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



(In millions)                                                              2002          2001           2000
<S>                                                                        <C>           <C>            <C>


SALES AND OPERATING REVENUES
APAC                                                                     $2,652        $2,624         $2,505
Ashland Distribution                                                      2,535         2,849          3,214
Ashland Specialty Chemical                                                1,290         1,248          1,283
Valvoline                                                                 1,152         1,092          1,077
Intersegment sales                                                          (86)          (94)          (118)
                                                                         ------------------------------------
                                                                         $7,543        $7,719         $7,961
                                                                         ====================================

OPERATING INCOME
APAC                                                                     $  122        $   55         $  140
Ashland Distribution                                                          1            35             70
Ashland Specialty Chemical                                                   87            58             95
Valvoline                                                                    77            81             78
Refining and Marketing(1)                                                   143           707            361
Corporate                                                                   (92)          (85)           (73)
                                                                         ------------------------------------
                                                                         $  338        $  851         $  671
                                                                         ====================================


OPERATING INFORMATION
APAC
   Construction backlog at September 30 (millions)(2)                    $1,691        $1,629         $1,397
   Hot-mix asphalt production (million tons)                               36.7          36.7           35.0
   Aggregate production (million tons)                                     31.0          28.7           27.8
   Ready-mix concrete production (million cubic yards)                      2.1           2.3            2.6
Ashland Distribution(3)
   Sales per shipping day (millions)                                     $ 10.1        $ 11.2         $ 12.8
   Gross profit as a percent of sales                                      16.0%         15.9%          15.6%
Ashland Specialty Chemical(3)
   Sales per shipping day (millions)                                     $  5.1        $  5.0         $  5.1
   Gross profit as a percent of sales                                      36.0%         33.8%          34.7%
Valvoline lubricant sales (million gallons)                               194.4         183.0          189.6
Refining and Marketing(4)
   Crude oil refined (thousand barrels per day)                             930           912            892
   Refined products sold (thousand barrels per day)(5)                    1,321         1,302          1,309
   Refining and wholesale marketing margin (per barrel)(6)               $ 1.82        $ 5.17         $ 2.63
   Speedway SuperAmerica (SSA)
      Retail outlets at September 30                                      2,063         2,145          2,288
      Gasoline and distillate sales (million gallons)                     3,622         3,587          3,742
      Gross margin - gasoline and distillates (per gallon)               $.1040        $.1218         $.1284
      Merchandise sales (millions)                                       $2,381        $2,186         $2,143
      Merchandise margin (as a percent of sales)                           24.2%         23.3%          24.5%
                                                                         ====================================

</TABLE>
(1)      Includes  Ashland's equity income from Marathon Ashland  Petroleum
         LLC (MAP),  amortization related to Ashland's excess investment in
         MAP, and other activities associated with refining and marketing.

(2)      Includes   APAC's   proportionate   share   of  the   backlog   of
         unconsolidated joint ventures.

(3)      Sales are defined as sales and operating revenues. Gross profit is
         defined as sales and  operating  revenues,  less cost of sales and
         operating expenses,  and depreciation and amortization relative to
         manufacturing assets.

(4)      Amounts represent 100% of MAP's operations,  in which Ashland owns
         a 38% interest.

(5)      Total average  daily volume of all refined  product sales to MAP's
         wholesale, branded and retail (SSA) customers.

(6)      Sales revenue less cost of refinery inputs, purchased products and
         manufacturing expenses, including depreciation.


                                    32

<PAGE>





RESULTS OF OPERATIONS

Ashland's net income (including  discontinued operations and the cumulative
effect of  accounting  changes)  amounted  to $117  million  in 2002,  $417
million in 2001 and $70 million in 2000. Income from continuing  operations
(which  excludes  discontinued  operations  and the  cumulative  effect  of
accounting  changes) amounted to $129 million in 2002, $403 million in 2001
and  $288  million  in 2000.  As  discussed  in Note A to the  Consolidated
Financial  Statements,  Ashland  adopted FASB  Statement No. 142 (FAS 142),
"Goodwill  and Other  Intangible  Assets,"  as of October  1,  2001.  Since
goodwill is not amortized  under FAS 142,  Ashland's  reported  results for
2002 are not comparable with previous  years.  The following table compares
reported results with pro forma financial information assuming that Ashland
adopted FAS 142 as of October 1, 1999.

<TABLE>
<CAPTION>
(In millions)                                                              2002          2001           2000
------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>            <C>
OPERATING INCOME
   As reported                                                             $338          $851           $671
   Pro forma                                                                338           903            710
INCOME FROM CONTINUING OPERATIONS
   As reported                                                              129           403            288
   Pro forma                                                                129           448            320
                                                                           =================================
</TABLE>

Prior  to  the  change  in  accounting  for  goodwill,  Ashland's  segments
recognized  goodwill  amortization  of $42 million in 2001 ($25 million for
APAC, $7 million for Ashland Distribution, $9 million for Ashland Specialty
Chemical and $1 million for Valvoline) and $29 million in 2000 ($22 million
for APAC,  $1 million  for  Ashland  Distribution,  $5 million  for Ashland
Specialty  Chemical and $1 million for  Valvoline).  In  addition,  part of
Ashland's  excess  investment in Marathon  Ashland  Petroleum LLC (MAP) was
accounted for as goodwill and was being  amortized at a rate of $10 million
a year prior to the adoption of FAS 142.

APAC

The APAC construction  companies generated operating income of $122 million
in 2002, compared to $55 million in 2001. The improvement  reflects the net
effects of better operating results, the change in accounting for goodwill,
costs associated with APAC's business process  redesign  initiative,  and a
non-recurring  charge of $18  million  related  to the  Manassas,  Virginia
division that reduced last year's earnings. Earnings from construction jobs
and the asphalt plants improved,  reflecting  better margins.  These margin
improvements  resulted from more efficient production and favorable weather
conditions,  lower costs for liquid asphalt,  fuel and power, and the prior
year  completion of most of the low-margin  work obtained in  acquisitions.
Goodwill  amortization  amounted  to $25  million in 2001,  but the expense
reduction from eliminating that amortization was largely offset by costs of
$17 million in 2002 associated with the process redesign initiative.

Operating  income from APAC  amounted  to $55 million in 2001,  compared to
$140  million in 2000.  The decline  resulted  principally  from  unusually
severe  winter  weather  in  most  of  APAC's   operating   regions,   weak
construction  margins  and a charge  of $18  million  to  correct  improper
recognition of construction contract earnings at its Manassas division. Net
construction job revenue (total revenue less  subcontract  costs) was about
flat,  while  production  of hot-mix  asphalt  and  aggregate  were both up
modestly.  The sale of certain  operations in September  2000 resulted in a
decline in the  production of ready-mix  concrete.  However,  the levels of
construction  activity and material  production were less important factors
than the  conditions  under  which the work took  place  (extreme  cold and
precipitation)  that made the processes  highly  inefficient.  Construction
contract  margins were also depressed as many  low-margin  jobs obtained in
acquisitions  worked  their  way  through  the  backlog,  and the  level of
higher-margin private work declined as a result of the economic slowdown.

(Bar graph showing APAC's operating income for 2000, 2001 and 2002)

During an internal investigation of financial activities at APAC's Manassas
division in the March 2001 quarter,  it was discovered  that the division's
earnings had been  intentionally  overstated,  and local  management of the
division  was  replaced.  Independent  investigations  confirmed  that  the
problems  related  primarily  to the improper  recognition  of revenues and
failure to  recognize  certain  costs over a period of about two years.  No
evidence of any impact on, or involvement by, outside parties, customers or
suppliers was discovered.

ASHLAND DISTRIBUTION

Operating  income of Ashland  Distribution  amounted to $1 million in 2002,
compared to $35  million in 2001.  Overall  sales were off 11%,  reflecting
weak markets and internal  execution problems related to the implementation
of an enterprise resource planning system. Of all of Ashland's  businesses,
Ashland  Distribution  is the most  sensitive to industrial  output,  which
remains soft in comparison to prior years. However,  sales in the September
2002 quarter  exceeded  last year's amount for that period and were also up
13% from the low point  experienced in the December 2001 quarter.  Economic
improvements and vigorous efforts to improve service  across-the-board with
new processes are continuing to occur.  Reported  results include income of
$7 million from the settlement of a sorbate class action


                                    33

<PAGE>


antitrust suit in 2002, compared to $11 million from a similar class action
involving citric acid in 2001. Results for 2001 also included charges of $7
million for goodwill  amortization  and  write-offs  prior to the change in
accounting.

Operating income from Ashland Distribution amounted to $35 million in 2001,
compared to $70 million in 2000.  Overall sales  declined 11%,  principally
reflecting  the  challenging  economic  environment  and a slowdown  in key
customer markets.  The unfavorable  economic  conditions also led to higher
credit losses,  particularly for the North American  plastics  distribution
and energy services divisions.  However, the effects of these declines were
partially  offset by expense  reductions  and  various  margin  improvement
efforts.  Such efforts resulted in higher earnings from three  distribution
business  units -  industrial  chemicals,  fine  ingredients  and  European
plastics  distribution.  Results of Ashland Distribution for 2001 reflect a
goodwill  write-off of $6 million and other asset impairment  charges,  the
combination of which was largely offset by the proceeds of $11 million from
the citric acid settlement.

(Bar graph showing Ashland  Distribution's  operating income for 2000, 2001
and 2002)

ASHLAND SPECIALTY CHEMICAL

Operating income from Ashland Specialty  Chemical  increased to $87 million
in 2002, a 50% increase compared to its  recession-weakened  results of $58
million  in 2001.  Despite  softness  in unit  volumes,  Ashland  Specialty
Chemical has  achieved  steady  improvement  throughout  the year.  Results
improved from performance materials  (unsaturated polyester resins, foundry
chemicals and adhesives)  and water  treatment  chemicals and services.  In
addition,  the  semiconductor  industry is  continuing  to recover from its
worldwide  downturn  during 2001. As a result,  electronic  chemicals had a
much better  performance  in the last half of 2002 even though results from
that  division were still down for the year.  Results of Ashland  Specialty
Chemical for 2001 included a charge of $9 million for goodwill amortization
and write-downs prior to the change in accounting.

(Bar graph showing Ashland Specialty  Chemical's operating income for 2000,
2001 and 2002)

Ashland  Specialty  Chemical's  operating income amounted to $58 million in
2001,  compared  to $95  million in 2000.  Earnings  from  marine and water
treatment  chemicals were up, but these  improvements were more than offset
by significant  declines in other business units that are more sensitive to
a weak economy,  including foundry products,  specialty  adhesives,  maleic
anhydride and polyester  resins.  Profits from  electronic  chemicals  also
deteriorated sharply as 2001 progressed,  reflecting the worldwide downturn
in the semiconductor  manufacturing industry.  Results of Ashland Specialty
Chemical  for 2001  reflect a goodwill  write-down  of $4 million and minor
asset impairment charges.

VALVOLINE

Operating  income from  Valvoline was $77 million in 2002,  compared to $81
million in 2001.  The decline was  attributable  entirely to lower sales of
R-12 automotive refrigerant that contributed essentially no gross profit to
2002 results, compared to $13 million in 2001. However, strong results from
core lubricants, automotive chemicals and international operations, as well
as a record year from Valvoline  Instant Oil Change (VIOC),  largely offset
the reduced earnings from sales of R-12.  Lubricant  volumes were up 6% and
sales of  premium  lubricants  continued  to grow.  Increasing  numbers  of
premium oil changes using MaxLife,  Durablend and SynPower also contributed
to VIOC's record year. Earnings from automotive chemicals and international
operations both recovered strongly from their weakened levels in 2001.

(Bar graph showing Valvoline's operating income for 2000, 2001 and 2002)

At September 30, 2002,  VIOC operated 363  company-owned  service  centers,
compared  to 364  centers  in 2001  and  358  centers  in  2000.  The  VIOC
franchising program continues to expand, with 335 centers open at September
30, 2002,  compared to 311 centers in 2001 and 272 centers in 2000.  VIOC's
future growth will continue to focus principally on expanding the number of
franchised rather than company-owned centers.

Valvoline's  operating  income  increased  from $78  million in 2000 to $81
million in 2001.  Results from the core  lubricants  business and Eagle One
were up, offsetting declines from other businesses. Although domestic sales
of Valvoline  branded motor oil were  comparable to 2000,  sales of premium
motor oils,  such as MaxLife,  continued to grow at a rapid rate.  Sales of
Eagle One products were up 16%, and its operating  income  amounted to more
than 10% of its revenues.  Results from international  operations were down
as sales  volumes  fell,  with Europe  experiencing  the  largest  decline.
Results from VIOC improved during the September 2001 quarter, but were down
slightly  from  2000,   which   included  gains  on  the  sale  of  certain
company-owned  service  centers.  Earnings  from  automotive  chemicals and
antifreeze suffered from lower margins.

REFINING AND MARKETING

Operating income from Refining and Marketing,  which consists  primarily of
equity  income from  Ashland's  38%  ownership  interest  in MAP,  was $143
million in 2002,  down from a record $707  million in 2001.  Equity  income
from  MAP's  refining  and  wholesale  marketing  operations  was down $585
million due principally to weak refining margins.  The reduction of $3.35 a
barrel in MAP's refining and wholesale  marketing  margin  resulted from an
industry-wide decline

                                    34

<PAGE>


in demand for petroleum  products and a narrow  differential  between sweet
and sour crude oil prices.  Sour crude oils typically account for about 60%
of MAP's  crude oil  slate.  Equity  income  from MAP's  retail  operations
(Speedway SuperAmerica and a 50% interest in the Pilot Travel Centers joint
venture)  improved  slightly,  reflecting  the net effects of higher  sales
volumes of products and merchandise, improved merchandise margins and lower
product margins.  Equity income from MAP for 2001 also included a charge of
$10 million for goodwill amortization.

