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, 2011

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 þ 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, 2011, the aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $4,546,731,348. 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 31, 2011, there were 78,107,463 shares of Registrant’s common stock outstanding.

Documents Incorporated by Reference

Portions of Registrant’s Proxy Statement (Proxy Statement) for its January 26, 2012 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
		Corporate Developments ......................................................................................................................................	1
		Ashland Specialty Ingredients..............................................................................................................................	2
		Ashland Water Technologies ..............................................................................................................................	3
		Ashland Performance Materials ..........................................................................................................................	4
		Ashland Consumer Markets ................................................................................................................................	5
		Miscellaneous ........................................................................................................................................................	6
	Item 1A.	Risk Factors ..............................................................................................................................................................	9
	Item 1B.	Unresolved Staff Comments ..................................................................................................................................	13
	Item 2.	Properties ..................................................................................................................................................................	13
	Item 3.	Legal Proceedings ...................................................................................................................................................	13
	Item 4.	(Removed and Reserved) .......................................................................................................................................	15
	Item X.	Executive Officers of Ashland ...............................................................................................................................	15

PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .........................................................................................	16
		Five-Year Total Return Performance Graph .......................................................................................................	17
	Item 6.	Selected Financial Data ..........................................................................................................................................	17
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................................................................................................	17
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk ...........................................................................	18
	Item 8.	Financial Statements and Supplementary Data ...................................................................................................	18
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..........................................................................................................	18
	Item 9A.	Controls and Procedures ........................................................................................................................................	18
	Item 9B.	Other Information .....................................................................................................................................................	18

PART III
	Item 10.	Directors, Executive Officers and Corporate Governance .................................................................................	18
	Item 11.	Executive Compensation .........................................................................................................................................	18
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ........................................................................................	18
	Item 13.	Certain Relationships and Related Transactions, and Director Independence .........................................................................................................................................................	19
	Item 14.	Principal Accountant Fees and Services ..............................................................................................................	19

PART IV
	Item 15.	Exhibits and Financial Statement Schedules ........................................................................................................	20

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.

Ashland is a leading, global specialty chemical company that provides products, services and solutions that meet customers needs throughout a variety of industries. Ashland’s business consists of four reportable segments: Ashland Specialty Ingredients; Ashland Water Technologies; Ashland Performance Materials and Ashland Consumer Markets.

Financial information about these segments for each of the fiscal years in the three-year period ended September 30, 2011 is set forth in Note Q of Notes to Consolidated Financial Statements in this annual report on Form 10-K.

Ashland Specialty Ingredients offers industry-leading products, technologies and resources for solving formulation and product performance challenges in a variety of markets including personal care, pharmaceutical, food and beverage, coatings, construction and energy.

Ashland Water Technologies is a leading specialty chemical supplier to the pulp, paper, mining, food and beverage, commercial and institutional, chemicals processing, general manufacturing and municipal wastewater-treatment industries.

Ashland Performance Materials is a global producer of specialty resins and adhesives serving the construction, transportation, infrastructure, packaging and converting, marine and energy markets.

At September 30, 2011, Ashland and its consolidated subsidiaries had approximately 15,000 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 on Forms 3, 4 and 5. All such reports will be available as soon as reasonably practicable after they are electronically filed with, or electronically furnished 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 code of business conduct that 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.

CORPORATE DEVELOPMENTS

On November 30, 2010, Ashland and Süd-Chemie AG (Süd-Chemie) completed the combination of their worldwide activities in the foundry chemical sector through the formation of a global joint venture. The joint venture, based in Hilden, Germany, operates under the name ASK Chemicals GmbH. Ashland and Süd-Chemie each hold a fifty-percent interest in ASK Chemicals GmbH, and operations management leadership is held by Süd-Chemie. For additional information regarding the joint venture, see Note C of Notes to Consolidated Financial Statements in this annual report on Form 10-K.

On March 31, 2011, Ashland completed the sale of substantially all of the assets of its global distribution business (which previously comprised the Ashland Distribution business segment) to Nexeo Solutions, LLC, formerly known as TPG Accolade, LLC, for a purchase price, net of adjustments, of $972 million in cash. For additional information regarding the sale of Ashland Distribution, see Note C of Notes to Consolidated Financial Statements in this annual report on Form 10-K.

On August 23, 2011, Ashland completed the acquisition of International Specialty Products Inc. (ISP) whereby Ashland acquired all of the outstanding equity interests of ISP. The purchase was an all-cash transaction for $3.2 billion, reduced by the amount of ISP’s net indebtedness at closing. The purchase price is subject to certain post-closing adjustments. As a result of the ISP transaction, Ashland’s former Ashland Aqualon Functional Ingredients business segment has been combined with ISP to form the Ashland Specialty Ingredients business segment. Additionally, as a part of the ISP acquisition, Ashland Performance Materials assumed operations of ISP’s Elastomers business. For additional information regarding the ISP transaction, see Note B of Notes to Consolidated Financial Statements in this annual report on Form 10-K.

ASHLAND SPECIALTY INGREDIENTS

Ashland Specialty Ingredients (Specialty Ingredients) offers industry-leading products, technologies and resources for solving formulation and product performance challenges in a variety of markets including personal care, pharmaceutical, food and beverage, coatings, construction and energy. Using natural, synthetic and semi-synthetic polymers derived from plant and seed extracts, cellulose ethers and vinyl pyrrolidones, Specialty Ingredients offers comprehensive and innovative solutions for consumer and industrial applications.

Specialty Ingredients’ areas of expertise include: organic and synthetic chemistry, polymer chemistry, surface and colloid science, rheology and microbiology.

Specialty Ingredients’ solutions provide an array of properties, including: thickening and rheology control, water retention, adhesive strength, binding power, film formation, conditioning and deposition, colloid stabilization, suspension, ultraviolet light filtration and color.

Specialty Ingredients is comprised of the following businesses:

Care Specialties – The Care Specialties business is comprised of the Oral Care, Hair Care, Skin Care and Household product lines.

Oral Care – Specialty Ingredients’ portfolio of oral care products deliver active ingredients in toothpaste and mouthwashes; provide bioadhesive functionality for dentures; deliver flavor, texture and other functional properties; and provide product binding to ensure form and function throughout product lifecycle.

Hair Care – Specialty Ingredients’ portfolio of hair care products include advanced styling polymers, fixatives, conditioning polymers, emulsifiers, preservatives and rheology modifiers.

Skin Care – Specialty Ingredients’ portfolio of skin care products help to detoxify, firm, nourish, revitalize and smooth skin. The Skin Care line also provides sun care products, including UV filters, water-resistant agents, and thickeners. Emulsifiers, emollients, preservatives and rheology modifiers complete the Skin Care product line.

Household – Specialty Ingredients’ portfolio of products and technologies are used in many types of cleaning applications, including fabric care, household and dish washing. Specialty Ingredients’ products are used in a variety of applications for viscosity enhancement, particle suspension, rheology modification and stabilization.

Pharmaceutical & Nutrition Specialties – The Pharmaceutical & Nutrition Specialties business includes the Pharmaceutical and Food and Beverage product lines.

Pharmaceutical –

Excipients and Tablet Coating Systems – Specialty Ingredients is a leading supplier of excipients and tablet coating systems to the pharmaceutical and nutraceutical industries. The excipients business offers a comprehensive range of polymers for use as tablet binders, superdisintegrants and drug solubilizers, as well as a portfolio of fully formulated, one-step tablet coating systems for immediate release, sustained release and delayed release solutions.

Specialty Products – Specialty Ingredients offers a select series of active ingredients and biopolymers with applications in the pharmaceutical and nutraceutical industries including an iron supplement that provides for bioavailabilty of iron, a PVP-iodine antiseptic skin disinfectant for wound treatments, and copolymers that deliver superior film forming and adhesion properties for spray bandages and ostomy adhesives.

Food and Beverage – Specialty Ingredients is a global leader in cellulosic food ingredients. Its products include premium additives, stabilizers and gums, which are used in a wide range of ingredient offerings for bakery, beverage, dairy, desserts and toppings, meat, meat alternatives, pet food, prepared foods, sauces and savory products, and clarifiers used for wine and beer.

Coatings Specialties – The Coatings Specialties business includes the Coatings and Biocides product lines.

Coatings – Specialty Ingredients is a recognized leader in rheology solutions for waterborne paints and coatings. Products include hydroxyethlcellulose (HEC), which provides thickening and application properties for interior and exterior paints, and nonionic synthetic associative thickeners (NSATs), which are APEO-free liquid synthetics for high performance paints and industrial coatings.

Biocides – Specialty Ingredients offers a comprehensive line of biocides and preservatives for paints, coatings and wood care. In addition, Specialty Ingredients offers a broad portfolio of performance foam control agents, surfactants and wetting agents, co-binders and dispersants, and pH neutralizers.

Industrial Specialties – The Industrial Specialties business includes the Construction and Energy product lines.

Construction – Specialty Ingredients is a major producer and supplier of cellulose ethers and companion products for the construction industry. These products control properties such as water retention, open time, workability, adhesion, stabilization, pumping, sag resistance, rheology properties, strength, appearance and performance.

Energy – Specialty Ingredients is a leading global manufacturer of synthetic-, cellulose-, and guar-based products for drilling fluids, oil well cement slurries, completion and workover fluids, fracturing fluids and production chemicals. Specialty Ingredients offers the oil and gas industry solutions for drilling, stimulation, completion, cementing and production applications.

Performance Specialties – The Performance Specialties business provides products and services to over 30 industry-focused business segments. It offers a broad spectrum of organo- and water-soluble polymers that are derived from both natural and synthetic resources. Its product lines include derivatized cellulose polymers, synthetics, guar and guar derivatives that impart effective functionalities to serve a variety of industrial markets and specialized applications. Performance Specialties also offers a comprehensive portfolio of butanediol (BDO) and its derivatives including tetrahydrofuran (THF), N-Methylpyrrolidone (NMP) and gamma-Butyrolactone. Many of the products within the Performance Specialties business function as performance additives that deliver high levels of end-user value in formulated products. In other areas, such as plastics and textiles, Performance Specialties’ products function as a processing aid, improving the quality of end products and reducing manufacturing costs.

Specialty Ingredients operates throughout the Americas, Europe and Asia Pacific. It has 26 manufacturing facilities in nine countries and participates in two joint ventures. Specialty Ingredients has manufacturing facilities in Huntsville, Alabama; Wilmington, Delaware; Dalton, Georgia; Calvert City, Kentucky; Columbia, Maryland; Freetown, Massachusetts; Chatham and Parlin, New Jersey; Columbus and Lima, Ohio; Kenedy and Texas City, Texas and Hopewell, Virginia within the United States and Doel-Beveren, Belgium; Cabreuva, Brazil; Leaside, Canada; Jiangmen and Nanjing, China; Alizay and Sophia Antipolis, France; Horhausen, Marl and Memmingen, Germany; Zwijndrecht, the Netherlands and Newton Aycliffe and Poole, United Kingdom. Specialty Ingredients also operates two production facilities through a joint venture in Luzhou and Suzhou, China.

Specialty Ingredients markets and distributes its products and services directly and through third-party distributors in the Americas, Europe and Asia Pacific.

ASHLAND WATER TECHNOLOGIES

Ashland Water Technologies (Water Technologies) is a leading specialty chemical supplier to the pulp, paper, mining, food and beverage, commercial and institutional industries, chemicals processing, general manufacturing and municipal wastewater-treatment. Its process, utility and functional chemistries are used to improve operational efficiencies, enhance product quality, protect plant assets and minimize environmental impact. To meet the diverse requirements of its customers, Water Technologies offers a range of services, including analytical and applications laboratories, customized program offerings and, through its StreamLink Specialty Chemicals service model, a focused-service approach. Water Technologies is the number one global producer of specialty paper-making chemicals.

Water Technologies’ chemical product lines include biocides, cleaners, coagulants and flocculants, converting additives, corrosion inhibitors, defoamers, deposit and scale inhibitors, internal and surface size agents, membrane treatments, odor inhibitors and neutralizers, oxygen scavengers, pulp mill additives, retention, drainage and clarification aids, tissue-making additives, wet- and dry-strength additives, and wood adhesives.

Water Technologies is comprised of the following product lines:

Process Chemistries — Water Technologies manufactures and sells a broad array of process chemicals including deposit and scale control agents, defoamers, biocides, retention aids, frothers and collection aids, crepe and release additives and other process additives for markets including pulp and paper manufacturing, mining and extraction, food processing, power, oil refining, chemicals processing, and general manufacturing. These products are designed to deliver benefits such as

enhanced operational efficiencies, system cleanliness, and superior performance in a wide variety of manufacturing operations globally.

Utility Chemistries — Utility Chemistries provides specialized chemicals and consulting services for the utility water treatment market, which includes boiler water, cooling water, fuel and waste streams for the pulp and paper, food and beverage, commercial and institutional, power, oil refining, chemicals processing, general manufacturing, and municipal waste-water treatment industries. Water Technologies also manufactures and sells automated equipment, including performance-based feed and control systems, proprietary monitoring devices and remote system surveillance. The utility products, services and equipment offerings are designed to protect plant assets and optimize energy, water and operational costs at customers’ facilities.

Functional Chemistries — Functional Chemistries produces specialized chemicals for the paper industry that impart specific properties such as strength, liquid holdout and printability to the final paper or board. Markets include packaging, tissue and towel, and printing and writing. Products and technologies include internal and surface sizing agents and wet/dry strength additives.

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. Water Technologies also utilizes third-party tolling manufacturers.

Water Technologies markets and distributes its products and services directly and through third-party distributors in the Americas, Europe and Asia Pacific.

ASHLAND PERFORMANCE MATERIALS

Ashland Performance Materials (Performance Materials) is a global producer of specialty resins and adhesives serving the construction, transportation, infrastructure, packaging and converting, marine and energy markets. It is a global leader in unsaturated polyester and vinyl ester resins. Performance Materials is also a major supplier of gelcoats, pressure-sensitive adhesives, structural adhesives, laminating adhesives and coatings, and elastomers. In addition, through Performance Materials, Ashland holds a fifty percent joint venture interest in ASK Chemicals GmbH, a global supplier of chemicals and materials to the foundry industry. For additional information regarding the global joint venture, see Note C of Notes to Consolidated Financial Statements in this annual report on Form 10-K.

Performance Materials is comprised of the following businesses:

Composites and Adhesives — The Composites and Adhesives business manufactures and sells a broad range of 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. Performance Materials’ composite products provide an array of functional properties including corrosion resistance, fire retardance, ultraviolet resistance, water and chemical resistance, high mechanical strength, impact and scratch resistance, and high strength-to-weight ratios.

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 multiple industries. 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 printing and converting applications; emulsion polymer isocyanate adhesives for structural wood bonding; elastomeric polymer adhesives and butyl rubber 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. Performance Materials’ adhesive products provide an array of functional properties including high-strength bonding, ease and speed of product assembly, heat and moisture resistance and design flexibility.

