ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and the accompanying Notes to Condensed Consolidated Financial Statements herein.

BUSINESS OVERVIEW

Ashland profile

Ashland is a global specialty chemicals company that provides products, services and solutions that meet customer needs throughout a variety of industries. With more than 15,000 employees worldwide, Ashland serves customers in more than 100 countries.

During the past several years, Ashland has been focused on the objective to create a dynamic, global specialty chemicals company. In that process, Ashland has divested noncore businesses, redesigned business models, and acquired businesses in growth markets like water and adhesives to enhance Ashland's specialty chemicals offerings. Ashland's recent acquisition of Hercules Incorporated (Hercules), in November 2008, propels Ashland to a global leadership position with expanded capabilities and promising growth potential in specialty additives and functional ingredients, paper and water technologies, and specialty resins.

Sales and operating revenues (revenues) by region expressed as a percentage of total consolidated revenue for the three months ended December 31 was as follows.

  Sales and Operating Revenues by Geography (a)   2008   2007
  North America                                    71%    71%
  Europe                                           19%    21%
  Asia Pacific                                      6%     5%
  Latin America & other                             4%     3%
                                                  100%   100%

(a) Revenues from the acquired operations of Hercules are included herein from November 14, 2008 through December 31, 2008.

Business segments

As discussed above, Ashland completed the acquisition of Hercules in November 2008. Following the acquisition, Ashland's reporting structure, incorporating the former Hercules businesses, is now composed of five commercial units: Ashland Aqualon Functional Ingredients (Functional Ingredients), previously Hercules' Aqualon Group, Ashland Hercules Water Technologies (Water Technologies), which includes Hercules' Paper Technologies and Venture segment as well as Ashland's legacy Water Technologies segment, Ashland Performance Materials (Performance Materials), Ashland Consumer Markets (Valvoline) and Ashland Distribution (Distribution). Functional Ingredients is a manufacturer and supplier of specialty additives and functional ingredients derived from renewable resources that are designed to manage the properties of water-based systems. The restructured Water Technologies business is a global supplier of functional and process chemicals for the paper industry in addition to water treatment chemicals.

Total consolidated revenue for the three months ended December 31 as a percent of revenue by business segment was as follows.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

--------------------------------------------------------------------------------

  Sales and Operating Revenues by Business Segment (a)   2008      2007
  Functional Ingredients                                   6%      -
  Water Technologies                                      16%       11%
  Performance Materials                                   15%       17%
  Consumer Markets                                        20%       20%
  Distribution                                            43%       52%
                                                         100%      100%

(a) Revenues from the acquired operations of Hercules are included herein as of November 14, 2008, through December 31, 2008.

KEY FISCAL 2009 DEVELOPMENTS

During fiscal 2009, the following operational decisions and economic developments had an impact on Ashland's current and future cash flows, results of operations and financial position.

Hercules acquisition

Ashland's completion of the Hercules acquisition in November 2008 was a significant step in achieving Ashland's objective to create a leading, global specialty chemicals company. As fiscal 2009 commences, the new combined company comprises a core of three specialty chemical businesses: specialty additives and functional ingredients, paper and water technologies, and specialty resins, which will drive Ashland both strategically and financially. This acquisition positions Ashland to deliver more stable and predictable earnings, generate stronger cash flows and gain access to higher growth markets worldwide.

The transaction was valued at $2,596 million and included $786 million of debt assumed in the acquisition. As part of the financing arrangement for the transaction, Ashland borrowed $2,300 million and retained $205 million in existing debt.

As a result of the financing and subsequent debt incurred to complete the Hercules acquisition, Standard & Poor's downgraded Ashland's corporate credit rating to BB- and Moody's Investor Services downgraded Ashland's corporate credit rating to Ba2. In addition, Ashland is now subjected to certain restrictions from various debt covenants. These covenants include certain affirmative covenants such as various internal certifications, maintenance of property, preferential security interest in acquired property, restriction on future dividend payments and applicable insurance coverage as well as negative covenants that include financial covenant restrictions associated with leverage and fixed charge coverage ratios and total net worth and capital expenditure levels. As a result of these new covenant restrictions Ashland's near-term priorities are to generate cash and pay down debt focusing on generating cash and savings from six sources: increased profitability from sales; reductions in operating expenses, working capital, capital expenditures and dividends; and the sales of non-strategic assets, primarily business divestitures and auction rate securities.

