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, 2008
 
OR
 
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
Hercules Incorporated 8% Convertible Subordinated
    Debentures due August 15, 2010
New York Stock Exchange
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 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, 2008, the aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $2,970,002,995.  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, 2008, there were 63,022,667 shares of Registrant’s common stock outstanding.
 
Documents Incorporated by Reference
 
Portions of Registrant’s Proxy Statement (the “Proxy Statement”) for its January 29, 2009 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 Performance Materials  .........................................................................................................................
2
 
   
Ashland Distribution  ...........................................................................................................................................
3
 
   
Valvoline  ................................................................................................................................................................
4
 
   
Ashland Water Technologies  ............................................................................................................................
5
 
   
Miscellaneous  .......................................................................................................................................................
5
 
 
Item 1A.
Risk Factors  .............................................................................................................................................................
7
 
 
Item 1B.
Unresolved Staff Comments  .................................................................................................................................
10
 
 
Item 2.
Properties  .................................................................................................................................................................
10
 
 
Item 3.
Legal Proceedings  ..................................................................................................................................................
11
 
 
Item 4.
Submission of Matters to a Vote of Security Holders  ......................................................................................
14
 
 
Item X.
Executive Officers of Ashland  ..............................................................................................................................
14
 
         
PART II
       
         
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities  ........................................................................................
15
 
   
Five-Year Total Return Performance Graph  ......................................................................................................
16
 
 
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  ..........................................................................
17
 
 
Item 8.
Financial Statements and Supplementary Data  ..................................................................................................
17
 
 
Item 9.
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure  .........................................................................................................
17
 
 
Item 9A.
Controls and Procedures  .......................................................................................................................................
17
 
 
Item 9B.
Other Information ....................................................................................................................................................
17
 
         
PART III
       
 
Item 10.
Directors, Executive Officers and Corporate Governance  ................................................................................
17
 
 
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  .......................................................................................................
19
 
 
 
 
 
 
 
 

 
 
 
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 has operated its business through four reportable segments: Ashland Performance Materials, Ashland Distribution, Valvoline and Ashland Water Technologies.  Financial information about these segments for each of the fiscal years in the three-year period ended September 30, 2008, is set forth on pages F-34 through F-36 of this annual report on Form 10-K.
 
Ashland Performance Materials is a worldwide manufacturer and supplier of specialty chemicals and customized services to the building and construction, transportation, metal casting, marine, and packaging and converting markets.  It is a technology leader in metal casting consumables and design services; unsaturated polyester and vinyl ester resins and gelcoats; and high-performance adhesives and specialty resins.
 
Ashland Distribution distributes chemicals, plastics and composite raw materials in North America and plastics in Europe and also provides environmental services in North America.  Ashland Distribution’s suppliers include many of the world’s leading chemical, composite and plastics manufacturers.  This segment specializes in providing material transfer and packaging services in mixed truckload and less-than-truckload quantities to customers in a wide range of industries.
 
Valvoline is a leading marketer of premium packaged automotive lubricants, chemicals, appearance products, antifreeze and filters.  In addition, Valvoline is engaged in the “fast oil change” business through outlets operating under the Valvoline Instant Oil Change ® name.
 
Ashland Water Technologies supplies chemical and non-chemical water treatment solutions for industrial, municipal and commercial facilities.  It provides industrial, commercial and institutional water treatments, wastewater treatment, paint and coating additives, pulp and paper processing and mining chemistries.  In addition, it also provides boiler and cooling water treatments; fuel treatments; welding, refrigerant and sealing products; and fire fighting, safety and rescue products and services for the ocean-going marine market.  For a discussion of recent changes affecting this business segment, see “Corporate Developments” in this annual report on Form 10-K.
 
At September 30, 2008, Ashland and its consolidated subsidiaries had approximately 11,900 employees (excluding contract employees).
 
Available Information - Ashland’s Internet address is http://www.ashland.com .  There, Ashland makes available, free of charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as well as any beneficial ownership reports of officers and directors filed electronically on Forms 3, 4 and 5.  All such reports will be available as soon as reasonably practicable after Ashland electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (“SEC”).  Ashland also makes available free of charge on its website, its Corporate Governance Guidelines; Board Committee Charters; Director Independence Standards; and its code of business conduct which applies to Ashland’s directors, officers and employees.  These documents are also available in print to any shareholder who requests them.  Information contained on Ashland’s website is not part of this annual report on Form 10-K and is not incorporated by reference in this document.  The public may read and copy any materials Ashland files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site ( http://www.sec.gov ) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
 
CORPORATE DEVELOPMENTS
 
On November 13, 2008, Ashland completed the acquisition of Hercules Incorporated (“Hercules”), through a subsidiary merger transaction (the “Hercules Transaction”). As a result of the Hercules Transaction, Hercules has become a wholly owned subsidiary of Ashland.  Each share of Hercules Common Stock outstanding at the effective time of the merger was exchanged for (i) 0.0930 of a share of Ashland Common Stock and (ii) $18.60 in cash.  The cash portion of the Hercules

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Transaction was funded through a combination of cash on hand and debt financing.  For additional information regarding the Hercules Transaction, see Note Q of “Notes to Consolidated Financial Statements” in this annual report on Form 10-K.
 
Prior to the Hercules Transaction, Hercules operated through the following two reportable business segments:
 
Paper Technologies and Ventures  - The Paper Technologies business group is one of the key global suppliers of functional and process chemicals for the paper industry, offering a wide and highly sophisticated range of technology and applications expertise with in-mill capabilities for use throughout the paper-making process.  The Ventures business group targets key industry verticals with distinct products such as: pulping chemicals; water treatment chemicals; lubricants; and adhesives, resin modifiers and coatings for the building and converting industries.  Paper Technologies and Ventures properties are located in Beringen, Belgium; Burlington, Ontario, Canada; Busnago, Italy; Chicopee, Massachusetts, U.S.; Franklin, Virginia, U.S.; Hattiesburg, Mississippi, U.S.; Helsingborg, Sweden; Kim Cheon, Korea; Louisiana, Missouri, U.S.; Macon, Georgia, U.S.; Mexico City, Mexico; Milwaukee, Wisconsin, U.S.; Natou, Taiwan; Paulinia, Brazil; Portland, Oregon, U.S.; Savannah, Georgia, U.S.; Shanghai, China; Sobernheim, Germany; Tampere, Finland; Tarragona, Spain; Voreppe, France; and Zwijndrecht, The Netherlands.  Hercules owns a manufacturing facility in Pilar, Argentina that has been leased to a major U.S. company under a five-year lease.  Hercules purchases its products for sale in Argentina from this plant under a five-year supply and distribution agreement which ends in 2009.  In Paper Technologies, customers and competitors are consolidating to enhance market positions and product offerings on a worldwide basis.
 
Aqualon Group  - Products offered by the Aqualon Group are primarily designed to manage the properties of aqueous (water-based) systems.  Most of the products are derived from renewable natural raw materials and are sold as key ingredients to other manufacturers where they are used as small-quantity additives to provide functionality such as thickening, water retention, film formation, emulsifying action and binding power.  Major end uses for the Aqualon Group’s products include personal care products, food additives, pharmaceutical products, construction materials, paints, coatings and oil and gas recovery, where polymers are used to modify viscosity, gel strength and/or fluid loss.  The Aqualon Group also manufactures wood and gum rosin resins and is the world’s only producer of pale wood rosin derivatives.  Product applications and markets include food and beverage, construction specialties, adhesives and rubber and plastic modifiers.  Aqualon Group properties are located in Alizay, France; Doel, Belgium; Dalton, Georgia, U.S.; Hopewell, Virginia, U.S.; Jiangmen City, China; Kenedy, Texas, U.S.; Luzhou and Suzhou, China (40% joint venture interest); Nanjing, China (land-use rights acquired in 2006 for facility construction beginning in 2007); Parlin, New Jersey, U.S.; Zwijndrecht, The Netherlands; and Brunswick, Georgia, U.S.  Aqualon is facing competitive threats from emerging Asian producers.  To address this threat, one element of Aqualon’s strategy includes reducing costs in existing facilities and adding production capacity in the growing, low-cost Asian region.
 
The reportable business segments through which Ashland operated prior to the consummation of the Hercules Transaction are discussed below. As a result of the Hercules Transaction, certain changes have been made to Ashland’s business segments.  Ashland Water Technologies segment has been integrated with Hercules’ Paper Technologies and Ventures segment to form Ashland Hercules Water Technologies segment.  In addition, a new specialty additives and ingredients segment has been formed, Ashland Aqualon Functional Ingredients.
 
ASHLAND PERFORMANCE MATERIALS
 
Ashland Performance Materials is a worldwide manufacturer and supplier of specialty chemicals and customized services to the building and construction, transportation, metal casting, marine, and packaging and converting markets.  It is a technology leader in metal casting consumables and design services; unsaturated polyester and vinyl ester resins and gelcoats; and high-performance adhesives and specialty resins.  Through this segment, Ashland owns and operates 34 manufacturing facilities and participates in eight manufacturing joint ventures in 15 countries.  This segment competes globally in selected niche markets, largely on the basis of technology and service.  The number of competitors in the specialty chemical business varies from product to product, and it is not practical to identify such competitors because of the broad range of products and markets served by those products.  However, many of Ashland Performance Materials’ businesses hold proprietary technologies, and Ashland believes it has a leading or strong market position in many of its specialty chemical products.
 
Composite Polymers - This business group manufactures and sells a broad range of corrosion-resistant, fire-retardant, general-purpose and high-performance grades of unsaturated polyester and vinyl ester resins, gelcoats and low profile additives for the reinforced plastics industry.   Key markets include the transportation, construction, marine and wind energy industries.  Composite Polymers markets vinyl ester resins under the brand name DERAKANE®, HETRON® and AROPOL®.  This business group has manufacturing plants in Jacksonville and Fort Smith, Arkansas; Los Angeles, California; Bartow, Florida; Pittsburgh and Philadelphia, Pennsylvania; Johnson Creek, Wisconsin; Campinas, Brazil; Kelowna and Mississauga, Canada; Changzhou and Kunshan, China; Porvoo and Lahti, Finland; Sauveterre, France; Miszewo, Poland; Benicarlo, Spain; and, through separate joint ventures, has manufacturing plants in Sao Paulo, Brazil and Jeddah, Saudi Arabia.
 
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Specialty Polymers and Adhesives - This business group manufactures and sells adhesive solutions to the packaging and converting, building and construction, and transportation markets.   In addition to these adhesive products, the business also manufactures and markets specialty coatings and adhesive solutions across the printing industry.  Key technologies and markets include: acrylic polymers for pressure-sensitive adhesives; polyvinyl emulsions, urethane adhesives for flexible packaging applications; aqueous and radiation curable adhesives and specialty coatings for the printing and converting applications; hot melt adhesives for various packaging applications; emulsion polymer isocyanate adhesives for structural wood bonding; elastomeric polymer adhesives and butyl rubber roofing tapes for commercial roofing applications; acrylic, polyurethane and epoxy structural adhesives for bonding fiberglass reinforced plastics, composites, thermoplastics and metals in automotive, marine, recreational and industrial applications; specialty phenolic resins for paper impregnation and friction material bonding.  The group has manufacturing plants in Calumet City, Illinois; Totowa, New Jersey; Greensboro, North Carolina; Ashland and Columbus, Ohio; White City, Oregon; Milwaukee, Wisconsin; Piedmont, South Carolina; Elkton, Maryland; and Kidderminster, England.
 
Casting Solutions - This business group manufactures and sells metal casting chemicals worldwide, including sand-binding resin systems, refractory coatings, release agents, engineered sand additives and riser sleeves.   This group also provides casting process modeling, core making process modeling and rapid prototyping services.  This business group serves the global metal casting industry from nine owned and operated manufacturing sites located in Campinas, Brazil; Mississauga, Canada; Changzhou, China; Milan, Italy; Castro-Urdilales and Idiazabal, Spain; Kidderminster, England; and Cleveland, Ohio (two sites).  Casting Solutions also has seven joint venture manufacturing facilities located in Vienna, Austria; Le Goulet, France; Bendorf and Wuelfrath, Germany; Ulsan, South Korea; Arceniega, Spain and Alvsjo, Sweden.
 
In June 2008, Ashland and Süd-Chemie AG signed a nonbinding memorandum of understanding to form a new, global 50-50 joint venture to serve foundries and the metal casting industry.  The joint venture would combine three businesses:   Ashland’s Casting Solutions business group, the foundry-related businesses of Süd-Chemie, and Ashland-Südchemie–Kernfest GmbH, the existing European-based joint venture between Ashland and Süd-Chemie.  This transaction is anticipated to close during fiscal 2009.  In connection with this proposed joint venture, Ashland Performance Materials combined the Composite Polymers and the Specialty Polymers and Adhesives business groups under a single leadership team and business model effective October 1, 2008.
 
ASHLAND DISTRIBUTION
 
Ashland Distribution distributes chemicals, plastics and composite raw materials in North America and plastics in Europe.  Ashland Distribution also provides environmental services, including hazardous and nonhazardous waste collection, recovery, recycling and disposal, in North America.  Deliveries are made in North America through a network of 60 owned or leased facilities, 70 third-party warehouses, rail terminals and tank terminals and 4 locations that perform contract packaging activities for Ashland Distribution.  Distribution of thermoplastic resins in Europe is conducted in 18 countries primarily through 14 third-party warehouses and one owned warehouse.  Each of Ashland Distribution’s lines of business (chemicals, plastics, composites and environmental services) competes with national, regional and local companies throughout North America.  The plastics distribution business also competes with other distribution companies in Europe.  Competition within each line of business is based primarily on breadth of product portfolio, service offerings, reliability of supply and price.
 
Chemicals - Ashland Distribution distributes specialty and industrial chemicals, additives and solvents to industrial users in North America as well as some export operations.   Markets served include the paint and coatings, personal care, inks, adhesives, polymer, rubber, industrial and institutional compounding, automotive, appliance, oil and gas and paper industries.
 
Plastics - Ashland Distribution offers a broad range of thermoplastic resins, and specialized technical service to processors in North America as well as some export operations.   Processors include injection molders, extruders, blow molders and rotational molders.  Ashland Distribution provides plastic material transfer and packaging services and less-than-truckload quantities of packaged thermoplastics.  Ashland Distribution also markets a broad range of thermoplastics to processors in Europe via distribution centers located in Belgium, Denmark, England, Finland, France, Germany, Ireland, Italy, The Netherlands, Norway, Poland, Portugal, Spain and Sweden.
 
Composites - Ashland Distribution supplies mixed truckload and less-than-truckload quantities of polyester thermoset resins, fiberglass and other specialty reinforcements, catalysts and allied products to customers in the cast polymer, corrosion, marine, building and construction, and other specialty reinforced plastics industries through distribution facilities located throughout North America.   It also offers Ashland’s own line of resins and gel coats, serving the fiber-reinforced plastics and cast-polymer industries.
 

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Environmental Services - Working in cooperation with chemical waste service companies, Ashland Distribution provides customers, including major automobile manufacturers, with comprehensive, nationwide hazardous and nonhazardous waste collection, recovery, recycling and disposal services.   These services are offered through a North American network of more than 20 distribution centers, including ten storage facilities that have been fully permitted by the United States Environmental Protection Agency (“USEPA”).
 
Ashland Distribution has significant relationships with suppliers of its products and services.  For a discussion of the risks affecting Ashland Distribution’s supplier relationships, see “Item 1A. Risk Factors” in this annual report on Form 10-K. 
 
VALVOLINE
 
Valvoline markets premium packaged automotive lubricants, chemicals, appearance products, antifreeze and filters, with sales in more than 100 countries.  The Valvoline® trademark was federally registered in 1873 and is the oldest trademark for lubricating oil in the United States.  Valvoline competes in the highly competitive automotive lubricants and consumer products car care businesses, principally through its offerings of premium products and services, coupled with a strong brand marketing, customer support, and distribution capabilities.  Some of the major brands of motor oils and lubricants with which Valvoline competes globally are Castrol®, Mobil® and Pennzoil®.  In the “fast oil change” business, Valvoline 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 Valvoline 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 of service, speed, location, convenience and sales promotion.
 
Valvoline markets the following key brands of products and services to the private passenger car, light truck and heavy duty markets:  Valvoline® lubricants; Valvoline Premium Blue® commercial lubricants; MaxLife® automotive products for vehicles with 75,000 or more miles; Valvoline Professional Series® automotive chemicals; Pyroil® automotive chemicals; Eagle One® automotive appearance products; Car Brite® automotive reconditioning products; Zerex® antifreeze; Tectyl® industrial products; and Valvoline Instant Oil Change® automotive services.
 
Valvoline operates lubricant blending and packaging plants in Santa Fe Springs, California; Cincinnati, Ohio; East Rochester, Pennsylvania; and Deer Park, Texas.  Automotive chemical manufacturing and distribution is conducted in Hernando, Mississippi.  Bulk blending and distribution facilities are located in College Park, Georgia; Willow Springs, Illinois; St. Louis, Missouri; and Mississauga, Canada.  Direct market distribution operations are conducted out of centers located in Orlando, Florida; College Park, Georgia; Willow Springs, Illinois; Indianapolis, Indiana; St. Louis, Missouri; Cincinnati, Ohio; East Rochester, Pennsylvania; Memphis, Tennessee; and Dallas, Texas.
 
Additives (from key suppliers such as Lubrizol Corporation) and base oils (from key suppliers such as Motiva Enterprises LLC) constitute a large portion of the raw materials required to manufacture Valvoline’s products.  In addition to raw materials, Valvoline sources a significant portion of its packaging from key suppliers such as Graham Packaging Inc.  For a discussion of the risks affecting Valvoline’s supplier relationships, see “Item 1A. Risk Factors” in this annual report on Form 10-K.

In North America, Valvoline is comprised of the following business groups:
 
·  
Do It Yourself (“DIY”) - The DIY business group sells Valvoline products to consumers who perform their own auto maintenance.   Valvoline products are sold through retail auto parts stores such as Autozone and Advance Auto Parts, mass merchandisers such as WalMart, and warehouse distributors and their affiliated jobber stores such as NAPA and Carquest.
 
·  
Installer Channels - The Installer Channels business group sells branded products and services to installers (such as car dealers, general repair shops and quick lubes) and to auto auctions through a network of independent distributors and company-owned and operated “direct market” operations.  This business also includes distribution to quick lubes branded “Valvoline Express Care®,” which consists of 368 independently owned and operated stores.
 


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·  
Valvoline Instant Oil Change® (“VIOC”) - The VIOC chain is one of the largest competitors in the U.S. “fast oil change” service business, providing Valvoline with a significant presence in the Installer Channels segment of the passenger car and light truck motor oil market.   As of September 30, 2008, 261 company-owned and 585 independently-owned and operated franchise centers were operating in 39 states.  VIOC has continued its customer service innovation through its upgraded and enhanced preventive maintenance tracking system for consumers and fleet operators.  This computer-based system maintains service records on all customer vehicles and contains a database on most car models, which allows service technicians to make service recommendations based primarily on manufacturer’s recommendations.
 
·  
Commercial & Industrial (“C&I”) - The C&I business group 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.  C&I direct market distribution operations are conducted out of centers located in Orlando, Florida; Willow Springs, Illinois; Indianapolis, Indiana; Cincinnati, Ohio; East Rochester, Pennsylvania; and Dallas, Texas.  The C&I business group also has a strategic alliance with Cummins Inc. (“Cummins”) to distribute heavy duty lubricants to the commercial market and Eaton Inc. (“Eaton”) to distribute co-branded hydraulic fluids to the commercial and industrial markets.

Outside North America, Valvoline is comprised of one business group:
 
·  
Valvoline International - Valvoline International markets Valvoline®, Eagle One® and Zerex® branded products through wholly-owned affiliates, joint ventures, licensees and independent distributors in more than 100 countries.   The profitability of the business is dispersed geographically, although more than half of the profit comes from mature markets in Europe and Australia.  There are rapidly growing businesses in the emerging markets, including joint ventures with Cummins in Argentina, Brazil, China and India.  In addition, Valvoline operates joint ventures with local entities in Ecuador, Thailand and Venezuela.  Valvoline International markets products for both consumer and commercial vehicles and equipment and is served by company-owned plants in the United States, Australia and The Netherlands and by toll manufacturers.
 
ASHLAND WATER TECHNOLOGIES
 
Ashland Water Technologies provides specialized chemicals and consulting services for the utility water treatment market, which includes boiler water, cooling water, fuel and waste streams.  Programs include performance-based feed and control automation and remote system surveillance.  This segment also provides process water treatments for the municipal, extraction/mining, pulp and paper processing, food processing, oil refining and chemical processing markets.  It also provides technical products and shipboard services for the ocean-going marine market.  Comprehensive marine programs include water and fuel treatment; maintenance, including specialized cleaners, welding and refrigerant products and sealants; and fire fighting, safety and rescue products and services.  Ashland Water Technologies also provides specialized chemical additives for the paint and coatings industry. 
 
Ashland Water Technologies owns and operates 11 manufacturing facilities in eight countries and participates in three joint ventures.  Ashland Water Technologies’ diverse spectrum of products competes globally in niche markets.  The number of competitors varies from product to product and markets served.
 
It conducts operations throughout the Americas, Europe and Asia Pacific and has manufacturing plants in Kearny, New Jersey; Houston, Texas; Greensboro, North Carolina; Americana, Brazil; Chester Hill, Australia; Nanjing, China; Beijing, China; Singapore; Somercotes, England; Krefeld, Germany; and Perm, Russia and, through separate joint ventures, has production facilities in Seoul, South Korea and Navi Mumbai, India.
 
As a result of the Hercules Transaction, Ashland Water Technologies segment has been integrated with Hercules’ Paper Technologies and Ventures segment to form Ashland Hercules Water Technologies segment.
 
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 operating groups 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
 
5
 
 
 
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 operating divisions 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/regulation.  New laws and regulations may be enacted or adopted by various regulatory agencies globally.  The costs of compliance with new rules cannot be estimated until the manner in which they will be implemented has been more precisely defined.
 
At September 30, 2008, Ashland’s reserves for environmental remediation amounted to $149 million, reflecting Ashland’s estimates of the most likely costs that will be incurred over an extended period to remediate identified conditions for which the costs are reasonably estimable, without regard to any third-party recoveries.  Engineering studies, judgments and estimates are used, along with historical experience and other factors, to identify and evaluate remediation alternatives and their related costs in determining the estimated reserves for environmental remediation.  Environmental remediation reserves are subject to numerous inherent uncertainties that affect Ashland’s ability to estimate its share of the costs.  Such uncertainties involve the nature and extent of contamination at each site, the extent of required cleanup efforts under existing environmental regulations, widely varying costs of alternate cleanup methods, changes in environmental regulations, the potential effect of continuing improvements in remediation technology, and the number and financial strength of other potentially responsible parties at multiparty sites.  Although it is not possible to predict with certainty the ultimate costs of environmental remediation, Ashland currently estimates that the upper end of the reasonably possible range of future costs for identified sites could be as high as approximately $230 million.  Ashland does not believe that any current individual remediation location is material to Ashland, as its largest reserve for any site does not exceed 15% of the remediation reserve.  Ashland regularly adjusts its reserves as environmental remediation continues.  Environmental remediation expense, net of receivable activity, amounted to $7 million in 2008, compared to $7 million in 2007 and $47 million in 2006.
 