(Bar graph showing  Refining and Marketing  operating income for 2000, 2001
and 2002)

Operating  income from  Refining  and  Marketing  amounted to a record $707
million in 2001, compared to $361 million in 2000. Equity income from MAP's
refining and wholesale marketing operations was up $404 million, reflecting
the net effects of strong refining  margins,  a slight reduction in refined
product  sales  and  higher  operating  and  administrative  expenses.  The
increase of $2.54 a barrel in MAP's refining and wholesale marketing margin
reflected tight product supplies during much of 2001 in its primary Midwest
market. However, equity income from MAP's retail operations declined by $40
million.  The  decline  principally  reflects  lower  product  margins  and
volumes,  reduced  earnings  from  merchandise  sales and higher  operating
expenses.

CORPORATE

Corporate  expenses  were $92 million in 2002,  $85 million in 2001 and $73
million in 2000. The increase in 2001 principally reflects higher incentive
and deferred compensation costs. Although such costs were down in 2002, the
effects  were  more  than  offset by  higher  administrative  expenses  and
additional reserves for environmental, litigation and severance costs.

NET INTEREST AND OTHER FINANCIAL COSTS

The following  table  summarizes  the  components of net interest and other
financial costs.
<TABLE>
<CAPTION>

(In millions)                                                              2002          2001           2000
------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>            <C>
NET INTEREST AND OTHER FINANCIAL COSTS
Interest expense                                                           $135          $162           $191
Expenses on sales of accounts receivable                                      4             8              6
Loss on early retirement of debt                                              -             5              6
Other financial costs                                                         3             2              1
Interest income                                                              (4)           (2)           (10)
                                                                           ---------------------------------
                                                                           $138          $175           $194
                                                                           =================================

</TABLE>
The decreases in Ashland's  interest  expense  during this period  resulted
principally  from  reductions  in the  average  level of debt  outstanding.
However, lower interest rates also brought the expense down from prior year
levels by $9 million in 2002 and $4 million in 2001.  Expenses  on sales of
accounts  receivable  also reflect lower  interest rates since that program
was implemented in March 2000.

INCOME TAXES

Ashland's  overall  effective  income tax rate  amounted  to 35.5% in 2002,
40.4% in 2001 and 39.6% in 2000. The tax rate declined in 2002  principally
as a result of the  accounting  change for  goodwill,  reduced state income
taxes  and a lower  tax rate on  foreign  results.  The  accounting  change
eliminated the amortization for financial reporting  purposes,  and most of
that amortization was not deductible for income tax purposes.  In addition,
state  income  tax  rates  actually   experienced  were  lower  than  those
previously  assumed in the  deferred  tax  calculations.  Those  reductions
resulted from changing  apportionment factors related to MAP's earnings and
the use of tax loss  carryforwards  in various  jurisdictions  that had not
been  recognized in prior years due to  uncertainties  as to their ultimate
realization.

DISCONTINUED OPERATIONS AND ACCOUNTING CHANGES

During  2000,  Ashland  spun-off  the  majority  of its shares of Arch Coal
common  stock to  Ashland's  shareholders.  Ashland  subsequently  sold its
remaining  Arch Coal shares in a public  offering in February 2001. Any net
income  or loss  associated  with  Arch  Coal  (including  the costs of the
spin-off) is included in discontinued operations.  The loss of $218 million
in 2000  associated  with Arch Coal included $203 million  related to asset
impairment  and  restructuring  costs.  The net gain of $19 million in 2001
represents  an  after-tax  gain of $33 million on the sale of the Arch Coal
shares,  less  after-tax  charges of $14 million from  reserves  related to
other discontinued operations.

As a result of the adoption of FAS 142,  Ashland  recognized  an impairment
loss of $12 million  after  income taxes in 2002 related to the goodwill of
Ashland Distribution.  In addition,  the cumulative effect of the change in
the method of accounting  for  derivatives  by MAP resulted in an after-tax
charge to Ashland of $5 million in 2001.

                                    35

<PAGE>

FINANCIAL POSITION
LIQUIDITY

Cash flows from operations, a major source of Ashland's liquidity, amounted
to $188  million in 2002,  $829  million in 2001 and $484  million in 2000.
Such amounts include cash  distributions  from MAP of $196 million in 2002,
$658 million in 2001 and $279  million in 2000.  MAP operates on a calendar
year basis and is organized as a limited liability company that has elected
to be taxed as a  partnership.  As a result,  Ashland  pays income taxes on
most of its share of the taxable earnings  reported by MAP in the following
year, creating additional  variability in Ashland's cash flows from year to
year.  Income taxes paid by Ashland  related to MAP's earnings  amounted to
$239 million in 2002, $157 million in 2001 and $54 million in 2000.

Cash flows from  operations  for 2000 were  increased  by  proceeds of $150
million from the sale of  receivables  (reflected  as part of the change in
operating assets and  liabilities).  Over the last three years,  cash flows
from  operations  have  exceeded  Ashland's  capital  requirements  for net
property  additions  and  dividends  by  nearly  $750  million,   providing
additional funds for debt reductions, stock purchases and acquisitions.

Ashland's  financial  position  has  enabled it to obtain  capital  for its
financing needs and to maintain investment grade ratings on its senior debt
of Baa2  from  Moody's  and BBB from  Standard  & Poor's.  Ashland  has two
revolving credit agreements providing for up to $425 million in borrowings,
neither  of which has been  used.  Furthermore,  Ashland  has access to the
commercial paper markets and various uncommitted lines of credit. While the
revolving  credit  agreements  contain a covenant  limiting new  borrowings
based on  Ashland's  stockholders'  equity,  these  agreements  would  have
permitted an  additional  $1.4 billion of borrowings at September 30, 2002.
Additional  permissible borrowings are increased (decreased) by 150% of any
increase (decrease) in stockholders' equity.

At September 30, 2002, working capital (excluding debt due within one year)
amounted  to $615  million,  compared  to $788  million at the end of 2001.
Ashland's  working  capital is  affected  by its use of the LIFO  method of
inventory valuation. That method valued inventories below their replacement
costs by $65 million at September  30,  2002,  and $70 million at September
30, 2001.  Liquid assets (cash,  cash equivalents and accounts  receivable)
amounted to 78% of current  liabilities at September 30, 2002,  compared to
94% at the end of 2001.

CAPITAL RESOURCES

Property additions amounted to $622 million during the last three years and
are summarized in the Information by Industry  Segment on page 61. For that
period,  APAC accounted for 48% of Ashland's  capital  expenditures,  while
Ashland  Specialty  Chemical  accounted for an additional 28%. Capital used
for acquisitions (including assumed debt and companies acquired through the
issuance of common  stock)  amounted to $705 million  during the last three
years,  of which $623 million was invested in APAC,  $79 million in Ashland
Specialty  Chemical and $3 million in  Valvoline.  A summary of the capital
employed in Ashland's operations follows.

<TABLE>
<CAPTION>

(In millions)                                                              2002          2001           2000
------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>           <C>            <C>
CAPITAL EMPLOYED
APAC                                                                     $1,039        $1,047         $1,156
Ashland Distribution                                                        459           470            574
Ashland Specialty Chemical                                                  610           612            597
Valvoline                                                                   343           389            333
Refining and Marketing                                                    1,818         1,654          1,679
                                                                         -----------------------------------
                                                                         $4,269        $4,172         $4,339
                                                                         ===================================
</TABLE>

Long-term  borrowings provided cash flows of nearly $1.1 billion during the
last three years, including the issuance of $600 million in debt related to
the acquisition of the construction operations of Superfos and $457 million
of medium-term  notes.  The proceeds from these  long-term  borrowings were
used in part to retire $984 million of long-term  debt,  including the $600
million of  Superfos-related  debt.  Debt  retirements  included  scheduled
maturities,  as well as prepayments or refundings to reduce interest costs.
Cash flows were  supplemented  as necessary  by the issuance of  short-term
notes and commercial paper.


During 2002, Ashland reduced its total debt by $64 million to $1.8 billion.
However,  stockholders'  equity also declined during 2002 by $53 million to
$2.2  billion.  Ashland's net income of $117 million for 2002 was more than
offset by cash  dividends  of $76 million,  common  stock  purchases of $42
million and a noncash  charge of $88  million to  recognize  an  additional
pension  liability.  On balance,  debt as a percent of capital employed was
reduced  slightly  from 45.7% at the end of 2001 to 45.4% at September  30,
2002.


At  September   30,  2002,   Ashland's   debt   included  $151  million  of
floating-rate  obligations,  including  short-term  commercial paper of $10
million and $141 million of long-term  debt,  and the interest  rates on an
additional $153 million of fixed-rate,  medium-term  notes were effectively
converted to floating  rates  through  interest  rate swap  agreements.  In
addition, Ashland's costs under its sale of receivables program and various
operating leases are based on the

                                    36

<PAGE>


floating-rate interest costs on $268 million of third-party debt underlying
those  transactions.  As a result,  Ashland was exposed to  fluctuations in
short-term  interest rates on $572 million of debt obligations at September
30, 2002.


Ashland  and its  subsidiaries  are  lessees  of office  buildings,  retail
outlets, transportation and off-road construction equipment, warehouses and
storage  facilities,  and other equipment,  facilities and properties under
leasing  agreements  that  expire  at  various  dates.   Capitalized  lease
obligations  are  not  significant  and are  included  in  long-term  debt.
Aggregate  maturities of long-term debt and minimum  rental  payments under
operating leases are summarized below for each of the periods shown.

<TABLE>
<CAPTION>

(In millions)                                         Total         2003  2004-2005  2006-2007    After 2007
------------------------------------------------------------------------------------------------------------
<S>                                                  <C>            <C>        <C>        <C>        <C>
CONTRACTUAL OBLIGATIONS
Long-term debt                                       $1,797         $191       $464       $185       $   957
Operating leases                                        262           47         73         47            95
                                                     -------------------------------------------------------
                                                     $2,059         $238       $537       $232        $1,052
                                                     =======================================================
</TABLE>

Under various operating  leases,  Ashland has guaranteed the residual value
of the underlying leased property. If Ashland had cancelled those leases as
of September 30, 2002, its maximum  obligations  under the related residual
value  guarantees  would have  amounted to $137  million.  Ashland does not
expect to incur any significant  charge to earnings under these guarantees,
$74 million of which  relates to real estate.  These lease  agreements  are
with   unrelated   third  party  lessors  and  Ashland  has  no  additional
contractual or other commitments to any parties to the leases.


Ashland has also  guaranteed  38% of MAP's  payments for certain  crude oil
purchases, up to a maximum guarantee of $86 million. At September 30, 2002,
Ashland's  contingent  liability  under  this  guarantee  amounted  to  $72
million.  Ashland  has not made and does not  expect  to make any  payments
under this guarantee.


During  2000,  Ashland  entered into a five-year  agreement to sell,  on an
ongoing  basis and with limited  recourse,  up to a $200 million  undivided
interest in a designated  pool of accounts  receivable.  Under the terms of
the agreement, new receivables are added to the pool and collections reduce
the pool. Since inception,  interests  totaling $150 million have been sold
on  a  continuous  basis.  Ashland  retains  a  credit  interest  in  these
receivables and addresses its risk of loss on this retained interest in its
allowance  for  doubtful  accounts.   Receivables  sold  exclude  defaulted
accounts (as defined) or  concentrations  over certain  limits with any one
customer.


Earnings before interest,  taxes, depreciation and amortization (EBITDA) is
a widely accepted  financial  indicator of a company's ability to incur and
service debt.  Ashland's  EBITDA,  which  represents  operating income plus
depreciation, depletion and amortization, amounted to $558 million in 2002,
$1.1  billion  in 2001  and $908  million  in 2000.  EBITDA  should  not be
considered  in  isolation  or as an  alternative  to net income,  operating
income,  cash  flows  from  operations,  or  a  measure  of  profitability,
liquidity or performance under generally accepted accounting principles.


From time to time, Ashland's Board of Directors has authorized the purchase
of shares of Ashland  common stock in the open market.  As of September 30,
2002,  Ashland  could  purchase  an  additional  2.7 million  shares  under
previous authorizations.  The number of shares ultimately purchased and the
prices  Ashland  will pay for its stock are subject to  periodic  review by
management.


During 2003,  Ashland expects capital  expenditures of  approximately  $165
million.  Ashland anticipates meeting its capital  requirements during 2003
for property  additions,  dividends and scheduled  debt  repayments of $191
million from internally generated funds. However, external financing may be
necessary to provide funds for acquisitions or other corporate purposes.


APPLICATION OF CRITICAL ACCOUNTING POLICIES

The preparation of Ashland's  consolidated  financial  statements  requires
management  to make  estimates  and  assumptions  that affect the  reported
amounts of assets, liabilities,  revenues and expenses, and the disclosures
of contingent assets and liabilities. Significant items that are subject to
such estimates and assumptions include long-lived assets,  employee benefit
obligations,   reserves   for   asbestos   litigation   and   environmental
remediation,  and income recognized under construction contracts.  Although
management  bases its estimates on historical  experience and various other
assumptions  that are believed to be  reasonable  under the  circumstances,
actual  results  could  differ   significantly  from  the  estimates  under
different assumptions or conditions.  Management has reviewed the estimates
affecting  these  items  with the Audit  Committee  of  Ashland's  Board of
Directors.

LONG-LIVED ASSETS

The cost of plant and equipment is depreciated by the straight-line  method
over the  estimated  useful lives of the assets.  Useful lives are based on
historical  experience  and are  adjusted  when  changes  in  planned  use,
technological advances or other factors show that a different life would be
more appropriate. Such costs are periodically reviewed

                                    37

<PAGE>


for recoverability when impairment  indicators are present. Such indicators
include,  among other factors,  operating losses,  unused capacity,  market
value declines and technological obsolescence. Recorded values of plant and
equipment that are not expected to be recovered through undiscounted future
net cash flows are written down to current  fair value,  which is generally
determined from estimated discounted future net cash flows (assets held for
use) or net realizable value (assets held for sale). Although circumstances
can change  considerably over time,  Ashland is not aware of any impairment
indicators that would necessitate periodic reviews on any significant asset
within its plant and equipment at this time.

