26

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

(In millions)                                                           1999           1998            1997
============================================================================================================
<S>                                                                   <C>            <C>            <C>
SALES AND OPERATING REVENUES
APAC                                                                  $1,678         $1,444         $ 1,257
Ashland Distribution                                                   2,925          2,941           2,818
Ashland Specialty Chemical                                             1,263          1,244           1,205
Valvoline                                                              1,059          1,023           1,053
Refining and Marketing                                                     -              -           6,828
Intersegment sales                                                      (124)          (118)           (328)
------------------------------------------------------------------------------------------------------------
                                                                      $6,801         $6,534         $12,833
============================================================================================================
OPERATING INCOME(1)
APAC                                                                  $  108         $   90         $    82
Ashland Distribution                                                      37             57              48
Ashland Specialty Chemical                                               107            101              92
Valvoline                                                                 74             53              65
Refining and Marketing(2)                                                323            239             209
Arch Coal                                                                 (3)            25              25
Corporate                                                                (24)          (118)            (60)
------------------------------------------------------------------------------------------------------------
                                                                      $  622         $  447         $   461
============================================================================================================
OPERATING INFORMATION
APAC
      Construction backlog at September 30 (millions)                 $  948         $  838         $   693
      Hot mix asphalt production (million tons)                         25.8           23.1            20.3
      Aggregate production (million tons)                               20.7           20.3            17.0
Valvoline lubricant sales (thousand barrels per day)                    16.7           16.7            15.8
Refining and Marketing(3)
      Refined products sold (thousand barrels per day)                 1,231          1,184
      Crude oil refined (thousand barrels per day)                       898            905
Arch Coal(3)
      Tons sold (millions)                                             109.3           67.3            53.7
      Tons produced (millions)                                         105.7           61.8            50.0
============================================================================================================
</TABLE>

(1)      See Page 27 for a discussion of unusual items.
(2)      Effective January 1, 1998,  includes  Ashland's equity income from
         Marathon  Ashland  Petroleum LLC (MAP),  amortization of Ashland's
         excess  investment  in MAP,  and  certain  retained  refining  and
         marketing activities.
(3)      Amounts represent 100% of the volumes of MAP or Arch Coal. MAP
         commenced operations January 1, 1998.



<PAGE>
27

BASIS OF PRESENTATION
During  1998,  Ashland and  Marathon Oil Company  formed  Marathon  Ashland
Petroleum  LLC  (MAP),  combining  the  major  elements  of  the  refining,
marketing and transportation operations of the two companies. Ashland holds
a 38% interest in MAP, which is accounted for using the equity method.  For
comparison  purposes,  Ashland  changed  its method of  accounting  for the
businesses  conveyed  to MAP to the equity  method as of the  beginning  of
fiscal 1998.  Since  restatements  for prior years are not permitted  under
generally accepted accounting principles,  Ashland's consolidated financial
statements for 1999 and 1998 are not comparable with those for 1997.  While
the change had no effect on  Ashland's  net income or common  stockholders'
equity, it significantly  reduced  Ashland's  revenues,  costs,  assets and
liabilities, and changed certain components of its cash flow.

RESULTS OF OPERATIONS
Ashland's net income amounted to $290 million in 1999, $203 million in 1998
and $279 million in 1997. Such earnings  include various unusual items that
significantly  affected the  comparability  of  year-to-year  results.  The
following  table shows the effects of unusual items on Ashland's  operating
and net income for each of the last three years.

<TABLE>
<CAPTION>

                                                                      Operating income                                Net income
                                                  -----------------------------------             --------------------------------
(In millions)                                     1999            1998            1997            1999        1998           1997
==================================================================================================================================
<S>                                               <C>             <C>             <C>             <C>         <C>           <C>
Income before unusual items                       $493            $541            $489            $216        $263          $245
Gain on sale of Blazer Energy                        -               -               -               -           -            71
Costs related to coal merger                         -               -             (13)              -           -           (13)
Environmental reserves                               -             (38)              -               -         (23)            -
Severance and relocation charges                   (10)             (5)              -              (6)         (3)            -
G&A restructuring and headquarters move              -             (50)              -               -         (31)            -
Adjustments to inventory market valuation
  reserve                                          117             (15)              -              71          (9)            -
Environmental recoveries                            43               -               -              26           -             -
Asset impairment write-downs                       (21)              -             (26)            (17)          -           (22)
Gain on sale of Melamine Chemicals                   -              14               -               -           6             -
Inventory liquidation gains                          -               -              11               -           -             7
Extraordinary loss on debt prepayment                -               -               -               -           -            (9)
----------------------------------------------------------------------------------------------------------------------------------
Income as reported                                $622            $447            $461             $290       $203           $279
==================================================================================================================================
</TABLE>

UNUSUAL ITEMS
In December 1996, Ashland announced a major profitability  improvement plan
including  initiatives to  restructure  its assets to emphasize its highest
return  businesses and cost efficiency.  Many of the unusual items reported
during  the last  three  years  have been  directly  associated  with these
initiatives as indicated below.
        o      Blazer Energy (Ashland's oil and gas exploration subsidiary)
               was sold in July 1997, resulting in an after tax gain of $71
               million.  Ashland subsequently completed its withdrawal from
               the  exploration  business  in 1998  through the sale of its
               Nigerian operations with no significant gain or loss.
        o      Ashland Coal and Arch Mineral merged to form Arch Coal, Inc.
               in July 1997.  Arch Coal  recognized  an after tax charge of
               $13  million to write off  duplicate  facilities  previously
               owned by Arch Mineral and to provide for severance and other
               costs related to the merger.
        o      Ashland and Marathon Oil Company formed MAP in January 1998.
               Under the formation  agreements,  Ashland was  contractually
               committed  to  complete  certain   voluntary   environmental
               remediation   efforts  in  progress  at  various   operating
               locations  conveyed  to MAP,  as well as  retain  the  costs
               associated with issues addressed in a multi-media inspection
               of  the  former  Ashland  refineries  by  the  Environmental
               Protection Agency.  Ashland also decided to close a landfill
               near  the  refinery  at  Catlettsburg,   Kentucky.   Charges
               associated with these environmental  matters amounted to $38
               million.  An additional  $15 million ($5 million in 1998 and
               $10 million in 1999) was  provided for  severance  and other
               costs   associated   with  the  formation  of  MAP  and  the
               consolidation of its retail marketing headquarters.
        o      Ashland    restructured    its    corporate    general   and
               administrative   functions   and   decided   to   move   its
               headquarters  in 1998.  Costs  associated with these actions
               amounted to $50 million.

When it was formed, MAP recognized an inventory market valuation reserve to
reduce  the costs of its crude oil and  petroleum  product  inventories  to
their net realizable values. MAP adjusts this reserve regularly for changes
in the values of refined products, and Ashland's share of those adjustments
resulted  in income of $117  million in 1999,  compared  to a charge of $15
million in 1998.

In addition to the items discussed  above,  Ashland  recognized  impairment
charges of $21 million in 1999  principally  related to the goodwill of its
European plastics distribution operations. Similar charges amounting to $26
million were recognized in 1997 related to the goodwill of certain European
operations  of  Ashland   Distribution,   Ashland  Specialty  Chemical  and
Valvoline. Results from these


<PAGE>
28

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

operations had  consistently  been well below the levels that were expected
when they were acquired,  necessitating the impairment review and resulting
write-downs.

Other unusual items  recognized  during the three years ended September 30,
1999, included the following.

        o      Settlements  were  reached in 1999 with certain of Ashland's
               insurance  carriers  related to the coverage  provided under
               historical    policies   with   respect   to   environmental
               remediation liabilities, resulting in a gain of $43 million.
        o      Ashland sold its 23% interest in Melamine  Chemicals in 1998
               at a gain of $14 million.
        o      During  1997,  Ashland  liquidated  certain  crude  oil  and
               petroleum product inventories of Refining and Marketing that
               were  accounted  for using  the  last-in,  first-out  (LIFO)
               method.  Under that method,  cost of sales includes the LIFO
               costs of these  inventories in the years they were acquired.
               Since  those  LIFO costs were  significantly  below  current
               replacement  costs,  their  sale  produced  a  gain  of  $11
               million.
        o      Ashland's  prepayment of certain  long-term debt resulted in
               an after tax loss of $9 million in 1997.

The following  table  compares  operating  income  before  unusual items by
segment for the three years ended September 30, 1999.
<TABLE>
<CAPTION>

(In millions)                                       1999                     1998                      1997
------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                      <C>                       <C>
APAC                                                $108                     $ 90                      $ 82
Ashland Distribution                                  58                       57                        59
Ashland Specialty Chemical                           107                       87                        97
Valvoline                                             74                       53                        75
Refining and Marketing                               216                      297                       198
Arch Coal                                             (3)                      25                        38
Corporate                                            (67)                     (68)                      (60)
------------------------------------------------------------------------------------------------------------
                                                    $493                     $541                      $489
============================================================================================================
</TABLE>

APAC
The APAC  construction  companies  achieved  record results in 1999 for the
second straight year with operating income of $108 million, compared to $90
million in 1998. Net  construction  revenue (total revenue less subcontract
work) increased 17% with improvements  coming from all geographic  regions.
In addition,  APAC's  production  of  construction  materials  continued to
expand with  increases in asphalt (up 12%),  crushed  aggregate (up 2%) and
ready-mix concrete (up 23%).

APAC's construction  backlog amounted to a record $948 million at September
30, 1999.  Such backlog  includes  increases in both the public and private
sectors, and is expected to contain margins comparable to those included in
last year's backlog.

Operating income from APAC amounted to $90 million in 1998, compared to $82
million in 1997.  Reflecting newly acquired operations,  net revenue was up
17%, while production of asphalt was up 13%,  crushed  aggregate was up 19%
and ready-mix concrete was up 9%. In addition, liquid asphalt costs per ton
were down about 7%, enhancing margins.

ASHLAND DISTRIBUTION
Excluding unusual items,  operating income of Ashland Distribution for 1999
was comparable to last year's  results.  The North American  thermoplastics
and  fiber-reinforced  plastics  distribution  businesses  achieved  record
earnings as a result of stronger  fundamentals in end-use markets,  and the
chemical  distribution business was also up. However, the favorable effects
were largely  offset by profit  declines  within the fine  ingredients  and
European thermoplastics distribution businesses,  which have been adversely
affected  by price  deflation  and  weak  markets.

Ashland  Distribution's  operating  income before  unusual  items  declined
slightly  from $59  million  in 1997 to $57  million  in  1998,  reflecting
reduced sales volumes of industrial chemicals and solvents.

ASHLAND SPECIALTY CHEMICAL
Operating  income from Ashland  Specialty  Chemical  increased  24% to $107
million in 1999, compared to $87 million in 1998, excluding the gain on the
sale of Melamine  Chemicals.  Robust market  conditions,  including  volume
increases in businesses related to construction and transportation,  led to
improved  results  from the  Composite  Polymers and  Specialty  Polymers &
Adhesives  divisions.  Results for  Petrochemicals  also  increased  due to
higher  sales  volumes  and  margins  for maleic  anhydride.  In  addition,
operating income from the Electronic  Chemicals division was up slightly as
it  continued  to recover  from the depths of the  worldwide  semiconductor
recession late last year. Such  improvements were partially offset by lower
earnings  from Drew Marine  where sales  reflect  the global  reduction  in
marine traffic.