Economic environment

As in fiscal 2008, Ashland's financial performance has continued to be hindered by rapidly declining demand, a direct result of continued weakness in the global economy, especially within Europe. Ashland experienced volume declines across all business segments, from the mid-single digits to the mid-twenties on a percentage basis versus the same prior-year quarter. This economic environment has created significant downward pressure on the gross profit margin of each business segment, particularly within the Water Technologies and Performance Materials businesses during the current quarter. Despite this pressure Ashland has been implementing pricing improvements, and as a result, overall revenue was down to a lesser extent than volume, as average selling prices increased. This is particularly evident for Distribution, where gross profit as a percent of sales increased 110 basis points compared to the prior year's quarter.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

Cost-structure efficiency programs

As a result of the Hercules acquisition, related financing agreement and the current global economic environment, Ashland has implemented an organizational restructuring designed to integrate operational processes and streamline various resource groups and functions in producing greater efficiencies and reducing the overall cost structure.

Ashland is targeting $265 million of run rate cost reductions by the end of fiscal 2009, with roughly $150 million expected to be realized during the current fiscal year. Steps taken to immediately reduce costs include:
· freezing wages and salaries globally for 2009, except where legally mandated otherwise, expected to save more than $25 million on a run-rate basis;

· implementing a two-week furlough program for most U.S. and Canadian based employees, to be completed during the next five months, and several other job and benefits related actions, estimated to be $25 million of savings;

· and carrying out other cost reduction measures totaling $30 million globally, including a significant reduction in travel and entertainment expenses and the closure of Ashland's corporate aviation department.

Previously announced cost reduction actions include:
· a $65 million cost structure efficiency initiative, essentially all of which has already been achieved, with an additional $15 million of savings now targeted from the Ashland Performance Materials business; and

· $120 million of synergies resulting from the Hercules acquisition, which are now expected to increase to $130 million by the end of fiscal 2010.

The cumulative effect of these restructuring activities has resulted in the elimination of approximately 500 employee positions through the end of the December 2008 quarter and in total is currently expected to reduce the global workforce, once specific employees are identified, by a total of approximately 1,300, or 9%, when excluding Valvoline retail employees, by the end of fiscal 2010. As of December 31, 2008, the total restructuring reserve under the program was $39 million, of which $23 million was charged as an expense during the current quarter within the Unallocated and Other caption and classified within the selling, general and administrative expense caption. The remaining reserve of $16 million relates to Hercules employees and was recorded as part of purchase price accounting within the accrued expenses and other liabilities caption of the Condensed Consolidated Balance Sheet and had no effect on the Statement of Consolidated Income. Additional charges will likely occur as plans are finalized throughout the remainder of fiscal year 2009.

RESULTS OF OPERATIONS - CONSOLIDATED REVIEW

Ashland recorded a net loss of $119 million for the three months ended December 31, 2008 as compared to net income of $33 million in the prior year same quarter. Loss from continuing operations was $120 million as compared to income from continuing operations of $58 million in the prior quarter. An operating loss of $7 million, compared to $46 million in income during the prior quarter, contributed to the current quarter loss as well as a $54 million loss related to cross-currency swaps, and a $32 million loss on auction rate securities, which were both reported below operating income within the other expense caption of the Statement of Consolidated Income. In addition, Ashland incurred net interest and other financing expense of $28 million for the December 2008 quarter as compared to net interest and other financing income of $12 million in the prior year quarter, with the current quarter expense due to interest attributable to the debt issued in conjunction with the financing of the Hercules acquisition. The operating loss of $7 million for the December 2008 quarter included $31 million in nonrecurring purchase accounting adjustments related to the Hercules acquisition and $26 million in severance charges. These key items, along with volume declines

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

across all business segments, hindered operating segment performance compared to the prior year quarter. Income taxes were affected by these key items previously identified as well as the negative effect of certain other tax items, which increased Ashland's net loss by $25 million.

A comparative analysis of the Statement of Consolidated Income by caption is provided as follows for the three months ended December 31, 2008 and 2007.

                                                            2008           %
  (In millions)                   2008        2007        change      change
  Sales and operating revenues $ 1,966     $ 1,905     $      61           3 %

Sales and operating revenues (revenues) for December 2008 increased 3% from the December 2007 quarter primarily due to a $238 million, or 12%, increase related to the acquired Hercules businesses recorded during the current quarter as well as price increases of $183 million, or 10%, across all business operations. These increases were offset by a $319 million, or 17%, cumulative decline in volume and mix, principally in Distribution and Performance Materials, and an unfavorable currency exchange of $71 million, or 4%. Revenues from the acquisition of Air Products' pressure sensitive adhesive business and atmospheric emulsions business (Air Products) on June 30, 2008 contributed an additional $30 million, or 2%, in the current quarter.

