Edgar Filing: ASHLAND INC.

form10k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the fiscal year ended September 30, 2009

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the transition period from _________ to ___________

Commission file number 1-32532

ASHLAND INC.

Kentucky

(State or other jurisdiction

of incorporation or organization)

20-0865835

(I.R.S. Employer Identification No.)

50 E. RiverCenter Boulevard

P.O. Box 391

Covington, Kentucky 41012-0391

Telephone Number (859) 815-3333

Securities Registered Pursuant to Section 12(b) of the Act:

	Title of each class	Name of each exchange on which registered
	Common Stock, par value $.01 per share	New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer þ Accelerated Filer o

Non-Accelerated Filer o Smaller Reporting Company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

At March 31, 2009, the aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $761,892,434. In determining this amount, the Registrant has assumed that its directors and executive officers are affiliates. Such assumption shall not be deemed conclusive for any other purpose.

At October 30, 2009, there were 74,915,769 shares of Registrant’s common stock outstanding.

Documents Incorporated by Reference

Portions of Registrant’s Proxy Statement (the “Proxy Statement”) for its January 28, 2010 Annual Meeting of Shareholders are incorporated by reference into Part III of this annual report on Form 10-K to the extent described herein.

TABLE OF CONTENTS

			Page
PART I
	Item 1.	Business ...................................................................................................................................................................	1
		General ....................................................................................................................................................................	1
		Ashland Aqualon Functional Ingredients .........................................................................................................	2
		Ashland Hercules Water Technologies .............................................................................................................	2
		Ashland Performance Materials ..........................................................................................................................	3
		Ashland Consumer Markets ................................................................................................................................	4
		Ashland Distribution ...........................................................................................................................................	5
		Miscellaneous .......................................................................................................................................................	6
	Item 1A.	Risk Factors .............................................................................................................................................................	8
	Item 1B.	Unresolved Staff Comments .................................................................................................................................	11
	Item 2.	Properties .................................................................................................................................................................	11
	Item 3.	Legal Proceedings ..................................................................................................................................................	12
	Item 4.	Submission of Matters to a Vote of Security Holders ......................................................................................	13
	Item X.	Executive Officers of Ashland ..............................................................................................................................	13

PART II

	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ........................................................................................	14
		Performance Graph ...............................................................................................................................................	15
	Item 6.	Selected Financial Data .........................................................................................................................................	16
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations ................................................................................................................	16
	Item 7A	Quantitative and Qualitative Disclosures about Market Risk ..........................................................................	16
	Item 8.	Financial Statements and Supplementary Data ..................................................................................................	16
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .........................................................................................................	16
	Item 9A.	Controls and Procedures .......................................................................................................................................	16
	Item 9B.	Other Information ....................................................................................................................................................	16

PART III
	Item 10.	Directors, Executive Officers and Corporate Governance ................................................................................	17
	Item 11.	Executive Compensation ........................................................................................................................................	17
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .......................................................................................	17
	Item 13.	Certain Relationships and Related Transactions, and Director Independence ........................................................................................................................................................	18
	Item 14.	Principal Accountant Fees and Services .............................................................................................................	18

PART IV
	Item 15.	Exhibits and Financial Statement Schedules .......................................................................................................	18

PART I

ITEM 1. BUSINESS

GENERAL

Ashland Inc. is a Kentucky corporation, with its principal executive offices located at 50 E. RiverCenter Boulevard, Covington, Kentucky 41011 (Mailing Address: 50 E. RiverCenter Boulevard, P.O. Box 391, Covington, Kentucky 41012-0391) (Telephone: (859) 815-3333). Ashland was organized in 2004 as the successor to a Kentucky corporation of the same name organized on October 22, 1936. The terms “Ashland” and the “Company” as used herein include Ashland Inc., its predecessors and its consolidated subsidiaries, except where the context indicates otherwise.

On November 13, 2008, Ashland completed the acquisition of Hercules Incorporated (“Hercules”) through a subsidiary merger transaction (the “Hercules Transaction”). As a result of the Hercules Transaction, Hercules became a wholly-owned subsidiary of Ashland. Each share of Hercules Common Stock outstanding at the effective time of the merger was exchanged for (i) 0.0930 of a share of Ashland Common Stock and (ii) $18.60 in cash. The cash portion of the acquisition consideration was funded through a combination of cash on hand and debt financing. For additional information regarding the Hercules Transaction, see Note B of “Notes to Consolidated Financial Statements” in this annual report on Form 10-K.

Ashland now operates through five reportable segments: Ashland Aqualon Functional Ingredients, previously Hercules’ Aqualon Group; Ashland Hercules Water Technologies, which includes the former Hercules’ Paper Technologies and Ventures segment as well as Ashland’s former Water Technologies segment; Ashland Performance Materials; Ashland Consumer Markets (Valvoline); and Ashland Distribution.

Financial information about these segments for each of the fiscal years in the three-year period ended September 30, 2009, is set forth in Note Q of “Notes to Consolidated Financial Statements” in this annual report on Form 10-K.

Ashland Aqualon Functional Ingredients is one of the world’s largest producers of cellulose ethers and pale wood rosin derivatives. It provides specialty additives and functional ingredients that manage the physical properties of aqueous (water-based) and nonaqueous systems. Many of its products are derived from renewable and natural raw materials and perform in a wide variety of applications.

Ashland Hercules Water Technologies is a leading global producer of papermaking chemicals and a leading specialty chemicals supplier to the pulp, paper, commercial and institutional, food and beverage, chemical, mining and municipal markets. Its process, water treatment and functional chemistries are used to improve operational efficiencies, enhance product quality, protect plant assets, and ensure environmental compliance.

Ashland Performance Materials is a global leader in unsaturated polyester resins and vinyl ester resins. In addition, it provides customers with leading technologies in gelcoats, pressure-sensitive and structural adhesives, and metal casting consumables and design services.

Ashland Consumer Markets, which includes the Valvoline® family of products and services, is a leading innovator, marketer and supplier of high-performing automotive lubricants, chemicals and appearance products. Valvoline, the world’s first lubricating oil, is the number three passenger car motor oil brand, and Valvoline Instant Oil Change represents the number two quick-lube franchise in the United States.

Ashland Distribution is a leading plastics and chemicals distributor in North America. It distributes chemicals, plastics and composite raw materials in North America, as well as plastics in Europe and China. Ashland Distribution also provides environmental services in North America, including hazardous and nonhazardous waste collection, recovery, recycling and disposal services.

At September 30, 2009, Ashland and its consolidated subsidiaries had approximately 14,700 employees (excluding contract employees).

Available Information — Ashland’s Internet address is http://www.ashland.com. On this website, Ashland makes available, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as well as any beneficial ownership reports of officers and directors filed electronically on Forms 3, 4 and 5. All such reports will be available as soon as reasonably practicable after Ashland electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (“SEC”). Ashland also makes available free of charge on its website, its Corporate Governance Guidelines; Board Committee Charters; Director Independence Standards; and its code of business conduct which applies to Ashland’s directors, officers and employees.

These documents are also available in print to any shareholder who requests them. Information contained on Ashland’s website is not part of this annual report on Form 10-K and is not incorporated by reference in this document. The public may read and copy any materials Ashland files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

ASHLAND AQUALON FUNCTIONAL INGREDIENTS

Ashland Aqualon Functional Ingredients (“Functional Ingredients”) offers products that are primarily designed to modify the properties of aqueous systems. Most of Functional Ingredients’ products are sold as key ingredients to other manufacturers where they are used as small-quantity additives to provide functionality such as thickening and rheology control; water retention; adhesive strength; binding power; film formation; protective colloid, suspending and emulsifying action; foam control; and pH stability. Functional Ingredients has a diversified, global customer base across nearly all of its businesses serving a broad range of applications within each business.

Functional Ingredients is comprised of the following businesses:

Regulated Industries — Regulated Industries’ food applications include bakery, beverage, confectionary, dairy, meat, meat analogues and pet food, prepared foods and sauces, dressings and fillings. Personal care applications include cosmetics, hair care, oral care, skin care, wound care and household products. In the pharmaceutical industry, Regulated Industries’ products are used for tablet binding, coatings, modified release and liquid and semi-liquid rheology control.

Coatings Additives — Coatings Additives offers a portfolio of complete rheology solutions for consistent, superior performance at very low use levels. For manufacturers of paints and other waterborne coatings products, these additives are crucial in controlling key product characteristics such as gloss, spatter, leveling and build, all of which are critical to delivering paints and coatings that fill specific market demand.

Construction — Construction’s product applications include tile and adhesive cements, gypsum plasters, renders, joint compounds, concrete, external insulation systems, masonry and mortar cements and self-leveling compounds and provide a comprehensive array of functional properties including thickening, water retention, sag resistance, workability and consistency, adhesion, stabilization, pumping, rheological properties and strength.

Energy and Specialties Solutions — Energy and Specialties Solutions offers water-soluble solutions for a variety of applications in the oil and gas industries including completion and workover fluids, drill-in fluids, oil-well cementing slurries, sodium formate, solvent thickeners and stimulation and hydraulic fracturing. This business also provides high-performance products to the industrial specialties market including applications in adhesives and glues, agricultural products, ceramics, fire-fighting fluids, foundry, industrial cleaners, inks and printing, mining, paint removers, paper and paper coatings, suspension polymerization, tobacco and welding rods.

Functional Ingredients currently conducts manufacturing in the Americas, Europe and Asia Pacific at ten facilities in five countries and participates in one joint venture. Functional Ingredients operates manufacturing facilities in Wilmington, Delaware; Brunswick and Dalton, Georgia; Parlin, New Jersey; Kenedy, Texas; and Hopewell, Virginia within the United States and Doel-Beveren, Belgium; Jiangmen, China; Alizay, France; and Zwijndrecht, the Netherlands. Functional Ingredients also operates two production facilities through a joint venture in Luzhou and Suzhou, China. In addition, Functional Ingredients is currently constructing a large-capacity hydroxyethylcellulose production facility in Nanjing, China scheduled to begin operations in late 2010.

Functional Ingredients’ businesses use raw materials derived from natural, petroleum and inorganic feedstocks obtained from a diversified supplier portfolio and maintains multiple suppliers for important raw materials in all regions.

ASHLAND HERCULES WATER TECHNOLOGIES

Ashland Hercules Water Technologies (“Water Technologies”) is a global service business delivering differentiated specialty chemical products to several industries including the paper, pulp, chemical, commercial and institutional, food and beverage, mining and municipal industries. Water Technologies is a leading global producer of papermaking chemicals for pulp and paper processing, tissues and towels, packaging, printing and writing papers, and virgin and deinked pulps. Its process, water treatment and functional chemistries are used to improve operational efficiencies, enhance product quality, protect plant assets and ensure environmental compliance.

Water Technologies is comprised of the following businesses:

Functional Chemistries — The Functional Chemistries business produces specialized chemicals for the paper industry that impart specific properties such as strength, liquid holdout and printability to the final paper or board. Product lines include sizing agents, wet/dry strength additives and very specific products such as crepe and release additives for tissue manufacturing.

Process Chemistries — The Process Chemistries business manufactures and sells a broad array of deposit control agents, defoamers, biocides and other process additives for markets including pulp and paper manufacturing, food processing, oil refining and chemical processing, general manufacturing and extraction/mining. This business’s products are designed to deliver benefits such as enhanced operational efficiencies, system cleanliness, and superior performance in a wide variety of manufacturing operations globally.

Water Treatment Chemistries — The Water Treatment Chemistries business provides specialized chemicals and consulting services for the utility water treatment market, which includes boiler water, cooling water, fuel and waste streams. Programs include performance-based feed and control automation and remote system surveillance. These products and services help ensure that water meets desired specifications, and aid in asset preservation and longevity as well as odor control.

Water Technologies operates throughout the Americas, Europe and Asia Pacific. It has 31 manufacturing facilities in 18 countries and participates in two joint ventures. Water Technologies has manufacturing plants in Macon and Savannah, Georgia; Chicopee, Massachusetts; Louisiana, Missouri; Greensboro, North Carolina; Portland, Oregon; Houston, Texas; Franklin, Virginia; Beckley, West Virginia; and Milwaukee, Wisconsin within the United States and Chester Hill, Australia; Beringen, Belgium; Americana, Leme and Paulinia, Brazil; Burlington, Canada; Beijing and Shanghai, China; Somercotes, England; Tampere, Finland; Krefeld and Sobernheim, Germany; Perawang, Indonesia; Busnago, Italy; Mexico City, Mexico; Zwijndrecht, the Netherlands; Perm, Russia; Tarragona, Spain; Kim Cheon, South Korea; Helsingborg, Sweden; and Nantou, Taiwan. Through separate joint ventures, it has production facilities in Navi Mumbai, India and Seoul, South Korea.

Key raw materials used in the Water Technologies’ businesses are largely available from multiple suppliers in quantities sufficient to meet expected demand.

On August 31, 2009, Ashland completed the sale of its global marine services business, Drew Marine, to J. F. Lehman & Co. for approximately $120 million before tax, which was subsequently reduced by $4 million after giving affect to post-closing adjustments related to working capital. The marine services business provides water and fuel treatment; specialized cleaners; sealing, welding and refrigerant products; and fire fighting, safety and rescue products and services to the global marine industry.

ASHLAND PERFORMANCE MATERIALS

Ashland Performance Materials (“Performance Materials”) is a worldwide manufacturer and supplier of specialty chemicals and customized services to the building and construction, transportation, metal casting, packaging and converting, and marine markets. It is a technology leader in unsaturated polyester and vinyl ester resins and gelcoats; high-performance adhesives and specialty resins; and metal casting consumables and design services.

Performance Materials is comprised of the following businesses:

Composites and Adhesives — The Composites and Adhesives business manufactures and sells a broad range of corrosion-resistant, fire-retardant, general-purpose and high-performance grades of unsaturated polyester and vinyl ester resins, gelcoats and low-profile additives for the reinforced plastics industry. Key markets include the transportation, construction, marine and infrastructure end markets. It also markets vinyl ester resins under the DERAKANE®, HETRON® and AROPOL® brand names.

The Composites and Adhesives business also manufactures and sells adhesive solutions to the packaging and converting, building and construction, and transportation markets and manufactures and markets specialty coatings and adhesive solutions across the printing industry. Key technologies and markets include: acrylic polymers for pressure-sensitive adhesives; polyvinyl acetate emulsions; urethane adhesives for flexible packaging applications; aqueous and radiation-curable adhesives and specialty coatings for the printing and converting applications; hot-melt adhesives for various packaging applications; emulsion polymer isocyanate adhesives for structural wood bonding; elastomeric polymer adhesives and butyl rubber roofing tapes for commercial roofing applications; acrylic, polyurethane and epoxy structural adhesives for bonding fiberglass reinforced plastics, composites, thermoplastics and metals in automotive, marine, recreational and industrial applications; specialty phenolic resins for paper impregnation and friction material bonding.

Casting Solutions — Casting Solutions manufactures and sells metal casting chemicals worldwide, including sand-binding resin systems, refractory coatings, release agents, engineered sand additives and riser sleeves. This business also provides casting process modeling, core-making process modeling and rapid prototyping services. In June 2008, Ashland and Süd-Chemie AG signed a nonbinding memorandum of understanding to form a new, global 50-50 joint venture to serve the foundries and the metal casting industry. The joint venture would combine three businesses: Ashland’s Casting Solutions business, the foundry-related businesses of Süd-Chemie, and Ashland-Südchemie-Kernfest GmbH, the existing European-based joint venture between Ashland and Süd-Chemie. As a result of global economic developments, the scope and other aspects of this project are being re-evaluated by Ashland and Süd-Chemie AG.