<PAGE>
29

Operating income excluding  unusual items declined from $97 million in 1997
to $87 million in 1998.  Reduced  earnings  from  electronic  chemicals and
foundry products more than offset the favorable  effects of cost reductions
by marine chemicals.  Electronic  chemicals felt the adverse effects of the
worldwide  semiconductor  recession,  as well as start-up costs  associated
with its new manufacturing plant in Pueblo, Colorado. Foundry products were
adversely  affected  by  the  strike  at  General  Motors  and  unfavorable
translation  effects from the strong U.S.  dollar on the earnings  from its
foreign  operations.  Results  from  petrochemicals  were down $3  million,
reflecting very weak methanol markets.

VALVOLINE
Valvoline's operating income increased 40% to $74 million in 1999, compared
to $53 million in 1998.  Contributing to the improved results were stronger
volumes for branded lubricants,  R-12 automotive refrigerant and automotive
chemicals,  as well as improved antifreeze results and record earnings from
Valvoline  Instant Oil Change  (VIOC).  These  improvements  were partially
offset by lower earnings from Valvoline  International,  reflecting reduced
sales volumes and margins in Europe and higher  expenses in Latin  America.
VIOC's operating  income  reflected better car counts,  higher revenues per
car  serviced  and gains on the sale of  certain  company-owned  units.  At
September 30, 1999, VIOC operated 377 company-owned units,  compared to 391
units in 1998 and 382 units in 1997. The VIOC franchising program continues
to expand,  with 207 units open in 1999, compared to 183 in 1998 and 137 in
1997.  VIOC's future growth will focus  principally on expanding the number
of franchised rather than company-owned units.

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

REFINING AND MARKETING
Excluding  unusual  items,  operating  income from  Refining and  Marketing
amounted  to $216  million  in  1999,  compared  to $297  million  in 1998.
Comparisons  between these  periods are difficult  because of the differing
mix of operations  and other changes  resulting  from the formation of MAP.
However,  the reduction in earnings  resulted  principally  from  depressed
refining margins during most of fiscal 1999. Crude prices escalated rapidly
during the year as average posted prices for West Texas  Intermediate crude
oil  increased  from a low of $8.65 a barrel in December  1998 to a high of
$20.94 a barrel in September  1999.  Wholesale  refined product prices were
not only slow to  respond,  but also failed to keep pace  overall  with the
increased crude prices. The adverse effects were partially offset by strong
retail  gasoline   margins  in  the  December  1998  quarter  and  improved
merchandise sales volumes.

Operating  income before unusual items from Refining and Marketing was $297
million in 1998,  up from $198 million in 1997.  Results for 1998  included
the operating income of Ashland Petroleum and SuperAmerica for the December
1997 quarter  prior to the  formation of MAP,  Ashland's 38% share of MAP's
earnings  for the nine  months  ended  September  30, 1998  (including  the
amortization of Ashland's excess investment in MAP), and results of certain
retained refining and marketing activities.  Earnings from Ashland's former
refining and marketing  businesses in the December 1997 quarter were up $20
million from the prior year's quarter,  reflecting higher refining margins,
combined  with  a  3.2 cent-a-gallon  improvement  in  retail  margins.  In
addition,  results for the nine months ended September 30, 1998,  reflect a
$79 million  improvement from the results achieved by Ashland Petroleum and
SuperAmerica  for that  period in 1997.  While  this  improvement  resulted
principally  from more favorable  industry  conditions,  a different mix of
operations  and captured  synergies  were also factors in the  year-to-year
improvement.  Results  during the March 1997  quarter  were also  adversely
affected  by  heavy  flooding  in the Ohio  Valley  which  limited  product
shipments on the river systems.

ARCH COAL
During  1999,  Ashland  incurred an  operating  loss of $3 million from its
investment  in Arch  Coal,  compared  to  income  in  1998 of $25  million,
including an after-tax  gain of $6 million on the sale of certain  inactive
mining assets in eastern  Kentucky.  However,  since Arch acquired the U.S.
coal operations of Atlantic  Richfield  Company effective June 1, 1998, its
results for 1999 are not directly  comparable with 1998.  Arch's operations
were  adversely  affected in 1999 by  numerous  factors.  Arch  experienced
adverse market  conditions in all of its coal markets caused by mild winter
weather.  Losses were also  incurred at its Dal-Tex  complex as  operations
wound down for a temporary  shutdown in July 1999. The shutdown  was due to
a delay in obtaining  mining permits  because of a legal action in the U.S.
District Court for the Southern  District of West Virginia  challenging the
legality of surface mining in West Virginia.  As a result of  the shutdown,
Arch  recorded  a charge  that  reduced  Ashland's  income  by $2  million,
comprised  principally of severance costs,  obligations for  non-cancelable
lease  payments  and a  change  in  the  reclamation  liability  due to the
temporary  shutdown.  Arch also  experienced  production  shortfalls at its
Black  Thunder  Mine  in  Wyoming  due  primarily  to  water  drainage  and
sequencing   difficulties.   At  various  times  during  the  year,  Arch's
operations were also hindered by rail difficulties  caused by consolidation
within the rail industry.  These negative  results were partially offset by
income of $2 million associated with the sale of a dragline and settlements
with certain suppliers.


<PAGE>
30

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

Ashland's operating income from Arch Coal amounted to $25 million in 1998,
compared to $38 million  before  unusual items in 1997.  Eastern coal sales
declined 14% in 1998,  and margins were down  reflecting  costs  associated
with the closing of certain mines, the scheduled  expiration of a favorable
long-term  supply  contract,  and costs  related to  extensive  maintenance
projects  undertaken during the summer shutdown for miners'  vacations.  In
addition,  Arch incurred significantly higher interest costs related to the
debt  incurred  to acquire  the  western  operations.  The effects of these
shortfalls, however, were partially offset by a gain on the sale of certain
inactive  mining  assets in eastern  Kentucky,  which  increased  Ashland's
income by $6 million.

CORPORATE
Excluding unusual items,  Corporate  expenses were $67 million in 1999, $68
million  in 1998 and $60  million  in 1997.  Although  expenses  were  down
slightly in 1998,  amounts  allocated  to  divisions  declined  $11 million
principally  due to the  formation of MAP. The  remaining  changes over the
three-year  period result  principally  from  fluctuations in incentive and
deferred compensation costs.

INTEREST EXPENSE
Interest expense (net of interest income) amounted to $140 million in 1999,
$130  million in 1998 and $142 million in 1997.  The  reduction in interest
expense  from 1997 to 1998  resulted  principally  from the  redemption  of
certain high  interest rate debt using the proceeds from the sale of Blazer
Energy during 1997. The increased interest expense for 1999 reflects higher
debt levels.

DISCONTINUED OPERATIONS
Ashland sold its oil and gas subsidiary, Blazer Energy, in 1997. Net income
from Blazer in 1997 prior to the sale  amounted to $25 million,  and a gain
of $71 million was realized from the sale.

FINANCIAL POSITION
LIQUIDITY
Ashland's  financial  position  has  enabled it to obtain  capital  for its
financing needs and to maintain investment grade ratings on its senior debt
of Baa2  from  Moody's  and BBB from  Standard  & Poor's.  Ashland  has two
revolving credit agreements providing for up to $400 million in borrowings,
neither  of  which  was  in  use at  September  30,  1999.  Under  a  shelf
registration, Ashland can also issue an additional $450 million in debt and
equity securities should future opportunities or needs arise.  Furthermore,
Ashland has access to various  uncommitted  lines of credit and  commercial
paper  markets,   under  which   short-term  notes  of  $182  million  were
outstanding at September 30, 1999.  While the revolving  credit  agreements
contain a covenant  limiting new  borrowings,  Ashland could have increased
its indebtedness (including any borrowings under these agreements) by up to
$1.5 billion at September 30, 1999.

Cash  flows  from  continuing  operations,  a  major  source  of  Ashland's
liquidity,  amounted to $390 million in 1999, $366 million in 1998 and $565
million in 1997.  The  reduction in cash flows from  operations  after 1997
reflects changes  resulting from the formation of MAP and increased working
capital  requirements  across Ashland's operating  divisions.  Since MAP is
accounted  for on the  equity  method,  Ashland's  share of  MAP's  capital
expenditures  are now reported as a reduction of cash flows from operations
(i.e., such expenditures reduce distributions from equity affiliates). Cash
flows from  operations  exceeded  Ashland's  capital  requirements  for net
property additions and dividends since 1996 by over $250 million, providing
additional funds for debt repayment and acquisitions.

Property additions amounted to $878 million during the last three years and
are summarized in the Information by Industry  Segment on Page 53. APAC and
Ashland  Specialty   Chemical   accounted  for  over  70%  of  the  capital
expenditures (excluding Refining and Marketing and Corporate), with Ashland
Distribution  and Valvoline  sharing the remainder  about equally.  Capital
used  for  acquisitions  (including  assumed  debt and  companies  acquired
through the issuance of common stock)  amounted to $504 million  during the
last three years,  of which $316 million was invested in APAC,  $90 million
in Ashland Specialty Chemical,  $54 million in Ashland Distribution and $26
million  in  Valvoline.  A summary of the  capital  employed  in  Ashland's
operations at the end of the last three fiscal years follows.
<TABLE>
<CAPTION>

(In millions)                                       1999                     1998                      1997
------------------------------------------------------------------------------------------------------------
<S>                                               <C>                      <C>                       <C>
WHOLLY OWNED OPERATIONS
APAC                                              $  663                   $  452                    $  273
Ashland Distribution                                 527                      477                       412
Ashland Specialty Chemical                           566                      557                       492
Valvoline                                            346                      357                       339
EQUITY INVESTMENTS
Refining and Marketing                             1,646                    1,729                     1,515
Arch Coal                                            370                      373                       353
------------------------------------------------------------------------------------------------------------
                                                  $4,118                   $3,945                    $3,384
============================================================================================================

</TABLE>

<PAGE>
31

Capital  employed  in  APAC  and  Ashland  Specialty   Chemical   increased
considerably  since 1996, as the majority of Ashland's  property  additions
and acquisitions were focused in these areas.  Capital employed in Refining
and Marketing  increased in 1998,  reflecting the purchase of leased assets
associated  with  the  formation  of MAP.  Despite  that  one-time  capital
infusion,  however,  capital  employed in Ashland's wholly owned operations
still  increased  from 44% of total  capital  employed at the end of fiscal
1996 to 51% at September 30, 1999.

Long-term  borrowings  provided cash flows of $387 million  during the last
three years,  including the issuance of $237 million of  medium-term  notes
and $150  million  in senior  notes.  The  proceeds  from  these  long-term
borrowings  were used in part to retire  $507  million  of  long-term  debt
(scheduled maturities as well as refundings to reduce interest costs). Cash
flows were  supplemented  as necessary by the issuance of short-term  notes
and commercial paper.

At September 30, 1999, working capital (excluding debt due within one year)
amounted to $882  million,  compared  to $592  million at the end of fiscal
1998.  Liquid  assets  (cash,  cash  equivalents  and accounts  receivable)
amounted to 95% of current  liabilities at September 30, 1999,  compared to
84% at the end of fiscal 1998. Ashland's working capital is affected by its
use of the LIFO method of inventory valuation, which valued inventories $54
million below their replacement costs at September 30, 1999.

CAPITAL RESOURCES
Ashland's  Board of Directors  has  authorized  the purchase of 9.4 million
shares of Ashland  common  stock.  Under this  authorization,  Ashland  had
repurchased 6.2 million shares at a cost of $274 million through  September
30, 1999. The number of shares ultimately  purchased and the prices Ashland
will pay for its stock are subject to periodic review by management.

