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 the combined new company 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 was as follows:

                                Three months ended        Six months ended
                                     March 31                 March 31
  Revenues by Geography (a)          2009        2008       2009        2008
  North America                       69%         70%        70%         70%
  Europe                              20%         22%        19%         22%
  Asia Pacific                         7%          5%         7%          5%
  Latin America & other                4%          3%         4%          3%
                                     100%        100%       100%        100%

(a) Revenues from the acquired operations of Hercules are included herein from November 14, 2008 through March 31, 2009.

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 reporting segments: Ashland Aqualon Functional Ingredients (Functional Ingredients), previously Hercules' Aqualon Group, Ashland Hercules Water Technologies (Water Technologies), which includes Hercules' Paper Technologies and Ventures segment as well as Ashland's legacy Water Technologies segment, Ashland Performance Materials (Performance Materials), Ashland Consumer Markets (Consumer Markets), previously Ashland's Valvoline segment, 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.

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

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The contribution to revenue by each business segment expressed as a percentage
of total consolidated revenue was as follows:


                                       Three months ended        Six months ended
                                            March 31                 March 31
  Revenues by Business Segment (a)          2009        2008       2009        2008
  Functional Ingredients                     11%         n/a         8%         n/a
  Water Technologies                         21%         10%        19%         11%
  Performance Materials                      13%         19%        14%         19%
  Consumer Markets                           20%         19%        20%         19%
  Distribution                               35%         52%        39%         51%
                                            100%        100%       100%        100%

(a) Revenues from the acquired operations of Hercules are included herein as of November 14, 2008, through March 31, 2009.

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. 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 $2,594 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 pay down debt by focusing on generating cash and savings from: 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

Ashland's financial performance in fiscal 2009 has continued to be hindered by a decline in demand, a direct result of continued weakness in the global economy, especially within Europe and the U.S. Ashland experienced volume declines across all business segments, including the operations acquired from Hercules, from 10% to 40% versus the same three and six month periods of the prior year. Despite this pressure, Ashland was able to manage pricing and reduce costs, leading to improved gross profit margins. This is particularly evident for Consumer Markets and Distribution, where gross profit margin increased during the three and six months ended March 31, 2009, compared to the same periods of the prior year.

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

Cost-structure efficiency programs

As a result of the Hercules acquisition, the related financing agreement and the current global economic environment, Ashland is implementing 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 over $200 million in actual savings expected to be realized during the current fiscal year within the Statement of Consolidated Income. Ashland has made significant progress on its cost reduction initiatives and, as of March 31, 2009, total run rate cost savings were $217 million.

Actions taken during fiscal 2009 to immediately reduce costs include:

· freezing wages and salaries globally for 2009, except where legally mandated otherwise, which is 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 through June of 2009, and several other job and benefits related actions. Furlough program savings during the second quarter were $8 million with an estimated benefit of approximately $16 million in the third quarter; and

· carrying out other cost reduction measures, including various plant and operational efficiencies, totaling $85 million globally, which also includes 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 Performance Materials business; and

· $130 million of synergies resulting from the Hercules acquisition by the end of fiscal 2010, of which $60 million in total run rate cost savings have been realized and an additional $40 million is expected by the end of fiscal year 2009.

The cumulative effect of these restructuring activities has resulted in the elimination of approximately 1,000 employee positions through the end of the March 2009 quarter and in total is currently expected to reduce the global workforce (excluding Valvoline retail employees) by a total of approximately 1,300, or 9% by the end of fiscal 2010. As of March 31, 2009, the total restructuring reserve under the program was $46 million, of which $3 million and $26 million for the three and six month periods ended March 31, 2009, respectively, were charged as an expense within the Unallocated and Other category and classified within the selling, general and administrative expense caption with an additional $2 million of accelerated depreciation charged to the cost of sales and operating expenses caption during the March 2009 quarter. The remaining reserve of $18 million related to severance associated with Hercules personnel and various plant closing costs, which qualified for purchase method of accounting in accordance with FAS 141, and had no effect on the Statement of Consolidated Income. Additional costs from reductions in resources or facilities may occur in future periods; which could include charges related to additional severance, plant closings, reassessed pension plan valuations or other items. Ashland anticipates completing these restructuring activities during fiscal year 2010.