Performance Materials operates throughout the Americas, Europe and Asia Pacific. It has 29 manufacturing facilities and participates in eight manufacturing joint ventures in 15 countries. Composites and Adhesives has manufacturing plants in Fort Smith and Jacksonville, Arkansas; Los Angeles, California; Bartow, Florida; Calumet City, Illinois; Elkton, Maryland; Ashland and Columbus, Ohio; White City, Oregon; Philadelphia and Pittsburgh, Pennsylvania; Piedmont, South Carolina; and Milwaukee, Wisconsin within the United States and Campinas, Brazil; Kelowna and Mississauga, Canada; Changzhou and Kunshan, China; Kidderminster, England; Porvoo and Lahti, Finland; Sauveterre, France; Miszewo, Poland; Benicarlo, Spain; and, through separate joint ventures, has manufacturing plants in Sao Paulo, Brazil and Jeddah, Saudi Arabia. Casting Solutions has manufacturing sites located in Cleveland, Ohio (two sites), United States and in Campinas, Brazil; Mississauga, Canada; Changzhou, China; Kidderminster, England; Milan, Italy; and Castro-Urdilales and Idiazabal, Spain. Casting Solutions also has joint venture manufacturing facilities located in Vienna, Austria; Bendorf and Wuelfrath, Germany; Ulsan, South Korea; Arceniega, Spain; and Alvsjo, Sweden.

Key raw materials used in the Performance Materials businesses are largely available from multiple suppliers in quantities sufficient to meet expected demand.

ASHLAND CONSUMER MARKETS

Ashland Consumer Markets (“Consumer Markets”) markets premium packaged automotive lubricants, chemicals, appearance products, antifreeze and filters, with sales in more than 100 countries. Consumer Markets’ Valvoline® trademark was federally registered in 1873 and is the oldest trademark for lubricating oil in the United States. Consumer Markets markets the following key brands of products and services to the private passenger car, light truck and heavy duty markets: Valvoline lubricants; Valvoline Premium Blue® commercial lubricants; MaxLife® automotive products for vehicles with 75,000 or more miles; Valvoline Professional Series® automotive chemicals; Pyroil® automotive chemicals; Eagle One® automotive appearance products; Car Brite® automotive reconditioning products; Zerex® antifreeze; Tectyl® industrial products; and Valvoline Instant Oil Change® automotive services.

Consumer Markets is comprised of the following businesses:

Do It Yourself (“DIY”) — The DIY business sells Valvoline® and other branded and private label products to consumers who perform their own auto maintenance. These products are sold through retail auto parts stores such as AutoZone and Advance Auto Parts, mass merchandisers such as Wal-Mart Stores, Inc., and warehouse distributors and their affiliated jobber stores such as NAPA and CARQUEST.

Installer Channels — The Installer Channels business sells branded products and services to installers (such as car dealers, general repair shops and quick lubes) and to auto auctions through a network of independent distributors and company-owned and operated “direct market” operations. This business also includes distribution to quick lubes branded “Valvoline Express Care®,” which consists of 355 independently owned and operated stores.

Valvoline Instant Oil Change (“VIOC”) — The Valvoline Instant Oil Change® chain is the second largest competitor in the U.S. “fast oil change” service business, providing Consumer Markets with a significant presence in the installer channels segment of the passenger car and light truck motor oil market. As of September 30, 2009, 259 company-owned and 592 independently-owned and operated franchise VIOC centers were operating in 40 states. VIOC centers offer customers an innovative computer-based preventive maintenance tracking system which allows service technicians to make service recommendations based primarily on manufacturers’ recommendations.

Commercial & Industrial (“C&I”) — The C&I business sells branded products and services to on-highway fleets, construction companies and original equipment manufacturers (OEMs) through company-owned and operated “direct market” operations, national accounts and a network of distributors. The C&I business also maintains a strategic alliance with Cummins Inc. (“Cummins”) to distribute heavy duty lubricants to the commercial market, as well as smaller alliances with other global OEMs.

Valvoline International — Outside of North America, Valvoline International markets Valvoline®, Eagle One®, Zerex® and other branded products through wholly-owned affiliates, joint ventures, licensees and independent distributors in

more than 100 countries. Valvoline International operates joint ventures with Cummins in Argentina, Brazil, China and India. In addition, Valvoline International operates joint ventures with local entities in Ecuador, Thailand and Venezuela. Valvoline International markets products for both consumer and commercial vehicles and equipment and is served by company-owned plants in the United States, Australia and the Netherlands and by toll manufacturers.

Consumer Markets operates lubricant blending and packaging plants in Santa Fe Springs, California; Cincinnati, Ohio; East Rochester, Pennsylvania; and Deer Park, Texas within the United States and Witherill Park, Australia; and Dordrecht, the Netherlands. Automotive chemical manufacturing and distribution is conducted in Hernando, Mississippi. Bulk blending and distribution facilities are located in College Park, Georgia; Willow Springs, Illinois; and St. Louis, Missouri within the United States and Mississauga, Canada. Direct market distribution operations are conducted out of centers located in Orlando, Florida; College Park, Georgia; Willow Springs, Illinois; Indianapolis, Indiana; St. Louis, Missouri; Cincinnati, Ohio; East Rochester, Pennsylvania; Memphis, Tennessee; and Dallas, Texas. C&I direct market distribution operations are conducted out of centers located in Orlando, Florida; Willow Springs, Illinois; Indianapolis, Indiana; Cincinnati, Ohio; East Rochester, Pennsylvania; and Dallas, Texas.

Additives (from key suppliers such as The Lubrizol Corporation) and base oils (from key suppliers such as Motiva Enterprises LLC and SK E&P Company) constitute a large portion of the raw materials required to manufacture Consumer Markets’ products. In addition to raw materials, Consumer Markets sources a significant portion of its packaging from key suppliers such as Graham Packaging Inc. For a discussion of the risks affecting Consumer Markets’ supplier relationships, see “Item 1A. Risk Factors” in this annual report on Form 10-K.

ASHLAND DISTRIBUTION

Ashland Distribution (“Distribution”) distributes chemicals, plastics and composite raw materials in North America and plastics in Europe and China. Distribution also provides environmental services, including hazardous and nonhazardous waste collection, recovery, recycling and disposal, in North America. Deliveries are made in North America through a network of owned, leased and third-party warehouses, as well as rail and tank terminals.

Distribution operates the following businesses:

Chemicals — The Chemicals business distributes specialty and industrial chemicals, additives and solvents to industrial users in North America as well as some export operations. Markets served include the paint and coatings, personal care, inks, adhesives, polymer, rubber, industrial and institutional compounding, automotive, appliance, oil and gas and paper industries.

Plastics — The Plastics business offers a broad range of thermoplastic resins, and specialized technical service to processors in North America as well as some export operations. Processors include injection molders, extruders, blow molders and rotational molders. This business provides plastic material transfer and packaging services and less-than-truckload quantities of packaged thermoplastics. It also markets a broad range of thermoplastics to processors in Europe.

Composites — The Composites business supplies mixed truckload and less-than-truckload quantities of polyester thermoset resins, fiberglass and other specialty reinforcements, catalysts and allied products to customers in the cast polymer, corrosion, marine, building and construction, and other specialty reinforced plastics industries through distribution facilities located throughout North America. It also offers Ashland’s own line of resins and gelcoats, serving the fiber-reinforced plastics and cast-polymer industries.

Environmental Services — The Environmental Services business, working in cooperation with chemical waste service companies, provides customers, including major automobile manufacturers, with comprehensive, nationwide hazardous and nonhazardous waste collection, recovery, recycling and disposal services. These services are offered through a North American network of distribution centers, including several storage facilities that have been fully permitted by the United States Environmental Protection Agency (“USEPA”).

Distribution has 57 owned or leased facilities, 62 third-party warehouses, rail terminals and tank terminals and three locations that perform contract packaging activities. Distribution of thermoplastic resins in Europe is conducted in 20 countries primarily through 14 third-party warehouses and one leased warehouse which also operates as a compounding facility.

Distribution has significant relationships with suppliers of its products and services. For a discussion of the risks affecting Distribution’s supplier relationships, see “Item 1A. Risk Factors” in this annual report on Form 10-K.

MISCELLANEOUS

Environmental Matters

Ashland has implemented a companywide environmental policy overseen by the Environmental, Health and Safety Committee of Ashland’s Board of Directors. Ashland’s Environmental, Health and Safety (“EH&S”) department has the responsibility to ensure that Ashland’s businesses worldwide maintain environmental compliance in accordance with applicable laws and regulations. This responsibility is carried out via training; widespread communication of EH&S policies; information and regulatory updates; formulation of relevant policies, procedures and work practices; design and implementation of EH&S management systems; internal auditing by an independent auditing group; monitoring of legislative and regulatory developments that may affect Ashland’s operations; assistance to the businesses in identifying compliance issues and opportunities for voluntary actions that go beyond compliance; and incident response planning and implementation.

Federal, state and local laws and regulations relating to the protection of the environment have a significant impact on how Ashland conducts its businesses. Ashland’s operations outside the United States are subject to the environmental laws of the countries in which they are located. These laws include regulation of air emissions and water discharges, waste handling, remediation and product inventory, registration and regulation. New laws and regulations may be enacted or adopted by various regulatory agencies globally. The costs of compliance with new rules cannot be estimated until the manner in which they will be implemented has been more precisely defined.

At September 30, 2009, Ashland’s reserves for environmental remediation amounted to $221 million, reflecting Ashland’s estimates of the most likely costs that will be incurred over an extended period to remediate identified conditions for which the costs are reasonably estimable, without regard to any third-party recoveries. Engineering studies, judgments and estimates are used, along with historical experience and other factors, to identify and evaluate remediation alternatives and their related costs in determining the estimated reserves for environmental remediation. Environmental remediation reserves are subject to numerous inherent uncertainties that affect Ashland’s ability to estimate its share of the costs. Such uncertainties involve the nature and extent of contamination at each site, the extent of required cleanup efforts under existing environmental regulations, widely varying costs of alternate cleanup methods, changes in environmental regulations, the potential effect of continuing improvements in remediation technology, and the number and financial strength of other potentially responsible parties at multiparty sites. Although it is not possible to predict with certainty the ultimate costs of environmental remediation, Ashland currently estimates that the upper end of the reasonably possible range of future costs for identified sites is approximately $375 million. Ashland does not believe that any current individual remediation location is material to Ashland, as its largest reserve for any site is less than 10% of the remediation reserve. Ashland regularly adjusts its reserves as environmental remediation continues. Environmental remediation expense, net of insurance receivables, amounted to $13 million in 2009, compared to $7 million in 2008 and $7 million in 2007.

Product Control, Registration and Inventory — Many of Ashland’s products and operations in the United States are subject to the Toxic Substance Control Act (“TSCA”); the Food, Drug and Cosmetics Act; the Chemical Diversion and Trafficking Act; the Chemical Weapons Convention; and other product-related regulations. In addition, the European Union (“EU”) has implemented an important new regulation, REACH (Registration, Evaluation and Authorization of Chemicals) which applies to existing and new chemical substances produced or imported into the EU in quantities of greater than one ton per year. Ashland has completed the preregistration of its chemical substances required by REACH. In addition, in accordance with REACH’s requirements, Ashland is communicating the intended use of chemical substances in its products to suppliers and customers. Under REACH additional testing requirements, documentation and risk assessments will occur and may adversely affect Ashland’s costs of products produced in or for export to the EU. Other countries have similar laws and regulations relating to product control, registration and inventory.

Remediation — Ashland currently operates, and in the past has operated, various facilities where, during the normal course of business, releases of hazardous substances have occurred. Additionally, Ashland has known or alleged potential environmental liabilities at a number of third-party sites for which Ashland has financial responsibility. Federal and state laws, including but not limited to the Resource Conservation and Recovery Act (“RCRA”), the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) of 1980 and various other remediation laws, require that contamination caused by such releases be assessed and, if necessary, remediated to meet applicable standards. Some of these laws also provide for liability for related damage to natural resources, and claims for alleged property and personal injury damage can also arise related to contaminated sites. Laws in other jurisdictions where Ashland operates require that contamination caused by such releases at these sites be assessed and, if necessary, remediated to meet applicable standards.

Air — In the United States, the Clean Air Act (the “CAA”) imposes stringent limits on facility air emissions, establishes a federally mandated operating permit program, allows for civil and criminal enforcement actions and sets limits on the volatile or toxic content of many types of industrial and consumer products. Additionally, it establishes air quality attainment deadlines and control requirements based on the severity of air pollution in a given geographical area. Various

state clean air acts implement, complement and, in many instances, add to the requirements of the federal CAA. The requirements of the CAA and its state counterparts have a significant impact on the daily operation of Ashland’s businesses and, in many cases, on product formulation and other long-term business decisions. Other countries where Ashland operates also have laws and regulations relating to air quality. Ashland’s businesses maintain numerous permits pursuant to these clean air laws.

State and local air agencies in the United States are still implementing strategies for meeting ozone and particulate matters standards established by the USEPA in 1997. Ozone strategies have included emission controls for certain types of emission sources, reduced limits on the volatile organic compound content of industrial and consumer products and many requirements on the transportation sector. Particulate matter strategies have included dust control measures for construction sites and reductions in emission rates allowed for industrial operations. In 2006 and 2008, the USEPA established newer and more stringent standards for particulate matter and ozone, respectively. State and local agencies are evaluating options for meeting these newest standards which will begin to be implemented between 2010 and 2013. It is not possible at this time to estimate any potential financial impact that these newest standards may have on Ashland’s operations or products. Ashland will continue to monitor and evaluate the standards proposed to meet these and all air quality standards.

Solid Waste — Ashland’s businesses are subject to various laws relating to and establishing standards for the management of hazardous and solid waste. In the United States, RCRA applies. While many U.S. facilities are subject to the RCRA rules governing generators of hazardous waste, certain facilities are also required to have hazardous waste storage permits. Ashland has implemented systems to oversee compliance with the RCRA regulations and, where applicable, permit conditions. In addition to regulating current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the storage of regulated substances in underground tanks. Other countries where Ashland operates also have laws and regulations relating to hazardous and solid waste.

Climate Change — Ashland has been collecting energy use data and calculating greenhouse gas (“GHG”) emissions for several years and is evaluating the potential risks from climate change to facilities, products, and other business interests, and the strategies to respond to those risks. In light of the uncertainty of these risks and any related opportunities, as well as the evolving nature of legislative and regulatory efforts in the U.S. and around the world, Ashland cannot predict whether GHG-related developments will affect its operations or financial condition.

Water — Ashland’s businesses maintain numerous discharge permits. In the United States, such permits may be required by the National Pollutant Discharge Elimination System of the Clean Water Act and similar state programs. Other countries have similar laws and regulations requiring permits and controls relating to water discharge.

Competition

Functional Ingredients, Water Technologies and Performance Materials compete in the highly fragmented specialty chemicals industry. The participants in the industry offer a varied and broad array of product lines designed to meet specific customer requirements. Participants compete with individual and service product offerings on a global, regional and/or local level subject to the nature of the businesses and products, as well as the end-markets and customers served. The industry has become increasingly global as participants focus on establishing and maintaining leadership positions outside of their home markets. Many of these segments’ product lines face domestic and international competitive factors, including industry consolidation, pricing pressures and competing technologies.

Consumer Markets competes in the highly competitive automotive lubricants and consumer products car care businesses, principally through its offerings of premium products and services primarily under the Valvoline® family of trademarks, coupled with strong brand marketing, customer support, and distribution capabilities. Some of the major brands of motor oils and lubricants with which Consumer Markets competes globally are Castrol®, Mobil® and Pennzoil®. In the “fast oil change” business, Consumer Markets competes with other leading independent fast lube chains on a national, regional or local basis, as well as automobile dealers and service stations. Important competitive factors for Consumer Markets in the “fast oil change” market include Valvoline’s brand recognition; maintaining market presence through Valvoline Instant Oil Change® and Valvoline Express Care® outlets; and quality and speed of service, location, convenience and sales promotions.

Distribution competes with national, regional and local companies throughout North America. The Plastics business also competes with other distribution companies in Europe and China. Competition within each of Distribution’s businesses is based primarily on reliable and timely supply of products, breadth of product portfolio, service offerings and price.

Research

Ashland conducts a program of market-focused research and development to understand the needs of the marketplace, to frame those needs in a platform in which Ashland has capability to deliver, and to determine how to develop or access the intellectual property required to meet the identified market needs. Research and development costs are expensed as they are incurred and totaled $96 million in 2009, ($48 million in 2008 and $45 million in 2007), including expenses incurred by Hercules.