Air - In the United States, the Clean Air Act (the “CAA”) imposes stringent limits on facility air emissions, establishes a federally mandated operating permit program, allows for civil and criminal enforcement actions and sets limits on the volatile or toxic content of many types of industrial and consumer products.   Additionally, it establishes air quality attainment deadlines and control requirements based on the severity of air pollution in a given geographical area.  Various state clean air acts implement, complement and, in many instances, add to the requirements of the federal CAA.  The requirements of the CAA and its state counterparts have a significant impact on the daily operation of Ashland’s businesses and, in many cases, on product formulation and other long-term business decisions.  Other countries where Ashland operates also have laws and regulations relating to air quality.  Ashland’s businesses maintain numerous permits pursuant to these clean air laws.
 
The United States Environmental Protection Agency (“USEPA”) is currently implementing the ozone and particulate matters standards they proposed in 1997.  State and local air agencies were required to submit their plans to meet the 1997 ozone standard by 2007, and states have begun to propose strategies for meeting this standard.  Proposed ozone strategies have included emission controls for certain types of emission sources, reduced limits on the volatile content of industrial and consumer products and many requirements on the transportation sector.  States had until April 2008 to propose strategies for meeting the 1997 particulate matter standard.  Additionally, in 2006 USEPA proposed new and more stringent standards, specifically for particulate matter and in 2007 for ozone.  It is not possible at this time to estimate any potential financial impact that the newly proposed standards may have on Ashland’s operations.  Ashland will continue to monitor and evaluate the newly proposed standards.
 
Climate Change - Ashland has been collecting energy use data and calculating greenhouse gas (GHG) emissions for several years and is evaluating the potential risks from climate change to facilities, products, and other business interests, and the strategies to respond to those risks.  In light of the uncertainty of these risks and any related opportunities, as well as the evolving nature of legislative and regulatory efforts in the U.S. and around the world, Ashland cannot predict whether GHG-related developments will affect its operations or financial condition.
 
Water - Ashland’s businesses maintain numerous discharge permits.   In the United States, such permits may be required by the National Pollutant Discharge Elimination System of the Clean Water Act and similar state programs.  Other countries have similar laws and regulations requiring permits and controls.
 

 
 
 
 
Solid Waste - Ashland’s businesses are subject to various laws around the world relating to and establishing standards for the management of hazardous and solid waste.   In the United States, the Resource Conservation and Recovery Act (“RCRA”) applies.  While many U.S. facilities are subject to the RCRA rules governing generators of hazardous waste, certain facilities also have hazardous waste storage permits.  Ashland has implemented systems to oversee compliance with the RCRA regulations and, where applicable, permit conditions.  In addition to regulating current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the storage of regulated substances in underground tanks.  Other countries where Ashland operates also have laws and regulations relating to hazardous and solid waste.
 
Remediation - Ashland currently operates, and in the past has operated, various facilities where, during the normal course of business, releases of hazardous substances have occurred.   Additionally, Ashland has known or alleged potential environmental liabilities at a number of third-party sites for which Ashland has financial responsibility.  Federal and state laws, including but not limited to RCRA, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and various remediation laws, require that contamination caused by such releases be assessed and, if necessary, remediated to meet applicable standards.  Some of these laws also provide for liability for related damage to natural resources and claims for alleged property and personal injury damage can also arise related to contaminated sites.  Laws in other jurisdictions where Ashland operates require that contamination caused by such releases at these sites be assessed and, if necessary, remediated to meet applicable standards.
 
Product Control, Registration and Inventory - Many of Ashland’s products and operations in the United States are subject to the Toxic Substance Control Act (“TSCA”); the Food, Drug and Cosmetics Act; the Chemical Diversion and Trafficking Act; the Chemical Weapons Convention; and other product-related regulations.  For further information about a TSCA compliance audit, see “Item 3. Legal Proceedings” in this annual report on Form 10-K.  The European Commission issued a new regulatory framework for the chemicals industry in the European Union (“EU”).  The regulation is known as REACH (Registration, Evaluation and Authorization of Chemicals) and applies to existing and new chemical substances produced or imported into the EU in quantities of greater than one ton per year.  Ashland is actively monitoring this regulation and has identified chemical substances that Ashland will pre-register for REACH by the deadline of December 1, 2008.  Under REACH additional testing, documentation and risk assessments will occur and may adversely affect Ashland’s costs of products produced in or for export to the EU.  Other countries have similar rules to TSCA and REACH.
 
Research
 
Ashland conducts a program of market-focused research and development to understand unmet needs in the marketplace, to frame those unmet needs in a platform in which Ashland has capability to deliver, and to determine how to develop or access the intellectual property required to meet the identified market needs.  Research and development costs are expensed as they are incurred and totaled $52 million in 2008 ($50 million in 2007 and $48 million in 2006). Hercules’ research and development efforts have historically been directed toward the discovery and development of new products and processes, the improvement and refinement of existing products and processes, the development of new applications for existing products, and cost improvement initiatives. Hercules incurred costs of $44 million in research and development activities in its fiscal year ended December 31, 2007 as compared to $39 million and $41 million in its 2006 and 2005 fiscal years, respectively.
 
Forward-Looking Statements
 
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Words such as “anticipates,” “believes,” “estimates,” “expects,” “is likely,” “predicts,” and variations of such words and similar expressions are intended to identify such forward-looking statements.  Although Ashland believes that its expectations are based on reasonable assumptions, it cannot assure that the expectations contained in such statements will be achieved.  Important factors that could cause actual results to differ materially from those contained in such statements are discussed under “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 affecting Ashland’s operations, see “Item 1A. Risk Factors” in this annual report on Form 10-K.
 
ITEM 1A.  RISK FACTORS
 
The following discussion of “risk factors” identifies the most significant factors that may adversely affect Ashland's business, operations, financial position or future financial performance.  This information should be read in conjunction with

 
 
 
 

Management’s Discussion and Analysis (“MD&A”) and the consolidated financial statements and related notes incorporated by reference into this report.  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 profitability of Ashland is susceptible to downturns in the economy, particularly in those segments related to durable goods, including the housing, construction, automotive and marine industries.  Both overall demand for Ashland’s products and services and its profitability will likely change as a direct result of an economic recession, inflation, changes in hydrocarbon (and its derivatives) and other raw materials prices or changes in governmental monetary or fiscal policies.
 
Ashland’s substantial indebtedness may impair its financial condition and prevent it from fulfilling its obligations under the debt instruments.
 
As a result of the Hercules Transaction, Ashland has incurred a substantial amount of debt.  Ashland’s substantial indebtedness could have important consequences including:
 
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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;
 
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requiring Ashland to dedicate a substantial portion of its cash flow from operations to pay interest on its debt, which would reduce availability of Ashland’s cash flow to fund working capital, capital expenditures, acquisitions, execution of its growth strategy and other general corporate purposes;
 
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making Ashland more vulnerable to adverse changes in general economic, industry and government regulations and in its business by limiting its flexibility in planning for, and making it more difficult for Ashland to react quickly to, changing conditions;
 
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placing Ashland at a competitive disadvantage compared with those of its competitors that have less debt; and
 
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exposing Ashland to risks inherent in interest rate fluctuations because some of its borrowings will be at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.
 
In addition, Ashland may not be able to generate sufficient cash flow from its operations to repay its indebtedness when it becomes due and to meet its other cash needs.  If Ashland is not able to pay its debts as they become due, Ashland will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring its indebtedness or selling additional debt or equity securities.  Ashland may not be able to refinance its debt or sell additional debt or equity securities or its assets on favorable terms, if at all, and if Ashland must sell its assets, it may negatively affect its ability to generate revenues.
 
The restrictive covenants in Ashland’s new credit facilities may affect Ashland’s ability to operate its business successfully.
 
The terms of Ashland’s new credit facilities contain various provisions that limit its ability to, among other things:  grant liens; incur additional indebtedness, guarantees or other contingent obligations; engage in mergers and consolidations; make sales, transfers and other dispositions of property and assets; make loans, acquisitions, joint ventures and other investments; declare dividends, make distributions or redeem or repurchase capital stock; change the nature of business; and enter into transactions with its affiliates.
 
These covenants could adversely affect Ashland’s ability to finance its future operations or capital needs and pursue available business opportunities.
 
In addition, Ashland’s new credit facilities require it to maintain specified financial ratios and satisfy certain financial condition tests.  Events beyond Ashland’s control, including changes in general economic and business conditions, may affect its ability to meet those financial ratios and financial condition tests.  Ashland cannot assure that it will meet those tests or that the lenders will waive any failure to meet those tests.  A breach of any of these covenants or any other restrictive covenants contained in Ashland’s new credit facilities would result in an event of default.  If an event of default under Ashland’s new credit facilities occurs, the holders of the affected indebtedness could declare all amounts outstanding, together with accrued interest, to be immediately due and payable, which, in turn, could cause the default and acceleration of the maturity of certain of Ashland’s other indebtedness.  If Ashland was unable to pay such amounts, the lenders under its new credit facilities could proceed against the collateral pledged to them.  Ashland has pledged a substantial portion of its assets to the lenders under its new credit facilities.

 
 
 

 
Ashland may not realize all of the anticipated benefits of the Hercules Transaction.
 
Ashland’s ability to realize the anticipated benefits of the Hercules Transaction will depend, in part, on Ashland’s ability to integrate the businesses of Hercules successfully and efficiently with its 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 Ashland’s diverse business practices and operations with those of Hercules.  The failure of the combined company to meet the challenges involved in integration or otherwise to realize any of the anticipated benefits of the Hercules Transaction could cause an interruption of, or a loss of momentum in, the activities of the combined company and could seriously harm Ashland’s 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, and may cause Ashland’s stock price to decline.
 
In addition, even if Ashland’s operations are integrated successfully with Hercules’ operations, the combined company may not realize the full benefits of the Hercules Transaction, including the synergies, cost savings, or sales or growth opportunities that are expected.  Such benefits may not be achieved within the anticipated time frame, or at all.  Further, because Ashland’s businesses differ from Hercules’ businesses, the results of operations of the combined company may be affected by factors different from those affecting Ashland prior to the Hercules Transaction, and may suffer as a result of the merger.  As a result, the realization of the full benefits anticipated from the merger may not be achieved.
 
The competitive nature of Ashland’s markets may delay or prevent the company from passing increases in raw materials costs on to its customers.  In addition, certain of Ashland’s suppliers may be unable to deliver products or raw materials or may withdraw from contractual arrangements.  The occurrence of either event could adversely affect Ashland’s results of operations.
 
Rising and volatile raw material prices, especially those of hydrocarbon derivatives, may negatively impact Ashland’s costs.  Ashland is not always able to raise prices in response to such increased costs, and its ability to pass on the costs of such price increases is dependent upon market conditions.  Likewise, Ashland purchases certain products and raw materials from suppliers, often pursuant to written supply contracts.  If those suppliers are unable to timely meet Ashland’s orders or choose to terminate or otherwise avoid contractual arrangements, Ashland may not be able to make alternative supply arrangements.  If Ashland is unable to obtain and retain qualified suppliers under commercially acceptable terms, its ability to manufacture and deliver products in a timely, competitive and profitable manner could be adversely affected.
 
Ashland is responsible for, and has financial exposure to, liabilities from pending and threatened claims, including those alleging personal injury caused by exposure to asbestos, which reduce Ashland’s cash flows and could reduce profitability.
 
There are various claims, lawsuits and administrative proceedings pending or threatened, including those alleging personal injury caused by exposure to asbestos, against Ashland and its current and former subsidiaries.  Such actions are with respect to commercial matters, product liability, toxic tort liability and other matters which seek remedies or damages, some of which are for substantial amounts.  In addition, a s a result of the Hercules Transaction, Ashland acquired Hercules subject to all of its litigation, including asbestos liabilities.   While these actions are being contested, their outcome is not predictable.   Ashland’s business could be materially and adversely affected by financial exposure to these liabilities.
 
Ashland has incurred, and may continue to incur, substantial operating costs and capital expenditures as a result of environmental, health and safety liabilities and requirements, which could reduce Ashland’s profitability.
 
Ashland is subject to various U.S. and foreign laws and regulations relating to environmental protection and worker health and safety.  These laws and regulations regulate discharges of pollutants into the air and water, the management and disposal of hazardous substances and the cleanup of contaminated properties.  The costs of complying with these laws and regulations can be substantial and may increase as applicable requirements and their enforcement become more stringent and new rules are implemented.  If Ashland violates the requirements of these laws and regulations, it may be forced to pay substantial fines, to complete additional costly projects or to modify or curtail its operations to limit contaminant emissions.
 
Ashland is responsible for, and has financial exposure to, substantially all of the environmental and other liabilities of Ashland and substantially all of the environmental and other liabilities of its subsidiaries including Hercules and its former subsidiaries.  Ashland has investigated and remediated a number of its current and former properties.  Engineering studies, historical experience and other factors are used to identify and evaluate remediation alternatives and their related costs in determining the estimated reserves for environmental remediation.  Environmental remediation reserves are subject to numerous inherent uncertainties that affect Ashland’s ability to estimate its share of the applicable costs.  Such uncertainties involve the nature and extent of contamination at each site, the extent of required cleanup efforts under existing environmental regulations, widely varying costs of alternate cleanup methods, changes in environmental regulations, the potential effect of continuing improvements in remediation technology and the number and financial strength of other potentially responsible parties at multiparty sites.  As a result, Ashland’s ultimate costs could exceed its reserves.

 
 
 

 
Ashland’s pension and post-retirement benefit plan obligations are currently underfunded.  Ashland may have to make significant cash payments to some or all of these plans, which would reduce the cash available for Ashland’s businesses.
 
Ashland has unfunded obligations under its domestic and foreign pension and post-retirement benefit plans.  A significant decline in the value of the plan investments 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.
 
Ashland’s customers or markets may migrate to developing countries where it may have an insufficient presence.  Also, Ashland may need to shift manufacturing of certain products to lower-cost countries or developing economies to remain competitive in its industry.
 
Ashland’s North American customers are subject to increasing foreign competition from developing economies.  If the demand for products manufactured by its North American customers declines, then demand for Ashland’s products in North America will also decline, with the potential to negatively impact Ashland’s results.
 
In recent years, new production capacity in the chemical industry has been shifting to countries with developing economies where demand is growing more rapidly   and the cost of production is lower.  Ashland is investing in such countries and there are certain political and other risks associated with doing business in such countries.  Moreover, as Ashland continues to invest in additional overseas facilities, its capital expenditures will increase to reflect the cost of construction of these facilities, which could impact Ashland’s cash flow.  This additional manufacturing capacity may also make some of Ashland’s existing sites redundant, triggering potential write-offs and severance payments.  In addition, as Ashland and its competitors shift production to lower-cost locations, worldwide pricing for certain products may decline, negatively impacting Ashland’s margins for those products.
 
Provisions of Ashland’s articles of incorporation and by-laws and Kentucky law could deter takeover attempts and adversely affect Ashland’s stock price.
 
Provisions of Ashland’s articles of incorporation and by-laws could make acquiring control of Ashland without the support of its Board of Directors difficult for a third party, even if the change of control might be beneficial to Ashland shareholders.  Ashland’s articles of incorporation and by-laws contain:
 
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provisions relating to the classification, nomination and removal of its directors;
 
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provisions limiting the right of shareholders to call special meetings of its Board of Directors and shareholders;
 
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provisions regulating the ability of its shareholders to bring matters for action at annual meetings of its shareholders; and
 
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the authorization given to its Board of Directors to issue and set the terms of preferred stock.
 
Ashland’s articles of incorporation and the laws of Kentucky impose some restrictions on mergers and other business combinations between Ashland and any beneficial owner of 10% or more of the voting power of its outstanding common stock.  The existence of these provisions may deprive shareholders of any opportunity to sell their shares at a premium over the prevailing market price for Ashland Common Stock.  The potential inability of Ashland shareholders to obtain a control premium could adversely affect the market price for Ashland Common Stock .
 
ITEM 1B.  UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.  PROPERTIES
 
Ashland’s corporate headquarters, which is leased, is located in Covington, Kentucky.  Principal offices of other major operations are located in Dublin, Ohio (Ashland Distribution and Ashland Water Technologies); Barendrecht, Netherlands (Ashland Performance Materials); Lexington, Kentucky (Valvoline); and Russell, Kentucky (Administrative Services).  All of these offices are leased, except for the Russell office and one building in Dublin, Ohio, which are owned.  Principal manufacturing, marketing and other materially important physical properties of Ashland and its subsidiaries are described under the appropriate segment under “Item 1” in this annual report on Form 10-K.  Additional information concerning certain leases may be found in Note I of “Notes to Consolidated Financial Statements” in this annual report on Form 10-K.
 
Hercules’ corporate headquarters and major research center are located in Wilmington, Delaware.  Hercules also owns a number of plants and facilities in strategic locations worldwide, as described under “Corporate Developments” in Item 1 of this annual report on Form 10-K.  All of Hercules’ principal properties are owned by Hercules, except for its corporate

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headquarters office building in Wilmington, Delaware, its European headquarters office building in Schaffhausen, Switzerland and its Asian headquarters in Shanghai, China, all of which are leased.
 
ITEM 3.  LEGAL PROCEEDINGS
 
T he following is a description of Ashland’s material legal proceedings, including legal proceedings related to Hercules.
 
Ashland 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.
 
The majority of lawsuits filed involve multiple plaintiffs and multiple defendants, with the number of defendants in many cases exceeding 100.  The monetary damages sought in the asbestos-related complaints that have been filed in state or federal courts vary as a result of jurisdictional requirements and practices, though the vast majority of these complaints either do not specify monetary damages sought or merely recite that the monetary damages sought meet or exceed the required jurisdictional minimum in which the complaint was filed.  Plaintiffs have asserted specific dollar claims for damages in approximately 5% of the 40,241 active lawsuits pending as of September 30, 2008.  In these active lawsuits, approximately 0.7% of the active lawsuits involve claims between $0 and $100,000; approximately 1.9% of the active lawsuits involve claims between $100,000 and $1 million; approximately 1% of the active lawsuits involve claims between $1 million and $5 million; less than 0.1% of the active lawsuits involve claims between $5 million and $10 million; approximately 1% of the active lawsuits involve claims between $10 million and $15 million; and less than .02% of the active lawsuits involve claims between $15 million and $100 million.  The variability of requested damages, coupled with the actual experience of resolving claims over an extended period, demonstrates that damages requested in any particular lawsuit or complaint bear little or no relevance to the merits or disposition value of a particular case.  Rather, the amount potentially recoverable by a specific plaintiff or group of plaintiffs is determined by other factors such as product identification or lack thereof, the type and severity of the disease alleged, the number and culpability of other defendants, the impact of bankruptcies of other companies that are co-defendants in claims, specific defenses available to certain defendants, other potential causative factors and the specific jurisdiction in which the claim is made.
 
For additional information regarding liabilities arising from asbestos-related litigation, see “Management’s Discussion and Analysis – Application of Critical Accounting Policies – Asbestos-related litigation” and Note O of “Notes to Consolidated Financial Statements” in this annual report on Form 10-K.
 
Environmental Proceedings – (1) Under the federal Comprehensive Environmental Response, Compensation and Liability Act (as amended) and similar state laws, Ashland may be subject to joint and several liability for clean-up costs in connection with alleged releases of hazardous substances at sites where it has been identified as a “potentially responsible party” (“PRP”).  As of September 30, 2008, Ashland had been named a PRP at 62 waste treatment or disposal sites.  These sites are currently subject to ongoing investigation and remedial activities, overseen by the USEPA or a state agency, in which Ashland is typically participating as a member of a PRP group.  Generally, the type of relief sought includes remediation of contaminated soil and/or groundwater, reimbursement for past costs of site clean-up and administrative oversight and/or long-term monitoring of environmental conditions at the sites.  The ultimate costs are not predictable with assurance.
 
(2) TSCA Audit   On April 30, 2007, in an action initiated by Ashland, Ashland signed a Consent Agreement and Final Order (“CAFO”) with the USEPA pursuant to which Ashland will conduct a compliance audit in accordance with Section 5 and Section 13 of the TSCA. TSCA regulates activities with respect to manufacturing, importing and exporting chemical substances in the United States.  Pursuant to the CAFO, Ashland will report any violations discovered.  In addition, the CAFO provides for certain reduced penalties for discovered violations.  While it is reasonable to believe the penalties for violations reported could exceed $100,000 in the aggregate, any such penalties should not be material to Ashland.  The date for completion of the audit has been extended from May 2009 to July 2009.
 
For additional information regarding environmental matters and reserves, see “Management’s Discussion and Analysis – Application of Critical Accounting Policies – Environmental remediation” and Note O of “Notes to Consolidated Financial Statements” in this annual report on Form 10-K.
 
MTBE Litigation – Ashland is a defendant along with many other companies in approximately 30 cases alleging methyl tertiary-butyl ether (“MTBE”) contamination in groundwater.  Nearly all of these cases have been consolidated in a multi-district litigation in the Southern District of New York for preliminary proceedings.  The plaintiffs generally are water providers or governmental authorities and they allege that refiners, manufacturers and sellers of gasoline containing MTBE are liable for introducing a defective product into the stream of commerce.  Ashland’s involvement in these cases relates to
 
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gasoline containing MTBE allegedly produced and sold by Ashland, or one or more of its subsidiaries, in the period prior to the formation of Marathon Ashland Petroleum LLC (“MAP”).  Ashland only distributed MTBE or gasoline containing MTBE in a limited number of states and has been dismissed in a number of cases in which it was established that Ashland did not market MTBE or gasoline containing MTBE in the state or region at issue.  The MTBE cases seek both compensatory and punitive damages under a variety of statutory and common law theories.  Ashland, along with a number of other defendants who operated refineries, has reached a settlement with the plaintiffs in 21 of the cases in which Ashland is a defendant.  The settlement will not result in a material impact to Ashland above amounts already reserved.  The potential impact of the unresolved cases and any future similar cases is uncertain.
 
Hercules Legal Proceedings
 
Asbestos-Related Litigation - Hercules is a defendant in numerous asbestos-related personal injury lawsuits involving claims which typically arise from alleged exposure to asbestos fibers from resin encapsulated pipe and tank products which were sold by one of the Hercules’ former subsidiaries to a limited industrial market (“products claims”).  Hercules is also a defendant in lawsuits alleging exposure to asbestos at facilities formerly or presently owned or operated by Hercules (“premises claims”).  Claims are received and settled or otherwise resolved on an on-going basis.
 
The majority of lawsuits filed involve multiple plaintiffs and multiple defendants.  The monetary damages sought in the asbestos-related complaints that have been filed in state or federal courts vary as a result of jurisdictional requirements and practices, though the vast majority of these complaints either do not specify monetary damages sought or merely recite that the monetary damages sought meet or exceed the required jurisdictional minimum in which the complaint was filed.  As of September 30, 2008, there were approximately 25,563 unresolved claims, of which approximately 895 were premises claims and the rest were products claims.  There were also approximately 1,745 unpaid claims which have been settled or are subject to the terms of a settlement agreement.  Between January 1, 2008 and September 30, 2008, Hercules received approximately 1,304 new claims.  During that same period, Hercules spent a net amount of $20.7 million to resolve and defend asbestos matters, including $15.7 million directly related to settlement payments and $5.0 million for defense costs.
 
Hercules reached a confidential settlement agreement with many of its solvent excess insurers whereby a significant portion of the costs incurred by Hercules with respect to future asbestos product liability claims will be reimbursed, subject to those claims meeting certain qualifying criteria (the “Future Coverage Agreement”).  That agreement is not expected to result in reimbursement to Hercules unless and until defense costs and settlement payments for qualifying asbestos products claims paid by Hercules subsequent to the effective date of the agreement aggregate to approximately $330 million to $370 million, of which approximately $123 million has been credited as of September 30, 2008.  If and when such amounts are paid by Hercules, the insurers’ obligations pursuant to the terms of the Future Coverage Agreement would be triggered, and the participating insurers would thereafter be required to pay their allocated share of defense costs and settlement payments for asbestos product liability claims that qualify for reimbursement subject to the limits of their liability pursuant to the terms of the Future Coverage Agreement, with Hercules being responsible for the share of such costs and payments that are not reimbursed by such participating insurers, as well as for such costs and payments for those claims that do not qualify for reimbursement under the terms of the agreement.
 
