt and for
general corporate  purposes.  The shovels have been leased over a period of
five years, while the continuous miners have been leased with terms ranging
from  two to five  years.  The  leases  contain  renewal  options  at lease
termination  and purchase  options at amounts  approximating  fair value at
lease  termination.  The gain on the sale and leaseback of $1.5 million was
deferred  and is  being  amortized  over the  base  term of the  lease as a
reduction of lease expense.

On January 29, 1998,  the Company sold mining  equipment for  approximately
$74.2 million and leased back the equipment under an operating lease with a
term of three  years.  This  included  the sale and  leaseback of equipment
purchased  under an existing  operating lease that expired on the same day.
The  proceeds of the sale were used to  purchase  the  equipment  under the
expired  lease for $28.3  million  and to pay down debt.  At the end of the
lease  term,  the  Company  had the  option  to  renew  the  lease  for two
additional one-year periods or purchase the equipment.  Alternatively,  the
equipment could have been sold to a third party. The gain on the sale and


                                    25
<PAGE>

leaseback of $10.7  million was deferred  and is being  amortized  over the
base term of the lease as a reduction of rental expense. Effective April 1,
1999 and  February 4, 2000,  the Company  purchased  for $14.4  million and
$10.3 million,  respectively,  several pieces of equipment under lease that
were included in this transaction. A pro-rata portion of the deferred gain,
or $3.4  million,  was offset  against the cost of the  assets.  On May 17,
2000, the Company  purchased the remaining assets under the lease for $34.7
million,  which  resulted in the  termination  of the lease.  The remaining
deferred gain of $1.2 million was offset against the cost of the assets.

19. RELATED PARTY TRANSACTIONS

In the ordinary course of business,  the Company  receives certain services
and purchases  fuel,  oil and other  products on a  competitive  basis from
subsidiaries  of Ashland  Inc.,  which  totaled $3.6 million in 2000,  $4.8
million in 1999 and $7.2 million in 1998.  Management believes that charges
between the Company  and Ashland  Inc.  for  services  and  purchases  were
transacted  on terms  equivalent  to those  prevailing  among  unaffiliated
parties.  At December 31, 2000, Ashland Inc. owned approximately 12% of the
Company's  outstanding  shares of common  stock.  On  August 3,  2000,  the
Company  received a written  notice  from  Ashland  Inc.  pursuant to which
Ashland Inc. exercised its demand  registration rights under a Registration
Rights  Agreement,  dated April 4, 1997, by and among the Company,  Ashland
Inc., Carboex  International,  Limited (now Carboex,  S.A.) and the certain
Hunt entities and requested that its remaining  4,756,968 shares be sold by
means of an  underwritten  offering.  Such shares were sold  subsequent  to
year-end.

As described in Note 1, the Company has a 65% ownership  interest in Canyon
Fuel which is  accounted  for on the equity  method.  The Company  receives
administration and production fees from Canyon Fuel for managing the Canyon
Fuel operations. The fee arrangement is calculated annually and is approved
by the Canyon Fuel Management  Board. The production fee is calculated on a
per-ton basis,  while the  administration fee represents the costs incurred
by Arch Coal employees related to Canyon Fuel administrative  matters.  The
fees  recognized  as other  income by the  Company and as expense by Canyon
Fuel were $7.4  million,  $7.0 million and $4.1 million for the years ended
December 31, 2000, 1999 and 1998, respectively.

20. COMMITMENTS AND CONTINGENCIES

The Company  leases  equipment,  land and various  other  properties  under
noncancelable  long-term leases,  expiring at various dates. Rental expense
related to these operating  leases amounted to $22.7 million in 2000, $42.2
million in 1999 and $28.0 million in 1998.  The decrease in rental  expense
is the result of the purchase of several  assets  during 2000 out of a sale
and leaseback  arrangement entered into in 1998 (see additional  discussion
in Note 18, "Sale and  Leaseback").  In addition,  the Company  recorded an
obligation  for  non-cancelable  lease  payments at its  Dal-Tex  operation
during 1999 (see additional discussion in Note 2, "Changes in Estimates and
Other Non-recurring  Revenues and Expenses").  The Company has also entered
into various  non-cancelable  royalty  lease  agreements  and federal lease
bonus payments  under which future minimum  payments are due. On October 1,
1998, the Company was the successful bidder in a federal auction of certain
mining  rights in the 3,546- acre  Thundercloud  tract in the Powder  River
Basin of Wyoming.  The  Company's  lease bonus bid amounted to $158 million
for the tract, of which $31.6 million was paid on October 1, 1998 and $31.6
million was paid on January 3, 2000. The remaining lease bonus payments are
reflected  below  under  the  caption   "Royalties."   The  tract  contains
approximately  412  million  tons  of  demonstrated  coal  reserves  and is
contiguous  with the  Company's  Black  Thunder  mine.  Geological  surveys
performed  by  outside  consultants  indicate  that  there  are  sufficient
reserves  relative to these  properties to permit recovery of the Company's
investment.