Forward-Looking Statements

This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as “anticipates,” “believes,” “estimates,” “expects,” “is likely,” “predicts,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Although Ashland believes that its expectations are based on reasonable assumptions, it cannot assure that the expectations contained in such statements will be achieved. Important factors that could cause actual results to differ materially from those contained in such statements are discussed under “Risk and Uncertainties” in Note A of “Notes to Consolidated Financial Statements” in this annual report on Form 10-K. For a discussion of other factors and risks affecting Ashland’s operations, see “Item 1A. Risk Factors” in this annual report on Form 10-K.

ITEM 1A. RISK FACTORS

The following discussion of “risk factors” identifies the most significant factors that may adversely affect Ashland’s business, operations, financial position or future financial performance. This information should be read in conjunction with Management’s Discussion and Analysis and the consolidated financial statements and related notes incorporated by reference into this annual report on Form 10-K. The following discussion of risks is designed to highlight what Ashland believes are important factors to consider when evaluating its expectations. These factors could cause future results to differ from those in forward-looking statements and from historical trends.

Several of Ashland’s businesses are cyclical in nature, and economic downturns or declines in demand, particularly for certain durable goods, may negatively impact its revenues and profitability.

Ashland’s revenues and profitability are susceptible to downturns in the economy, particularly in those segments serving the housing, construction, automotive, paper and marine industries. Both overall demand for Ashland’s products and services and its profitability are affected by economic recession, inflation, changes in prices of hydrocarbon (and its derivatives) and other raw materials or changes in governmental monetary or fiscal policies. During the economic downturn, a number of Ashland’s customers in the construction, automotive, paper and certain other industries are experiencing financial and production stresses, which has led to decreased demand for Ashland’s products and has affected Ashland’s margins on products sold. While Ashland strives to reduce costs to help offset the effects of this decreased demand, there is no assurance Ashland will be able to manage costs in light of any further demand decreases. If the economic downturn intensifies or there is a further decline in customer demand, Ashland’s business, results of operations and financial condition could be negatively impacted.

Ashland is undergoing a strategic transformation which introduces uncertainties regarding its business, financial condition and results of operations.

Ashland’s strategic objective has been to create a more focused company built around a strong core of specialty chemicals businesses. Ashland intends to invest in and to grow its specialty chemicals businesses, operating its other businesses to generate strong cash flows to fund this investment. As a result, Ashland is currently in a transformational period in which it has made and may continue to make changes that could be material to its business, financial condition and results of operations. Over the past five years, changes have included the disposition of Ashland’s refining and marketing and highway construction businesses and the acquisition of Hercules.

In addition, because Ashland’s businesses differed from Hercules’ businesses, the results of operations of the combined company may be affected by factors different from those affecting Ashland prior to the Hercules Transaction, and the realization of the full benefits anticipated from the Hercules Transaction may not be achieved. It is difficult to predict the impact of any future changes on Ashland’s business, financial condition or results of operations.

The competitive nature of Ashland’s markets may delay or prevent the Company from passing increases in raw materials costs on to its customers. In addition, certain of Ashland’s suppliers may be unable to deliver products or raw materials or may withdraw from contractual arrangements. The occurrence of either event could adversely affect Ashland’s results of operations.

Rising and volatile raw material prices, especially those of hydrocarbon derivatives, may negatively impact Ashland’s costs. Ashland is not always able to raise prices in response to such increased costs, and its ability to pass on the costs of such price increases is dependent upon market conditions. Likewise, Ashland purchases certain products and raw materials from suppliers, often pursuant to written supply contracts. If those suppliers are unable to timely meet Ashland’s orders or choose to terminate or otherwise avoid contractual arrangements, Ashland may not be able to make alternative supply arrangements. If Ashland is unable to obtain and retain qualified suppliers under commercially acceptable terms, its ability to manufacture and deliver products in a timely, competitive and profitable manner could be adversely affected.

Ashland’s substantial indebtedness may impair its financial condition and prevent it from fulfilling its obligations under the debt instruments.

As a result of the Hercules Transaction, Ashland has incurred a substantial amount of debt. Ashland’s substantial indebtedness could have important consequences including:

limiting Ashland’s ability to borrow additional amounts to fund working capital, capital expenditures, acquisitions, debt service requirements, execution of its growth strategy and other purposes;

requiring Ashland to dedicate a substantial portion of its cash flow from operations to pay interest on its debt, which would reduce availability of Ashland’s cash flow to fund working capital, capital expenditures, acquisitions, execution of its growth strategy and other general corporate purposes;

making Ashland more vulnerable to adverse changes in general economic, industry and government regulations and in its business by limiting its flexibility in planning for, and making it more difficult for Ashland to react quickly to, changing conditions;

placing Ashland at a competitive disadvantage compared with those of its competitors that have less debt; and

exposing Ashland to risks inherent in interest rate fluctuations because some of its borrowings will be at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.

In addition, Ashland may not be able to generate sufficient cash flow from its operations to repay its indebtedness when it becomes due and to meet its other cash needs. If Ashland is not able to pay its debts as they become due, Ashland will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring its indebtedness or selling additional debt or equity securities. Ashland may not be able to refinance its debt or sell additional debt or equity securities or its assets on favorable terms, if at all, and if Ashland must sell its assets, such sales may negatively affect its ability to generate revenues.

Ashland’s restrictive debt covenants may affect its ability to operate its business successfully.

The terms of Ashland’s credit facilities and senior unsecured notes contain various provisions that limit its ability to, among other things: grant liens; incur additional indebtedness, guarantees or other contingent obligations; engage in mergers and consolidations; sell, transfer and otherwise dispose of property and assets; make loans, acquisitions, joint ventures and other investments; declare dividends, make distributions or redeem or repurchase capital stock; change the nature of Ashland’s business; and enter into transactions with its affiliates. These covenants could adversely affect Ashland’s ability to finance its future operations or capital needs and pursue available business opportunities.

In addition, Ashland’s credit facilities require it to maintain specified financial ratios and satisfy certain financial condition tests. Events beyond Ashland’s control, including changes in general economic and business conditions, may affect its ability to meet those financial ratios and financial condition tests. Ashland cannot assure that it will meet those tests or that the lenders will waive any failure to meet those tests. A breach of any of these covenants or any other restrictive covenants contained in Ashland’s credit facilities or senior unsecured notes would result in an event of default.

If an event of default under Ashland’s credit facilities occurs, the holders of the affected indebtedness could declare all amounts outstanding, together with accrued interest, to be immediately due and payable, which, in turn, could cause the default and acceleration of the maturity of certain of Ashland’s other indebtedness. If Ashland was unable to pay such amounts, the lenders under its credit facilities could proceed against the collateral pledged to them. Ashland has pledged a substantial portion of its assets to the lenders under its credit facilities. If an event of default occurs under the senior unsecured notes, the Trustee under the notes or holders of at least 25% of the outstanding aggregate principal amount of notes may declare the principal of the notes and any accrued interest immediately payable, which, in turn, could cause the default and acceleration of the maturity of certain of Ashland’s other indebtedness.

Ashland’s pension and post-retirement benefit plan obligations are currently underfunded, and Ashland may have to make significant cash payments to some or all of these plans, which would reduce the cash available for Ashland’s businesses.

Ashland has unfunded obligations under its domestic and foreign pension and post-retirement benefit plans. The funded status of Ashland’s pension plans is dependent upon many factors, including returns on invested assets, the level of certain market interest rates and the discount rate used to determine pension obligations. Unfavorable returns on the plan assets or unfavorable changes in applicable laws or regulations could materially change the timing and amount of required plan funding, which would reduce the cash available for Ashland’s businesses. In addition, a decrease in the discount rate used to determine pension obligations could result in an increase in the valuation of pension obligations, which could affect the reported funding status of Ashland’s pension plans and future contributions, as well as the periodic pension cost in subsequent fiscal years.

Under the Employee Retirement Income Security Act of 1974, as amended, or ERISA, the Pension Benefit Guaranty Corporation, or PBGC, has the authority to terminate an underfunded tax-qualified pension plan under limited circumstances. In the event Ashland’s tax-qualified pension plans are terminated by the PBGC, Ashland could be liable to the PBGC for some portion of the underfunded amount and, under certain circumstances, the liability could be senior to Ashland’s senior unsecured notes.

Ashland is responsible for, and has financial exposure to, liabilities from pending and threatened claims, including those alleging personal injury caused by exposure to asbestos, which reduce Ashland’s cash flows and could reduce profitability.

There are various claims, lawsuits and administrative proceedings pending or threatened, including those alleging personal injury caused by exposure to asbestos, against Ashland and its current and former subsidiaries. Such actions are with respect to commercial matters, product liability, toxic tort liability and other matters which seek remedies or damages, some of which are for substantial amounts. While these actions are being contested, their outcome is not predictable. Ashland’s businesses could be materially and adversely affected by financial exposure to these liabilities.

Ashland’s implementation of its SAP® enterprise resource planning (“ERP”) project in the business units acquired as part of the Hercules Transaction has the potential for business interruption and associated adverse impact on operating results as well as internal controls.

Ashland is proceeding with a project to implement its ERP system within the business units acquired as part of the Hercules Transaction during fiscal 2010. Extensive planning is underway to support the effective implementation of the ERP system in those business units; however, such implementations carry certain risks, including potential for business interruption with the associated adverse impact on operating income. In addition, internal controls that are modified or redesigned to support the ERP system implemented in those business units may result in deficiencies in the future that could constitute significant deficiencies, or in the aggregate, a material weakness in internal control over financial reporting.

Ashland’s success depends upon its ability to attract and retain key employees and the succession of senior management.

Ashland’s success depends on its ability to attract and retain key personnel, and Ashland relies heavily on its management team. The inability to recruit and retain key personnel or the unexpected loss of key personnel may adversely affect Ashland’s operations. Retention of senior personnel and appropriate succession planning will continue to be critical to the successful implementation of Ashland’s strategies.

Ashland has incurred, and may continue to incur, substantial operating costs and capital expenditures as a result of environmental, health and safety liabilities and requirements, which could reduce Ashland’s profitability.

Ashland is subject to various U.S. and foreign laws and regulations relating to environmental protection and worker health and safety. These laws and regulations regulate discharges of pollutants into the air and water, the management and disposal of hazardous substances and the cleanup of contaminated properties. The costs of complying with these laws and regulations can be substantial and may increase as applicable requirements and their enforcement become more stringent and new rules are implemented. If Ashland violates the requirements of these laws and regulations, it may be forced to pay substantial fines, to complete additional costly projects or to modify or curtail its operations to limit contaminant emissions.

Ashland has financial exposure to substantially all of Ashland’s environmental and other liabilities and substantially all of the environmental and other liabilities of its subsidiaries including Hercules and its former subsidiaries. Ashland has investigated and remediated a number of its current and former properties. Engineering studies, historical experience and other factors are used to identify and evaluate remediation alternatives and their related costs in determining the estimated reserves for environmental remediation. Environmental remediation reserves are subject to numerous inherent uncertainties

that affect Ashland’s ability to estimate its share of the applicable costs. Such uncertainties involve the nature and extent of contamination at each site, the extent of required cleanup efforts under existing environmental regulations, widely varying costs of alternate cleanup methods, changes in environmental regulations, the potential effect of continuing improvements in remediation technology and the number and financial strength of other potentially responsible parties at multiparty sites. As a result, Ashland’s ultimate costs could exceed its reserves.

Ashland’s facilities are subject to operating hazards, which may disrupt its business.

Ashland is dependent upon the continued safe operation of its production, storage and distribution facilities. Ashland’s facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products, including leaks and ruptures, explosions, fires, inclement weather and natural disasters, unexpected utility disruptions or outages, unscheduled downtime and environmental hazards. Ashland may have incidents that may temporarily shut down or otherwise disrupt its facilities, causing production delays and resulting in liability for workplace injuries and fatalities. Ashland cannot assure that it will not experience these types of incidents in the future or that these incidents will not result in production delays or otherwise have a material adverse effect on Ashland’s business, financial condition or results of operations.

Ashland’s business could be adversely affected by the occurrence of a catastrophe, including a natural or man-made disaster.

The occurrence of any pandemic disease, natural disaster or terrorist attacks or any catastrophic event that results in Ashland’s workforce being unable to be physically located at one of its facilities could result in lengthy disruption of Ashland’s business operations. In addition, any of these events could have severe negative effects on the global economic environment.

Provisions of Ashland’s articles of incorporation and by-laws and Kentucky law could deter takeover attempts and adversely affect Ashland’s stock price.

Provisions of Ashland’s articles of incorporation and by-laws could make acquiring control of Ashland without the support of its Board of Directors difficult for a third party, even if the change of control might be beneficial to Ashland shareholders. Ashland’s articles of incorporation and by-laws contain:

provisions relating to the classification, nomination and removal of its directors;

provisions limiting the right of shareholders to call special meetings of its Board of Directors and shareholders;

provisions regulating the ability of its shareholders to bring matters for action at annual meetings of its shareholders; and

an authorization to its Board of Directors to issue and set the terms of preferred stock.

Ashland’s articles of incorporation and the laws of Kentucky impose some restrictions on mergers and other business combinations between Ashland and any beneficial owner of 10% or more of the voting power of its outstanding common stock. The existence of these provisions may deprive shareholders of any opportunity to sell their shares at a premium over the prevailing market price for Ashland Common Stock. The potential inability of Ashland shareholders to obtain a control premium could adversely affect the market price for Ashland Common Stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Ashland’s corporate headquarters, which is leased, is located in Covington, Kentucky. Principal offices of other major operations are located in Wilmington, Delaware (Functional Ingredients and Water Technologies); Dublin, Ohio (Performance Materials and Distribution); Lexington, Kentucky (Consumer Markets); Barendrecht, the Netherlands; Shanghai, China and Schaffhausen, Switzerland. All of these offices are leased, except for portions of the Dublin, Ohio facilities which are owned. Principal manufacturing, marketing and other materially important physical properties of Ashland and its subsidiaries are described under the appropriate segment under “Item 1” in this annual report on Form 10-K. Additional information concerning certain leases may be found in Note K of “Notes to Consolidated Financial Statements” in this annual report on Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

The following is a description of Ashland’s material legal proceedings.

Asbestos-Related Litigation

Ashland is subject to liabilities from claims alleging personal injury caused by exposure to asbestos. Such claims result primarily from indemnification obligations undertaken in 1990 in connection with the sale of Riley Stoker Corporation (“Riley”), a former subsidiary. Although Riley was neither a producer nor a manufacturer of asbestos, its industrial boilers contained some asbestos-containing components provided by other companies.

Hercules, a wholly-owned subsidiary of Ashland, is also subject to liabilities from asbestos-related personal injury lawsuits involving claims which typically arise from alleged exposure to asbestos fibers from resin encapsulated pipe and tank products which were sold by one of the Hercules’ former subsidiaries to a limited industrial market.

Ashland and Hercules are also defendants in lawsuits alleging exposure to asbestos at facilities formerly or presently owned or operated by Ashland or Hercules.

For additional information regarding liabilities arising from asbestos-related litigation, see “Management’s Discussion and Analysis – Application of Critical Accounting Policies – Asbestos-related litigation” and Note P of “Notes to Consolidated Financial Statements” in this annual report on Form 10-K.

Environmental Proceedings

(1) CERCLA and Similar State Law Sites – Under CERCLA and similar state laws, Ashland and Hercules may be subject to joint and several liability for clean-up costs in connection with alleged releases of hazardous substances at sites where it has been identified as a “potentially responsible party” (“PRP”). As of September 30, 2009, Ashland and Hercules have been identified as a PRP by U.S. federal and state authorities, or by private parties seeking contribution, for the cost of environmental investigation and/or cleanup at 94 waste treatment or disposal sites. These sites are currently subject to ongoing investigation and remedial activities, overseen by the USEPA or a state agency, in which Ashland or Hercules is typically participating as a member of a PRP group. Generally, the type of relief sought includes remediation of contaminated soil and/or groundwater, reimbursement for past costs of site clean-up and administrative oversight and/or long-term monitoring of environmental conditions at the sites. The ultimate costs are not predictable with assurance.