At  September  30, 1999,  Ashland's  debt level  amounted to $1.8  billion,
compared to $1.6 billion at the end of fiscal 1998.  The increase  reflects
an active acquisition  program during 1999, as well as the share repurchase
program.  Common  stockholders' equity increased by $63 million during 1999
to $2.2  billion,  principally  due to the net  effects of earnings of $209
million  retained in the  business,  issuances  of $79 million in stock for
acquired  companies,  and share  repurchases.  Debt as a percent of capital
employed amounted to 46% at September 30, 1999,  compared to 43% at the end
of fiscal 1998.

In October 1999,  Ashland acquired  Superfos a/s, an industrial  company in
Copenhagen,  Denmark,  at a cost of approximately  $950 million,  including
assumed debt.  Ashland has also reached an agreement to sell the businesses
of  Superfos  other  than  its U.S.  construction  operations  to  Industri
Kapital,  a European  private equity fund,  for a short-term  note for $285
million  and cash.  After  that sale  during  the  December  1999  quarter,
Ashland's  net cost for the  U.S.  construction  business  of  Superfos  is
expected to be about $525 million.  Since the  acquisition  was funded with
debt using new credit  facilities,  Ashland's debt is expected to initially
increase to around 56% of capital employed, declining to about 52% once the
sale is completed and the note is redeemed in the March 2000 quarter.

During  fiscal  2000,   Ashland   anticipates   capital   expenditures   of
approximately  $300  million.   Ashland  anticipates  meeting  its  capital
requirements in 2000 for property  additions,  dividends and scheduled debt
repayments  of  $37  million  from  internally  generated  funds.  However,
external  financing may be necessary to provide funds for  acquisitions  or
purchases of common stock.

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

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

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

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

From time to time,  Ashland uses commodity futures contracts or derivatives
to manage  its  exposure  to price  fluctuations  for  natural  gas used by
Ashland's manufacturing facilities.  These financial products are also used
to hedge fixed-price natural gas purchase or


<PAGE>
32

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

sales contracts entered into under Ashland's energy management  program for
its suppliers and customers.  Ashland also uses forward exchange  contracts
to hedge foreign currency transaction exposures of its operations. However,
the  potential  loss from a  hypothetical  10% adverse  change in commodity
prices or foreign  currency rates on Ashland's  open commodity  futures and
foreign exchange  contracts at September 30, 1999, would not  significantly
affect Ashland's consolidated financial position,  results of operations or
cash flows.

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. However, Ashland liquidated all but one of its
outstanding swap agreements during 1999, since management believed that the
potential  benefits of floating rate debt no longer outweighed the risks of
future  interest  rate  increases.  The final  reset on the  remaining  $25
million floating-rate swap agreement was set in July 1999, with Ashland due
to receive the final settlement payment in January 2000.

Ashland's  long-term  debt  included $38 million of  floating-rate  debt at
September 30, 1999. As a result,  Ashland's  annual  interest costs in 2000
will  fluctuate  based on short-term  interest rates on that portion of its
long-term  debt  outstanding  at  September  30,  1999,  as  well as on any
short-term notes and commercial paper.

OUTLOOK
Ashland will  continue its primary  focus on the basic  industrial  markets
currently  served,  where  it  can  provide  high-performance,  value-added
products and services that are differentiated from competitors on the basis
of  superior  technology,  capability,  quality and  reputation.  The major
emphasis   will  continue  to  be  on  the  growing   markets   related  to
transportation  and construction  where Ashland already has  market-leading
positions and strong product and service offerings.

Transportation  and  construction  markets offer strong potential for sales
growth. No matter how e-commerce  affects product marketing,  trucks,  cars
and  other  means of  transportation  will  still be  necessary.  Passenger
transportation  will continue to rise along with  population  and increased
mobility.  In addition,  current  federal  funding for highway  projects in
states in which APAC does business is forecast to rise by 59% over the next
four years.  Because of the Superfos acquisition and others, APAC is better
positioned than ever to take advantage of this increased funding.

All  four  of  Ashland's  wholly  owned  businesses  are key  providers  of
materials  and  services to make and maintain  the world's  vehicles.  Such
involvement  ranges from  plastics and paint  additives  handled by Ashland
Distribution  and  microchips  made  using  our  electronic  chemicals,  to
highways paved by APAC and Valvoline car-care products. In addition,  three
of Ashland's  wholly owned businesses  provide  materials and services from
the  ground  up in  construction-related  markets.  In  addition  to APAC's
highway  paving  and  production  of  construction  materials,  end uses of
products  and  services  provided  by  Ashland   Distribution  and  Ashland
Specialty  Chemical  include a vast array of  residential,  commercial  and
industrial applications, such as structural supports, interior and exterior
walls,  roofing,  flooring,  paints and stains,  tanks, pipes and fittings,
stacks and scrubbers.

MAP enjoys an excellent  market  position as the fourth largest  refiner in
the United  States and a leading  marketer in eight  states in the Midwest.
This Midwest  focus  provides  the  benefits not only of a strong  gasoline
market,  but also  typically  stronger  crack spreads  compared to the Gulf
Coast and New York Harbor. Ashland expects a stronger year from MAP in 2000
based on its operational improvements.

Ashland acquired the U.S. road construction business of Superfos in October
1999. Since those operations provide the same products and services as APAC
and strengthens  its market position in five states,  the acquisition is an
excellent  strategic fit.  Although  Superfos  should  contribute to APAC's
operating  income in fiscal  2000,  it is not  expected to be  accretive to
Ashland's net income until fiscal 2001.

Ashland  has been  exploring  strategic  alternatives  with  respect to its
investment  in  Arch  Coal.  After  a  careful   evaluation  of  identified
alternatives,  a proposal was made to Arch's Board of Directors  that would
result in a tax-free spin-off of this investment to Ashland's shareholders.
Arch has formed a special board committee to evaluate  Ashland's  proposal.
The proposal is subject to, among other things, a negotiated agreement with
the special board committee, approval by the Arch shareholders, a favorable
ruling from the Internal Revenue Service and approval of Ashland's Board of
Directors.  Even if an  agreement is reached and such  conditions  are met,
Ashland  anticipates that it will be several months before a spin-off could
be consummated.

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



<PAGE>
33

Ashland  has  resolved  identified  issues  with  respect  to its  internal
information  systems  through  system  modifications  or  replacement.   In
addition,  Ashland  engaged the services of an  independent  third party to
perform a verification of its code  remediation  efforts.  Although testing
will  continue,  Ashland  believes that its critical  systems are currently
Year 2000 ready.

Ashland has assessed  the  embedded  systems that operate such items as its
manufacturing systems,  laboratory processes,  security systems and heating
and air conditioning.  Ashland believes that it has completed the necessary
steps to make the major embedded systems Year 2000 ready.

Formal  communications have been conducted with major vendors to assess the
potential  exposure to Ashland from their  failure to  remediate  their own
Year  2000  issues.  A  failure  by any of  these  vendors  could  become a
significant  challenge to Ashland's  ability to operate its  facilities  at
affected   locations.   Vendors  contacted  include  Ashland's   suppliers,
financial institutions and companies providing utilities (electric, natural
gas,  telephone  and water).  Alternate  providers of products and services
will be established, if deemed necessary.  Although Ashland has no means of
ensuring  the Year 2000  readiness  of such  vendors,  it will  continue to
gather   information   and   monitor   their   compliance.   Based  on  the
representations provided by these vendors to date, Ashland has no reason to
believe that these vendors are not  adequately  addressing  their Year 2000
issues.

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

Ashland estimates that its remaining costs related to Year 2000 issues will
be minimal.  Since  Ashland's  Year 2000  compliance  program was initiated
several years ago and has been integrated  with other system  enhancements,
Ashland's  total  costs of  remediating  Year 2000  issues are not  readily
discernible.

Ashland  believes  its  significant  Year 2000 issues have been  adequately
resolved.  However, certain exposures are outside Ashland's direct control.
If Ashland was  unsuccessful in identifying or remediating Year 2000 issues
in its critical  systems,  is affected by major vendors not being Year 2000
ready, or is affected by general economic  disruptions  resulting from Year
2000 issues,  its consolidated  financial position or results of operations
could be materially adversely affected.

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

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

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

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

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

FORWARD-LOOKING STATEMENTS
Management's  Discussion and Analysis contains  forward-looking  statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities  Exchange Act of 1934,  including various information
within the Capital Resources, Derivative Instruments, Outlook and Year 2000
Readiness  sections.  Although  Ashland  believes that its expectations are
based on reasonable  assumptions,  it cannot  assure that the  expectations
contained in such statements will be achieved. Important factors that could
cause  actual  results to differ  materially  from those  contained in such
statements  are discussed  under Risks and  Uncertainties  in Note A to the
Consolidated  Financial  Statements.  Other  factors  and  risks  affecting
Ashland's  revenues and operations are contained in Ashland's Form 10-K for
the  fiscal  year  ended  September  30,  1999,  which is on file  with the
Securities and Exchange Commission.



<PAGE>
35

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

(In millions except per share data)                              1999                     1998                      1997
=========================================================================================================================
<S>                                                            <C>                      <C>                      <C>
REVENUES
Sales and operating revenues (including excise taxes)          $6,801                   $6,534                   $12,833
Equity income - Note E                                            349                      329                        39
Other income                                                      101                       70                        89
-------------------------------------------------------------------------------------------------------------------------
                                                                7,251                    6,933                    12,961
COSTS AND EXPENSES
Cost of sales and operating expenses                            5,346                    5,299                     9,810
Excise taxes on products and merchandise                            -                        -                       992
Selling, general and administrative expenses                    1,055                    1,006                     1,350
Depreciation, depletion and amortization                          228                      181                       348
-------------------------------------------------------------------------------------------------------------------------
                                                                6,629                    6,486                    12,500
-------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME                                                  622                      447                       461
Interest expense (net of interest income)                        (140)                    (130)                     (142)
-------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES             482                      317                       319
Income taxes - Note D                                            (192)                    (114)                     (127)
-------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS                                 290                      203                       192
Income from discontinued operations (net of income
   taxes) - Note B                                                  -                        -                        25
Gain on sale of discontinued operations (net of
      income taxes) - Note B                                        -                        -                        71
-------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY LOSS                                  290                      203                       288
Extraordinary loss on early retirement of debt (net of
      income taxes) - Note F                                        -                        -                        (9)
-------------------------------------------------------------------------------------------------------------------------
NET INCOME                                                     $  290                   $  203                   $   279
=========================================================================================================================
EARNINGS PER SHARE - NOTE A
Basic
      Income from continuing operations                        $ 3.94                   $ 2.68                   $  2.61
      Income from discontinued operations                           -                        -                       .36
      Gain on sale of discontinued operations                       -                        -                      1.02
      Extraordinary loss                                            -                        -                      (.13)
-------------------------------------------------------------------------------------------------------------------------
      Net income                                               $ 3.94                   $ 2.68                   $  3.86
Diluted
      Income from continuing operations                        $ 3.89                   $ 2.63                   $  2.51
      Income from discontinued operations                           -                        -                       .33
      Gain on sale of discontinued operations                       -                        -                       .92
      Extraordinary loss                                            -                        -                      (.12)
-------------------------------------------------------------------------------------------------------------------------
      Net income                                               $ 3.89                   $ 2.63                   $  3.64
=========================================================================================================================

</TABLE>

See Notes to Consolidated Financial Statements.