Environmental Proceedings  – (1) As of September 30, 2008, Hercules has 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 41 sites.  Hercules becomes aware of sites in which it may be named a PRP through correspondence from the USEPA or other government agencies or from previously named PRPs, who either request information or notify Hercules of its potential liability. 
 
 (2)   United States of America v. Vertac Chemical Corporation, et al. - This case, a cost-recovery action commenced in 1980 and based upon the CERCLA, as well as other statutes, involves liability for costs incurred by the USEPA in connection with the investigation and remediation of the Vertac Chemical Corporation (“Vertac”) site in Jacksonville, Arkansas.  Following extended litigation and appeals, a final judgment against Hercules for $124.5 million was entered in 2005 by the U.S.  District Court for the Eastern District of Arkansas, and ultimately upheld by the appellate courts.  Following payment of the judgment, on July 20, 2007, Hercules received a claim from the USEPA seeking reimbursement of approximately $19 million for response costs incurred since June 1, 1998.  Hercules agreed to resolve USEPA’s claim for those additional response costs, including interest, for $14.5 million.  This settlement is subject to public comment and Court approval.  Hercules adjusted its accrual to $14.5 million with respect to this matter as of September 30, 2008.
 
(3)   In the Matter of Eastman Company and Hercules Incorporated - On December 23, 2005, USEPA Region III issued a Notice of Violation (“NOV”) to Hercules and to Eastman Chemical Company (“Eastman”) alleging various violations of the Clean Air Act, primarily focused on the Act’s requirements governing emissions of volatile organic compounds, at a manufacturing facility located in West Elizabeth, Pennsylvania.  That facility was sold to Eastman as part of Hercules’ divestiture of its resins business in May 2001.  The USEPA has not specifically made a demand for monetary penalties upon

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Hercules and Eastman.  Investigation of this matter is continuing.  At this time, Hercules cannot reasonably estimate its liability, if any, with respect to this matter.
 
(4)   Environmental Compliance - In April 2005, Hercules’ Franklin, Virginia manufacturing facilities were subject to a multi-media environmental compliance investigation by the USEPA and the Virginia Department of Environmental Quality (“VADEQ”), and in April 2007, Hercules’ Hopewell, Virginia manufacturing facilities were subject to a Clean Air Act compliance investigation by USEPA and the VADEQ.  In April 2008, the results of both investigations were provided to Hercules.  The results of both investigations uncovered areas of potential noncompliance with various environmental requirements which are being evaluated.  At this time, Hercules cannot reasonably estimate its potential liability, if any, with respect to these matters.
 
(5)     Naval Weapons Industrial Reserve Plant - The Naval Weapons Industrial Reserve Plant in McGregor, Texas (the “Site”), is a government-owned facility which was operated by various contractors on behalf of the U.S. Department of the Navy (the “Navy”) from 1942 to 1995.  Hercules operated the Site from 1978 to 1995.  The U.S. Department of Justice, on behalf of the Navy, has advised Hercules and other former contractors that, pursuant to CERCLA, the Government has incurred costs of over $50 million with respect to certain environmental liabilities which the Government alleges are attributable, at least in part, to Hercules’ and the other former contractors’ past operation of the Site.  Hercules and the other former contractors have executed a tolling agreement with the Government and have been engaged in discussions with the Government concerning the Site.  Based on the investigation undertaken by Hercules to date, Hercules believes that there may be substantial defenses to some or all of the Government’s claims.  At this time, Hercules cannot reasonably estimate its potential liability, if any, with respect to the Site. 
 
Agent Orange Litigation - Agent Orange is a defoliant that was manufactured by several companies, including Hercules, at the direction of the U.S. Government, and used by the U.S. Government in military operations in both Korea and Vietnam from 1965 to 1970.  In 1984, as part of a class action settlement, Hercules and other defendants settled the claims of persons who were in the U.S., New Zealand and Australian Armed Forces who alleged injury due to exposure to Agent Orange.  Following that settlement, all claims for alleged injuries due to exposure to Agent Orange by persons who had served in the Armed Forces of those countries were treated as covered by that class action settlement.
 
On June 9, 2003, the U.S. Supreme Court affirmed the decision of the U.S. Court of Appeals for the Second Circuit in a case captioned Dow Chemical Company, et al. v. Daniel Raymond Stephenson, et al. where plaintiffs Stephenson and Isaacson (in separate but consolidated cases) alleged that they were injured from exposure to Agent Orange and that such injury did not manifest until after exhaustion of the settlement fund created through the 1984 class action settlement.  As a result of that decision, the claims of persons who allege injuries due to exposure to Agent Orange and whose injuries first manifest themselves after exhaustion of the settlement fund created through the 1984 class action settlement may no longer be barred by the 1984 class action settlement and such persons may now be able to pursue claims against Hercules and the other former manufacturers of Agent Orange. 
 
Currently, Hercules is a defendant in approximately thirty-one lawsuits (including two purported class actions) where plaintiffs allege that exposure to Agent Orange caused them to sustain various personal injuries.  On February 9, 2004, the U.S. District Court for the Eastern District of New York issued a series of rulings, which held that plaintiffs’ claims against the defendant manufacturers of Agent Orange that were brought in the state courts are properly removable to federal court under the “federal officer removal statute” and that such claims are subject to dismissal by application of the “government contractor defense.” The District Court dismissed plaintiffs’ claims in all of the lawsuits that were before it at that time.  Plaintiffs appealed those dismissals to the U.S. Court of Appeals for the Second Circuit.  The Court of Appeals affirmed the District Court’s dismissal of these actions and also denied the plaintiffs’ petition for rehearing en banc.   On or about October 6, 2008, Plaintiffs in these actions filed Petitions for Writ of Certiorari with the U.S. Supreme Court seeking review of the rulings of the trial court and the U.S. Court of Appeals for the Second Circuit. 
 
In addition, in January 2004, Hercules was sued in a purported class action filed in the United States District Court for the Eastern District of New York by The Vietnam Association for Victims of Agent Orange/Dioxin and several individuals who claim to represent between two and four million Vietnamese who allege that Agent Orange used by the United States during the Vietnam War caused them or their families to sustain personal injuries.  That complaint alleges violations of international law and war crimes, as well as violations of the common law for products liability, negligence and international torts.  On motion of the defendants, the District Court dismissed this lawsuit and the Second Circuit Court of Appeals affirmed the dismissal and denied the plaintiffs’ petition for rehearing en banc.   Plaintiffs have filed a Petition for Writ of Certiorari with the U.S. Supreme Court seeking review of the rulings of the trial court and the U.S. Court of Appeals for the Second Circuit. 
 
In addition, in 1999, approximately 17,200 Korean veterans of the Vietnam War filed suit in Seoul, Korea, against The Dow Chemical Company (“Dow”) and Monsanto Company (“Monsanto”) for their alleged injuries from exposure to Agent Orange.   Following the commencement of those lawsuits, Dow and Monsanto petitioned the court to issue Notices of Pendency to each of the non-defendant manufacturers of Agent Orange, including Hercules, in an attempt to bind those

13 
 
 
 
 
companies to factual and legal findings which may be made in the Korean courts if Dow and Monsanto are held liable to plaintiffs and sue those companies for contribution.  The District Court dismissed the plaintiffs’ claims, and the plaintiffs appealed.  On January 26, 2006, the intermediate appellate court in Seoul reversed the District Court and awarded damages of $65.2 million plus pre- and post-judgment interest to approximately 6,800 of the approximately 17,200 plaintiffs that filed these lawsuits.  Hercules has been informed that Dow and Monsanto have appealed.  If Dow and Monsanto are not successful on appeal, it is possible that they might initiate an action seeking contribution from the non-defendant manufacturers of Agent Orange, including Hercules.  Further, if the intermediate appellate court’s decision is ultimately upheld, it is possible that new lawsuits could be brought in Korea against the Agent Orange manufacturers, including Hercules, by other Korean veterans of the Vietnam War. 
 
Hercules believes that it has substantial meritorious defenses to all of the Agent Orange-related claims described above and those that may yet be brought, and will vigorously defend all actions now pending or that may be brought in the future.
 
 
Other Pending Legal Proceedings
 
In addition to the matters described above, there are various claims, lawsuits and administrative proceedings pending or threatened against Ashland and its current and former subsidiaries, including Hercules.  Such actions are with respect to commercial matters, product liability, toxic tort liability and other environmental matters, which seek remedies or damages, some of which are for substantial amounts.  While these actions are being contested, their outcome is not predictable.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended September 30, 2008.
 
ITEM X.  EXECUTIVE OFFICERS OF ASHLAND
 
The following is a list of Ashland’s executive officers, their ages and their positions and offices during the last five years (listed alphabetically after the Chief Executive Officer as to current members of Ashland’s Executive Committee and other executive officers). 
 
JAMES J. O’BRIEN (age 54) 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 54) is Senior Vice President, Chief Financial Officer and Controller of Ashland and has served in such capacities since June 2008 and 2004, respectively.  During the past five years, he has also served as Vice President of Ashland and Senior Vice President - Finance & Administration of Ashland Paving And Construction, Inc. (a former subsidiary of Ashland). 
 
DAVID L. HAUSRATH (age 56) is Senior Vice President and General Counsel of Ashland and has served in such capacities since 2004 and 1999, respectively.  During the past five years, he has also served as Secretary and Vice President of Ashland. 
 
ROBERT M. CRAYCRAFT, II (age 39) is Vice President of Ashland and President of Ashland Distribution and has served in such capacities since November 13, 2008.  During the past five years, he has also served as Vice President-U.S. Chemicals of Ashland Distribution and Senior Vice President and General Manager-Retail Business; Vice President-Business Transformation; and Vice President and General Manager-Distributor Sales of Valvoline. 
 
SUSAN B. ESLER (age 47) is Vice President - Human Resources and Communications of Ashland and has served in such capacity since 2006.  During the past five years, she has also served as Vice President - Human Resources of Ashland. 
 
THEODORE L. HARRIS (age 43) is Vice President of Ashland and President of Global Supply Chain; Environmental, Health and Safety; and Information Technology and has served in such capacities since 2006 and November 13, 2008, respectively.  During the past five years, he has also served as President of Ashland Distribution, Vice President and General Manager of the Composite Polymers Division and General Manager-Food Ingredients Division of FMC Corporation. 
 
J. WILLIAM HEITMAN (age 54) is Vice President of Ashland and has served in such capacity since November 10, 2008.  He was elected Controller of Ashland on November 19, 2008 effective December 1, 2008.  During the past five years, he has also served as Controller of the North American Operations of The Goodyear Tire & Rubber Company and Vice President of Finance and Interim Chief Financial Officer of Ferro Corporation.
 

14 
 
 
 
 
SAMUEL J. MITCHELL, JR. (age 47) is Vice President of Ashland and President of Ashland Consumer Markets (Valvoline) and has served in such capacities since 2002.
 
JOHN E. PANICHELLA (age 49) is Vice President of Ashland and President of Ashland Aqualon Functional Ingredients and has served in such capacities since November 13, 2008.  During the past five years, he has also served as Vice President and President-Aqualon Division of Hercules and General Manager-Americas of General Electric Water & Process Technologies.
 
PAUL C. RAYMOND, III (age 46) is Vice President of Ashland and President of Ashland Hercules Water Technologies and has served in such capacities since November 13, 2008.  During the past five years, he has also served as Vice President and President-Paper Technologies and Ventures Division and President-Pulp and Paper Division of Hercules and Vice President and General Manager of Honeywell Electronic Materials.
 
PETER H. RIJNEVELDSHOEK (age 56) is Vice President of Ashland and President of Ashland Performance Materials and has served in such capacities since 2006 and August 2008, respectively.  During the past five years, he has also served as President of Ashland Europe, Senior Vice President of Performance Materials, Vice President of the Europe, Middle East, Asia Pacific and Africa business of Drew Industrial Division and Director of European Shared Business Services.
 
WALTER H. SOLOMON (age 48) is Vice President and Chief Growth Officer of Ashland and has served in such capacities since 2005.  During the past five years, he has also served as Senior Vice President and General Manager-Retail Business of Valvoline.
 
FRANK L. WATERS * (age 47) is Vice President of Ashland and has served in such capacity since 2002.  During the past five years, he has also served as President of Ashland Water Technologies, President of Ashland Performance Materials and President of Ashland Distribution.
 
*Mr. Waters ceased to be an executive officer of Ashland effective November 13, 2008.
 
 
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
 
For information relating to equity compensation plans required by Item 201(d) of Regulation S-K, see Item 12 in this annual report on Form 10-K.
 
See Quarterly Financial Information on page F-38 for information relating to market price and dividends of Ashland’s Common Stock.
 
At October 31, 2008, there were approximately 12,700 holders of record of Ashland’s Common Stock.  Ashland Common Stock is listed on the New York Stock Exchange (ticker symbol ASH) and has trading privileges on NASDAQ and the Chicago and National stock exchanges.
 
There were no sales of unregistered securities required to be reported under Item 701 of Regulation S-K.  Ashland made no purchases of Ashland Common Stock during the fourth quarter of fiscal 2008.


15 
 
 
 

 
 
 
 
FIVE-YEAR TOTAL RETURN PERFORMANCE GRAPH
 
The following graph compares Ashland’s five-year cumulative total shareholder return with the cumulative total return of the Standard & Poor’s 500 index and a peer group of companies.  The cumulative total shareholder return for each of these groups assumes the reinvestment of dividends.
 
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
ASHLAND, S&P 500 INDEX AND PEER GROUP
 
 
   
2003
2004
2005
2006
2007
2008
 
 
Ashland 1
100
159
193
227
250
124
 
 
S&P 500
100
113
126
140
163
127
 
 
Peer Group 2
100
176
300
322
403
370
 

1
Ashland’s total return excludes Marathon Ashland Petroleum LLC (MAP) from fiscal 2005 to 2008 and Transportation and Construction from fiscal 2007 to 2008.  Ashland’s former Petroleum Refining and Marketing operations consisted primarily of its 38% interest in MAP which was transferred on June 30, 2005, along with two other businesses to Marathon Oil Corporation.  Ashland’s former Transportation Construction operations consisted of Ashland Paving And Construction, Inc. which was sold on August 28, 2006, to Oldcastle Materials, Inc.
 
2
Ashland’s Peer Group five-year cumulative total return index reflects Petroleum Refining and Marketing peers for fiscal 2002 through 2005 and Transportation and Construction peers for fiscal 2002 through 2006.  Ashland’s Peer Group five-year cumulative total return index is 341 when the Petroleum Refining and Marketing peer total returns for the three months ended September 30, 2005 and Highway Construction peer total returns for 2007 are excluded.

The peer group consists of the following industry indices:
 
 
Highway Construction Portfolio: Standard & Poor’s 500 Construction Materials (Large-Cap), Standard & Poor’s 400 Construction Materials (Mid-Cap), and Standard & Poor’s 600 Construction Materials (Small-Cap).
 
 
Specialty Chemical Production, Distribution, and Motor Oil and Car Care Products Portfolio: Standard & Poor’s 500 Specialty Chemicals (Large-Cap), Standard & Poor’s 400 Specialty Chemicals (Mid-Cap), Standard & Poor’s 600 Specialty Chemicals (Small-Cap), and Standard & Poor’s 400 Diversified Chemicals (Mid-Cap).
 
 
Petroleum Refining and Marketing Portfolio: Standard & Poor’s 500 Oil & Gas Refining & Marketing & Transportation (Large-Cap), Standard & Poor’s 400 Oil & Gas Refining & Marketing & Transportation (Mid-Cap) (index was discontinued by Standard & Poor’s on April 28, 2006), and Standard & Poor’s 600 Oil & Gas Refining & Marketing & Transportation (Small-Cap) (index has been in existence from the last quarter of fiscal 2002 forward and initially consisted only of Frontier Oil Corp.; the results for Frontier Oil Corp. have been included for prior periods to give complete information).

16 
 
 
 
 
As of September 30, 2008, the aforementioned indices consisted of 31 companies.  The annual returns for the companies or indices in each of the portfolios have been weighted by their respective beginning-of-year market capitalization.  Each portfolio is then weighted to reflect Ashland’s annual invested capital in each of these lines of business with the annual return for the peer group represented by the sum of these weighted portfolios.
 
 
ITEM 6.  SELECTED FINANCIAL DATA
 
See Five-Year Selected Financial Information on page F-39.
 
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-18.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
See Quantitative and Qualitative Disclosures about Market Risk on page M-18.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The consolidated financial statements and financial schedule of Ashland presented in this annual report on Form 10-K are listed in the index on page F-1.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
As disclosed in Ashland’s Current Reports on Forms 8-K and 8-K/A filed August 29, 2008 and September 8, 2008, respectively, Ashland changed its independent registered public accountants effective for the fiscal year ending September 30, 2009.  There were no disagreements related to the change in accountants.
 
ITEM 9A.  CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures - As of September 30, 2008, 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, 2008.
 
Internal Control - See Management’s Report on Internal Control Over Financial Reporting on page F-2.
 
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, 2008, that has materially affected, or is reasonably likely to materially affect, Ashland's internal control over financial reporting.
 
ITEM 9B.  OTHER INFORMATION
 
None.
 
PART III
 
ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
There is hereby incorporated by reference the information to appear under the captions “Election of Directors” and “Miscellaneous - Section 16(a) Beneficial Ownership Reporting Compliance” in Ashland’s Proxy Statement, which will be filed with the SEC within 120 days after September 30, 2008.  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.  

17 
 
 
 
 
There is hereby incorporated by reference the information to appear under the caption “Corporate Governance - Shareholder Recommendations for Directors” in Ashland’s Proxy Statement.  
 
There is hereby incorporated by reference the information to appear under the caption “Audit Committee Report” regarding Ashland’s audit committee and audit committee financial experts, as defined under Item 407(d)(4) and (5) of Regulation S-K of the Securities Exchange Act of 1934, as amended, in Ashland’s Proxy Statement.  
 
ITEM 11.  EXECUTIVE COMPENSATION
 
There is hereby incorporated by reference the information to appear under the captions “Compensation of Directors,” “Committees and Meetings of the Board of Directors - Personnel and Compensation Committee Interlocks and Insider Participation,” “Executive Compensation,” “Compensation Discussion and Analysis,” and “Personnel and Compensation Committee Report on Executive Compensation” in Ashland’s Proxy Statement.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
There is hereby incorporated by reference the information to appear under the captions “Ashland Common Stock Ownership of Certain Beneficial Owners” and “Ashland Common Stock Ownership of Directors and Executive Officers of Ashland” in Ashland’s Proxy Statement.  
 
The following table summarizes the equity compensation plans under which Ashland Common Stock may be issued as of September 30, 2008.  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
1,530,564 (1)
   
$27.42 (2)
     
3,449,839 (3)
 
Equity compensation plans
     not approved by security
     holders
28,242 (4)
   
$33.69 (2)
     
967,477 (5)
 
             Total
1,558,806
   
$27.43 (2)
     
4,417,316
 
 
(1)
This figure includes (a) 303,407 stock options outstanding under the Ashland Inc. 1997 Stock Incentive Plan, (b) 570,817 stock options outstanding under the Amended and Restated Ashland Inc. Incentive Plan (the “Amended Plan”), and (c) 334,829 restricted stock shares granted under the Amended Plan and deferred.  This figure also includes 118,708 performance share units for the 2007-2009 performance period and 109,723 performance share units for the 2008-2010 performance period, payable in stock issued under the 2006 Ashland Inc. Incentive Plan (the “2006 Plan”), estimated assuming target performance is achieved.  Also included in the figure are 93,080 shares to be issued under the Deferred Compensation Plan, payable in stock upon termination of employment with Ashland.
 
(2)
This weighted-average exercise price excludes shares of Ashland Common Stock which may be distributed under the deferred compensation plans for employees and the deferred restricted stock and performance share units which may be distributed under the Amended Plan and 2006 Plan as described in footnotes (1) and (4) in this table.
 
(3)
This figure includes 2,871,382 shares available for issuance under the 2006 Plan, 232,441 shares available for issuance under the Deferred Compensation Plan and 346,016 shares available for issuance under the Deferred Compensation Plan for Non-Employee Directors.
 
(4)
This figure includes 1,068 stock options issued pursuant to the Ashland Inc. Stock Option Plan for Employees of Joint Ventures which was not approved by Ashland’s shareholders.  There are currently no shares reserved for future issuance under this plan.  All remaining stock options granted under this plan expired on  October 17, 2008.  Also included in this figure are 27,174 shares to be issued under the Deferred Compensation Plan for Employees (2005), payable in stock upon termination of employment with Ashland.

  18
 
 
 

 
(5)
This figure includes 469,017 shares available for issuance under the Deferred Compensation Plan for Employees (2005) and 498,460 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 New York Stock Exchange, neither plan required approval by Ashland’s shareholders.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
There is hereby incorporated by reference the information to appear under the captions “Corporate Governance - Director Independence and Certain Relationships,” and “Related Person Transaction Policy,” and “Audit Committee Report” in Ashland’s Proxy Statement.
 
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
There is hereby incorporated by reference the information with respect to principal accountant fees and services to appear under the captions “Audit Committee Report,” “Auditor's Fees,” 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 D 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 effective May 17, 2006 (filed as Exhibit 3(i) to Ashland’s Form 10-Q for the quarter ended June 30, 2006, and incorporated herein by reference).
 
 
3.2
-
By-laws of Ashland, effective as of June 30, 2005 (filed as Exhibit 3(ii) to Ashland’s Form 10-Q for the quarter ended June 30, 2005, and incorporated herein by reference).
 
 
4.1
-
Ashland agrees to provide the SEC, upon request, copies of instruments defining the rights of holders of long-term debt of Ashland and all of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed with the SEC.
 
 
4.2
-
Indenture, dated as of August 15, 1989, as amended and restated as of August 15, 1990, between Ashland and Citibank, N.A., as Trustee.
 
 
4.3
-
Agreement of Resignation, Appointment and Acceptance, dated as of November 30, 2006, by and among Ashland, Wilmington Trust Company (“Wilmington”) and Citibank, N.A. (“Citibank”) whereby Wilmington replaced Citibank as Trustee under the Indenture dated as of August 15, 1989, as amended and restated as of August 15, 1990, between Ashland and Citibank (filed as Exhibit 4 to Ashland’s Form 10-Q for the quarter ended December 31, 2006, and incorporated herein by reference).
 
 
4.4
-
Warrant Agreement dated July 27, 1999 between Hercules and The Chase Manhattan Bank, as warrant agent. (Filed as Exhibit 4.4 to Hercules’ Current Report on Form 8-K, dated July 27, 1999 (SEC File No. 001-00496), and incorporated herein by reference).
 
 
4.5
-
Form of Series A Junior Subordinated Deferrable Interest Debentures (Filed as Exhibit 4.5 to Hercules’ Current Report on Form 8-K, dated July 27, 1999 (SEC File No. 001-00496), and incorporated herein by reference).
 
 
4.6
-
Form of CRESTS SM Unit (filed as Exhibit 4.7 to Hercules’ Current Report on Form 8-K, dated July 27, 1999 (SEC File No. 001-00496), and incorporated herein by reference).

19 
 
 
 

 
 
4.7
-
Form of Warrant (filed as Exhibit 4.8 to Hercules’ Current Report on Form 8-K, dated July 27, 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, and incorporated herein by reference).
 