(2) Multi-Media Environmental Compliance Investigation – In April 2005, Hercules’ Franklin, Virginia manufacturing facilities were subject to a multi-media environmental compliance investigation by the USEPA and the Virginia Department of Environmental Quality (“VADEQ”), and in April 2007, Hercules’ Hopewell, Virginia manufacturing facilities were subject to a CAA compliance investigation by USEPA and the VADEQ. In April 2008, the results of both investigations were provided to Hercules which uncovered areas of potential noncompliance with various environmental requirements which are being evaluated. At this time, the potential liability, if any, with respect to these matters should not be material to Ashland.

(3) Naval Weapons Industrial Reserve Plant – The Naval Weapons Industrial Reserve Plant in McGregor, Texas (the “Site”), is a government-owned facility which was operated by various contractors on behalf of the U.S. Department of the Navy (the “Navy”) from 1942 to 1995. Hercules operated the Site from 1978 to 1995. The U.S. Department of Justice, on behalf of the Navy, has advised Hercules and other former contractors that, pursuant to CERCLA, the Government has incurred costs of over $50 million with respect to certain environmental liabilities which the Government alleges are attributable, at least in part, to Hercules’ and the other former contractors’ past operation of the Site. Hercules and the other former contractors have executed a tolling agreement with the Government and have been engaged in discussions with the Government concerning the Site. The investigation undertaken to date indicates that there may be substantial defenses to the Government’s claims. At this time, the potential liability, if any, with respect to this Site should not be material to Ashland.

For additional information regarding environmental matters and reserves, see “Management’s Discussion and Analysis – Application of Critical Accounting Policies – Environmental Remediation” and Note P of “Notes to Consolidated Financial Statements” in this annual report on Form 10-K.

Other Pending Legal Proceedings

In addition to the matters described, there are various claims, lawsuits and administrative proceedings pending or threatened against Ashland and its current and former subsidiaries. Such actions are with respect to commercial matters, product liability, toxic tort liability and other environmental matters, which seek remedies or damages, some of which are for substantial amounts. While these actions are being contested, their outcome is not predictable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended September 30, 2009.

ITEM X. EXECUTIVE OFFICERS OF ASHLAND

The following is a list of Ashland’s executive officers, their ages and their positions and offices during the last five years (listed alphabetically after the Chief Executive Officer as to current members of Ashland’s Executive Committee and other executive officers).

JAMES J. O’BRIEN (age 55) is Chairman of the Board, Chief Executive Officer and a Director of Ashland and has served in such capacities since 2002.

LAMAR M. CHAMBERS (age 55) is Senior Vice President and Chief Financial Officer of Ashland and has served in such capacities since 2008. During the past five years, he has also served as Vice President and Controller of Ashland.

DAVID L. HAUSRATH (age 57) is Senior Vice President and General Counsel of Ashland and has served in such capacities since 2004 and 1999, respectively. During the past five years, he has also served as Secretary of Ashland.

ROBERT M. CRAYCRAFT, II (age 40) is Vice President of Ashland and President of Distribution and has served in such capacities since 2008. During the past five years, he has also served as Vice President-U.S. Chemicals of Distribution and Senior Vice President and General Manager-Retail Business and Vice President-Business Transformation of Consumer Markets.

SUSAN B. ESLER (age 48) is Vice President, Human Resources and Communications of Ashland and has served in such capacity since 2006. During the past five years, she has also served as Vice President - Human Resources of Ashland.

THEODORE L. HARRIS (age 44) is Vice President of Ashland; President, Global Supply Chain and Environmental, Health and Safety; and President of Performance Materials and has served in such capacities since 2006, 2008 and July 2009, respectively. During the past five years, he has also served as Vice President of Information Technology, President of Distribution and Vice President and General Manager of the Composite Polymers Division of Ashland.

J. WILLIAM HEITMAN (age 55) is Vice President and Controller of Ashland and has served in such capacities since 2008. During the past five years, he has also served as Controller of the North American Operations of The Goodyear Tire & Rubber Company.

SAMUEL J. MITCHELL, JR. (age 48) is Vice President of Ashland and President of Consumer Markets and has served in such capacities since 2002.

JOHN E. PANICHELLA (age 50) is Vice President of Ashland and President of Functional Ingredients and has served in such capacities since 2008. During the past five years, he has also served as Vice President and President-Aqualon Division of Hercules and Vice President and General Manager-Americas of General Electric Water & Process Technologies.

PAUL C. RAYMOND, III (age 47) is Vice President of Ashland and President of Water Technologies and has served in such capacities since 2008. During the past five years, he has also served as Vice President, President-Paper Technologies and Ventures Division and President-Pulp and Paper Division of Hercules and Vice President and General Manager of Honeywell Electronic Materials.

ANNE T. SCHUMANN (age 49) is Vice President and Chief Information and Administrative Services Officer of Ashland and has served in such capacities since 2008 and August 2009, respectively. During the past five years, she has also served as Vice President, Acquisition Integration of Ashland and Vice President, Information Technology and Human Resources and Vice President, Shared Services Center of Hercules.

WALTER H. SOLOMON (age 49) is Vice President and Chief Growth Officer of Ashland and has served in such capacities since 2005. During the past five years, he has also served as Senior Vice President and General Manager-Retail Business of Valvoline.

Each executive officer is elected by the Board of Directors of Ashland to a term of one year, or until a successor is duly elected, at the annual meeting of the Board of Directors, except in those instances where the officer is elected other than at an annual meeting of the Board of Directors, in which case his or her tenure will expire at the next annual meeting of the Board of Directors unless the officer is re-elected.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

See Quarterly Financial Information on page F-48 for information relating to market price and dividends of Ashland’s Common Stock.

At October 30, 2009, there were approximately 19,300 holders of record of Ashland’s Common Stock. Ashland Common Stock is listed on the New York Stock Exchange (ticker symbol ASH) and has trading privileges on NASDAQ and the Chicago and National stock exchanges.

There were no sales of unregistered securities required to be reported under Item 701 of Regulation S-K and Ashland made no purchases of Ashland Common Stock during the fourth quarter of fiscal 2009.

PERFORMANCE GRAPH

The following graph compares Ashland’s five-year cumulative total shareholder return with the cumulative total return of Standard & Poor’s 500 Index, Standard & Poor’s 400 Midcap Index, and a peer group of companies. Ashland was listed in the S&P 500 Index until November 2008 and is now listed in the S&P 400 Midcap Index. The cumulative total shareholder return for each of these groups assumes the reinvestment of dividends.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

ASHLAND, S&P 500 INDEX, S&P 400 MIDCAP INDEX, AND PEER GROUP

	2004	2005	2006	2007	2008	2009
Ashland 1	100	122	143	157	78	118
S&P 500	100	112	124	145	113	105
S&P 400 Midcap	100	122	130	154	129	125
Peer Group 2	100	171	183	229	211	239

Ashland’s former Petroleum Refining and Marketing operations consisted primarily of its 38% interest in Marathon Ashland Petroleum LLC which was transferred on June 30, 2005, along with two other businesses, to Marathon Oil Corporation. Ashland’s former Transportation Construction operations consisted of Ashland Paving And Construction, Inc. which was sold on August 28, 2006, to Oldcastle Materials, Inc.

2	Ashland’s Peer Group five-year cumulative total return index reflects Petroleum Refining and Marketing peers for fiscal 2005 and Transportation and Construction peers for fiscal 2005 and 2006.

The peer group consists of the following industry indices:

∙

Specialty Chemical Production, Distribution, and Motor Oil and Car Care Products Portfolio: Standard & Poor’s 500 Specialty Chemicals (Large-Cap), Standard & Poor’s 400 Specialty Chemicals (Mid-Cap), Standard & Poor’s 600 Specialty Chemicals (Small-Cap), and Standard & Poor’s 400 Diversified Chemicals (Mid-Cap).

∙

Highway Construction Portfolio, for fiscal 2005 and 2006 only: Standard & Poor’s 500 Construction Materials (Large-Cap), Standard & Poor’s 400 Construction Materials (Mid-Cap), and Standard & Poor’s 600 Construction Materials (Small-Cap).

∙

Petroleum Refining and Marketing Portfolio, for fiscal 2005 only: Standard & Poor’s 500 Oil & Gas Refining & Marketing & Transportation (Large-Cap), Standard & Poor’s 400 Oil & Gas Refining & Marketing & Transportation (Mid-Cap), and Standard & Poor’s 600 Oil & Gas Refining & Marketing & Transportation (Small-Cap).

As of September 30, 2009, the aforementioned indices consisted of 33 companies. The annual returns for the companies or indices in each of the portfolios have been weighted by their respective beginning-of-year market capitalization. Each portfolio is then weighted to reflect Ashland’s annual invested capital in each of these lines of business with the annual return for the peer group represented by the sum of these weighted portfolios.

ITEM 6. SELECTED FINANCIAL DATA

See Five-Year Selected Financial Information on page F-49.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

See Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages M-1 through M-26.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Quantitative and Qualitative Disclosures about Market Risk on page M-26.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and financial schedule of Ashland presented in this annual report on Form 10-K are listed in the index on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

As disclosed in Ashland’s current reports on Forms 8-K and 8-K/A filed on August 29, 2008, September 8, 2008 and December 1, 2008, Ashland changed its independent registered public accountants effective for the fiscal year ended September 30, 2009. There were no disagreements or reportable events related to the change in accountants.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures — As of September 30, 2009, Ashland, under the supervision and with the participation of Ashland’s management, including Ashland’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of Ashland’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of September 30, 2009.

Internal Control — See Management’s Report on Internal Control Over Financial Reporting on page F-2 and the Report of Independent Registered Public Accounting Firm on page F-3 and F-4.

Changes in Internal Control Over Financial Reporting — There has been no change in Ashland’s internal control over financial reporting during the quarter ended September 30, 2009, that has materially affected, or is reasonably likely to materially affect, Ashland’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

There is hereby incorporated by reference the information to appear under the captions “Election of Directors” and “Miscellaneous - Section 16(a) Beneficial Ownership Reporting Compliance” in Ashland’s Proxy Statement, which will be filed with the SEC within 120 days after September 30, 2009. See also the list of Ashland’s executive officers and related information under “Executive Officers of Ashland” in Part I - Item X in this annual report on Form 10-K.

There is hereby incorporated by reference the information to appear under the caption “Corporate Governance - Governance Principles” in Ashland’s Proxy Statement.

There is hereby incorporated by reference the information to appear under the caption “Corporate Governance - Shareholder Recommendations for Directors” in Ashland’s Proxy Statement.

There is hereby incorporated by reference the information to appear under the caption “Audit Committee Report” regarding Ashland’s audit committee and audit committee financial experts, as defined under Item 407(d)(4) and (5) of Regulation S-K of the Securities Exchange Act of 1934, as amended, in Ashland’s Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

There is hereby incorporated by reference the information to appear under the captions “Compensation of Directors,” “Committees and Meetings of the Board of Directors - Personnel and Compensation Committee Interlocks and Insider Participation,” “Executive Compensation,” “Compensation Discussion and Analysis,” and “Personnel and Compensation Committee Report on Executive Compensation” in Ashland’s Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

There is hereby incorporated by reference the information to appear under the captions “Ashland Common Stock Ownership of Certain Beneficial Owners” and “Ashland Common Stock Ownership of Directors and Executive Officers of Ashland” in Ashland’s Proxy Statement.

The following table summarizes the equity compensation plans under which Ashland Common Stock may be issued as of September 30, 2009. Except as disclosed in the narrative to the table, all plans were approved by shareholders of Ashland.

Equity Compensation Plan Information

Plan Category

Number of securities

to be issued upon

exercise

of outstanding options,

warrants and rights

Weighted-average

exercise price of

outstanding options,

warrants and rights

Number of securities

remaining available for

future issuance under

equity compensation plans

(excluding securities

reflected in column (a))

(a)

(b)

(c)

Equity compensation plans approved by security holders			2,541,657	(1)		$	17.14	(2)			1,559,342	(3)
Equity compensation plans not approved by security holders			110,944	(4)							880,041	(5)

Total

2,652,601

17.14

(2)

2,439,383

(1)

This figure includes (a) 37,542 stock options outstanding under the Ashland Inc. 1997 Stock Incentive Plan, (b) 473,642 stock options outstanding under the Amended and Restated Ashland Inc. Incentive Plan (the “Amended Plan”), (c) 108,366 stock options outstanding under the Hercules Incorporated Amended and Restated Long Term Incentive Compensation Plan, and (d) 32,406 stock options outstanding under the Hercules Incorporated Omnibus Equity Compensation Plan for Non-Employee Directors. This figure also includes 59,538 net shares that could be issued under stock-settled SARs under the Amended Plan and 985,656 net shares that could be issued under stock-settled SARs under the 2006 Ashland Inc. Incentive Plan (the “2006 Plan”), based upon the closing price of Ashland Common Stock on the New York Stock Exchange Composite Tape on September 30, 2009 ($43.22). Additionally, this figure includes

251,943 restricted stock shares granted under the Amended Plan and deferred, 114,065 performance share units for the 2007-2009 performance period, 102,268 performance share units for the 2008-2010 performance period and 276,058 performance share units for the 2009-2011 performance period, payable in stock under the 2006 Plan, estimated assuming target performance is achieved. Also included in the figure are 100,173 shares to be issued under the pre-2005 Deferred Compensation Plan for Employees, payable in stock upon termination of employment with Ashland.

(2)

The weighted-average exercise price excludes shares in Ashland Common Stock which may be distributed under the deferred compensation plans and the deferred restricted stock and performance share units which may be distributed under the Amended Plan and 2006 Plan as described in footnotes (1) and (4) in this table.

(3)	This figure includes 1,072,890 shares available for issuance under the 2006 Plan, 149,152 shares available for issuance under the pre-2005 Deferred Compensation Plan for Employees and 337,300 shares available for issuance under the pre-2005 Deferred Compensation Plan for Non-Employee Directors.

(4)

This figure includes 88,926 shares to be issued under the Deferred Compensation Plan for Employees (2005) and 22,018 shares to be issued under the Deferred Compensation Plan for Non-Employee Directors (2005), payable in stock upon termination of employment or service with Ashland. Because these plans are not equity compensation plans as defined by the rules of the New York Stock Exchange (“NYSE”), neither plan required approval by Ashland’s shareholders.

(5)

This figure includes 403,599 shares available for issuance under the Deferred Compensation Plan for Employees (2005) and 476,442 shares available for issuance under the Deferred Compensation Plan for Non-Employee Directors (2005). Because these plans are not equity compensation plans as defined by the rules of the NYSE, neither plan required approval by Ashland’s shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

There is hereby incorporated by reference the information to appear under the captions “Corporate Governance - Director Independence and Certain Relationships,” and “Related Person Transaction Policy,” and “Audit Committee Report” in Ashland’s Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

There is hereby incorporated by reference the information with respect to principal accountant fees and services to appear under the captions “Audit Committee Report” and “Ratification of Independent Registered Public Accountants” in Ashland’s Proxy Statement.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this Report

(1) and (2) Financial Statements and Financial Schedule

(3) See Item 15(b) in this annual report on Form 10-K

The consolidated financial statements and financial schedule of Ashland presented in this annual report on Form 10-K are listed in the index on page F-1.

Schedules other than that listed have been omitted because of the absence of the conditions under which they are required or because the information required is shown in the consolidated financial statements or the notes thereto. Separate financial statements of unconsolidated affiliates are omitted because each company does not constitute a significant subsidiary using the 20% tests when considered individually. Summarized financial information for such affiliates is disclosed in Note F of “Notes to Consolidated Financial Statements.”

(b) Documents required by Item 601 of Regulation S-K

3.1

Third Restated Articles of Incorporation of Ashland and amendment thereto effective February 3, 2009 (filed as Exhibit 3.1 to Ashland’s Form 10-Q for the quarter ended December 31, 2008, and incorporated herein by reference).

3.2

By-laws of Ashland, effective as of June 30, 2005 (filed as Exhibit 3(ii) to Ashland’s Form 10-Q for the quarter ended June 30, 2005, and incorporated herein by reference).