Goodwill and other  intangible  assets with indefinite lives are subject to
annual impairment  tests. As a result of Ashland's initial  impairment test
under FAS 142, the entire  goodwill of $14 million of Ashland  Distribution
was written off in 2002. Ashland's reporting units are generally synonymous
with its industry segments,  except that the individual operating divisions
of Ashland Specialty Chemical are also considered reporting units under FAS
142.  Since  market  prices of  Ashland's  reporting  units are not readily
available,   management   makes  various   estimates  and   assumptions  in
determining the estimated fair values of those units. Fair values are based
principally on EBITDA  multiples of peer group  companies for each of these
reporting units. Except for the goodwill of Ashland Distribution, the tests
indicated  that the fair values of each of  Ashland's  remaining  reporting
units with significant  goodwill were in excess of their carrying values by
at least 20%.

EMPLOYEE BENEFIT OBLIGATIONS

Ashland  and its  subsidiaries  sponsor  noncontributory,  defined  benefit
pension plans that cover substantially all employees.  Benefits under these
plans are generally based on employees'  years of service and  compensation
during the years immediately preceding their retirement. In addition, these
companies also sponsor other  postretirement  benefit plans,  which provide
health care and life insurance  benefits for eligible  employees who retire
or are disabled.  Retiree  contributions to Ashland's health care plans are
adjusted  periodically,  and the plans contain other cost-sharing features,
such as deductibles  and  coinsurance.  Life insurance  plans are generally
noncontributory.

The principal  assumptions  used to determine  Ashland's  pension and other
postretirement  benefit costs are the discount rate, the salary  adjustment
rate and the  expected  return  on plan  assets.  Nearly  all of  Ashland's
retiree health care plans contain a cap that limits Ashland's contributions
to base year per capita  costs,  plus  annual  increases  of up to 4.5% per
year.  Ashland  believes that medical  inflation will continue at a rate in
excess of 4.5% for the  immediate  future  and,  as a result,  no  explicit
assumption  was  required  as  to  the  expected  rate  of  future  medical
inflation.

The discount  rates used to determine the present  value of future  pension
payments, medical costs and life insurance benefits are based on the yields
on  high-quality,   fixed-income  investments  (such  as  Moody's  Aa-rated
corporate  bonds), as adjusted for the longer duration of Ashland's pension
and  other  postretirement  benefit  obligations.  The  present  values  of
Ashland's  future  pension  and  other   postretirement   obligations  were
determined  using  discount rates of 6.75% at September 30, 2002, and 7.25%
at September  30, 2001.  Ashland's  expense under these plans is determined
using the  discount  rate as of the  beginning  of the fiscal  year,  which
amounted to 7.25% for 2002, 7.75% for both 2001 and 2000, and will be 6.75%
for 2003.

The salary  adjustment  rate and the  expected  return on plan  assets were
assumed to be 5% and 9% for each of the last three years, and those factors
will  also be used to  determine  Ashland's  costs  for  2003.  The  salary
assumption  has been  indicative of actual  results for the last few years,
but actual  returns on plan  assets  have been below the  expected  amounts
during two of the last three  years.  For 2002,  the  pension  plan  assets
generated a loss of 6.7%,  compared to a loss of 7.1% in 2001 and income of
12.3% in 2000.  However,  the expected return on plan assets is designed to
be a long-term assumption that will be subject to considerable year-to-year
variability by its inherent nature. Ashland has generated compounded annual
investment  returns of 2.1% and 7.3% on its  pension  plan  assets over the
last five and ten year periods.  Although  those returns are well below the
long-term  assumption,  they were  measured  with the ending point amidst a
two-year  period of  declining  stock  prices  that  accompanied  depressed
economic  conditions.  For the  five  and ten year  periods  that  ended in
September  2000 prior to this adverse  investment  climate,  the compounded
annual  investment  returns on Ashland's pension plan assets were 11.4% and
12.4%.

Shown below are the estimated increases in pension and other postretirement
costs  that  would  have  resulted  from  a  1%  change  in  the  principal
assumptions for each of the last three years.

<TABLE>
<CAPTION>

(In millions)                                                              2002          2001           2000
------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>            <C>
INCREASE IN PENSION COSTS FROM
Decrease in the discount rate                                               $21           $15            $14
Increase in the salary adjustment rate                                       10             6              6
Decrease in the expected return on plan assets                                5             5              4
INCREASE IN OTHER POSTRETIREMENT COSTS FROM
Decrease in the discount rate                                                 4             3              2
                                                                           =================================
</TABLE>
                                    38

<PAGE>

ASBESTOS-RELATED LITIGATION

Ashland is subject to  liabilities  from claims  alleging  personal  injury
caused  by  exposure  to  asbestos.  Those  claims  result  primarily  from
indemnification  obligations undertaken in 1990 in connection with the sale
of Riley Stoker Corporation (Riley), a former subsidiary. Ashland's reserve
for asbestos  claims  amounted to $202 million at September  30, 2002,  and
reflects the estimated costs on an undiscounted basis that will be incurred
over an extended period to resolve open claims.

The reserve  for  asbestos  claims is based on  assumptions  and  estimates
derived from currently known facts. However, projecting future events, such
as the average  cost of resolving  the open claims,  is subject to numerous
variables that are extremely difficult to predict.  These variables include
the type and severity of the disease  alleged by each  claimant,  dismissal
rates,  future costs of medical  treatment,  the impact of  bankruptcies of
other companies that are co-defendants in claims, uncertainties surrounding
the litigation  process from  jurisdiction to jurisdiction and from case to
case,  and the impact of  potential  changes  in  legislative  or  judicial
standards.

Insurance  provides  reimbursements  for most of the litigation defense and
claim settlement  costs incurred,  and  coverage-in-place  agreements exist
with the insurance carriers that provide  substantially all of the coverage
that is currently being accessed. The amounts not recoverable are generally
due from insurers that are insolvent,  rather than as a result of uninsured
claims or the exhaustion of the insurance coverage.  At September 30, 2002,
the receivable for  recoveries of litigation  defense and claim  settlement
costs from insurers amounted to $196 million, including $24 million related
to costs previously incurred.

Ashland  believes that  insurance will cover the majority of the costs that
will be  incurred  on open and  future  asbestos  claims.  Equitas  Limited
(Equitas)  and other London  companies  currently  provide about 59% of the
insurance  coverage,  and this percentage could decline over time to around
44% if higher  layers of  coverage  provided by other  carriers  have to be
accessed.  The remaining 41% of the coverage is currently  provided by five
companies,  all of which  are  rated A or  higher  by A. M.  Best  Company.
Depending  upon the  level  of costs  that  are  ultimately  incurred,  the
non-London coverage could ultimately expand to about 25 insurance companies
or groups.  Companies or groups that provide about 90% of this coverage are
also rated A or higher.

Ashland has not recognized a reserve for future asbestos claims that may be
asserted.  Although additional claim filings are expected, Ashland does not
have sufficient  information to make a reasonable estimate of the number of
new claims  that might be filed.  Furthermore,  any  predictions  about the
other   variables   discussed   previously  are  subject  to  even  greater
uncertainty as the projection  period  lengthens.  Ashland has retained the
services of professional advisors to assist management in the estimation of
projected liabilities and probable insurance recoveries for future asbestos
claims.  Results of that  effort are  expected to be  available  during the
quarter ending March 31, 2003.


Although  coverage limits are resolved in the  coverage-in-place  agreement
with Equitas and the other London  companies,  there is a disagreement with
these  companies  over  the  timing  of  recoveries.   Depending  upon  the
assumptions  made with respect to the  projected  payments to settle future
claims,  an unfavorable  resolution of this  disagreement  could materially
affect the present  value of  additional  insurance  recoveries  from those
companies.  Until such time as this disagreement is resolved,  Ashland will
use the less favorable  interpretation of this agreement in estimating such
insurance recoveries.

ENVIRONMENTAL REMEDIATION

Ashland is subject to various federal,  state and local  environmental laws
and  regulations  that  require  environmental  assessment  or  remediation
efforts (collectively  environmental remediation) at multiple locations. At
September 30, 2002, such locations  included 97 waste treatment or disposal
sites where Ashland has been identified as a potentially  responsible party
under Superfund or similar state laws, approximately 140 current and former
operating  facilities  (including certain  facilities  conveyed to MAP) and
about  1,220   service   station   properties.   Ashland's   reserves   for
environmental  remediation  amounted to $169 million at September 30, 2002,
and reflect its  estimates  of the most likely  costs that will be incurred
over an extended  period to remediate  identified  conditions for which the
costs  are  reasonably   estimable,   without  regard  to  any  third-party
recoveries.   Engineering  studies,   probability  techniques,   historical
experience and other factors are used to identify and evaluate  remediation
alternatives and their related costs, in determining the estimated reserves
for environmental remediation.

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

None of the remediation  locations is  individually  material to Ashland as
its  largest  reserve for any site is less than $10  million.  As a result,
Ashland's  exposure to adverse  developments with respect to any individual
site is not

                                    39

<PAGE>

expected to be material,  and these sites are in various  stages of ongoing
remediation.  Although  environmental  remediation  could  have a  material
effect on results of operations if a series of adverse  developments occurs
in a particular quarter or fiscal year, Ashland believes that the chance of
such developments occurring in the same quarter or fiscal year is remote.

CONSTRUCTION CONTRACTS

Income  related to  construction  contracts is generally  recognized by the
units-of-production    method,    which    is   a    variation    of    the
percentage-of-completion method. Construction jobs by their very nature are
subject to numerous risks that could create  variances  from  expectations.
Such risks include changes in raw material and other costs, adverse weather
conditions and the performance of subcontractors and other entities. Income
is only  known for  certain  after a job is  completed,  and the  extent of
completion can be difficult to assess in certain circumstances.

The  extent  of  completion  for each  production  phase is  determined  by
reference to material quantities,  labor hours,  subcontract costs or other
factors that are believed to be most  indicative of the progress made under
each phase of a project.  Revenues  earned are computed by reference to the
extent of  completion  and either the  contract  or  detailed  analyses  of
revenues  and  expenses  by  production  phase that  supported  the related
construction  contract or bid proposal.  These detailed analyses also serve
as early indicators as to whether a construction contract may ultimately be
completed at a loss. Any  anticipated  losses on such contracts are charged
against operations as soon as such losses are determined to be probable and
estimable.

Assumptions  concerning  the extent of  completion  can have a  significant
affect on the income  recognized on an individual  construction  project in
any  period.  However,  the  effects of  individual  assumptions  on APAC's
reported results are mitigated to a large extent by the significant  number
of jobs in various stages of completion at any point in time.


DERIVATIVE INSTRUMENTS

Ashland  selectively  uses  unleveraged  interest  rate swap  agreements to
obtain greater access to the lower  borrowing  costs normally  available on
floating-rate debt, while minimizing refunding risk through the issuance of
long-term,   fixed-rate   debt.   Ashland's   intent  is  to  maintain  its
floating-rate  exposure  between  25%  and  45% of  total  interest-bearing
obligations.  At September 30, 2002,  Ashland held interest rate swaps that
effectively  converted  the interest  rates on $153 million of  fixed-rate,
medium-term notes to floating rates based upon three-month LIBOR. The swaps
have been designated as fair value hedges,  and since the critical terms of
the debt  instruments  and the swaps  match,  the hedges are  assumed to be
perfectly  effective,  with the changes in fair value of the debt and swaps
offsetting.

Ashland  regularly uses  commodity-based  and foreign  currency  derivative
instruments to manage its exposure to price  fluctuations  associated  with
the  purchase and sale of natural gas in its energy  services  business and
certain  transactions  denominated  in  foreign  currencies.  In  addition,
Ashland  opportunistically  enters into  petroleum  crackspread  futures to
economically  hedge or enhance its equity  earnings and cash  distributions
from MAP.  Although  certain of these  instruments  could be  designated as
qualifying for hedge  accounting  treatment,  Ashland has not elected to do
so. Therefore, the fair value of the derivatives is recorded on the balance
sheet,  with the offsetting  gain or loss recognized in earnings during the
period of change. The potential loss from a hypothetical 10% adverse change
in  commodity   prices  or  foreign   currency   rates  on  Ashland's  open
commodity-based  and foreign currency  derivative  instruments at September
30, 2002, would not significantly affect Ashland's  consolidated  financial
position, results of operations, cash flows or liquidity.

MAP uses commodity-based futures, forwards, swaps and options to reduce the
effects of price  fluctuations on purchases and sales of crude oil, natural
gas and refined products. MAP has not elected to designate these derivative
instruments as qualifying for hedge accounting treatment.  As a result, the
changes in fair  value of these  derivatives  are  recognized  in  earnings
during the period of change,  impacting  Ashland's  equity  income from MAP
accordingly.


OUTLOOK

Ashland's  strategy has  consistently  been to strengthen  its wholly owned
businesses,  maintain a strong financial position and manage its investment
in MAP for growth in  earnings  and cash  distributions.  In October  2002,
management announced the following  eight-point plan to bring this strategy
into sharper focus and improve Ashland's profitability.

o        Identify  and divest  assets that cannot  achieve  desired  market
         strength as part of Ashland.

o        Increase  revenues and profits,  largely through organic means, by
         expanding in existing or adjacent product and geographic  markets,
         primarily in APAC and Ashland Specialty Chemical.

o        Reduce debt over time to a target of 35% of capital  employed from
         a current  level of about 45%.  In the near term,  debt  reduction
         will be emphasized over stock repurchases and growth investments.

o        Reduce general and administrative expenses by $25 million a year.

o        Improve  returns from  Ashland  Distribution  or pursue  strategic
         alternatives  for this  business.

o        Increase  returns from APAC,  achieving a 10% after-tax  return on
         capital employed by fiscal 2004.

o        Capture value from the MAP investment through cash distributions.

o        Improve  organizational  effectiveness  by using common  processes
         across  all  of   Ashland's   businesses   to  improve   operating
         efficiency.