Elastomers – The Elastomers business, acquired as part of the ISP transaction, is one of the largest suppliers in North America to the merchant market of high-quality styrene butadiene rubber (SBR). It provides raw materials used in the manufacture of tires, flooring, shoe soles, adhesives and sealants, automotive parts and industrial rubber goods. With a variety of product grades, the Elastomers business supplies SBR to a wide array of manufacturers.

Performance Materials operates throughout the Americas, Europe and Asia Pacific. It has 26 manufacturing facilities in 10 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; Neville Island and Philadelphia, Pennsylvania; Piedmont, South Carolina; Neal, West Virginia and Oak Creek, Wisconsin within the United States and Arcariguama, Brazil; Kelowna, Canada; Changzhou and Kunshan, China; Kidderminster, England; Porvoo, Finland; Sauveterre, France; Miszewo, Poland; and Benicarló, Spain. Elastomers has one manufacturing facility in Port Neches, Texas. Performance Materials also provides toll manufacturing services to the ASK Chemicals GmbH joint venture through manufacturing facilities located in Changzhou, China; Kidderminster, England; Milan, Italy and Castro-Urdilales, Spain.

Performance Materials markets and distributes its products directly and through third-party distributors in the Americas, Europe and Asia Pacific.

ASHLAND CONSUMER MARKETS

Ashland Consumer Markets is a leading innovator and supplier of high-performance lubricants, automotive chemicals and appearance products, including those marketed under the Valvoline™ brands, and is an operator and franchisor of Valvoline Instant Oil Change™ centers. 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™ lubricant products for vehicles with 75,000 or more miles; NextGen™ motor oil made from 50 percent recycled oil; Valvoline Professional Series™ automotive chemicals; Pyroil™ automotive chemicals; Eagle One™ automotive appearance products; Car Brite™ automotive reconditioning products; MaxLife™ and 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, O’Reilly’s, 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 sells to national accounts such as Goodyear, Monro and Sears. In addition, this business includes distribution to quick lubes branded “Valvoline Express Care™,” which consists of 333 independently-owned and operated stores.

Valvoline Instant Oil Change (VIOC) — The Valvoline Instant Oil Change™ chain is the second largest franchise 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, 2011, 260 company-owned and 604 independently-owned and operated franchise VIOC centers were operating in 41 states. VIOC centers offer customers an innovative computer-based preventive maintenance tracking system that 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 129 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 numerous third-party warehouses and toll manufacturers throughout the world.

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 Wetherill 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. Distribution operations are conducted from centers located in College

Park, Georgia; Willow Springs, Illinois; Indianapolis, Indiana; St. Louis, Missouri; Cincinnati, Ohio and East Rochester, Pennsylvania within the United States and through owned facilities in Dordrecht, the Netherlands and Birkenhead, United Kingdom and leased facilities in Adelaide, Melbourne, New Castle, Perth and Sydney, Australia.

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.

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 any new laws or regulations cannot be estimated until the manner in which they will be implemented has been more precisely defined.

At September 30, 2011, Ashland’s reserves for environmental remediation amounted to $246 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 and probability techniques 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 $390 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 $36 million in 2011, compared to $22 million in 2010 and $13 million in 2009.

Product Control, Registration and Inventory — Many of Ashland’s products and operations are subject to chemical control laws of the countries in which they are located. These laws include regulation of chemical substances and inventories under the Toxic Substances Control Act (TSCA) in the United States and Registration, Evaluation and Authorisation of Chemicals (REACH) in Europe. Under REACH additional testing requirements, documentation, risk assessments and registrations are occurring and will continue to occur and may adversely affect Ashland’s costs of products produced in or imported into the European Union. Examples of other product control regulations include right to know laws under the Global Harmonized System (GHS) for hazard communication, regulation of biocides under the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA) in the United States, the Biocidal Products Directive (BPD) in Europe, regulation of chemicals that contact food under the Food, Drug and Cosmetics Act in the United States, the Framework Regulation in Europe and other product control requirements for chemical weapons, drug procurers and import/export. New laws and regulations may be enacted or adopted by various regulatory agencies globally. The costs of compliance with any new laws or regulations cannot be estimated until the manner in which they will be implemented has been more precisely defined.

Remediation — Ashland currently operates, and in the past has operated, various facilities at which, 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. Federal and state laws, including but not limited to the Resource Conservation and Recovery Act (RCRA), the Comprehensive Environmental Response, Compensation and Liability Act of

1980 (CERCLA) and various other remediation laws, require that contamination caused by hazardous substance 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 in which 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 (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 materials and consumer products. The CAA establishes national ambient air quality standards (NAAQS) with 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 and emission control devices pursuant to these clean air laws.

The United States Environmental Protection Agency (USEPA) has increased its frequency in reviewing the NAAQS. In 2006, 2008 and 2009, the USEPA established newer and more stringent standards for particulate matter, ozone and sulfur dioxide, respectively. State and local agencies are beginning to implement options for meeting these newest standards, which should all be in place by 2013. Particulate matter strategies include dust control measures for construction sites and reductions in emission rates allowed for industrial operations. Options for ozone include emission controls for certain types of sources, reduced limits on the volatile organic compound content of industrial materials and consumer products, and requirements on the transportation sector. Most options for sulfur dioxide focus on coal and diesel fuel combustion sources. It is not possible at this time to estimate the potential financial impact that these newest standards may have on Ashland’s operations or products. Ashland will continue to monitor and evaluate these standards to meet these and all air quality requirements.

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, Ashland’s facilities are subject to RCRA and its regulations governing generators of hazardous waste. Ashland has implemented systems to oversee compliance with the RCRA regulations. 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. Ashland has or has retained the remediation liability for certain facilities subject to these regulations. Other countries where Ashland operates also have laws and regulations relating to hazardous and solid waste, and Ashland has systems in place to oversee compliance.

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.

Climate Change and Related Regulatory Developments — Ashland has been collecting energy use data and calculating greenhouse gas (GHG) emissions for many years. For the past few years, Ashland has been evaluating the potential impacts from both climate change and the anticipated GHG regulations to facilities, products and other business interests, as well as the strategies commonly considered by the industrial sector to reduce the potential impact of these risks. These risks are generally grouped as impacts from legislative, regulatory and international developments, impacts from business and investment trends, and impacts to company assets from the physical effects of climate change. Current North American, European, and other regional regulatory developments are not expected to have a material effect on Ashland’s operations, although some facilities are subject to promulgated rules. Business and investment trends are expected to drive an increase in the demand for products that improve energy efficiency, reduce energy use and increase the use of renewable resources. At this time, Ashland cannot estimate the impact of this expected demand increase to its businesses. Physical effects from climate change have the potential to affect Ashland’s assets in areas prone to sea level rise or extreme weather events much as they do the general public and other businesses. Due to the uncertainty of these matters, Ashland cannot estimate the impact at this time of GHG-related developments on its operations or financial condition.

Competition

Specialty 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. Competition is based on several key criteria, including product performance and quality, product price, product availability and security of supply, responsiveness of product development in cooperation with customers and customer service. Certain key competitors are significantly larger than Ashland and have greater financial resources, leading to greater operating and

financial flexibility. The industry has become increasingly global as participants have focused 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.

Intellectual Property

Ashland has a broad intellectual property portfolio which is an important component of all of Ashland’s business segments. In particular, Ashland’s Specialty Ingredients, Water Technologies and Performance Materials segments rely on patents, trade secrets, formulae and know-how to protect and differentiate their products and technologies. In addition, these business segments own valuable trademarks which identify and differentiate Ashland’s products from its competitors. The Valvoline™ trademark and other trademarks related to Valvoline products and franchises are of particular importance to the Consumer Markets segment and the overall Ashland business. Ashland also licenses intellectual property rights from third-parties.

Raw Materials

All of Ashland’s business segments were negatively impacted to varying degrees in fiscal 2011 by rising and volatile raw materials costs, and these conditions may continue in fiscal 2012. Ashland purchases its raw materials from multiple sources of supply in the United States and foreign countries, and believes that raw material supplies will be available in quantities sufficient to meet demand in fiscal 2012.

Research and Development

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. Ashland has focused on developing new chemistries, market-changing technologies and customer driven solutions at numerous technology centers located in the Americas, Europe and the Asia Pacific region. Research and development costs are expensed as they are incurred and totaled $89 million in 2011 ($86 million in 2010 and $96 million in 2009).

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. These forward-looking statements are not historical facts and generally are identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “is likely,” “predicts,” and variations of such words and similar expressions. Although Ashland believes that its expectations are based on reasonable assumptions, such expectations are subject to risks and uncertainties that are difficult to predict and may be beyond Ashland’s control. As a result, Ashland 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 “Use of estimates, risks 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 that could affect Ashland’s expectations and 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.

The revenues and profitability of several of Ashland’s businesses are susceptible to downturns in the economy, particularly in those segments serving the housing, construction, automotive and paper industries. Both overall demand for Ashland’s products and services and its profitability are affected by economic recession, inflation, changes in prices of raw materials (including many hydrocarbon derivatives, wood pulp and cotton linters) or changes in governmental monetary or fiscal policies. During the recent economic downturn, a number of Ashland’s customers in the construction, automotive, paper and certain other industries experienced financial and production stresses, which led to decreased demand for certain of Ashland’s products and has affected Ashland’s margins on certain products sold. Demand for Ashland’s products by many of these customers has not returned to pre-downturn levels, and may not. 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 another economic downturn occurs, the economic recovery is slower than expected or there is a significant decline in customer demand, Ashland’s business, results of operations, financial condition and ability to grow could be negatively impacted.

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, cotton linters or wood pulp, may negatively impact Ashland’s costs. Similarly, energy costs are a significant component of certain of Ashland’s product 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. Also, domestic and global government regulations related to the manufacture or transport of certain raw materials may impede Ashland’s ability to obtain those raw materials on commercially reasonable terms. 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 or grow its business successfully could be adversely affected.

Ashland faces competition from other companies, which places downward pressure on prices and margins and may otherwise adversely affect Ashland’s business.

Ashland operates in highly competitive markets, competing against a number of domestic and foreign companies. Competition is based on several key criteria, including product performance and quality, product price, product availability and security of supply, responsiveness of product development in cooperation with customers and customer service, as well as the ability to bring innovative products or services to the marketplace. Certain key competitors are significantly larger than Ashland and have greater financial resources, leading to greater operating and financial flexibility. As a result, these competitors may be better able to withstand changes in conditions within the relevant industry, changes in the prices of raw materials and energy and changes in general economic conditions. In addition, competitors’ pricing decisions could compel Ashland to decrease its prices, which could negatively affect its margins and profitability. Also, additional competition in markets served by Ashland could adversely affect margins and profitability and could lead to a reduction in market share.

Ashland may not realize the anticipated benefits of the ISP acquisition.

Ashland’s ability to realize the anticipated benefits of the ISP acquisition will depend, in part, on its ability to integrate the businesses of ISP successfully and efficiently with Ashland’s businesses. The combination of two independent companies is a complex, costly and time-consuming process. As a result, the combined company will be required to devote significant management attention and resources to integrating ISP’s operations and employees with those of Ashland. For example, because ISP is a privately-held company, Ashland may need to implement additional systems and controls to bring ISP into conformance with public company standards. In addition, ISP does not utilize an SAP™ enterprise resource

planning system (ERP), and Ashland will accordingly need to devote significant resources to convert ISP to Ashland’s ERP platform. The failure of the combined company to meet the challenges involved in integration or otherwise to realize any of the anticipated benefits of the ISP acquisition could cause an interruption of, or a loss of momentum in, the activities of the combined company and could adversely affect Ashland’s business or results of operations. In addition, the overall integration of the two companies may result in unanticipated problems, expenses, liabilities, competitive responses, loss of customer and other relationships, and diversion of management’s attention, any of which could negatively impact Ashland’s results of operations.

In addition, even if ISP’s operations and employees are integrated successfully with Ashland, the combined company may not realize the full benefits of the acquisition, including the expected sales and growth opportunities, synergies and cost savings. Such benefits may not be achieved within the anticipated time frame or at all.

Ashland’s substantial global operations subject it to risks of doing business in foreign countries, which could adversely affect its business, financial condition and results of operations.

Nearly one half of Ashland’s net sales for fiscal 2012 is expected to be to customers outside of North America. Ashland expects sales from international markets to continue to represent an even larger portion of the Company’s net sales in the future. Ashland has approximately 55 manufacturing facilities located outside of the United States. Accordingly, Ashland’s business is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions.

The global nature of Ashland’s business presents difficulties in hiring and maintaining a workforce in certain countries. Fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services provided in foreign countries. In addition, foreign countries may impose additional withholding taxes or otherwise tax Ashland’s foreign income, or adopt other restrictions on foreign trade or investment, including currency exchange controls. The imposition of tariffs is also a risk that could impair Ashland’s financial performance.

Certain legal and political risks are also inherent in the operation of a company with Ashland’s global scope. For example, it may be more difficult for Ashland to enforce its agreements or collect receivables through foreign legal systems. There is a risk that foreign governments may nationalize private enterprises in certain countries where Ashland operates. In certain countries or regions, terrorist activities and the response to such activities may threaten Ashland’s operations more than in those in the United States. Also, changes in general economic and political conditions in countries where Ashland operates, particularly in emerging markets, are a risk to Ashland’s financial performance.

As Ashland continues to operate its business globally, its success will depend, in part, on its ability to anticipate and effectively manage these and other related risks. There can be no assurance that the consequences of these and other factors relating to its multinational operations will not have an adverse effect on Ashland’s business, financial condition and results of operations.

Changes in laws or regulations or the manner of their interpretation or enforcement could adversely impact Ashland’s financial performance and restrict its ability to operate its business or execute its strategies.

New laws or regulations, or changes in existing laws or regulations or the manner of their interpretation or enforcement, could increase Ashland’s cost of doing business and restrict its ability to operate its business or execute its strategies. This includes, among other things, the possible taxation under U.S. law of certain income from foreign operations, regulations issued by the U.S. Food and Drug Administration affecting Ashland and its customers, compliance costs and enforcement under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and costs associated with complying with the Patient Protection and Affordable Care Act of 2010 and the regulations promulgated thereunder.

Business disruptions could seriously harm Ashland’s operations and financial performance.

Business disruptions, including those related to natural disasters, severe weather conditions, supply disruptions, increasing costs for energy, temporary plant and/or power outages, information technology systems and network disruptions, terrorist attacks, armed conflict, war, pandemic diseases or other catastrophic events, could seriously harm Ashland’s operations, as well as the operations of its customers and suppliers, and adversely impact Ashland’s financial performance. Although it is impossible to predict the occurrence or consequences of any such events, they could result in reduced demand for Ashland’s products, make it difficult or impossible for Ashland to manufacture its products or deliver products and services to its customers or to receive raw materials from suppliers, or create delays and inefficiencies in the supply chain.

