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 approximately 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 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       Nine months ended
                                      June 30                 June 30
  Revenues by Geography (a)          2009        2008       2009        2008
  North America                       66%         69%        69%         69%
  Europe                              21%         22%        20%         22%
  Asia Pacific                         9%          6%         7%          6%
  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 June 30, 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

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

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


                                       Three months ended       Nine months ended
                                             June 30                 June 30
  Revenues by Business Segment (a)          2009        2008       2009        2008
  Functional Ingredients                     11%         n/a         9%         n/a
  Water Technologies                         21%         11%        20%         11%
  Performance Materials                      13%         19%        14%         19%
  Consumer Markets                           21%         19%        20%         19%
  Distribution                               34%         51%        37%         51%
                                            100%        100%       100%        100%

(a) Revenues from the acquired operations of Hercules are included herein as of November 14, 2008, through June 30, 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, which included $100 million drawn on the $400 million revolving credit facility, a $400 million term loan A facility, an $850 million term loan B facility, a $200 million accounts receivable securitization facility and a $750 million bridge loan that was repaid primarily with the issuance of $650 million senior unsecured bonds in May 2009, 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.

Drew Marine divestiture

In June 2009, Ashland signed a definitive agreement to sell its global marine services business known as Drew Marine, a business unit of Water Technologies, to J.F. Lehman & Co. in a transaction valued pretax at approximately $120 million. This sale reflects Ashland's strategy to strengthen its core specialty chemicals businesses while reducing Ashland's investment in non-core or non-strategic businesses. The Drew Marine business is a recognized global leader in providing technical solutions, high value products and services to

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

the global marine industry, including chemicals and testing equipment, water treatment, tank cleaners and corrosion inhibitors, sealing and welding products, refrigerants and refrigeration services, engineered systems and products, fuel management programs, and fire safety and rescue products and services. The transaction is expected to close during the fourth quarter.

Economic environment

Ashland's financial performance in fiscal 2009 has continued to be hindered by a significant decline in demand within the markets it conducts business, a direct result of continued weakness in the global economy, especially within North America and Europe. Ashland has experienced significant volume declines of approximately 10% to 40% across all of its business segments during fiscal 2009. Despite this pressure, Ashland was able to manage pricing and reduce costs, resulting in an overall improved gross profit margin. This is particularly evident for Consumer Markets, where the gross profit as a percent of sales increased significantly during the three and nine months ended June 30, 2009, compared to the same periods of the prior year.

Cost-structure efficiency programs

As a result of the Hercules acquisition, the related financing agreements and current global economic environment, Ashland is implementing an organizational restructuring designed to integrate operational processes and streamline various resource groups and functions to produce greater efficiencies and reduce the overall cost structure.

Ashland is targeting approximately $390 million of run rate cost reductions, compared with a base line of April 1, 2008, with over $250 million in actual savings (including one-time 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 June 30, 2009, total run rate cost savings were $287 million.

Actions announced in January 2009 to immediately reduce costs includes:

· freezing wage and salaries globally for 2009, except where legally mandated otherwise, with estimated savings of approximately $25 million;

· implementing a two-week furlough program for most U.S. and Canadian based employees, that was completed in June of 2009, and several other job and benefits related actions. Furlough program savings during the third quarter were $18 million with a total benefit of approximately $25 million for the program year to date; and

· carrying out other cost reduction measures previously announced as $30 million that has been expanded to total nearly $100 million globally, including various plant and operational efficiencies and a significant reduction in travel and entertainment expenses.

In July 2009 Ashland announced that it is targeting an additional $100 million of cost reductions. Specifically, a $27 million cost reduction program within Distribution was announced to realign the cost structure of the business. The additional $73 million will come from continued efforts to resize Ashland to match the current market environment.

Previously announced cost reduction actions include:

· an $85 million cost structure efficiency initiative, essentially all of which has already been achieved, primarily within the Performance Materials and Water Technologies businesses; and

· $130 million of synergies resulting from the Hercules acquisition by the end of fiscal 2010, of which $105 million in total run rate cost savings have been realized.

The cumulative effect of these restructuring activities has resulted in the elimination of approximately 1,300 employee positions and six facility closings through the end of the June 2009 quarter and in total is currently expected to reduce the global workforce (excluding Valvoline retail employees) by a total of approximately 1,800, or 12% by the end of fiscal 2010. As of June 30, 2009, the total restructuring reserve incurred under

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

the cost-structure efficiency programs was $73 million, of which $52 million for the nine month period ended June 30, 2009 has been charged as an expense within the Statement of Consolidated Income, consisting of $39 million classified within the selling, general and administrative expense caption and $13 million of accelerated depreciation charged to the cost of sales and operating expenses caption. The remaining reserve of $21 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.