                                    26

<PAGE>

Minimum payments due in future years under these agreements in effect at
December 31, 2000 are as follows:

<TABLE>
<CAPTION>
                                                                                    Operating
                                                                                   Leases and    Capital
(in thousands)                                                         Leases       Royalties     Leases
========================================================================================================
<S>                                                                  <C>           <C>          <C>
2001                                                                 $ 16,990      $ 60,050     $  4,226
2002                                                                   12,431        62,773        3,756
2003                                                                   10,556        62,603        3,756
2004                                                                    6,619        30,205        3,756
2005                                                                    6,506        26,807        1,466
Thereafter                                                             15,616       177,089            -
--------------------------------------------------------------------------------------------------------
                                                                     $ 68,718      $419,527     $ 16,960
========================================================================================================

Less amount representing interest                                                               $  3,087
-------------------------------------------------------------------------------------------------------
Present value of net minimum lease payments under capital leases                                  13,873
Current portion                                                                                    2,525
--------------------------------------------------------------------------------------------------------
Long-term capitalized lease obligations                                                         $ 11,348
========================================================================================================
</TABLE>

Property, plant and equipment at year-end include the following amounts for
capitalized leases:

<TABLE>
<CAPTION>
December 31 (in thousands)                                                                          2000
========================================================================================================
<S>                                                                                             <C>
Plant and equipment                                                                             $ 15,228
Accumulated amortization                                                                           1,475
--------------------------------------------------------------------------------------------------------
                                                                                                $ 13,753
========================================================================================================
</TABLE>

The Company is a party to numerous claims and lawsuits with respect to various
matters. The Company provides for costs related to contingencies when a loss is
probable and the amount is reasonably determinable. As of December 31, 2000, the
Company had accrued $2.5 million related to a settlement with the U.S.
Department of the Interior associated with the 1996 impoundment failure at Lone
Mountain. The Company expects to make the settlement payment during the first
quarter of 2001. After conferring with counsel, it is the opinion of management
that the ultimate resolution of these claims, to the extent not previously
provided for, will not have a material adverse effect on the consolidated
financial condition, results of operations or liquidity of the Company.

The Company holds a 17.5% general partnership interest in Dominion Terminal
Associates  ("DTA"),   which  operates  a  ground   storage-to-vessel  coal
transloading  facility in Newport News,  Virginia.  DTA leases the facility
from Peninsula Ports Authority of Virginia ("PPAV") for amounts  sufficient
to meet  debt-service  requirements.  Financing is provided  through $132.8
million  of  tax-exempt  bonds  issued  by PPAV (of which  the  Company  is
responsible for 17.5%,  or $23.2 million) which mature July 1, 2016.  Under
the terms of a throughput and handling  agreement with DTA, each partner is
charged its share of cash operating and debt-service  costs in exchange for
the  right  to use its  share of the  facility's  loading  capacity  and is
required to make  periodic  cash  advances to DTA to fund such costs.  On a
cumulative basis, costs exceeded cash advances by $10.9 million at December
31, 2000 (included in other  noncurrent  liabilities).  Future payments for
fixed  operating  costs and debt service are estimated to approximate  $3.3
million annually through 2015 and $26.0 million in 2016.


                                    27
<PAGE>

In connection with the Arch Western  transaction,  the Company entered into
an  agreement  pursuant to which the Company  agreed to  indemnify  another
member of Arch Western  against  certain tax  liabilities in the event that
such  liabilities  arise as a result of certain actions taken prior to June
1, 2013,  including the sale or other disposition of certain  properties of
Arch Western, the repurchase of certain equity interests in Arch Western by
Arch Western or the reduction under certain  circumstances  of indebtedness
incurred by Arch Western in connection  with the Arch Western  transaction.
Depending on the time at which any such  indemnification  obligation was to
arise, it could have a material adverse effect on the business,  results of
operations and financial condition of the Company.