While Ashland maintains business continuity plans that are intended to allow it to continue operations or mitigate the effect of events that could disrupt its business, Ashland cannot provide assurances that its plans would fully protect it from all such events. In addition, insurance maintained by Ashland to protect against loss of business and other related consequences resulting from business disruptions is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of Ashland’s damages or damages to others in the event Ashland’s

business is disrupted. In addition, insurance related to these types of risks may not be available now or, if available, may not be available in the future at commercially reasonable rates.

Ashland’s success depends upon its ability to attract and retain key employees and the identification and development of talent to succeed 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. Also, approximately one-third of Ashland’s U.S. based employees will be retirement-eligible within the next five years, which increases the risk that key employees could leave the Company. This risk of unwanted employee turnover is enhanced in developing markets which Ashland has targeted for growth, especially in Asia, South America and Eastern Europe. In addition, because of its reliance on its management team, Ashland’s future success depends, in part, on its ability to identify and develop talent to succeed its senior management. The retention of key personnel and appropriate senior management succession planning will continue to be critical to the successful implementation of Ashland’s strategies.

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 that 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 adversely affected by financial exposure to these liabilities. Insurance maintained by Ashland to protect against claims for damages alleged by third parties is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of Ashland’s liabilities to others. In addition, insurance related to these types of risks may not be available now or, if available, may not be available in the future at commercially reasonable rates.

Projecting future asbestos costs is subject to numerous variables that are extremely difficult to predict. In addition to the significant uncertainties surrounding the number of claims that might be received, other variables include the type and severity of the disease alleged by each claimant, the long latency period associated with asbestos exposure, dismissal rates, costs of medical treatment, the impact of bankruptcies of other companies that are co-defendants in claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, and the impact of potential changes in legislative or judicial standards. Furthermore, any predictions with respect to these variables are subject to even greater uncertainty as the projection period lengthens. In light of these inherent uncertainties, Ashland believes that its asbestos reserves represent the best estimate within a range of possible outcomes. As a part of the process to develop these estimates of future asbestos costs, a range of long-term cost models was developed. These models are based on national studies that predict the number of people likely to develop asbestos-related diseases and are heavily influenced by assumptions regarding long-term inflation rates for indemnity payments and legal defense costs, as well as other variables mentioned previously. Because of the inherent uncertainties in projecting future asbestos liabilities and establishing appropriate reserves, Ashland’s actual asbestos costs may exceed its reserves, which could adversely affect its profitability and financial performance.

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

Ashland is subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, protection of the environment and human health and safety, and the generation, storage, handling, treatment, disposal and remediation of hazardous substances and waste materials. Ashland has incurred, and will continue to incur, significant costs and capital expenditures to comply with these laws and regulations.

Environmental, health and safety regulations change frequently, and such regulations and their enforcement have tended to become more stringent over time. Accordingly, changes in environmental, health and safety laws and regulations and the enforcement of such laws and regulations could interrupt Ashland’s operations, require modifications to its facilities or cause Ashland to incur significant liabilities, costs or losses that could adversely affect its profitability. Actual or alleged violations of environmental, health or safety laws and regulations could result in restrictions or prohibitions on plant operations as well as substantial damages, penalties, fines, civil or criminal sanctions and remediation costs. In addition, under some environmental laws, Ashland may be strictly liable and/or jointly and severally liable for environmental damages and penalties.

Ashland is also subject to various federal, state, local and foreign environmental laws and regulations that require environmental assessment or remediation efforts (collectively environmental remediation) at multiple locations. Ashland

uses engineering studies, 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 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 actual costs for environmental remediation could exceed its reserves and, therefore, adversely affect Ashland’s financial performance.

Ashland’s pension and postretirement 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 postretirement 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.

Ashland’s substantial indebtedness may adversely affect its business, results of operations and financial condition, and Ashland’s restrictive debt covenants may affect its ability to successfully operate its businesses.

As a result of the acquisitions of ISP and Hercules Incorporated, Ashland incurred a substantial amount of debt. Ashland’s substantial indebtedness could adversely affect its business, results of operations and financial condition by, among other things:

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

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;

making Ashland more vulnerable to adverse changes in general economic, industry and regulatory conditions and in its business by limiting Ashland’s 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 lower debt service requirements;

making Ashland more vulnerable to increases in interest rates since some of its indebtedness is subject to variable rates of interest; and

making it more difficult for Ashland to satisfy its financial obligations.

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, it could be in default under its credit facility or other indebtedness. Ashland might also be required to pursue one or more alternative strategies to repay indebtedness, 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, it may negatively affect its ability to generate revenues.

Ashland’s debt facilities contain various covenants that limit its ability to, among other things: grant liens; incur additional indebtedness; provide guarantees; engage in mergers and acquisitions; sell, transfer and otherwise dispose of property and assets; make loans; invest in 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. In addition, Ashland is required to maintain specified financial ratios and satisfy certain financial condition tests specified in its

senior credit facility. If Ashland does not adhere to these covenants, the lenders may have the right to declare a default and could require immediate payment of all debts outstanding or seek other remedies available to them under the debt facilities.

Ashland may not be able to effectively protect or enforce its intellectual property rights.

Ashland relies on the patent, trademark, trade secret and copyright laws of the United States and other countries to protect its intellectual property rights. The laws of some countries may not protect Ashland’s intellectual property rights to the same extent as the laws of the United States. Failure of foreign countries to have laws to protect Ashland’s intellectual property rights or an inability to effectively enforce such rights in foreign countries could result in the loss of valuable proprietary information, which could have an adverse effect on Ashland’s business and results of operations.

Even in circumstances where Ashland has a patent on certain technologies, such patents may not provide meaningful protection against competitors or against competing technologies. In addition, any patent applications submitted by Ashland may not result in an issued patent. There can be no assurance that Ashland’s intellectual property rights will not be challenged, invalidated, circumvented or rendered unenforceable. Ashland could also face claims from third parties alleging that Ashland’s products or processes infringe on their proprietary rights. If Ashland is found liable for infringement, it could be responsible for significant damages, prohibited from using certain products or processes or required to modify certain products and processes. Any such infringement liability could adversely affect Ashland’s product and service offerings, profitability and results of operations.

Ashland also protects its know-how and trade secrets by entering into confidentiality and non-disclosure agreements with most of its employees and third parties. There can be no assurance that such agreements will not be breached or that Ashland will be able to effectively enforce them. Any unauthorized disclosure of any of Ashland’s material know-how or trade secrets could adversely affect Ashland’s business and results of operations.

Ashland’s business exposes it to potential product liability claims and recalls, which could adversely affect its financial condition and performance.

The development, manufacture and sale of specialty chemical products by Ashland, including products produced as food ingredients or with pharmaceutical and nutritional supplement applications, involve an inherent risk of exposure to product liability claims, product recalls, product seizures and related adverse publicity. A product liability claim or judgment against Ashland could also result in substantial and unexpected expenditures, affect consumer or customer confidence in its products, and divert management’s attention from other responsibilities. Although Ashland maintains product liability insurance, there can be no assurance that this type or the level of coverage is adequate or that Ashland will be able to continue to maintain its existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured judgment against Ashland could have a material adverse effect on its results of operations and financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Ashland’s corporate headquarters is located in Covington, Kentucky. Principal offices of other major operations are located in Wilmington, Delaware (Specialty Ingredients and Water Technologies); Wayne, New Jersey (Specialty Ingredients); Dublin, Ohio (Performance Materials); Lexington, Kentucky (Consumer Markets); and Barendrecht, the Netherlands; Shanghai, China; Hyderabad, India and Schaffhausen and Züg, Switzerland (shared service centers of Ashland’s business segments). All of these offices are leased, except for portions of the Dublin, Ohio facilities that are owned. Principal manufacturing, marketing and other materially important physical properties of Ashland and its subsidiaries are described within the appropriate business segment under “Item 1” in this annual report on Form 10-K. All of Ashland’s physical properties are owned or leased. Ashland believes its physical properties are suitable and adequate for the Company’s business. 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 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 detailed information regarding liabilities arising from asbestos-related litigation, see “Management’s Discussion and Analysis – Application of Critical Accounting Policies – Asbestos litigation” and Note N of Notes to Consolidated Financial Statements in this annual report on Form 10-K.

Environmental Proceedings

(1) CERCLA and Similar State Law Sites – Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state laws, Ashland and its subsidiaries may be subject to joint and several liability for cleanup 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, 2011, Ashland and its subsidiaries 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 95 waste treatment or disposal sites. These sites are currently subject to ongoing investigation and remedial activities, overseen by the United States Environmental Protection Agency (USEPA) or a state agency, in which Ashland or its subsidiaries are 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 cleanup and administrative oversight and/or long-term monitoring of environmental conditions at the sites. The ultimate costs are not predictable with assurance.

(2) Franklin, Virginia Multi-Media Environmental Compliance Inspection – In April 2005, Hercules’ Franklin, Virginia manufacturing facilities were subject to a multi-media environmental compliance inspection by the USEPA and the Virginia Department of Environmental Quality (VADEQ). In April 2008, the results of the inspection were provided to Hercules. The inspection identified areas of potential noncompliance with various environmental regulations. Hercules and another defendant reached a final settlement with the USEPA in September 2011 pursuant to which they agreed to pay a civil penalty in the aggregate amount of $700,000. Court approval of the settlement was received in October 2011.

(3) Hopewell, Virginia Clean Air Act Compliance Inspection – In April 2007, Hercules’ Hopewell, Virginia manufacturing facilities were subject to a Clean Air Act (CAA) compliance inspection by the USEPA and the VADEQ. In April 2008, the results of the inspection were provided to Hercules. The inspection uncovered areas of potential noncompliance with air emissions regulations. In March 2011, Hercules received from the USEPA a proposed consent decree which included certain remedial actions and a proposed penalty assessment in excess of $100,000. Hercules is engaged in negotiations with the USEPA and the VADEQ concerning this matter. While it is reasonable to believe that this matter could potentially involve penalties exceeding $100,000, the potential liability with respect to this matter should not be material to Ashland.

(4) Hattiesburg, Mississippi Resource Conservation and Recovery Act Matter – In November 2008, the Mississippi Department of Environmental Quality (MDEQ) issued a Notice of Violation to Hercules’ now-closed Hattiesburg, Mississippi manufacturing facility alleging that a storm water retention basin at the facility had been operated as a hazardous waste storage and treatment facility without a permit in violation of the Resource Conservation and Recovery Act. Ashland has been working with the MDEQ to settle this matter in the context of the shutdown and ongoing remediation of the Hattiesburg facility. The MDEQ proposed a settlement penalty in excess of $100,000. In May 2011, the USEPA issued an inspection report from a September 2010 inspection with allegations similar to those of the MDEQ and promulgated an information request. While it is reasonable to believe that this matter will involve a penalty from the MDEQ and/or the USEPA exceeding $100,000, the potential liability with respect to this matter should not be material to Ashland.

(5) Louisiana, Missouri Air Inspection and Penalty Assessment – In 2007, the USEPA conducted an inspection of Hercules’ Louisiana, Missouri production facility for compliance with the CAA’s Leak Detection and Repair regulations. Hercules subsequently provided additional information to the USEPA in response to matters identified during the inspection close-out meeting. The USEPA and Hercules entered into a final order pursuant to which Hercules was assessed a penalty of $245,500. The court approved the final order in September 2011.

For additional information regarding environmental matters and reserves, see “Management’s Discussion and Analysis – Application of Critical Accounting Policies – Environmental remediation and asset retirement obligations” and Note N 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, environmental and other matters that seek remedies or damages, some of which are for substantial amounts. While these actions are being contested, their outcome is not predictable with assurance.

ITEM 4. (REMOVED AND RESERVED)

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 and the current members of Ashland’s Executive Committee).

JAMES J. O’BRIEN (age 57) 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 57) 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.

PETER J. GANZ (age 49) is Senior Vice President and General Counsel of Ashland and has served in such capacities since July 2011. During the past five years, he has also served as a partner with Sedgwick LLP and as Executive Vice President, General Counsel and Secretary of Foster Wheeler AG.

DAVID L. HAUSRATH (age 59) is Senior Vice President of Ashland and has served in such capacity since 2004. During the past five years, he has also served as General Counsel of Ashland until July 2011. As previously announced, Mr. Hausrath has elected to retire from Ashland effective December 1, 2011.

SUSAN B. ESLER (age 50) is Vice President and Chief Human Resources and Communications Officer of Ashland and has served in such capacities since 2006 and July 2011, respectively. During the past five years, she has also served as Vice President, Human Resources and Communications of Ashland.

THEODORE L. HARRIS (age 46) is Senior Vice President of Ashland; President, Global Supply Chain; and President of Performance Materials and has served in such capacities since July 2011, 2008 and 2009, respectively. During the past five years, he has also served as Vice President of Ashland; President of Environmental, Health and Safety and Information Technology; President of Ashland Distribution and General Manager of the Composite Polymers Division of Ashland.

J. WILLIAM HEITMAN (age 57) 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 50) is Senior Vice President of Ashland and President of Consumer Markets and has served in such capacities since July 2011 and 2002, respectively. During the past five years, he has also served as Vice President of Ashland.

JOHN E. PANICHELLA (age 52) is Senior Vice President of Ashland and President of Specialty Ingredients and has served in such capacities since July 2011 and August 2011, respectively. During the past five years, he has also served as Vice President of Ashland, President of Ashland Aqualon Functional Ingredients and Vice President and President-Aqualon Division of Hercules.

STEVEN E. POST (age 57) is Vice President, Operations and Environmental, Health and Safety of Ashland and has served in such capacities since October 2011. During the past five years, he has also served as Senior Vice President, Operations-Specialty Chemicals for ISP’s global manufacturing operations.

PAUL C. RAYMOND, III (age 49) is Senior Vice President of Ashland and President of Water Technologies and has served in such capacities since July 2011 and 2008, respectively. During the past five years, he has also served as Vice President of Ashland and Vice President and President-Paper Technologies and Ventures Division of Hercules.

ANNE T. SCHUMANN (age 51) is Vice President and Chief Information and Administrative Services Officer of Ashland and has served in such capacities since 2008 and 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 of Hercules.

WALTER H. SOLOMON (age 52) is Vice President and Chief Growth Officer of Ashland and has served in such capacities since 2005.

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-56 for information relating to market price and dividends of Ashland’s Common Stock.

At October 31, 2011, there were approximately 15,600 holders of record of Ashland’s Common Stock. Ashland Common Stock is listed on the New York Stock Exchange (NYSE) (ticker symbol ASH) and has trading privileges on NASDAQ.

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 2011.

