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 leading, global specialty chemical company that provides products, services and solutions that meet customer needs throughout a variety of industries. Ashland's chemistry is used in a wide variety of markets and applications, including architectural coatings, automotive, construction, energy, food and beverage, personal care, pharmaceutical, tissue and towel, and water treatment. With approximately 15,000 employees worldwide, Ashland serves customers in more than 100 countries.
Ashland's sales generated outside of North America were 48% for the three months ended December 31, 2012 and 2011. Sales by region expressed as a percentage of total consolidated sales for the three months ended December 31 were as follows:

                            December 31
Sales by Geography       2012          2011
North America (a)          52 %          52 %
Europe                     27 %          27 %
Asia Pacific               14 %          14 %
Latin America & other       7 %           7 %
                          100 %         100 %

(a)Ashland includes only U.S. and Canada in its North America designation. Business segments Ashland's reporting structure is composed of four reporting segments: Ashland Specialty Ingredients (Specialty Ingredients), Ashland Water Technologies (Water Technologies), Ashland Performance Materials (Performance Materials) and Ashland Consumer Markets (Consumer Markets). For further descriptions of each business segment, see the "Results of Operations - Business Segment Review" beginning on page 36. The contribution to sales by each business segment expressed as a percentage of total consolidated sales for the three months ended December 31 were as follows:

                            Three months ended
                                December 31
Sales by Business Segment    2012          2011
Specialty Ingredients          33 %          32 %
Water Technologies             23 %          23 %
Performance Materials          18 %          20 %
Consumer Markets               26 %          25 %
                              100 %         100 %

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

KEY DEVELOPMENTS
During 2013 and other previous periods, the following transactions and operational decisions had an impact on Ashland's current and future cash flows, results of operations and financial position. Acquisitions/Divestitures
Synlubes business divestiture
In January 2012, Ashland completed the sale of its aviation and refrigerant lubricants business, a polyol/ester-based synlubes (Synlubes) business previously included within the Water Technologies business segment to Monument Chemical Inc., a Heritage Group Company. Annual sales of the business were approximately $50 million. Total net assets related to this business totaled $20 million as of the date of sale and primarily consisted of property, plant and equipment. The transaction resulted in a pretax loss of less than $1 million recognized during 2012.
PVAc business divestiture
In January 2012, Ashland completed the sale of its polyvinyl acetate homopolymer and copolymer (PVAc) business previously included within the Performance Materials business segment to Celanese Corporation. Annual sales of the business were approximately $45 million. Total net assets related to this business totaled $20 million as of the date of sale and primarily consisted of property, plant and equipment. The sale included the transfer of the PVAc business, inventory and related technology, but did not include any real estate or manufacturing facilities. Ashland's PVAc business included two brands, Flexbond™ and Vinac™ emulsions. To support the transition, the products are being temporarily toll manufactured by Ashland for Celanese Corporation. The transaction resulted in a pretax gain of $2 million recognized during 2012. International Specialty Products acquisition On August 23, 2011, Ashland completed its acquisition of ISP, a global specialty chemical manufacturer of innovative functional ingredients and technologies, in a transaction valued at $3.2 billion. ISP reported sales of $1.9 billion for the twelve month period ended September 30, 2011. The purchase price of $2,179 million was an all cash transaction, reduced by the amount of ISP's net indebtedness at closing. Ashland has included ISP within the Specialty Ingredients reportable segment, with the exception of ISP's Elastomers business line, which has been included within the Performance Materials reportable segment. The acquisition was recorded by Ashland using the acquisition method of accounting in accordance with applicable U.S. GAAP whereby the total purchase price was allocated to tangible and intangible assets and liabilities acquired based on respective fair values. The purchase price allocation for the acquisition was completed as of September 30, 2012. Distribution divestiture
On March 31, 2011, Ashland completed the sale to Nexeo Solutions, LLC (Nexeo) of substantially all of the assets and certain liabilities of its global distribution business which previously comprised the Ashland Distribution (Distribution) segment. The transaction was an asset sale with the total post-closing adjusted cash proceeds received by Ashland of $972 million, before transaction fees and taxes. Ashland recognized an after-tax gain of $271 million during 2011. Because this transaction signified Ashland's exit from the distribution business, the results of operations and cash flows of Distribution have been classified as discontinued operations for all periods presented. During the year following the sale of Distribution, certain indirect corporate costs included within selling, general and administrative expense that were previously allocated to the Distribution reporting segment that did not qualify for discontinued operations accounting classification were reported as costs within the Unallocated and other section of continuing operations for segment reporting purposes and equaled $5 million for the three months ended December 31, 2011.