<PAGE>
36

                 Ashland Inc. and Consolidated Subsidiaries
                        CONSOLIDATED BALANCE SHEETS
                                September 30
<TABLE>
<CAPTION>

(In millions)                                                                1999                      1998
============================================================================================================
<S>                                                                        <C>                       <C>
ASSETS

CURRENT ASSETS
Cash and cash equivalents                                                  $  110                    $   34
Accounts receivable (less allowances for doubtful accounts of
    $23 million in 1999 and $19 million in 1998)                            1,219                     1,110
Inventories - Note A                                                          464                       440
Deferred income taxes - Note D                                                107                       104
Other current assets                                                          159                       140
------------------------------------------------------------------------------------------------------------
                                                                            2,059                     1,828

INVESTMENTS AND OTHER ASSETS
Investment in MAP - Note E                                                  2,172                     2,102
Investment in Arch Coal - Note E                                              417                       422
Cost in excess of net assets of companies acquired (less accumulated
      amortization of $98 million in 1999 and $65 million in 1998)            220                       207
Other noncurrent assets                                                       264                       362
------------------------------------------------------------------------------------------------------------
                                                                            3,073                     3,093

PROPERTY, PLANT AND EQUIPMENT
Cost
      APAC                                                                    990                       809
      Ashland Distribution                                                    352                       332
      Ashland Specialty Chemical                                              768                       717
      Valvoline                                                               348                       354
      Corporate                                                               191                       201
------------------------------------------------------------------------------------------------------------
                                                                            2,649                     2,413
Accumulated depreciation, depletion and amortization                       (1,357)                   (1,252)
------------------------------------------------------------------------------------------------------------
                                                                            1,292                     1,161
------------------------------------------------------------------------------------------------------------
                                                                           $6,424                    $6,082
============================================================================================================

</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>
37
<TABLE>
<CAPTION>

(In millions)                                                                       1999                      1998
-------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                       <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Debt due within one year
      Notes payable to financial institutions                                     $  182                    $   84
      Current portion of long-term debt                                               37                        41
Trade and other payables                                                           1,135                     1,199
Income taxes                                                                          42                        37
-------------------------------------------------------------------------------------------------------------------
                                                                                   1,396                     1,361
NONCURRENT LIABILITIES
Long-term debt (less current portion) - Notes F and G                              1,627                     1,507
Employee benefit obligations - Note N                                                418                       458
Deferred income taxes - Note D                                                       226                       120
Reserves of captive insurance companies                                              175                       165
Other long-term liabilities and deferred credits                                     382                       334
Commitments and contingencies - Notes H and K
-------------------------------------------------------------------------------------------------------------------
                                                                                   2,828                     2,584
STOCKHOLDERS'  EQUITY - Notes F, I and J
Preferred  stock, no par value, 30 million shares authorized

Common stockholders' equity
      Common stock, par value $1.00 per share
          Authorized - 300 million shares
          Issued - 72 million shares in 1999 and 76 million shares in 1998            72                        76
      Paid-in capital                                                                464                       602
      Retained earnings                                                            1,710                     1,501
      Accumulated other comprehensive loss                                           (46)                      (42)
-------------------------------------------------------------------------------------------------------------------
                                                                                   2,200                     2,137
-------------------------------------------------------------------------------------------------------------------
                                                                                  $6,424                    $6,082
===================================================================================================================

</TABLE>

<PAGE>
38

                 Ashland Inc. and Consolidated Subsidiaries
              STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                                                        Accumulated
                                                                                                              other
                                           Preferred        Common        Paid-in          Retained   comprehensive
(In millions)                                  stock         stock        capital          earnings            loss        Total
=================================================================================================================================
<S>                                             <C>            <C>           <C>             <C>              <C>         <C>
BALANCE AT OCTOBER 1, 1996                      $293           $64           $280            $1,186           $ (9)       $1,814
Total comprehensive income(1)                                                                   279            (26)          253
Preferred stock cash dividends                                                                   (9)                          (9)
Common stock cash dividends, $1.10 a share                                                      (77)                         (77)
Issued common stock under
      Preferred stock conversion                (290)            9            281                                              -
      Stock incentive plans                                      2             44                                             46
      Employee savings plan                                                     1                                              1
Preferred stock redemption                        (3)                                                                         (3)
Other changes                                                                  (1)                                            (1)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997                      -            75            605             1,379            (35)        2,024
Total comprehensive income(1)                                                                   203             (7)          196
Common stock cash dividends, $1.10 a share                                                      (84)                         (84)
Issued common stock under
      Stock incentive plans                                      1             15                                             16
      Acquisitions of other companies                            1             29                 3                           33
Repurchase of common stock                                      (1)           (45)                                           (46)
Other changes                                                                  (2)                                            (2)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1998                      -            76            602             1,501            (42)        2,137
Total comprehensive income(1)                                                                   290             (4)          286
Common stock cash dividends, $1.10 a share                                                      (81)                         (81)
Issued common stock under
      Stock incentive plans                                                     7                                              7
      Acquisitions of other companies                            2             77                                             79
Repurchase of common stock                                      (6)          (222)                                          (228)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999                   $  -           $72           $464            $1,710           $(46)       $2,200
=================================================================================================================================
(1) Reconciliations of net income to total comprehensive income follow.

(In millions)                                                                                  1999           1998          1997
=================================================================================================================================
NET INCOME                                                                                     $290           $203          $279
Minimum pension liability adjustment                                                             13             (6)           (4)
      Related tax benefit (expense)                                                              (5)             2             2
Unrealized translation adjustments                                                              (11)            (7)          (27)
      Related tax benefit                                                                         3              1             -
Unrealized gains (losses) on securities                                                          (6)             8             5
      Related tax benefit (expense)                                                               2             (3)           (2)
Losses (gains) on securities included in net income                                               -             (3)            -
      Related tax expense                                                                         -              1             -
---------------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME                                                                     $286           $196          $253
=================================================================================================================================
</TABLE>

At September 30, 1999,  the  accumulated  other  comprehensive  loss of $46
million was comprised of net unrealized  translation  losses of $36 million
and a minimum pension liability of $10 million.

See Notes to Consolidated Financial Statements.

<PAGE>
39

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

(In millions)                                                      1999                     1998                       1997
----------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                       <C>                        <C>
CASH FLOWS FROM CONTINUING OPERATIONS
Income from continuing operations                                 $ 290                     $203                       $192
Expense (income) not affecting cash
      Depreciation, depletion and amortization                      228                      181                        348
      Deferred income taxes                                         101                       60                         33
      Equity income from affiliates                                (349)                    (329)                       (39)
      Distributions from equity affiliates                          349                      252                         20
      Other items                                                   (2)                       (6)                         -
Change in operating assets and liabilities(1)                     (227)                        5                         11
----------------------------------------------------------------------------------------------------------------------------
                                                                   390                       366                        565
CASH FLOWS FROM FINANCING
Proceeds from issuance of long-term debt                           150                       150                         87
Proceeds from issuance of capital stock                              4                        10                         35
Repayment of long-term debt                                        (59)                      (53)                      (395)
Repurchase of capital stock                                       (228)                      (46)                        (3)
Increase (decrease) in short-term debt                              98                        81                        (68)
Dividends paid                                                     (81)                      (84)                       (86)
----------------------------------------------------------------------------------------------------------------------------
                                                                  (116)                       58                       (430)
CASH FLOWS FROM INVESTMENT
Additions to property, plant and equipment                        (248)                     (274)                      (356)
Purchase of leased assets associated with the
  formation of MAP                                                   -                      (254)                         -
Purchase of operations - net of cash acquired                      (72)                     (194)                       (79)
Investment purchases(2)                                           (235)                     (215)                      (248)
Investment sales and maturities(2)                                 311                       308                        216
Other - net                                                         46                        44                         27
----------------------------------------------------------------------------------------------------------------------------
                                                                  (198)                     (585)                      (440)
----------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED (USED) BY CONTINUING OPERATIONS                       76                      (161)                      (305)
Cash provided (used) by discontinued operations - Note B             -                       (55)                       485
----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                    76                      (216)                       180
Cash and cash equivalents - beginning of year                       34                       250                         70
----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - END OF YEAR                          $ 110                      $ 34                       $250
============================================================================================================================
DECREASE (INCREASE) IN OPERATING ASSETS(1)
Accounts receivable                                              $ (90)                     $(54)                      $(16)
Inventories                                                        (26)                      (21)                        30
Deferred income taxes                                                1                       (16)                         -
Other current assets                                               (21)                      (36)                         6
Investments and other assets                                       (54)                      (19)                        (5)

INCREASE (DECREASE) IN OPERATING LIABILITIES(1)
Trade and other payables                                           (79)                       33                       (117)
Income taxes                                                         2                        (2)                        31
Noncurrent liabilities                                              40                       120                         82
----------------------------------------------------------------------------------------------------------------------------
CHANGE IN OPERATING ASSETS AND LIABILITIES                       $(227)                     $  5                       $ 11
============================================================================================================================

(1)  Excludes  changes  resulting  from  operations  acquired or sold.
(2)  Represents   primarily   investment   transactions  of  captive   insurance companies.
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>
40

                 Ashland Inc. and Consolidated Subsidiaries
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION
The consolidated  financial  statements include the accounts of Ashland and
its majority  owned  subsidiaries,  except Arch Coal,  Inc.  Investments in
joint ventures, 20% to 50% owned affiliates and Arch Coal are accounted for
on the  equity  method.  Ashland  does not  consolidate  its 58%  ownership
interest in Arch Coal because supermajority  provisions in its bylaws grant
significant participating and veto rights to the minority shareholders.

Effective January 1, 1998, Ashland and Marathon Oil Company formed Marathon
Ashland Petroleum LLC (MAP),  combining the major elements of the refining,
marketing and transportation operations of the two companies. Ashland holds
a 38% interest in MAP, which is accounted for using the equity method.  For
comparison  purposes,  Ashland  changed  its method of  accounting  for the
businesses  conveyed  to MAP to the equity  method as of the  beginning  of
fiscal 1998.  Since  restatements  for prior years are not permitted  under
generally accepted accounting principles,  Ashland's consolidated financial
statements for 1999 and 1998 are not comparable with those for 1997.  While
the change had no effect on  Ashland's  net income or common  stockholders'
equity, it significantly  reduced  Ashland's  revenues,  costs,  assets and
liabilities, and changed certain components of its cash flow.

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

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

INVENTORIES
(In millions)                                                                                       1999               1998
============================================================================================================================
<S>                                                                                                 <C>                <C>
Chemicals and plastics                                                                              $358               $352
Petroleum products                                                                                    45                 48
Construction materials                                                                                55                 39
Other products                                                                                        55                 49
Supplies                                                                                               5                  9
Excess of replacement costs over LIFO carrying values                                                (54)               (57)
----------------------------------------------------------------------------------------------------------------------------
                                                                                                    $464               $440
============================================================================================================================
</TABLE>

Chemicals,  plastics,  petroleum  products and supplies  with a replacement
cost of $302 million at September  30, 1999,  and $285 million at September
30, 1998,  are valued  using the  last-in,  first-out  (LIFO)  method.  The
remaining  inventories are stated generally at the lower of cost (using the
first-in, first-out [FIFO] or average cost method) or market.

Ashland decreased  certain LIFO inventories in 1997 for operating  reasons.
Cost of sales and operating  expenses  include costs for these  inventories
based on prior  years' LIFO  carrying  values  which were less than current
replacement costs. As a result of LIFO inventory  liquidations,  net income
was  increased  by $7 million (9 cents per share) in 1997.  The  effects of
LIFO inventory liquidations during 1998 and 1999 were not significant.


<PAGE>
41

LONG-LIVED AND INTANGIBLE ASSETS
The  cost  of  plant  and  equipment  is  principally  depreciated  by  the
straight-line  method over the estimated useful lives of the assets.  Costs
in  excess  of net  assets  of  companies  acquired  are  amortized  by the
straight-line  method over periods  generally  ranging from 15 to 40 years,
with an  average  remaining  life of 13 years.  Long-lived  and  intangible
assets  are  periodically   reviewed  for  recoverability  when  impairment
indicators  are  present.  Recorded  values  that  are not  expected  to be
recovered  through  undiscounted  future  cash  flows are  written  down to
current fair value, which is generally determined from estimated discounted
future net cash flows (assets held for use) or net realizable value (assets
held for sale).