 
10. 2
-
Ashland Inc. Deferred Compensation Plan and Amendment No. 1 (filed as Exhibit 10.3 to Ashland’s Form 10-Q for the quarter ended December 31, 2004, and incorporated herein by reference).
 
 
10.3
-
Amended and Restated Ashland Inc. Deferred Compensation Plan for Employees (2005).
 
 
10.4
-
Amended and Restated Ashland Inc. Deferred Compensation Plan for Non-Employee Directors (2005).
 
 
10.5
-
Amended and Restated Ashland Inc. Supplemental Early Retirement Plan for Certain Employees.
 
 
10.6
-
Amended and Restated Ashland Inc. Nonqualified Excess Benefit Pension Plan.
 
 
10.7
-
Hercules Incorporated Amended and Restated Long Term Incentive Compensation Plan (filed as Exhibit 10-K to Hercules’ Annual Report on Form 10-K, filed March 29, 2000 (SEC File No. 001-00496), and incorporated herein by reference).
 
 
10.8
-
Amendment 2002-1 to Amended and Restated Long Term Incentive Compensation Plan (filed as Exhibit I, Proxy Statement, dated May 15, 2002 (SEC File No. 001-00496), and incorporated herein by reference).
 
 
10.9
-
Hercules Incorporated Omnibus Equity Compensation Plan for Non-Employee Directors (filed as Appendix II, Proxy Statement, dated June 20, 2003 (SEC File No. 001-00496), and incorporated herein by reference).
 
 
10.10
-
Hercules Incorporated 1993 Non-Employee Director Stock Accumulation and Deferred Compensation Plan (filed as Exhibit 4.1, Registration Statement on Form S-8, filed July 16, 1993 (SEC File No. 33-66136), and incorporated herein by reference).
 
 
10.11
-
Amendment 2002-1 to Non-Employee Director Stock Accumulation Plan (filed as Exhibit II, Proxy Statement, dated May 15, 2002 (SEC File No. 001-00496), and incorporated herein by reference).
 
 
10.12
-
Ashland Inc. Salary Continuation Plan.
 
 
10.13
-
Form of Ashland Inc. Executive Employment Contract between Ashland and certain executives of Ashland (filed as Exhibit 10.1 to Ashland’s Form 8-K filed on September 28, 2006, and incorporated herein by reference).
 
 
10.14
-
Employment Agreement between Ashland and John E. Panichella.
 
 
10.15
-
Employment Agreement between Ashland and Paul C. Raymond, III.
 
 
10.16
-
Form of Indemnification Agreement between Ashland and members of its Board of Directors (filed as Exhibit 10.10 to Ashland’s annual report on Form 10-K for fiscal year ended September 30, 2005, and incorporated herein by reference).
 
 
10.17
-
Ashland Inc. 1997 Stock Incentive Plan.
 
 
10.18
-
Amended and Restated Ashland Inc. Incentive Plan (filed as Exhibit 10.1 to Ashland’s Form 10-Q for the quarter ended June 30, 2004, and incorporated herein by reference).
 
 
10.19
-
2006 Ashland Inc. Incentive Plan (filed as Exhibit 10 to Ashland’s Form 10-Q for the quarter ended December 31, 2005, and incorporated herein by reference).
 
 
10.20
-
Form of Notice granting Stock Appreciation Rights Awards.
 
 
10.21
-
Form of Notice granting Restricted Stock Awards.
 
 
10.22
-
Separation Agreement and General Release between Ashland and Gary A. Cappeline effective January 10, 2007 (filed as Exhibit 10.1 to Ashland’s Form 10-Q for the quarter ended December 31, 2006, and incorporated herein by reference).
 
 
10.23
-
Agreement and Plan of Merger dated as of July 10, 2008 among Ashland, Ashland Sub-One, Inc. and Hercules Incorporated (filed as Exhibit 2.1 to Ashland’s Form 8-K filed on July 14, 2008, and incorporated herein by reference).
 
20
 
 
 
 
10.24
-
Credit Agreement dated as of November 13, 2008 among Ashland, Bank of America, N.A., as Administrative Agent, The Bank of Nova Scotia, as Syndication Agent, the other Lenders party thereto, and Banc of America Securities LLC and The Bank of Nova Scotia, as Joint Lead Arrangers and Joint Book Managers (filed as Exhibit 10.1 to Ashland’s Form 8-K filed on November 19, 2008, and incorporated herein by reference).
 
 
10.25
-
Interim Credit Agreement dated as of November 13, 2008 among Ashland, Banc of America Bridge LLC, as Administrative Agent, The Bank of Nova Scotia, as Syndication Agent, the other Lenders party thereto, and Banc of America Securities LLC and The Bank of Nova Scotia, as Joint Lead Arrangers and Joint Book Managers (filed as Exhibit 10.2 to Ashland’s Form 8-K filed on November 19, 2008, and incorporated herein by reference).
 
 
10.26
-
Transfer and Administration Agreement dated as of November 13, 2008 among CVG Capital II LLC, Ashland, in its capacity as both initial Originator and initial Servicer, each of YC SUSI Trust and Liberty Street Funding LLC, as Conduit Investors and Uncommitted Investors, Bank of America, National Association, as a Letter of Credit Issuer, a Managing Agent, an Administrator and a Committed Investor and as the Agent, The Bank of Nova Scotia, as a Letter of Credit Issuer, a Managing Agent, an Administrator and a Committed Investor, and the Letter of Credit Issuers, Managing Agents, Administrators, Uncommitted Investors and Committed Investors parties thereto from time to time (filed as Exhibit 10.3 to Ashland’s Form 8-K filed on November 19, 2008, and incorporated herein by reference).
 
 
10.27
-
Sale Agreement dated as of November 13, 2008 among Ashland and CVG Capital II LLC (filed as Exhibit 10.4 to Ashland’s Form 8-K filed on November 19, 2008, and incorporated herein by reference).
 
 
11
-
Computation of Earnings Per Share (appearing on page F-13 of this annual report on Form 10-K).
 
 
12
-
Computation of Ratio of Earnings to Fixed Charges.
 
 
21
-
List of Subsidiaries.
 
 
23.1
-
Consent of Independent Registered Public Accounting Firm.
 
 
23.2
-
Consent of Hamilton, Rabinovitz & Associates, Inc.
 
 
24
-
Power of Attorney, including resolutions of the Board of Directors.
 
 
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.
 
 
32
-
Certification of James J. O’Brien, Chief Executive Officer of Ashland, and Lamar M. Chambers, Chief Financial Officer of Ashland, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Upon written or oral request, a copy of the above exhibits will be furnished at cost.
 

  21
 
 
 

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, Chief Financial Officer and Controller
  Date:  November 26, 2008  
 
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 26, 2008.
 
 
Signatures
 
 
  Capacity
 
 
 
/s/ James J. O'Brien
_____________________________________
James J. O’Brien
 
 
 
Chairman of the Board,  Chief Executive Officer and Director
(Principal Executive Officer)
 
 
 
/s/ Lamar M. Chambers
_____________________________________
Lamar M. Chambers
 
 
Senior Vice President, Chief Financial Officer and Controller
(Principal Accounting Officer)
 
 
 
*
_____________________________________
Roger W. Hale
 
 
Director
 
 
 
*
_____________________________________
Bernadine P. Healy
 
 
Director
 
 
 
 *
_____________________________________
Kathleen Ligocki
 
 
Director
 
 
 
 *
_____________________________________
Vada O. Manager
 
 
Director
 
 
 
*
_____________________________________
Barry W. Perry
 
 
Director
 
 
 
*
_____________________________________
Mark C. Rohr
 
 
Director
 
 
 
 *
_____________________________________
George A. Schaefer, Jr.
 
 
Director
 
 
 
*
_____________________________________
Theodore M. Solso
 
 
Director
 
 
 
    *
_____________________________________
John F. Turner
 
 
Director
 
 
 
*
_____________________________________
Michael J. Ward
 
 
 
Director
 
 
 
*By:
 
/s/ David L. Hausrath                                          
 
 
David L. Hausrath
 
Attorney-in-Fact
 
Date: November 26, 2008

 
 
22
 
 

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, 2008, 2007 and 2006.

 
BUSINESS OVERVIEW
 
Ashland profile
 
Ashland is a diversified, global chemicals company that provides innovative products, services and solutions to a diverse customer base.  Ashland is a manufacturer of specialty chemicals, a leading distributor of chemicals and plastics, and a provider of automotive lubricants, car-care products and quick-lube services.  Established in 1924 as a regional petroleum refiner, Ashland has recently completed several key acquisitions and divestitures to realign its business operations.  After exiting the transportation construction market in August 2006 and the petroleum refining and marketing sector in June 2005 along with acquiring Hercules Incorporated (Hercules) in November 2008, Ashland is now positioned to achieve its vision in becoming a leading, global specialty chemicals company.
 
Approximately 30% of Ashland’s sales and operating revenues (revenues) are generated outside of North America.  Revenue by region expressed as a percentage of total consolidated revenue for the years ended September 30, 2008, 2007 and 2006 was as follows:
 

   
2008
   
2007
   
2006
North America
   
71%
   
72%
   
79%
Europe
     
21%
   
20%
   
16%
Asia Pacific
   
5%
   
5%
   
3%
Latin America & other
   
3%
   
3%
   
2%
           
100%
   
100%
   
100%
 
 
Business segments
 
Prior to the acquisition of Hercules in November 2008, Ashland consisted of four commercial divisions:  Ashland Performance Materials, Ashland Distribution, Valvoline and Ashland Water Technologies.  Performance Materials is a worldwide manufacturer and supplier of specialty chemicals and customized services to the building and construction, packaging and converting, transportation, marine and metal casting industries.  Distribution is a distributor of chemicals, plastics, composite materials and environmental services in North America, and thermoplastics in Europe.  Valvoline is a marketer, distributor and producer of quality branded automotive and industrial products and services.  Water Technologies is a supplier of chemical and non-chemical water treatment solutions for industrial, commercial and institutional facilities, and specialized chemicals for utility water treatment.
 
Total consolidated revenue for the years ended September 30, 2008, 2007 and 2006 as a percent of revenue by business segment was as follows:

Sales and Operating Revenues by Business Segment
   
2008
   
2007
   
2006
Performance Materials
   
19%
   
18%
   
18%
Distribution
   
51%
   
51%
   
56%
Valvoline
   
19%
   
20%
   
19%
Water Technologies
   
11%
   
11%
   
7%
           
100%
   
100%
   
100%
 
 
M-1
 
 
 
KEY 2008 DEVELOPMENTS
 
During 2008, the following operational decisions and economic developments had an impact on Ashland’s current and future cash flows, results of operations and financial position.
 
Hercules acquisition
 
In November 2008, Ashland completed the acquisition of Hercules, a significant step in achieving its objective to create a leading, global specialty chemicals company.  As fiscal 2009 commences, the new combined company comprises a core of three specialty chemical businesses: specialty additives and functional ingredients, paper and water technologies, and specialty resins, which will drive Ashland both strategically and financially.  This acquisition better positions Ashland to deliver more stable and predictable earnings, generate stronger cash flows and gain access to higher growth markets worldwide.  As a result of the transaction, the expanded international presence of Ashland will increase revenue derived outside North America to roughly 35% from approximately 30% in fiscal 2008.
 
Ashland’s new structure, incorporating the former Hercules businesses, is composed of five commercial units:  Ashland Hercules Water Technologies, Ashland Aqualon Functional Ingredients (Aqualon), Ashland Performance Materials, Ashland Distribution and Ashland Consumer Markets (Valvoline).  The restructured Ashland Hercules Water Technologies business will be a global supplier of functional and process chemicals for the paper industry in addition to water treatment chemicals.  Aqualon is a manufacturer and supplier of specialty additives and functional ingredients derived from renewable resources that are designed to manage the properties of water-based systems.
 
The estimated transaction value of $3.4 billion includes $0.8 billion of debt assumed in the acquisition.  As part of the financing arrangement for the transaction, Ashland borrowed $2.3 billion and retained approximately $0.3 billion in existing debt, combining for a projected weighted-average interest rate of approximately 9.5%.  For further information on this transaction see the “Liquidity” discussion within Management’s Discussion and Analysis as well as Note Q in the Notes to the Consolidated Financial Statements.
 
Raw material volatility
 
Unprecedented volatility in many hydrocarbon and base lube oil markets caused unusually large fluctuations in gross profit margins throughout fiscal 2008.  This volatility was highlighted during the 2008 summer, which saw the crude oil market soar to over $145 per barrel from approximately $80 per barrel at the end of fiscal 2007.  These significant raw material increases caused tight supply and extreme price increases on core raw material commodities in a very short period of time.  The timing delay of implementing price increases on Ashland’s products in the market place to recapture gross profit margin from these significant increases caused overall gross profit margin erosion during the year in each of Ashland’s businesses.
 
Working capital and cash flow management
 
Ashland’s commitment to the implementation of its SAP ® enterprisewide resource planning (ERP) project was only the first step in efforts to improve working capital and cash flow management.  The majority of Ashland’s operations had implemented this system by the beginning of fiscal 2008, resulting in real time information which provided greater transparency in cash management and related business decisions.  As a result, focus shifted on improving the cash flow metric in 2008 by tying cash flow results directly to management compensation.  Ashland’s efforts and focus in this area were highly successful in fiscal 2008 as it generated $478 million of cash flows from operations, a $289 million increase from the prior year.  Operating segment trade working capital decreased from 15.3% of revenue at September 30, 2007 to 12.3% of revenue at September 30, 2008.  Improvements in this area were largely driven by inventory optimization in Ashland Distribution, but also from attention to accounts receivable collection across all business units.  Overall, trade working capital provided approximately $200 million in cash flow during 2008.
 
Cost-structure efficiency program
 
During 2008, Ashland initiated a cost-structure efficiency program designed to realign its available resources within certain businesses to maximize operating income and long-term growth opportunities.  Ashland committed to achieve $65 million in total savings from existing businesses by the end of fiscal 2009.  When the program was introduced, the company run-rate target for fiscal 2008 was $14 million.  Ashland exceeded this initial target by the end of fiscal 2008, achieving total run-rate savings of $41 million.  These cost savings were primarily within Performance Materials and Water Technologies, where run-rate savings of $24 million and $14 million, respectively, were achieved.
 
M-2
 
 
 
MAP settlement
 
During 2008, Ashland and Marathon agreed to a tax related settlement with respect to four specific tax attributes and deductions that were originally scheduled to be reimbursed periodically at much later points in the future, some with the potential of greater than 20 years or more.  The effect of this settlement accelerated Marathon’s reimbursement to Ashland for certain of these deductions, resulting in the receipt of $26 million in cash from Marathon representing the present value of the future deductions.  As a result of this specific agreement, Ashland recorded a gain within the MAP Transaction caption of the Statement of Consolidated Income of $23 million during 2008.

 
RESULTS OF OPERATIONS – CONSOLIDATED REVIEW
 
Ashland’s net income amounted to $167 million in 2008, $230 million in 2007 and $407 million in 2006.  Income from continuing operations, which excludes results from discontinued operations, amounted to $175 million in 2008, $201 million in 2007 and $183 million in 2006.  Net income is primarily affected by results within operating income, net interest and other financing income and discontinued operations.  Ashland’s operating income amounted to $213 million in 2008, $216 million in 2007 and $170 million in 2006.  Operating results in 2008 compared to 2007 declined slightly as operating income decreases in Performance Materials and Water Technologies were offset by an operating income increase in Distribution and income associated with Unallocated and other.  Increases in operating income during 2007 compared to 2006 primarily related to Valvoline’s record operating income year as Distribution, and to a lesser extent Performance Materials, reported lower operating results.  Net interest and other financing income was $28 million in 2008, $46 million in 2007 and $47 million in 2006.  The decrease in 2008 compared to prior periods primarily reflects the lower interest rate environment for short-term investment instruments.  Ashland’s after-tax results from discontinued operations included a gain on the sale of APAC of $110 million in 2006, which was subsequently reduced by $7 million in both 2008 and 2007, a $35 million gain associated with estimated future asbestos liabilities less probable recoveries during 2007 and net income from APAC operations of $115 million in 2006.
 
A comparative analysis of the Statement of Consolidated Income by caption is provided as follows for the years ended September 30, 2008, 2007 and 2006.

 

                             
  2008
     
  2007
 
(In millions)
   
2008
     
2007
     
2006
     
change
     
change
 
Sales and operating revenues
 
$
8,381
   
$
7,785
   
$
7,233
   
$
596
   
$
552
 
 
 
Revenues for 2008 increased 8% from 2007 primarily due to increased pricing of $560 million and $288 million related to a favorable currency exchange as well as $34 million from the acquisition of the pressure-sensitive adhesive business and atmospheric emulsions business of Air Products and Chemicals, Inc. (Air Products) within Performance Materials in June.  This increase was partially offset by a $143 million decrease related to declines in both volume and product mix as well as an additional $143 million decrease related to the elimination of a one-month financial reporting lag for foreign operations (reporting lag) during 2007.  During 2008, pricing increases were consistently implemented across each of Ashland’s businesses to recover significant cost increases occurring within volatile raw material markets.  Volume only declined slightly, despite the difficult market conditions that continued to deteriorate the North American economy throughout 2008, particularly in core sectors such as building and construction, coatings, transportation and marine.  The favorable currency exchange rate is principally influenced by the U.S. dollar’s (USD) performance against the Euro, which weakened by 13% during 2008.
 
Revenues for 2007 increased 8% from 2006 primarily as a result of Water Technologies’ purchase of the water treatment business from Degussa AG in May 2006 as revenues associated with these purchased operations were $363 million in 2007, as compared to $82 million in the prior year (2006 included only five months of business activity due to the purchase date).  Revenues in 2007 also included an additional $143 million as a result of the elimination of the reporting lag during 2007 as compared to 2006.  These increases, along with pricing increases within Valvoline, primarily contributed to the overall increase in revenues.

 

                     
2008
   
2007
 
(In millions)
 
2008
   
2007
   
2006
   
change
   
change
 
Cost of sales and operating expenses
  $ 7,056     $ 6,447     $ 6,030     $ 609     $ 417  
Gross profit as a percent of sales
    16 %     17 %     17 %                
 

 
Cost of sales and operating expenses (cost of sales) for 2008 increased 9% compared to 2007, which resulted in an overall 1% decline in gross profit as a percent of sales (gross profit).  Raw material price increases were the primary factor
 
M-3
 
 
 
 
for this gross profit decline, which represented a $591 million cost increase compared to 2007.  Volatile pricing in raw materials, particularly in the crude oil market, which experienced an approximate 75% increase in the cost per barrel of oil during 2008 before peaking at over $145 a barrel, primarily influenced other significant hydrocarbon based raw material increases throughout 2008.  Currency exchange rates increased cost of sales $228 million, while the Air Products acquisition added an additional $32 million.  These revenue increases were partially offset by a $127 million decrease related to volume declines and product mix as well as a $115 million decline related to the reporting lag elimination during 2007.
 
Cost of sales for 2007 increased 7% compared to 2006, yet gross profit remained consistent year over year.  Cost of sales fluctuations generally track revenue as the increase from 2006 to 2007 primarily reflected year over year raw material cost increases.  Gross profit declined in three of Ashland’s four business segments over the same period, with the exception being Valvoline due to timely and effective pricing increases.  Fiscal 2007 also included an additional $115 million in cost of sales as compared to 2006 as a result of the reporting lag elimination.
 
 
                       
2008
   
2007
 
(In millions)
 
2008
     
2007
   
2006
   
change
   
change
 
Selling, general and administrative expenses
  $ 1,166     $ 1,171     $ 1,077     $ (5 )   $ 94  
As a % of revenues
    14 %     15 %     15 %                
 
 
 
Selling, general and administrative expenses for 2008 decreased slightly compared to 2007 while decreasing one percentage point as a percent of total revenue.  Expenses impacting the comparability of 2008 compared to 2007 include charges recorded in 2007 that consisted of $25 million for the voluntary severance offer, $22 million for the elimination of the reporting lag and $8 million related to an expense for certain postretirement plans.  These expenses did not occur in 2008.  Expenses during 2008 were negatively impacted by $40 million for currency exchange and $11 million for severance charges, related to realignment of certain businesses within Ashland during 2008.
 
During 2007 selling, general and administrative expenses increased 9%, however remained consistent as a percent of revenue from period to period.  The charges of $25 million for the voluntary severance offer, $22 million for the elimination of the reporting lag, $8 million for the postretirement plans and the additional expense related to the Degussa acquisition were the primary increases in expenses year over year.  Corporate costs previously allocated to APAC of $41 million were retained within 2006 expenses in accordance with applicable GAAP guidance.
 
 
                     
2008
   
2007
 
(In millions)
 
2008
   
2007
   
2006
   
change
   
change
 
Equity and other income
                                       
Equity income
  $ 23     $ 15     $ 11     $ 8     $ 4  
Other income
    31       34       33       (3 )     1  
    $ 54     $ 49     $ 44     $ 5     $ 5  

 
Total equity and other income increased 10% during 2008 and 11% during 2007 compared to the prior period.  The increases in 2008 and 2007 primarily relate to improved performance from various foreign joint venture associations.
 

 
                     
2008
   
2007
 
(In millions)
 
2008
   
2007
   
2006
   
change
   
change
 
Gain (loss) on the MAP Transaction
  $ 20     $ (3 )   $ (5 )   $ 23     $ 2  
 
 
The $20 million gain in 2008 primarily related to a settlement with Marathon for certain related tax matters associated with the MAP Transaction which resulted in a $23 million gain.  This gain was offset by a decrease in the recorded receivable from Marathon for the estimated present value of future tax deductions related primarily to environmental and other postretirement obligations.  Ashland recorded a loss on the MAP Transaction of $3 million in 2007 as a result of a decrease in the discounted receivable from Marathon for the estimated present value of future tax deductions.  In 2006, a $5 million loss resulted primarily from a $4 million reclassification of certain tax benefits related to previously owned businesses of Ashland.  The offsetting benefit was recorded in income taxes as deferred tax benefits.  See Note C of Notes to Consolidated Financial Statements for a discussion of the MAP Transaction.

 

M-4
 
 
 
 
                     
2008
   
2007
 
(In millions)
 
2008
   
2007
   
2006
   
change
   
change
 
Net interest and other financing income
                             
Interest income
  $ 40     $ 59     $ 59     $ (19 )   $ -  
Interest expense
    (9 )     (10 )     (8 )     1       (2 )
Other financing costs
    (3 )     (3 )     (4 )     -       1  
    $ 28     $ 46     $ 47     $ (18 )   $ (1 )
 

 
The decrease in interest income to $40 million in 2008 from $59 million in 2007 and 2006 primarily reflects the lower interest rate environment for short-term investment instruments compared to prior periods.  Interest expense and other financial costs have remained consistent across all periods.

 

                     
2008
   
2007
 
(In millions)
 
2008
   
2007
   
2006
   
change
   
change
 
Income tax expense
  $ 86     $ 58     $ 29     $ 28     $ 29  
Effective tax rate
    32.9 %     22.3 %     13.6 %                
 

 
The overall effective tax rate significantly increased in 2008 from rates in prior periods due to several key factors.  Significant volatility in the capital markets as it relates to investments held for life insurance policies resulted in a $9 million tax effect in 2008, which historically has been a tax benefit for Ashland.  In addition, during 2007 Ashland recorded a $15 million tax benefit related to dividends held within the employee stock ownership plan compared with a $1 million tax benefit in 2008, primarily due to the special dividend of $10.20 paid on October 25, 2006 as part of the distribution to shareholders of a substantial portion of the APAC divestiture proceeds.
 