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

Ashland retained and agreed to indemnify Nexeo for certain liabilities of the Distribution business arising prior to the closing of the sale. This includes pension and other postretirement benefits, as well as certain other liabilities, including certain litigation and environmental liabilities relating to the pre-closing period, as described in the definitive agreement. The ongoing effects of the pension and postretirement plans for former Distribution employees are reported within the Unallocated and other section of continuing operations for segment reporting purposes.
As part of this sale, Ashland received transition service fees for ongoing administrative and other services provided to Nexeo. Ashland recognized transition service fees of $8 million during the three months ended December 31, 2011, which offset costs of providing transition services and were classified within the selling, general and administrative expense caption of the Statements of Consolidated Comprehensive Income. While the transition service agreements varied in duration depending upon the type of service provided, Ashland implemented plans to reduce costs as the transition services were phased out. Restructuring and integration programs
Ashland periodically implements restructuring programs related to acquisitions, divestitures or other cost reduction programs in order to enhance profitability through streamlined operations and an improved overall cost structure for each business.
Severance costs
During the prior years, Ashland announced steps to reduce stranded costs resulting from the divestiture of Distribution and the contribution of the Casting Solutions business to an expanded global joint venture. Targeted cost reductions for the Distribution and Casting Solutions' stranded costs were $40 million. In addition, Ashland is currently implementing plans to integrate ISP, subsequent to its purchase in August 2011. Targeted synergy cost reductions related to this acquisition are $50 million.
Steps to address cost reduction opportunities included Ashland's announced voluntary severance offer (VSO) in June 2011 to approximately 1,500 regular, full-time, non-union, U.S.-based employees, primarily within various shared resource groups as well as certain positions within the Specialty Ingredients business, which ultimately resulted in 150 employees being formally approved for the VSO. An involuntary program was also initiated in 2011 as a further step to capture targeted saving levels from these transactions and other business cost savings initiatives. The VSO and involuntary programs resulted in a severance charge of $34 million during the September 2011 quarter. The involuntary program continued during 2012 and resulted in an expense of $28 million being recognized within the selling, general and administrative expense caption during the three months ended December 31, 2011. As of December 31, 2012, the remaining restructuring reserve for these programs totaled $20 million.
As of December 31, 2012, approximately $75 million of annualized cost savings have been achieved from these cost reduction programs primarily through reductions in supply chain, IT and finance resource groups. The $40 million original estimated cost savings were principally achieved as of the end of the March 2012 quarter for the Distribution and Casting Solutions stranded costs, while $35 million of the remaining $50 million of synergy savings were achieved through December 31, 2012, with the remaining $15 million expected to be completed during 2013 once full implementation of Ashland's ERP platform is completed. Additional charges related to the involuntary program may occur in subsequent periods as they are identified through ongoing internal assessments and efforts to maximize operational efficiencies. Facility costs
During the March 2012 quarter, Ashland incurred a $20 million lease abandonment charge related to its exit from an office facility that was retained as part of the Hercules acquisition. The costs related to the reserve will be paid over the remaining lease term through May 2016. Also during the March 2012 quarter, in order to maximize operational efficiencies, Ashland abandoned a construction project for a multi-purpose facility