                                                                    2008           %
  (In millions)                           2008        2007        change      change
  Cost of sales and operating expenses $ 1,641     $ 1,589     $      52           3 %
  Gross profit as a percent of sales      16.5 %      16.6 %

Cost of sales and operating expenses (cost of sales) for the December 2008 quarter increased 3% compared to the December 2007 quarter, which resulted in an overall 10 basis point decline in gross profit as a percent of sales (gross profit). The acquisitions of Hercules and Air Products and raw material price increases were the primary factors for the gross profit decline, which represented a $197 million and $149 million cost increase, respectively, compared to the December 2007 quarter. Cost of sales included a nonrecurring charge of $21 million associated with the inventory fair value adjustment of Hercules' acquired inventory and a depreciation step-up adjustment of $5 million associated with the fair value adjustment of Hercules' property, plant and equipment, which will be ongoing. These cost of sales increases were more than offset by a $263 million decline related to volume and a $57 million decline in currency exchange due to strengthening of the U.S. dollar.

                                                                          2008           %
  (In millions)                                  2008       2007        change      change
  Selling, general and administrative expenses $  344     $  281     $      63          22 %
  As a % of revenues                             17.5 %     14.8 %

Selling, general and administrative expenses for the December 2008 quarter increased 22% compared to the December 2007 quarter with selling, general and administrative expenses as a percent of revenue increasing 2.7 percentage points. Expenses impacting the comparability of the December 2008 quarter compared to the December 2007 quarter included charges of $10 million related to the purchased in-process research and development projects at Hercules as of the merger date and $26 million for severance charges primarily due to the ongoing integration and reorganization from the Hercules acquisition. The acquisitions of Hercules and Air Products added an additional $53 million in selling, general and administrative expenses as compared to the prior year same quarter. Currency exchange effects, Ashland's implemented cost reduction initiatives and other items reduced selling, general and administrative expenses by $26 million from the prior year December quarter. For further information on cost cutting initiatives see the "Key Fiscal 2009

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

--------------------------------------------------------------------------------

Developments" discussion  within Management's Discussion  and  Analysis as well
as Note C  in the Notes  to Condensed Consolidated Financial Statements.

                                                 2008
  (In millions)            2008      2007      change
  Equity and other income
  Equity income           $   5     $   5     $     -
  Other income                7         6           1
                          $  12     $  11     $     1

Total equity and other income increased 9% during the December 2008 quarter compared to the prior year quarter. The increase in the current quarter primarily relates to service fee income increasing in the Performance Materials reporting segment.

                                                     2008
  (In millions)                2008      2007      change
  Gain on the MAP Transaction $   1     $   -     $     1

"MAP Transaction" refers to the June 30, 2005 transfer of Ashland's 38% interest in Marathon Ashland Petroleum LLC (MAP) and two other businesses to Marathon Oil Corporation. Ashland recorded a $1 million increase in the recorded receivable from Marathon for the estimated present value of future tax deductions related primarily to environmental and other postretirement obligations during the current quarter related to this transaction.

                                                                            2008
  (In millions)                                      2008      2007       change
  Net interest and other financing (expense) income
  Interest income                                   $   8     $  15     $     (7 )
  Interest expense                                    (35 )      (2 )        (33 )
  Other financing costs                                (1 )      (1 )          -
                                                    $ (28 )   $  12     $    (40 )

The increase in interest expense of $33 million from the prior year quarter represents interest charges associated with the $2,300 million debt drawn upon the closing of the Hercules acquisition. In conjunction with the acquisition, interest income also declined as the remaining funding to complete the merger was paid from Ashland's existing cash on hand. For further information on this transaction see the "Liquidity" discussion within Management's Discussion and Analysis as well as Note C in the Notes to Condensed Consolidated Financial Statements.

                                                         2008
  (In millions)                    2008      2007      change
  Other expenses
  Loss on currency swaps          $  54     $   -     $    54
  Loss on auction rate securities    32         -          32
                                  $  86     $   -     $    86

The other expenses caption included two significant one time items. The first was a $54 million loss on currency swaps related to the Hercules acquisition which was a hedge against Hercules' open currency swap positions prior to the acquisition. The second was a $32 million charge on auction rate securities. For further information on auction rate securities see the "Liquidity" discussion within Management's Discussion and Analysis as well as Note E in the Notes to Condensed Consolidated Financial Statements.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

--------------------------------------------------------------------------------


                                                          2008
  (In millions)                  2008        2007       change
  Income tax (benefit) expense $   (1 )    $   20     $    (21 )
  Effective tax rate             (0.6 %)     34.8 %

The overall effective tax rate benefit was significantly decreased in the December 2008 quarter from the comparable rate in the prior year same quarter due to several key factors. Using a 35% statutory federal tax rate applied to the loss and income from continuing operations for both the December 2008 and 2007 quarters income taxes would have been a benefit of $42 million in 2008 and a $21 million expense in 2007. Significant discreet items reducing the benefit for 2008 included income tax on repatriated foreign earnings of $14 million, a $10 million valuation allowance on auction rate security losses, increases in FIN 48 reserves of $9 million, and nondeductible in-process research and development cost increasing tax expense by $3 million. In addition, the current quarter was negatively effected by nondeductible life insurance losses of $5 million and a $3 million adjustment for projected annual income earnings related to Ashland's effective tax rate. Ashland's effective tax rate for the December 2008 quarter was approximately 24%. See Note J to the Condensed Consolidated Financial Statements for further information on adjustments during the current and prior year's quarter.