Goodwill  amortization amounted to $34 million in 1999, $14 million in 1998
and $38 million in 1997.  These  amounts  included  unusual  charges of $19
million in 1999 and $26 million in 1997 for goodwill write-downs related to
certain European operations. Results from these operations had consistently
been well  below the levels  that were  expected  when they were  acquired,
necessitating the impairment review and resulting write-downs.  In addition
to these amounts,  equity income includes the amortization of the excess of
Ashland's  investment  over its underlying  equity in the net assets of MAP
and Arch Coal. At September 30, 1999,  such excess amounted to $399 million
for MAP and $72 million for Arch Coal.  Such amounts are being amortized on
a straight-line basis for MAP ($27 million in 1999 and $21 million in 1998)
and on the basis of tons of coal produced for Arch Coal ($3 million in 1999
and 1998 and $2 million in 1997).

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

EARNINGS PER SHARE
The  following  table  sets  forth the  computation  of basic  and  diluted
earnings per share (EPS) from continuing operations.
<TABLE>
<CAPTION>

(In millions except per share data)                                             1999                  1998                   1997
==================================================================================================================================
<S>                                                                            <C>                   <C>                    <C>
NUMERATOR
Income from continuing operations                                              $ 290                 $ 203                  $ 192
Preferred stock dividends                                                          -                     -                     (9)
----------------------------------------------------------------------------------------------------------------------------------
Numerator for basic EPS - Income available to common shares                      290                   203                    183
Effect of dilutive securities
      Dividends on convertible preferred stock                                     -                     -                      9
      Interest on convertible debentures (net of income taxes)                     -                     -                      4
----------------------------------------------------------------------------------------------------------------------------------
Numerator for diluted EPS - Income available
      to common shares after assumed conversions                               $ 290                 $ 203                  $ 196
==================================================================================================================================
DENOMINATOR
Denominator for basic EPS - Weighted average
      common shares outstanding                                                   74                    76                     70
Common shares issuable upon
      Exercise of stock options                                                    1                     1                      2
      Conversion of debentures                                                     -                     -                      2
      Conversion of preferred stock                                                -                     -                      4
----------------------------------------------------------------------------------------------------------------------------------
Denominator for diluted EPS - Adjusted weighted
      average shares and assumed conversions                                      75                    77                     78
==================================================================================================================================
BASIC EPS FROM CONTINUING OPERATIONS                                           $3.94                 $2.68                  $2.61
DILUTED EPS FROM CONTINUING OPERATIONS                                         $3.89                 $2.63                  $2.51
==================================================================================================================================
</TABLE>

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


<PAGE>
42


NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DERIVATIVE INSTRUMENTS (CONTINUED)

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

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

In June 1998, the Financial Accounting Standards Board issued Statement No.
133  (FAS  133),   "Accounting  for  Derivative   Instruments  and  Hedging
Activities,"  which is required to be adopted in years beginning after June
15, 2000. Because of Ashland's minimal use of derivatives,  management does
not anticipate that its adoption of FAS 133 will have a significant  effect
on Ashland's earnings or financial position.

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 J.

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 estimable.

Research and  development  costs are  expensed as incurred  ($27 million in
1999,  $28  million in 1998 and $29  million in 1997).

Certain  prior year  amounts  have been  reclassified  in the  consolidated
financial   statements  and   accompanying   notes  to  conform  with  1999
classifications.

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

(In millions)                                                  1999               1998                 1997
============================================================================================================
<S>                                                           <C>                <C>                   <C>
INCOME STATEMENT DATA
Revenues                                                      $   -              $   -                 $240
Costs and expenses                                                -                  -                 (215)
------------------------------------------------------------------------------------------------------------
Operating income                                                  -                  -                   25
Income tax expense                                                -                  -                    -
------------------------------------------------------------------------------------------------------------
Income from discontinued operations                           $   -              $   -                 $ 25
============================================================================================================
CASH FLOW DATA
Cash flows from operations                                    $   -              $ (81)                $(41)
Cash flows from investment (including sales proceeds)             -                 26                  526
------------------------------------------------------------------------------------------------------------
Cash provided (used) by discontinued operations               $   -              $ (55)                $485
============================================================================================================
</TABLE>


<PAGE>
43

NOTE C - 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,  Refining and Marketing,  and Arch
Coal.  Ashland  Distribution and Ashland Specialty  Chemical were formed in
1999, in an effort to provide  greater  market focus and definition for the
former Ashland Chemical  segment.  Information by industry segment shown on
Pages 52 and 53 has been restated to reflect the change.

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

Ashland Distribution distributes chemicals,  plastics, fiber reinforcements
and fine ingredients in North America and plastics in Europe.

Ashland Specialty  Chemical  manufactures and supplies  specialty  chemical
products and services to industries  including the  adhesives,  automotive,
composites,   foundry,   merchant  marine,   paint,  paper,   plastics  and
semiconductor fabrication industries.

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

The  Refining  and  Marketing  segment  includes  Ashland's  38%  ownership
interest  in Marathon  Ashland  Petroleum  LLC (MAP) and  certain  retained
refining  and  marketing  activities.  MAP  was  formed  January  1,  1998,
combining the major elements of the refining,  marketing and transportation
operations  of Ashland and Marathon Oil Company.  MAP has seven  refineries
with a combined crude oil refining  capacity of 935,000 barrels per day, 88
light  products and asphalt  terminals in the Midwest and Southeast  United
States,  more  than  5,400  retail  marketing  outlets  in  21  states  and
significant  pipeline  holdings.  Ashland  accounts for its interest in MAP
using the equity method. As a result, the segment  information for 1998 and
1999 is not comparable to 1997,  when Ashland's 100% ownership  interest in
its  former  Refining  and  Marketing  operations  (Ashland  Petroleum  and
SuperAmerica) was consolidated.

Arch Coal,  Inc. is a publicly  traded  company  which was created  July 1,
1997,  as a result of the merger of Ashland  Coal,  Inc.  and Arch  Mineral
Corporation.  Ashland holds a 58% ownership interest in Arch Coal, which it
accounts  for under the equity  method as described in Note A. Arch Coal is
the nation's  second  largest coal producer with  subsidiary  operations in
West Virginia,  Kentucky,  Virginia,  Illinois, Wyoming, Colorado and Utah.
Through these operations,  Arch Coal provides the fuel for approximately 6%
of the electricity generated in the United States.

Ashland  has been  exploring  strategic  alternatives  with  respect to its
investment  in  Arch  Coal.  After  a  careful   evaluation  of  identified
alternatives,  a proposal was made to Arch's Board of Directors  that would
result in a tax-free spin-off of this investment to Ashland's shareholders.
Arch has formed a special board committee to evaluate  Ashland's  proposal.
The proposal is subject to, among other things, a negotiated agreement with
the special board committee, approval by the Arch shareholders, a favorable
ruling from the Internal Revenue Service and approval of Ashland's Board of
Directors.  Even if an  agreement is reached and such  conditions  are met,
Ashland  anticipates that it will be several months before a spin-off could
be consummated.

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

                                             Revenues from external customers(1)                               Long-lived assets
                                      ----------------------------------------------------                -------------------------
 (In millions)                        1999                  1998                     1997                   1999              1998
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                  <C>                     <C>                     <C>               <C>
United States                        $6,183               $5,880                  $11,821                 $1,181            $1,068
Foreign                               1,068                1,053                    1,140                    111                93
-----------------------------------------------------------------------------------------------------------------------------------
                                     $7,251               $6,933                  $12,961                 $1,292            $1,161
===================================================================================================================================
</TABLE>

(1)  Prior to the formation of MAP, sales of gasoline  accounted for 19% of
     Ashland's  1997   consolidated   revenues  from  external   customers,
     excluding excise taxes.


<PAGE>
44


NOTE D - INCOME TAXES
A  summary  of  the  provision  for  income  taxes  related  to  continuing
operations follows.
<TABLE>
<CAPTION>

(In millions)                                                         1999                   1998                       1997
=============================================================================================================================
<S>                                                                  <C>                    <C>                        <C>
Current(1)
      Federal                                                        $  63                  $  42                      $  72
      State                                                             17                     (1)                         5
      Foreign                                                           11                     13                         17
-----------------------------------------------------------------------------------------------------------------------------
                                                                        91                     54                         94
Deferred                                                               101                     60                         33
-----------------------------------------------------------------------------------------------------------------------------
                                                                     $ 192                  $ 114                     $  127
=============================================================================================================================
</TABLE>

(1) Income tax payments  amounted to $142 million in 1999,  $109 million in
1998 and $51 million in 1997.

Deferred income taxes are provided for income and expense items  recognized
in different  years for tax and  financial  reporting  purposes.  Temporary
differences  that  give  rise  to  significant   deferred  tax  assets  and
liabilities follow.
<TABLE>
<CAPTION>

(In millions)                                                                                1999                       1998
=============================================================================================================================
<S>                                                                                        <C>                        <C>
Employee benefit obligations                                                               $  174                     $  182
Environmental, insurance and litigation reserves                                              123                        119
Compensation accruals                                                                          44                         49
Uncollectible accounts receivable                                                              11                         16
Other items                                                                                    76                         63
-----------------------------------------------------------------------------------------------------------------------------
Total deferred tax assets                                                                     428                        429
-----------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment                                                                  95                         83
Investment in unconsolidated affiliates                                                       452                        362
-----------------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities                                                                547                        445
-----------------------------------------------------------------------------------------------------------------------------
Net deferred tax liability                                                                 $ (119)                    $  (16)
=============================================================================================================================
</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)                                                         1999                     1998                     1997
=============================================================================================================================
<S>                                                                  <C>                     <C>                      <C>
Income from continuing operations before income taxes
      United States                                                  $ 458                   $  274                   $  298
      Foreign                                                           24                       43                       21
-----------------------------------------------------------------------------------------------------------------------------
                                                                     $ 482                   $  317                   $  319
=============================================================================================================================
Income taxes computed at U.S. statutory rates                        $ 169                   $  111                   $  112
Increase (decrease) in amount computed resulting from
      Equity income                                                     (2)                     (10)                     (10)
      State income taxes                                                16                        5                        6
      Net impact of foreign results                                      6                        5                       10
      Other items                                                        3                        3                        9
-----------------------------------------------------------------------------------------------------------------------------
Income taxes                                                         $ 192                   $  114                   $  127
=============================================================================================================================
</TABLE>

Note E - UNCONSOLIDATED AFFILIATES
Affiliated  companies  accounted for on the equity method include  Marathon
Ashland  Petroleum LLC (MAP),  Arch Coal, Inc. and various other companies.
See  Notes A and C for a  description  of MAP and Arch  Coal,  as well as a
discussion  of the  use of the  equity  method  for  these  two  investees.
Summarized financial information reported by these affiliates and a summary
of the amounts  recorded in  Ashland's  consolidated  financial  statements
follow.  MAP is organized  as a limited  liability  company  (LLC) that has
elected  to  be  taxed  as  a  partnership.   Therefore,  the  parents  are
responsible  for income taxes  applicable  to their share of MAP's  taxable
income.  The net  income  reflected  below  for MAP  does not  include  any
provision for income taxes incurred by its parents.  At September 30, 1999,
Ashland's retained earnings include $257 million of undistributed  earnings
from unconsolidated affiliates accounted for on the equity method.