Ashland’s income tax expense for 2007 and 2006 included $9 million of tax expense and $16 million of tax benefits, respectively, due to the resolution of domestic and foreign tax matters and the reevaluation of income tax reserves related to tax positions taken in prior years.  Also during 2006, $16 million in tax benefits were recorded to adjust the 2005 tax provision to the 2005 tax returns as ultimately filed.
 
Excluding these identified items, Ashland’s effective tax rate would have been 29.9% in 2008, compared to 24.7% in 2007 and 28.8% in 2006.  See Note K of Notes to Consolidated Financial Statements for the reconciliation of Ashland’s tax provision for the last three years to the 35% U.S. statutory rate.
 

 

                     
2008
   
2007
 
(In millions)
 
2008
   
2007
   
2006
   
change
   
change
 
Income (loss) from discontinued operations (net of tax)
                             
APAC
                             
Income from operations
  $ 1     $ 2     $ 115     $ (1 )   $ (113 )
(Loss) gain on sale of operations
    (7 )     (7 )     110       -       (117 )
Asbestos-related litigation reserves
    (2 )     35       (1 )     (37 )     36  
Electronic Chemicals
    -       (1 )     -       1       (1 )
    $ (8 )   $ 29     $ 224     $ (37 )   $ (195 )
 

 
Ashland recorded an after-tax gain on the sale of APAC of $110 million in 2006.  During 2008 and 2007, subsequent tax adjustments of $7 million per year reduced the gain on the sale of APAC.  Ashland periodically updates the model used for purposes of valuing the asbestos-related litigation reserves, which resulted in a net $2 million and $1 million charge in 2008 and 2006, respectively, and a favorable net $17 million adjustment during 2007.  In addition, Ashland reassessed its assumption for a certain asbestos receivable due to improved credit quality, which resulted in a favorable $18 million after-tax adjustment during 2007.  Net income from the results of operations of APAC amounted to $1 million, $2 million and $115 million in 2008, 2007 and 2006, respectively.

 
The following details Ashland’s quarterly reported operating income for the years ended September 30, 2008, 2007 and 2006.

M-5
 
 
 
 

 
(In millions)
 
2008
   
2007
   
2006
 
Quarterly operating income
                 
December 31
  $ 46     $ 58     $ 46  
March 31
    52       41       49  
June 30
    87       91       47  
September 30
    28       26       28  
 

 
RESULTS OF OPERATIONS – BUSINESS SEGMENT REVIEW
 
Segment operating results reflect the methodology adopted in October 2005 for allocating substantially all budgeted corporate expenses to Ashland’s operating businesses, with the exception of certain legacy costs or items clearly not associated with the operating divisions.  Corporate expenses allocated to Ashland’s four operating divisions under this methodology amounted to $88 million in 2008, $84 million in 2007 and $70 million in 2006.  Actual corporate expenses incurred throughout the year are recorded within Unallocated and other.  In August 2006 the sale of APAC qualified as a discontinued operation.  Under generally accepted accounting principles, allocations of general corporate overhead may not be allocated to discontinued operations for financial statement presentation.  As a result, the Unallocated and other component of operating income during 2006 reflects $41 million of corporate overhead previously allocated to APAC.
 
The following table shows revenues, operating income and operating information by business segment for each of the last three years ended September 30.


(In millions)
 
2008
   
2007
   
2006
 
Sales and operating revenues
                 
Performance Materials
  $ 1,621     $ 1,580     $ 1,425  
Distribution
    4,374       4,031       4,070  
Valvoline
    1,662       1,525       1,409  
Water Technologies
    893       818       502  
Intersegment sales
    (169 )     (169 )     (173 )
    $ 8,381     $ 7,785     $ 7,233  
Operating income
                       
Performance Materials
  $ 52     $ 89     $ 112  
Distribution
    51       41       120  
Valvoline
    83       86       (21 )
Water Technologies
    10       16       14  
Unallocated and other (a)
    17       (16 )     (55 )
    $ 213     $ 216     $ 170  
Operating information
                       
Performance Materials (b)
                       
Sales per shipping day
  $ 6.4     $ 6.1     $ 5.7  
Pounds sold per shipping day
    4.9       4.9       4.9  
Gross profit as a percent of sales
    17.0 %     20.5 %     22.5 %
Distribution (b)
                       
Sales per shipping day
  $ 17.3     $ 15.9     $ 16.2  
Pounds sold per shipping day
    18.8       19.6       20.3  
Gross profit as a percent of sales
    7.8 %     7.9 %     9.5 %
Valvoline (b)
                       
Lubricant sales gallons
    169.2       167.1       168.7  
Premium lubricants (percent of U.S. branded volumes)
    24.9 %     23.3 %     23.1 %
Gross profit as a percent of sales
    23.0 %     24.8 %     19.9 %
Water Technologies (b)
                       
Sales per shipping day
  $ 3.5     $ 3.1     $ 2.0  
Gross profit as a percent of sales
    36.7 %     39.2 %     43.7 %


(a)  
Includes a $25 million charge for costs associated with Ashland’s voluntary severance offer in 2007 and corporate costs previously allocated to APAC of $41 million in 2006.

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

M-6
 
 
 
During 2008, Ashland’s financial performance was hindered by declining demand and significant raw material cost increases, a direct result of continued weakness in the North American economy, where approximately 70% of revenue is derived, and instability in raw material markets.  This economic environment created significant downward pressure on the gross profit margin of each business segment, particularly within the Performance Materials, Valvoline and Water Technologies businesses during 2008.  Despite the economic weakness and gross profit margin pressure, Distribution was able to keep gross profit as a percent of sales relatively flat compared to 2007.  Overall volume results during 2008 for the businesses were mixed, with Water Technologies and Valvoline reporting modest increases compared to 2007 while Distribution declined slightly and Performance Materials’ levels were flat.
 
Performance Materials
 
Performance Materials reported operating income of $52 million during 2008, a 42% decrease from the $89 million reported during 2007.  Revenues increased 3% to $1,621 million compared to $1,580 million during the prior period.  Increases in currency exchange of $88 million, or 6%, and price of $45 million, or 3%, were the primary factors in the increase in revenue.  In addition, the acquisition of Air Products in June 2008 contributed $34 million to 2008 revenues.  These increases in revenue were partially offset by volume and product mix decreases of $70 million, or 4%, primarily as a result of weakness in the North American markets for the Composite Polymers and Specialty Polymers and Adhesives business units, and a $56 million decrease related to the reporting lag elimination recorded during 2007.  The decrease in volume and product mix caused operating income to decline by $30 million.
 
Gross profit as a percent of sales during 2008 decreased 3.5 percentage points to 17.0% primarily due to raw material cost increases of $69 million.  These raw material cost increases were not fully offset by price increases during 2008, causing gross profit margin and operating income to decline by $24 million.  The decreases in gross profit margin related to price, volume and product mix were partially offset by an increase from currency exchange of $16 million.  Selling, general and administrative expenses decreased $3 million, or 1%, during 2008 as an $8 million increase in currency exchange was offset by a $7 million decrease in costs recorded from the reporting lag recorded during 2007.  Equity and other income increased $5 million during 2008 compared to 2007, primarily due to a $6 million increase in equity income associated with joint ventures.
 
Performance Materials reported operating income of $89 million for 2007, a 21% decrease compared to the record $112 million for 2006.  The gross profit margin decreased to 20.5% from 22.5% in 2006, resulting in an $8 million decrease in operating income.  Sales and operating revenues increased 11%, from $1,425 million for 2006 to $1,580 million for 2007, primarily due to price increases, as pounds per shipping day were flat for both periods at 4.9 million pounds.  On a comparable twelve month period, when adjusted for the acquisitions of Northwest Coatings and the purchase of third-party ownership interests in a former Japanese joint venture, sales and operating revenues increased 4% while volumes decreased 3%.  Selling, general and administrative expenses increased $25 million, or 11% compared to the 2006 period, primarily due to increased international expansion as well as $10 million of additional costs from the previously mentioned acquisitions.
 
Distribution
 
Distribution reported operating income of $51 million during 2008, a 24% increase from the $41 million reported during 2007.  Revenues increased 9% to $4,374 million compared to $4,031 million in the prior period.  Price increases, primarily in certain chemicals and plastics, were the primary factor in revenue growth causing a $446 million, or 11%, increase with currency exchange increases adding an additional $97 million, or 2%.  These increases during 2008 were offset by a $154 million decrease in volume, as pounds sold per shipping day decreased 4% to 18.8 million compared to 19.6 million in 2007, causing a decline in the gross profit margin and operating income of $13 million.  The reporting lag recorded during 2007 resulted in an additional $46 million decrease in revenue.
 
Gross profit as a percent of sales during the current period decreased 0.1 percentage point to 7.8%.  Despite this decline, actual gross profit margin (in dollars) increased $22 million compared to 2007 as price increases offset raw material cost increases, contributing $34 million to gross profit margin and operating income.  Selling, general and administrative expenses increased $12 million, or 4%, during 2008 primarily due to increased charges for incentive compensation of $11 million.  The currency exchange increased operating income by $1 million during 2008.
 
Distribution earned operating income of $41 million for 2007, a 66% decrease from the record $120 million earned for 2006.  Sales and operating revenues decreased 1% from $4,070 million for 2006, to $4,031 million for 2007.  Pounds sold per shipping day decreased 3% in 2007 to 19.6 million pounds from 20.3 million pounds in 2006, resulting in a $10 million decrease in operating income.  Gross profit as a percent of sales declined from 9.5% for 2006 to 7.9% for 2007.  Two factors primarily caused this decrease.  The first was unusually high margins in the prior period, resulting from hurricane supply disruptions.  The second was the limited ability of Distribution to raise prices in a rising commodity cost environment due to demand weakness in the North American manufacturing sector.  The decline in gross profit margin lowered operating income by $57 million compared to 2006.  Selling, general and administrative expenses increased $13 million, or 5%,
 

M-7
 
 
 
comparing the current period to the prior period in part due to a one time $6 million adjustment in foreign postretirement benefit obligations.
 
Valvoline
 
Valvoline reported operating income of $83 million during 2008, a 3% decrease compared to the record $86 million reported during 2007.  Revenues increased 9% to $1,662 million during 2008 compared to $1,525 million in 2007.  Increases in pricing of $76 million, or 5%, and currency exchange of $40 million, or 3%, contributed to the revenue growth.  In addition, revenue related to volume increased $49 million as lubricant volume increased 1% to 169.2 million gallons during 2008 compared to 2007, which resulted in an increase in gross profit margin and operating income of $14 million.  A change in the product mix sold during 2008 reduced revenue by $28 million compared to 2007.
 
Gross profit as a percent of sales during 2008 decreased 1.8 percentage points to 23.0%.  Despite this decrease, actual gross profit margin (in dollars) increased $4 million from the prior period as currency exchange contributed an increase of $11 million while price increases did not fully offset increases in raw material costs, causing a net $14 million decline in gross profit margin and operating income.  The remaining difference was due to fluctuations within product mix, which caused gross profit margin and operating income to decline by $7 million.  Selling, general and administrative expenses increased $7 million during the current period primarily due to currency exchange increases of $8 million.
 
Valvoline reported record operating income of $86 million for 2007, compared to an operating loss of $21 million for 2006.  The improvement in operating income primarily reflects gross profit margin recovery, which increased to 24.8% in 2007 from 19.9% in 2006, as a result of stable base-oil costs and the full effect of previous price increases.  This increase in gross profit margin during 2007 contributed $97 million to operating income.  Sales and operating revenues increased 8% over the 2007 period to $1,525 million, reflecting increased pricing and product mix as volume levels decreased 1% to 167.1 million lubricant gallons.  Valvoline Instant Oil Change reported a $13 million increase in operating income compared to the prior year driven by higher levels of customer satisfaction which contributed to an increase in same store sales revenue.  Selling, general and administrative expenses decreased $6 million during 2007 primarily due to lower employee benefit costs as well as an unfavorable litigation charge recorded in the prior period.
 
Water Technologies
 
Water Technologies reported operating income of $10 million during 2008, a 38% decrease compared to $16 million reported during 2007, as lower gross profit margin and increased selling, general and administrative costs were the primary factors in this decline.  Revenues increased 9% to $893 million compared to $818 million during 2007, primarily due to increases of approximately $64 million, or 8%, and $61 million, or 7%, in currency exchange and volume, respectively.  These increases were offset by an $8 million, or 1%, decrease in price and a $42 million, or 5%, decrease as a result of the reporting lag recorded in 2007.
 
Gross profit as a percent of sales decreased 2.5 percentage points to 36.7%.  Despite this decrease, actual gross profit margin (in dollars) increased $6 million from 2007 as currency exchange and volume contributed increases of $24 million and $22 million, respectively, to gross profit margin.  These increases in gross profit were almost fully offset by cost increases in raw materials and services of $25 million as well as a $15 million decrease related to the reporting lag recorded during 2007.  Selling, general and administrative expenses increased $12 million during 2008 primarily due to a $20 million increase in currency exchange and a $12 million decrease from costs associated with the reporting lag recorded during 2007.
 
Water Technologies earned operating income of $16 million for 2007, compared to $14 million for 2006, which included an $8 million currency hedge gain related to the acquisition of the water treatment business of Degussa AG (E&PS).  Sales and operating revenues increased 63% to $818 million in 2007 compared to $502 million in 2006, primarily due to the $363 million in sales and operating revenues contributed by the E&PS business during the entire current year, which had only reported four months in the prior period.  The marine and industrial businesses’ combined revenue increase of 5%, on a comparable twelve month basis, and the improving gross profit margin have been the primary factors in the operating income improvement in 2007, while inclusion of the E&PS business has also contributed to operating income growth.  Operating income was also impacted during the current year by an $11 million asset impairment charge on PathGuard ® pathogen control equipment that was adjusted to fair value in conjunction with the decision to exit the poultry processing market.
 
Unallocated and other
 
Unallocated and other income (costs), consisting of certain legacy costs or items clearly not associated with the operating segments, were $17 million in 2008, ($16) million in 2007 and ($55) million in 2006.  These amounts included a $15 million benefit in 2008 for lower direct support costs allocated to each business segment, a $25 million charge for costs associated with Ashland’s voluntary severance offer in 2007 and costs previously allocated to APAC of $41 million in 2006
 

M-8
 
 
 
that were retained in this component of operating income in accordance with applicable GAAP guidance.  Ashland’s voluntary severance offer was initiated as a result of the APAC divestiture in August 2006.  As a result of the divestiture, it was determined that certain identified corporate costs that had previously been allocated to that business needed to be eliminated to maintain Ashland’s overall competitiveness.  As a means to eliminate those costs, Ashland offered an enhanced early retirement or voluntary severance opportunity to administrative and corporate employees during fiscal year 2007.  In total, Ashland accepted voluntary severance offers from 172 employees under the program.  As a result, a $25 million pretax charge was recorded for severance, pension and other postretirement benefit costs during fiscal year 2007.  The termination dates for employees participating in the program were completed and paid in fiscal year 2008.
 
In addition to the ongoing costs that typically occur each year related to formerly owned businesses, 2008 included $8 million in expense for joint venture and other costs related to growth opportunities, which was fully offset by an $11 million adjustment from favorable experiences related to Ashland’s self-insurance program.  Fiscal 2007 included $4 million in reduced expenditures as well as $8 million in income recorded from favorable experiences related to Ashland’s self-insurance program.  Included in 2006 were $17 million in environmental remediation expenses, income of $11 million from an insurance claim recovery and income of $5 million from the favorable adjustment to the previously estimated withdrawal premium due Oil Insurance Limited (OIL), the energy-industry mutual insurance consortium in which Ashland terminated its participation effective December 31, 2005.

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

 
2008
   
2007
   
2006
 
Cash (used) provided by:
                 
Operating activities from continuing operations
  $ 478     $ 189     $ 145  
Investing activities from continuing operations
    (418 )     (6 )     (285 )
Financing activities from continuing operations
    (70 )     (1,016 )     (472 )
Discontinued operations
    (8 )     (95 )     1,445  
Effect of currency exchange rate changes on cash and cash equivalents
    7       5       2  
Net (decrease) increase in cash and cash equivalents
  $ (11 )   $ (923 )   $ 835  
 

 
Cash flows generated from operating activities from continuing operations, a major source of Ashland’s liquidity, amounted to $478 million in 2008, $189 million in 2007 and $145 million in 2006.  The increased cash generated during 2008 primarily reflects a $311 million and $302 million cash improvement in operating assets and liabilities as compared to 2007 and 2006, respectively.  The cash inflow for the current period was primarily attributable to changes within accounts receivable, inventory and trade and other payables as a result of Ashland’s increased focus on working capital management throughout the company.  These captions generated $193 million of cash inflow during 2008 compared to cash outflows of $234 million and $92 million from the same captions during 2007 and 2006.  During 2008, Ashland paid income taxes of $53 million, compared to $25 million in 2007 and $140 million in 2006.  Ashland contributed $25 million to its qualified pension plans in 2008, compared with $58 million in 2007 and $111 million in 2006.  Cash receipts for interest income was $40 million in 2008 and $59 million in 2007 and 2006, while cash payments for interest expense amounted to $10 million in 2008, $10 million in 2007 and $9 million in 2006.  Cash flows from discontinued operations, consisting primarily of cash flows from APAC, amounted to a cash outflow of $8 million in 2008, $95 million in 2007 and cash inflow of $1,445 million in 2006.
 
During 2007, Ashland replaced its revolving credit agreement with a new five year revolving credit facility which provides for up to $300 million in borrowings.  Up to an additional $100 million in borrowings is available with the consent of one or more of the lenders.  The borrowing capacity under this new facility was reduced by $102 million for letters of credit outstanding under the credit agreement at September 30, 2008.  The revolving credit agreement contains a covenant limiting the total debt Ashland may incur from all sources as a function of Ashland’s stockholders’ equity.  The covenant’s terms would have permitted Ashland to borrow $4.7 billion at September 30, 2008 in addition to the actual total debt incurred at that time.  Permissible total Ashland debt under the covenant’s terms increases (or decreases) by 150% for any increase (or decrease) in stockholders’ equity.
 
M-9
 
 
 
On November 13, 2008, Ashland completed its acquisition of Hercules, creating a leading specialty chemicals company.  The cost to acquire the 112.7 million shares of outstanding Hercules Common Stock at November 13, 2008, paid in cash and Ashland Common Stock, was approximately $2.6 billion, consisting of cash consideration of $2.1 billion and stock consideration, valued as of the original announcement date, of $0.5 billion.  Ashland Common Stock issued as part of the merger acquisition was approximately 10.5 million shares.  In addition, Ashland assumed debt that had a carrying value of approximately $0.8 billion as of the closing date.
 
In conjunction with the acquisition of Hercules previously described, Ashland secured $2.6 billion in financing from Bank of America Securities LLC and Scotia Capital (USA) Inc. consisting of a $400 million revolving credit facility, a $400 million term loan A facility, an $850 million term loan B facility, a $200 million accounts receivable securitization facility, and a $750 million bridge loan.  The total debt drawn upon the closing of the completed merger was $2.3 billion resulting in ongoing Ashland total debt of approximately $2.6 billion, which included amounts used to fund the extinguishment of certain debt instruments that Hercules held as of the closing date.
 
As a result of the financing and subsequent debt issued to complete this merger, Standard & Poor’s downgraded Ashland’s corporate credit rating to BB- and Moody’s Investor Services downgraded Ashland’s corporate credit rating to Ba2.  In addition, Ashland is now subject to cash and other restrictions from various debt covenants.  These covenants include certain affirmative covenants such as various internal certifications, maintenance of property and applicable insurance coverage as well as negative covenants that include financial covenant restrictions associated with leverage and fixed charge coverage ratios and total net worth.
 
At September 30, 2008, working capital (excluding debt due within one year) amounted to $1,823 million, compared to $2,129 million at the end of 2007.  Ashland’s working capital is affected by its use of the LIFO method of inventory valuation that valued inventories below their replacement costs by $200 million at September 30, 2008 and $155 million at September 30, 2007.  Liquid assets (cash, cash equivalents, available-for-sale securities and accounts receivable) amounted to 191% of current liabilities at September 30, 2008, compared to 219% at September 30, 2007.  The decrease in both working capital and liquid assets is partially attributable to auction rate securities classified as noncurrent assets in the current year as opposed to being classified as current assets in the prior year.
 
At September 30, 2008, Ashland held at par value $275 million of student loan auction rate securities, which are variable-rate debt securities and have a long-term maturity with the interest rates being reset through a dutch auction process typically held every 7 or 28 days, for which there was not an active market.  Auction rate securities have historically traded at par value and are callable at par value at the option of the issuer.  At September 30, 2008, all the student loan instruments held by Ashland were AAA rated and collateralized by student loans which have guarantees by the U.S. government under the Federal Family Education Loan Program.
 
Until February 2008, the auction rate securities market was highly liquid.  Starting mid-February 2008, a substantial number of auctions became largely illiquid as there was not enough demand to sell all of the securities that holders desired to sell at auction.  Because the auction rate securities market has failed to achieve equilibrium since mid-February, Ashland determined that there is insufficient observable auction rate securities market information available to determine the fair value of the student loan securities.  As a result, Ashland developed various internal valuation models to estimate the fair value of these auction rate securities based on discounted cash flow models and relevant observable market prices.  Assumptions used in estimating fair value include credit quality, liquidity, estimates on the probability of each valuation model, and the impact due to extended periods of maximum auction rates.  Based on these various internal valuation models, Ashland has recorded a temporary impairment of $32 million related to the student loan securities as of September 30, 2008.  Any 25 basis point change in the discount rate or three month adjustment in the duration assumptions would impact the internal valuation model by approximately $2 million.
 
Ashland believes this adjustment in valuation is necessary to account for the current limited liquidity of these instruments and should be temporary.  Ashland believes these securities ultimately will be liquidated primarily due to the quality of the collateral securing most of the instruments as well as based on recent actions being taken to correct the current failed auctions in this marketplace.  However, the period of time it could take to ultimately realize the securities’ par value is currently not determinable and may be longer than twelve months.  As a result, Ashland has classified these instruments as long-term assets at September 30, 2008 in Ashland’s Consolidated Balance Sheet.  As of September 30, 2008 Ashland has the intent and ability to hold the auction rate securities for a sufficient period of time to allow for recovery of the principal amounts invested.
 
M-10
 
 
 
Capital resources
 
On September 14, 2006 Ashland’s Board of Directors authorized the distribution of a substantial portion of the proceeds of the sale of APAC to the Ashland Common Stock shareholders as a one-time special dividend.  Each shareholder of record as of October 10, 2006, received $10.20 per share, for a total of $674 million.  This amount was accrued as dividends payable in the Consolidated Balance Sheet at September 30, 2006 and was subsequently paid during 2007.  Substantially all of the remaining proceeds were directed to be used to repurchase Ashland Common Stock in accordance with the terms authorized by Ashland’s Board of Directors.  See Note L of Notes to Consolidated Financial Statements for a description of Ashland’s share repurchase programs.
 
Ashland did not repurchase any shares during 2008, but did repurchase 4.7 million shares for $288 million during 2007 and 6.7 million shares for $405 million during 2006.  Since July 2005 through September 30, 2007, Ashland has repurchased a total of 13.2 million shares at a cost of $793 million.  These repurchases represent approximately 18% of the shares outstanding on June 30, 2005.  The stock repurchase actions were consistent with certain representations of intent made to the Internal Revenue Service with respect to the transfer of MAP.  At September 30, 2008, 8.4 million common shares are reserved for issuance under stock incentive and deferred compensation plans.  As part of the completed merger to acquire all of the outstanding shares of Hercules in November 2008, Ashland issued approximately 10.5 million shares.  See Note Q of the Notes to Consolidated Financial Statements for additional details regarding the completed merger.
 