                                    40

<PAGE>


In October,  APAC  announced a strategic  reorganization  of  operations to
become more  competitive in each of its markets and more efficient.  APAC's
first  priority is to  complete  this  effort and finish  implementing  its
ongoing  business  process  redesign  initiative.   In  addition,   Ashland
Distribution  has  completely  redesigned  the  way it goes  to  market  by
restructuring  its sales  organization,  consolidating  its marketing  into
regional  territories  and changing its processes to become more  efficient
and customer service oriented.

At  September  30,  2002,  APAC's  construction  backlog  amounted  to $1.7
billion, compared to $1.6 billion at the end of 2001. Public sector work in
the backlog increased 5% during the year from $1.5 billion to $1.6 billion,
and the public funding  outlook  remains  positive.  Private  contract work
declined  from $149  million at the end of 2001 to $136  million this year,
reflecting the weaker economy.

Ashland's  sales and  operating  revenues are normally  subject to seasonal
variations.  Although  APAC tends to enjoy a relatively  long  construction
season,  most of its operating  income is generated during the construction
period of May to October. In addition, MAP experiences demand increases for
gasoline  during the summer  driving  season,  for propane  and  distillate
during the winter heating  season and for asphalt  during the  construction
season.  The following table compares  operating  income by quarter for the
three  years ended  September  30, 2002  (amounts  for each  quarter do not
necessarily total to results for the year due to rounding).

<TABLE>
<CAPTION>
(In millions)                                                              2002          2001           2000
------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>            <C>
QUARTERLY OPERATING INCOME (LOSS)
December 31                                                                $ 98          $144           $111
March 31                                                                     (1)           87             90
June 30                                                                     137           369            268
September 30                                                                104           251            203
                                                                           =================================
</TABLE>

EFFECTS OF INFLATION AND CHANGING PRICES

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

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

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

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

FORWARD-LOOKING STATEMENTS

Management's  Discussion  and  Analysis  (MD&A)  contains   forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the  Securities  Exchange  Act of 1934,  with respect to
various information in the sections entitled Capital Resources, Application
of  Critical  Accounting  Policies,  Derivative  Instruments  and  Outlook.
Estimates as to operating performance and earnings are based on a number of
assumptions,  including  those  mentioned in MD&A.  Such estimates are also
based upon  internal  forecasts  and analyses of current and future  market
conditions and trends, management plans and strategies,  weather, operating
efficiencies and economic  conditions,  such as prices,  supply and demand,
and cost of raw materials.  Although  Ashland believes its expectations are
based  on  reasonable  assumptions,   it  cannot  assure  the  expectations
reflected in MD&A will be achieved.  This  forward-looking  information may
prove to be inaccurate  and actual  results may differ  significantly  from
those  anticipated  if  one  or  more  of  the  underlying  assumptions  or
expectations  proves  to be  inaccurate  or  is  unrealized,  or  if  other
unexpected  conditions or events occur.  Other factors and risks  affecting
Ashland  are  contained  in  Risks  and  Uncertainties  in  Note  A to  the
Consolidated Financial Statements and in Ashland's Form 10-K for the fiscal
year  ended  September  30,  2002.  Ashland  undertakes  no  obligation  to
subsequently update or revise these forward-looking statements.

                                    41

<PAGE>


Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED INCOME
Years Ended September 30

<TABLE>
<CAPTION>
(In millions except per share data)                                        2002          2001           2000
<S>                                                                      <C>           <C>            <C>

REVENUES
Sales and operating revenues                                             $7,543        $7,719         $7,961
Equity income - Note D                                                      181           754            394
Other income                                                                 68            74             81
                                                                         -----------------------------------
                                                                          7,792         8,547          8,436
COSTS AND EXPENSES
Cost of sales and operating expenses                                      6,049         6,319          6,434
Selling, general and administrative expenses                              1,185         1,127          1,094
Depreciation, depletion and amortization                                    220           250            237
                                                                         -----------------------------------
                                                                          7,454         7,696          7,765
                                                                         -----------------------------------
OPERATING INCOME                                                            338           851            671
Net interest and other financial costs - Note E                            (138)         (175)          (194)
                                                                         -----------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES                       200           676            477
Income taxes - Note J                                                       (71)         (273)          (189)
                                                                         -----------------------------------
INCOME FROM CONTINUING OPERATIONS                                           129           403            288
Results from discontinued operations (net of income taxes) - Note N           -            19           (218)
                                                                         -----------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES                       129           422             70
Cumulative effect of accounting changes (net of income taxes) - Note A      (12)           (5)             -
                                                                         -----------------------------------
NET INCOME                                                               $  117        $  417         $   70
                                                                         ===================================

EARNINGS PER SHARE - NOTE A
Basic
   Income from continuing operations                                     $ 1.86        $ 5.79         $ 4.06
   Results from discontinued operations                                       -           .27          (3.07)
   Cumulative effect of accounting changes                                 (.17)         (.07)             -
                                                                         -----------------------------------
   Net income                                                            $ 1.69        $ 5.99         $  .99
                                                                         ===================================

Diluted
   Income from continuing operations                                     $ 1.83        $ 5.73         $ 4.05
   Results from discontinued operations                                       -           .26          (3.07)
   Cumulative effect of accounting changes                                 (.16)         (.06)             -
                                                                         -----------------------------------
   Net income                                                            $ 1.67        $ 5.93         $  .98
                                                                         ===================================

</TABLE>
See Notes to Consolidated Financial Statements.


                                    43

<PAGE>


Ashland Inc. and Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30
<TABLE>
<CAPTION>
(In millions)                                                                            2002           2001

<S>                                                                                    <C>           <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents                                                              $   90        $   236
Accounts receivable (less allowances for doubtful accounts of
   $35 million in 2002 and $34 million in 2001)                                         1,089          1,201
Inventories - Note A                                                                      485            495
Deferred income taxes - Note J                                                            122            134
Other current assets                                                                      139            171
                                                                                       ---------------------
                                                                                        1,925          2,237
INVESTMENTS AND OTHER ASSETS
Investment in Marathon Ashland Petroleum LLC (MAP) - Note D                             2,350          2,387
Goodwill                                                                                  521            528
Other noncurrent assets                                                                   512            539
                                                                                       ---------------------
                                                                                        3,383          3,454
PROPERTY, PLANT AND EQUIPMENT
Cost
   APAC                                                                                 1,358          1,290
   Ashland Distribution                                                                   360            359
   Ashland Specialty Chemical                                                             906            887
   Valvoline                                                                              379            374
   Corporate                                                                              115            120
                                                                                       ---------------------
                                                                                        3,118          3,030
Accumulated depreciation, depletion and amortization                                   (1,701)        (1,590)
                                                                                       ---------------------
                                                                                        1,417          1,440
                                                                                       ---------------------
                                                                                       $6,725         $7,131
                                                                                       =====================

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Debt due within one year
   Commercial paper                                                                    $   10         $    -
   Current portion of long-term debt                                                      191             85
Trade and other payables                                                                1,285          1,429
Income taxes                                                                               25             20
                                                                                       ---------------------
                                                                                        1,511          1,534
NONCURRENT LIABILITIES
Long-term debt (less current portion) - Note E                                          1,606          1,786
Employee benefit obligations - Note O                                                     509            412
Deferred income taxes - Note J                                                            256            448
Reserves of captive insurance companies                                                   166            173
Other long-term liabilities and deferred credits                                          504            552
Commitments and contingencies - Notes F and M
                                                                                       ---------------------
                                                                                        3,041          3,371
STOCKHOLDERS' EQUITY - NOTES E, K AND L
Preferred stock, no par value, 30 million shares authorized                                 -              -
Common stock,par value $1.00 per share, 300 millon shares authorized
   Issued - 68 million shares in 2002 and 69 million shares in 2001                        68             69
Paid-in capital                                                                           338            363
Retained earnings                                                                       1,961          1,920
Accumulated other comprehensive loss                                                     (194)          (126)
                                                                                       ---------------------
                                                                                        2,173          2,226
                                                                                       ---------------------
                                                                                       $6,725         $7,131
                                                                                       =====================
</TABLE>
See Notes to Consolidated Financial Statements.


                                    44

<PAGE>


Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                  Accumulated
                                                                                        other
                                           Common       Paid-in       Retained  comprehensive
(In millions)                               stock       capital       earnings           loss          Total
<S>                                         <C>         <C>           <C>       <C>                     <C>

BALANCE AT OCTOBER 1, 1999                  $ 72           $464         $1,710          $ (46)        $2,200
Total comprehensive income(1)                                               70            (26)            44
Dividends
   Cash, $1.10 per common share                                            (78)                          (78)
   Spin-off of Arch Coal shares                                           (123)                         (123)
Issued common stock under
   Stock incentive plans                                      8                                            8
   Acquisitions of other companies                            3                                            3
Repurchase of common stock                    (2)           (87)                                         (89)
                                            ----------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2000                 70            388          1,579            (72)         1,965
Total comprehensive income(1)                                              417            (54)           363
Cash dividends, $1.10 per common share                                     (76)                          (76)
Issued common stock under
   stock incentive plans                       1             22                                           23
Repurchase of common stock                    (2)           (47)                                         (49)
                                            ----------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2001                 69            363          1,920           (126)         2,226
Total comprehensive income(1)                                              117            (68)            49
Cash dividends, $1.10 per common share                                     (76)                          (76)
Issued common stock under
   stock incentive plans                                     16                                           16
Repurchase of common stock                    (1)           (41)                                         (42)
                                            ----------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 2002               $ 68           $338         $1,961          $(194)        $2,173
                                            ================================================================
</TABLE>
(1)      Reconciliations  of  net  income  to  total  comprehensive  income
         follow.



(In millions)                                2002          2001            2000

Net income                                  $ 117          $417             $70
Minimum pension liability adjustment         (144)          (57)              2
   Related tax benefit (expense)               56            22              (1)
Unrealized translation gains (losses)          19           (21)            (37)
   Related tax benefit                          1             2              10
                                            -----------------------------------
Total comprehensive income                  $  49          $363             $44
                                            ===================================

At September 30, 2002, the  accumulated  other  comprehensive  loss of $194
million (after tax) was comprised of net unrealized  translation  losses of
$63 million and a minimum pension liability of $131 million.




See Notes to Consolidated Financial Statements.


                                    45


<PAGE>



Ashland Inc. and Consolidated Subsidiaries
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years Ended September 30
<TABLE>
<CAPTION>
(In millions)                                                              2002          2001           2000
<S>                                                                       <C>           <C>            <C>

CASH FLOWS FROM OPERATIONS
Income from continuing operations                                         $ 129          $403           $288
Expense (income) not affecting cash
   Depreciation, depletion and amortization                                 220           250            237
   Deferred income taxes                                                   (119)          152            111
   Equity income from affiliates                                           (181)         (754)          (394)
   Distributions from equity affiliates                                     201           664            282
   Other items                                                                -             5            (19)
Change in operating assets and liabilities(1)                               (62)          109            (21)
                                                                          ----------------------------------
                                                                            188           829            484
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt                                     55            52            988
Proceeds from issuance of common stock                                       11            15              5
Repayment of long-term debt                                                (140)         (169)          (675)
Repurchase of common stock                                                  (42)          (49)           (89)
Increase (decrease) in short-term debt                                       10          (245)            63
Dividends paid                                                              (76)          (76)           (78)
                                                                          ----------------------------------
                                                                           (182)         (472)           214
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment                                 (185)         (205)          (232)
Purchase of operations - net of cash acquired                               (15)          (91)          (590)
Proceeds from sale of operations                                              -             9             50
Other - net                                                                  26            13             71
                                                                          ----------------------------------
                                                                           (174)         (274)          (701)
                                                                          ----------------------------------
CASH PROVIDED (USED) BY CONTINUING OPERATIONS                              (168)           83             (3)
Cash provided (used) by discontinued operations                              22            86            (40)
                                                                          ----------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           (146)          169            (43)
Cash and cash equivalents - beginning of year                               236            67            110
                                                                          ----------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR                                   $  90          $236           $ 67
                                                                          ==================================


DECREASE (INCREASE) IN OPERATING ASSETS(1)
Accounts receivable                                                       $ 112          $ 70           $ 67
Inventories                                                                  11             5              -
Deferred income taxes                                                        18             -            (28)
Other current assets                                                         31            29            (27)
Investments and other assets                                                 33          (170)           (92)
INCREASE (DECREASE) IN OPERATING LIABILITIES(1)
Trade and other payables                                                   (133)           67            112
Income taxes                                                                (17)            2            (13)
Noncurrent liabilities                                                     (117)          106            (40)
                                                                          ----------------------------------
CHANGE IN OPERATING ASSETS AND LIABILITIES                                $ (62)         $109           $(21)
                                                                          ==================================
</TABLE>

(1)      Excludes changes resulting from operations acquired or sold.




See Notes to Consolidated Financial Statements.

                                    46


<PAGE>


Ashland Inc. and Consolidated Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE A - SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements include the accounts of Ashland and
its majority owned  subsidiaries.  Investments in joint ventures and 20% to
50% owned affiliates are accounted for on the equity method.

RISKS AND UNCERTAINTIES

The preparation of Ashland's  consolidated  financial  statements  requires
management  to make  estimates  and  assumptions  that affect the  reported
amounts of assets, liabilities,  revenues and expenses, and the disclosures
of contingent assets and liabilities. Significant items that are subject to
such estimates and assumptions include long-lived assets,  employee benefit
obligations,   reserves   for   asbestos   litigation   and   environmental
remediation,  and income recognized under construction contracts.  Although
management  bases its estimates on historical  experience and various other
assumptions  that are believed to be  reasonable  under the  circumstances,
actual  results  could  differ   significantly  from  the  estimates  under
different assumptions or conditions.