21.  CASH FLOW

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


<TABLE>
<CAPTION>
Year ended December 31 (in thousands)                        2000        1999       1998
========================================================================================
<S>                                                    <C>         <C>         <C>
Decrease (increase) in operating assets:
  Receivables                                          $   8,194   $  38,356   $ (35,464)
  Inventories                                             14,452       5,188       6,723
Increase (decrease) in operating liabilities:
  Accounts payable and accrued expenses                   (4,515)    (15,593)     30,229
  Income taxes                                            (2,683)    (76,952)    (35,057)
  Accrued postretirement benefits other than pension      (7,330)        440       6,813
  Accrued reclamation and mine closure                   (10,941)    (20,767)      1,936
  Accrued workers' compensation                          (26,597)       (143)        149
----------------------------------------------------------------------------------------
Changes in operating assets and liabilities            $ (29,420)  $ (69,471)  $ (24,671)
========================================================================================
</TABLE>


22. ACCOUNTING DEVELOPMENT

In June 1998,  the  Financial  Accounting  Standards  Board issued FAS 133,
Accounting  for Derivative  Instruments  and Hedging  Activities,  which is
required  to be adopted in years  beginning  after June 15,  2000.  FAS 133
permits early  adoption as of the beginning of any fiscal quarter after its
issuance.  FAS 133 will require the Company to recognize all derivatives on
the balance  sheet at fair value.  Derivatives  that are not hedges must be
adjusted  to fair  value  through  income.  If the  derivative  is a hedge,
depending  on the  nature of the  hedge,  changes  in the fair value of the
derivative  will  either be offset  against the change in fair value of the
hedged  assets,  liabilities,  or  firm  commitments  through  earnings  or
recognized  in  other  comprehensive   income  until  the  hedged  item  is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be  immediately  recognized  in earnings.  FAS 133 will not
have  a  significant  impact  on  the  financial  position  or  results  of
operations of the Company.


                                    28
<PAGE>

23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Quarterly financial data for 2000 and 1999 is summarized below:

<TABLE>
<CAPTION>
(in thousands)                                                 March 31/(1)/    June 30/(1)/      Sept. 30/(1)/    Dec. 31/(1)/
================================================================================================================================
<S>                                                            <C>             <C>                <C>            <C>
2000:
  Coal sales, equity income and other revenues                   $ 357,801      $ 340,153           $ 359,289    $ 347,378
  Income from operations                                             2,898         19,966/(2)(3)/      15,851       35,269/(4)(5)/
Net income (loss)                                                  (15,027)        (2,125)             (5,198)       9,614
Basic and diluted earnings (loss) per common share/(9)/              (0.39)         (0.06)              (0.14)        0.25

1999:
  Coal sales, equity income and other revenues                   $ 421,126      $ 391,292           $ 382,236    $ 372,728
  Income (loss) from operations                                     13,983/(6)/    20,739              12,602     (374,350)/(8)/
  Income (loss) before cumulative effect of accounting change       (2,380)         2,459              (1,820)    (348,352)
Net income (loss)                                                    1,433/(7)/     2,459              (1,820)    (348,352)
Basic and diluted earnings (loss) per
  common share before cumulative effect of accounting change         (0.06)          0.06               (0.05)       (9.12)
Basic and diluted earnings (loss) per common share/(9)/               0.04           0.06               (0.05)       (9.12)
</TABLE>

(1)  At the  West  Elk  underground  mine  in  Gunnison  County,  Colorado,
     following  the detection of  combustion-related  gases in a portion of
     the mine,  the Company idled its operation on January 28, 2000.  While
     it was idled,  the Company  incurred between $4 million and $6 million
     per month in after-tax  losses at that mine.  On July 12, 2000,  after
     controlling  the   combustion-related   gases,   the  Company  resumed
     production  at the  West Elk mine  and  started  to ramp up to  normal
     levels of production. During the ramp-up process, the mine experienced
     geological  conditions  that  hindered  production  during  the fourth
     quarter. The Company recognized partial pre-tax insurance  settlements
     of $12.0 million  during each of the second and third quarters of 2000
     and $7.0  million  during the fourth  quarter of 2000 which  covered a
     portion of the losses  incurred at West Elk during  2000.  The Company
     expects to receive  additional  insurance  payments under its property
     and business  interruption  policy.  However,  any additional recovery
     will depend on resolution of the claim with the insurance carrier, the
     timing of which is uncertain.