FIVE-YEAR TOTAL RETURN PERFORMANCE GRAPH

The following graph compares Ashland’s five-year cumulative total shareholder return with the cumulative total return of S&P 500† large-cap index, S&P MidCap 400† index, and two peer groups of companies. As a result of Ashland’s acquisition of ISP and its disposition of the Distribution segment in fiscal year 2011, the Peer Group – Materials was added to this year’s graph because this peer group is a better comparison group to Ashland’s business. However, in accordance with SEC rules, the graph continues to include the Peer Group – Chemicals for comparison purposes. Ashland intends to remove Peer Group – Chemicals in next year’s performance graph. Ashland was listed in the S&P 500† index until November 2008 and is now listed in the S&P MidCap 400† 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† LARGE-CAP INDEX, S&P MIDCAP 400† INDEX, AND PEER GROUPS

	2006	2007	2008	2009	2010	2011
Ashland	100	110	55	83	94	86
S&P 500† (large-cap)	100	116	91	85	93	94
S&P MidCap 400†	100	119	99	96	113	111
Peer Group - Chemicals	100	125	116	133	162	161
Peet Group - Materials	100	137	109	105	118	110

The peer groups consist of the following industry indices:

∙

Peer Group – Chemicals: S&P 500† Specialty Chemicals (large-cap), S&P MidCap 400† Specialty Chemicals, S&P SmallCap 600† Specialty Chemicals, and S&P MidCap 400† Diversified Chemicals. As of September 30, 2011, this peer group consists of 24 companies.

∙

Peer Group - Materials: S&P 500† Materials (large-cap) and S&P 400† Materials. As of September 30, 2011, this peer group consists of 59 companies.

ITEM 6. SELECTED FINANCIAL DATA

See Five-Year Selected Financial Information on page F-57.

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-35.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Quantitative and Qualitative Disclosures about Market Risk on page M-34.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures — As of September 30, 2011, 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, 2011.

Internal Control Over Financial Reporting — 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.

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, 2011, 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” in Ashland’s Proxy Statement, which will be filed with the SEC within 120 days after September 30, 2011. 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 Nominations of 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,” “Corporate Governance - 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,” “Ashland Common Stock Ownership of Directors and Executive Officers of Ashland,” “Compensation of Directors – Annual Retainer” and “Executive Compensation – Nonqualified Deferred Compensation” 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, 2011. 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...................................................................................................		1,892,932	(1)		$25.80	(2)		2,390,395	(3)

Equity compensation plans not approved by security holders...................................................................................................		256,702	(4)		—			713,491	(5)

Total.......................................................................................................		2,149,634			$25.80	(2)		3,103,886

________

(1)

This figure includes (a) 201,904 stock options outstanding under the Amended and Restated Ashland Inc. Incentive Plan (Amended Plan), (b) 32,384 stock options outstanding under the Hercules Incorporated Amended and Restated Long Term Incentive Compensation Plan, and (c) 11,784 stock options outstanding under the Hercules Incorporated Omnibus Equity Compensation Plan for Non-Employee Directors. This figure also includes 47,577 net shares that could be issued under stock-settled SARs under the Amended Plan and 650,972 net shares that could be issued under stock-settled SARs under the 2006 Ashland Inc. Incentive Plan (2006 Incentive Plan), based upon the closing price of Ashland Common Stock on the NYSE on September 30, 2011 of $44.14. Additionally, this figure includes 247,956 restricted stock shares granted under the Amended Plan and deferred, 257,456 performance share units for the fiscal 2009-2011 performance period, 162,330 performance share units for the fiscal 2010-2012 performance period, and 157,056 performance share units for the fiscal 2011-2013 performance period, payable in Ashland Common Stock under the 2006 Incentive Plan, estimated assuming target performance is achieved. Also included in the figure are 85,273 shares to be issued under the pre-2005 Deferred Compensation Plan for Employees and 38,240 shares to be issued under the pre-2005 Deferred Compensation Plan for Non-Employee Directors, payable in Ashland Common Stock upon termination of employment or service 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 the 2006 Incentive Plan as described in footnotes (1) and (4) in this table.

(3)

This figure includes 1,945,943 shares available for issuance under the 2011 Incentive Plan, 148,827 shares available for issuance under the pre-2005 Deferred Compensation Plan for Employees and 295,625 shares available for issuance under the pre-2005 Deferred Compensation Plan for Non-Employee Directors.

(4)

This figure includes 74,600 shares to be issued under the Deferred Compensation Plan for Employees (2005) and 182,102 shares to be issued under the Deferred Compensation Plan for Non-Employee Directors (2005), payable in Ashland Common Stock upon termination of employment or service with Ashland. Because these plans are not equity compensation plans as defined by the rules of the NYSE, neither plan required approval by Ashland’s shareholders.

(5)

This figure includes 397,820 shares available for issuance under the Deferred Compensation Plan for Employees (2005) and 315,671 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,” “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 E 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 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), and incorporated herein by reference).

4.5

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).

4.6

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).

4.7

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).

4.8

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).

The following Exhibits 10.1 through 10.22 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 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), 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, 2010 (SEC File No. 001-32532), and incorporated herein by reference).

10.6

Ashland Supplemental Defined Contribution Plan for Certain Employees (filed as Exhibit 10.3 to Ashland’s Form 10-Q for the quarter ended March 31, 2011 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), and incorporated herein by reference).

10.8

Hercules Incorporated Employee Pension Restoration Plan (filed as Exhibit 10.9 to Ashland’s Form 10-K for the fiscal year ended September 30, 2010 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), and incorporated herein by reference).

10.11

Form of Executive Officer Change in Control Agreement, effective for agreements entered into after July 2009 (filed as Exhibit 10.11 to Ashland’s Form 10-K for the fiscal year ended September 30, 2009 (SEC File No. 001-32532), and incorporated herein by reference).

10.12

Ashland Inc. Severance Pay Plan (filed as Exhibit 10.3 to Ashland’s Form 8-K filed on January 7, 2009 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), 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 (SEC File No. 001-32532), and incorporated herein by reference).

10.16

Amended and Restated Ashland Inc. Incentive Plan (filed as Exhibit 10.17 to Ashland’s Form 10-K for the fiscal year ended September 30, 2009 (SEC File No. 001-32532), and incorporated herein by reference).

10.17

2006 Ashland Inc. Incentive Plan (filed as Exhibit 10 to Ashland’s Form 10-Q for the quarter ended December 31, 2005 (SEC File No. 001-32532), and incorporated herein by reference).

10.18

2011 Ashland Inc. Incentive Plan (filed as Exhibit 10.1 to Ashland’s Form 8-K filed on February 1, 2011 (SEC File No. 001-32532), and incorporated herein by reference).

10.19

Form of Stock Appreciation Rights Award Agreement (filed as Exhibit 10.4 to Ashland’s Form 10-Q for the quarter ended March 31, 2011 (SEC File No. 001-32532), and incorporated herein by reference).

10.20

Form of Performance Unit (LTIP) Award Agreement (filed as Exhibit 10.5 to Ashland’s Form 10-Q for the quarter ended March 31, 2011 (SEC File No. 001-32532), and incorporated herein by reference).

10.21

Form of Restricted Stock Award Agreement (filed as Exhibit 10.6 to Ashland’s Form 10-Q for the quarter ended March 31, 2011 (SEC File No. 001-32532), and incorporated herein by reference).

10.22

Form of Restricted Stock Unit Agreement.

10.23

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 (SEC File No. 001-32532), and incorporated herein by reference).

10.24

Credit Agreement dated as of August 23, 2011, among Ashland, as Borrower, The Bank of Nova Scotia, as Administrative Agent, Swing Line Lender and an L/C Issuer, Citibank, N.A., as Syndication Agent, Bank of America, N.A., U.S. Bank National Association and PNC Bank, National Association, as Co-Documentation Agents, and the Lenders from time to time party thereto (filed as Exhibit 10.1 to Ashland’s Form 8-K filed on August 29, 2011 (SEC File No. 001-32532), and incorporated herein by reference).

10.25

Master Formation Agreement dated July 15, 2010, among Ashland, Süd-Chemie Aktiengesellschaft and Ashland-Südchemie-Kernfest GmbH filed as Exhibit 10.26 to Ashland’s Form 10-K for the fiscal year ended September 30, 2010 (SEC File No. 001-32532), and incorporated herein by reference).

10.26

Master Contribution and Sale Agreement dated July 15, 2010, among Ashland, Ashland International Holdings, Inc., Süd-Chemie Aktiengesellschaft, Tecpro Holding Corporation Inc. and Ashland-Südchemie-Kernfest GmbH (filed as Exhibit 10.27 to Ashland’s Form 10-K for the fiscal year ended September 30, 2010 (SEC File No. 001-32532), and incorporated herein by reference).

10.27

Shareholders’ Agreement effective November 30, 2010 by and between Süd-Chemie Aktiengesellschaft and Süd-Chemie Finance GmbH and Ashland and Ashland International Holdings, Inc. (filed as Exhibit 10 to Ashland’s Form 10-Q for the quarter ended December 31, 2010 (SEC File No. 001-32532), and incorporated herein by reference).

10.28

Agreement of Purchase and Sale dated November 5, 2010, by and between Ashland Inc. and TPG Accolade, LLC (filed as Exhibit 2.1 to Ashland’s Form 8-K filed on November 10, 2010 (SEC File No. 001-32532), and incorporated herein by reference).

10.29

Amendment Agreement dated March 31, 2011, by and between Ashland and Nexeo Solutions, LLC, formerly known as TPG Accolade, LLC (filed as Exhibit 10.1 to Ashland’s Form 8-K filed on April 5, 2011 (SEC File No. 001-32532), and incorporated herein by reference).

10.30

Stock Purchase Agreement dated as of May 30, 2011, entered into by and among The Samuel J. Heyman 1981 Continuing Trust for Lazarus S. Heyman, The Samuel J. Heyman 1981 Continuing Trust for Eleanor S. Heyman, The Samuel J. Heyman 1981 Continuing Trust for Jennifer L. Heyman, The Samuel J. Heyman 1981 Continuing Trust for Elizabeth D. Heyman, The Lazarus S. Heyman Age 50 Trust for Assets Appointed Under Will of Lazarus S. Heyman, The Eleanor S. Heyman Age 50 Trust for Assets Appointed Under Will of Lazarus S. Heyman, The Jennifer L. Heyman Age 50 Trust for Assets Appointed Under Will of Lazarus S. Heyman, The Elizabeth D. Heyman Age 50 Trust for Assets Appointed Under Will of Lazarus S. Heyman, The Horizon Holdings Residual Trust, RFH Investment Holdings LLC, Ashland and Ronnie F. Heyman, as representative of the Seller Parties (filed as Exhibit 2.1 to Ashland’s Form 8-K filed on May 31, 2011 (SEC File No. 001-32532), 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.

PricewaterhouseCoopers LLP Preferability Letter Related to Change in Accounting for Pensions and Inventory.

List of Subsidiaries.

23.1

Consent of PricewaterhouseCoopers LLP.

23.2

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.

101.INS*

XBRL Instance Document.

101.SCH*

XBRL Taxonomy Extension Schema Document.

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document.

*Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Statements of Consolidated Income for years ended September 30, 2011, 2010 and 2009; (ii) Consolidated Balance Sheets at September 30, 2011 and 2010; (iii) Statements of Consolidated Stockholders’ Equity at September 30, 2011, 2010 and 2009; (iv) Statements of Consolidated Cash Flows for years ended September 30, 2011, 2010 and 2009; and (v) Notes to Consolidated Financial Statements. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

™ Trademark Ashland or its subsidiaries, registered in various countries.

† Trademark owned by a third party.

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, 2011

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, 2011.

Signatures			Capacity


/s/ James J. O’Brien			Chairman of the Board, Chief Executive Officer and Director
James J. O’Brien			(Principal Executive Officer)

/s/ Lamar M. Chambers			Senior Vice President and Chief Financial Officer
Lamar M. Chambers			(Principal Financial Officer)

/s/ J. William Heitman			Vice President and Controller
J. William Heitman			(Principal Accounting Officer)

*			Director
Roger W. Hale

*			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

*By:

/s/ Peter J. Ganz

Peter J. Ganz

	Attorney-in-Fact

Date:	November 23, 2011

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, 2011, 2010 and 2009.

BUSINESS OVERVIEW

Ashland profile

Ashland is a leading, global specialty chemical company that provides products, services and solutions that meet customer needs throughout a variety of industries. Ashland’s chemistry is used in a wide variety of markets and applications, including architectural coatings, automotive, construction, energy, food and beverage, personal care, pharmaceutical, tissue and towel, and water treatment. With approximately 15,000 employees worldwide, Ashland serves customers in more than 100 countries.

Ashland’s sales generated outside of North America were 46% in 2011, 44% in 2010 and 43% in 2009. Sales by region expressed as a percentage of total consolidated sales were as follows:


Sales by Geography	2011		(a)	2010			2009		(b)
North America		54	%		56	%		57	%
Europe		26	%		25	%		25	%
Asia Pacific		13	%		12	%		12	%
Latin America & other		7	%		7	%		6	%
		100	%		100	%		100	%

(a) Sales from the acquired operations of International Specialty Products Inc. (ISP) are included from the acquired date of August 23, 2011 and forward.

(b) Sales from the acquired operations of Hercules Incorporated (Hercules) are included from the acquired date of November 13, 2008 and forward.

Business segments

Ashland’s reporting structure is composed of four reporting segments: Ashland Specialty Ingredients (Specialty Ingredients) which in previous years was known as Ashland Functional Ingredients, Ashland Water Technologies (Water Technologies), Ashland Performance Materials (Performance Materials) and Ashland Consumer Markets (Consumer Markets). For further descriptions of each business segment see the “Results of Operations – Business Segment Review” beginning on page M-11.

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


Sales by Business Segment	2011		(a)	2010			2009		(b)
Specialty Ingredients		20	%		16	%		15	%
Water Technologies		29	%		31	%		32	%
Performance Materials		21	%		22	%		21	%
Consumer Markets		30	%		31	%		32	%
		100	%		100	%		100	%

(a) Sales from the acquired operations of ISP are included from the acquired date of August 23, 2011 and forward.

(b) Sales from the acquired operations of Hercules are included from the acquired date of November 13, 2008 and forward.

KEY DEVELOPMENTS

During 2011and other previous periods, the following operational decisions and economic developments had an impact on Ashland’s current and future cash flows, results of operations and financial position.

Economic environment

Ashland has generally experienced demand increases within each operating segment on a comparable basis; however, its current financial performance has been adversely impacted by escalating raw material costs. Ashland continues to emphasize price increases to offset these increased costs, while internally assessing operations for cost reduction opportunities,

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including stranded costs from the sale of the Distribution business and the contribution of the Casting Solutions business to the expanded global joint venture with Süd-Chemie that both occurred during 2011.

Acquisitions/Divestitures

International Specialty Products acquisition

On August 23, 2011, Ashland completed its acquisition of ISP, a global specialty chemical manufacturer of innovative functional ingredients and technologies, in a transaction valued at $3.2 billion. ISP reported sales of $1.9 billion for the twelve months ended September 30, 2011. The purchase price was an all cash transaction, reduced by the amount of ISP’s net indebtedness at closing, and is subject to a post-closing adjustment based on changes in ISP’s net working capital at closing. In addition, the purchase price is subject to post-closing adjustments to the extent that certain change in control payments, termination costs for interest rate swaps, and accrued pension and other post-employment benefit liabilities of ISP exceed specified amounts. Ashland has included ISP within the Specialty Ingredients reporting segment, with the exception of ISP’s Elastomers business line, a business with $410 million of sales for the twelve months ended September 30, 2011, which has been included within the Performance Materials reporting segment.