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

<TABLE>
<CAPTION>
INVENTORIES

(In millions)                                                                            2002           2001
------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>            <C>
Chemicals and plastics                                                                   $367           $374
Construction materials                                                                     68             74
Petroleum products                                                                         58             54
Other products                                                                             51             57
Supplies                                                                                    6              6
Excess of replacement costs over LIFO carrying values                                     (65)           (70)
                                                                                         -------------------
                                                                                         $485           $495
                                                                                         ===================
</TABLE>

Chemicals,  plastics,  petroleum  products and supplies  with a replacement
cost of $321 million at September  30, 2002,  and $330 million at September
30, 2001,  are valued  using the  last-in,  first-out  (LIFO)  method.  The
remaining  inventories are stated generally at the lower of cost (using the
first-in, first-out [FIFO] or average cost method) or market.

LONG-LIVED ASSETS, GOODWILL AND OTHER INTANGIBLE ASSETS

The cost of plant and equipment is depreciated by the straight-line  method
over the estimated useful lives of the assets.  Such costs are periodically
reviewed for recoverability  when impairment  indicators are present.  Such
indicators include, among other factors, operating losses, unused capacity,
market value declines and  technological  obsolescence.  Recorded values of
plant  and  equipment  that  are  not  expected  to  be  recovered  through
undiscounted  future net cash flows are written down to current fair value,
which is generally  determined  from estimated  discounted  future net cash
flows (assets held for use) or net realizable value (assets held for sale).

As of October 1, 2001, Ashland adopted Financial Accounting Standards Board
Statement No. 142 (FAS 142),  "Goodwill and Other Intangible Assets." Under
FAS 142, goodwill and intangible assets with indefinite lives are no longer
amortized but are subject to annual impairment tests. Prior to the adoption
of FAS 142,  Ashland's  goodwill was amortized by the straight-line  method
over  periods   generally  ranging  from  15  to  40  years,  and  goodwill
amortization  amounted to $42 million in 2001 and $29 million in 2000.  The
amount for 2001 included charges of $10 million for write-downs  related to
certain  operations.  Results from these  operations  consistently had been
well  below  the  levels  that  were  expected  when  they  were  acquired,
necessitating the impairment review and resulting write-downs.

When MAP was formed, Ashland's investment exceeded its underlying equity in
the net  assets of that  company.  That  excess  investment  included  $245
million that was accounted for as part of the carrying value of MAP's plant
and  equipment,  and is being  amortized on a  straight-line  basis over 15
years at a rate of $16 million a year.  The  remainder was accounted for as
goodwill and was being amortized on a straight-line  basis over 20 years at
a rate of $10 million


                                    47

<PAGE>




NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

a year prior to the adoption of FAS 142. At September  30, 2002,  Ashland's
investment exceeds its equity in the net assets of MAP by $323 million,  of
which $167 million  represents plant and equipment that will continue to be
amortized, and $156 million represents goodwill.

As a result of the adoption of FAS 142, it was determined that the goodwill
of Ashland  Distribution was impaired.  Accordingly,  an impairment loss of
$14 million ($12 million net of income  taxes) was recorded as a cumulative
effect  of   accounting   change  as  of  October  1,  2001.   Due  to  the
nonamortization  of goodwill,  Ashland's  reported results for 2002 are not
comparable  with previous  years.  The following  table  presents pro forma
information assuming that Ashland adopted FAS 142 as of October 1, 1999.

<TABLE>
<CAPTION>
(In millions)                                                             2002           2001           2000
------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>            <C>
Income from continuing operations                                        $ 129          $ 448          $ 320
Earnings per share
   Basic                                                                  1.86           6.44           4.52
   Diluted                                                                1.83           6.37           4.51
                                                                         ===================================
</TABLE>

All of  Ashland's  intangible  assets are  subject to  amortization.  These
intangible  assets  (included in other  noncurrent  assets) and the related
amortization expense are not material to Ashland's  consolidated  financial
position or results of operations.

Following  is a  progression  of  goodwill  by  segment  for the year ended
September 30, 2002.
<TABLE>
<CAPTION>
                                                                          Ashland
                                                        Ashland         Specialty
(In millions)                               APAC   Distribution          Chemical   Valvoline          Total
------------------------------------------------------------------------------------------------------------
<S>                                         <C>             <C>               <C>          <C>          <C>

Balance at October 1, 2001                  $419            $14               $92          $3           $528
Goodwill acquired                              1              -                 1           2              4
Impairment losses                              -            (14)                -           -            (14)
Currency translation adjustments               -              -                 3           -              3
                                            ----------------------------------------------------------------
Balance at September 30, 2002               $420            $ -               $96          $5           $521
                                            ================================================================
</TABLE>

ENVIRONMENTAL COSTS

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

EARNINGS PER SHARE

Following is the computation of basic and diluted  earnings per share (EPS)
from continuing operations.
<TABLE>
<CAPTION>
(In millions except per share data)                                        2002          2001           2000
------------------------------------------------------------------------------------------------------------

<S>                                                                       <C>            <C>            <C>
NUMERATOR
Numerator for basic and diluted EPS - Income from continuing operations   $ 129         $ 403          $ 288
                                                                          ==================================
DENOMINATOR
Denominator for basic EPS - Weighted average common shares outstanding       69            69             71
Common shares issuable upon exercise of stock options                         1             1              -
                                                                          ----------------------------------
Denominator for diluted EPS - Adjusted weighted average shares and
   assumed conversions                                                       70            70             71
                                                                          ==================================

BASIC EPS FROM CONTINUING OPERATIONS                                      $1.86         $5.79          $4.06
DILUTED EPS FROM CONTINUING OPERATIONS                                    $1.83         $5.73          $4.05
                                                                          ==================================
</TABLE>

                                    48

<PAGE>


STOCK INCENTIVE PLANS

Ashland  accounts for its stock options  using the  intrinsic  value method
prescribed  by  Accounting  Principles  Board  Opinion  No.  25  (APB  25),
"Accounting  for Stock Issued to Employees,"  and related  Interpretations.
The  disclosure   requirements  of  Financial  Accounting  Standards  Board
Statement No. 123 (FAS 123), "Accounting for Stock-Based Compensation," are
included in Note L. Ashland will start  expensing  stock  options under FAS
123 effective October 1, 2002.

DERIVATIVE INSTRUMENTS

In June 1998, the Financial Accounting Standards Board issued Statement No.
133  (FAS  133),   "Accounting  for  Derivative   Instruments  and  Hedging
Activities."  FAS 133 was amended by two other  statements and was required
to be adopted in years beginning after June 15, 2000.  Because of Ashland's
minimal use of  derivatives,  FAS 133 did not have a significant  effect on
Ashland's  consolidated financial position or results of operations when it
was  adopted on October 1, 2000.  MAP's  adoption  of FAS 133 on January 1,
2001,  resulted in a $20 million pretax loss from the cumulative  effect of
this accounting  change.  Ashland's share of the pretax loss amounted to $8
million which, net of income tax benefits of $3 million, resulted in a loss
of $5 million from the cumulative effect of this accounting change.

Ashland  selectively  uses  unleveraged  interest  rate swap  agreements to
obtain greater access to the lower  borrowing  costs normally  available on
floating-rate debt, while minimizing refunding risk through the issuance of
long-term,   fixed-rate   debt.   Ashland's   intent  is  to  maintain  its
floating-rate  exposure  between  25%  and  45% of  total  interest-bearing
obligations.  At September 30, 2002,  Ashland held interest rate swaps that
effectively  converted  the interest  rates on $153 million of  fixed-rate,
medium-term notes to floating rates based upon three-month LIBOR. The swaps
have been designated as fair value hedges,  and since the critical terms of
the debt  instruments  and the swaps  match,  the hedges are  assumed to be
perfectly  effective,  with the changes in fair value of the debt and swaps
offsetting.

Ashland  regularly uses  commodity-based  and foreign  currency  derivative
instruments to manage its exposure to price  fluctuations  associated  with
the  purchase and sale of natural gas in its energy  services  business and
certain  transactions  denominated  in  foreign  currencies.  In  addition,
Ashland  opportunistically  enters into  petroleum  crackspread  futures to
economically  hedge or enhance its equity  earnings and cash  distributions
from MAP.  Although  certain of these  instruments  could be  designated as
qualifying for hedge  accounting  treatment,  Ashland has not elected to do
so. Therefore, the fair value of the derivatives is recorded on the balance
sheet,  with the offsetting  gain or loss recognized in earnings during the
period of change.

MAP uses commodity-based futures, forwards, swaps and options to reduce the
effects of price  fluctuations on purchases and sales of crude oil, natural
gas and refined products. MAP has not elected to designate these derivative
instruments as qualifying for hedge accounting treatment.  As a result, the
changes in fair  value of these  derivatives  are  recognized  in  earnings
during the period of change,  impacting  Ashland's  equity  income from MAP
accordingly.

OTHER

Cash equivalents  include highly liquid  investments  maturing within three
months after purchase.

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

Advertising costs ($79 million in 2002, $67 million in 2001 and $67 million
in 2000) and  research  and  development  costs ($38  million in 2002,  $36
million in 2001 and $33 million in 2000) are expensed as incurred.

In April 2002, the Financial  Accounting  Standards Board issued  Statement
No. 145 (FAS 145), under which gains and losses on early retirement of debt
are  generally  no  longer  shown  as  extraordinary  items  in the  income
statement.  Ashland  adopted  the  statement  as of October  1,  2001,  the
beginning of its fiscal year. As a result of the reclassification of losses
on early retirement of debt to interest and other financial  costs,  income
from  continuing  operations  was reduced by $3 million ($.04 per share) in
2001 and $4 million ($.05 per share) in 2000.


Certain  prior year  amounts  have been  reclassified  in the  consolidated
financial   statements   and   accompanying   notes  to   conform  to  2002
classifications.

                                    49

<PAGE>


NOTE B - INFORMATION BY INDUSTRY SEGMENT

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

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

Ashland Distribution distributes chemicals,  plastics, fiber reinforcements
and fine ingredients in North America and plastics in Europe,  and provides
environmental and energy management services.

Ashland Specialty Chemical manufactures composites,  adhesives, and casting
binder chemicals for use in the transportation and construction industries.
Ashland Specialty Chemical also manufactures water treatment  chemicals for
use in the general industrial and merchant marine markets. In addition, the
company  manufactures  high purity  chemicals and provides  services to the
microelectronics industry.

Valvoline is a marketer of premium-branded  automotive and commercial oils,
automotive  chemicals,  appearance products and automotive  services,  with
sales in more than 140  countries.  Valvoline  is  engaged in the "fast oil
change"  business  through owned and franchised  service centers  operating
under the Valvoline Instant Oil Change name.

The  Refining  and  Marketing  segment  includes  Ashland's  38%  ownership
interest  in  Marathon  Ashland  Petroleum  LLC (MAP) and other  activities
associated  with refining and  marketing.  MAP was formed  January 1, 1998,
combining the major elements of the refining,  marketing and transportation
operations  of Ashland and Marathon Oil Company.  MAP has seven  refineries
with a combined crude oil refining capacity of 935,000 barrels per calendar
day, 88 light  products and asphalt  terminals in the Midwest and Southeast
United  States,  about  5,900  retail  marketing  outlets  in 17 states and
significant  pipeline holdings.  Ashland accounts for its investment in MAP
using the equity method.

Information  about  Ashland's  domestic  and  foreign  operations  follows.
Ashland has no material operations in any individual foreign country.
<TABLE>
<CAPTION>
                                                                Revenues from                Property, plant
                                                              external customers               and equipment
(In millions)                                               2002     2001     2000             2002     2001
------------------------------------------------------------------------------------------------------------
<S>                                                       <C>      <C>      <C>              <C>      <C>

United States                                             $6,766   $7,526   $7,344           $1,275   $1,299
Foreign                                                    1,026    1,021    1,092              142      141
                                                          --------------------------------------------------
                                                          $7,792   $8,547   $8,436           $1,417   $1,440
                                                          ==================================================
</TABLE>

NOTE C - RELATED PARTY TRANSACTIONS

Ashland sells  chemicals and lubricants to Marathon  Ashland  Petroleum LLC
(MAP) and purchases  petroleum  products from MAP. Such transactions are in
the ordinary course of business at negotiated prices comparable to those of
transactions  with other  customers  and  suppliers.  In addition,  Ashland
leases  certain  facilities  to  MAP,  and  provides  certain   information
technology and administrative services to MAP. For the year ended September
30, 2002,  Ashland's  sales to MAP amounted to $24 million,  its  purchases
from MAP amounted to $217 million, and its costs charged to MAP amounted to
$6 million.  Comparable amounts for the year ended September 30, 2001, were
$22 million, $258 million, and $6 million, and for the year ended September
30,  2000,  were $15  million,  $261  million,  and $8  million.  Ashland's
transactions   with  other   affiliates   and  related   parties  were  not
significant.

Ashland  has  entered  into  revolving  credit  agreements   providing  for
short-term loans, at Ashland's  discretion,  to and from MAP at competitive
rates. Under MAP's borrowing agreement, Ashland may loan up to $190 million
to MAP. Under Ashland's borrowing agreement,  MAP could invest up to 38% of
its surplus cash  balances with Ashland.  No loans were  outstanding  under
either agreement at September 30, 2002, and 2001.  Under these  agreements,
Ashland paid  interest  expense to MAP of $4 million in 2001 and $5 million
in 2000.  Interest expense paid to MAP in 2002 and interest income received
from MAP in all three years was not significant.


Ashland  has  guaranteed  38% of  MAP's  payments  for  certain  crude  oil
purchases, up to a maximum guarantee of $86 million. At September 30, 2002,
Ashland's  contingent  liability  under  this  guarantee  amounted  to  $72
million.  Ashland  has not made and does not  expect  to make any  payments
under this guarantee.