(2)  During the second quarter of 2000, as a result of permit  revisions at
     Arch of Illinois,  the Company  reduced its  reclamation  liability at
     Arch of Illinois by $7.8 million (pre-tax).

(3)  During the second quarter of 2000,  the IRS issued a notice  outlining
     the  procedures for obtaining tax refunds on certain excise taxes paid
     by the industry on export sales tonnage.  The notice was the result of
     a  1998  federal   court   decision   that  found  such  taxes  to  be
     unconstitutional. The Company recorded $12.7 million of pre-tax income
     related to these excise tax recoveries.

(4)  During  the  fourth  quarter of 2000,  as a result of  adjustments  to
     employee  postretirement medical benefits, the Company recognized $9.8
     million  of pre-  tax  curtailment  gains  resulting  from  previously
     unrecognized  postretirement  benefit  changes which occurred in prior
     years.

(5)  During  the  fourth  quarter  of 2000,  the  Company  settled  certain
     workers'  compensation  liabilities  with the  State of West  Virginia
     partially offset by adjusting other workers' compensation  liabilities
     resulting in a net pre- tax gain of $13.0 million.

(6)  During the first  quarter of 1999,  the  Company  recorded a charge of
     $6.5   million   related   to   severance   costs,   obligations   for
     non-cancelable   lease  payments  and  a  change  in  the  reclamation
     liability due to the shut-down of the Company's Dal-Tex operation.

(7)  During the first quarter of 1999, the Company changed its depreciation
     method on  preparation  plants and  loadouts and recorded a cumulative
     effect  adjustment which increased income by $3.8 million (net of tax)
     from applying the new method for years prior to 1999.

(8)  During the fourth  quarter of 1999,  the  Company  recorded a one-time
     pre-tax  charge of $380.9  million  to  write-down  the  assets at its
     Dal-Tex, Hobet 21 and Coal-Mac operations and write-down certain other
     coal  reserves  in central  Appalachia.  Included in this charge was a
     $16.3  million  pre-tax  charge  related to the  restructuring  of the
     Company's  administrative  work  force  and the  closure  of  mines in
     Illinois, Kentucky and West Virginia.

(9)  The sum of the quarterly  earnings (loss) per common share amounts may
     not equal  earnings  (loss) per common share for the full year because
     per share amounts are computed  independently for each quarter and for
     the  year  based on the  weighted  average  number  of  common  shares
     outstanding during each period.



                                    29
<PAGE>


                                                                     SCHEDULE II

                        ARCH COAL, INC. AND SUBSIDIARIES

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (In thousands)

<TABLE>
<CAPTION>
                                      Additions
                           Balance at Charged to                        Balance
                           Beginning  Costs and                         at End
       Description          of Year    Expenses  Deductions(1) Other(2) of Year
       -----------         ---------- ---------- ------------- -------- -------
<S>                        <C>        <C>        <C>           <C>      <C>
Year Ended December 31,
 2000.....................
  Reserves Deducted from
   Asset Accounts.........
    Other Assets--Other
     Notes and Accounts
     Receivable...........      541       --           482        --        59
    Current Assets--
     Supplies Inventory...   23,542     4,223        7,926        --    19,839
Year Ended December 31,
 1999.....................
  Reserves Deducted from
   Asset Accounts.........
    Other Assets--Other
     Notes and Accounts
     Receivable...........      582       325          366        --       541
    Current Assets--
     Supplies Inventory...   23,901     5,966        6,325        --    23,542
Year Ended December 31,
 1998.....................
  Reserves Deducted from
   Asset Accounts.........
    Other Assets--Other
     Notes and Accounts
     Receivable...........      471       306          195        --       582
    Current Assets--
     Supplies Inventory...   17,681     2,292        5,999      9,927   23,901
</TABLE>
--------
(1) Reserves utilized, unless otherwise indicated.
(2) Balances acquired in the Arch Western transaction.

                                       30


<PAGE>

                              EXHIBIT INDEX

Exhibit No.                   Description
----------         ----------------------------------------------------------

   23.2            Consent of PricewaterhouseCoopers LLP
   23.3            Consent of Ernst & Young LLP