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

in China. This project abandonment resulted in a $13 million charge which primarily related to expenses incurred for engineering and construction in progress. Both charges were recognized within the selling, general and administrative expense caption during 2012. As of December 31, 2012, the remaining restructuring reserve for the lease abandonment totaled $12 million. Financing activities
Senior secured credit facility
On August 23, 2011, in conjunction with the ISP acquisition closing, Ashland entered into a $3.9 billion senior secured credit facility with a group of lenders (the Senior Credit Facility). The Senior Credit Facility was comprised of (i) a $1.5 billion term loan A facility, (ii) a $1.4 billion term loan B facility and (iii) a $1.0 billion revolving credit facility. Proceeds from borrowings under the term loan A facility and the term loan B facility were used, together with cash on hand, to finance the cash consideration paid for the ISP acquisition, as well as to finance the repayment of existing indebtedness of ISP in connection with the acquisition. During 2012, Ashland prepaid $350 million of principal on its term loan B facility, using proceeds from its newly issued accounts receivable securitization facility. 9.125% senior notes and 4.750% senior notes In July 2012, Ashland commenced a tender offer to purchase for cash any and all of the premium $650 million aggregate principal of the 9.125% senior notes. In conjunction with this tender offer, Ashland issued $500 million aggregate principal amount of 4.750% senior unsecured, unsubordinated notes due 2022. The proceeds of the new notes, together with available cash, were used to pay the consideration, accrued and unpaid interest and related fees and expenses in connection with Ashland's cash tender offer of the 9.125% senior notes. At the close of the tender offer, $572 million aggregate principal amount of the 9.125% senior notes was redeemed by Ashland, representing 88% of the 9.125% senior notes. Ashland recognized a $24 million charge for debt issuance costs and original issue discount related to the portion of the 9.125% senior notes that were redeemed early, as well as a $67 million charge related to an early redemption premium payment, both of which are included in the net interest and other financing expense caption in the Statements of Consolidated Comprehensive Income for the September 2012 quarter.
Accounts receivable securitization
On August 31, 2012, Ashland entered into a $350 million accounts receivable securitization facility pursuant to (i) a Sale Agreement, among Ashland and certain of its direct and indirect subsidiaries (each an Originator and collectively, the Originators) and CVG Capital III LLC, a wholly-owned "bankruptcy remote" special purpose subsidiary of the Originators (CVG) and (ii) a Transfer and Administration Agreement, among CVG, each Originator, Ashland, as Master Servicer, certain Conduit Investors, Uncommitted Investors, Letter of Credit Issuers, Managing Agents, Administrators and Committed Investors, and The Bank of Nova Scotia, as agent for various secured parties (the Agent). Under the Sale Agreement, each Originator will transfer, on an ongoing basis, substantially all of its accounts receivable, certain related assets and the right to the collections on those accounts receivable to CVG. Under the terms of the Transfer and Administration Agreement, CVG may, from time to time, obtain up to $350 million (in the form of cash or letters of credit for the benefit of Ashland and its subsidiaries) from the Conduit Investors, the Uncommitted Investors and/or the Committed Investors through the sale of an undivided interest in such accounts receivable, related assets and collections. The Transfer and Administration Agreement has a term of three years, but is extendable at the discretion of the Investors. Ashland will account for the securitization facility as secured borrowings, and the receivables sold pursuant to the facility are included in the Condensed Consolidated Balance Sheets as accounts receivable. Fundings under the Transfer and Administration Agreement will be repaid as accounts receivable are collected, with new fundings being advanced (through daily reinvestments) as new accounts receivable are originated by the Originators and transferred to CVG, with settlement generally occurring monthly. Ashland continues to classify any borrowings under this facility