                                    50

<PAGE>




NOTE D - UNCONSOLIDATED AFFILIATES

Affiliated  companies  accounted for on the equity method include  Marathon
Ashland  Petroleum LLC (MAP) and various other companies.  See Note B for a
description  of MAP.  Summarized  financial  information  reported by these
affiliates and a summary of the amounts recorded in Ashland's  consolidated
financial  statements  follow.  MAP is  organized  as a  limited  liability
company  that has  elected  to be taxed as a  partnership.  Therefore,  the
parents are responsible for income taxes applicable to their share of MAP's
taxable income. The net income reflected below for MAP does not include any
provision  for  income  taxes  that will be  incurred  by its  parents.  At
September 30, 2002,  Ashland's  retained  earnings included $157 million of
undistributed earnings from unconsolidated  affiliates accounted for on the
equity method.
<TABLE>
<CAPTION>
                                                                                        Other
(In millions)                                                               MAP    affiliates          Total
------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>              <C>            <C>

SEPTEMBER 30, 2002
Financial position
   Current assets                                                       $ 3,425          $165
   Current liabilities                                                   (2,200)          (85)
                                                                        ------------------------------------
   Working capital                                                        1,225            80
   Noncurrent assets                                                      4,572           125
   Noncurrent liabilities                                                  (461)         (106)
                                                                        ------------------------------------
   Stockholders' equity                                                 $ 5,336          $ 99
                                                                        ====================================
Results of operations
   Sales and operating revenues                                         $25,063          $262
   Income from operations                                                   511            23
   Net income                                                               502            15
Amounts recorded by Ashland
   Investments and advances                                               2,350(1)         48         $2,398
   Equity income                                                            176             5            181
   Distributions received                                                   196             5            201
                                                                        ====================================

SEPTEMBER 30, 2001
Financial position
   Current assets                                                       $ 3,485          $ 80
   Current liabilities                                                   (2,214)          (55)
                                                                        -----------------------------------
   Working capital                                                        1,271            25
   Noncurrent assets                                                      4,431            77
   Noncurrent liabilities                                                  (364)          (15)
                                                                        -----------------------------------
   Stockholders' equity                                                 $ 5,338          $ 87
                                                                        ==================================
Results of operations
   Sales and operating revenues                                         $28,865          $207
   Income from operations                                                 2,042            21
   Net income                                                             2,022            12
Amounts recorded by Ashland
   Investments and advances                                               2,387            45         $2,432
   Equity income                                                            749             5            754
   Distributions received                                                   658             6            664
                                                                        ====================================

SEPTEMBER 30, 2000
Results of operations
   Sales and operating revenues                                         $27,657          $181
   Income from operations                                                 1,084            21
   Net income                                                             1,092            13
Amounts recorded by Ashland
   Equity income                                                            389             5         $  394
   Distributions received                                                   279             3            282
                                                                       =====================================

</TABLE>
(1)      At September 30, 2002,  Ashland's investment exceeds its equity in
         the net  assets  of MAP by $323  million,  of which  $167  million
         represents plant and equipment that will continue to be amortized,
         and $156 million represents goodwill.  Straight-line  amortization
         of this excess  investment  against equity income  amounted to $16
         million in 2002 and $26 million in 2001 and 2000 (see Note A).



                                    51


<PAGE>




 NOTE E - DEBT
<TABLE>
<CAPTION>
(In millions)                                                                            2002           2001
------------------------------------------------------------------------------------------------------------

<S>                                                                                    <C>            <C>
Medium-term notes, due 2003-2025, interest at a weighted
   average rate of 7.3% at September 30, 2002 (2.4% to 10.4%)                          $  765         $  845
8.80% debentures, due 2012                                                                250            250
7.83% medium-term notes, Series J, due 2005                                               229            229
Pollution control and industrial revenue bonds, due
   2003-2022, interest at a weighted average rate of 5.7%
   at September 30, 2002 (1.6% to 7.2%)                                                   201            201
6.86% medium-term notes, Series H, due 2009                                               150            150
6.625% senior notes, due 2008                                                             150            150
Other                                                                                      52             46
                                                                                       ---------------------
Total long-term debt                                                                    1,797          1,871
Current portion of long-term debt                                                        (191)           (85)
                                                                                       ---------------------
Long-term debt (less current portion)                                                  $1,606         $1,786
                                                                                       =====================
</TABLE>

Aggregate  maturities  of  long-term  debt are $191  million  in 2003,  $68
million in 2004, $396 million in 2005, $60 million in 2006 and $125 million
in 2007. Interest payments on all indebtedness  amounted to $138 million in
2002,  $167 million in 2001 and $189 million in 2000. The weighted  average
interest rate on short-term  borrowings  outstanding  was 1.9% at September
30, 2002. No short-term borrowings were outstanding at September 30, 2001.

Ashland  has  two  revolving  credit  agreements  providing  for up to $425
million  in  borrowings,  neither  of which has been  used.  The  agreement
providing  for $250  million in  borrowings  expires  on June 2, 2004.  The
agreement providing for $175 million in borrowings expires on June 6, 2003.
Both  agreements  contain  a  covenant  limiting  new  borrowings  based on
Ashland's  stockholders  equity.   However,  these  agreements  would  have
permitted an  additional  $1.4 billion of borrowings at September 30, 2002.
Additional  permissible borrowings are increased (decreased) by 150% of any
increase (decrease) in stockholders' equity.

NET INTEREST AND OTHER FINANCIAL COSTS
<TABLE>
<CAPTION>
(In millions)                                                              2002          2001           2000
------------------------------------------------------------------------------------------------------------

<S>                                                                        <C>           <C>            <C>
Interest expense                                                           $135          $162           $191
Expenses on sales of accounts receivable (see Note G)                         4             8              6
Loss on early retirement of debt                                              -             5              6
Other financial costs                                                         3             2              1
Interest income                                                              (4)           (2)           (10)
                                                                           ---------------------------------
                                                                           $138          $175           $194
                                                                           =================================

</TABLE>
NOTE F - LEASES

Ashland  and its  subsidiaries  are  lessees  of office  buildings,  retail
outlets, transportation and off-road construction equipment, warehouses and
storage  facilities,  and other equipment,  facilities and properties under
leasing  agreements that expire at various dates.  Under various  operating
leases,  Ashland has guaranteed the residual value of the underlying leased
property.  If Ashland had cancelled  those leases as of September 30, 2002,
its maximum  obligations  under the related residual value guarantees would
have  amounted  to $137  million.  Ashland  does not  expect  to incur  any
significant charge to earnings under these guarantees, $74 million of which
relates to real estate.  These lease  agreements are with  unrelated  third
party  lessors  and  Ashland  has  no  additional   contractual   or  other
commitments to any parties to the leases. Capitalized lease obligations are
not significant  and are included in long-term debt.  Future minimum rental
payments at September 30, 2002, and rental expense under  operating  leases
follow.
<TABLE>
<CAPTION>
(In millions)                                       (In millions)
Future minimum rental payments                      Rental expense                    2002     2001     2000
----------------------------------                  --------------------------------------------------------
<S>                          <C>                    <S>                              <C>      <C>      <C>

2003                          $ 47
2004                            40                  Minimum rentals
2005                            33                    (including rentals under
2006                            25                    short-term leases)              $106     $119     $115
2007                            22                  Contingent rentals                   3        5        5
Later years                     95                  Sublease rental income              (2)      (2)      (2)
----------------------------------                 ---------------------------------------------------------
                              $262                                                    $107     $122     $118
==================================                 =========================================================
</TABLE>


                                    52


<PAGE>




NOTE G - SALE OF ACCOUNTS RECEIVABLE

On March 15, 2000,  Ashland entered into a five-year  agreement to sell, on
an ongoing  basis with limited  recourse,  up to a $200  million  undivided
interest in a designated  pool of accounts  receivable.  Under the terms of
the agreement, new receivables are added to the pool and collections reduce
the pool. Since inception,  interests  totaling $150 million have been sold
on  a  continuous  basis.  Ashland  retains  a  credit  interest  in  these
receivables and addresses its risk of loss on this retained interest in its
allowance  for  doubtful  accounts.   Receivables  sold  exclude  defaulted
accounts (as defined) or  concentrations  over certain  limits with any one
customer.  The proceeds from the initial sale were reflected as a reduction
of accounts  receivable  on Ashland's  balance sheet and as cash flows from
operations  (included in change in  operating  assets and  liabilities)  on
Ashland's  cash flow  statement.  The costs of these sales are based on the
buyer's  short-term  borrowing rates and approximated 2.2% at September 30,
2002, and 3.5% at September 30, 2001.


NOTE H - FINANCIAL INSTRUMENTS

DERIVATIVE INSTRUMENTS

Ashland uses interest rate swaps and  commodity-based  and foreign currency
derivative  instruments as described in Note A. Open  contracts  other than
interest rate swaps were not significant at September 30, 2002, and 2001.

FAIR VALUES

The  carrying  amounts and fair values of Ashland's  significant  financial
instruments  at September  30, 2002,  and 2001,  are shown below.  The fair
values  of cash and cash  equivalents,  investments  of  captive  insurance
companies and commercial paper approximate their carrying amounts. The fair
values of long-term  debt are based on quoted  market  prices or, if market
prices are not available,  the present values of the underlying  cash flows
discounted at Ashland's  incremental  borrowing  rates.  The fair values of
interest rate swaps are based on quoted market prices.
<TABLE>
<CAPTION>
                                                                         2002                      2001
                                                                 Carrying     Fair        Carrying      Fair
(In millions)                                                      amount    value          amount     value
------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>      <C>             <C>      <C>
Assets
   Cash and cash equivalents                                       $   90   $   90          $  236    $  236
   Interest rate swaps                                                 11       11               3         3
   Investments of captive insurance companies(1)                        3        3              20        20
Liabilities
   Commercial paper                                                    10       10               -         -
   Long-term debt (including current portion)                       1,797    1,958           1,871     2,023
                                                                   =========================================
</TABLE>

(1)      Included in other noncurrent  assets in the  Consolidated  Balance
         Sheets.


NOTE I - ACQUISITIONS AND DIVESTITURES

ACQUISITIONS

In October  1999,  Ashland  completed  its tender offer for Superfos a/s, a
Denmark  based  industrial  company.  In  November  1999,  in a  series  of
transactions,  Ashland sold the businesses of Superfos, other than its U.S.
construction operations,  to a unit of Industri Kapital, a European private
equity  fund.  Ashland's  net cost for the U.S.  construction  business  of
Superfos was approximately $533 million, of which $315 million was assigned
to goodwill and was being amortized on a straight-line basis over a 20-year
period   through   September  30,  2001.  In  addition,   several   smaller
acquisitions were made by APAC and Ashland Specialty  Chemical in 2000, two
of which included the issuance of $3 million in Ashland common stock.

During  2001,   Ashland  Specialty   Chemical  acquired  Neste  Polyester's
unsaturated  polyester  resins and gelcoats  business and assets from Dynea
Oy. Several  smaller  acquisitions  were also completed by APAC and Ashland
Specialty  Chemical in 2001. During 2002,  several small  acquisitions were
made by APAC, Ashland Specialty Chemical and Valvoline.  These acquisitions
were  accounted for as purchases  and did not have a significant  effect on
Ashland's consolidated financial statements.

DIVESTITURES

During  2001,  APAC  sold  certain   grading  and  utilities   construction
operations.  During 2000,  APAC sold certain  concrete and block plants and
Ashland  Distribution sold its plastics compounding business in Italy. None
of these  divestitures had a significant  effect on Ashland's  consolidated
financial statements.

                                    53

<PAGE>


NOTE J - INCOME TAXES

A summary of the provision for income taxes related to continuing operations
follows.
<TABLE>
<CAPTION>
(In millions)                                                              2002          2001           2000
------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>            <C>

Current(1)
   Federal                                                                 $151          $ 89           $ 55
   State                                                                     22            13              6
   Foreign                                                                   17            19             17
                                                                           ---------------------------------
                                                                            190           121             78
Deferred                                                                   (119)          152            111
                                                                           ---------------------------------
                                                                           $ 71          $273           $189
                                                                           =================================
</TABLE>

(1)      Income tax payments amounted to $158 million in 2002, $103 million
         in 2001 and $114 million in 2000.

Deferred income taxes are provided for income and expense items  recognized
in different years for tax and financial  reporting  purposes.  Ashland has
not recorded deferred income taxes on the undistributed earnings of certain
foreign  subsidiaries  and 50%  owned  foreign  corporate  joint  ventures.
Management intends to indefinitely  reinvest such earnings,  which amounted
to $96 million at September 30, 2002.  Because of  significant  foreign tax
credits,  it is not  practicable  to determine the U.S.  federal income tax
liability,   if  any,  that  might  be  incurred  if  those  earnings  were
distributed.  Temporary  differences that give rise to significant deferred
tax assets and liabilities follow.
<TABLE>
<CAPTION>
(In millions)                                                                            2002           2001
------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>            <C>
Employee benefit obligations                                                             $204           $177
Environmental, self-insurance and litigation reserves                                     134            148
Compensation accruals                                                                      53             61
Uncollectible accounts receivable                                                          19             20
Other items                                                                                54             59
                                                                                         -------------------
Total deferred tax assets                                                                 464            465
                                                                                         -------------------
Property, plant and equipment                                                             186            173
Investment in unconsolidated affiliates                                                   412            606
                                                                                         -------------------
Total deferred tax liabilities                                                            598            779
                                                                                         -------------------
Net deferred tax liability                                                               $134           $314
                                                                                         ===================

</TABLE>

The U.S. and foreign components of income from continuing operations before
income taxes and a reconciliation  of the statutory federal income tax with
the provision for income taxes follow.
<TABLE>
<CAPTION>
(In millions)                                                              2002          2001           2000
------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>            <C>

Income from continuing operations before income taxes
   United States                                                           $114          $605           $417
   Foreign                                                                   86            71             60
                                                                           ---------------------------------
                                                                           $200          $676           $477
                                                                           =================================
Income taxes computed at U.S. statutory rate (35%)                         $ 70          $236           $167
Increase (decrease) in amount computed resulting from
   State income taxes                                                         1            22             14
   Net impact of foreign results                                              -             3              -
   Nondeductible goodwill amortization                                        -            12              7
   Other items                                                                -             -              1
                                                                           ---------------------------------
Income taxes                                                               $ 71          $273           $189
                                                                           =================================
</TABLE>
                                     54


<PAGE>


NOTE K - CAPITAL STOCK

From time to time, Ashland's Board of Directors has authorized the purchase
of shares of Ashland  common stock in the open market.  As of September 30,
2002,  Ashland  could  purchase  an  additional  2.7 million  shares  under
previous authorizations.