4.1

Ashland agrees to provide the SEC, upon request, copies of instruments defining the rights of holders of long-term debt of Ashland and all of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed with the SEC.

4.2

Indenture, dated as of August 15, 1989, as amended and restated as of August 15, 1990, between Ashland and Citibank, N.A., as Trustee (filed as Exhibit 4.2 to Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and incorporated herein by reference).

4.3

Agreement of Resignation, Appointment and Acceptance, dated as of November 30, 2006, by and among Ashland, Wilmington Trust Company (“Wilmington”) and Citibank, N.A. (“Citibank”) whereby Wilmington replaced Citibank as Trustee under the Indenture dated as of August 15, 1989, as amended and restated as of August 15, 1990, between Ashland and Citibank (filed as Exhibit 4 to Ashland’s Form 10-Q for the quarter ended December 31, 2006, and incorporated herein by reference).

4.4

Indenture, dated May 27, 2009, by and among Ashland, the Guarantors and U.S. Bank National Association (filed as Exhibit 4.1 to Ashland’s Form 10-Q for the quarter ended June 30, 2009, and incorporated herein by reference).

4.5

Registration Rights Agreement, dated May 27, 2009, by and among Ashland, the Guarantors and Banc of America Securities, LLC and Scotia Capital (USA) Inc. (filed as Exhibit 4.2 to Ashland’s Form 10-Q for the quarter ended June 30, 2009, and incorporated herein by reference).

4.6

Warrant Agreement dated July 27, 1999 between Hercules and The Chase Manhattan Bank, as warrant agent (filed as Exhibit 4.4 to Hercules’ Form 8-K filed on July 28, 1999 (SEC File No. 001-00496), and incorporated herein by reference).

4.7

Form of Series A Junior Subordinated Deferrable Interest Debentures (filed as Exhibit 4.5 to Hercules’ Form 8-K filed on July 28, 1999 (SEC File No. 001-00496), and incorporated herein by reference).

4.8

Form of CRESTSSM Unit (filed as Exhibit 4.7 to Hercules’ Form 8-K filed on July 28, 1999 (SEC File No. 001-00496), and incorporated herein by reference).

4.9

Form of Warrant (filed as Exhibit 4.8 to Hercules’ Form 8-K filed on July 28, 1999 (SEC File No. 001-00496), and incorporated herein by reference).

4.10

Registration Rights Agreement dated as of November 3, 2009 between Ashland Inc. and Evercore Trust Company, N.A. (filed as Exhibit 4.1 to Ashland’s Form 8-K filed on November 6, 2009, and incorporated herein by reference).

The following Exhibits 10.1 through 10.20 are contracts or compensatory plans or arrangements or management contracts required to be filed as exhibits pursuant to Items 601(b)(10)(ii)(A) and 601(b)(10)(iii)(A) and (B) of Regulation S-K.

10.1

Ashland Inc. Deferred Compensation Plan for Non-Employee Directors and Amendment No. 1 (filed as Exhibit 10.5 to Ashland’s Form 10-Q for the quarter ended December 31, 2004, and incorporated herein by reference).

10.2

Ashland Inc. Deferred Compensation Plan and Amendment No. 1 (filed as Exhibit 10.3 to Ashland’s Form 10-Q for the quarter ended December 31, 2004, and incorporated herein by reference).

10.3

Amended and Restated Ashland Inc. Deferred Compensation Plan for Employees (2005) (filed as Exhibit 10.3 to Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and incorporated herein by reference).

10.4

Amended and Restated Ashland Inc. Deferred Compensation Plan for Non-Employee Directors (2005) (filed as Exhibit 10.4 to Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and incorporated herein by reference).

10.5

Amended and Restated Ashland Inc. Supplemental Early Retirement Plan for Certain Employees (filed as Exhibit 10.5 to Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and incorporated herein by reference).

10.6

Amendment No. 1 to Amended and Restated Ashland Inc. Supplemental Early Retirement Plan for Certain Employees (filed as Exhibit 10.1 to Ashland’s Form 10-Q for the quarter ended December 31, 2008, and incorporated herein by reference).

10.7

Amended and Restated Ashland Inc. Nonqualified Excess Benefit Pension Plan (filed as Exhibit 10.6 to Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and incorporated herein by reference).

10.8

Hercules Incorporated Long Term Incentive Compensation Plan (as Amended and Restated) (filed as Exhibit 10.2 to Ashland’s Form 10-Q for the quarter ended December 31, 2008, and incorporated herein by reference).

10.9

Form of Chief Executive Officer Change in Control Agreement (filed as Exhibit 10.1 to Ashland’s Form 8-K filed on January 7, 2009, and incorporated herein by reference).

10.10

Form of Executive Officer Change in Control Agreement (filed as Exhibit 10.2 to Ashland’s Form 8-K filed on January 7, 2009, and incorporated herein by reference).

10.11

Form of Executive Officer Change in Control Agreement, effective for agreements entered into after July 2009.

10.12

Ashland Inc. Severance Pay Plan (filed as Exhibit 10.3 to Ashland’s Form 8-K filed on January 7, 2009, and incorporated herein by reference).

10.13

Employment Agreement between Ashland and John E. Panichella (filed as Exhibit 10.14 to Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and incorporated herein by reference).

10.14

Employment Agreement between Ashland and Paul C. Raymond, III (filed as Exhibit 10.15 to Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and incorporated herein by reference).

10.15

Form of Indemnification Agreement between Ashland and members of its Board of Directors (filed as Exhibit 10.10 to Ashland’s annual report on Form 10-K for fiscal year ended September 30, 2005, and incorporated herein by reference).

10.16

Ashland Inc. 1997 Stock Incentive Plan (filed as Exhibit 10.17 to Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and incorporated herein by reference).

10.17

Amended and Restated Ashland Inc. Incentive Plan.

10.18

2006 Ashland Inc. Incentive Plan (filed as Exhibit 10 to Ashland’s Form 10-Q for the quarter ended December 31, 2005, and incorporated herein by reference).

10.19

Form of Notice granting Stock Appreciation Rights Awards.

10.20

Form of Notice granting Restricted Stock Awards (filed as Exhibit 10.21 to Ashland’s Form 10-K for the fiscal year ended September 30, 2008, and incorporated herein by reference).

10.21

Agreement and Plan of Merger dated as of July 10, 2008 among Ashland, Ashland Sub-One, Inc. and Hercules Incorporated (filed as Exhibit 2.1 to Ashland’s Form 8-K filed on July 14, 2008, and incorporated herein by reference).

10.22

Credit Agreement dated as of November 13, 2008 among Ashland, Bank of America, N.A., as Administrative Agent, The Bank of Nova Scotia, as Syndication Agent, the other Lenders party thereto, and Banc of America Securities LLC and The Bank of Nova Scotia, as Joint Lead Arrangers and Joint Book Managers (filed as Exhibit 10.1 to Ashland’s Form 8-K filed on November 19, 2008, and incorporated herein by reference).

10.23

Amendment No. 1 to Credit Agreement, dated as of April 17, 2009 (filed as Exhibit 10 to Ashland’s Form 10-Q for the quarter ended March 31, 2009, and incorporated herein by reference).

10.24

Amendment No. 2 to Credit Agreement, dated as of May 20, 2009 (filed as Exhibit 10.2 to Ashland’s Form 10-Q for the quarter ended June 30, 2009, and incorporated herein by reference).

10.25

Transfer and Administration Agreement dated as of November 13, 2008 among CVG Capital II LLC, Ashland, in its capacity as both initial Originator and initial Servicer, each of YC SUSI Trust and Liberty Street Funding LLC, as Conduit Investors and Uncommitted Investors, Bank of America, National Association, as a Letter of Credit Issuer, a Managing Agent, an Administrator and a Committed Investor and as the Agent, The Bank of Nova Scotia, as a Letter of Credit Issuer, a Managing Agent, an Administrator and a Committed Investor, and the Letter of Credit Issuers, Managing Agents, Administrators, Uncommitted Investors and Committed Investors parties thereto from time to time (filed as Exhibit 10.3 to Ashland’s Form 8-K filed on November 19, 2008, and incorporated herein by reference).

10.26

First Amendment to the Transfer and Administration Agreement dated as of November 4, 2009 among Ashland Inc., CVG Capital II LLC, the Investors, Letter of Credit Issuers, Managing Agents and Administrators party hereto, and Bank of America, N.A., as Agent for the Investors.

10.27

Sale Agreement dated as of November 13, 2008 among Ashland and CVG Capital II LLC (filed as Exhibit 10.4 to Ashland’s Form 8-K filed on November 19, 2008, and incorporated herein by reference).

10.28

Purchase Agreement for the $650 Million 9 1/8% Senior Notes due 2017, dated May 19, 2009, between Ashland and Banc of America Securities, LLC, Scotia Capital (USA) Inc. and SunTrust Robinson Humphrey, Inc. (filed as Exhibit 10.1 to Ashland’s Form 10-Q for the quarter ended June 30, 2009, and incorporated herein by reference).

Computation of Earnings Per Share (appearing in Note A of “Notes to Consolidated Financial Statements” in this annual report on Form 10-K).

Computation of Ratio of Earnings to Fixed Charges.

List of Subsidiaries.

23.1

Consent of PricewaterhouseCoopers LLP.

23.2

Consent of Ernst & Young LLP.

23.3

Consent of Hamilton, Rabinovitz & Associates, Inc..

Power of Attorney.

31.1

Certification of James J. O’Brien, Chief Executive Officer of Ashland, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Lamar M. Chambers, Chief Financial Officer of Ashland, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of James J. O’Brien, Chief Executive Officer of Ashland, and Lamar M. Chambers, Chief Financial Officer of Ashland, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Upon written or oral request, a copy of the above exhibits will be furnished at cost.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ASHLAND INC.
	(Registrant)
	By:
	/s/ Lamar M. Chambers
	Lamar M. Chambers
	Senior Vice President and Chief Financial Officer
	Date: November 23, 2009

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, in the capacities indicated, on November 23, 2009.

Signatures		Capacity
/s/ James J. O'Brien _____________________________________ James J. O’Brien		Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)
/s/ Lamar M. Chambers _____________________________________ Lamar M. Chambers		Senior Vice President and Chief Financial Officer (Principal Financial Officer)
/s/ J. William Heitman _____________________________________ J. William Heitman		Vice President and Controller (Principal Accounting Officer)
* _____________________________________ Roger W. Hale		Director
* _____________________________________ Bernadine P. Healy		Director
* _____________________________________ Kathleen Ligocki		Director
* _____________________________________ Vada O. Manager		Director
* _____________________________________ Barry W. Perry		Director
* _____________________________________ Mark C. Rohr		Director
* _____________________________________ George A. Schaefer, Jr.		Director
* _____________________________________ Theodore M. Solso		Director
* _____________________________________ John F. Turner		Director
* _____________________________________ Michael J. Ward		Director

*By:

/s/ David L. Hausrath

David L. Hausrath

	Attorney-in-Fact

Date:	November 23, 2009

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements for the years ended September 30, 2009, 2008 and 2007.

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 14,700 employees worldwide, Ashland serves customers in more than 100 countries.

Established in 1924 as a regional petroleum refiner, Ashland, during the past several years, has been focused on the objective of creating a dynamic, global specialty chemicals company. In that process, Ashland has divested certain noncore businesses, redesigned business models, and acquired businesses in growth markets like specialty additives, functional ingredients, water and adhesives to enhance Ashland’s specialty chemicals offerings. Ashland’s acquisition of Hercules Incorporated (Hercules), in November 2008, propels the combined 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.

With the acquisition of Hercules, Ashland has expanded its international footprint as Ashland’s sales and operating revenues (revenues) generated outside of North America in 2009 increased to 32% from 29% and 28% in 2008 and 2007, respectively. Revenue by region expressed as a percentage of total consolidated revenue for the years ended September 30, 2009, 2008 and 2007 was as follows:

Revenues by Geography	2009		(a)	2008			2007
North America		68	%		71	%		72	%
Europe		20	%		21	%		20	%
Asia Pacific		8	%		5	%		5	%
Latin America & other		4	%		3	%		3	%
		100	%		100	%		100	%

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

Business segments

As discussed above, Ashland completed the acquisition of Hercules in November 2008. Ashland’s reporting structure 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), and Ashland Distribution (Distribution). For further descriptions of each business segment see the “Results of Operations – Business Segment Review” beginning on page M-7.

Total consolidated revenue for 2009, 2008 and 2007 as a percent of revenue by business segment was as follows:

Revenues by Business Segment	2009	(a)	2008	2007
Functional Ingredients	10%		n/a	n/a
Water Technologies	20%		11%	11%
Performance Materials	13%		19%	18%
Consumer Markets	20%		19%	20%
Distribution	37%		51%	51%
	100%		100%	100%

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

M-1

KEY 2009 DEVELOPMENTS

During 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 acquisition of Hercules in November 2008 was a significant step in achieving Ashland’s objective of creating a leading, global specialty chemicals company. The new combined company is comprised of 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 $799 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 subsequently replaced with the issuance of $650 million senior unsecured bonds in May 2009. Ashland retained $205 million of assumed Hercules debt.

As a result of the financing and subsequent debt incurred to complete the Hercules acquisition, Standard & Poor’s and Moody’s Investor Services downgraded Ashland’s corporate credit rating to BB- and Ba2, respectively. In addition, Ashland is now subject 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 focus during 2009 was to pay down debt by concentrating on generating cash and savings from: increased profitability from sales; reductions in operating expenses, working capital, capital expenditures and dividends; and the sale of non-strategic assets, primarily business divestitures and auction rate securities. This focus and efficient execution on these cash generation and savings opportunities enabled Ashland to reduce debt by approximately $1 billion in debt during 2009 despite a steep economic decline.

Drew Marine divestiture

In August 2009, Ashland sold 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 before tax, which was subsequently reduced by $4 million after giving affect to post-closing adjustments related to working capital. This transaction resulted in a pretax gain of $56 million, which is included in the net gain (loss) on divestitures caption of the Statement of Consolidated Income. This sale reflects Ashland’s strategy to strengthen its core specialty chemicals businesses. The Drew Marine business is a recognized global leader in providing technical solutions, high value products and services to 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.

Economic environment

Ashland’s financial performance during 2009 was severely impacted 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, which began broadly at the end of 2008. Ashland experienced significant volume declines of 6% to 22% across all of its business segments during 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 twelve months ended September 30, 2009, compared to the prior year. Overall, Ashland’s aggressive pricing management and cost reduction initiatives outweighed the significant volume declines during 2009, enabling Ashland to increase operating cash flows and substantially reduce debt associated with the financing of the Hercules acquisition.

Cost-structure efficiency and Hercules integration programs

During 2008, Ashland implemented operational redesigns (2008 Program), primarily within Ashland’s Water Technologies and Performance Materials businesses, to take proactive steps to enhance profitability through streamlined operations and an improved overall cost structure of the businesses. This program continued during 2009 and was further expanded to capture additional cost saving opportunities.

In conjunction with the Hercules acquisition in November 2008, Ashland announced an integration plan (Integration Plan) that targeted certain projected cost savings as part of combining joint and redundant services and facilities. This

M-2

program focused primarily on capturing operational, selling and administrative savings within the combined company. Additionally, with the prolonged and significant deterioration of global economic demand during 2009, Ashland announced in January 2009 an additional cost reduction and organizational restructuring plan (2009 Program), which was subsequently expanded in July 2009, to further reduce Ashland’s overall cost structure.

A summary of each program, along with targeted savings and status as of September 30, 2009, is as follows:

2008 Program – Originally intended to produce annualized cost savings of $40 million by the end of 2009, primarily within the Water Technologies and Performance Materials businesses, was expanded to $85 million by the end of 2009. Essentially all cost savings initiatives related to this program have been achieved as of the end of 2009.

Integration Program – Originally intended to produce synergy cost savings of $50 million, was expanded to $130 million in expected synergy savings by the end of 2010. As of the end of fiscal 2009, Ashland has achieved essentially all of the total run rate cost savings associated with this program.