Distribution divestiture

On March 31, 2011, Ashland completed the sale to Nexeo Solutions, LLC (formerly known as TPG Accolade, LLC (Nexeo)) of substantially all of the assets and certain liabilities of its global distribution business which previously comprised the Ashland Distribution (Distribution) segment. The transaction was an asset sale with the total post-closing adjusted cash proceeds received by Ashland of $972 million, before transaction fees and taxes. Ashland recognized an after-tax gain of $271 million. The tax effects on the gain were partially offset by a $72 million release of tax valuation allowances on a capital loss carry-forward generated from the December 2008 divestiture of Ashland’s interest in FiberVisions Holdings LLC. The gain was included within the discontinued operations caption in the Statements of Consolidated Income for 2011. Ashland Distribution recorded sales of $3,419 million during the fiscal year ended September 30, 2010 and employed approximately 2,000 employees across North America and Europe.

Because this transaction signifies Ashland’s exit from the distribution business, the results of operations and cash flows of Distribution have been classified as discontinued operations for all periods presented. Certain indirect corporate costs included within selling, general and administrative expense that were previously allocated to the Distribution reporting segment that do not qualify for discontinued operations accounting classification are now reported as costs within the Unallocated and other section for segment reporting purposes, and equaled $36 million, $31 million and $25 million for 2011, 2010 and 2009, respectively. Ashland is currently implementing plans to reduce these stranded costs.

Ashland will retain and has agreed to indemnify Nexeo for certain liabilities of the Distribution business arising prior to the closing of the sale. This includes pension and other postretirement benefits, as well as certain other liabilities, including certain litigation and environmental liabilities relating to the pre-closing period, as described in the definitive agreement. Costs directly related to these expenses have been included within the discontinued operations caption for 2011, 2010 and 2009. The ongoing effects of the pension and postretirement plans for former Distribution employees will be reported within the Unallocated and other section of continuing operations subsequent to March 31, 2011.

As part of this sale, Ashland is receiving transition service fees for ongoing administrative and other services being provided to Nexeo. During 2011 Ashland recognized transition service fees of $17 million, which offset costs within the selling, general and administrative expense caption of the Statements of Consolidated Income. While the transition service agreements vary in duration depending upon the type of service provided, Ashland is implementing plans to reduce costs as the transition services are phased out. See Note D of Notes to Consolidated Financial Statements for further information on the results of operations of Distribution for all periods presented.

Casting Solutions joint venture

In July 2010, Ashland and Süd-Chemie AG (Süd-Chemie) signed an agreement for the formation of an expanded global joint venture serving the foundry chemical sector. The transaction closed on November 30, 2010 and combined three businesses: (i) Ashland’s Casting Solutions business group, (ii) Süd-Chemie’s Foundry-Products and Specialty Resins business unit, and (iii) Ashland-Südchemie-Kernfest GmbH (ASK), the then existing 50% owned European-based joint venture between Ashland and Süd-Chemie, for which Ashland historically only recognized equity income of the joint venture within its consolidated results. Ashland’s Casting Solutions and ASK businesses recorded sales of $279 million and $145 million, respectively, during each businesses’ most recently completed fiscal year prior to the closing. The Foundry-Products and Specialty Resins business unit of Süd-Chemie contributed to the joint venture generated sales of approximately $146 million for its most recently completed fiscal year prior to the closing.

During the fifth year of the joint venture’s operations, Ashland will have the option to sell its shares in the expanded global joint venture to Süd-Chemie under mutually agreed terms. If Ashland does not execute this option by the end of the

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sixth year of the joint venture’s operations, Süd-Chemie will have the option to acquire Ashland’s shares under mutually agreed terms. Under both options, if mutually agreed terms cannot be reached, then the fair market value of the shares will be determined through an appraisal process set forth in the agreement.

Upon closing of the transaction, the joint venture distributed a $21 million net payment to Ashland in accordance with the agreement. From the closing date of the transaction through the end of 2011, Ashland received an additional $46 million cash payment from the joint venture, representing final distributions resulting from post-closing activities and measurements set forth in the agreement.

Ashland recognized a pretax gain of $23 million during 2011, attributable to the fair market value of the net assets contributed to the joint venture. For the majority of the valuation of the contributed assets and liabilities, Ashland utilized the discounted cash flow method; however, the adjusted book value method was also used in some areas of the valuation. The gains were included in the net gain on acquisitions and divestitures caption in the Statements of Consolidated Income.

Ashland’s equity interest in the expanded joint venture qualifies for equity method accounting treatment under accounting principles generally accepted in the United States of America (U.S. GAAP). As a result, beginning on December 1, 2010, the results of the Performance Materials segment no longer includes the sales, cost of sales, selling, general and administrative expense and corresponding taxes related to the Casting Solutions business; however, Ashland includes the financial results of the joint venture within operating income of the Performance Materials segment and in the equity and other income caption of the Statements of Consolidated Income. In addition, the expanded joint venture has resulted in certain stranded costs that Ashland is currently implementing cost reduction plans to eliminate.

Ara Quimica acquisition

In April 2010, Ashland acquired the remaining 50% interest in Ara Quimica S.A. (Ara Quimica), a leading producer of custom unsaturated polyester resin formulations for the composites industry in South America, for $28 million. Prior to the acquisition, Ashland owned a 50% interest in Ara Quimica, which it recorded as an equity-method investment within the Performance Materials reporting segment. During 2010, Ashland recognized a pretax gain of $23 million as a result of revaluing its existing equity interest held in Ara Quimica before the business combination. The gain was included in the net gain on acquisitions and divestitures caption on the Statements of Consolidated Income. As a result of this transaction, Ashland recorded $19 million of current assets and $61 million of long-term assets, which includes $55 million of goodwill and intangible assets. In addition, Ashland recorded $18 million of current liabilities and $6 million of noncurrent liabilities.

Pinova divestiture

In January 2010, Ashland sold its refined wood rosin and natural wood terpenes business, formerly known as Pinova, a business unit of Specialty Ingredients, to TorQuest Partners in a transaction valued at approximately $75 million before tax, which was comprised of $60 million in cash and a $15 million five-year promissory note from TorQuest Partners. The Pinova business, with annual revenues of approximately $85 million per year, had approximately 200 employees along with an associated manufacturing facility located in Brunswick, Georgia. The transaction resulted in a pretax gain of less than $1 million, which was included in the net gain on acquisitions and divestitures caption on the Statements of Consolidated Income. As part of this transaction, TorQuest Partners has agreed to continue to manufacture certain products on behalf of Ashland.

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 at approximately $120 million before tax, which was subsequently reduced by $4 million after giving effect to post-closing adjustments related primarily to working capital. Drew Marine businesses had annual sales of approximately $140 million per year. The transaction resulted in an initial pretax gain of $56 million during 2009, which was included in the net gain on acquisitions and divestitures caption on the Statements of Consolidated Income. As part of this transaction, Ashland has agreed to continue to manufacture certain products for Drew Marine.

Hercules acquisition

On November 13, 2008, Ashland completed its acquisition of Hercules in a transaction valued at approximately $3.4 billion. The total merger consideration for outstanding Hercules Common Stock was $2,594 million, including $2,096 million in cash, $450 million in Ashland Common Stock with the remaining value of the transaction related to cash consideration and value for restricted stock units, stock options and transaction costs. In addition, Ashland assumed $798 million in debt as a part of the transaction. The acquired businesses of Hercules currently comprise significant portions of the Specialty Ingredients and Water Technologies reporting segments.

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Restructuring and integration programs

Ashland periodically implements restructuring programs related to acquisitions, divestitures or other cost reduction programs in order to enhance profitability through streamlined operations and an improved overall cost structure for each business. As of September 30, 2011, the remaining restructuring reserves for previously announced programs principally consisted of severance payments from the 2009 Hercules Integration Plan, which resulted in 12 permanent facility closings and a reduction in the global workforce of over 2,000 employees between 2008 and 2010, and the Performance Materials restructuring, which consisted of several plant closings and operational redesign to eliminate excess capacity that was announced during 2010. The total restructuring cost incurred under these plans during 2010 was $15 million, and was classified within the selling, general and administrative expense caption of the Statements of Consolidated Income. The total restructuring cost incurred during 2009 was $96 million, of which $75 million had been charged as an expense within the Statements 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 caption. The remaining cost of $21 million related to severance associated with Hercules personnel, which qualified for the purchase method of accounting in accordance with U.S. GAAP at that time, and had no effect on the Statements of Consolidated Income.

During 2011, Ashland announced steps to reduce stranded costs resulting from the divestiture of Distribution and the contribution of the Casting Solutions business to the new global joint venture with Süd-Chemie. In addition, Ashland is currently taking action to integrate ISP into the Specialty Ingredients and Performance Materials businesses, subsequent to its purchase in August 2011. As a first step to address cost reduction opportunities resulting from these transactions, Ashland announced a voluntary severance offer (VSO) in June 2011 to approximately 1,500 regular, full-time, non-union, U.S.-based employees, primarily within various shared resource groups as well as certain positions within the Specialty Ingredients business. As of September 30, 2011, 150 employees have been formally approved for the VSO. An involuntary program was also initiated as a further step to capture targeted saving levels from these transactions and other business cost saving initiatives. The VSO and involuntary program resulted in a severance charge of $34 million classified within the selling, general and administrative expense caption of the Statements of Consolidated Income. Ashland anticipates additional subsequent charges from ongoing efforts to maximize operational efficiencies as a result of these transactions.

Financing activities

On August 23, 2011, in conjunction with the ISP acquisition closing, Ashland entered into a $3.9 billion senior secured credit facility with a group of lenders (the Senior Credit Facility). The Senior Credit Facility is comprised of (i) a $1.5 billion term loan A facility, (ii) a $1.4 billion term loan B facility and (iii) a $1.0 billion revolving credit facility. Proceeds from borrowings under the term loan A facility and the term loan B facility were used, together with cash on hand, to finance the cash consideration paid for the ISP acquisition, as well as to finance the repayment of existing indebtedness of ISP in connection with the acquisition.

The Senior Credit Facility is guaranteed by Ashland’s existing and future subsidiaries (other than certain immaterial subsidiaries, joint ventures, special purpose financing subsidiaries, regulated subsidiaries, certain foreign subsidiaries and certain other subsidiaries), and is secured by a first-priority security interest in substantially all the personal property assets, and certain real property assets, of Ashland and the guarantors, including all or a portion of the equity interests of certain of Ashland’s domestic subsidiaries and first-tier foreign subsidiaries and, in certain cases, a portion of the equity interests of other foreign subsidiaries. The term loan A facility was drawn in full at closing and is required to be repaid by Ashland in consecutive quarterly installments beginning on December 31, 2011, with an aggregate amount equal to 5% of the original principal amount of such facility due in each of the first and second years after August 23, 2011 (the closing date), an aggregate amount equal to 10% of the original principal amount due in each of the third and fourth years after the closing date, an aggregate amount equal to 15% of the original principal amount due in the fifth year after the closing date, and a final payment of all outstanding principal and interest due on August 23, 2016. The term loan B facility was also drawn in full at closing and is required to be repaid by Ashland in consecutive quarterly installments beginning on December 31, 2011, with an aggregate amount equal to 1% of the original principal amount of such facility due in each of the seven years after the closing date, and a final payment of all outstanding principal and interest due on August 23, 2018. Total borrowing capacity remaining under the $1.0 billion revolving credit facility was $914 million, representing a reduction of $86 million for letters of credit outstanding at September 30, 2011.

At Ashland’s option, loans issued under the credit agreement carry interest rates of LIBOR or an alternate base rate, in each case plus the applicable interest rate margin. Loans in respect of the term loan B facility carry interest rates of LIBOR plus 2.75%, in the case of LIBOR borrowings, or at the alternate base rate plus 1.75%, and is subject to a 1% LIBOR floor. Loans in respect of the term loan A facility and the revolving credit facility carried an initial interest rate of LIBOR plus 2.25%, in the case of LIBOR borrowings, or at the alternate base rate plus 1.25%, through and including February 19, 2012, and thereafter the interest rate will fluctuate between LIBOR plus 1.75% and LIBOR plus 2.50% (or between the alternate base rate plus 0.75% and the alternate base rate plus 1.50%), based upon Ashland’s corporate credit ratings or the consolidated gross leverage ratio (as defined in the credit agreement) (whichever yields a lower applicable interest rate margin) at such time. In addition, Ashland will initially be required to pay fees of 0.40% on the daily unused amount of the

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revolving credit facility through and including February 19, 2012, and thereafter the fee rate will fluctuate between 0.30% and 0.50%, based upon Ashland’s corporate credit ratings or the consolidated gross leverage ratio. In order to manage the variable interest rate risk associated with term loans A and B, Ashland entered into interest rate swap agreements. As of September 30, 2011, the total notional value of interest rate swaps related to term loan A and term loan B equaled $1.5 billion and $650 million, respectively, effectively fixing the interest rates for approximately 75% of the term loan A and term loan B principal in the aggregate. See Note G for additional information on the interest rate swap instruments.

The term loan A facility and the revolving credit facility may be prepaid at any time without premium. If within one year of the closing date, Ashland refinances, or voluntarily prepays loans in respect of, the term loan B facility through the incurrence of other long-term bank debt that has a lower effective yield than the yield on the term loan B facility, then Ashland is required to pay a prepayment premium equal to 1.0% of the aggregate principal amount of the term loan B facility so refinanced or prepaid. In addition, Ashland is required to make mandatory prepayments in respect of the Senior Credit Facility with specified percentages of the net cash proceeds of certain asset dispositions, casualty events and debt and equity issuances and with specified percentages of excess cash flow, in each case subject to certain conditions.

Former senior credit facility

During March 2011, Ashland terminated its previous term loan A facility due 2014, paying off the outstanding balance of $289 million with funds received from the sale of Distribution. As a result of the termination of this facility, Ashland recognized an $11 million charge for the remaining debt issuance costs related to the loan fees paid to originate the loan, which is included in the net interest and other financing expense caption in the Statements of Consolidated Income.

On March 31, 2010, as part of a refinancing of its then-existing senior credit facilities, Ashland entered into a credit agreement with a group of lenders. The credit agreement provided for an aggregate principal amount of $850 million in senior secured credit facilities, consisting of a $300 million four-year term loan A facility and a $550 million revolving credit facility. The proceeds from the borrowings from the term loan A facility were used, together with proceeds from the accounts receivable securitization facility described further within this note, and cash on hand to repay all amounts outstanding under Ashland’s previous senior secured facilities and to pay for fees and expenses incurred in connection with the credit facilities and the related transactions. As discussed above, the term loan A facility was terminated and repaid in March 2011, and the revolving credit facility was replaced with a new $1.0 billion revolving credit facility as part of the August 23, 2011 current Senior Credit Facility.