RESULTS OF OPERATIONS - CONSOLIDATED REVIEW

Current Quarter - Ashland recorded net income of $50 million, or $.66 per diluted earnings per share, for the three months ended June 30, 2009 as compared to net income of $72 million, or $1.13 per diluted earnings per share, for the three months ended June 30, 2008. The current quarter included a loss from discontinued operations in the amount of $1 million, or $.02 per diluted earnings per share, as compared to income of $6 million, or $.10 per diluted earnings per share, for the prior quarter. Both periods' discontinued operations results included net favorable adjustments to the asbestos receivable for insurance recoveries as a result of Ashland's ongoing assessment of these matters; however, the current quarter's benefit was more than offset by tax adjustments associated with the previous sale of former Ashland divisions. Operating income was $152 million for the current quarter as compared to $87 million of operating income for the prior quarter. Operating income for the current quarter as compared to the prior quarter included an additional $37 million of operating income within the acquired businesses of Hercules (on November 13, 2008) and Air Products (on June 30, 2008). Certain items during the current quarter impacting operating income include $16 million for severance, asset impairment and accelerated depreciation charges for the ongoing integration and reorganization from the Hercules acquisition and other cost reduction programs related to the global economic downturn.

Ashland incurred net interest and other financing expense of $62 million for the June 2009 quarter, which includes an additional $10 million of accelerated amortization for debt issuance costs associated with the bridge loan facility payoff in May of 2009, as compared to net interest and other financing income of $5 million in the prior quarter. The current quarter increase in expense relates to interest attributable to the debt issued in conjunction with the financing of the Hercules acquisition. Ashland's effective tax rate was 44.3% for the three months ended June 30, 2009 and included an unfavorable $8 million tax judgment in a foreign jurisdiction as compared to 29.4% for the prior quarter. The current quarter's income tax expense was also significantly affected by an unfavorable adjustment related to a projected shift to more U.S. sourced earnings for the year.

Year-to-Date - Ashland recorded a net loss of $22 million, or $.30 per diluted earnings per share, for the nine months ended June 30, 2009 as compared to net income of $177 million, or $2.78 per diluted earnings per share, for the nine months ended June 30, 2008. The current period included a loss from discontinued operations in the amount of $2 million, or $.03 per diluted earnings per share, for the nine months ended June 30, 2009 as compared to income of $1 million, or $.01 per diluted earnings per share, for the nine months ended June 30, 2008. Both periods' discontinued operations results included favorable net adjustments to the asbestos receivable for insurance recoveries as a result of Ashland's ongoing assessment of these matters which were both offset by tax adjustments associated with the previous sales of former Ashland divisions. Loss from continuing operations for the nine months ended June 30, 2009 was $20 million, as compared to income from continuing operations of $176 million in the nine months ended June 30, 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 within the other expense caption of the Statement of Consolidated Income. In addition, Ashland incurred net interest and other

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

financing expense of $144 million during the current period as compared to net interest and other financing income of $26 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. The prior period 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 in the gain on the MAP Transaction caption of the Statement of Consolidated Income. Income taxes were affected by the other expense items previously identified that were not deductible for income tax purposes as well as the negative effect of certain other tax items, which increased Ashland's net loss by $47 million compared to the prior period's effective tax rate of 24.7%.

Operating income for the nine months ended June 30, 2009 was $257 million, an increase of $72 million compared to the $185 million in operating income earned during the nine months ended June 30, 2008. The acquisition of Hercules businesses increased operating income by approximately $15 million for the nine months ended June 30, 2009, despite $47 million in nonrecurring purchase accounting adjustments related to inventory and in-process research and development. In addition, Ashland incurred $52 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 aggressive cost reductions, lower raw materials costs and the affects of pricing improvements, particularly within the Consumer Markets segment.

A comparative analysis of the Statement of Consolidated Income by caption is provided as follows for the three and nine months ended June 30, 2009 and 2008.