2009 Program – Originally intended to produce reduced costs (including various plant and operational efficiencies and significant reductions in travel and entertainment expenses) of $85 million. This program was expanded to $185 million and includes a specific $27 million cost reduction program within Distribution to realign the cost structure of this business and additional continued efforts to resize Ashland to match the current global economic demand. As of the end of 2009, Ashland has achieved approximately $140 million in total run rate cost savings associated with this program. Other items included in the program announced in January 2009, but not part of the totals above, reduced costs during 2009 only. These items primarily included:

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

·	Implementing a two-week furlough program for most U.S. and Canadian based employees, that was essentially completed in June of 2009, and several other job and benefits related actions. Furlough program savings totaled approximately $25 million.

In total, Ashland has achieved run rate cost reductions of $355 million of the combined $400 million in these cost reduction initiatives. The cumulative effect of these restructuring activities has resulted in the elimination of approximately 1,600 employee positions and eight permanent facility closings through the end of 2009 and in total is currently expected to reduce the global workforce by a total of approximately 1,900, or 12% by the end of 2010. As of September 30, 2009, the total restructuring cost incurred under the cost-structure efficiency programs during 2009 was $96 million, of which $75 million during 2009 had been charged as an expense within the Statement of Consolidated Income, consisting of $58 million classified within the selling, general and administrative expense caption and $17 million of accelerated depreciation charged to the cost of sales and operating expenses caption. The remaining cost of $21 million related to severance associated with Hercules personnel, which qualified for purchase method of accounting in accordance with U.S. GAAP, 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, although Ashland does not currently expect these to be significant. Ashland anticipates completing these restructuring activities during 2010. For further information on Ashland’s cost-structure efficiency and Hercules’ integration programs, see Note D of Notes to Consolidated Financial Statements.

RESULTS OF OPERATIONS – CONSOLIDATED REVIEW

Ashland’s net income amounted to $71 million in 2009, $167 million in 2008 and $230 million in 2007, or $.96, $2.63 and $3.60 diluted earnings per share, respectively. Income from continuing operations, which excludes results from discontinued operations, amounted to $78 million in 2009, $175 million in 2008 and $201 million in 2007, or $1.07, $2.76 and $3.15 per diluted earnings per share, respectively.

Ashland’s net income is primarily affected by results within operating income, net interest and other financing (expense) income, income taxes and discontinued operations. Operating income amounted to $390 million in 2009, $213 million in 2008 and $216 million in 2007. Operating results in 2009 compared to 2008 increased as the acquisition of Hercules businesses increased operating income by approximately $49 million in 2009, despite $47 million in nonrecurring purchase accounting charges related to inventory fair value adjustments and in-process research and development. In addition, Ashland incurred $75 million for severance charges and accelerated depreciation for the ongoing integration and reorganization from the Hercules acquisition and other cost-structure efficiency programs. These key items, along with significant volume declines across all business segments, severely effected operating results as compared to the prior period for legacy Ashland businesses, but were more than offset by aggressive cost reductions, lower raw materials costs and the affects of price increases, particularly within the Consumer Markets segment. Operating results in 2008 compared to 2007 declined slightly as operating income decreases in Performance Materials and Water Technologies were offset by an operating income increase in Distribution and income associated with Unallocated and other.

M-3

Ashland incurred net interest and other financing expense of $205 million during 2009 as compared to net interest and other financing income of $28 million in 2008 and $46 million in 2007, with the current year expense primarily attributable to the debt issued in conjunction with the financing of the Hercules acquisition. The decrease in net interest and other financing income in 2008 compared to 2007 primarily reflects the lower interest rate environment for short-term investment instruments. In 2009, Ashland incurred certain significant nonrecurring items that included a $56 million gain from the sale of Drew Marine, which was reported within the net gain (loss) on divestitures caption of the Statement of Consolidated Income, as well as a $54 million loss related to cross-currency swaps and a $32 million loss on auction rate securities, which were both caused by the Hercules acquisition and reported within the other expense caption of the Statement of Consolidated Income.

The effective income tax rate for 2009 of 50.6% was significantly affected by the other expense caption items described above as well as certain resolutions to previously open foreign and domestic tax matters during the year. The effective tax rate of 32.9% during 2008 and 22.3% during 2007 were impacted by several nonrecurring charges during the year as well as the resolution of specific foreign and domestic tax matters, but to a lesser extent than during 2009.

Discontinued operations was a $7 million and $8 million loss, respectively, during 2009 and 2008 and income of $29 million during 2007. Each year had various adjustments related to previously recorded divestiture gains as well as updates to the asbestos liability and receivable models, which in 2007 included a significant income adjustment of $18 million after-tax relating to improved credit quality in a certain receivable.

A comparative analysis of the Statement of Consolidated Income by caption is provided as follows for the years ended September 30, 2009, 2008 and 2007.

(In millions)		2009				2008				2007					2009 change			2008 change
Sales and operating revenues		$	8,106			$	8,381			$	7,785			$	(275	)		$	596

Revenues for 2009 decreased $275 million, or 3%, compared to 2008. The current year included $1,709 million, or 20%, in additional revenues related to the acquired Hercules businesses. Significant volume declines across all businesses substantially decreased revenue by $1,585 million, or 19%, with unfavorable currency exchange rates decreasing revenue by $292 million, or 3%, compared to 2008. Net price and mix decreases of $189 million, or 2%, also reduced revenues compared to 2008 as successful price management within Consumer Markets and Water Technologies were more than offset by price declines within Performance Materials and Distribution. Revenues from the acquisition of the pressure-sensitive adhesive and atmospheric emulsions business of Air Products and Chemicals, Inc. (Air Products) within Performance Materials in June 2008 contributed an additional $82 million, or 1%, in 2009.

Revenues for 2008 increased $596 million, or 8%, from 2007 primarily due to increased pricing of $560 million and $288 million related to a favorable currency exchange as well as $34 million from the acquisition of Air Products. This increase was partially offset by a $143 million decrease related to declines in both volume and product mix as well as an additional $143 million decrease related to the elimination of a one-month financial reporting lag for foreign operations (reporting lag) during 2007. During 2008, pricing increases were consistently implemented across each of Ashland’s businesses to recover significant cost increases occurring within volatile raw material markets. Volumes declined modestly, despite the difficult market conditions that continued to deteriorate the North American economy throughout 2008, particularly in core sectors such as building and construction, coatings, transportation and marine. The currency exchange rate is principally influenced by the U.S. dollar’s (USD) performance against the Euro.

(In millions)	2009			2008			2007				2009 change			2008 change
Cost of sales and operating expenses	$	6,317		$	7,056		$	6,447		$	(739	)	$	609
Gross profit as a percent of sales		22.1	%		15.8	%		17.2	%

Cost of sales and operating expenses (cost of sales) for 2009 decreased $739 million, or 11%, compared to 2008 as increases related to the acquisitions of Hercules and Air Products were more than offset by significant declines in volume and raw material costs in 2009 as compared to 2008. The acquisitions of Hercules and Air Products represented a $1,308 million, or 18%, increase in cost of sales for 2009, which includes a nonrecurring charge of $37 million associated with the inventory fair value adjustment of Hercules’ acquired inventory. Additionally, a change in product mix increased cost of sales by $18 million. Significant volume declines reduced cost of sales by $1,276 million, or 18%, while currency exchange, due to the strengthening of the U.S. dollar’s average as compared to 2008, reduced cost of sales by $224 million, or 3%. Decreases in raw material costs contributed an additional $565 million, or 8%, decline in cost of sales. Gross profit as a percent of sales (gross profit margin) increased by 6.3 percentage points compared to 2008 as a result of the Hercules acquisition, which included higher margin businesses, the mix of higher margin products sold during 2009 and improved pricing, particularly within Consumer Markets.

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Cost of sales for 2008 increased 9% compared to 2007, which resulted in an overall 1% decline in gross profit margin. Raw material price increases were the primary factor for this gross profit decline, which represented a $591 million cost increase compared to 2007 as volatile pricing in the crude oil market, which experienced an approximate 75% increase in the cost per barrel of oil during 2008 before peaking at over $145 a barrel, also influenced other significant hydrocarbon based raw materials throughout 2008. Currency exchange rates increased cost of sales $228 million, while the Air Products acquisition added an additional $32 million. These cost of sales increases were partially offset by a combined $127 million decrease related to volume declines and product mix as well as a $115 million decline related to the reporting lag elimination during 2007.

(In millions)	2009			2008			2007			2009 change		2008 change
Selling, general and administrative expenses	$	1,341		$	1,118		$	1,126		$	223	$	(8	)
As a percent of revenues		16.5	%		13.3	%		14.5	%

Selling, general and administrative expenses for 2009 increased 20% compared to 2008, with selling, general and administrative expenses as a percent of revenue increasing 3.2 percentage points as the acquisition of Hercules businesses and several key charges increased this percentage. Expenses impacting the comparability of 2009 as compared to 2008 include $58 million in severance and restructuring charges, primarily due to the ongoing integration and reorganization from the Hercules acquisition. The acquisitions of Hercules and Air Products added $348 million in selling, general and administrative expenses (excluding the severance and restructuring charges) as compared to 2008. Ashland’s cost reduction initiatives and other items reduced expenses by $138 million from 2008, while currency exchange effects reduced selling, general and administrative expenses by $45 million. For further information on cost cutting initiatives see the “Key Fiscal 2009 Developments” discussion within Management’s Discussion and Analysis as well as Note D in the Notes to Consolidated Financial Statements.

Selling, general and administrative expenses for 2008 decreased slightly compared to 2007 while decreasing 1.2 percentage points as a percent of total revenue. Expenses impacting the comparability of 2008 compared to 2007 include charges recorded in 2007 that consisted of $25 million for the voluntary severance offer, $22 million for the elimination of the reporting lag and $8 million related to an expense for certain postretirement plans. These expenses did not occur in 2008. Expenses during 2008 were negatively impacted by $40 million for currency exchange and $11 million for severance charges, related to realignment of certain businesses within Ashland during 2008, partially offset by $4 million of decreased other costs.

(In millions)		2009				2008				2007				2009 change				2008 change
Research and development expenses		$	96			$	48			$	45			$	48			$	3

Research and development expenses for 2009 doubled compared to 2008 and included a charge of $10 million related to the purchased in-process research and development projects at Hercules as of the acquisition date. The acquired businesses of Hercules added $45 million in research and development expenses (excluding the previously mentioned in-process research and development charge) as compared to 2008, while legacy Ashland businesses decreased expenses by $10 million during 2009. Research and development expenses increased $3 million in 2008 as compared to 2007.

(In millions)	2009		2008		2007		2009 change			2008 change
Equity and other income
Equity income	$	14	$	23	$	15	$	(9	)	$	8
Other income		24		31		34		(7	)		(3	)
	$	38	$	54	$	49	$	(16	)	$	5

Total equity and other income decreased 30% during 2009 compared to 2008. The decrease in 2009 primarily relates to decreased equity income from joint ventures associated with Performance Materials, which have been severely impacted by significant declines in global demand. Total equity and other income increased 10% during 2008 compared to 2007. The increase in 2008 primarily related to improved performance from various foreign joint venture associations compared to 2007.

(In millions)		2009				2008				2007				2009 change				2008 change
Net gain (loss) on divestitures		$	59			$	20			$	(3	)		$	39			$	23

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Net gain (loss) on divestitures includes the 2009 sale of Drew Marine, a division within Water Technologies, as well as the 2005 transfer of Ashland’s 38% interest in Marathon Ashland Petroleum LLC (MAP Transaction) along with two other businesses to Marathon Oil Corporation (Marathon). Ashland recorded a gain of $56 million during 2009 related to the sale of Drew Marine. The gain in 2008 primarily relates to the settlement with Marathon of certain tax related matters associated with the MAP Transaction, which resulted in a $23 million gain. Other gains and losses recorded during the three-year period primarily relate to increases and decreases in the recorded receivable from Marathon for the estimated present value of future tax deductions related primarily to environmental and other postretirement obligations. See Note C of Notes to Consolidated Financial Statements for further discussion on divestitures.

(In millions)	2009			2008			2007			2009 change			2008 change
Net interest and other financing (expense) income
Interest income	$	21		$	40		$	59		$	(19	)	$	(19	)
Interest expense		(215	)		(9	)		(10	)		(206	)		1
Other financing costs		(11	)		(3	)		(3	)		(8	)		-
	$	(205	)	$	28		$	46		$	(233	)	$	(18	)

The increase in net interest and other financing expense of $233 million during 2009 primarily relates to an increase in interest expense of $206 million compared to 2008, which represents interest charges associated with debt drawn upon the closing, on November 13, 2008, of the Hercules acquisition, which also increased other financing costs as compared to 2008. Interest expense for 2009 includes $52 million of amortization for deferred debt issuance costs, with $10 million related to the bridge loan extinguishment that was converted into senior unsecured bonds during 2009. In addition, interest expense included $8 million related to accelerated amortization from prepayments made on both the term loan A and term loan B facilities. In conjunction with the Hercules acquisition, interest income declined during 2009 as the remaining funding to complete the merger was paid from Ashland’s existing liquid investments.

The decrease of $18 million in net interest and other financing income during 2008 compared to 2007 primarily related to the decrease in interest income to $40 million in 2008 from $59 million in 2007, reflecting the lower interest rate environment for short-term investment instruments compared to 2007. Interest expense and other financial costs remained consistent from 2007 to 2008.

(In millions)	2009			2008		2007		2009 change			2008 change
Other expenses
Loss on currency swaps	$	(54	)	$	-	$	-	$	(54	)	$	-
Loss on auction rate securities		(32	)		-		-		(32	)		-
	$	(86	)	$	-	$	-	$	(86	)	$	-

Other expenses included two significant nonrecurring items caused by the Hercules acquisition. The first was a $54 million loss on currency swaps related to a swap associated with the Hercules acquisition. Hercules had held a significant hedge against certain open currency swap positions that Ashland immediately settled upon the acquisition. The second was a $32 million charge on auction rate securities as a result of a permanent realized loss on these securities due to the continued illiquid market these securities trade in and Ashland’s change in intent to no longer hold these securities until maturity. For further information on auction rate securities see the “Liquidity” discussion within Management’s Discussion and Analysis as well as Note G of Notes to Consolidated Financial Statements.

(In millions)	2009			2008			2007			2009 change			2008 change
Income tax expense	$	80		$	86		$	58		$	(6	)	$	28
Effective tax rate		50.6	%		32.9	%		22.3	%

The overall effective tax rate was significantly increased during 2009 due to several key factors. Using a 35% statutory federal tax rate applied to the income from continuing operations for 2009, income taxes would have been an expense of $55 million. Significant discrete items for 2009 included an $8 million valuation allowance on auction rate security losses and increases in the resolution and re-evaluation of tax positions taken in prior years of $29 million. These discrete expense items were partially offset by research and development credits of $9 million. See Note L of Notes to Consolidated Financial Statements for a complete reconciliation of Ashland’s tax provision for the last three years to the 35% U.S. statutory rate.

The overall effective tax rate significantly increased in 2008 from 2007 due to several key factors. Significant volatility in the capital markets as it relates to investments held for life insurance policies resulted in a $9 million tax effect in 2008,

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which historically has been a tax benefit for Ashland. In addition, during 2007 Ashland recorded a $15 million tax benefit related to dividends held within the employee stock ownership plan compared with a $1 million tax benefit in 2008, primarily due to the special dividend of $10.20 paid on October 25, 2006 as part of the distribution to shareholders of a substantial portion of the APAC divestiture proceeds.

(In millions)	2009			2008			2007			2009 change			2008 change
Income from discontinued operations (net of tax)
APAC	$	(6	)	$	(6	)	$	(5	)	$	-		$	(1	)
Asbestos-related litigation reserves		2			(2	)		35			4			(37	)
Electronic Chemicals		(3	)		-			(1	)		(3	)		1
	$	(7	)	$	(8	)	$	29		$	1		$	(37	)

During 2009, Ashland recorded two adjustments that related to prior periods within the discontinued operations caption of the Statement of Consolidated Income. These included a charge related to a change in the duration period on a retained environmental liability from the Electronic Chemicals business (divested in 2003) and a charge related to a tax basis adjustment from the APAC divestiture. Ashland assessed the affect these adjustments had on income from discontinued operations and net income in the current and prior periods and, after considering quantitative and qualitative factors, determined such adjustments to be below the threshold that would necessitate a restatement of the consolidated financial statements for the prior years. Ashland also considered the impact of these prior period adjustments on its internal controls and financial reporting and based on qualitative and quantitative factors, including the discrete nature of the transactions involved, concluded that the matters did not indicate a material weakness in internal controls over financial reporting.