As a result of the ISP acquisition and financing of the transaction, Ashland’s corporate credit rating was downgraded by Standard & Poor’s from BB+ to BB, while Ashland’s corporate credit rating from Moody’s Investor Services remained unchanged at Ba1. At September 30, 2011, Standard & Poor’s and Moody’s Investor Services both rated Ashland’s outlook as stable. Ashland’s ability to access capital markets to provide liquidity has remained largely unchanged as a result of these ratings actions; however, improvements in the credit markets and Ashland’s financial performance, has allowed, and should continue in the future to allow, Ashland to borrow on more favorable terms, including less restrictive covenants and lower interest rates.

Based on Ashland’s current debt structure included in Note I of Notes to Consolidated Financial Statements and the debt restructuring during 2011 in conjunction with the closing of the ISP transaction, future annual interest expense is expected to range from approximately $220 million to $240 million based on applicable fixed and floating interest rates, assuming interest rates remain stable.

Specialty Ingredients expansion – HEC manufacturing facility

In November 2010, Specialty Ingredients’ new hydroxyethylcellulose (HEC) production facility in Nanjing, China became operational. At a cost of $90 million, the new facility represents Ashland’s largest single investment in China and the Asia Pacific region. This manufacturing facility increased Specialty Ingredients’ HEC production capacity by 10,000 metric tons per year and can be expanded to produce up to 20,000 metric tons per year.

Stock repurchase and annual dividend increase

In March 2011, the Board of Directors of Ashland approved a $400 million stock repurchase program. Under the program that began on April 1, 2011, Ashland purchased common shares through a $200 million 10b5-1 automatic trading plan. Effective May 31, 2011, as a result of the announcement of the ISP acquisition, Ashland terminated the 10b5-1 automatic trading program. Purchases under the plan amounted to $71 million, or 1.2 million shares. Ashland still has the ability to make discretionary purchases of Ashland Common Stock on the open market, pursuant to the Board’s original $400 million share repurchase authorization.

In May 2011, the Board of Directors of Ashland announced a quarterly cash dividend of 17.5 cents per share, 70 cents per share on an annual basis, to eligible shareholders of record. This amount was paid for quarterly dividends in June and September 2011, and was an increase from the quarterly cash dividend of 15 cents per share paid during the first and second

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quarters of fiscal 2011. Cash dividends paid during fiscal 2011, 2010 and 2009 were 65 cents, 45 cents and 30 cents per share, respectively.

RESULTS OF OPERATIONS – CONSOLIDATED REVIEW

Use of non-GAAP measures

Based on clarification and interpretive guidance from the Securities and Exchange Commission regarding the use of non-GAAP measures, Ashland has included within this document certain non-GAAP measures which include EBITDA (operating income plus depreciation and amortization), adjusted EBITDA (EBITDA adjusted for key items, which may include pro forma affects for significant acquisitions or divestitures, as applicable), adjusted EBITDA margin (adjusted EBITDA, which can include pro forma adjustments, divided by sales) and free cash flow (cash flows by operating activities from continuing operations minus cash dividends paid and additions to property, plant and equipment). Such measurements are not prepared in accordance with U.S. GAAP and should not be construed as an alternative to reported results determined in accordance with U.S. GAAP. Management believes the use of such non-GAAP measures on a consolidated and business segment basis assists investors in understanding the ongoing operating performance by presenting the financial results between periods on a more comparable basis. In addition, certain financial covenants related to Ashland’s Senior Credit Facility are based on similar non-GAAP measures. The non-GAAP information provided is unique to Ashland and may not be consistent with the methodologies used by other companies.

Consolidated review

Net income

Ashland’s net income amounted to $414 million in 2011, $141 million in 2010 and a loss of $261 million in 2009, or $5.17, $1.78 and $(3.60) diluted earnings per share, respectively. Ashland’s net income is primarily affected by results within operating income, net interest and other financing expense, income taxes, discontinued operations and other significant events or transactions that are unusual or nonrecurring. Operating income includes Ashland’s adjustment for the immediate recognition of the change in the fair value of the plan assets and net actuarial gains and losses annually for defined benefit pension plans and other postretirement benefit plans each fiscal year. See “Application of Critical Accounting Policies” for additional details regarding Ashland’s accounting policies for benefit plan obligations.

Income from continuing operations, which excludes results from discontinued operations, amounted to $56 million in 2011, $88 million in 2010 and a loss of $240 million in 2009, or $.70, $1.11 and $(3.31) per diluted earnings per share, respectively. Operating income was $130 million, $249 million and a loss of $91 million during 2011, 2010 and 2009, respectively. See the “Operating income” discussion for an analysis of these results.

Ashland incurred pretax net interest and other financing expense of $121 million, $197 million and $205 million during 2011, 2010 and 2009, respectively. Included within 2011, 2010 and 2009 were accelerated amortization charges and prepayment penalties totaling $12 million, $66 million and $18 million, respectively, for early repayment of various debt instruments. The decrease in interest expense during 2011 compared to 2010 was primarily attributable to accelerated amortization costs incurred in 2010, as well as reduced debt levels throughout fiscal 2011 as compared to 2010. The decrease in interest expense during 2010 compared to 2009 was primarily attributable to a lower weighted-average rate of borrowing due to Ashland’s refinancing of debt, as well as approximately $400 million in debt reduction.

The effective income tax benefit rate of 1,766.7% for 2011, 17.3% for 2010 and 25.7% for 2009 were significantly affected by a number of discrete items discussed in further detail within the income tax expense caption discussion in the comparative Statements of Consolidated Income analysis.

Discontinued operations, which are reported net of taxes, resulted in $358 million and $53 million of income during 2011 and 2010, respectively, and a loss of $21 million in 2009. The results each year include the direct operating results of Distribution and various adjustments related to previously recorded divestitures as well as updates to the asbestos liability and receivable models. For further information on items reported within this caption, see the discontinued operations caption discussion in the comparative Statements of Consolidated Income analysis.

Ashland reported significant nonrecurring items in 2011, 2010 and 2009 that were not classified in operating income. These items in 2011 included a pretax gain of $23 million from the fair value assessment of the Casting Solutions net assets contributed to the expanded global joint venture with Süd-Chemie exceeding the recorded amounts, offset by ISP transaction costs of $21 million included within the net (loss) gain on acquisitions and divestitures caption of the Statements of Consolidated Income. These items in 2010 included a $23 million pretax gain as a result of remeasuring Ashland’s previously held 50% equity interest in Ara Quimica partially offset by a $5 million pretax charge as a result of the Patient Protection and Affordable Care Act included within the net (loss) gain on acquisitions and divestitures caption of the Statements of Consolidated Income. These items in 2009 included a $56 million pretax gain from the sale of Drew Marine, which was also reported within the net (loss) gain on acquisitions and divestitures caption of the Statements of Consolidated

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Income, as well as a $54 million pretax loss related to cross-currency swaps and a $32 million pretax loss on auction rate securities, which were both associated with the Hercules acquisition and reported within the other income and (expense) caption of the Statements of Consolidated Income. For further information on each of these items see the related income statement caption discussion in the comparative Statements of Consolidated Income analysis.

Operating income

Operating income amounted to $130 million in 2011, $249 million in 2010 and a loss of $91 million in 2009. Operating income or loss for each period includes the impact of Ashland’s policy to immediately recognize the change in the fair value of the plan assets and net actuarial gains and losses for defined benefit pension plans and other postretirement benefit plans, which resulted in charges of $318 million in 2011, $268 million in 2010 and $409 million in 2009.

Operating income results in 2011 compared to 2010 included an additional $5 million of operating income from the additional 39 day period the businesses of ISP (acquired on August 23, 2011) were owned in 2011 compared to 2010. Additionally, the results in 2011 included $55 million for severance and restructuring charges compared to $18 million in 2010. The results in 2011 also included $16 million for a nonrecurring purchase accounting adjustment related to inventory as well as $19 million for environmental reserve adjustments and $2 million for Casting Solutions transaction and start-up costs related to the Süd-Chemie joint venture.

Operating income results in 2010 compared to 2009 included an additional $24 million of operating income from the additional 44 day period the businesses of Hercules (acquired on November 13, 2008) were owned in 2010 as compared to 2009. Additionally, the results in 2010 included an $18 million restructuring charge for plant closure costs associated with capacity reductions in the composites line of business within Performance Materials. The results in 2009 included $47 million in nonrecurring purchase accounting adjustments related to inventory and in-process research and development associated with the Hercules acquisition and $74 million in severance, restructuring charges and plant closure costs for the ongoing integration and reorganization from the Hercules acquisition and other cost reduction programs. Excluding the items above, operating results improved from 2009 to 2010 due partially to Ashland’s focus on cost control and price management over the past year. This cost control and price management, along with significant sales growth from increased volumes within all of Ashland’s business segments, after excluding the effect of acquisitions and divestitures as compared to 2009, helped mitigate the effect of substantial raw material cost increases.

Operating income for 2011, 2010 and 2009 included depreciation and amortization (including a $10 million in-process research and development charge during 2009) of $299 million, $280 million and $315 million, respectively. EBITDA totaled $429 million, $529 million and $224 million for 2011, 2010 and 2009, respectively. Adjusted EBITDA results in the table below have been prepared to illustrate the ongoing effects of Ashland’s operations, which exclude certain key items since management believes the use of such non-GAAP measures on a consolidated and business segment basis assists investors in understanding the ongoing operating performance by presenting the financial results between periods on a more comparable basis. The inventory fair value adjustments of $16 million in 2011 and $37 million in 2009 relate to charges required by U.S. GAAP upon acquisition of a company’s inventory. The Hercules business results of $35 million in 2009 relate to the operating income earned and depreciation and amortization expense for the period in which Ashland did not yet own this business.

(In millions)	2011		2010		2009
Operating income	$	130	$	249	$	(91	)
Depreciation and amortization (a)		299		280		315
EBITDA		429		529		224
Actuarial loss on pension and other postretirement plan remeasurement		318		268		409
Severance		36		11		50
Environmental reserve adjustments		19		-		-
Casting Solutions transaction and start-up costs		2		-		-
Inventory fair value adjustment		16		-		37
Results of the Hercules business prior to acquisition		-		-		35
Plant closing costs		-		-		4
Currency gain on intracompany loan		-		-		(5	)
Adjusted EBITDA	$	820	$	808	$	754

(a)	Includes $19 million, $7 million and $20 million of asset impairment and accelerated depreciation during 2011, 2010 and 2009, respectively, and a $10 million charge for purchased in-process research and development in 2009.

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Statements of Consolidated Income – caption review

A comparative analysis of the Statements of Consolidated Income by caption is provided as follows for the years ended September 30, 2011, 2010 and 2009.

							2011		2010
(In millions)	2011		2010		2009		change		change
Sales	$	6,502	$	5,741	$	5,220	$	761	$	521

Sales for 2011 increased $761 million, or 13%, compared to 2010 primarily as a result of increases in pricing, implemented to recover the effects of increases in raw material costs, and volume increases, which increased sales $475 million and $142 million, respectively, or 11%, in total. Favorable currency exchange rates and product mix increased sales $111 million and $11 million, respectively. In addition, the net of acquisitions and divestitures, attributable to the acquisition of ISP in August of 2011, the divestiture of Pinova in January 2010, purchase of Ara Quimica in April 2010 and the contribution of the Casting Solutions business in November 2010, increased sales by $22 million.

Sales for 2010 increased $521 million, or 10%, compared to 2009 primarily as a result of increases in volume and favorable currency exchange rates as price declines partially offset these increases. During 2010, Ashland experienced solid volume growth as all operating segments reported volume increases, after excluding the effect of acquisitions and divestitures, which increased sales $466 million, or 9%. Favorable currency exchange rates increased sales $76 million, or 1%, while net price and product mix decreased sales by $128 million, or 2%. An additional increase in sales of $107 million, or 2%, occurred in 2010 from net acquisitions and divestitures attributable to the November 2008 acquisition of Hercules, the August 2009 divestiture of Drew Marine, the January 2010 divestiture of Pinova, and the April 2010 purchase of Ara Quimica.

										2011		2010
(In millions)	2011			2010			2009			change		change
Cost of sales	$	4,890		$	4,124		$	3,850		$	766	$	274
Gross profit as a percent of sales		24.8	%		28.2	%		26.2	%

Cost of sales for 2011 increased $766 million, or 19%, compared to 2010 primarily due to escalating raw material costs, that increased cost of sales $570 million, or 14%, which includes a $13 million increase in cost of sales for net actuarial losses for defined benefit plans and other postretirement benefit plans. Increased volume contributed an additional $66 million, or 2%, to cost of sales, while the net acquisitions and divestitures impact of ISP, Pinova, Ara Quimica and Casting Solutions caused an increase of $35 million, or 1%. Currency exchange, due to the weakening of the U.S. dollar as compared to 2010, increased cost of sales by $80 million, or 2%. Change in product mix increased cost of sales by $15 million.

Cost of sales for 2010 increased $274 million, or 7%, compared to 2009 primarily due to increases in volume. Volume increased cost of sales by $283 million, or 7%. The net acquisitions and divestitures impact of Hercules, Drew Marine, Pinova and Ara Quimica represented an $82 million, or 2%, increase in cost of sales for 2010. The cost of production, which includes a decrease in cost of sales for net actuarial losses for defined benefit plans and other postretirement benefit plans of $52 million, and change in product mix decreased cost of sales by $107 million, or 3%, and $31 million, or 1%, respectively. Currency exchange, due to the weakening of the U.S. dollar as compared to 2009, increased cost of sales by an additional $47 million, or 1%.

										2011		2010
(In millions)	2011			2010			2009			change		change
Selling, general and administrative expense	$	1,442		$	1,330		$	1,399		$	112	$	(69	)
As a percent of sales		22.2	%		23.2	%		26.8	%

Selling, general and administrative expenses for the current period increased 8% compared to 2010 as expenses as a percent of sales declined 1.0 percentage point. Expenses impacting the comparability of 2011 compared to 2010 included $35 million and $4 million for severance and restructuring charges during 2011 and 2010, respectively, net actuarial loss increase of $30 million for defined benefit pension plans and other postretirement benefit plans, and nonrecurring environmental reserve charges of $19 million in 2011. The currency exchange impact on selling, general and administrative expense resulted in a $15 million increase.

Selling, general and administrative expenses for 2010 decreased 5% compared to 2009 as expenses as a percent of sales decreased 3.6 percentage points. Expenses impacting the comparability of 2010 compared to 2009 included $4 million and

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$50 million for severance and restructuring charges during 2010 and 2009, respectively, primarily due to the ongoing integration and reorganization from the Hercules acquisition, and a $21 million reduction in expenses during 2009 as a result of the employee furlough program. In addition, 2009 excluded approximately $50 million of costs related to the former Hercules businesses due to the timing of the acquisition (44 days into the first quarter). The net actuarial losses for pension plans and other postretirement benefit plans declined $98 million in 2010 compared to 2009. Currency exchange also increased expenses by an additional $16 million, while the remaining increase related primarily to increases in incentive compensation during 2010 compared to 2009. For further information on cost saving initiatives see the “Key Developments” discussion within Management’s Discussion and Analysis as well as Note F of Notes to Consolidated Financial Statements.