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

RESULTS OF OPERATIONS - CONSOLIDATED REVIEW

Current Quarter - Ashland recorded net income and income from continuing operations of $48 million, or $.65 per diluted earnings per share, for the three months ended March 31, 2009 as compared to net income and income from continuing operations of $72 million, or $1.13 per diluted earnings per share, for the three months ended March 31, 2008. Operating income was $112 million for the current quarter as compared to $52 million of operating income for the prior quarter. Operating income for the current quarter as compared to the prior quarter included an additional $4 million of operating income as a result of the acquisitions of Hercules (on November 13, 2008) and Air Products (on June 30, 2008). Nonrecurring items during the current quarter impacting operating income include a $16 million charge for a purchase accounting adjustment related to the Hercules acquisition for inventory and $11 million for severance, asset impairment and accelerated depreciation charges for the ongoing integration and reorganization from the Hercules acquisition and other cost reduction programs. These charges were partially offset by a currency gain on an intracompany loan of $5 million in the current quarter. The prior quarter included a $5 million charge for costs associated with the suspension of Ashland's joint venture with Cargill to manufacture bio-based propylene glycol. The prior quarter also included a one-time $23 million gain from the partial resolution of certain tax related matters with Marathon Oil Corporation related to the MAP Transaction, which was reported below operating income under the (loss) gain on the MAP Transaction caption of the Statement of Consolidated Income.

Ashland incurred net interest and other financing expense of $54 million for the March 2009 quarter as compared to net interest and other financing income of $8 million in the prior quarter, with the current quarter expense due to interest attributable to the debt issued in conjunction with the financing of the Hercules acquisition. Ashland's effective tax rate was 15.8% for the three months ended March 31, 2009 as compared to 12.3% for the prior quarter.

Year-to-Date - Ashland recorded a net loss of $71 million, or ($1.00) per diluted earnings per share, for the six months ended March 31, 2009 as compared to net income of $105 million, or $1.65 per diluted earnings per share, for the six months ended March 31, 2008. Loss from continuing operations for the six months ended March 31, 2009 was $71 million as compared to income from continuing operations of $110 million in the six months ended March 31, 2008. During the current period, Ashland incurred 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 $82 million during the current period as compared to net interest and other financing income of $21 million in the prior period, with the current year expense due to interest attributable to the debt issued in conjunction with the financing of the Hercules acquisition. Income taxes were affected by the nondeductible portion of the other expense items previously identified as well as the negative effect of certain other tax items, which increased Ashland's net loss by $30 million.

Operating income for the six months ended March 31, 2009 was $105 million, an increase of $7 million compared to the $98 million in operating income earned during the six months ended March 31, 2008. The acquisition of Hercules operations reduced operating income by approximately $18 million for the six months ended March 31, 2009, primarily due to $47 million in nonrecurring purchase accounting adjustments related to inventory and in-process research and development. In addition, Ashland incurred $31 million for severance charges for the ongoing integration and reorganization from the Hercules acquisition and other cost reduction programs. These key items, along with significant volume declines across all business segments, hindered operating results as compared to the prior period, but were more than offset by lower raw materials costs and the affects of pricing improvements, particularly among the Consumer Markets and Distribution segments.

A comparative analysis of the Statement of Consolidated Income by caption is provided as follows for the three and six months ended March 31, 2009 and 2008.