Property additions (excluding the property additions of the discontinued operations of APAC) averaged $178 million during the last three years and are summarized in the Information by Industry Segment on page F-36.  For the past three years, Performance Materials accounted for 30% of Ashland’s capital expenditures, while Valvoline accounted for 20%, Distribution accounted for 17% and Water Technologies accounted for 12%.  Capital used for acquisitions amounted to $387 million during the last three years, of which $210 million was invested in Performance Materials, $169 million in Water Technologies and $8 million in Valvoline.  A summary of the capital employed in Ashland’s current operations as of the end of the last three years follows.
 

(In millions)
 
2008
   
2007
   
2006
 
Capital employed
                 
Performance Materials
  $ 795     $ 682     $ 505  
Distribution
    521       672       564  
Valvoline
    485       501       489  
Water Technologies
    333       359       322  
 
During 2008, Ashland reduced its total debt by $3 million to $66 million and stockholders’ equity increased by $48 million to $3,202 million.  The increases in stockholders’ equity resulted from $167 million of net income, $17 million from issuance of common shares under stock incentive and other plans and $4 million of translation gains associated with foreign operations.  These increases were offset by a $51 million decrease attributable to an increase in the pension and other postretirement liability, a $20 million decrease associated with unrealized losses on investment securities and regular cash dividends of $69 million.  Debt as a percent of capital employed was 2.0% at September 30, 2008 compared to 2.1% at September 30, 2007.
 
During 2009, Ashland expects total capital expenditures, including those related to the Hercules businesses, to be below the actual capital expenditures of $205 million in 2008.  Capital expenditures during 2008 included several significant nonrecurring expenditures, including $40 million for growth initiatives specifically related to China, which included construction of an administration and technology office building, and $10 million for costs associated with the implementation of the ERP system.  In 2004, Ashland initiated a multi-year ERP project that is expected to increase efficiency and effectiveness in supply chain, financial, and environmental, health and safety processes.  The implementation of the ERP system began in October 2005 in Canada, continued during fiscal 2007 for all U.S. operations, and was successfully launched in our Europe, Middle East, Africa, China and Singapore operations during 2008.  As of September 30, 2008, Ashland had more than 90% of global revenue converted and functioning on this one ERP system, which is a significant milestone.  The total cost of the project through fiscal 2008 is $144 million, of which $118 million has been capitalized.
 
On November 20, 2008, the Board of Directors of Ashland declared a quarterly cash dividend of 7.5 cents per share, payable December 15, 2008, to shareholders of record at the close of business on December 1, 2008.  This is reduced from the previous quarterly dividend of 27.5 cents per share.  In total, the reduction is expected to decrease Ashland’s annual cash outflow for dividends by approximately $60 million.
 
M-11
 
 
 
The following table aggregates Ashland’s obligations and commitments to make future payments under existing contracts at September 30, 2008.  Contractual obligations for which the ultimate settlement of quantities or prices are not fixed and determinable have been excluded.
 

                  2010-       2012-    
Later
 
(In millions)
 
Total
   
2009
      2011        2013     
Years
 
Contractual obligations
                                 
Raw material and service contract purchase obligations (a)
  $ 101     $ 53     $ 48     $ -     $ -  
Employee benefit obligations (b)
    270       32       46       51       141  
Operating lease obligations (c)
    215       42       67       49       57  
Long-term debt (d)
    66       21       4       28       13  
Unrecognized tax benefits (e)
    79       5       3       1       70  
Total contractual obligations
  $ 731     $ 153     $ 168     $ 129     $ 281  
                                         
Other commitments
                                       
Letters of credit (f)
  $ 102     $ 102     $ -     $ -     $ -  
 
 

 
(a)
Includes raw material and service contracts where minimal committed quantities and prices are fixed.
 
(b)
Includes estimated funding of Ashland’s qualified U.S. and non-U.S. pension plans for 2009, as well as projected benefit payments through 2018 under Ashland’s unfunded pension and other postretirement benefit plans.  See Note N of Notes to Consolidated Financial Statements for additional information.
 
(c)
Includes leases for office buildings, retail outlets, transportation equipment, warehouses and storage facilities and other equipment.  For further information see Note I of Notes to Consolidated Financial Statements.
 
(d)
Includes principal and interest payments.  Capitalized lease obligations are not significant and are included in long-term debt.  For further information see Note G of Notes to Consolidated Financial Statements.
 
(e)
Due to uncertainties in the timing of the effective settlement of tax positions with respect to taxing authorities, Ashland is unable to determine the timing of payments related to noncurrent unrecognized tax benefits, including interest and penalties.  Therefore, these amounts were principally included in the “Later Years” column.
 
(f)
Ashland issues various types of letters of credit as part of its normal course of business.  For further information see Note G of Notes to Consolidated Financial Statements.

 
OFF-BALANCE SHEET ARRANGEMENTS
 
As part of its normal course of business, Ashland is a party to various financial guarantees and other commitments.  These arrangements involve elements of performance and credit risk that are not included in the consolidated balance sheets.  The possibility that Ashland would have to make actual cash expenditures in connection with these obligations is largely dependent on the performance of the guaranteed party, or the occurrence of future events that Ashland is unable to predict.  Ashland has reserved the approximate fair value of these guarantees in accordance with the provisions of Interpretation No. 45 (FIN 45) “Guarantor’s Accounting and Disclosure Requirements for Guarantees.”

 
APPLICATION OF CRITICAL ACCOUNTING POLICIES
 
The preparation of Ashland’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities.  Significant items that are subject to such estimates and assumptions include long-lived assets, employee benefit obligations, income taxes, reserves and associated receivables for asbestos litigation and environmental remediation.  Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.  Management has reviewed the estimates affecting these items with the Audit Committee of Ashland’s Board of Directors.
 
Long-lived assets
 
The cost of plant and equipment is depreciated principally by the straight-line method over the estimated useful lives of the assets.  Useful lives are based on historical experience and are adjusted when changes in planned use, technological advances or other factors show that a different life would be more appropriate.  Such costs are periodically reviewed for recoverability when impairment indicators are present.  Such indicators include, among other factors, operating losses, unused capacity, market value declines and technological obsolescence.  Recorded values of property, plant and equipment that are not expected to be recovered through undiscounted future net cash flows are written down to current fair value,
 

M-12
 
 
 
which generally is determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale).  Asset impairment charges were $2 million in 2008, $15 million in 2007 and $6 million in 2006.
 
Goodwill and intangible assets with indefinite lives are subject to an annual impairment test as of July 1 and whenever events or circumstances make it more likely than not that an impairment may have occurred.  Such tests are completed separately with respect to the goodwill of each of Ashland’s reporting units, which are operating segments or business units within these operating segments.  Because market prices of Ashland’s reporting units are not readily available, management makes various estimates and assumptions in determining the estimated fair values of those units.  Fair values are based principally on EBITDA (earnings before interest, taxes, depreciation and amortization) multiples of peer group companies for each of these reporting units and, as deemed necessary, a discounted cash flow model.  Ashland did not recognize any goodwill impairment during 2008, 2007 and 2006.  The most recent annual impairment tests indicated that the fair values of each of Ashland’s reporting units with significant goodwill were in excess of their carrying values, with consolidated fair values exceeding carrying values by approximately 17%.  Despite that excess, however, impairment charges could still be required if a divestiture decision or other significant economic event were made or occurred with respect to a particular business included in one of the reporting units.  Subsequent to this annual impairment test, no indications of an impairment were identified. 
 
Employee benefit obligations
 
Ashland and its subsidiaries sponsor contributory and noncontributory qualified and non-qualified defined benefit pension plans that cover substantially all employees in the United States and in a number of other countries.  Benefits under these plans generally are based on employees’ years of service and compensation during the years immediately preceding their retirement.  In addition, the companies also sponsor unfunded postretirement benefit plans, which provide health care and life insurance benefits for eligible employees who retire or are disabled.  Retiree contributions to Ashland’s health care plans are adjusted periodically, and the plans contain other cost-sharing features, such as deductibles and coinsurance.  Life insurance plans generally are noncontributory.
 
Certain assumptions are used to measure the plan obligations of company-sponsored defined benefit pension plans and postretirement benefit plans.  Ashland’s pension and other postretirement obligations and annual expense calculations are based on a number of key assumptions including the discount rate at which obligations can be effectively settled, the anticipated rate of compensation increase, the expected long-term rate of return on plan assets and certain employee-related factors, such as turnover, retirement age and mortality.  Because Ashland’s retiree health care plans contain various caps that limit Ashland’s contributions and because medical inflation is expected to continue at a rate in excess of these caps, the health care cost trend rate has no material impact on Ashland’s postretirement health care benefit costs.
 
Ashland developed the discount rate used to determine the present value of its obligations under the U.S. pension and postretirement health and life plans by matching the stream of benefit payments from the plans to the Mercer Pension Discount Yield Curve Spot Rates.  Ashland uses this approach to reflect the specific cash flows of these plans for determining the discount rate.  The discount rate determined as of September 30, 2008 was 8.01% for the U.S. pension plans and 7.78% for the postretirement health and life plans.  Non-U.S. pension plans followed a similar process based on financial markets in those countries where Ashland provides a defined benefit pension plan.  The weighted-average discount rate for Ashland’s U.S. and non-U.S. pension plans combined was 7.81% as of September 30, 2008.
 
At September 30, 2007, the discount rate for U.S. pension and postretirement health and life plans was established by matching the benefit payment streams from the plans to the Citigroup Pension Discount Curve Spot Rates.  The Mercer Pension Discount Yield Curve was elected in 2008.  While both models use the same Ashland-specific benefit cash flows, the Mercer model is based on actual corporate rates.  Management determined that during a period of such extreme market volatility, a model that closely reflects corporate rates would be more appropriate.
 
Ashland’s expense under both U.S. and non-U.S. pension plans is determined using the discount rate as of the beginning of the fiscal year, which amounted to a weighted-average rate of 6.16% for 2008, 5.66% for 2007 and 5.42% for 2006.  The rates used for the postretirement health and life plans were 5.96% for 2008, 5.64% for 2007 and 5.33% for 2006.  The 2009 expense for the pension plans will be based on a weighted-average discount rate of 7.81%, while 7.78% will be used for the postretirement health and life plans.
 
The weighted-average rate of compensation increase assumptions were 3.74% for 2008, 3.74% for 2007 and 4.46% for 2006.  The compensation increase assumptions for the U.S. plans were 3.75% for 2008, 3.75% for 2007 and 4.25% for 2006.  The rate of the compensation increase assumption for the U.S. plans will remain at 3.75% in determining Ashland’s pension costs for 2009.
 
The weighted-average long-term expected rate of return on assets was assumed to be 7.62%% in 2008, 7.58% in 2007 and 8.26% in 2006.  The long-term expected rate of return on assets for the U.S. plans was assumed to be 7.75% in 2008, 7.75% in 2007 and 8.50% in 2006.  For 2008, the U.S. pension plan assets generated an actual loss of 18.5%, compared to
 
 

M-13
 
 
 
an actual return of 15.3% in 2007 and 8.8% in 2006.  However, the expected return on plan assets is designed to be a long-term assumption, and actual returns will be subject to considerable year-to-year variances.  Ashland has generated compounded annual investment returns of 5.4% and 4.9% on its U.S. pension plan assets over the last five-year and ten-year periods.  In 2008, 17% of the pension portfolio was shifted from equity investments to alternative assets, prompting an increase in the expected return on U.S. plan assets to 8.25% in determining Ashland’s pension costs for 2009.  Ashland estimates total fiscal 2009 pension costs to be approximately $55 million.
 
As of September 30, 2007, Ashland revised certain demographic assumptions used to determine its pension and other postretirement benefit costs.  To comply with provisions of the Pension Protection Act of 2006, the mortality assumption was changed to the RP2000 Combined Mortality Table with mortality improvement projected forward from the base year of 2007 by seven years for annuitants and 15 years for nonannuitants using Scale AA.  The previous mortality assumption was the RP2000 Combined Mortality Table for Males and Females – Healthy Lives projected to 2006 using Scale AA.  The turnover and retirement rates are based upon actual experience and were not revised.
 
Shown below are the estimated increases in pension and postretirement expense that would have resulted from a one percentage point change in each of the assumptions for each of the last three years. 

(In millions)
 
2008
   
2007
   
2006
 
Increase in pension costs from
                 
  Decrease in the discount rate
  $ 16     $ 24     $ 25  
  Increase in the salary adjustment rate
    7       9       11  
  Decrease in the expected return on plan assets
    15       13       11  
Increase in other postretirement costs from
                       
  Decrease in the discount rate
    2       2       2  
 

 
Income taxes
 
Ashland is subject to income taxes in the United States and numerous foreign jurisdictions.  Significant judgment is required in determining Ashland’s provision for income taxes and the related assets and liabilities.  Income taxes are accounted for under FASB Statement No. 109 (FAS 109), “Accounting for Income Taxes.”  The provision for income taxes includes income taxes paid, currently payable or receivable, and those deferred.  Under FAS 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse.  Deferred tax assets are also recognized for the estimated future effects of tax loss carryforwards.  The effect on deferred taxes of changes in tax rates is recognized in the period in which the enactment date changes.  Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized.
 
In June 2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Financial Accounting Standard No. 109 (FAS 109), “Accounting for Income Taxes.”  FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Ashland adopted the provisions of FIN 48 effective October 1, 2007.  The cumulative effect of adoption of FIN 48 resulted in a reduction to the October 1, 2007 opening retained earnings balance of less than $1 million.  For additional information on the adoption, implementation and disclosure requirements of this Interpretation see Note K.
 
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, 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.
 
Ashland retained HR&A to assist in developing and annually updating independent reserve estimates for future asbestos claims and related costs given various assumptions.  The methodology used by HR&A to project future asbestos costs is based largely on Ashland’s recent experience, including claim-filing and settlement rates, disease mix, enacted legislation, open claims, and litigation defense and claim settlement costs.  Ashland’s claim experience is compared to the results of previously conducted epidemiological studies estimating the number of people likely to develop asbestos-related diseases.  Those studies were undertaken in connection with national analyses of the population expected to have been exposed to
 
 

M-14
 
 
 
asbestos.  Using that information, HR&A estimates a range of the number of future claims that may be filed, as well as the related costs that may be incurred in resolving those claims.
 
From the range of estimates, Ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs.  During the most recent update of this estimate completed during 2008, it was determined that the reserve for asbestos claims should be increased by $2 million.  This increase in the reserve was based on the results of a non-inflated, non-discounted 51-year model developed with the assistance of HR&A.  This increase resulted in total reserves for asbestos claims of $572 million at September 30, 2008, compared to $610 million at September 30, 2007.
 
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 its asbestos reserve represents the best estimate within a range of possible outcomes.  As a part of the process to develop Ashland’s estimates of future asbestos costs, a range of long-term cost models is 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.  Ashland has estimated that it is reasonably possible that total future litigation defense and claim settlement costs on an inflated and undiscounted basis could range as high as approximately $1 billion, depending on the combination of assumptions selected in the various models.  If actual experience is worse than projected relative to the number of claims filed, the severity of alleged disease associated with those claims or costs incurred to resolve those claims, Ashland may need to increase further the estimates of the costs associated with asbestos claims and these increases could potentially be material over time.
 
Ashland has insurance coverage for most of the litigation defense and claim settlement costs incurred in connection with its asbestos claims, and coverage-in-place agreements exist with the insurance companies that provide most of the coverage currently being accessed.  As a result, increases in the asbestos reserve have been largely offset by probable insurance recoveries.  The amounts not recoverable generally are due from insurers that are insolvent, rather than as a result of uninsured claims or the exhaustion of Ashland’s insurance coverage.
 
Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent.  Approximately 65% of the estimated receivables from insurance companies are expected to be due from domestic insurers, of which 83% have a credit rating of B+ or higher by A. M. Best as of September 30, 2008.  The remainder of the insurance receivable is due from London insurance companies, which generally have lower credit quality ratings, and from Underwriters at Lloyd’s, which is reinsured by Equitas (Limited).  Ashland discounts a substantial portion of this piece of the receivable based upon the projected timing of the receipt of cash from those insurers.  During 2007 a significant amount of Equitas’ reinsurance of liabilities became reinsured by National Indemnity Corporation, a member of the Berkshire Hathaway group of insurance companies with a current A. M. Best rating of A++.  As a result Ashland reassessed its assumptions for the receivable recorded from Equitas, and due to the improved credit quality of this portion of the receivable, Ashland increased its recorded receivable by $21 million during 2007.
 
At September 30, 2008, Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $458 million, of which $77 million relate to costs previously paid.  Receivables from insurers amounted to $488 million at September 30, 2007.  During 2008, the model used for purposes of valuing the asbestos reserve described above, and its impact on the valuation of future recoveries from insurers was updated, which caused an additional $8 million increase in the receivable for probable insurance recoveries.
 
Environmental remediation
 
Ashland is subject to various federal, state and local environmental laws and regulations that require environmental assessment or remediation efforts (collectively environmental remediation) at multiple locations.  At September 30, 2008, such locations included 62 waste treatment or disposal sites where Ashland has been identified as a potentially responsible party under Superfund or similar state laws, 105 current and former operating facilities (including certain operating facilities conveyed to MAP) and about 1,220 service station properties, of which 177 are being actively remediated.  Ashland’s reserves for environmental remediation amounted to $149 million at September 30, 2008, compared to $174 million at September 30, 2007, of which $112 million at September 30, 2008 and $153 million at September 30, 2007 were classified
 

 
M-15
 
 
 
 
in noncurrent liabilities on the Consolidated Balance Sheets.  The total reserves for environmental remediation reflect 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, probability techniques, historical experience and other factors are used to identify and evaluate remediation alternatives and their related costs in determining the estimated reserves for environmental remediation.  Ashland regularly adjusts its reserves as environmental remediation continues.  Ashland has estimated the value of its probable insurance recoveries associated with its environmental reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage.  At September 30, 2008 and 2007 Ashland’s recorded receivable for these probable insurance recoveries was $40 million and $44 million, respectively.  Environmental remediation expense is included within the selling, general and administrative expense caption of the Statements of Consolidated Income and on an aggregate basis amounted to $11 million in 2008, $15 million in 2007 and $59 million in 2006.  Environmental remediation expense, net of receivable activity, was $7 million in 2008, $7 million in 2007 and $47 million in 2006.
 
The decrease in net environmental remediation expense during fiscal 2008 and 2007 compared to fiscal 2006 is principally attributable to favorable remediation developments for a portion of our sites and enhancements made to our environmental remediation estimation process.  In addition, in fiscal 2007, engineering estimates for future remediation costs related to former Ashland properties transferred to Marathon Ashland Petroleum LLC (MAP) exceeded a contractual ceiling established with Marathon Oil Corporation under the terms of the MAP Transaction.  As part of the MAP Transaction, Ashland agreed to pay the first $50 million of environmental remediation costs incurred on or after January 1, 2004 related to former Ashland petroleum properties that were contributed to MAP upon the formation of the joint venture in 1998.  Engineering estimates for future remediation costs related to former Ashland properties transferred to MAP exceeded the $50 million ceiling during fiscal 2007.  Accordingly, after that point, no additional expense was required for these sites.
 
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 could be as high as approximately $230 million.  No individual remediation location is material to Ashland, as its largest reserve for any site does not exceed 15% of the remediation reserve.

 
OUTLOOK
 
During the past several years Ashland has redesigned its core operations to better position each business for future growth while combining to form a dynamic company that is a leading global provider of specialty chemicals.  In recent years Ashland has divested several key non-core businesses and reinvested those proceeds in both organic and acquisitive growth opportunities, culminating in Ashland’s recent purchase in November 2008 of Hercules.  This recent acquisition propels Ashland to a global leadership position with expanded capabilities and promising growth potential in specialty resins, specialty additives and functional ingredients and paper and water technologies.
 
Performance Materials will continue to be challenged by the difficult conditions in the North American construction and transportation markets and the recent downturn in the European market.  As a result of these weakening market conditions in many of Performance Materials’ key North American markets, reductions have occurred in operational headcount at five manufacturing facilities.  In addition, the Composite Polymers and Specialty Polymers and Adhesives business units were consolidated during the last quarter of fiscal 2008, combining many sales, marketing, technical and administrative roles.  Substantial improvements in Performance Materials’ cost structure as a result of these personnel decreases, as well as the reductions in the hours of operations and headcount at certain manufacturing facilities, should curtail the impact of adverse economic conditions.  Ashland expects that price increases implemented during the last quarter of fiscal 2008, combined with softness in the crude oil market, should provide some improvement to the gross profit percentage of the business, as long as volume reductions are not significant.
 
Distribution’s future performance will continue to be affected by volatile raw material costs and weakness in North American industrial output, particularly from the core markets of building and construction, coatings, automotive and marine.  The volume in this business is predominantly contingent on these U.S. industrial production sectors and Ashland remains concerned about the level of business activity of our customers due to the current global economic environment.  While any one customer would not have a significant impact on this business, the widespread nature of the credit crisis will likely be reflected in reduced overall demand.  However, the continued focus on pricing and margins should assist in partially mitigating the effects of these economic trends.
 
M-16
 
 
 
 
Despite persistent volume declines in the overall lubricant market and unprecedented increases in raw material costs during 2008, Valvoline nearly equaled its record operating income performance of 2007.  While volume challenges will likely continue during 2009, this business has demonstrated the ability to outperform the market as Valvoline Instant Oil Change and other international businesses are well positioned for continued earnings growth.  Valvoline’s price increases implemented during the last quarter of fiscal 2008 fully offset the record raw material cost increases received over the 2008 summer months, where the crude oil market climbed to over $145 a barrel.  These price increases combined with no significant prospects for higher base oil pricing, should enable gross profit to improve on a unit basis from depressed levels in the last half of 2008.  Given the recent decline in the crude oil market, Ashland does expect downward pressure on raw material costs during 2009 in a highly competitive lubricant market.
 
Water Technologies implemented a number of cost reductions during 2008 in sales, marketing, technical, administrative and plant staffing, with additional reductions targeted for 2009, to harmonize the cost structure in support of this business.  These reductions should have a positive impact on near-term results.  In addition, during the first quarter of fiscal 2009, 35% to 40% of full service and municipal contracts come up for annual renewal and renegotiation.  These new pricing contracts, along with recent price increases and a softer raw material market, should allow for gross profit percentage expansion from significantly reduced levels in the last quarter of fiscal 2008, particularly starting in the second quarter of fiscal 2009, after many contract renewals are negotiated.
 
During 2008 Ashland implemented several operational redesigns, primarily within our Performance Materials and Water Technologies businesses.  Ashland is significantly ahead of plan in achieving initial targeted run-rate annualized cost savings of $40 million by year-end fiscal 2009, already achieving a run-rate savings of $41 million through the end of fiscal 2008.  Through these operational redesign initiatives in the historical businesses, Ashland expects to achieve in total $65 million of cost-structure efficiencies by the end of fiscal 2009.
 
The Hercules integration process is progressing.  Identified synergy saving opportunities of approximately $120 million are currently being implemented throughout both Ashland’s previously existing organization and Hercules’ structure.  Ashland expects to generate run-rate synergies of approximately $80 million by the first anniversary of the closing date of the acquisition.  As part of the financing agreement for this acquisition, Ashland will be subjected to cash restrictions from certain debt covenants, including leverage and fixed charge coverage ratios, which could restrict the company’s financial and operational flexibility.  With the commitment of these new employees and the addition of Hercules’ Paper Technologies and Ventures and Aqualon business operations, Ashland is poised for continued growth as a leader in the specialty chemical industry.