							2011		2010
(In millions)	2011		2010		2009		change		change
Research and development expense	$	89	$	86	$	96	$	3	$	(10	)

Research and development expenses during 2011 increased $3 million as compared to 2010. The increase relates to the inclusion of ISP costs during the 39 day period owned in 2011, which added an additional $4 million compared to the prior year.

Research and development expenses for 2010 decreased as compared to 2009 primarily as a result of a $10 million charge related to the purchased in-process research and development projects at Hercules as of the acquisition date that occurred in 2009.

							2011			2010
(In millions)	2011		2010		2009		change			change
Equity and other income
Equity income	$	17	$	19	$	14	$	(2	)	$	5
Other income		32		29		20		3			9
	$	49	$	48	$	34	$	1		$	14

Total equity and other income increased 2% during 2011 compared to 2010. The decrease in equity income in fiscal 2011 primarily related to equity income from the Performance Materials business segment. This decline was the result of the Ara Quimica joint venture purchased in April 2010 being removed from the 2011 period as well as operational results for the new global joint venture with Süd-Chemie that included certain start-up costs associated with the joint venture in fiscal 2011, essentially offsetting income from the joint venture with Süd-Chemie recorded during the year. See Note D of Notes to Consolidated Financial Statements for additional information on this expanded global joint venture. The increase in other income for 2011 compared to 2010 was attributable to increases associated with Water Technologies and other corporate activities.

Total equity and other income increased 41% during 2010 compared to 2009. The increase in 2010 primarily relates to increased equity income from various joint venture affiliations and other income attributable to Consumer Markets, Performance Materials and other corporate activities.

										2011		2010
(In millions)	2011			2010			2009			change		change
Net interest and other financing (expense) income
Interest expense	$	(131	)	$	(198	)	$	(215	)	$	67	$	17
Interest income		16			12			21			4		(9	)
Other financing costs		(6	)		(11	)		(11	)		5		-
	$	(121	)	$	(197	)	$	(205	)	$	76	$	8

The combined decrease, excluding interest income, in interest expense and other financing costs of $72 million in 2011 compared to 2010 was primarily attributable to a prior year $66 million accelerated amortization charge for deferred debt issuance costs and prepayment penalties associated with the senior credit facility refinancing in March of 2010. The 2011 period included a $12 million accelerated amortization charge for the early repayment of Ashland’s $289 million term loan A balance and termination of the accounts receivable securitization facility in March 2011. Excluding these accelerated amortization charges in both periods, interest expense decreased $18 million, which was a result of reduced average levels of debt outstanding during 2011 as well as a reduction in the weighted-average interest rate for debt outstanding from 6.8% in 2010 to 6.5% in 2011.

The combined decrease, excluding interest income, in interest expense and other financing costs of $17 million in 2010 compared to 2009 is a result of the significant decrease in debt outstanding of approximately $400 million compared to 2009

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and a lower weighted-average interest rate as a result of the senior credit facility debt refinanced during 2010. Additionally, 2010 included $66 million of accelerated amortization of debt issuance costs and prepayment penalties associated with the senior credit facility refinancing. Excluding this charge and the $18 million of accelerated amortization for the bridge loan extinguishment and prepayments made on both term loan A and term loan B facilities, interest expense and other financial costs decreased by $65 million during 2010. In conjunction with the Hercules acquisition, interest income in 2010 compared to 2009 also declined, as part of the funding to complete the acquisition was paid from Ashland’s existing liquid investments in the first quarter of fiscal 2009. For further information on Ashland’s debt, including rates paid and scheduled maturities, see Note I of Notes to Consolidated Financial Statements.

									2011			2010
(In millions)	2011			2010			2009		change			change
Net (loss) gain on acquisitions and divestitures
Süd-Chemie joint venture	$	23		$	-		$	-	$	23		$	-
ISP transaction costs		(21	)		-			-		(21	)		-
Ara Quimica		-			23			-		(23	)		23
MAP Transaction		(3	)		(4	)		3		1			(7	)
Drew Marine		-			2			56		(2	)		(54	)
Other		(4	)		-			-		(4	)		-
	$	(5	)	$	21		$	59	$	(26	)	$	(38	)

Net (loss) gain on acquisitions and divestitures during 2011 includes a $23 million remeasurement gain from Ashland’s fair market value assessment of the Casting Solutions net assets contributed to the expanded joint venture with Süd-Chemie exceeding the previously recorded amounts in November 2010. In addition, Ashland incurred a $21 million charge in transaction costs associated with the ISP acquisition and a $3 million loss for the estimated present value of future tax deductions from the MAP Transaction. Other items recorded during the current period include a $6 million gain associated with Ashland’s sale of its 50% joint venture interest in Exaloid Süd-Chemie S.L., a $7 million loss associated with the sale of its pentaerythritol business, and a $3 million charge for contingent environmental indemnifications associated with the sale of Pinova in 2010.

Net (loss) gain on acquisitions and divestitures during 2010 includes the remeasurement gain from Ashland’s previously held equity interest in Ara Quimica upon the purchase of the remaining 50% interest in April 2010 and subsequent adjustments to the 2005 transfer of Ashland’s 38% interest in the Marathon Ashland Petroleum joint venture and two other small businesses to Marathon Oil Corporation (Marathon) (the MAP Transaction), along with a final closing gain associated with the sale of Drew Marine. See Notes B and C of Notes to Consolidated Financial Statements for further discussion on acquisitions and divestitures.

Net (loss) gain on acquisitions and divestitures for 2009 includes the sale of Drew Marine, as well as subsequent adjustments to the 2005 transfer of Ashland’s 38% interest in Marathon.

									2011			2010
(In millions)	2011			2010		2009			change			change
Other income (expense)
Loss on currency swaps	$	-		$	-	$	(54	)	$	-		$	54
(Loss) gain on auction rate securities		(1	)		2		(32	)		(3	)		34
	$	(1	)	$	2	$	(86	)	$	(3	)	$	88

Other income and expenses activity for 2011 and 2010 relates to auction rate security sales. Other income and expense during 2009 included two significant nonrecurring charges related to 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.

										2011			2010
(In millions)	2011			2010			2009			change			change
Income tax benefit	$	(53	)	$	(13	)	$	(83	)	$	(40	)	$	70
Effective tax rate		(1,766.7	)%		(17.3	)%		(25.7	)%

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Income tax expense for 2011 included a tax benefit of $92 million for valuation allowance releases primarily related to state deferred tax assets, and tax expense of $60 million related to the repatriation of foreign earnings to the U.S. In addition, 2011 income tax expense included a benefit of $9 million for research and development credits, of which $4 million related to credits signed into law on a retroactive basis, and tax expense of $8 million associated with unfavorable tax adjustments related to the Süd-Chemie joint venture.

Income tax expense for 2010 included a benefit of $17 million for the identification of additional U.S. research and development tax credits within the acquired Hercules businesses, a $5 million benefit from foreign results, and a benefit of $9 million related to a deferred tax balance adjustment. In addition, income tax expense for 2010 included a benefit of $8 million attributable to a non-taxable book gain which was recorded as a result of the Ara Quimica acquisition.

Income tax expense for 2009 included an $8 million valuation allowance on auction rate securities 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.

								2011			2010
(In millions)	2011		2010		2009			change			change
Income (loss) from discontinued operations
(net of income taxes)
Distribution	$	333	$	22	$	(14	)	$	311		$	36
APAC		3		8		(6	)		(5	)		14
Asbestos-related litigation reserves		20		21		2			(1	)		19
Electronic Chemicals		2		2		(3	)		-			5
	$	358	$	53	$	(21	)	$	305		$	74

The 2011 period includes a gain of $271 million on the sale of Distribution and two quarters of Distribution’s operating results as compared to a full year of operating results for 2010 and 2009 as a result of the March 31, 2011 sale of the Distribution business to Nexeo. The operational results for 2011, 2010 and 2009 were $62 million, $22 million and $(14) million, respectively, which includes the proportionate share of the pension and other postretirement actuarial gain or loss that was allocated to this business. Distribution’s sales for 2011, 2010 and 2009 included in discontinued operations were $1,868 million, $3,419 million and $3,020 million, respectively. Gross profit margin, on a comparable basis, was 8.8% in 2011 compared to 9.3% in 2010 and 10.0% in 2009.

During 2010, Ashland entered into a new agreement with a number of London market insurance companies with respect to coverage for asbestos-related insurance claims. As a result, a $12 million increase to the Ashland asbestos receivable was recorded within the Consolidated Balance Sheet, which had a $9 million (after-tax) affect on the Statements of Consolidated Income within the discontinued operations caption. As a result of this agreement and other revised estimates, Ashland no longer discounts any portion of the asbestos receivable.

The remaining impacts within discontinued operations were favorable net adjustments (after-tax) to the asbestos reserve and related receivables for each year of $20 million, $12 million and $2 million, respectively, as a result of Ashland’s ongoing assessment of these matters. Additionally, subsequent tax adjustments were made each year to the gain on the sale of APAC (divested in 2006) and adjustments to environmental claims from the gain on the sale of Electronic Chemicals (divested in 2003). See Notes D and N of Notes to Consolidated Financial Statements for further information.

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 allocates all costs to its business segments except for certain significant company-wide restructuring activities, such as the current restructuring plans described in Note F of Notes to Consolidated Financial Statements, and other costs or adjustments that relate to former businesses that Ashland no longer operates. 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.

As previously discussed, Ashland’s businesses are managed along four industry segments: Specialty Ingredients, Water Technologies, Performance Materials and Consumer Markets. As a result of Distribution’s sale to Nexeo, the operating

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results and assets and liabilities related to Distribution have been reflected as discontinued operations for all periods presented. For additional information, see Note Q of Notes to Consolidated Financial Statements.

During 2011, Ashland elected to change its method of recognizing actuarial gains and losses for its defined benefit pension plans and other postretirement benefit plans. Previously, Ashland recognized the actuarial gains and losses as a component of Stockholders’ Equity within the Consolidated Balance Sheet on an annual basis and amortized the gains and losses into operating results over the average future service period of active employees within the related plans. Ashland has elected to immediately recognize the change in the fair value of plan assets and net actuarial gains and losses annually in the fourth quarter of each fiscal year and whenever a plan is determined to qualify for a remeasurement during a fiscal year. The remaining components of pension and other postretirement benefits expense will be recorded on a quarterly basis. While Ashland’s historical policy of recognizing pension and other postretirement benefit expense is considered acceptable under U.S. GAAP, Ashland believes that the new policy is preferable as it eliminates the delay in recognizing gains and losses within operating results. This change will also improve transparency within Ashland’s operating results by immediately recognizing the effects of economic and interest rate trends on plan investments and assumptions in the year these gains and losses are actually incurred. This change in accounting policy has been applied retrospectively, adjusting all prior periods presented.

In connection with this change in accounting policy for pension and other postretirement benefits, Ashland also elected to change its method of accounting for certain costs included in inventory. Ashland has elected to exclude the amount of its pension and other postretirement benefit costs applicable to inactive participants from inventoriable costs and charge them directly to cost of sales. While Ashland’s historical policy of including all pension and other postretirement benefit costs as a component of inventoriable costs was acceptable, Ashland believes that the new policy is preferable, as inventoriable costs will include costs that are directly attributable to current employees within cost of sales. Applying this change retrospectively, in connection with the change in accounting for pension and other postretirement benefit costs, did not have a significant impact on previously reported inventory, cost of sales or segment reported results in any of the prior period financial statements.

In addition, as a further attempt to properly match actual operational expenses each business segment is incurring, Ashland has changed its expense allocation for pension and other postretirement benefit plans during 2011. Previously, Ashland allocated all components of pension and other postretirement benefit plan expenses to each business segment on a ratable basis. Ashland now allocates only the service cost component of these plans to the actual business segment that incurred this expense. All other pension and other postretirement benefit plan expense components are recorded within the Unallocated and other reporting segment. Ashland believes the revised expense allocation will more appropriately match the cost incurred for active employees to the respective business segment. The financial information disclosed in the following tables for each business segment reflects the retrospective application of this expense allocation change on each period.

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

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(In millions)	2011			2010			2009
Sales
Specialty Ingredients	$	1,256		$	915		$	812
Water Technologies		1,902			1,785			1,652
Performance Materials		1,373			1,286			1,106
Consumer Markets		1,971			1,755			1,650
	$	6,502		$	5,741		$	5,220
Operating income (loss)
Specialty Ingredients	$	171		$	125		$	44
Water Technologies		93			130			95
Performance Materials		37			32			10
Consumer Markets		213			270			259
Unallocated and other		(384	)		(308	)		(499	)
	$	130		$	249		$	(91	)
Depreciation and amortization
Specialty Ingredients (a)	$	113		$	99		$	106
Water Technologies (a)		85			88			99
Performance Materials		59			53			63
Consumer Markets		38			36			36
Unallocated and other		4			4			11
	$	299		$	280		$	315
Operating information
Specialty Ingredients (b) (c) (d)
Sales per shipping day	$	4.3		$	3.6		$	3.7
Metric tons sold (thousands)		174.6			163.6			154.1
Gross profit as a percent of sales		32.9	%		33.7	%		26.7	%
Water Technologies (b) (c)
Sales per shipping day	$	7.5		$	7.1		$	6.6
Gross profit as a percent of sales		30.8	%		34.1	%		33.9	%
Performance Materials (b) (d)
Sales per shipping day	$	5.2		$	5.1		$	4.4
Pounds sold per shipping day		4.3			4.5			3.9
Gross profit as a percent of sales		13.1	%		16.0	%		17.0	%
Consumer Markets (b)
Lubricant sales gallons		171.3			174.3			158.8
Premium lubricants (percent of U.S. branded volumes)		31.3	%		29.6	%		28.2	%
Gross profit as a percent of sales		27.3	%		32.0	%		32.0	%

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

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

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

(d)	All statistical information presented excludes activity related to ISP, which was acquired on August 23, 2011. Sales from the acquired operations of ISP are included from the acquired date of August 23, 2011 and forward.

The EBITDA and adjusted EBITDA amounts presented below within this business section are provided as a means to enhance the understanding of financial measurements that Ashland has internally determined to be relevant measures of comparison for each segment. Each of these non-GAAP measures is defined as follows: EBITDA (operating income plus depreciation and amortization), adjusted EBITDA (EBITDA adjusted for key items, which may include pro forma affects for significant acquisitions or divestitures, as applicable), and adjusted EBITDA margin (adjusted EBITDA, which may include pro forma adjustments, divided by sales).