<PAGE>
45
<TABLE>
<CAPTION>

(In millions)                                        MAP                Arch Coal                   Other            Total
---------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                       <C>                     <C>             <C>
SEPTEMBER 30, 1999
Financial position
      Current assets                             $ 3,220                   $  331                  $   84
      Current liabilities                         (1,895)                    (365)                    (46)
                                                 ---------------------------------------------------------
      Working capital                              1,325                      (34)                     38
      Noncurrent assets                            3,611                    2,313                      72
      Noncurrent liabilities                        (271)                  (1,685)                    (19)
                                                 ---------------------------------------------------------
      Stockholders' equity                       $ 4,665                   $  594                  $   91
                                                 =========================================================
Results of operations
      Sales and operating revenues               $18,965                   $1,548                  $  163
      Income from operations                         976                       61                      23
      Net income                                     977                        2                      13
Amounts recorded by Ashland
      Investments and advances                     2,172(1)                   417(1)(2)                49           $2,638
      Equity income                                  345                       (2)                      6              349
      Distributions received                         333                       10                       6              349
===========================================================================================================================
SEPTEMBER 30, 1998
Financial position
      Current assets                             $ 3,190                   $  362                  $   74
      Current liabilities                         (1,915)                    (384)                    (34)
                                                 ---------------------------------------------------------
      Working capital                              1,275                      (22)                     40
      Noncurrent assets                            3,588                    2,470                      63
      Noncurrent liabilities                        (320)                  (1,826)                    (15)
                                                 ---------------------------------------------------------
      Stockholders' equity                       $ 4,543                   $  622                  $   88
                                                 =========================================================
Results of operations
      Sales and operating revenues               $14,588(3)                $1,363                  $  165
      Income from operations                         729(3)                   103                      45
      Net income                                     742(3)                    51                      13
Amounts recorded by Ashland
      Investments and advances                     2,102                      422                      45           $2,569
      Equity income                                  298(4)                    25                       6              329
      Distributions received                         233(4)                    10                       9              252
===========================================================================================================================
SEPTEMBER 30, 1997
Results of operations
      Sales and operating revenues                                         $1,367                  $1,117
      Income from operations                                                   71                     278
      Net income                                                               50                      65
Amounts recorded by Ashland
      Equity income                                                            25                      14           $   39
      Distributions received                                                   12                       8               20
===========================================================================================================================
</TABLE>

(1)      At  September  30,  1999,   Ashland's   investment   exceeded  its
         underlying  equity in net assets by $399  million  for MAP and $72
         million  for Arch Coal.  Such excess was being  amortized  against
         equity  income on a  straight-line  basis for MAP ($27  million in
         1999 and $21  million  in 1998)  and on the  basis of tons of coal
         produced for Arch Coal ($3 million in 1999, $3 million in 1998 and
         $2 million in 1997).
(2)      At September 30, 1999, the market value of Ashland's investment in
         Arch Coal's common stock amounted to $272 million.
(3)      Amounts  represent  results  of  operations  for MAP for the  nine
         months ended  September 30, 1998,  since MAP was formed on January
         1, 1998.
(4)      Includes $36 million of equity income and $61 million in cash flow
         from Ashland's  former  Refining and Marketing  operations for the
         quarter ended December 31, 1997.


<PAGE>
46


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

(In millions)                                                             1999                1998
===================================================================================================
<S>                                                                      <C>                 <C>
Medium-term notes, due 2000-2025, interest at a weighted average rate
      of 8.7% at September 30, 1999 (6.8% to 10.4%)                      $  999              $ 888
8.80% debentures, due 2012                                                  250                250
Pollution control and industrial revenue bonds, due
      2003-2022, interest at a weighted average rate of 6.5%
      at September 30, 1999 (3.7% to 7.4%)                                  217                217
6.625% senior notes, due 2008                                               150                150
Other                                                                        48                 43
----------------------------------------------------------------------------------------------------
                                                                          1,664              1,548
Current portion of long-term debt                                           (37)               (41)
----------------------------------------------------------------------------------------------------
                                                                         $1,627             $1,507
====================================================================================================
</TABLE>

Aggregate maturities of long-term debt are $37 million in 2000, $75 million
in 2001,  $83 million in 2002, $89 million in 2003 and $57 million in 2004.
Excluded from such  maturities are $38 million of  floating-rate  pollution
control and  industrial  revenue  bonds,  due between 2003 and 2009.  These
bonds are subject to early  redemptions  at the  holders'  option,  but not
before October 1, 2000.

Ashland  has  two  revolving  credit  agreements  providing  for up to $400
million in  borrowings,  neither of which was in use at September 30, 1999.
The agreement  providing for $250 million in borrowings  expires on June 2,
2004. The agreement providing for $150 million in borrowings expires on May
31, 2000. The agreements contain a covenant limiting new borrowings.  Based
on  Ashland's   financial  position  at  September  30,  1999,   borrowings
(including any borrowings under these  agreements) could be increased by up
to $1.5 billion.  Additional  permissible borrowings are reduced by 150% of
any reductions in stockholders' equity.

Interest  payments on all  indebtedness  amounted to $136  million in 1999,
$132  million  in 1998  and $161  million  in 1997.  The  weighted  average
interest rate on short-term  borrowings  outstanding  was 5.7% at September
30, 1999, and 6.0% at September 30, 1998.

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

NOTE G - FINANCIAL INSTRUMENTS

COMMODITY AND FOREIGN CURRENCY HEDGES
Ashland uses commodity futures contracts and forward exchange  contracts to
reduce its exposure to certain  risks  inherent  within its  businesses  as
described in Note A. The fair value of open commodity and foreign  exchange
contracts was not significant at September 30, 1999, and 1998.

INTEREST RATE SWAPS
Ashland  selectively  uses interest rate swap  agreements to obtain greater
access to the lower  borrowing  costs normally  available on  floating-rate
debt,  while  minimizing  refunding risk through the issuance of long-term,
fixed-rate  debt.  During the quarter  ended  December  31,  1998,  Ashland
liquidated  $200 million of its interest  rate swap  agreements,  which had
converted  fixed-rate  debt to floating  rates at September  30, 1998.  The
final reset on the remaining $25 million  floating-rate  swap agreement was
set on July 6,  1999,  with  Ashland  due to receive  the final  settlement
payment on January 6, 2000.



<PAGE>
47

FAIR VALUES
The  carrying  amounts and fair values of Ashland's  significant  financial
instruments  at September  30, 1999,  and 1998,  are shown below.  The fair
values  of cash and cash  equivalents,  investments  of  captive  insurance
companies and notes  payable to financial  institutions  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,  which  reflect  the  present  values  of the  differences  between
estimated future variable-rate payments and future fixed-rate receipts.
<TABLE>
<CAPTION>

                                                                                     1999                                     1998
                                                        ---------------------------------            ------------------------------
                                                        Carrying                     Fair            Carrying                 Fair
(In millions)                                             amount                    value              amount                value
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                       <C>                <C>                   <C>
Assets
  Cash and cash equivalents                              $  110                    $  110             $   34                $   34
  Investments of captive insurance companies(1)              16                        16                 98                    98
  Interest rate swaps                                         -                         -                  -                     8
Liabilities
  Notes payable to financial institutions                   182                       182                 84                    84
  Long-term debt (including current portion)              1,664                     1,732              1,548                 1,775
===================================================================================================================================
</TABLE>

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

NOTE H - LEASES AND OTHER COMMITMENTS

LEASES
Ashland  and  its  subsidiaries   are  lessees  in  noncancelable   leasing
agreements  for office  buildings,  warehouses,  transportation  equipment,
storage  facilities,  retail  outlets,  manufacturing  facilities and other
equipment and properties which expire at various dates.  Capitalized  lease
obligations are not significant and are included in long-term debt.  Future
minimum  rental  payments at September 30, 1999,  and rental  expense under
operating  leases follow.  During 1998,  Ashland  purchased $254 million in
formerly leased assets in connection with the formation of Marathon Ashland
Petroleum LLC (MAP), resulting in reduced rental expense.
<TABLE>
<CAPTION>

(In millions)
-----------------------------------------------------------------------------------------------------------
Future minimum rental payments    Rental expense                   1999              1998             1997
-------------------------------  --------------------------------------------------------------------------
<S>                   <C>         <C>                              <C>               <C>              <C>
2000                  $ 44
2001                    38        Minimum rentals
2002                    30         (including rentals under
2003                    26          short-term leases)             $103              $119             $144
2004                    22        Contingent rentals                  5                 8               13
Later years            130        Sublease rental income             (3)               (6)             (13)
-------------------------------  ---------------------------------------------------------------------------
                      $290                                         $105              $121             $144
============================================================================================================
</TABLE>

OTHER COMMITMENTS
To obtain  mining  permits,  Arch Coal must post surety bonds  guaranteeing
that it will perform any required  reclamation upon closure of a mine. Such
bonds are  currently  included in Ashland's  corporate  surety bond program
which includes its wholly owned  subsidiaries,  primarily the APAC group of
construction  companies.  Since Ashland has indemnity  agreements  with its
surety  companies,  Ashland was guarantor for reclamation and various other
bonds posted by Arch Coal totaling $635 million at September 30, 1999.

Ashland  and  Marathon  (collectively  the  Lenders)  have  entered  into a
revolving credit  agreement  providing for loans up to $500 million to MAP.
Loans will be funded by the  Lenders  based on their  respective  ownership
interests.  At September  30, 1999,  no loans were  outstanding  under this
agreement.


<PAGE>
48

NOTE I - CAPITAL STOCK
Ashland's  Board of Directors  has  authorized  the purchase of 9.4 million
shares of Ashland  common stock in the open market.  Through  September 30,
1999, Ashland had repurchased 6.2 million shares at a cost of $274 million.

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

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

At September 30, 1999,  500,000  shares of cumulative  preferred  stock are
reserved for potential  issuance under the Shareholder  Rights Plan and 6.4
million  common shares are reserved for issuance  under  outstanding  stock
options.

NOTE J - STOCK INCENTIVE PLANS
Ashland has stock  incentive  plans under which key  employees or directors
can purchase shares of common stock under stock options or restricted stock
awards. Stock options are granted to employees at a price equal to the fair
market value of the stock on the date of grant and become  exercisable over
periods of one to 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 weighted  average fair value of
options granted was determined using the Black-Scholes option pricing model
with the indicated assumptions.
<TABLE>
<CAPTION>

                                                              1999                     1998                       1997
======================================================================================================================
<S>                                                          <C>                     <C>                        <C>
 Pro forma
     Net income (in millions)                               $ 286                   $  199                     $ 277
      Basic earnings per share                                3.88                     2.63                      3.83
      Diluted earnings per share                              3.84                     2.58                      3.61
----------------------------------------------------------------------------------------------------------------------
Weighted average fair value per share of options
   granted                                                   $7.97                   $11.45                    $11.28
----------------------------------------------------------------------------------------------------------------------
Assumptions (weighted average)
      Risk-free interest rate                                  6.0%                     4.7%                      4.6%
      Expected dividend yield                                  3.0%                     2.0%                      2.5%
      Expected volatility                                     21.0%                    23.8%                     22.5%
      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>

                                                            1999                     1998                            1997
                                            --------------------   ----------------------       -------------------------
                                                        Weighted                 Weighted                        Weighted
                                                         average                  average                         average
                                            Common  option price    Common   option price       Common       option price
(In thousands except per share data)        shares     per share    shares      per share       shares          per share
--------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>        <C>           <C>           <C>               <C>
Outstanding - beginning of year(1)          4,965         $38.82     4,718         $37.52        5,247             $33.97
Granted                                     1,590          36.97       580          48.07          814              53.22
Exercised                                    (120)         34.55      (282)         34.85       (1,271)             32.94
Canceled                                      (54)         49.75       (51)         45.78          (72)             37.29
--------------------------------------------------------------------------------------------------------------------------
Outstanding - end of year(1)                6,381         $38.34     4,965         $38.82        4,718             $37.52
==========================================================================================================================
Exercisable - end of year                   4,348         $37.65     3,836         $35.93        3,373             $33.78
==========================================================================================================================
</TABLE>

(1)      Shares of common stock  available  for future grants of options or
         awards  amounted to 3,670,000 at September 30, 1999, and 5,134,000
         at  September  30,  1998.  Exercise  prices per share for  options
         outstanding  at September  30, 1999,  ranged from $23.88 to $33.88
         for 1,978,000 shares,  from $35.88 to $43.13 for 3,054,000 shares,
         and from  $48.00 to $53.38  for  1,349,000  shares.  The  weighted
         average remaining contractual life of the options was 6.6 years.