During 2008 and 2007, subsequent tax adjustments reduced the gain on the sale of APAC. Ashland periodically updates the model used for purposes of valuing the asbestos-related litigation reserves, which resulted in a net $2 million charge in 2008, and a favorable net $2 million and $17 million adjustment during 2009 and 2007, respectively. Additionally, during 2007 a favorable $18 million after-tax adjustment was recorded due to a reassessed assumption for a certain asbestos receivable due to improved credit quality.

Quarterly operating income (loss)

The following details Ashland’s quarterly reported operating income for the years ended September 30, 2009, 2008 and 2007.

(In millions)	2009			2008		2007
December 31	$	(7	)	$	46	$	58
March 31		112			52		41
June 30		152			87		91
September 30		133			28		26

RESULTS OF OPERATIONS – BUSINESS SEGMENT REVIEW

Results of Ashland’s business segments are presented based on its management structure and internal accounting practices. The structure and practices are specific to Ashland; therefore, the financial results of Ashland’s business segments are not necessarily comparable with similar information for other comparable companies. Ashland refines its expense allocation methodologies to the reportable 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. During 2009, Ashland began fully allocating significant actual corporate costs as opposed to budgeted expenditures which was utilized in prior periods, except for certain significant company-wide restructuring activities, such as the current restructuring plan related to the Hercules acquisition described in Note D of Notes to Consolidated Financial Statements, and other costs or adjustments that relate to former businesses that Ashland no longer operates. To align prior period results to the current period presentation, Ashland reclassified certain depreciation and amortization charges in 2008 and 2007 that were previously presented within the unallocated and other section to the applicable reporting segments that were originally allocated these corporate charges.

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 Note Q in the Notes to Consolidated Financial Statements.

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The following table shows revenues, operating income and statistical operating information by business segment for each of the last three years ended September 30.

(In millions)	2009			2008			2007
Sales and operating revenues
Functional Ingredients	$	812		$	-		$	-
Water Technologies		1,652			893			818
Performance Materials		1,106			1,621			1,580
Consumer Markets		1,650			1,662			1,525
Distribution		3,020			4,374			4,031
Intersegment sales		(134	)		(169	)		(169	)
	$	8,106		$	8,381		$	7,785
Operating income (loss)
Functional Ingredients	$	36		$	-		$	-
Water Technologies		78			10			16
Performance Materials		1			52			89
Consumer Markets		252			83			86
Distribution		52			51			41
Unallocated and other		(29	)		17			(16	)
	$	390		$	213		$	216
Depreciation and amortization
Functional Ingredients (a)	$	106		$	-		$	-
Water Technologies (a)		99			29			29
Performance Materials		63			46			39
Consumer Markets		36			35			34
Distribution		28			28			25
Unallocated and other		7			7			6
	$	339		$	145		$	133

Operating information
Functional Ingredients (b) (c)
Sales per shipping day	$	3.7		$	-		$	-
Metric tons sold (thousands)		154.1			-			-
Gross profit as a percent of sales		26.7	%		-			-
Water Technologies (b) (c)
Sales per shipping day	$	6.6		$	3.5		$	3.1
Gross profit as a percent of sales		33.9	%		36.7	%		39.2	%
Performance Materials (b)
Sales per shipping day	$	4.4		$	6.4		$	6.1
Pounds sold per shipping day		3.9			4.9			4.9
Gross profit as a percent of sales		17.0	%		17.0	%		20.5	%
Consumer Markets (b)
Lubricant sales gallons		158.8			169.2			167.1
Premium lubricants (percent of U.S. branded volumes)		28.2	%		24.9	%		23.3	%
Gross profit as a percent of sales		32.0	%		23.0	%		24.8	%
Distribution (b)
Sales per shipping day	$	12.0		$	17.3		$	15.9
Pounds sold per shipping day		14.7			18.8			19.6
Gross profit as a percent of sales (d)		10.0	%		7.8	%		7.9	%

(a)	Includes, during 2009, amortization for purchased in-process research and development of $5 million within both Functional Ingredients and Water Technologies.

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

(c)	Industry segment results from November 14, 2008 forward include operations acquired from Hercules Incorporated.

(d)	Distribution’s gross profit as a percentage of sales for 2009 and 2008 include a LIFO quantity credit of $15 million and $16 million, respectively. There was no LIFO quantity credit for 2007.

As previously discussed, Ashland’s financial performance during 2009 has been severely impacted by significantly declining demand, a direct result of the continued weakness in the global economy, especially within the North American and European transportation and construction industries. Volume levels were down across all businesses, including operations acquired from Hercules on November 13, 2008, decreasing anywhere from 6% to 22% versus 2008. Despite this

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pressure Ashland has been implementing pricing improvements and has aggressively reduced excess capacity to match current market demands, which has more than offset the effects of the declining volume, as average selling prices are generally higher versus a year ago. This coupled with significant reductions in selling, general and administrative expenses from the cost-structure efficiency programs previously described further improved operating income during 2009.

During 2008, Ashland’s financial performance was also hindered by modest declining demand and significant raw material cost increases due to instability in raw material markets as compared to 2007. This economic environment created significant downward pressure on the gross profit margin of each business segment, particularly within the Performance Materials, Valvoline and Water Technologies businesses during 2008. Overall volume results during 2008 for the businesses were mixed, with Water Technologies and Valvoline reporting slight increases compared to 2007 while Distribution declined and Performance Materials’ levels were unchanged.

Functional Ingredients

Functional Ingredients is one of the world’s largest producers of cellulose ethers and pale wood rosin derivatives. It provides specialty additives and functional ingredients that manage the physical properties of aqueous (water-based) and nonaqueous systems. Many of its products are derived from renewable and natural raw materials and perform in a wide variety of applications.

Functional Ingredients reported operating income of $36 million for 2009 since Ashland’s acquisition of Hercules on November 13, 2008. During 2009, this business incurred several significant charges that included: a $30 million inventory fair value adjustment and a $5 million charge for purchased in-process research and development, both associated with the Hercules acquisition, as well as a severance charge of $10 million. Revenues reported were $812 million and included a significant one-time sales transaction to an oilfield chemical supplier in the amount of $17 million, which represented 2% of revenues and 5% of volume for 2009. Sales per shipping day for 2009 was $3.7 million and metric tons sold was 154.1 thousand. Gross profit margin of 26.7% was negatively impacted by 4.3 points due to the significant one-time sales transaction and acquisition-related inventory charge described above. Selling, general and administrative expenses incurred during 2009 were $152 million, which included the severance charge of $10 million previously mentioned, and represented 19% of revenues. Research and development expenses were $30 million, which included the $5 million nonrecurring charge for purchased in-process research and development.

Water Technologies

Water Technologies is a leading global producer of papermaking chemicals and a leading specialty chemicals supplier to the pulp, paper, commercial and institutional, food and beverage, chemical, mining and municipal markets. Its process, water treatment and functional chemistries are used to improve operational efficiencies, enhance product quality, protect plant assets, and ensure environmental compliance.

In August 2009 Ashland sold 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 before tax, which was subsequently reduced by $4 million after giving affect to post-closing adjustments related to working capital. The Drew Marine business, with annual revenues of approximately $140 million a year, has approximately 325 employees, 28 offices and 98 stocking locations in 47 countries. The transaction resulted in a pretax gain of $56 million, which is included in the net gain (loss) on divestitures caption of the Statement of Consolidated Income. As part of this sale arrangement Ashland has agreed to continue to manufacture certain products on behalf of Drew Marine.

2009 compared to 2008

Water Technologies reported operating income of $78 million for 2009 compared to $10 million reported during 2008. Significant volume declines related to the global economic downturn were more than offset by reductions within selling, general and administrative expenses, reductions to costs of goods, improved product mix and pricing, and the addition of the former Hercules Paper Technologies and Ventures business from the Hercules acquisition. Current year results also included several charges related to this acquisition that included: a $7 million inventory fair value adjustment recorded within the cost of sales caption, a $5 million charge for purchased in-process research and development recorded within the research and development expense caption and a severance charge of $4 million recorded within the selling, general and administrative caption. Revenues increased 85% to $1,652 million compared to $893 million, a direct result of the Hercules acquisition, which contributed revenues of $919 million. This increase in revenue was partially offset by a $126 million, or 14%, decline in volume and a $63 million, or 7%, decline attributable to foreign currency, while improved pricing and mix contributed an additional $29 million, or 3%, as compared to 2008.

Gross profit margin decreased 2.8 percentage points to 33.9% for 2009, partially due to the $7 million of previously mentioned acquisition-related inventory charges to cost of sales as well as inclusion of the former Hercules Paper Technologies and Ventures business, which has historically been a lower gross profit business as compared to the legacy Ashland business. The acquired Hercules business contributed $257 million to gross profit while price increases and mix

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improvements that reduced cost of goods sold, contributed an additional $47 million to gross profit. Other items affecting the gross profit margin included a $45 million decrease in volume and a $28 million decrease attributable to foreign currency. Overall raw material inflation was experienced early in 2009, with sequential moderation through the rest of the year; however, this was more than offset by successfully negotiated full service and municipal contracts that recaptured the increased raw material costs during the period. Selling, general and administrative expenses increased $138 million during 2009, as the $216 million increase from the acquired operations of Hercules was partially offset by a $43 million reduction in selling expense, principally related to operational cost savings from restructuring the business subsequent to the Hercules acquisition, and a $19 million reduction attributable to foreign currency. Research and development expenses increased $25 million during 2009, primarily due to a $26 million increase from the acquired operations of Hercules, which included the $5 million acquisition-related charge for purchased in-process research and development.

2008 compared to 2007

Water Technologies reported operating income of $10 million during 2008, a 38% decrease compared to $16 million reported during 2007, as lower gross profit margin and increased selling, general and administrative costs were the primary factors in this decline. Revenues increased 9% to $893 million compared to $818 million during 2007, primarily due to increases of approximately $64 million, or 8%, and $61 million, or 7%, in currency exchange and volume, respectively. These increases were partially offset by an $8 million, or 1%, decrease in price and a $42 million, or 5%, decrease as a result of the reporting lag recorded in 2007.

Gross profit margin decreased 2.5 percentage points to 36.7%. Despite this decrease, gross profit increased $6 million from 2007 as currency exchange and volume contributed increases of $24 million and $22 million, respectively, to gross profit. These increases in gross profit were offset by cost increases in raw materials and services of $25 million as well as a $15 million decrease related to the reporting lag recorded during 2007. Selling, general and administrative expenses increased $5 million during 2008 primarily due to a $20 million increase in currency exchange and a $12 million decrease from costs associated with the reporting lag recorded during 2007. Research and development expenses increased $7 million during 2008.

Performance Materials

Performance Materials is a global leader in unsaturated polyester resins and vinyl ester resins. In addition, it provides customers with leading technologies in gelcoats, pressure-sensitive and structural adhesives, and metal casting consumables and design services.

2009 compared to 2008

Performance Materials reported operating income of $1 million for 2009, a 98% decrease from the $52 million reported during 2008. Significant volume declines during 2009, primarily due to the global economic downturn, were partially offset by lower selling, general and administrative expenses. Revenues decreased 32% to $1,106 million compared to $1,621 million in 2008. Decreases in volume of $463 million, or 29%, primarily due to significant weakness within the transportation, construction, packaging and converting and metal casting markets, currency exchange of $83 million, or 5%, and price declines of $51 million, or 3%, were the primary factors in the decrease in revenue. These decreases were partially offset by revenues from the acquisition of Air Products which contributed $82 million, or 5%, to 2009 revenues. Excluding the effect of Air Products for 2009, revenue decreased 37%.

Gross profit margin during 2009 remained unchanged at 17.0%. Pounds sold per shipping day decreased 20% to 3.9 million during 2009, which caused a $140 million decrease in gross profit, while the effect of foreign currency decreased gross profit by $16 million. However, disciplined price management and aggressive reductions in manufacturing costs from excess capacity mitigated the gross profit margin decline from lost volume as price increases coupled with raw material cost decreases added $55 million to gross profit, which included a $14 million charge for plant closure costs. The acquisition of Air Products contributed $13 million to gross profit. Selling, general and administrative expenses decreased $38 million, or 18%, during 2009 as compared to 2008, primarily due to a $20 million decrease related to headcount and other cost reduction programs and a $17 million decline in reduced corporate allocations. These decreases were partially offset by increased severance charges of $1 million during 2009 compared to 2008. Research and development expenses declined $6 million during 2009 compared to 2008, which was also primarily related to headcount reductions and cost saving initiatives. Equity and other income decreased $7 million during 2009 compared to 2008, primarily due to reduced equity income from various joint ventures impacted by the current global economic environment as well as a $3 million charge from a joint venture that closed a manufacturing facility.

2008 compared to 2007

Performance Materials reported operating income of $52 million during 2008, a 42% decrease from the $89 million reported during 2007. Revenues increased 3% to $1,621 million compared to $1,580 million during the prior period. Increases in currency exchange of $88 million, or 6%, and price of $45 million, or 3%, were the primary factors in the

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increase in revenue. In addition, the acquisition of Air Products in June 2008 contributed $34 million to 2008 revenues. These increases in revenue were partially offset by volume and product mix decreases of $70 million, or 4%, primarily as a result of weakness in the North American markets for the Composites and Adhesives business unit, and a $56 million decrease related to the reporting lag elimination recorded during 2007. The decrease in volume and product mix caused operating income to decline by $30 million.

Gross profit margin during 2008 decreased 3.5 percentage points to 17.0% primarily due to raw material cost increases of $69 million. These raw material cost increases were not fully offset by price increases during 2008, causing gross profit and operating income to decline by $24 million. The decreases in gross profit related to price, volume and product mix were partially offset by an increase from currency exchange of $16 million. Selling, general and administrative expenses increased $8 million during 2008 as an increase of $10 million and $8 million related to corporate allocations and currency exchange, respectively, was partially offset by a $7 million decrease in costs recorded from the reporting lag recorded during 2007. Research and development expenses decreased $4 million during 2008. Equity and other income increased $5 million during 2008 compared to 2007, primarily due to a $6 million increase in equity income associated with joint ventures.

Consumer Markets

Consumer Markets, which includes the Valvoline® family of products and services, is a leading innovator, marketer and supplier of high-performing automotive lubricants, chemicals and appearance products. Valvoline, the world’s first lubricating oil, is the number three passenger car motor oil brand, and Valvoline Instant Oil Change represents the number two quick-lube franchise in the United States.

2009 compared to 2008

Consumer Markets reported record operating income of $252 million for 2009, a 204% increase compared to $83 million reported during 2008. Profit margin improvement was the primary factor in Consumer Markets’ record performance as well as successful implementation of various cost saving initiatives within operations and selling, general and administrative costs. Revenues decreased 1% to $1,650 million compared to $1,662 million in 2008. Increased pricing of $112 million, or 7%, and a favorable change in product mix of more premium lubricants sold during 2009 of $22 million, or 1%, partially offset volume declines in revenue of $92 million, or 6%, as lubricant volume decreased to 158.8 million gallons during 2009. Foreign currency declines also reduced revenue by an additional $54 million, or 3%, as compared to 2008.

Gross profit margin during 2009 increased 9.0 percentage points to 32.0%. The combination of price increases that began in fiscal 2008, lower raw material costs and cost saving initiatives positively impacted results causing an increase in gross profit of $170 million. This increase in gross profit was offset by net volume and mix decreases reducing gross profit by $7 million and foreign currency declines of $16 million compared to 2008. Selling, general and administrative expenses decreased $18 million, or 6%, during 2009 primarily due to currency exchange decreases of $11 million and reduced travel, entertainment and other expenses of $13 million. Research and development expenses remained unchanged during 2009 compared to 2008. Equity and other income increased by $4 million during 2009, primarily due to increases in equity income from various joint ventures.