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

as a short-term debt instrument within the Condensed Consolidated Balance Sheets. Once sold to CVG, the accounts receivable, related assets and rights to collection described above will be separate and distinct from each Originator's own assets and will not be available to its creditors should such Originator become insolvent. Substantially all of CVG's assets have been pledged to the Agent in support of its obligations under the Transfer and Administration Agreement. In addition, the Originators' equity interests in CVG have been pledged to the lenders under the Senior Credit Facility.
At December 31, 2012, Ashland had drawn $300 million of the $324 million in available funding provided by the $533 million in qualifying accounts receivable transferred by Ashland to CVG. The weighted-average interest rate for this instrument was 1.1% for the three months ended December 31, 2012. Other financing activities
Ashland's corporate credit ratings have remained unchanged from those reported in its Form 10-K filed in November 2012. Standard & Poor's ratings are BB, while Moody's Investor Services are Ba1, with a stable outlook from both. Subsequent changes to these ratings may have an affect on Ashland's borrowing rate or ability to access capital markets in the future. As of December 31, 2012, Ashland's access to cash has remained largely unchanged with a total of approximately $1.4 billion of liquidity, defined as cash and availability under liquidity facilities.
Stock repurchase and annual dividend increase Ashland has the ability to make discretionary purchases of Ashland Common Stock on the open market, pursuant to a $400 million share repurchase authorization, approved by the Board of Directors of Ashland in March 2011, of which $329 million is still available at December 31, 2012. During the three months ended December 31, 2012 and 2011, Ashland did not execute any share repurchases. During the December 2012 quarter, the Board of Directors of Ashland announced and paid a quarterly cash dividend of 22.5 cents per share to eligible shareholders of record. This amount was also paid for quarterly dividends in June and September of 2012, and was an increase from the quarterly cash dividend of 17.5 cents per share paid during first and second quarters of the prior year.
RESULTS OF OPERATIONS - CONSOLIDATED REVIEW Use of non-GAAP measures
Ashland has included within this document certain non-GAAP measures which include EBITDA (net income, plus income tax expense (benefit), net interest and other financing expenses, and depreciation and amortization), adjusted EBITDA (EBITDA adjusted for discontinued operations, net gain (loss) on acquisitions and divestitures, other income and (expense) and key items, which may include pro forma effects for significant acquisitions or divestitures, as applicable) and adjusted EBITDA margin (adjusted EBITDA, which can include pro forma adjustments, divided by sales). Such measurements are not prepared in accordance with U.S. GAAP and as related to pro forma adjustments, contain Ashland's best estimates of cost allocations and shared resource costs. Management believes the use of non-GAAP measures on a consolidated and business segment basis assists investors in understanding the ongoing operating performance by presenting comparable financial results between periods. The non-GAAP information provided is used by Ashland management and may not be determined in a manner consistent with the methodologies used by other companies. EBITDA and Adjusted EBITDA provide a supplemental presentation of Ashland's operating performance on a consolidated and business segment basis. Adjusted EBITDA generally includes adjustments for unusual, non-operational or restructuring-related activities. In addition, certain financial covenants related to Ashland's Senior Credit Facility are based on similar non-GAAP measures and are defined further in the sections that reference this metric.

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

Ashland has included free cash flow as an additional non-GAAP metric of cash flow generation. Ashland believes free cash flow is relevant because capital expenditures are an important element of Ashland's ongoing cash activities. By deducting capital expenditures from operating cash flows, Ashland is able to provide a better indication of the ongoing cash being generated that is ultimately available for both debt and equity holders as well as other investment opportunities. Previously, Ashland deducted dividends from this calculation, but has discontinued this deduction to be more reflective of the broader industry's definition of the term free cash flow. Consolidated review
Net income
Ashland's net income amounted to $101 million and $61 million for the three months ended December 31, 2012 and 2011, respectively, or $1.26 and $0.77 diluted earnings per share, respectively. Ashland's net income is primarily affected by results within operating income, net interest and other financing expense, income taxes, discontinued operations and other significant events or transactions that are unusual or nonrecurring.
Income from continuing operations, which excludes results from discontinued operations, amounted to $102 million and $60 million for the three months ended December 31, 2012 and 2011, respectively, or $1.27 and $0.76 per diluted earnings per share, respectively. Operating income was $176 million and $144 million for the three months ended December 31, 2012 and 2011, respectively. See the "Operating income" discussion for an analysis of these results. Ashland incurred pretax net interest and other financing expense of $44 million and $57 million for the three months ended December 31, 2012 and 2011, respectively. The decrease in interest expense during the current quarter compared to the prior year quarter was due to a lower weighted-average interest rate during the current quarter, primarily resulting from Ashland's repayment of $572 million aggregate principal of its 9.125% senior notes during the September 2012 quarter.
The effective income tax expense rates of 22.7% and 27.7% for the three months ended December 31, 2012 and 2011, respectively, were both affected by certain discrete items disclosed in further detail within the income tax expense caption discussion in the comparative Statements of Consolidated Comprehensive Income caption review analysis.
Discontinued operations, which are reported net of taxes, resulted in expense of $1 million and income of $1 million for the three months ended December 31, 2012 and 2011, respectively. For further information on items reported within this caption, see the discontinued operations caption discussion in the comparative Statements of Consolidated Comprehensive Income caption review analysis. Operating income
Operating income amounted to $176 million and $144 million for the three months ended December 31, 2012 and 2011, respectively. The current quarter included a $31 million loss on straight guar, as well as a $22 million gain resulting from Ashland's settlement of an insurance claim. The prior year quarter included a noncash charge of $25 million related to the fair value assessment of inventory acquired from ISP at the date of acquisition, as well as $28 million for severance and restructuring charges from Ashland's ongoing stranded cost and ISP integration programs.
Operating income for the three months ended December 31, 2012 and 2011 included depreciation and amortization of $105 million and $104 million (which excludes accelerated depreciation of $2 million for the three months ended December 31, 2012). EBITDA totaled $280 million and $245 million for the three months ended December 31, 2012 and 2011, respectively. Adjusted EBITDA results in the table below have been prepared to illustrate the ongoing effects of Ashland's operations, which exclude certain key items.