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

At September 30, 2002,  500,000  shares of cumulative  preferred  stock are
reserved for potential  issuance under the Shareholder  Rights Plan and 7.5
million  common shares are reserved for issuance  under  outstanding  stock
options.


NOTE L - STOCK INCENTIVE PLANS

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

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

<TABLE>
<CAPTION>
                                                                          2002          2001            2000
------------------------------------------------------------------------------------------------------------

<S>                                                                      <C>           <C>             <C>
Pro forma
   Net income (in millions)                                              $ 113         $ 414           $  66
   Basic earnings per share                                               1.63          5.94             .93
   Diluted earnings per share                                             1.61          5.88             .92
                                                                         -----------------------------------
Weighted average fair value per share of options granted                 $5.35         $7.38           $7.26
                                                                         -----------------------------------
Assumptions (weighted average)
   Risk-free interest rate                                                 2.9%          4.1%            6.1%
   Expected dividend yield                                                 3.8%          3.0%            3.3%
   Expected volatility                                                    26.7%         24.4%           22.9%
   Expected life (in years)                                                5.0           5.0             5.0
                                                                         ===================================

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

<TABLE>
<CAPTION>
                                       2002                         2001                         2000

                                       Weighted avg.                Weighted avg.                Weighted avg.
(In thousands except            Common  option price         Common  option price       Common    option price
 per share data)                shares     per share         shares     per share       shares       per share
--------------------------------------------------------------------------------------------------------------
<S>                             <C>           <C>            <C>          <C>           <C>            <C>

Outstanding -
   beginning of year(1)         6,735         $38.41          6,380        $38.01        6,381          $38.34
Granted                         1,210          29.05          1,001         36.38          506           32.96
Exercised                        (413)         31.34           (572)        30.06         (195)          30.75
Canceled                          (50)         38.54            (74)        41.04         (312)          41.26
                               -------------------------------------------------------------------------------
Outstanding - end of year(1)    7,482         $37.28          6,735        $38.41        6,380          $38.01
                               ===============================================================================

Exercisable - end of year       5,537         $39.34          4,803        $39.36        4,684          $38.53
                               ===============================================================================

(1)      Shares of common stock  available  for future grants of options or
         awards  amounted to 3,727,000 at September 30, 2002, and 4,812,000
         at  September  30,  2001.  Exercise  prices per share for  options
         outstanding  at September  30, 2002,  ranged from $23.88 to $33.88
         for 2,591,000 shares,  from $35.88 to $43.13 for 3,554,000 shares,
         and from  $44.20 to $53.38  for  1,337,000  shares.  The  weighted
         average remaining contractual life of the options was 6.2 years.

                                    55
</TABLE>
<PAGE>





NOTE M - LITIGATION, CLAIMS AND CONTINGENCIES

ASBESTOS-RELATED LITIGATION

Ashland is subject to  liabilities  from claims  alleging  personal  injury
caused  by  exposure  to  asbestos.  Those  claims  result  primarily  from
indemnification  obligations undertaken in 1990 in connection with the sale
of Riley Stoker Corporation  (Riley),  a former subsidiary.  Although Riley
was neither a producer  nor a  manufacturer  of  asbestos,  its  industrial
boilers  contained some  asbestos-containing  components  produced by other
companies.

A summary of  asbestos claims activity follows. Because claims are
frequently  filed and  settled  in large  groups,  the amount and timing of
settlements,  and the number of open claims,  can  fluctuate  significantly
from period to period.  Over the last 17 years, Riley has been dismissed as
a defendant in 55% of the resolved claims.

<TABLE>
<CAPTION>

(In thousands)                                                             2002          2001           2000
------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>            <C>

Open claims - beginning of year                                             167           118             93
New claims filed                                                             45            52             37
Claims settled                                                              (15)           (2)            (9)
Claims dismissed                                                            (37)           (1)            (3)
                                                                           ---------------------------------
Open claims - end of year                                                   160           167            118
                                                                           =================================

</TABLE>
Amounts  spent on  litigation  defense  and claim  settlements  totaled $38
million in 2002,  $15  million in 2001 and $11  million in 2000.  Insurance
provides  reimbursements  for most of these  costs,  and  coverage-in-place
agreements exist with the insurance carriers that provide substantially all
of  the  coverage  that  is  currently  being  accessed.  The  amounts  not
recoverable are generally due from insurers that are insolvent, rather than
as a  result  of  uninsured  claims  or the  exhaustion  of  the  insurance
coverage.

In previous  years,  Ashland  recognized  a net  reserve for the  estimated
litigation  defense and claim  settlement  costs to settle open claims that
would not be recovered  from insolvent  insurance  carriers.  However,  the
reserve  and  related  receivable  are now  presented  on a gross  basis in
consolidated  balance  sheet at September  30, 2001, to conform to the 2002
presentation.  This  change did not result  from an  increase  in  expected
asbestos exposure, and had no effect on net income or stockholders' equity.
Under this  presentation,  the reserve for asbestos claims amounted to $202
million at September 30, 2002, and $199 million at September 30, 2001. Such
reserve reflects the estimated costs on an undiscounted  basis that will be
incurred over an extended period to resolve open claims.  In addition,  the
receivable for recoveries of litigation  defense and claim settlement costs
from  insurers  amounted to $196  million at September  30, 2002,  and $178
million at September 30, 2001.

The reserve  for  asbestos  claims is based on  assumptions  and  estimates
derived from currently known facts. However, projecting future events, such
as the average  cost of resolving  the open claims,  is subject to numerous
variables that are extremely difficult to predict.  These variables include
the type and severity of the disease  alleged by each  claimant,  dismissal
rates,  future costs of medical  treatment,  the impact of  bankruptcies of
other companies that are co-defendants in claims, uncertainties surrounding
the litigation  process from  jurisdiction to jurisdiction and from case to
case,  and the impact of  potential  changes  in  legislative  or  judicial
standards.

Ashland  believes that  insurance will cover the majority of the costs that
will be  incurred  on open and  future  asbestos  claims.  Equitas  Limited
(Equitas)  and other London  companies  currently  provide about 59% of the
insurance  coverage,  and this percentage could decline over time to around
44% if higher  layers of  coverage  provided by other  carriers  have to be
accessed.  The remaining 41% of the coverage is currently  provided by five
companies,  all of which  are  rated A or  higher  by A. M.  Best  Company.
Depending  upon the  level  of costs  that  are  ultimately  incurred,  the
non-London coverage could ultimately expand to about 25 insurance companies
or groups.  Companies or groups that provide about 90% of this coverage are
also rated A or higher.

Ashland has not recognized a reserve for future asbestos claims that may be
asserted.  Although additional claim filings are expected, Ashland does not
have sufficient  information to make a reasonable estimate of the number of
new claims  that might be filed.  Furthermore,  any  predictions  about the
other   variables   discussed   previously  are  subject  to  even  greater
uncertainty as the projection  period  lengthens.  Ashland has retained the
services of professional advisors to assist management in the estimation of
projected liabilities and probable insurance recoveries for future asbestos
claims.  Results of that  effort are  expected to be  available  during the
quarter ending March 31, 2003.

Although  coverage limits are resolved in the  coverage-in-place  agreement
with Equitas and the other London  companies,  there is a disagreement with
these  companies  over  the  timing  of  recoveries.   Depending  upon  the
assumptions  made with respect to the  projected  payments to settle future
claims,  an unfavorable  resolution of this  disagreement  could materially
affect the present  value of  additional  insurance  recoveries  from those
companies.  Until such time as this disagreement is resolved,  Ashland will
use the less favorable  interpretation of this agreement in estimating such
insurance recoveries.


                                    56


<PAGE>



ENVIRONMENTAL PROCEEDINGS


Ashland is subject to various federal,  state and local  environmental laws
and  regulations  that  require  environmental  assessment  or  remediation
efforts (collectively  environmental remediation) at multiple locations. At
September 30, 2002, such locations  included 97 waste treatment or disposal
sites where Ashland has been identified as a potentially  responsible party
under Superfund or similar state laws, approximately 140 current and former
operating  facilities  (including certain operating  facilities conveyed to
MAP) and about 1,220 service  station  properties.  Ashland's  reserves for
environmental  remediation  amounted to $169 million at September 30, 2002,
and $176 million at  September  30, 2001.  Such amounts  reflect  Ashland's
estimates of the most likely  costs that will be incurred  over an extended
period  to  remediate  identified   conditions  for  which  the  costs  are
reasonably  estimable,   without  regard  to  any  third-party  recoveries.
Engineering  studies,  probability  techniques,  historical  experience and
other  factors are used to identify and evaluate  remediation  alternatives
and  their  related  costs,  in  determining  the  estimated  reserves  for
environmental remediation.

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

None of the remediation  locations is individually  material to Ashland, as
its  largest  reserve for any site is less than $10  million.  As a result,
Ashland's  exposure to adverse  developments with respect to any individual
site is not expected to be material,  and these sites are in various stages
of ongoing  remediation.  Although  environmental  remediation could have a
material   effect  on  results  of   operations  if  a  series  of  adverse
developments  occurs  in a  particular  quarter  or  fiscal  year,  Ashland
believes that the chance of such developments occurring in the same quarter
or fiscal year is remote.

OTHER LEGAL PROCEEDINGS

In addition to the matters described above, there are pending or threatened
against  Ashland and its current and former  subsidiaries  various  claims,
lawsuits and administrative  proceedings.  Such actions are with respect to
commercial  matters,  product  liability,  toxic tort liability,  and other
environmental matters, which seek remedies or damages some of which are for
substantial amounts. While these actions are being contested, their outcome
is not predictable with assurance.


NOTE N - DISCONTINUED OPERATIONS

On March 16, 2000, Ashland's Board of Directors approved a spin-off of 17.4
million shares of its Arch Coal Common Stock to Ashland's  shareholders  of
record on March 24,  2000,  in the form of a taxable  dividend.  The shares
were  distributed  on the basis of .246097 of a share of Arch Coal for each
Ashland share  outstanding.  The spin-off  resulted in a charge to retained
earnings of $123 million,  with no gain or loss recorded.  Ashland sold its
remaining 4.7 million Arch Coal shares in a public offering during February
2001 for $86 million (after  underwriting  commissions).  In 2002,  Ashland
received $22 million in current tax benefits  from capital loss  carrybacks
generated  by the sale,  which are  included  in "Cash  provided  (used) by
discontinued  operations"  on the  Statements of  Consolidated  Cash Flows.
Ashland's   net  income  (loss)   associated   with  Arch  Coal  and  other
discontinued operations are summarized below.
<TABLE>
<CAPTION>
(In millions)                                                              2002          2001           2000
-------------------------------------------------------------------------------------------------------------

<S>                                                                       <C>            <C>            <C>
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Arch Coal
   Equity loss                                                            $   -           $ -          $(246)(1)
   Administrative expenses                                                    -             -             (1)
Reserves related to other discontinued operations                             -           (23)             -

GAIN (LOSS) ON DISPOSAL OF ARCH COAL
Gain on sale of stock                                                         -            49              -
Costs related to the spin-off                                                 -             -             (5)
                                                                          ------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES                                             -            26           (252)
INCOME TAXES
Income (loss) from discontinued operations                                    -             9             32
Gain (loss) on disposal of Arch Coal                                          -           (16)             2
                                                                          ------------------------------------
RESULTS FROM DISCONTINUED OPERATIONS                                      $   -           $19          $(218)
                                                                          ====================================
</TABLE>

(1)      Includes a net loss of $203  million  related to asset  impairment
         and restructuring  costs,  largely due to the write-down of assets
         at Arch's Dal-Tex and Hobet 21 mining  operations and certain coal
         reserves in central Appalachia.



                                    57

<PAGE>


NOTE O - EMPLOYEE BENEFIT PLANS

PENSION AND OTHER POSTRETIREMENT PLANS

Ashland  and its  subsidiaries  sponsor  noncontributory,  defined  benefit
pension plans that cover substantially all employees.  Benefits under these
plans are generally based on employees'  years of service and  compensation
during the years immediately preceding their retirement. For certain plans,
50% of employees'  leveraged employee stock ownership plan (LESOP) accounts
are  coordinated  with and used to partially  fund their pension  benefits.
Ashland's objective is to fully fund the accumulated benefit obligations of
its qualified plans, and determines the level of its contributions annually
to achieve  that  objective  over  time.  Ashland's  contributions  of $103
million to its pension  plans  during 2002  exceeded  the amounts  required
under  federal  laws  and  regulations  by $48  million.  These  additional
contributions  were made to partially  mitigate the adverse  effects of the
reduction  in the discount  rate and  depressed  investment  returns on the
funded status of its qualified plans.