                                          Three months                         Nine months
  (In millions)                     2009        2008      Change        2009        2008      Change
  Sales and operating revenues   $ 2,037     $ 2,201     $  (164 )   $ 5,993     $ 6,166     $  (173 )

Current Quarter - Revenues for the three months ended June 30, 2009 decreased $164 million, or 7%, compared to the June 2008 quarter primarily due to significant volume declines of $461 million, or 21%, as operating segments, other than Consumer Markets, reported volume declines anywhere from 15% to 40% as a result of the global economic slowdown, particularly within the automotive, construction and recreational marine industries. Unfavorable currency exchange rates decreased revenue $83 million, or 4%, while price and mix decreased revenue by an additional $128 million, or 5%. These declines were partially offset by a $483 million, or 22%, 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 $25 million, or 1%, in the current quarter.

Year-to-Date - Revenues for the nine months ended June 30, 2009 decreased $173 million compared to the prior period. The current period included $1,193 million, or 19%, in additional revenues related to the acquired Hercules businesses. Significant volume declines decreased revenue by $1,255 million, or 20%, with unfavorable currency exchange rates decreasing revenue by $236 million, or 4%, compared to the prior period. These declines were partially offset by price and mix increases of $43 million, or 1%, 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 $82 million, or 1%, in the current period.

                                   Three months                             Nine months
     (In millions)          2009         2008        Change         2009         2008        Change
     Cost of sales and
     operating
     expenses            $ 1,544      $ 1,844      $   (300 )    $ 4,716      $ 5,158      $   (442 )
     Gross profit as a
     percent of sales       24.2 %       16.2 %                     21.3 %       16.3 %

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

Current Quarter - Cost of sales and operating expenses (cost of sales) for the June 2009 quarter decreased $300 million, or 16%, compared to the June 2008 quarter as increases related to the acquisitions of Hercules and Air Products were more than offset by significant 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 $368 million, or 20%, increase in cost of sales for the three months ended June 30, 2009, with change in product mix adding an additional $4 million. Significant volume declines reduced cost of sales by $371 million, or 20%, while currency exchange, due to the strengthening of the U.S. dollar as compared to the prior quarter, reduced cost of sales by $62 million, or 3%. Declining raw material costs decreased cost of sales by $239 million, or 13%, compared to the prior quarter. Gross profit as a percent of sales (gross profit margin) increased by 8.0 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 within Consumer Markets.

Year-to-Date - Cost of sales for the nine months ended June 30, 2009 decreased $442 million, or 9%, 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 $965 million, or 18%, increase in cost of sales for the current period, which includes a nonrecurring charge of $37 million associated with the inventory fair value adjustment of Hercules' acquired inventory, with change in product mix adding an additional $12 million. Significant volume declines reduced cost of sales by $1,003 million, or 19%, while currency exchange, due to the strengthening of the U.S. dollar as compared to the prior period, reduced cost of sales by $183 million, or 4%. Decreases in raw material costs contributed an additional $233 million, or 4%, decline in cost of sales. Gross profit margin increased by 5.0 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 within Consumer Markets.

Three months Nine months (In millions) 2009 2008 Change 2009 2008 Change Selling, general and administrative
expenses $ 353 $ 283 $ 70 $ 1,049 $ 856 $ 193 As a % of revenues 17.3 % 12.9 % 17.5 % 13.9 %

Current Quarter - Selling, general and administrative expenses for the June 2009 quarter increased 25% compared to the June 2008 quarter with selling, general and administrative expenses as a percent of revenue increasing 4.4 percentage points. Nonrecurring items impacting the comparability of the June 2009 quarter compared to the June 2008 quarter included a $4 million charge for severance from various cost reduction programs. The acquisitions of Hercules and Air Products added an additional $101 million in selling, general and administrative expenses (excluding the nonrecurring charges) as compared to the prior quarter. Currency exchange effects reduced selling, general and administrative expenses by $13 million, while Ashland's implemented cost reduction initiatives and other items reduced these same expenses by $22 million from the prior year June 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 nine months ended June 30, 2009 increased 23% compared to the nine months ended June 30, 2008, with selling, general and administrative expenses as a percent of revenue increasing 3.6 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 $39 million in severance and restructuring charges, primarily due to the ongoing integration and reorganization from the Hercules acquisition. These charges were partially 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 $273 million in selling,

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

general and administrative expenses (excluding the nonrecurring charges) as compared to the prior period. Currency exchange effects reduced selling, general and administrative expenses by $39 million, while Ashland's implemented cost reduction initiatives and other items reduced these same 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.

. . .