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





                                                                Three months ended
                                                                    December 31
(In millions)                                                    2012               2011
Net income                                               $        101       $         61
Income tax expense                                                 30                 23
Net interest and other financing expense                           44                 57
Depreciation and amortization (a)                                 105                104
EBITDA                                                            280                245
Loss (income) from discontinued operations (net of
income taxes)                                                       1                 (1 )
Insurance settlement                                              (22 )                -
Restructuring and other integration costs                           7                 28
Net loss on acquisitions and divestitures                           -                  4
Inventory fair value adjustment                                     -                 25
Accelerated depreciation                                            2                  -
Adjusted EBITDA                                          $        268       $        301

(a)Excludes $2 million of accelerated depreciation for the three months ended December 31, 2012.

Statements of Consolidated Comprehensive Income - caption review A comparative analysis of the Statements of Consolidated Comprehensive Income by caption is provided as follows for the three months ended December 31, 2012 and 2011.
Three months ended December 31 (In millions) 2012 2011 Change Sales $ 1,869 $ 1,930 $ (61 )

Sales for the current quarter decreased $61 million, or 3%, compared to the prior year quarter primarily as a result of pricing decreases and unfavorable currency exchange rates, which decreased sales by $12 million and $23 million, respectively. The sale of Ashland's Synlubes and PVAc businesses reduced sales by a combined $29 million, or 2%. Volume and favorable mix of product combined to increase sales by $3 million.

                                          Three months ended December 31
(In millions)                             2012              2011       Change
Cost of sales                      $     1,332       $     1,408     $    (76 )
Gross profit as a percent of sales        28.7 %            27.0 %

Cost of sales for the current quarter decreased $76 million, or 5%, compared to the prior year quarter primarily due to lower raw material costs resulting in decreased cost of sales of $19 million, or 1%, in addition to the sale of Ashland's Synlubes and PVAc businesses, which caused a combined decrease of $24 million, or 2%. Favorable currency exchange rates caused a decrease of $17 million, or 1%, while change in product mix caused a decrease of $2 million. The current quarter also included a $31 million loss on straight guar, as well as a $22 million gain resulting from Ashland's settlement of an insurance claim and accelerated depreciation of $2 million related to plant closure costs. The prior year quarter included a noncash charge of $25 million related to the fair value assessment of inventory acquired from ISP at the date of acquisition.

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





                                                 Three months ended December 31
(In millions)                                    2012            2011        Change
Selling, general and administrative expense $     343       $     362       $   (19 )
As a percent of sales                            18.4 %          18.8 %

Selling, general and administrative expenses for the current quarter decreased . . .