2008 compared to 2007

Consumer Markets reported operating income of $83 million during 2008, a 3% decrease compared to $86 million reported during 2007. Revenues increased 9% to $1,662 million during 2008 compared to $1,525 million in 2007. Increases in pricing of $76 million, or 5%, and currency exchange of $40 million, or 3%, contributed to the revenue growth. In addition, revenue related to volume increased $49 million as lubricant volume increased 1% to 169.2 million gallons during 2008 compared to 2007, which resulted in an increase in gross profit and operating income of $14 million. A change in the product mix sold during 2008 reduced revenue by $28 million compared to 2007.

Gross profit margin during 2008 decreased 1.8 percentage points to 23.0%. Despite this decrease, gross profit increased $4 million from the prior period as currency exchange contributed an increase of $11 million while price increases did not fully offset increases in raw material costs, causing a net $14 million decline in gross profit and operating income. The remaining difference was due to fluctuations within product mix, which caused gross profit and operating income to decline by $7 million. Selling, general and administrative expenses increased $7 million during the current period primarily due to currency exchange increases of $8 million.

Distribution

Distribution is a leading plastics and chemicals distributor in North America. It distributes chemicals, plastics and composite raw materials in North America, as well as plastics in Europe and China. Ashland Distribution also provides environmental services in North America, including hazardous and nonhazardous waste collection, recovery, recycling and disposal services.

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2009 compared to 2008

Distribution reported operating income of $52 million for 2009, a 2% increase compared to $51 million for 2008 as significant declines in volume, primarily due to the weakness in North American industrial output, was offset by an improved gross margin and successful cost savings initiatives within selling, general and administrative expenses, which included some restructuring of excess capacity. Revenues decreased 31% to $3,020 million compared to $4,374 million in 2008 primarily as a result of volume declines. Pounds sold per shipping day decreased 22% to 14.7 million compared to 18.8 million in 2008, causing a $962 million decline in revenues. Decreases in foreign currency of $92 million, or 2%, and price of $300 million, or 7%, contributed to the overall revenues decline as price increase announcements with customers during 2009 have been met with limited success.

Gross profit margin during 2009 increased 2.2 percentage points to 10.0% and benefited from a favorable $15 million quantity LIFO adjustment. Raw material price decreases resulted in a favorable contribution of $78 million to gross profit, which includes the favorable quantity LIFO adjustment. This increase was offset by a $109 million decrease in gross profit due to volume declines and a $7 million decrease in currency exchange compared to 2008. Selling, general and administrative expenses decreased $39 million, or 13%, during 2009 as compared to 2008, with decreases in corporate allocations of $15 million, incentive compensation and salaries of $16 million, travel and entertainment of $6 million and currency exchange of $7 million as the primary factors. These decreases were partially offset by severance charges of $4 million incurred during 2009.

2008 compared to 2007

Distribution reported operating income of $51 million during 2008, a 24% increase from the $41 million reported during 2007. Revenues increased 9% to $4,374 million compared to $4,031 million in the prior period. Price increases, primarily in certain chemicals and plastics, were the primary factor in revenue growth causing a $446 million, or 11%, increase with currency exchange increases adding an additional $97 million, or 2%. These increases during 2008 were offset by a $154 million decrease in volume, as pounds sold per shipping day decreased 4% to 18.8 million compared to 19.6 million in 2007, causing a decline in the gross profit and operating income of $13 million. The reporting lag recorded during 2007 resulted in an additional $46 million decrease in revenue.

Gross profit margin during the current period decreased 0.1 percentage point to 7.8% and benefited from a favorable LIFO quantity credit of $16 million. Despite this decline, gross profit increased $22 million compared to 2007 as price increases offset raw material cost increases, contributing $34 million to gross profit and operating income. Selling, general and administrative expenses increased $12 million, or 4%, during 2008 primarily due to increased charges for incentive compensation of $11 million.

Unallocated and other

Unallocated and other costs were $29 million for 2009 compared to income of $17 million for 2008 and costs of $16 million in 2007. During 2009, Ashland began fully allocating significant actual corporate costs as opposed to budgeted expenditures which was utilized in prior periods, except for certain significant company-wide restructuring activities, such as the current restructuring plan related to the Hercules acquisition described in Note D of Notes to Consolidated Financial Statements, and other costs or adjustments that relate to former businesses that Ashland no longer operates. Cost components for 2009 consisted of $31 million for severance and plant closure charges associated with the ongoing integration and reorganization of the Hercules acquisition and $3 million in due diligence costs associated with investment opportunities and other charges, which were partially offset by a currency gain on an intercompany loan of $5 million.

Income components for 2008 included lower incentive compensation and direct support costs that were not reallocated back to the businesses that was partially offset by an $8 million charge for costs associated with Ashland’s joint venture with Cargill to manufacture bio-based propylene glycol, which had been suspended due to persistently high glycerin input costs and other costs related to growth opportunities. In addition to the ongoing costs that typically occur each year related to formerly owned businesses, 2008 included an $11 million adjustment from favorable experiences related to Ashland’s self-insurance program.

Fiscal 2007 included $9 million of income from reduced corporate expenditures and other costs as well as a $25 million charge for costs associated with Ashland’s voluntary severance offer. Ashland’s voluntary severance offer was initiated as a result of the APAC divestiture in August 2006. As a result of the divestiture, it was determined that certain identified corporate costs that had previously been allocated to that business needed to be eliminated to maintain Ashland’s overall competitiveness. As a means to eliminate those costs, Ashland offered an enhanced early retirement or voluntary severance opportunity to administrative and corporate employees during fiscal 2007. In total, Ashland accepted voluntary severance offers from 172 employees under the program. As a result, a $25 million charge was recorded for severance, pension and other postretirement benefit costs during fiscal 2007. The termination dates for employees participating in the program were completed and paid in fiscal 2008.

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FINANCIAL POSITION

Liquidity

Ashland’s cash flows from operating, investing and financing activities, as reflected in the Statements of Consolidated Cash Flows, are summarized as follows.

(In millions)	2009			2008			2007
Cash (used) provided by:
Operating activities from continuing operations	$	1,027		$	478		$	189
Investing activities from continuing operations		(2,115	)		(418	)		(6	)
Financing activities from continuing operations		573			(70	)		(1,016	)
Discontinued operations		(2	)		(8	)		(95	)
Effect of currency exchange rate changes on cash and cash equivalents		(17	)		7			5
Net decrease in cash and cash equivalents	$	(534	)	$	(11	)	$	(923	)

Operating activities

Cash flows generated from operating activities from continuing operations, a major source of Ashland’s liquidity, amounted to $1,027 million in 2009, $478 million in 2008 and $189 million in 2007. The increased cash generated during 2009 primarily reflects a cash improvement in operating assets and liabilities as compared to 2008 and 2007, primarily attributable to changes within accounts receivable, inventory and trade and other payables as a result of Ashland’s increased focus on working capital management throughout the company. These elements of working capital generated $344 million of cash inflow during 2009 compared to a cash inflow of $193 million in 2008 and a cash outflow of $234 million in 2007.

Net income of $71 million for 2009 included a noncash adjustment for depreciation and amortization of $329 million as well as significant charges from the Hercules acquisition and other items that did not occur in 2008 and 2007, including an inventory fair value adjustment and purchased in-process research and development amortization of $37 million and $10 million, respectively, debt issuance cost amortization of $52 million, a currency swap loss of $54 million and a $32 million loss on auction rate securities. These significant charges were offset by the gain associated with the Drew Marine sale of $56 million. Operating cash flows for 2008 and 2007 included net income of $167 million and $230 million, respectively, and a noncash adjustment of $145 million and $133 million, respectively, for depreciation and amortization. The increase in depreciation and amortization expense as compared to 2009 relates to the additional depreciation and amortization associated with the valuation of the acquired Hercules operations and other acquisition related amortization. The depreciation and amortization from these assets will be included in operations on an ongoing basis through the remainder of their useful lives as determined and as part of the purchase accounting fair value estimates discussed in Note B of the Notes to Consolidated Financial Statements.

Ashland contributed $47 million to its qualified pension plans in 2009, compared with $25 million in 2008 and $58 million in 2007 and paid income taxes of $49 million during 2009, compared to $53 million in 2008 and $25 million in 2007. Cash receipts for interest income were $21 million in 2009, $40 million in 2008 and $59 million in 2007, while cash payments for interest expense amounted to $198 million in 2009, $10 million in 2008 and $10 million in 2007. Cash flows from discontinued operations, consisting primarily of cash flows from APAC, amounted to a cash outflow of $2 million in 2009, $8 million in 2008 and $95 million in 2007.

Investing activities

Cash used in investing activities was $2,115 million for 2009 as compared to $418 million and $6 million used by investing activities in 2008 and 2007, respectively. The significant cash investing activities for 2009 included cash outflows of $2,080 million for the purchase of Hercules’ operations in November 2008, $95 million for the settlement of currency interest rate swap hedges related to the acquisition and $174 million for capital expenditures. These significant cash investing activities were offset by sales of auction rate securities during 2009 resulting in cash proceeds of $73 million and proceeds from the FiberVisions and Drew Marine sales of $114 million. Significant cash investing activities for 2008 included net purchases of available-for-sale securities of $120 million, $205 million for capital expenditures and $129 million for purchased operations offset by cash proceeds of $26 million associated with the MAP Transaction. Significant cash investing activities for 2007 included $154 million for capital expenditures and $75 million for the Northwest Coatings acquisition offset by $196 million in cash inflow from available-for-sale securities.

Financing activities

Cash provided by financing activities was $573 million for 2009 as compared to a $70 million and a $1,016 million cash usage for financing activities in 2008 and 2007, respectively. Significant cash financing activities for 2009 included cash

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inflows of $2,628 million associated with short-term and long-term financing secured with Bank of America Securities LLC, Scotia Capital (USA) Inc. and other lenders for the acquisition of Hercules, including the subsequent 9.125% Senior Notes due 2017 issued in May 2009 for which the proceeds were used to extinguish the bridge loan facility under the interim credit agreement discussed further in Note I of the Notes to Consolidated Financial Statements. This cash inflow for 2009 was partially offset by cash used for the extinguishment of certain debt instruments that Hercules held as of the closing date of the acquisition, the extinguishment of the bridge loan facility, previously discussed, and other debt prepayments made subsequent to the Hercules acquisition that totaled $1,881 million. In addition, $162 million in debt issue costs were paid in connection with securing the financing for the Hercules acquisition and the subsequent 9.125% Senior Notes due 2017 issued to replace the bridge loan facility. In total, as a result of Ashland’s focus and efficient execution on cash generation and savings opportunities, Ashland was able to reduce debt by approximately $1 billion of the debt associated with the financing of the Hercules acquisition during 2009.

Cash dividends paid during 2009 were $.30 per common share and totaled $22 million, a $47 million reduction as compared to 2008 as a result of the reduction in the $1.10 per common share dividend paid during 2008 and 2007. Fiscal 2007 included a significant cash outflow of $743 million for cash dividends paid and $288 million for repurchase of common stock which are both discussed further in the “Capital resources” discussion.

Cash flow metrics

At September 30, 2009, working capital (current assets minus current liabilities, excluding long-term debt due within one year) amounted to $960 million, compared to $1,817 million at the end of 2008. Ashland’s working capital is affected by its use of the LIFO method of inventory valuation that valued inventories below their replacement costs by $125 million at September 30, 2009, $200 million at September 30, 2008. Liquid assets (cash, cash equivalents and accounts receivable) amounted to 112% of current liabilities at September 30, 2009, compared to 189% at September 30, 2008. The decrease in both working capital and liquid assets in 2009 is primarily the result of cash on hand used for the financing of the Hercules acquisition.

The following summary reflects Ashland’s cash, investment securities and debt as of September 30, 2009 and 2008.

	September 30		September 30
(In millions)	2009		2008

Short-term debt	$	23	$	-
Long-term debt (including current portion)		1,590		66
Total debt	$	1,613	$	66

Cash and cash equivalents	$	352	$	886
Auction rate securities	$	170	$	243

The scheduled aggregate maturities of debt by fiscal year for the next five years are as follows: $76 million in 2010, $66 million in 2011, $64 million in 2012, $95 million in 2013 and $536 million in 2014. Total borrowing capacity remaining under the $400 million revolving credit facility was $264 million, after reduction of the facility by $136 million for letters of credit outstanding at September 30, 2009 with an additional $198 million of borrowing capacity available through the accounts receivable securitization facility. Total short-term debt at September 30, 2009 was $23 million, which primarily related to draws on revolving credit facilities among international operations. No short-term debt was outstanding at September 30, 2008.

The current portion of long-term debt was $53 million at September 30, 2009 and $21 million at September 30, 2008. Debt subject to variable interest rates as of September 30, 2009 was $803 million. A 100-basis point increase or decrease in interest rates at September 30, 2009 would have resulted in an $8 million increase or decrease in interest expense. The sensitivity analysis assumes an instantaneous 100-basis point move in interest rates from their current levels, with all other variables held constant. Based on Ashland’s current debt structure included in Note I of the Notes to Consolidated Financial Statements and assuming interest rates remain somewhat stable, future interest expense could range from approximately $170 million to $190 million based on applicable fixed and floating interest rates.

As a result of the financing and subsequent debt issued to complete the acquisition of Hercules, Standard & Poor’s and Moody’s Investor Services downgraded Ashland’s corporate credit rating to BB- and Ba2, respectively.

Covenants related to debt agreements

Ashland is now subject to certain restrictions from various debt covenants. These covenants include certain affirmative covenants such as various internal certifications, maintenance of property and applicable insurance coverage as well as negative covenants that include financial covenant restrictions, these include: leverage and fixed charge coverage ratios,

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total net worth and capital expenditure limitations. The permitted consolidated leverage ratio at any time during any period of four fiscal quarters for Ashland is as follows under the credit facility.

Maximum

consolidated

leverage ratio

For fiscal quarters ending:

Funding date through September 30, 2009

3.75:1.00

December 31, 2009 through September 30, 2010

3.50:1.00

December 31, 2010 through September 30, 2011

3.00:1.00

December 31, 2011 through September 30, 2012

2.75:1.00

December 31, 2012 and each fiscal quarter thereafter

2.50:1.00

The following describes Ashland’s September 2009 calculation of the consolidated leverage ratio per the senior credit agreement as previously disclosed in a Form 8-K filed on November 21, 2008 and reconciliation of Consolidated EBITDA (as defined by the senior credit agreement, as amended) to net income. Ashland has included certain non-U.S. GAAP information below to assist in the understanding of various financial debt covenant calculations.

																Covenant
(In millions, except ratios) (a)	Q1'09			Q2'09			Q3'09			Q4'09			Total			ratio
Debt/EBITDA
Consolidated EBITDA	$	155		$	227		$	266		$	304		$	952
Debt		2,473			2,266			2,021			1,642			1,642
Debt/EBITDA														1.7	x		3.75	x
																max.

Reconciliation of Consolidated EBITDA:
(In millions)	Q1'09			Q2'09			Q3'09			Q4'09
Net (loss) income	$	(119	)	$	48		$	50		$	93
Key items excluded (b)		82			(1	)		3			-
Consolidated interest charges		35			56			64			63
Income taxes (benefit) expense		(1	)		9			40			39
Depreciation and amortization		63			93			88			85
Hercules stub-period results (c)		34			-			-			-
Other nonrecurring or noncash charges (d)		61			22			21			24
Total consolidated EBITDA	$	155		$	227		$	266		$	304


Reconciliation of Debt:
(In millions)	Q1'09			Q2'09			Q3'09			Q4'09
Total debt (long-term and short-term)	$	2,468		$	2,262		$	1,993		$	1,613
Defeased debt		(31	)		(31	)		(13	)		(13	)
Guarantees (bank and third party)		36			35			41			42
	$	2,473		$	2,266		$	2,021		$	1,642

(a)	All numbers adjusted to reflect terminology and calculation methodology governing the senior credit agreement, included in a Form 8-K filed on November 21, 2008, as amended.

(b)