                                                                        2008
  (In millions)                                   2008      2007      change
  Loss from discontinued operations (net of tax)
  APAC loss on sale of operations                $   -     $  (5 )   $     5

On August 28, 2006, Ashland completed the sale of the stock of its wholly owned subsidiary, Ashland Paving And Construction, Inc. (APAC) to Oldcastle Materials, Inc. (Oldcastle) for $1.3 billion. The operating results and assets and liabilities related to APAC have been previously reflected as discontinued operations in the Condensed Consolidated Financial Statements. Ashland made adjustments to the gain on the sale of APAC, relating to the tax effects of the sale, during the three months ended December 31, 2007. Such adjustments may continue to occur in future periods. Adjustments to the gain are reflected in the period they are determined and recorded in the discontinued operations caption in the Statements of Consolidated Income.

RESULTS OF OPERATIONS - OPERATING SEGMENT

Results of Ashland's operating segments are presented based on its operational and management structure and accounting practices. The structure and practices are specific to Ashland; therefore, the financial results of Ashland's business segments are not necessarily comparable with other similar companies. Ashland refines its expense allocation methodologies to the operating segments from time to time as internal accounting practices are improved, more refined information becomes available and businesses change. Revisions to Ashland's methodologies that are deemed insignificant are applied on a prospective basis. Ashland fully allocates significant corporate costs, except for certain significant company wide restructuring activities, such as the current quarter's $23 million restructuring plan related to the Hercules acquisition, and other costs or adjustments that relate to former businesses that Ashland no longer operates.

As previously discussed, Ashland's businesses are managed along five industry segments: Functional Ingredients, Water Technologies, Performance Materials, Consumer Markets and Distribution. For additional information see Notes A and P in Notes to Condensed Consolidated Financial Statements.

The following table shows revenues, operating income and operating information by business segment for the three months ended December 31, 2008 and 2007.

ASHLAND INC. AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS

--------------------------------------------------------------------------------


                                                         Three months ended
                                                             December 31
  (In millions)                                              2008         2007
  Sales and operating revenues
  Functional Ingredients                               $      119      $     -
  Water Technologies                                          318          206
  Performance Materials                                       324          371
  Consumer Markets                                            388          380
  Distribution                                                853          990
  Intersegment sales                                          (36 )        (42 )
                                                       $    1,966      $ 1,905
  Operating (loss) income
  Functional Ingredients                               $       (7 )    $     -
  Water Technologies                                           (6 )          5
  Performance Materials                                         5           12
  Consumer Markets                                             19           20
  Distribution                                                 10            6
  Unallocated and other                                       (28 )          3
                                                       $       (7 )    $    46
  Operating information
  Functional Ingredients (a)
  Sales per shipping day                               $      4.0      $     -
  Pounds sold per shipping day                                2.5            -
  Water Technologies (a)
  Sales per shipping day                               $      5.1      $   3.3
  Gross profit as a percent of sales                         30.3 %       39.3 %
  Performance Materials (a)
  Sales per shipping day                               $      5.2      $   6.0
  Pounds sold per shipping day                                4.3          4.6
  Gross profit as a percent of sales                         15.9 %       18.2 %
  Consumer Markets (a)
  Lubricant sales gallons                                    33.0         39.9
  Premium lubricants (percent of U.S. branded volumes)       27.1 %       23.0 %
  Gross profit as a percent of sales                         21.8 %       24.7 %
  Distribution (a)
  Sales per shipping day                               $     13.8      $  16.0
  Pounds sold per shipping day                               15.5         18.7
  Gross profit as a percent of sales                          8.6 %        7.5 %

(a) Sales are defined as sales and operating revenues. Gross profit is defined as sales and operating revenues, less cost of sales and operating expenses.

As previously discussed, Ashland's financial performance during the current quarter was hindered by declining demand, a direct result of continued weakness in the global economy, especially within Europe. Volume levels for the current quarter were down across all businesses, including operations acquired from Hercules on November 13, 2008, decreasing anywhere from the mid-single digits to the low twenties versus the prior year quarter. This economic environment created significant downward pressure on the gross profit margin of each business segment, particularly within Water Technologies and Performance Materials businesses during the quarter. However, Distribution was able to . . .