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

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                                          Three months                          Six months
  (In millions)                     2009        2008       Change        2009        2008      Change
  Sales and operating revenues   $ 1,990     $ 2,059     $    (69 )   $ 3,956     $ 3,964     $    (8 )

Current Quarter - Revenues for the three months ended March 31, 2009 decreased $69 million, or 3%, compared to the March 2008 quarter primarily due to significant volume declines of $469 million, or 23%, as operating segments reported volume declines anywhere from 10% to 40% as a result of the global economic slowdown, particularly among the automotive, construction and recreational marine industries. Unfavorable currency exchange rates added an additional $93 million, or 5%, reduction in revenue with price and mix adding an additional $6 million reduction. These declines were offset by a $472 million, or 23%, increase in revenues related to the acquired Hercules businesses recorded during the current quarter. Revenues from the acquisition of Air Products' pressure sensitive adhesive business and atmospheric emulsions business (Air Products) on June 30, 2008 contributed an additional $27 million, or 1%, in the current quarter.

Year-to-Date - Revenues for the six months ended March 31, 2009 decreased $8 million compared to the prior period. The current period included $711 million, or 18%, in additional revenues related to the acquired Hercules businesses. Significant volume declines decreased revenue by $790 million, or 20%, with unfavorable currency exchange rates decreasing revenue by $164 million, or 4%, compared to the prior period. These declines were partially offset by price and mix increases of $178 million, or 5%, across almost all operating segments as a result of successful price management throughout the current period. Revenues from the acquisition of Air Products contributed an additional $57 million, or 1%, in the current period.

                                   Three months                             Six months
     (In millions)          2009         2008        Change         2009         2008        Change
     Cost of sales and
     operating
     expenses            $ 1,531      $ 1,725      $   (194 )    $ 3,172      $ 3,314      $   (142 )
     Gross profit as a
     percent of sales       23.1 %       16.2 %                     19.8 %       16.4 %

Current Quarter - Cost of sales and operating expenses (cost of sales) for the March 2009 quarter decreased $194 million, or 11%, compared to the March 2008 quarter as increases related to the acquisitions of Hercules and Air Products were more than offset by declines in volume and raw material costs and a positive currency exchange impact in the current quarter as compared to the prior quarter. The acquisitions of Hercules and Air Products represented a $375 million, or 22%, increase in cost of sales for the three months ended March 31, 2009, which includes a nonrecurring charge of $16 million associated with the inventory fair value adjustment of Hercules' acquired inventory, with change in product mix adding an additional $3 million. Volume declines reduced cost of sales by $368 million, or 21%, while currency exchange, due to the strengthening of the U.S. dollar, reduced cost of sales by $72 million, or 4%, as compared to the March 2008 quarter. Declining raw material costs decreased cost of sales by $132 million, or 8%, compared to the prior period. Gross profit as a percent of sales (gross profit margin) increased by 6.9 percentage points compared to the prior quarter as a result of the acquisition of higher margin businesses, the mix of revenue by operating segment and a realization of improved gross profit margins, particularly in Consumer Markets and Distribution.

Year-to-Date - Cost of sales for the six months ended March 31, 2009 decreased $142 million, or 4%, compared to the prior period as increases related to the acquisitions of Hercules and Air Products were more than offset by significant declines in volume and a positive currency exchange impact in the current period as compared to the prior period. The acquisitions of Hercules and Air Products represented a $598 million, or 18%, increase in cost of sales for the current period, which includes a nonrecurring charge of $37 million

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

associated with the inventory fair value adjustment of Hercules' acquired inventory, with change in product mix adding an additional $4 million. Significant volume declines reduced cost of sales by $627 million, or 19%, while currency exchange, due to the strengthening of the U.S. dollar, reduced cost of sales by $128 million, or 4%, as compared to the prior period. These decreases were offset by an $11 million, or 1%, increase attributable to raw material cost increases experienced primarily in the December quarter of the current period. Gross profit margin increased by 3.4 percentage points compared to the prior period as a result of the acquisition of higher margin businesses, the mix of revenue by operating segment and a realization of improved gross profit margins, particularly in Consumer Markets and Distribution.