 
EFFECTS OF INFLATION AND CHANGING PRICES
 
Ashland’s financial statements are prepared on the historical cost method of accounting and, as a result, do not reflect changes in the purchasing power of the U.S. dollar.  Although annual inflation rates have been low in recent years, Ashland’s results are still affected by the cumulative inflationary trend from prior years.
 
Certain of the industries in which Ashland operates are capital-intensive, and replacement costs for its plant and equipment generally would exceed their historical costs.  Accordingly, depreciation and amortization expense would be greater if it were based on current replacement costs.  However, because replacement facilities would reflect technological improvements and changes in business strategies, such facilities would be expected to be more productive than existing facilities, mitigating at least part of the increased expense.
 
Ashland uses the LIFO method to value a substantial portion of its inventories to provide a better matching of revenues with current costs.  However, LIFO values such inventories below their replacement costs.
 
Monetary assets (such as cash, cash equivalents and accounts receivable) lose purchasing power as a result of inflation, while monetary liabilities (such as accounts payable and indebtedness) result in a gain, because they can be settled with dollars of diminished purchasing power.  Ashland’s monetary assets continues to currently exceed its monetary liabilities, leaving it more exposed to the effects of future inflation than in the past, when that relationship was reversed.  However, given the recent consistent stability of inflation in the U.S. in the past several years as well as forward economic outlooks, current inflationary pressures seem moderate.

M-17
 
 
 
FORWARD-LOOKING STATEMENTS
 
Management’s Discussion and Analysis (MD&A) 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.  The statements include those made with respect to Ashland’s operating performance and Ashland’s acquisition of Hercules Incorporated.  These expectations are based upon a number of assumptions, including those mentioned within the MD&A.  Performance estimates are also based upon internal forecasts and analyses of current and future market conditions and trends, management plans and strategies, operating efficiencies and economic conditions, such as prices, supply and demand, cost of raw materials, weather and legal proceedings and claims (including environmental and asbestos matters).  These risks and uncertainties may cause actual operating results to differ materially from those stated, projected or implied.  Such risks and uncertainties with respect to Ashland’s acquisition of Hercules include the possibility that the benefits anticipated from the Hercules transaction will not be fully realized; the substantial indebtedness Ashland has incurred to finance the acquisition may impair Ashland’s financial condition; the restrictive covenants under the debt instruments may hinder the successful operation of Ashland’s business; future cash flow may be insufficient to repay the debt; and other risks that are described in filings made by Ashland with the Securities and Exchange Commission (SEC).  Although Ashland believes its expectations are based on reasonable assumptions, it cannot assure the expectations reflected herein will be achieved.  This forward-looking information may prove to be inaccurate and actual results may differ significantly from those anticipated if one or more of the underlying assumptions or expectations proves to be inaccurate or is unrealized or if other unexpected conditions or events occur.  Other factors, uncertainties and risks affecting Ashland are contained in Risks and Uncertainties in Note A to the Notes to Consolidated Financial Statements and in Item 1A of this annual report on Form 10-K.  Ashland undertakes no obligation to subsequently update or revise the forward-looking statements made in this news release to reflect events or circumstances after the date of this news release.

 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Ashland regularly uses foreign currency derivative instruments to manage its exposure to certain transactions denominated in foreign currencies.  All derivative instruments are recognized as either assets or liabilities on the balance sheet and are measured at fair value.  Changes in the fair value of all derivatives are recognized immediately in income unless the derivative qualifies as a hedge of future cash flows.  Gains and losses related to a hedge are either recognized in income immediately to offset the gain or loss on the hedged item, or deferred and recorded in the stockholders’ equity section of the Consolidated Balance Sheet as a component of total comprehensive income and subsequently recognized in the Statements of Consolidated Income when the hedged item affects net income.  The ineffective portion of the change in fair value of a hedge is recognized in income immediately.  Ashland has typically designated a limited portion of its foreign currency derivatives as qualifying for hedge accounting treatment, but their impact on the consolidated financial statements has not been significant.  Credit risks arise from the possible inability of counterparties to meet the terms of their contracts, but exposure is limited to the replacement value of the contracts.  Ashland further minimizes this credit risk through internal monitoring procedures and as of September 30, 2008 does not have significant credit risk on open derivative contracts.  The potential loss from a hypothetical 10% adverse change in foreign currency rates on Ashland’s open foreign currency derivative instruments at September 30, 2008 would not significantly affect Ashland’s consolidated financial position, results of operations, cash flows or liquidity.
 
M-18
 
 
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL SCHEDULE

 
Page
Management’s report on internal control over financial reporting .......................................................................................................................
F-2
Reports of independent registered public accounting firm ..................... ..............................................................................................................
F-3
Consolidated financial statements:
 
  Statements of consolidated income ..................... ..............................................................................................................................................
F-5
  Consolidated balance sheets ..................... ..........................................................................................................................................................
F-6
  Statements of consolidated stockholders’ equity ..................... .......................................................................................................................
F-7
  Statements of consolidated cash flows ..................... ........................................................................................................................................
F-8
  Notes to consolidated financial statements ................... ...................................................................................................................................
F-9
Quarterly financial information ................................................................................................................................................................................…
F-38
Consolidated financial schedule:
 
  Schedule II – Valuation and qualifying accounts ............................................................................................................................................
F-38
Five-year selected financial information ..................... ..............................................................................................................................................
F-39

 

F-1
 
 
 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Management is responsible for the preparation and integrity of the consolidated financial statements and other financial information included in this annual report on Form 10-K.  Such financial statements are prepared in accordance with U.S. generally accepted accounting principles.  Accounting principles are selected and information is reported which, using management’s best judgment and estimates, present fairly Ashland’s consolidated financial position, results of operations and cash flows.  The other financial information in this annual report on Form 10-K is consistent with the consolidated financial statements.
 
Ashland’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Ashland’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of Ashland’s consolidated financial statements.  Ashland’s internal control over financial reporting is supported by a code of business conduct which summarizes our guiding values such as obeying the law, adhering to high ethical standards and acting as responsible members of the communities where we operate.  Compliance with that Code forms the foundation of our internal control systems, which are designed to provide reasonable assurance that Ashland’s assets are safeguarded and its records reflect, in all material respects, transactions in accordance with management’s authorization.  The concept of reasonable assurance is based on the recognition that the cost of a system of internal control should not exceed the related benefits.  Management believes that adequate internal controls are maintained by the selection and training of qualified personnel, by an appropriate division of responsibility in all organizational arrangements, by the establishment and communication of accounting and business policies, and by internal audits.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation.  Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
The Board, subject to stockholder ratification, selects and engages the independent auditors based on the recommendation of the Audit Committee.  The Audit Committee, composed of directors who are not members of management, reviews the adequacy of Ashland’s policies, procedures, controls and risk management strategies, the scope of auditing and other services performed by the independent auditors, and the scope of the internal audit function.  The Committee holds meetings with Ashland’s internal auditor and independent auditors, with and without management present, to discuss the findings of their audits, the overall quality of Ashland’s financial reporting and their evaluation of Ashland’s internal controls.  The report of Ashland’s Audit Committee can be found in the Company’s 2008 Proxy Statement.
 
Management assessed the effectiveness of Ashland’s internal control over financial reporting as of September 30, 2008.  Management conducted its assessment utilizing the framework described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on this assessment, management believes that Ashland maintained effective internal control over financial reporting as of September 30, 2008.
 
Ernst & Young LLP, an independent registered public accounting firm, has audited and reported on the consolidated financial statements of Ashland Inc. and consolidated subsidiaries and the effectiveness of Ashland’s internal control over financial reporting.  The reports of the independent auditors are contained in this Annual Report.
 
 
 
 /s/ James J. O'Brien     /s/ Lamar M. Chambers 
 James J. O'Brien     Lamar M. Chambers 
 Chairman of the Board and     Senior Vice President and 
 Chief Financial Officer     Chief Financial Officer 
 

 
 
November 25, 2008
 
 
F-2
 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
Ashland Inc. and consolidated subsidiaries
 
We have audited the accompanying consolidated balance sheets of Ashland Inc. and consolidated subsidiaries as of September 30, 2008 and 2007, and the related statements of consolidated income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2008.  Our audits also included the financial statement schedule listed in the Index at Item 15(a).  These financial statements and schedule are the responsibility of Ashland Inc. and consolidated subsidiaries’ management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ashland Inc. and consolidated subsidiaries at September 30, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2008, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
As discussed in Note A to the consolidated financial statements, effective October 1, 2007, Ashland Inc. and consolidated subsidiaries adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.   Also as discussed in Note A to the consolidated financial statements, effective September 30, 2007, Ashland Inc. and consolidated subsidiaries adopted Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) .
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Ashland Inc. and consolidated subsidiaries’ internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 25, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
Cincinnati, Ohio
November 25, 2008
 
 
 
F-3
 
 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
Ashland Inc. and consolidated subsidiaries
 
We have audited Ashland Inc. and consolidated subsidiaries’ internal control over financial reporting as of September 30, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).  Ashland Inc. and consolidated subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Ashland Inc. and consolidated subsidiaries maintained, in all material respects, effective internal control over financial reporting as of September 30, 2008, based on   the COSO criteria .
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Ashland Inc. and consolidated subsidiaries as of September 30, 2008 and 2007, and the related statements of consolidated income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2008, and our report dated November 25, 2008 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP
Cincinnati, Ohio
November 25, 2008



F-4
 
 
 

 
Ashland Inc. and Consolidated Subsidiaries
                 
Statements of Consolidated Income
                 
Years Ended September 30
                 
                   
(In millions except per share data)
 
2008
   
2007
   
2006
 
Sales and operating revenues
  $ 8,381     $ 7,785     $ 7,233  
Costs and expenses
                       
Cost of sales and operating expenses
    7,056       6,447       6,030  
Selling, general and administrative expenses
    1,166       1,171       1,077  
      8,222       7,618       7,107  
Equity and other income - Notes A & D
    54       49       44  
Operating income
    213       216       170  
Gain (loss) on the MAP Transaction - Note C   (a)
    20       (3 )     (5 )
Net interest and other financing income - Note G
    28       46       47  
Income from continuing operations before income taxes
    261       259       212  
Income taxes - Note K
    86       58       29  
Income from continuing operations
    175       201       183  
Income (loss) from discontinued operations (net of income taxes) - Note B
    (8 )     29       224  
Net income
  $ 167     $ 230     $ 407  
                         
Earnings per share - Note A
                       
Basic
                       
Income from continuing operations
  $ 2.78     $ 3.20     $ 2.57  
Income (loss) from discontinued operations
    (0.13 )     0.46       3.16  
Net income
  $ 2.65     $ 3.66     $ 5.73  
Diluted
                       
Income from continuing operations
  $ 2.76     $ 3.15     $ 2.53  
Income (loss) from discontinued operations
    (0.13 )     0.45       3.11  
Net income
  $ 2.63     $ 3.60     $ 5.64  


(a)
“MAP Transaction” refers to the June 30, 2005 transfer of Ashland’s 38% interest in Marathon Ashland Petroleum LLC (MAP), Ashland’s maleic anhydride business and 60 Valvoline Instant Oil Change centers in Michigan and northwest Ohio to Marathon Oil Corporation in a transaction valued at approximately $3.7 billion.  See Note C for further information.

 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements.
 
 
F-5
 
 
 
 
Ashland Inc. and Consolidated Subsidiaries
           
Consolidated Balance Sheets
           
September 30
           
             
(In millions)
 
2008
   
2007
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 886     $ 897  
Available-for-sale securities - Note E
    -       155  
Accounts receivable (less allowances for doubtful accounts of
               
$33 million in 2008 and $41 million in 2007) - Note A
    1,469       1,467  
Inventories - Note A
    494       610  
Deferred income taxes - Note K
    97       69  
Other current assets
    86       78  
      3,032       3,276  
Investments and other assets
               
Auction rate securities - Note E
    243       -  
Goodwill and other intangibles - Note F
    408       377  
Asbestos insurance receivable (noncurrent portion) - Note O
    428       458  
Deferred income taxes - Note K
    154       157  
Other noncurrent assets - Note H
    394       435  
      1,627       1,427  
Property, plant and equipment - Note A
               
Cost
               
Land
    82       79  
Buildings
    555       541  
Machinery and equipment
    1,520       1,390  
Construction in progress
    140       115  
      2,297       2,125  
Accumulated depreciation and amortization
    (1,185 )     (1,142 )
      1,112       983  
    $ 5,771     $ 5,686  
Liabilities and Stockholders’ Equity
               
Current liabilities
               
Current portion of long-term debt - Note G
  $ 21     $ 5  
Trade and other payables
    1,209       1,141  
Income taxes
    -       6  
      1,230       1,152  
Noncurrent liabilities
               
Long-term debt (noncurrent portion) - Note G
    45       64  
Employee benefit obligations - Note N
    344       255  
Asbestos litigation reserve (noncurrent portion) - Note O
    522       560  
Other noncurrent liabilities - Note H
    428       501  
      1,339       1,380  
Stockholders’ equity - Notes L & M
               
Common stock, par value $.01 per share, 200 million shares authorized
               
Issued - 63 million shares in 2008 and 2007
    1       1  
Paid-in capital
    33       16  
Retained earnings
    3,138       3,040  
Accumulated other comprehensive income
    30       97  
      3,202       3,154  
    $ 5,771     $ 5,686  
















 
See Notes to Consolidated Financial Statements.
 
 
 
F-6
 
 
 
 
Ashland Inc. and Consolidated Subsidiaries
                         
Statements of Consolidated Stockholders’ Equity
                       
                     
Accumulated
         
                     
other
         
   
Common
   
Paid-in
   
Retained
   
comprehensive
         
(In millions)
 
stock
   
capital
   
earnings
   
income (loss)
 
(a)
 
Total
 
Balance at September 30, 2005
  $ 1     $ 605     $ 3,251     $ (118 )     $ 3,739  
Total comprehensive income (b)
                    407       74         481  
Regular dividends, $1.10 per common share
            2       (80 )               (78 )
Special dividend, $10.20 per common share - Note L
            5       (679 )               (674 )
Issued 662,451 common shares under
                                         
stock incentive and other plans (c)
            33                         33  
Repurchase of 6,670,930 common shares
            (405 )                       (405 )
Balance at September 30, 2006
    1       240       2,899       (44 )       3,096  
Total comprehensive income (b)
                    230       184         414  
Regular dividends, $1.10 per common share
            (1 )     (68 )               (69 )
Issued 728,839 common shares under
                                         
stock incentive and other plans (c)
            44                         44  
Adoption of FAS 158, net of $27 million tax benefits
                            (43 )       (43 )
Repurchase of 4,712,000 common shares
            (267 )     (21 )               (288 )
Balance at September 30, 2007
    1           16       3,040       97         3,154  
Total comprehensive income (b)
                    167       (67 )       100  
Regular dividends, $1.10 per common share
                         (69 )               (69 )
Issued 151,821 common shares under
                                         
stock incentive and other plans (c)
            17                         17  
Balance at September 30, 2008
  $ 1     $ 33     $ 3,138     $ 30       $ 3,202  


(a)  
At September 30, 2008 and 2007, the accumulated other comprehensive income (after-tax) of $30 million for 2008 and $97 million for 2007 was comprised of pension and postretirement obligations of $107 million for 2008 and $55 million for 2007, net unrealized translation gains of $157 million for 2008 and $153 million for 2007, net unrealized losses on investment securities of $20 million for 2008, and net unrealized losses on cash flow hedges of $1 million for 2007.

(b)  
Reconciliations of net income to total comprehensive income follow.

(In millions)
 
2008
   
2007
   
2006
                 
Net income
  $ 167     $ 230     $ 407                  
Pension and postretirement obligation adjustment
    (84 )     165       76                  
Related tax (expense) benefit
    33       (64 )     (29 )                
Unrealized translation gains
    4       82       27                  
Related tax benefit
    -       -       1                  
Net unrealized losses on investment securities
    (32 )     -       -                  
Related tax benefit
    12       -       -                  
Unrealized gains (losses) on cash flow hedges
    -       1       (1 )                
Total comprehensive income
  $ 100     $ 414     $ 481                  

(c)   Includes income tax benefits resulting from the exercise of stock options of $2 million in 2008, $12 million in 2007 and $7 million in 2006.





















See Notes to Consolidated Financial Statements.
 
 
F-7
 
 
 
 
                 
Statements of Consolidated Cash Flows
                 
Years Ended September 30
                 
                   
(In millions)
 
2008
   
2007
   
2006
 
Cash flows from operating activities from continuing operations
                 
Net income
  $ 167     $ 230     $ 407  
Loss (income) from discontinued operations (net of income taxes)
    8       (29 )     (224 )
Adjustments to reconcile income from continuing operations
                       
  to cash flows from operating activities
                       
Depreciation and amortization
    145       133       111  
Deferred income taxes
    44       22       (1 )
Equity income from affiliates
    (23 )     (15 )     (11 )
Distributions from equity affiliates
    13       10       5  
Gain from the sale of property and equipment
    (2 )     (4 )     (1 )
Stock based compensation expense
    12       16       25  
(Gain) loss on the MAP Transaction - Note C
    (20 )     3       5  
Change in operating assets and liabilities (a)
    134       (177 )     (168 )
Other items
    -       -       (3 )
      478       189       145  
Cash flows from investing activities from continuing operations
                       
Additions to property, plant and equipment
    (205 )     (154 )     (175 )
Proceeds from the disposal of property, plant and equipment
    10       27       21  
Purchase of operations - net of cash acquired
    (129 )     (75 )     (183 )
Proceeds from sale of operations
    26       -       -  
Purchases of available-for-sale securities
    (435 )     (484 )     (824 )
Proceeds from sales and maturities of available-for-sale securities
    315       680       876  
      (418 )     (6 )     (285 )
Cash flows from financing activities from continuing operations
                       
Proceeds from the exercise of stock options
    3       19       18  
Excess tax benefits related to share-based payments
    1       9       6  
Repayment of long-term debt
    (5 )     (13 )     (13 )
Repurchase of common stock
    -       (288 )     (405 )
Cash dividends paid
    (69 )     (743 )     (78 )
      (70 )     (1,016 )     (472 )
Cash used by continuing operations
    (10 )     (833 )     (612 )
Cash (used) provided by discontinued operations
                       
Operating cash flows
    (8 )     (3 )     197  
Investing cash flows
    -       (92 )     1,248  
      (8 )     (95 )     1,445  
Effect of currency exchange rate changes on cash and cash equivalents - Note A
    7       5       2  
(Decrease) increase in cash and cash equivalents
    (11 )     (923 )     835  
Cash and cash equivalents - beginning of year
    897       1,820       985  
Cash and cash equivalents - end of year
  $ 886     $ 897     $ 1,820  
                         
(Increase) decrease in operating assets (a)
                       
Accounts receivable
  $ 10     $ (56 )   $ (77 )
Inventories
    126       (75 )     (56 )
Other current assets
    (53 )     (22 )     21  
Investments and other assets
    78       90       (2 )
Increase (decrease) in operating liabilities (a)
                       
Trade and other payables
    57       (103 )     41  
Other current liabilities
    (7 )     (20 )     (90 )
Pension contributions
    (25 )     (58 )     (111 )
Noncurrent liabilities
    (52 )     67       106  
Change in operating assets and liabilities
  $ 134     $ (177 )   $ (168 )
                         
Supplemental disclosures
                       
Interest paid
  $ 10     $ 10     $ 9  
Income taxes paid
    53       25       140  

 
 
(a)   Excludes changes resulting from operations acquired or sold.



See Notes to Consolidated Financial Statements.
 

 
F-8
 
 
 
Ashland Inc. and Consolidated Subsidiaries
Notes to Consolidated Financial Statements

 
NOTE A – SIGNIFICANT ACCOUNTING POLICIES
 
Principles of consolidation and basis of presentation
 
The consolidated financial statements include the accounts of Ashland and its majority owned subsidiaries.  Investments in joint ventures and 20% to 50% owned affiliates where Ashland has the ability to exert significant influence are accounted for by the equity method.  All material intercompany transactions and balances have been eliminated.  Certain prior period data has been reclassified in the consolidated financial statements and accompanying notes to conform to the current period presentation.  Equity and other income, which previously had been classified within the revenue caption of the Statements of Consolidated Income during 2007 and 2006, has been combined and reclassified as a separate caption included in the computation of operating income within these financial statements.  The effect of currency exchange rate changes on cash and cash equivalents, which previously had been classified within operating activities of the Statements of Consolidated Cash Flows during 2007 and 2006, has been reclassified as a separate caption within these financial statements.  These reclassifications did not impact operating income, net income, earnings per share or net change in cash and cash equivalents, as previously reported.
 
On August 28, 2006, Ashland completed the sale of the stock of its wholly owned subsidiary, Ashland Paving And Construction, Inc. (APAC), to Oldcastle Materials, Inc. (Oldcastle).  The operating results related to APAC have been reflected as discontinued operations in the consolidated financial statements for all periods presented.  Unless otherwise noted, amounts in these Notes to Consolidated Financial Statements exclude amounts attributable to discontinued operations.  
 
Use of estimates, risks and uncertainties
 
The preparation of Ashland’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities.  Significant items that are subject to such estimates and assumptions include certain financial instruments, long-lived assets, employee benefit obligations, income taxes, reserves and associated receivables for asbestos litigation and environmental remediation.  Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.
 
Ashland’s results are affected by domestic and international economic, political, legislative, regulatory and legal actions.  Economic conditions, such as recessionary trends, inflation, interest and monetary exchange rates, government fiscal policies, and changes in the prices of hydrocarbon-based products and other raw materials, can have a significant effect on operations.  While Ashland maintains reserves for anticipated liabilities and carries various levels of insurance, Ashland could be affected by civil, criminal, regulatory or administrative actions, claims or proceedings relating to asbestos, environmental remediation or other matters.
 
Cash and cash equivalents
 
Cash and cash equivalents include cash and highly liquid investments maturing within three months after purchase.
 
Investment securities
 
Securities are classified as held-to-maturity or available-for-sale on the date of purchase.  Ashland did not have any securities classified as held-to-maturity as of September 30, 2008 and 2007.  Available-for-sale securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in accumulated other comprehensive income, a component of stockholders’ equity.  Interest and dividends along with realized gains or losses are reported within the caption net interest and other financing income in the Statements of Consolidated Income.  The cost of securities sold is based on the specific identification method.  All securities are reviewed quarterly for possible other-than-temporary impairment.  The review includes an analysis of the facts and circumstances of each individual investment such as the severity of loss, the length of time the fair value has been below cost, the expectation for that security’s performance, the creditworthiness of the issuer and Ashland’s intent and ability to hold the security.  A decline in value that is considered to be other-than-temporary is recorded as a loss within the caption net interest and other financing income in the Statements of Consolidated Income.
 
Allowance for doubtful accounts
 
Ashland records an allowance for doubtful accounts as a best estimate of the amount of probable credit losses for accounts receivable.  Each month Ashland reviews this allowance and considers factors such as customer credit, past
 
 
 
F-9
 
 
 

NOTE A – SIGNIFICANT ACCOUNTING POLICIES (continued)
 
transaction history with the customer and changes in customer payment terms when determining whether the collection of a receivable is reasonably assured.  Past due balances over 90 days and over a specified amount are reviewed individually for collectibility.  Receivables are charged off against the allowance for doubtful accounts when it is probable a receivable will not be recovered.