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

Summaries  of the  changes  in the  benefit  obligations  and  plan  assets
(primarily  listed stocks and debt  securities) and of the funded status of
the plans follow.
<TABLE>
<CAPTION>
                                                         Pension benefits
                                                   2002                     2001
                                           -------------------------------------------             Other
                                                          Non-                    Non-        postretirement
                                           Qualified qualified     Qualified qualified            benefits
(In millions)                                  plans     plans         plans     plans         2002     2001
------------------------------------------------------------------------------------------------------------
<S>                                             <C>       <C>           <C>       <C>          <C>      <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at October 1                $715      $103          $595      $ 87         $333     $269
Service cost                                      42         1            35         2           12       11
Interest cost                                     52         7            46         7           23       22
Retiree contributions                              -         -             -         -            8        7
Benefits paid                                    (30)       (4)          (28)       (5)         (33)     (28)
Other-primarily actuarial loss                    95         2            67        12           18       52
                                           -----------------------------------------------------------------
Benefit obligations at September 30             $874      $109          $715      $103         $361     $333
                                           =================================================================

CHANGE IN PLAN ASSETS
Value of plan assets at October 1               $518      $  -          $506      $  -         $  -     $  -
Actual return on plan assets                     (42)        -           (40)        -            -        -
Employer contributions                           103         4            76         5           25       21
Retiree contributions                              -         -             -         -            8        7
Benefits paid                                    (30)       (4)          (28)       (5)         (33)     (28)
Other                                              2         -             4         -            -        -
                                           -----------------------------------------------------------------
Value of plan assets at September 30            $551      $  -          $518      $  -         $  -     $  -
                                           =================================================================

FUNDED STATUS OF THE PLANS
Unfunded accumulated obligation                 $150      $ 98          $ 53      $ 91         $361     $333
Provision for future salary increases            173        11           144        12            -        -
                                          -----------------------------------------------------------------
Excess of obligations over plan assets           323       109           197       103          361      333
Unrecognized actuarial loss                     (354)      (43)         (186)      (44)         (72)     (56)
Unrecognized prior service credit (cost)          (2)        -            (3)        -           15       24
                                           -----------------------------------------------------------------
Net liability recognized                        $(33)     $ 66          $  8      $ 59         $304     $301
                                           =================================================================

BALANCE SHEET LIABILITIES (ASSETS)
Prepaid benefit costs                              $    -                  $  (4)              $  -     $  -
Accrued benefit liabilities                           250                    144                304      301
Intangible assets                                      (2)                    (2)                 -        -
Accumulated other comprehensive loss                 (215)                   (71)                 -        -
                                           -----------------------------------------------------------------
Net liability recognized                           $   33                  $  67               $304     $301
                                           =================================================================

ASSUMPTIONS AS OF SEPTEMBER 30
Discount rate                                        6.75%                  7.25%              6.75%    7.25%
Salary adjustment rate                               5.00                   5.00                  -        -
Expected return on plan assets                       9.00                   9.00                  -        -
                                           =================================================================
</TABLE>

                                     58


<PAGE>



The  following   table   details  the   components  of  pension  and  other
postretirement benefit costs.
<TABLE>
<CAPTION>
                                                                                              Other
                                                       Pension benefits               postretirement benefits
(In millions)                                      2002     2001     2000             2002     2001      2000
<S>                                                <C>      <C>      <C>              <C>      <C>       <C>
-------------------------------------------------------------------------------------------------------------
Service cost                                        $43      $37      $37              $12      $11       $ 9
Interest cost                                        59       53       47               23       22        19
Expected return on plan assets                      (47)     (48)     (39)               -        -         -
Other amortization and deferral                      19        4        5               (6)      (6)       (9)
                                                   ----------------------------------------------------------
                                                    $74      $46      $50              $29      $27       $19
                                                   ==========================================================

</TABLE>

Ashland  amended  nearly all of its  retiree  health  care plans in 1992 to
place a cap on its contributions  and to adopt a cost-sharing  method based
upon years of service. The cap limits Ashland's  contributions to base year
per capita  costs,  plus  annual  increases  of up to 4.5% per year.  These
amendments  reduced  Ashland's  obligations  under its retiree  health care
plans, with the reduction  amortized to income over approximately 12 years.
The remaining  credit at September 30, 2002,  amounted to $14 million,  and
the amortization to income will amount to $8 million in 2003 and $6 million
in 2004.

OTHER PLANS

Ashland sponsors a qualified  savings plan to assist eligible  employees in
providing for  retirement or other future needs.  Under that plan,  Ashland
contributes  up to 4.2% of a  participating  employee's  earnings.  Company
contributions  amounted to $17 million in 2002, $16 million in 2001 and $15
million in 2000.


NOTE P - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table presents quarterly financial  information and per share
data  relative to Ashland's  common  stock.  Amounts for the December  2001
quarter have been restated to include the  cumulative  effect of accounting
change for the adoption of FAS 142.  Amounts for the September 2001 quarter
have been  restated  for the  adoption  of FAS 145.  See Note A for further
explanations.

<TABLE>
<CAPTION>
Quarters ended                          December 31           March 31             June 30           September 30
(In millions except per share data)     2001(1) 2000        2002(1) 2001         2002    2001        2002    2001
-----------------------------------------------------------------------------------------------------------------
<S>                                   <C>     <C>         <C>     <C>          <C>     <C>        <C>      <C>

Sales and operating revenues          $1,812  $1,878      $1,598  $1,659       $2,047  $2,053      $2,086  $2,129
Operating income (loss)                   98     144          (1)     87          137     369         104     251
Income (loss) from continuing operations  38      59         (21)     26           65     197          47     122
Net income (loss)                         27      59         (21)     46           65     197          47     116

Basic earnings (loss) per share
   Continuing operations              $  .55  $  .84      $ (.31) $  .37       $  .94  $ 2.82      $  .68  $ 1.75
   Net income (loss)                     .38     .84        (.31)    .66          .94    2.82         .68    1.66

Diluted earnings (loss) per share
   Continuing operations              $  .54  $  .84      $ (.31) $  .37       $  .93  $ 2.79      $  .68  $ 1.73
   Net income (loss)                     .38     .84        (.31)    .66          .93    2.79         .68    1.64

Common cash dividends per share       $ .275  $ .275      $ .275  $ .275       $ .275  $ .275      $ .275  $ .275

Market price per common share
   High                               $46.54  $36.24      $46.98  $41.35       $45.61  $44.25      $41.20  $44.05
   Low                                 37.60   30.63       43.04   34.39        37.11   37.15       26.29   35.53
                                      ===========================================================================
</TABLE>

(1)      MAP  maintains an inventory  valuation  reserve to reduce the LIFO
         cost  of  its   inventories  to  their  net   realizable   values.
         Adjustments  in that  reserve are  recognized  quarterly  based on
         changes in petroleum product prices,  creating non-cash charges or
         credits to Ashland's earnings. A pretax charge of $29 million ($18
         million  after  tax,  or $.26 per  share)  was  recognized  in the
         December  2001 quarter and reversed in the March 2002 quarter as a
         result of these adjustments.

                                    59


<PAGE>


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


(In millions)                                                              2002          2001           2000

<S>                                                                     <C>            <C>            <C>
REVENUES
Sales and operating revenues
   APAC                                                                  $2,652        $2,624         $2,505
   Ashland Distribution                                                   2,535         2,849          3,214
   Ashland Specialty Chemical                                             1,290         1,248          1,283
   Valvoline                                                              1,152         1,092          1,077
   Intersegment sales(1)
      Ashland Distribution                                                  (20)          (26)           (38)
      Ashland Specialty Chemical                                            (64)          (66)           (78)
      Valvoline                                                              (2)           (2)            (2)
                                                                         -----------------------------------
                                                                          7,543         7,719          7,961

Equity income
   Ashland Specialty Chemical                                                 4             4              4
   Valvoline                                                                  1             1              1
   Refining and Marketing                                                   176           749            389
                                                                         -----------------------------------
                                                                            181           754            394

Other income
   APAC                                                                      12            13             21
   Ashland Distribution                                                      17            15              9
   Ashland Specialty Chemical                                                26            27             30
   Valvoline                                                                  6             6              7
   Refining and Marketing                                                     2             7              6
   Corporate                                                                  5             6              8
                                                                         -----------------------------------
                                                                             68            74             81
                                                                         -----------------------------------
                                                                         $7,792        $8,547         $8,436
                                                                         ===================================


OPERATING INCOME
APAC                                                                     $  122        $   55         $  140
Ashland Distribution                                                          1            35             70
Ashland Specialty Chemical                                                   87            58             95
Valvoline                                                                    77            81             78
Refining and Marketing(2)                                                   143           707            361
Corporate                                                                   (92)          (85)           (73)
                                                                         -----------------------------------
                                                                         $  338        $  851         $  671
                                                                         ===================================


ASSETS
APAC                                                                     $1,498        $1,574         $1,654
Ashland Distribution                                                        884           961          1,047
Ashland Specialty Chemical                                                  944           944            888
Valvoline                                                                   611           642            573
Refining and Marketing                                                    2,409         2,452          2,352
Corporate(3)                                                                379           558            311
                                                                         -----------------------------------
                                                                         $6,725        $7,131         $6,825
                                                                         ===================================
</TABLE>
                                    60

<PAGE>
<TABLE>
<CAPTION>

(In millions)                                                              2002          2001           2000

<S>                                                                      <C>           <C>            <C>
INVESTMENT IN EQUITY AFFILIATES
APAC                                                                     $   (2)       $    -         $   10
Ashland Specialty Chemical                                                   41            36             40
Valvoline                                                                     9             9              7
Refining and Marketing                                                    2,350         2,387          2,295
                                                                         -----------------------------------
                                                                         $2,398        $2,432         $2,352
                                                                         ===================================


EXPENSE (INCOME) NOT AFFECTING CASH
Depreciation, depletion and amortization
   APAC                                                                  $  114        $  133         $  129
   Ashland Distribution                                                      21            27             23
   Ashland Specialty Chemical                                                50            56             49
   Valvoline                                                                 24            23             23
   Corporate                                                                 11            11             13
                                                                         -----------------------------------
                                                                            220           250            237
Other noncash items(4)
   APAC                                                                      24            14              9
   Ashland Distribution                                                       1            (1)            (3)
   Ashland Specialty Chemical                                                 5             5              3
   Valvoline                                                                 (2)            4              -
   Refining and Marketing                                                  (168)           21            (17)
   Corporate                                                                 41            24            (12)
                                                                         -----------------------------------
                                                                            (99)           67            (20)
                                                                         -----------------------------------
                                                                         $  121        $  317         $  217
                                                                         ===================================


ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
APAC                                                                     $  107        $   92         $   98
Ashland Distribution                                                         12            15             18
Ashland Specialty Chemical                                                   38            57             82
Valvoline                                                                    21            29             25
Corporate                                                                     7            12              9
                                                                         -----------------------------------
                                                                         $  185        $  205         $  232
                                                                         ===================================
</TABLE>

(1)      Intersegment  sales are accounted  for at prices that  approximate
         market value.

(2)      Includes Ashland's equity income from MAP, amortization related to
         Ashland's   excess   investment  in  MAP,  and  other   activities
         associated with refining and marketing.

(3)      Includes cash, cash equivalents and other unallocated assets.

(4)      Includes deferred income taxes,  equity income from affiliates net
         of distributions, and other items not affecting cash.


                                    61


<PAGE>


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

<TABLE>
<CAPTION>

(In millions except per share data)           2002         2001            2000          1999           1998

<S>                                         <C>          <C>             <C>           <C>            <C>
SUMMARY OF OPERATIONS
Revenues
   Sales and operating revenues             $7,543       $7,719          $7,961        $6,801         $6,534
   Equity income                               181          754             394           351            304
   Other income                                 68           74              81           101             70
Costs and expenses
   Cost of sales and operating expenses     (6,049)      (6,319)         (6,434)       (5,346)        (5,299)
   Selling, general and
      administrative expenses               (1,185)      (1,127)         (1,094)       (1,054)        (1,006)
   Depreciation, depletion and
      amortization                            (220)        (250)           (237)         (228)          (181)
                                            ----------------------------------------------------------------
Operating income                               338          851             671           625            422
Net interest and other financial costs        (138)        (175)           (194)         (140)          (130)
                                            ----------------------------------------------------------------
Income from continuing operations
      before income taxes                      200          676             477           485            292
Income taxes                                   (71)        (273)           (189)         (194)          (114)
                                            ----------------------------------------------------------------
Income from continuing operations              129          403             288           291            178
Results from discontinued operations             -           19            (218)           (1)            25
                                            ----------------------------------------------------------------
Income before cumulative effect
    of accounting changes                      129          422              70           290            203
Cumulative effect of accounting changes        (12)          (5)              -             -              -
                                            ----------------------------------------------------------------
Net income                                  $  117       $  417          $   70        $  290         $  203
                                            ================================================================

BALANCE SHEET INFORMATION
Current assets                              $1,925       $2,237          $2,139        $2,063         $1,832
Current liabilities                          1,511        1,534           1,712         1,401          1,367
                                            ----------------------------------------------------------------
Working capital                             $  414       $  703          $  427        $  662         $  465
                                            ================================================================
Total assets                                $6,725       $7,131          $6,825        $6,478         $6,136
                                            ================================================================
Debt due within one year                    $  201       $   85          $  327        $  219         $  125
Long-term debt (less current portion)        1,606        1,786           1,899         1,627          1,507
Stockholders' equity                         2,173        2,226           1,965         2,200          2,137
                                            ----------------------------------------------------------------
Capital employed                            $3,980       $4,097          $4,191        $4,046         $3,769
                                            ================================================================

CASH FLOW INFORMATION
Cash flows from operations                  $  188       $  829          $  484        $  383         $  354
Additions to property, plant and equipment     185          205             232           248            274
Cash dividends                                  76           76              78            81             84
                                            ================================================================

COMMON STOCK INFORMATION
Diluted earnings per share
   Income from continuing operations        $ 1.83      $  5.73            4.05        $ 3.90         $ 2.31
   Net income                                 1.67         5.93             .98          3.89           2.63
Cash dividends per share                      1.10         1.10            1.10          1.10           1.10
                                            ================================================================

</TABLE>


                                       62