Three months Six months (In millions) 2009 2008 Change 2009 2008 Change Selling, general and administrative
expenses $ 352 $ 292 $ 60 $ 696 $ 573 $ 123 As a % of revenues 17.7 % 14.2 % 17.6 % 14.5 %

Current Quarter - Selling, general and administrative expenses for the March 2009 quarter increased 21% compared to the March 2008 quarter with selling, general and administrative expenses as a percent of revenue increasing 3.5 percentage points. Nonrecurring items impacting the comparability of the March 2009 quarter compared to the March 2008 quarter included a $5 million charge for severance for the ongoing integration and reorganization from the Hercules acquisition, along with other cost reduction programs, offset by a currency gain on an intracompany loan of $5 million in 2009, while 2008 included a $5 million charge for costs related to the suspension of a joint venture project. The acquisitions of Hercules and Air Products added an additional $119 million in selling, general and administrative expenses (excluding the nonrecurring charges) as compared to the prior quarter. Currency exchange effects, Ashland's implemented cost reduction initiatives and other items reduced selling, general and administrative expenses by $54 million from the prior year March quarter. For further information on cost cutting initiatives see the "Key Fiscal 2009 Developments" discussion within Management's Discussion and Analysis as well as Note C in the Notes to Condensed Consolidated Financial Statements.

Year-to-Date - Selling, general and administrative expenses for the six months ended March 31, 2009 increased 22% compared to the six months ended March 31, 2008, with selling, general and administrative expenses as a percent of revenue increasing 3.1 percentage points. Expenses impacting the comparability of the current period as compared to the prior period include a charge of $10 million related to the purchased in-process research and development projects at Hercules as of the acquisition date and $31 million in severance charges primarily due to the ongoing integration and reorganization from the Hercules acquisition. These charges were offset by a currency gain on an intracompany loan of $5 million in 2009, while 2008 included a $5 million charge for costs related to the suspension of a joint venture project. The acquisitions of Hercules and Air Products added an additional $172 million in selling, general and administrative expenses (excluding the nonrecurring charges) as compared to the prior period. Currency exchange effects, Ashland's implemented cost reduction initiatives and other items reduced selling, general and administrative expenses by $80 million from the prior period. For further information on cost cutting initiatives see the "Key Fiscal 2009 Developments" discussion within Management's Discussion and Analysis as well as Note C in the Notes to Condensed Consolidated Financial Statements.

                                   Three months                     Six months
  (In millions)              2009      2008      Change      2009      2008      Change
  Equity and other income
  Equity income             $   2     $   6     $    (4 )   $   7     $  11     $    (4 )
  Other income                  3         4          (1 )      10        10           -
                            $   5     $  10     $    (5 )   $  17     $  21     $    (4 )

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

Current Quarter - Total equity and other income decreased $5 million during the March 2009 quarter compared to the prior year same quarter. The decrease in the current quarter primarily relates to decreased equity income from Performance Materials joint ventures impacted by the current economic downturn.

Year-to-Date - Total equity and other income decreased $4 million during the six months ended March 31, 2009 compared to the prior period. The decrease in the current period primarily relates to decreased equity income of joint ventures associated with Performance Materials as discussed above.

                                               Three months                      Six months
  (In millions)                         2009      2008       Change      2009      2008       Change
  (Loss) gain on the MAP Transaction   $  (1 )   $  22     $    (23 )   $   -     $  22     $    (22 )

Current Quarter and Year-to-Date - "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 decrease 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. The gain in the prior quarter relates to the settlement with Marathon of certain tax related matters associated with the MAP Transaction, which resulted in a $23 million gain. This gain was slightly offset by an adjustment in the recorded receivable for future estimated tax deductions related primarily to environmental and other postretirement reserves.

Three months Six months (In millions) 2009 2008 Change 2009 2008 Change Net interest and other financing

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