<PAGE>
49


NOTE K - LITIGATION, CLAIMS AND CONTINGENCIES
Ashland is subject to various federal,  state and local  environmental laws
and regulations  that require  remediation  efforts at multiple  locations,
including current operating  facilities,  operating  facilities conveyed to
Marathon  Ashland  Petroleum  LLC  (MAP),   previously  owned  or  operated
facilities,  and  Superfund  or other waste  sites.  During  1998,  Ashland
provided  additional  environmental  reserves  of  $38  million  associated
principally with the completion of certain voluntary efforts in progress at
various operating  facilities conveyed to MAP and the closing of a landfill
near Ashland's former Catlettsburg,  Kentucky refinery. Consistent with its
accounting  policy  for  environmental   costs,   Ashland's   reserves  for
environmental  assessments and remediation efforts amounted to $166 million
at September 30, 1999, and $172 million at September 30, 1998. Such amounts
reflect Ashland's estimates of the most likely costs which will be incurred
over an extended period to remediate  identified  environmental  conditions
for  which  the  costs  are  reasonably  estimable,  without  regard to any
third-party recoveries.

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

During 1999, as part of a comprehensive  environmental  insurance  recovery
project,  Ashland  entered into  settlement  agreements with certain of its
insurance  carriers in exchange  for  releases of their  present and future
liabilities to Ashland under its historical liability policies. As a result
of these agreements, Ashland recorded pretax income of $43 million.

Ashland is a defendant in a series of cases  involving more than 600 former
workers  at  the  Lockheed  aircraft  manufacturing  facility  in  Burbank,
California.  The plaintiffs  allege personal injury resulting from exposure
to chemicals sold to Lockheed by Ashland,  and inadequate  labeling of such
chemicals.  The cases are being tried in the Superior Court of the State of
California for the County of Los Angeles.  To date,  five trials  involving
approximately  130 plaintiffs  have resulted in total  verdicts  adverse to
Ashland of approximately $80 million (approximately $75 million of which is
punitive  damages).  The  damage  awards  have been  appealed  and  Ashland
believes  that there is a  substantial  probability  that the damage awards
will be reversed or reduced substantially.

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

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

NOTE L - ACQUISITIONS AND DIVESTITURES

ACQUISITIONS
During  1999,  APAC  acquired  14  construction  businesses,  six of  which
included the issuance of $79 million in Ashland common stock.  During 1998,
APAC  acquired 10  Missouri-based  companies  known as the  Masters-Jackson
group,  strengthening APAC's capabilities in asphalt production and paving,
concrete  paving,  aggregate  production  and  bridge-building,   and  also
acquired several smaller  construction  businesses.  Also in 1998,  Ashland
Distribution  and Ashland  Specialty  Chemical  acquired  Gwil  Industries'
Plastics  Division  and made  several  smaller  acquisitions.  In addition,
Valvoline  acquired  the Eagle One brand of premium  automotive  appearance
products. Eagle One and four of the smaller APAC acquisitions were acquired
by the issuance of a total of $61 million in Ashland common stock,  certain
of which were  accounted for as poolings of  interests.  Prior periods were
not restated,  since the effects would have been  insignificant.  The other
acquisitions,  as well as several smaller acquisitions completed during the
last  three  years,  were  accounted  for as  purchases  and did not have a
significant effect on Ashland's consolidated financial statements.

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

NOTE M - RELATED PARTY TRANSACTIONS

Ashland sells  chemicals and lubricants to Marathon  Ashland  Petroleum LLC
(MAP) and purchases  petroleum  products from MAP. Such transactions are in
the ordinary course of business at negotiated prices comparable to those of
transactions  with other  customers  and  suppliers.  In addition,  Ashland
leases certain facilities to MAP, and provides certain computer,  treasury,
accounting, internal auditing and legal services to MAP. For the year ended
September  30, 1999,  Ashland's  sales to MAP amounted to $14 million,  its
purchases  from MAP amounted to $181 million,  and its costs charged to MAP
amounted to $17  million.  Comparable  amounts  for the nine  months  ended
September  30,  1998,  were $14  million,  $147  million,  and $21 million.
Ashland's  transactions  with other affiliates and related parties were not
significant.


<PAGE>
50

NOTE N - 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 fund  their  pension  benefits.  Ashland
determines  the level of  contributions  to its pension plans  annually and
contributes  amounts  within the  limitations  imposed by Internal  Revenue
Service regulations.

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

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

                                                                 Pension benefits
                                           -------------------------------------------------------
                                                         1999                      1998                 Other postretirement
                                           ----------------------------    -----------------------             benefits
                                            Qualified      Nonqualified   Qualified   Nonqualified    ------------------------
(In millions)                                   plans             plans       plans          plans     1999              1998
------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                <C>        <C>             <C>     <C>               <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at October 1                 $505               $98        $539            $96     $262              $308
Service cost                                       33                 1          26              2        8                 8
Interest cost                                      35                 6          27              7       18                16
Retiree contributions                               -                 -           -              -        4                 4
Benefits paid                                     (17)               (3)        (17)           (10)     (23)              (21)
Obligations assumed by MAP                          -                 -        (144)            (9)       -               (66)
Other-primarily actuarial (gain) loss             (27)              (14)         75             11       (7)               13
------------------------------------------------------------------------------------------------------------------------------
Benefit obligations at September 30              $529               $88        $506            $97     $262              $262
==============================================================================================================================
CHANGE IN PLAN ASSETS
Value of plan assets at October 1                $369               $ -        $435            $ -     $  -              $  -
Actual return on plan assets                       31                 -          19              -        -                 -
Employer contributions                             42                 -           4              -       19                17
Retiree contributions                               -                 -           -              -        4                 4
Benefits paid                                     (17)                -         (17)             -      (23)              (21)
Assets transferred to MAP                           4                 -         (72)             -        -                 -
------------------------------------------------------------------------------------------------------------------------------
Value of plan assets at September 30             $429               $ -        $369            $ -     $  -              $  -
==============================================================================================================================
FUNDED STATUS OF THE PLANS
Under (over) funded accumulated obligation(1)    $(14)              $73        $ 20            $83     $262              $262
Provision for future salary increases             114                15         117             14        -                 -
------------------------------------------------------------------------------------------------------------------------------
Excess of obligations over plan assets(1)         100                88         137             97      262               262
Unrecognized actuarial loss                       (36)              (26)        (66)           (40)      (7)              (12)
Unrecognized transition gain (loss)                 -                (1)          1             (1)       -                 -
Unrecognized prior service credit (cost)           (5)                -          (6)             -       39                48
------------------------------------------------------------------------------------------------------------------------------
Net liability recognized                         $ 59               $61        $ 66            $56     $294              $298
==============================================================================================================================
BALANCE SHEET LIABILITIES (ASSETS)
Prepaid benefit costs                                      $ (2)                      $ (2)            $  -              $  -
Accrued benefit liabilities                                 139                        156              294               298
Intangible assets                                            (1)                        (3)               -                 -
Accumulated other comprehensive loss                        (16)                       (29)               -                 -
------------------------------------------------------------------------------------------------------------------------------
Net liability recognized                                   $120                       $122             $294              $298
==============================================================================================================================
ASSUMPTIONS AS OF SEPTEMBER 30
Discount rate                                              7.75%                      7.00%            7.75%             7.00%
Rate of compensation increase                              5.00                       5.00                -                 -
Expected return on plan assets                             9.00                       9.00                -                 -
==============================================================================================================================
</TABLE>

(1)      The projected benefit obligations, accumulated benefit obligations
         and plan  assets for  qualified  pension  plans  with  accumulated
         benefit  obligations  in excess of plan assets were $506  million,
         $389 million and $369 million as of September 30, 1998.


<PAGE>
51

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

                                                    Pension benefits                       Other postretirement benefits
                                          -------------------------------------            ------------------------------
(In millions)                             1999            1998            1997             1999        1998         1997
=========================================================================================================================
<S>                                        <C>             <C>            <C>              <C>          <C>          <C>
Service cost                               $34             $28            $36              $  8         $ 8          $11
Interest cost                               41              34             42                18          16           21
Expected return on plan assets             (34)            (30)           (31)                -           -            -
Other amortization and deferral              5               8              1                (7)        (10)         (16)
-------------------------------------------------------------------------------------------------------------------------
                                           $46             $40            $48              $ 19         $14          $16
=========================================================================================================================
</TABLE>

Ashland  amended  nearly all of its  retiree  health  care plans in 1992 to
place a cap on its contributions  and to adopt a cost-sharing  method based
upon years of service. The cap limits Ashland's  contributions to base year
per capita  costs,  plus  annual  increases  of up to 4.5% per year.  These
amendments  reduced  Ashland's  obligations  under its retiree  health care
plans at that time by $197  million,  which was being  amortized  to income
over  approximately 12 years.  During 1998,  Marathon Ashland Petroleum LLC
(MAP) assumed certain of Ashland's postretirement benefit obligations,  and
$38 million of the unrecognized credit from this plan amendment was applied
against the carrying  value of Ashland's  investment  in MAP. The remaining
credit  at  September  30,  1999,  amounted  to $41  million,  and  will be
amortized  over  approximately  five years in  declining  amounts  from $10
million in 2000 to $6 million in 2004.

OTHER PLANS
Ashland  sponsors a savings plan to assist eligible  employees in providing
for retirement or other future needs. Under that plan, Ashland  contributes
up to 4.2% of a participating  employee's earnings.  Company  contributions
amounted  to $15  million in 1999,  $15  million in 1998 and $21 million in
1997.

NOTE O - SUBSEQUENT EVENT
In October 1999,  Ashland acquired  Superfos a/s, an industrial  company in
Copenhagen,  Denmark,  at a cost of approximately  $950 million,  including
assumed debt.  Ashland has also reached an agreement to sell the businesses
of  Superfos  other  than  its U.S.  construction  operations  to  Industri
Kapital,  a European  private equity fund,  for a short-term  note for $285
million  and cash.  After  that sale  during  the  December  1999  quarter,
Ashland's  net cost for the  U.S.  construction  business  of  Superfos  is
expected to be about $525 million.  Since the  acquisition  was funded with
debt using new credit  facilities,  Ashland's debt is expected to initially
increase to around 56% of capital employed, declining to about 52% once the
sale is completed and the note is redeemed in the March 2000 quarter.