Specialty Ingredients

Specialty Ingredients, which was formerly known as Functional Ingredients, offers industry-leading products, technologies and resources for solving formulation and product performance challenges in a variety of markets including personal care, pharmaceutical, food and beverage, coatings, construction and energy.

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September 30, 2011, which has been included within the Performance Materials reporting segment. Sales for ISP’s business prior to the acquisition and excluding Elastomers were $1,232 million and $1,085 million for the twelve months ended September 30, 2010 and 2009, respectively, while sales in 2011 prior to the August 23, 2011 acquisition were $1,284 million. EBITDA for ISP’s business prior to the acquisition and excluding Elastomers was $272 million and $218 million for the twelve months ended September 30, 2010 and 2009, respectively, while EBITDA in 2011 prior to the August 23, 2011 acquisition was $308 million.

In January 2010, Ashland sold its refined wood rosin and natural wood terpenes business, formerly known as Pinova, a business unit of Specialty Ingredients, to TorQuest Partners in a transaction valued at approximately $75 million before tax. The Pinova business, with annual sales of approximately $85 million a year, had approximately 200 employees along with an associated manufacturing facility located in Brunswick, Georgia.

In November 2008, Ashland acquired Hercules in a transaction valued at approximately $3.4 billion. The acquired company included the Functional Ingredients business segment which is now part of the Specialty Ingredients business. This former Hercules functional ingredients business, which reported sales of $112 million for the 44 day period prior to the acquisition in fiscal 2009, now forms one of Ashland’s four current operating business segments.

2011 compared to 2010

Specialty Ingredients’ sales increased 37% to $1,256 million in 2011 compared to $915 million in 2010. The acquisition of ISP increased sales $157 million, or 17%, while higher pricing increased sales an additional $100 million, or 11%. Volume increased sales $96 million, or 10%, during 2011 as metric tons sold increased to 174.6 thousand, when excluding volumes associated with the ISP acquisition and the Pinova divestiture. Favorable currency exchange added $17 million, or 2%, to sales. The divestiture of the Pinova business reduced sales $27 million, or 3%, compared to 2010, while the mix of product sold decreased sales an additional $2 million.

Gross profit during 2011 increased $83 million compared to 2010. Increased volume improved gross profit by $71 million, while the acquisition of ISP increased gross profit an additional $31 million. Pricing more than offset higher costs, causing an additional $9 million increase in gross profit, which included production start-up costs of approximately $3 million associated with the new Nanjing production facility. Currency exchange during the current period increased gross profit $5 million. Unfavorable product mix sold and the divestiture of Pinova reduced gross profit by $12 million and $5 million, respectively. In addition, during 2011, gross profit was negatively affected by a nonrecurring charge of $16 million related to the fair value of inventory acquired from ISP. In total, gross profit margin during 2011 decreased 0.8 percentage points to 32.9% compared to the prior period.

Selling, general and administrative expenses (which include research and development expenses throughout the business segment discussion and analysis) increased $37 million, or 20%, during 2011 as compared to 2010, primarily due to increases from the ISP acquisition of $27 million and increases in salaries, benefits and incentive compensation of $10 million.

Operating income totaled $171 million for the current year compared to $125 million in 2010. EBITDA increased $60 million, from $224 million in 2010 to $284 million in 2011. Adjusted EBITDA increased $76 million, from $224 million in 2010 to $300 million in 2011. Adjusted EBITDA margin declined 0.6 percentage points in 2011 from 24.5% in 2010 to 23.9% in 2011.

2010 compared to 2009

Specialty Ingredients’ sales increased 13% to $915 million compared to $812 million for the 321 day period this business was owned in 2009, which was due to the closing of the Hercules acquisition on November 13, 2008. The additional 44 days in 2010 contributed $112 million, or 14%, in sales, while the divestiture of Pinova in January of 2010 reduced sales by $59 million, or 7%. Sales in 2009 included a significant nonrecurring transaction to an oilfield chemical supplier in the amount of $17 million, representing 5% of the product volume for 2009. Including this one-time sales transaction, volume increased sales by $85 million, or 10%, primarily due to strength in demand within the regulated and coatings markets, while an unfavorable currency exchange decreased sales by $5 million. Price and product mix decreased sales by $30 million, or 4%, compared to 2009.

Gross profit increased $92 million in 2010 compared to 2009. The additional 44 day period that the acquired operations of the Hercules business was owned in 2010 increased gross profit by $36 million. Increased volume added an additional $55 million in gross profit as metric tons sold increased 6% to 163.6 thousand. Price decreased gross profit by $48 million, while the divestiture of Pinova and currency exchange reduced gross profit by an additional $7 million and $2 million, respectively. A favorable change in product mix added an additional $28 million in gross profit. In addition, during 2009,

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gross profit was negatively affected by a nonrecurring charge of $30 million related to the fair value of inventory acquired from Hercules. In total, gross profit margin during 2010 increased 7.0 percentage points to 33.7%.

Selling, general and administrative expenses increased $12 million primarily as a result of the $20 million increase associated with the additional 44 day period that the acquired operations of the Hercules business was owned in 2010. Salaries, benefits and incentive compensation combined to increase expenses by $5 million in 2010, primarily due to the employee furlough program that was in place during 2009. These increases were partially offset by a nonrecurring $5 million in-process research and development charge recorded in 2009, which was associated with the valuation from the Hercules acquisition and severance and restructuring accruals of $10 million charged during 2009. Equity and other income increased by $1 million during 2010 as compared to 2009.

Operating income totaled $125 million in 2010 compared to $44 million in 2009. EBITDA increased $74 million, from $150 million in 2009 to $224 million in 2010. Adjusted EBITDA increased $13 million, from $211 million in 2009 to $224 million in 2010. Adjusted EBITDA margin increased 1.7 percentage points in 2010 from 22.8% in 2009 to 24.5% in 2010.

EBITDA and Adjusted EBITDA reconciliation

The following EBITDA and adjusted EBITDA presentation for the three annual periods below is provided as a means to enhance the understanding of financial measurements that Ashland has internally determined to be relevant measures of comparison for the results of Specialty Ingredients. Adjusted EBITDA results have been prepared to illustrate the ongoing effects of Ashland’s operations, which exclude certain key items. The inventory fair value adjustments of $16 million in 2011 and $30 million in 2009 relate to the portion of acquired inventory sold during the period that was recorded at fair value in conjunction with the acquisition of ISP and Hercules, respectively. The Hercules business results of $21 million during 2009 relate to the operating income and depreciation and amortization recognized for the period in which Ashland did not yet own this business.

	September 30
(In millions)	2011		2010		2009
Operating income	$	171	$	125	$	44
Depreciation and amortization (a)		113		99		106
EBITDA		284		224		150
Severance		-		-		10
Inventory fair value adjustment		16		-		30
Results of the Hercules business prior to acquisition		-		-		21
Adjusted EBITDA	$	300	$	224	$	211

(a)	Includes $5 million for purchased in-process research and development expensed in 2009.

Water Technologies

Water Technologies is a leading specialty chemical supplier to the pulp, paper, mining, food and beverage, commercial and institutional, chemicals processing, general manufacturing, and municipal wastewater-treatment industries.

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 at approximately $120 million before tax. The Drew Marine business, with annual sales of approximately $140 million a year, had approximately 325 employees, 28 offices and 98 stocking locations in 47 countries. The transaction resulted in an initial pretax gain of $56 million recorded in 2009, which is included in the net gain on acquisitions and divestitures caption of the Statements of Consolidated Income. As part of this transaction, Ashland agreed to continue to manufacture certain products for Drew Marine.

In November 2008, Ashland acquired Hercules, in a transaction valued at approximately $3.4 billion. The acquired company included a significant global pulp, paper, and water treatment business. This business, which had sales of $155 million for the 44 day period prior to the acquisition in fiscal 2009, was combined into Ashland’s existing water technologies business to form a global water treatment business with significant scale worldwide.

2011 compared to 2010

Water Technologies’ sales increased 7% to $1,902 million in 2011 compared to $1,785 million in 2010. Higher product pricing increased sales $92 million, or 5%, while favorable currency exchange increased sales an additional $44 million, or 3%. Volume decreased sales by $19 million, or 1%.

Gross profit decreased $24 million in 2011 compared to 2010. Increased raw material costs were the primary factor in the gross profit decline as the business was unable to fully recover these and other cost increases during the current year,

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resulting in a $32 million decline, which included an accelerated amortization charge of $4 million for asset impairment charges associated with a plant closing. Volume decreased gross profit $7 million. These decreases, however, were partially offset by favorable currency exchange as compared to 2010, which increased gross profit by $15 million. In total, gross profit margin during 2011 decreased 3.3 percentage points to 30.8% compared to 2010.

Selling, general and administrative expenses increased $17 million during 2011 as compared to 2010, primarily as a result of severance charges of $9 million for reorganization activities, unfavorable foreign currency of $9 million, environmental charges of $7 million, and a $4 million increase in research and development expense. These increases were partially offset by a $12 million net decrease in administration, technical and selling expense support. In addition, equity and other income increased $4 million during 2011 as compared to 2010, primarily due to increased royalty income.

Operating income totaled $93 million during 2011 compared to $130 million during 2010. EBITDA decreased $40 million, from $218 million in 2010 to $178 million in 2011. Adjusted EBITDA decreased $24 million, from $218 million in 2010 to $194 million in 2011. Adjusted EBITDA margin decreased 2.0 percentage points in 2011 from 12.2% in 2010 to 10.2% in 2011.

2010 compared to 2009

Water Technologies’ sales increased 8% to $1,785 million compared to $1,652 million in 2009, a direct result of the inclusion of the additional 44 day period that the Hercules paper business was owned in 2010, which contributed sales of $155 million, or 9%. Additionally, volume and currency exchange increased sales $92 million and $31 million, respectively, for a total of 7%, compared to 2009. The previously mentioned divestiture of Drew Marine in August of 2009 reduced sales by $130 million, or 7%, compared to 2009, with unfavorable pricing adding an additional $20 million, or 1%, decline. Change in product mix increased sales by $5 million.

Gross profit increased $49 million in 2010 compared to 2009. The additional 44 day period that the acquired operations of the Hercules business was owned in 2010 increased gross profit by $47 million. Volume and currency exchange increased gross profit by $31 million and $14 million, respectively, with pricing and product mix adding an additional $5 million and $2 million, respectively, in gross profit. The divestiture of Drew Marine in August of 2009 reduced gross profit by $57 million compared to 2009. In addition, during 2009, gross profit was negatively affected by a nonrecurring charge of $7 million related to the fair value of inventory from the Hercules acquisition. In total, gross profit margin during 2010 increased 0.2 percentage points to 34.1%.

Selling, general and administrative expenses increased $12 million during 2010, or 2%, primarily as a result of the additional 44 day period the Hercules paper business was owned, which contributed an additional $30 million in expense when comparing to 2009. Foreign currency added an additional $9 million of expense, while the divestiture of Drew Marine and various cost saving initiatives, primarily integration and employee reduction activities, reduced expenses by approximately $18 million. In addition, during 2009, the selling, general and administrative expenses were negatively affected by a nonrecurring charge of $5 million related to purchased in-process research and development projects and $4 million in severance, both a result of the Hercules acquisition. Equity and other income decreased by $2 million during 2010 as compared to 2009.

Operating income totaled $130 million in 2010 compared to $95 million during 2009. EBITDA increased $24 million, from $194 million in 2009 to $218 million in 2010. Adjusted EBITDA increased $3 million, from $215 million in 2009 to $218 million in 2010. Adjusted EBITDA margin increased 0.3 percentage points in 2010 from 11.9% in 2009 to 12.2% in 2010.

EBITDA and Adjusted EBITDA reconciliation

The following EBITDA and adjusted EBITDA presentation for the three annual periods below is provided as a means to enhance the understanding of financial measurements that Ashland has internally determined to be relevant measures of comparison for the results of Water Technologies. Adjusted EBITDA results have been prepared to illustrate the ongoing effects of Ashland’s acquisition of Hercules, which exclude certain acquisition related charges, while assuming the acquisition of Hercules had been consummated on October 1, 2008. The inventory fair value adjustment of $7 million in 2009 relates to a charge required by U.S. GAAP upon acquisition of a company’s inventory, which will not reoccur for this purchased inventory. The Hercules paper business results of $10 million in 2009 relate to the operating income and depreciation and amortization recognized for the 44 day period in 2009 that this business was not owned.

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	September 30
(In millions)	2011		2010		2009
Operating income	$	93	$	130	$	95
Depreciation and amortization (a)		85		88		99
EBITDA		178		218		194
Severance		9		-		4
Environmental charges		7		-		-
Inventory fair value adjustment		-		-		7
Results of the Hercules business prior to acquisition		-		-		10
Adjusted EBITDA	$	194	$	218	$	215

(a)	Includes accelerated depreciation of $4 million in 2011 and $5 million for purchased in-process research and development expensed in 2009.

Performance Materials

Performance Materials is a global producer of specialty resins and adhesives serving the construction, transportation, infrastructure, packaging and converting, marine and energy markets.

On August 23, 2011, Ashland completed its acquisition of ISP, a global specialty chemical manufacturer of innovative functional ingredients and technologies, in a transaction valued at $3.2 billion. ISP reported sales of $1.9 billion for the twelve months ended September 30, 2011. Ashland has included ISP within the Specialty Ingredients reporting segment, with the exception of ISP’s Elastomers business line, a business with $410 million of sales for the twelve months ended September 30, 2011, which has been included within the Performance Materials reporting segment. Sales for ISP’s Elastomers business line prior to the acquisition were $237 million and $189 million for the twelve months ended September 30, 2010 and 2009, respectively, while sales in 2011 prior to the August 23, 2011 acquisition were $362 million. EBITDA for ISP’s Elastomers business line prior to the acquisition was $27 million and $23 million for the twelve months ended September 30, 2010 and 2009, respectively, while EBITDA in 2011 prior to the August 23, 2011 acquisition was $34 million.

In July 2010, Ashland and Süd-Chemie AG (Süd-Chemie) signed an agreement for the formation of an expanded global joint venture serving the foundry chemical sector. The transaction closed on November 30, 2010 and combined three businesses: (i) Ashland’s Casting Solutions business group, (ii) Süd-Chemie’s Foundry-Products and Specialty Resins business unit, and (iii) Ashland-Südchemie-Kernfest GmbH (ASK), the then existing 50% owned European-based joint venture between Ashland and Süd-Chemie, for which Ashland historically only recognized equity income of the joint venture within its consolidated results. Ashland’s Casting Solutions and ASK businesses recorded sales of $279 million and $145 million, respectively, during each businesses’ most recent completed fiscal year prior to the closing. The Foundry-Products and Specialty Resins business unit of Süd-Chemie contributed to the joint venture generated sales of approximately $146 million for its most recently completed fiscal year prior to the closing.

Ashland’s equity interest in the expanded joint venture qualifies for equity method accounting treatment under U.S. GAAP. As a result, beginning on December 1, 2010, the re