NOTE P - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents quarterly financial  information and per share
data relative to Ashland's common stock.
<TABLE>
<CAPTION>

Quarters ended                            December 31               March 31                June 30               September 30
-------------------------------------------------------        -----------------        --------------        ------------------
(In millions except per share data)    1998        1997        1999         1998        1999      1998        1999        1998
===================================================================================================================================
<S>                                  <C>         <C>         <C>          <C>         <C>       <C>         <C>         <C>
Sales and operating revenues         $1,646      $1,598      $1,503       $1,473      $1,796    $1,705      $1,856      $1,757
Operating income                         16         114         176           80         197       226         233          26
Net income (loss)                       (11)         52          87           28         100       123         114           -
Basic earnings (loss) per share        (.14)        .69        1.17          .37        1.36      1.61        1.58           -
Diluted earnings (loss) per share      (.14)        .68        1.16          .37        1.35      1.59        1.57           -
Excluding unusual items(1)
      Operating income                  109         100          44           77         173       225         168         139
      Net income                         46          46           6           26          85       122          79          69
      Basic earnings per share          .62         .61         .08          .35        1.16      1.60        1.09         .91
      Diluted earnings per share        .62         .60         .08          .34        1.15      1.58        1.08         .91
Common dividends per share             .275        .275        .275         .275        .275      .275        .275        .275
Market price per common share
      High                               52          55          50-5/8       57-15/16    44-1/2    56-3/16     43-1/4      56-5/16
      Low                                42-9/16     44-1/8      40-15/16     49-1/2      39-7/16   48          33-5/8      45-5/16
===================================================================================================================================
</TABLE>

(1) See  Management's  Discussion and Analysis and  Information by Industry
Segment for a discussion of unusual items.


<PAGE>
52

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

(In millions)                                          1999                     1998                     1997
==============================================================================================================
<S>                                                  <C>                      <C>                      <C>
REVENUES
Sales and operating revenues
      APAC                                           $1,678                   $1,444                   $1,257
      Ashland Distribution                            2,925                    2,941                    2,818
      Ashland Specialty Chemical                      1,263                    1,244                    1,205
      Valvoline                                       1,059                    1,023                    1,053
      Refining and Marketing                              -                        -                    6,828
      Intersegment sales(1)
          Ashland Distribution                          (35)                     (27)                     (29)
          Ashland Specialty Chemical                    (84)                     (80)                     (78)
          Valvoline                                      (5)                     (11)                     (12)
          Refining and Marketing                          -                        -                     (209)
--------------------------------------------------------------------------------------------------------------
                                                      6,801                    6,534                   12,833
Equity income
      Ashland Specialty Chemical                          5                        6                        9
      Valvoline                                           1                        -                        -
      Refining and Marketing                            345                      298                        5
      Arch Coal                                          (2)                      25                       25
--------------------------------------------------------------------------------------------------------------
                                                        349                      329                       39
Other income
      APAC                                               12                        8                        6
      Ashland Distribution                                6                        6                        5
      Ashland Specialty Chemical                         19                       37                       21
      Valvoline                                           6                        6                        8
      Refining and Marketing                              8                        4                       31
      Corporate                                          50                        9                       18
--------------------------------------------------------------------------------------------------------------
                                                        101                       70                       89
--------------------------------------------------------------------------------------------------------------
                                                     $7,251                   $6,933                  $12,961
==============================================================================================================
OPERATING INCOME
APAC                                                 $  108                   $   90                  $    82
Ashland Distribution                                     37(2)                    57                       48(3)
Ashland Specialty Chemical                              107                      101(4)                    92(3)
Valvoline                                                74                       53                       65(3)
Refining and Marketing(5)                               206(6)                   254(7)                   209(8)
      Inventory valuation adjustments(9)                117                      (15)                       -
Arch Coal                                                (3)                      25                       25(10)
Corporate                                               (24)(11)                (118)(12)                 (60)
--------------------------------------------------------------------------------------------------------------
                                                     $  622                   $  447                  $   461
==============================================================================================================
ASSETS
APAC                                                 $  996                   $  757                  $   531
Ashland Distribution                                    917                      915                      834
Ashland Specialty Chemical                              878                      861                      749
Valvoline                                               561                      581                      550
Refining and Marketing                                2,229                    2,189                    2,726
Arch Coal                                               417                      422                      403
Corporate(13)                                           426                      357                      669
--------------------------------------------------------------------------------------------------------------
                                                     $6,424                   $6,082                   $6,462
==============================================================================================================

</TABLE>

<PAGE>
53

<TABLE>
<CAPTION>

(In millions)                                          1999                     1998                      1997
---------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                      <C>                         <C>
INVESTMENT IN EQUITY AFFILIATES
APAC                                                 $   10                   $   10                      $  -
Ashland Specialty Chemical                               33                       30                        40
Valvoline                                                 6                        5                         6
Refining and Marketing                                2,172                    2,102                        37
Arch Coal                                               417                      422                       403
Corporate                                                 -                        -                         3
---------------------------------------------------------------------------------------------------------------
                                                     $2,638                   $2,569                      $489
===============================================================================================================
EXPENSE (INCOME) NOT AFFECTING CASH
Depreciation, depletion and amortization
      APAC                                           $   89                   $   64                      $ 49
      Ashland Distribution                               44(14)                   27                        37(3)
      Ashland Specialty Chemical                         53                       52                        57(3)
      Valvoline                                          26                       24                        32(3)
      Refining and Marketing                              -                        -                       160
      Corporate                                          16                       14                        13
---------------------------------------------------------------------------------------------------------------
                                                        228                      181                       348
Other noncash items(15)
      APAC                                                1                        3                         9
      Ashland Distribution                               (6)                      (2)                        2
      Ashland Specialty Chemical                          8                       (2)                        -
      Valvoline                                          (1)                      (1)                       (4)
      Refining and Marketing                             93                       36                        22
      Arch Coal                                           9                      (15)                      (11)
      Corporate                                          (5)                     (42)                       (4)
---------------------------------------------------------------------------------------------------------------
                                                         99                      (23)                       14
---------------------------------------------------------------------------------------------------------------
                                                     $  327                   $  158                      $362
===============================================================================================================
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT
APAC                                                 $  104                   $   81                      $ 62
Ashland Distribution                                     30                       47                        27
Ashland Specialty Chemical                               70                       94                        73
Valvoline                                                26                       32                        29
Refining and Marketing                                    -                        -                       150
Corporate                                                18                       20                        15
---------------------------------------------------------------------------------------------------------------
                                                     $  248                   $  274                      $356
===============================================================================================================
</TABLE>

   (1)  Intersegment  sales are  accounted  for at prices that  approximate
        market value.
   (2)  Includes  a $21  million  charge  for asset  impairment  related to
        European plastics distribution operations.
   (3)  Includes  charges  of $11  million  for  Ashland  Distribution,  $5
        million  for  Ashland  Specialty   Chemical  and  $10  million  for
        Valvoline  to write  down  goodwill  related  to  certain  European
        operations.
   (4)  Includes  a gain  of $14  million  on the  sale  of  Ashland's  23%
        interest in Melamine Chemicals, Inc.
   (5)  Effective  January 1, 1998,  includes  Ashland's equity income from
        MAP,  amortization  of  Ashland's  excess  investment  in MAP,  and
        certain retained refining and marketing activities.
   (6)  Includes a $10 million charge for severence and other costs related
        to the formation of MAP.
   (7)  Includes   charges  of  $43  million  for   reserves  for  retained
        environmental issues associated with properties  contributed to MAP
        and for certain severance costs.
   (8)  Includes  a gain  of $11  million  resulting  from  LIFO  inventory
        liquidations.
   (9)  Represents Ashland's share of inventory adjustments associated with
        the  formation  of  MAP  and  changes  in  MAP's  inventory  market
        valuation reserve. The reserve reflects the excess of the LIFO cost
        of MAP's crude oil and refined product  inventories  over their net
        realizable values.
   (10) Includes charges of $13 million for duplicate facility  write-offs,
        severance and other costs resulting from the merger of Ashland Coal
        and Arch Mineral into Arch Coal, Inc.
   (11) Includes $43 million in environmental insurance recoveries.
   (12) Includes  charges  of $50  million  related to a  restructuring  of
        corporate G&A functions and the move of Ashland's headquarters. The
        charge includes severance costs to be paid to terminated employees,
        reserves for excess leased real estate,  and  contributions of cash
        and other real estate  committed  to be  conveyed  to  Ashland-area
        charitable and economic development organizations.
   (13) Includes  principally  cash,  cash  equivalents  and investments of
        captive insurance companies.
   (14) Includes a charge of $19 million to write down goodwill  related to
        European plastics distribution operations.
   (15) Includes  deferred  taxes,  equity  income from  affiliates  net of
        distributions, and other items not affecting cash.



<PAGE>
54

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

(In millions except per share data)                             1999            1998            1997            1996        1995
---------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>             <C>            <C>             <C>         <C>
SUMMARY OF OPERATIONS
Revenues
      Sales and operating revenues (including excise taxes)   $6,801          $6,534         $12,833         $12,313     $11,361
      Equity income                                              349             329              39              33          25
      Other income                                               101              70              89              66          54
Costs and expenses
      Cost of sales and operating expenses                    (5,346)         (5,299)         (9,810)         (9,512)     (8,664)
      Excise taxes on products and merchandise                     -               -            (992)           (985)       (988)
      Selling, general and administrative expenses            (1,055)         (1,006)         (1,350)         (1,257)     (1,252)
      Depreciation, depletion and amortization                  (228)           (181)           (348)           (299)       (374)
---------------------------------------------------------------------------------------------------------------------------------
Operating income                                                 622             447             461             359         162
Interest expense (net of interest income)                       (140)           (130)           (142)           (151)       (149)
---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes            482             317             319             208          13
Income taxes                                                    (192)           (114)           (127)            (72)          1
---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations                                290             203             192             136          14
Income from discontinued operations                                -               -              25              75          10
Gain on sale of discontinued operations                            -               -              71               -           -
---------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss                                 290             203             288             211          24
Extraordinary loss on early retirement of debt                     -               -              (9)              -           -
---------------------------------------------------------------------------------------------------------------------------------
Net income                                                    $  290          $  203         $   279         $   211     $    24
=================================================================================================================================
BALANCE SHEET INFORMATION
Working capital
      Current assets                                          $2,059          $1,828         $ 2,720         $ 2,539     $ 2,405
      Current liabilities                                      1,396           1,361           2,028           2,067       1,908
---------------------------------------------------------------------------------------------------------------------------------
                                                              $  663          $  467         $   692         $   472     $   497
---------------------------------------------------------------------------------------------------------------------------------
Total assets                                                  $6,424          $6,082         $ 6,462         $ 6,496     $ 6,225
---------------------------------------------------------------------------------------------------------------------------------
Capital employed
      Debt due within one year                                $  219          $  125         $    49         $   127     $   200
      Long-term debt (less current portion)                    1,627           1,507           1,356           1,653       1,672
      Convertible preferred stock                                  -               -               -             293         293
      Common stockholders' equity                              2,200           2,137           2,024           1,521       1,362
---------------------------------------------------------------------------------------------------------------------------------
                                                              $4,046          $3,769         $ 3,429         $ 3,594     $ 3,527
=================================================================================================================================
CASH FLOW INFORMATION
Cash flows from continuing operations                         $  390          $  366         $   565         $   544     $   322
Additions to property, plant and equipment                       248             274             356             372         341
Dividends                                                         81              84              86              89          87
=================================================================================================================================
COMMON STOCK INFORMATION
Diluted earnings per share
      Income (loss) from continuing operations                $ 3.89          $ 2.63         $  2.51         $  1.80     $  (.08)
      Net income                                                3.89            2.63            3.64            2.96         .08
Dividends per share                                             1.10            1.10            1.10            1.10        1.10
=================================================================================================================================

</TABLE>