 
Inventories

(In millions)
 
2008
   
2007
 
Chemicals and plastics
  $ 549     $ 625  
Lubricants
    127       117  
Other products and supplies
    18       23  
Excess of replacement costs over LIFO carrying values
    (200 )     (155 )
    $ 494     $ 610  
 

 
Inventories are carried at the lower of cost or market.  Chemicals, plastics and lubricants with a replacement cost of $384 million at September 30, 2008, and $416 million at September 30, 2007, are valued at cost using the last-in, first-out (LIFO) method.  The remaining inventories are stated at cost using the first-in, first-out (FIFO) method or average cost method (which approximates FIFO).  Liquidation of LIFO layers resulted in a net decrease to cost of sales and operating expenses of $31 million in 2008.  LIFO liquidations did not have a material impact to cost of sales and operating expenses in 2007 and 2006.
 
Property, plant and equipment
 
The cost of property, plant and equipment is depreciated by the straight-line method over the estimated useful lives of the assets.  Buildings are depreciated principally over 25 to 35 years and machinery and equipment principally over 4 to 15 years.  Such costs are periodically reviewed for recoverability when impairment indicators are present.  Such indicators include, among other factors, operating losses, unused capacity, market value declines and technological obsolescence.  Recorded values of property, plant and equipment that are not expected to be recovered through undiscounted future net cash flows are written down to current fair value, which generally is determined from estimated discounted future net cash flows (assets held for use) or net realizable value (assets held for sale).  Asset impairment charges are included within the selling, general and administrative expense caption of the Statements of Consolidated Income and were $2 million in 2008, $15 million in 2007 and $6 million in 2006.  Impairment expense for 2007 includes an $11 million charge related to PathGuard ® pathogen control equipment.  As a result of Water Technologies’ decision to withdraw from this market during 2007, these assets were written down to the approximate fair value of comparable assets.
 
In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations,” an interpretation of FASB Statement No. 143, “Accounting for Asset Retirement Obligations.”  FIN 47 requires that a liability be established for all legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, or development and (or) the normal operation of a long-lived asset.  The adoption of FIN 47 during fiscal year 2006 did not have a material effect on Ashland’s financial position, results of operations or cash flows.
 
Goodwill and other intangibles
 
In accordance with FASB Statement No. 142 (FAS 142), “Goodwill and Other Intangible Assets,” goodwill and indefinite-lived intangible assets are tested for impairment annually as of July 1 and whenever events or circumstances make it more likely than not that an impairment may have occurred.  In accordance with FAS 142, Ashland reviewed goodwill for impairment based on its identified reporting units, which are defined as operating segments or groupings of businesses one level below the operating segment level.  Goodwill is tested for impairment by comparing the estimated fair value of its reporting units, determined using a market approach and, as deemed necessary, a discounted cash flow model, with units’ carrying value.  Ashland tests its indefinite-lived intangible assets, principally trademarks and trade names, using a “relief-from-royalty” method.  Significant assumptions inherent in the methodologies are employed and include such estimates as royalty and discount rates.  For further information on goodwill and other intangible assets see Note F.
 
In April 2008, the FASB issued Staff Position No. FAS 142-3 (FSP 142-3), “Determination of the Useful Life of Intangible Assets,” which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FAS 142.  The new guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions.  FSP 142-3 becomes effective for Ashland on October 1, 2009.  Ashland is currently in the process of determining the effect, if any, the adoption of FSP 142-3 will have on the consolidated financial statements.
 
 
F-10
 
 
 
Derivative instruments
 
Ashland regularly uses foreign currency derivative instruments to manage its exposure to certain transactions denominated in foreign currencies.  All derivative instruments are recognized as either assets or liabilities on the balance sheet and are measured at fair value.  Changes in the fair value of all derivatives are recognized immediately in income unless the derivative qualifies as a hedge of future cash flows.  Gains and losses related to a hedge are either recognized in income immediately to offset the gain or loss on the hedged item, or deferred and recorded in the stockholders’ equity section of the Consolidated Balance Sheet as a component of accumulated other comprehensive income and subsequently recognized in the Statements of Consolidated Income when the hedged item affects net income.  The ineffective portion of the change in fair value of a hedge is recognized in income immediately.  Ashland has typically designated a limited portion of its foreign currency derivatives as qualifying for hedge accounting treatment and their impact on the consolidated financial statements is not significant.  Credit risks arise from the possible inability of counterparties to meet the terms of their contracts, but exposure is limited to the replacement value of the contracts.  Ashland further minimizes this credit risk through internal monitoring procedures and as of September 30, 2008 does not have significant credit risk on open derivative contracts.
 
In March 2008, the FASB issued Statement No. 161 (FAS 161), “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 Accounting for Derivative Instruments and Hedging Activities.”  FAS 161 requires enhanced disclosures for derivative and hedging activities by providing qualitative information about the objectives and strategies for using derivatives, quantitative data about the fair value of the gains and losses on derivative contracts, and details of credit risk related to contingent features of hedged positions.  This Statement also requires Ashland to disclose more information about the location and amounts of derivative instruments in the consolidated financial statements and how derivatives and related hedges are accounted for under FAS 133.  FAS 161 becomes effective for Ashland on January 1, 2009.  Ashland is currently in the process of determining the effect, if any, the adoption of FAS 161 will have on the consolidated financial statements.
 
Revenue recognition
 
Revenues generally are recognized when persuasive evidence of an arrangement exists, products are shipped or services are provided to customers, the sales price is fixed or determinable and collectibility is reasonably assured.  Ashland reports all revenues net of tax assessed by qualifying governmental authorities.
 
Expense recognition
 
Cost of sales and operating expenses include material and production costs, as well as the costs of inbound and outbound freight, purchasing and receiving, inspection, warehousing, internal transfers, and all other distribution network costs.  Selling, general and administrative expenses include sales and marketing costs, advertising, research and development, customer support, environmental remediation, and corporate and divisional administrative costs.
 
Because Ashland’s products generally are sold without extended warranties, liabilities for product warranties are not significant.  Costs of product warranties generally are expensed as incurred.  Advertising costs ($66 million in 2008, $67 million in 2007 and $68 million in 2006) and research and development costs ($52 million in 2008, $50 million in 2007 and $48 million in 2006) are expensed as incurred.
 
Income taxes
 
Ashland is subject to income taxes in the United States and numerous foreign jurisdictions.  Significant judgment is required in determining Ashland’s provision for income taxes and the related assets and liabilities.  Income taxes are accounted for under FASB Statement No. 109 (FAS 109), “Accounting for Income Taxes.”  The provision for income taxes includes income taxes paid, currently payable or receivable, and those deferred.  Under FAS 109, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities, and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse.  Deferred tax assets are also recognized for the estimated future effects of tax loss carryforwards.  The effect of changes in tax rates on deferred taxes is recognized in the period in which the enactment date changes.  Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized.
 
In June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.”  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS 109.  FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Ashland adopted the provisions of FIN 48 effective October 1, 2007.  The cumulative effect of adoption of FIN 48 resulted in a reduction to the October 1, 2007 opening balance of retained earnings of less than $1 million.  For additional information see Note K.
 
 
F-11
 
 
 
NOTE A – SIGNIFICANT ACCOUNTING POLICIES (continued)
 
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.
 
Ashland retained Hamilton, Rabinovitz & Associates, Inc. (HR&A) to assist in developing and annually updating independent reserve estimates for future asbestos claims and related costs given various assumptions.  The methodology used by HR&A to project future asbestos costs is based largely on Ashland’s recent experience, including claim-filing and settlement rates, disease mix, enacted legislation, open claims, and litigation defense and claim settlement costs.  Ashland’s claim experience is compared to the results of previously conducted epidemiological studies estimating the number of people likely to develop asbestos-related diseases.  Those studies were undertaken in connection with national analyses of the population expected to have been exposed to asbestos.  Using that information, HR&A estimates a range of the number of future claims that may be filed, as well as the related costs that may be incurred in resolving those claims.  From the range of estimates, Ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs.
 
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 its asbestos reserve represents the best estimate within a range of possible outcomes.  For further information on asbestos-related litigation see Note O.
 
Environmental remediation
 
Accruals for environmental remediation are recognized when it is probable a liability has been incurred and the amount of that liability can be reasonably estimated.  Such costs are charged to expense if they relate to the remediation of conditions caused by past operations or are not expected to mitigate or prevent contamination from future operations.  Liabilities are recorded at undiscounted amounts based on experience, assessments and current technology, without regard to any third-party recoveries and are regularly adjusted as environmental assessments and remediation efforts continue.  For further information on environmental remediation see Note O.
 
Pension and other postretirement benefit costs
 
The funded status of Ashland’s pension and other postretirement benefit plans is recognized in the Consolidated Balance Sheets.  The funded status is measured as the difference between the fair value of plan assets and the benefit obligation at September 30, the measurement date.  For defined benefit pension plans, the benefit obligation is the projected benefit obligation (PBO) and for the other postretirement benefit plans the benefit obligation is the accumulated postretirement benefit obligation (APBO).  The PBO represents the actuarial present value of benefits expected to be paid upon retirement based on estimated future compensation levels.  The APBO represents the actuarial present value of postretirement benefits attributed to employee services already rendered.  The fair value of plan assets represents the current market value of assets held by an irrevocable trust fund for the sole benefit of participants.  The measurement of the benefit obligation is based on the company’s estimates and actuarial valuations.  These valuations reflect the terms of the plans and use participant-specific information such as compensation, age and years of service, as well as certain assumptions that require significant judgment, including estimates of discount rates, expected return on plan assets, rate of compensation increases, interest crediting rates and mortality rates.  For further information regarding plan assumptions and the current financial position of the pension and other postretirement plans see Note N.
 
In September 2006, the FASB issued Statement No. 158 (FAS 158), “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).”  This Statement amended the accounting for pensions and postretirement benefits by requiring an entity to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position, with a corresponding adjustment to accumulated other comprehensive income, net of tax.  The adjustment to accumulated other comprehensive income at adoption represents the unrecognized actuarial gains and losses and the prior service costs and credits remaining from the initial adoption of FAS 87, all of which were previously netted against the plan’s funded status.  These amounts will be subsequently recognized as periodic pension cost pursuant to Ashland’s historic accounting policy for amortizing such
 
 
 

 
F-12
 
 
 
amounts.  Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of total comprehensive income.  Additionally, this Statement required an entity to measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position, which Ashland has historically practiced.  Ashland adopted this Statement on September 30, 2007 and recognized $43 million, after-tax, of net actuarial losses and prior service cost as a reduction to accumulated other comprehensive income.  For further information on the adoption of this statement see Note N.
 
Foreign currency translation
 
Operations outside the United States are measured using the local currency as the functional currency.  Upon consolidation, the results of operations of the subsidiaries and affiliates whose functional currency is other than the U.S. dollar are translated into U.S. dollars at the average exchange rates for the year and assets and liabilities are translated at year-end exchange rates.  Adjustments to translate assets and liabilities into U.S. dollars are recorded in the stockholders’ equity section of the Consolidated Balance Sheet as a component of accumulated other comprehensive income and are included in net earnings only upon sale or liquidation of the underlying foreign subsidiary or affiliated company.
 
Stock incentive plans
 
As of October 1, 2002, Ashland began expensing employee stock awards in accordance with FASB Statement No. 123 (FAS 123), “Accounting for Stock-Based Compensation,” and its related amendments.  Ashland elected the modified prospective method of adoption of FAS 123, under which compensation costs recorded in the year ended September 30, 2003 were the same as that which would have been recorded had the recognition provisions of FAS 123 been applied from its original effective date.  Results for prior periods were not restated.  In December 2004, the FASB issued Statement No. 123R (FAS 123R), “Shared-Based Payment,” which revised FAS 123 by requiring the expensing of share-based compensation over the vesting period of the award based on the grant date fair value of the award.  FAS 123 had provided companies the option of expensing such awards or disclosing the pro forma effects of such expensing in the notes to financial statements.  The adoption of FAS 123R during 2006 did not have a material effect on Ashland’s financial position, results of operations or cash flows.  Ashland began granting stock-settled stock appreciation rights (SARs) in 2004, which are expensed like stock options in accordance with FAS 123R.  In addition to stock options and SARs, Ashland grants nonvested stock awards to key employees and directors, which are expensed over their vesting period.  For further information concerning equity awards see Note M.
 
Earnings per share
 
The following is the computation of basic and diluted earnings per share (EPS) from continuing operations.  Stock options and SARs available to purchase shares outstanding for each reported year whose grant price was greater than the average market price of Ashland Common Stock for each applicable fiscal year were not included in the computation of income from continuing operations per diluted share because the effect of these instruments would be antidilutive.  The total number of these shares outstanding was 2.2 million, 0.5 million and less than 0.1 million for 2008, 2007 and 2006, respectively.
 
 
 
2008
   
2007
   
2006
 
Numerator
                 
Numerator for basic and diluted EPS -
                 
Income from continuing operations
  $ 175     $ 201     $ 183  
Denominator
                       
Denominator for basic EPS - Weighted-average
                       
common shares outstanding
    63       63       71  
Share based awards convertible to common shares
    1       1       1  
Denominator for diluted EPS - Adjusted weighted-
                       
average shares and assumed conversions
    64       64       72  
EPS from continuing operations
                       
Basic
  $ 2.78     $ 3.20     $ 2.57  
Diluted
    2.76       3.15       2.53  
 

F-13
 
 
 
NOTE B – DISCONTINUED OPERATIONS
 
APAC
 
On August 28, 2006, Ashland completed the sale of the stock of its wholly owned subsidiary, APAC, to Oldcastle.  The sale price of $1.3 billion was subject to adjustments for changes in working capital and certain other accounts from September 30, 2005, until the closing date.  Oldcastle paid $34 million at closing as a preliminary estimate of the working capital adjustment.  Per the agreement, Oldcastle had a certain period of time to review this working capital calculation after the closing date of the transaction.  This review was completed during fiscal 2007 and the working capital adjustment was subsequently calculated at $7 million.  Ashland repaid Oldcastle’s $27 million estimated working capital overpayment during 2007, which completed the sale.  Ashland’s Board of Directors authorized that substantially all of the $1.23 billion after-tax proceeds of the sale of APAC be distributed as a one-time special dividend to the shareholders of Ashland and through an expanded share repurchase program.  For further information on the special dividend and previous share repurchase programs see Note L.
 
Proceeds, net of expense of approximately $11 million, exceeded the book investment, which included $410 million of intangible assets, and resulted in a pretax gain of $128 million recorded in 2006.  This gain was subsequently adjusted to $122 million during subsequent periods.  The sale of APAC was a taxable transaction that resulted in $67 million being recorded for the combined federal and state income tax obligation.  Net deferred tax liabilities totaling $27 million were reversed through the income tax provision and included in the gain computation of the transaction.  The reversal of deferred taxes reflects the fact that Oldcastle assumed Ashland’s tax basis in these net assets as a result of this divestiture.  In addition, the sale of APAC resulted in a pretax curtailment gain of $34 million, or $21 million after-tax, related to the pension and postretirement plans and is included as a component of the total gain recorded as a result of the sale.  For further information on the curtailment gain and its impact on the pension and postretirement plan obligations see Note N.  The total gain on the sale of APAC, including the working capital and other post-closing adjustments, amounted to $156 million pretax and $96 million after-tax.  As part of the agreement with Oldcastle, Ashland also retained $78 million in net liabilities as of the date of the transaction related to APAC’s employee benefit obligations and incentive compensation.
 
APAC qualifies as discontinued operations under FASB Statement No. 144 (FAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets.”  Accordingly, the operating results, net of tax, of discontinued operations are presented separately in Ashland’s consolidated financial statements and the Notes to Consolidated Financial Statements have been adjusted to exclude discontinued operations.  The amounts eliminated from continuing operations did not include allocations of corporate expenses included in the selling, general and administrative expenses caption in the Statements of Consolidated Income and the related combined 39% U.S. federal (35%) and state (4%, net of federal deductions) statutory income tax benefits of such expenses.  These corporate expenses were $41 million in 2006.  In accordance with a consensus of the Emerging Issues Task Force (EITF) Issue No. 87-24, allocations of general corporate overhead may not be allocated to discontinued operations for financial statement presentation.
 
Ashland has made adjustments to the gain on the sale of APAC, primarily relating to the tax effects of the sale, during 2008 and 2007.  Such adjustments may continue to occur in future periods.  Adjustments to the gain are reflected in the period they are determined and recorded in the discontinued operations caption in the Statements of Consolidated Income.
 
Other
 
In 1990, Ashland sold Riley, a former subsidiary, and indemnified the buyer from certain liabilities from claims alleging personal injury caused by exposure to asbestos.  Additional adjustments to the recorded litigation reserves and related insurance receivables continue annually and primarily reflect updates to these estimates.  See Note O for further information on Ashland’s asbestos-related litigation.
 
Components of amounts reflected in the Statements of Consolidated Income related to discontinued operations are presented in the following table for each of the years ended September 30.
 
 
 
F-14
 
 
 
 
2008
   
2007
   
2006
 
Revenues from discontinued operations
                 
APAC (a)
  $ -     $ -     $ 2,730  
Income (loss) from discontinued operations
                       
APAC (a)
    -       -       176  
Asbestos-related litigation reserves, expenses and related receivables
    (11 )     35       (2 )
Gain (loss) on disposal of discontinued operations
                       
APAC
    -       (6 )     162  
Electronic Chemicals
    -       (1 )     -  
Income before income taxes
    (11 )     28       336  
Income tax (expense) benefit
                       
Benefit (expense) related to income (loss) from discontinued operations
                       
     APAC     1       2       (61 )
     Asbestos-related litigation reserves and expenses     9       -       1  
Expense related to gain (loss) on disposal of discontinued operations
                       
         APAC     (7 )     (1 )     (52 )
Income from discontinued operations (net of income taxes)
  $ (8 )   $ 29     $ 224  
                         
 
 
(a)
APAC revenues and income for 2006 were for the eleven months ended August 28, 2006.
 

 
NOTE C – MAP TRANSACTION
 
On June 30, 2005, Ashland completed the transfer of Ashland’s 38% interest in Marathon Ashland Petroleum LLC (MAP) and two other businesses to Marathon Oil Corporation (Marathon) in a transaction valued at approximately $3.7 billion (the “MAP Transaction”).  The two other businesses were Ashland’s maleic anhydride business and 60 Valvoline Instant Oil Change (VIOC) centers in Michigan and northwest Ohio.  The transaction resulted in Ashland’s receipt of $2.4 billion in cash and MAP accounts receivable of $913 million, which totaled $3.3 billion.  This amount was comprised of $2.8 billion of cash and accounts receivable, which amount was included in the $3.7 billion transaction value, and $518 million of additional cash and accounts receivable representing 38% of MAP’s distributable cash and other adjustments as of June 30, 2005.  The resulting pretax gain was shown on a separate line caption on the Statements of Consolidated Income below operating income and labeled gain (loss) on the MAP Transaction.  Since none of the businesses qualified as discontinued operations under FAS 144, the gain was reported in income from continuing operations, with no restatement of prior results.
 
The MAP Transaction was structured to be generally tax-free to Ashland shareholders and tax-efficient to Ashland.  Ashland and Marathon entered into a closing agreement with the Internal Revenue Service (IRS) with respect to various tax consequences of the transaction.  Pursuant to a Tax Matters Agreement (TMA) with Marathon, any tax payable under Section 355(e) of the Internal Revenue Code on the transaction up to $200 million will be borne by Marathon, with the next $175 million being borne by Ashland, and any tax over $375 million being split equally between the two companies.  As of September 30, 2008 the MAP Transaction has resulted in approximately $22 million of Section 355(e) tax which has been borne by Marathon.
 
Due to the structure of the transaction, Marathon is entitled to the tax deductions for Ashland’s future payments of certain contingent liabilities related to previously owned businesses of Ashland.  However, pursuant to the terms of the TMA, Marathon has agreed to compensate Ashland for these tax deductions.  Ashland recorded a discounted receivable for the estimated present value of probable recoveries from Marathon for the portion of these future tax deductions which is not dependent upon Marathon’s ability to utilize these deductions.  This receivable was included in the total pretax gain on the transaction.  Deferred tax assets previously recorded on these contingent liabilities were reversed through the income tax provision for the transaction.  Adjustments to the receivable resulting from changes in the liability estimates have been and will continue to be recorded in the gain (loss) on the MAP Transaction line caption in the Statements of Consolidated Income, while the accretion of the discount will be reflected in the net interest and other financing income caption.  At September 30, 2008 and 2007, this receivable was $38 million and $51 million, respectively, and is included in other current and noncurrent assets on Ashland’s Consolidated Balance Sheets.  Due to the continuing nature of certain tax issues, the original recorded gain has been adjusted in 2008, 2007 and 2006, and may continue to be adjusted in future periods.
 
 
F-15
 
 
 
NOTE C – MAP TRANSACTION (continued)
 
During 2008, Ashland and Marathon agreed to a tax related settlement with respect to four specific tax attributes and deductions subject to the terms of this TMA.  These tax attributes and deductions were originally scheduled to be reimbursed periodically at much later points in the future, some with the potential of greater than 20 or more years.  The effect of this settlement accelerated Marathon’s reimbursement to Ashland for certain of these deductions, resulting in the receipt of $26 million in cash from Marathon representing the present value of the future deductions.  As a result of this specific agreement, Ashland recorded a gain within the MAP Transaction caption of the Consolidated Statement of Income of $23 million during 2008.

 
NOTE D – UNCONSOLIDATED AFFILIATES
 
Summarized financial information for companies accounted for on the equity method is presented in the following table, along with a summary of the amounts recorded in Ashland’s consolidated financial statements.  The summarized financial information for all companies accounted for on the equity method by Ashland is as of and for the years ended September 30, 2008, 2007 and 2006, respectively.  At September 30, 2008 and 2007, Ashland’s retained earnings included $48 million and $44 million, respectively, of undistributed earnings from unconsolidated affiliates accounted for on the equity method.
 
(In millions)
 
2008
   
2007
   
2006
 
Financial position
                 
Current assets
  $ 254     $ 217        
Current liabilities
    (120 )     (104 )      
Working capital
    134       113        
Noncurrent assets
    71       72        
Noncurrent liabilities
    (9 )     (14 )      
Stockholders' equity
  $ 196     $ 171        
Results of operations
                     
Sales and operating revenues
  $ 655     $ 514     $ 426  
Income from operations
    75       51       40  
Net income
    52       42       27  
Amounts recorded by Ashland
                       
Investments and advances
  $ 81     $ 73     $ 61  
Equity income
    23       15       11  
Distributions received
    13       10       5  
 
In June 2008, Ashland and Süd-Chemie AG signed a nonbinding memorandum of understanding to form a new, global joint venture to serve the foundries and metal casting industry.  Under the terms of the memorandum, each parent company would hold a 50-percent share of the joint venture, which is planned to be headquartered in Venlo, The Netherlands.  Assets and employees would transfer to the new joint venture upon closing, anticipated during fiscal 2009.  The transaction is dependent upon the successful negotiation of definitive agreements, and closing will depend upon satisfactory completion of a number of standard closing conditions, including regulatory review.  The new enterprise would combine three businesses:  Ashland’s Casting Solutions, a business unit of Performance Materials, the foundry-related businesses of Süd-Chemie, and Ashland-Südchemie-Kernfest GmbH (ASK), which currently operates as a joint venture.  Ashland and ASK businesses to be contributed to the new joint venture recorded revenues of approximately $650 million for fiscal year 2008.  The foundry-related businesses of Süd-Chemie AG expected to be contributed to the joint venture generated revenues of approximately $400 million for the year ended December 31, 2007.
 
In December 2007, the FASB’s Emerging Issues Task Force (EITF) issued new guidance for entities that enter into collaborative arrangements in Issue 07-1 (EITF 07-1), “Accounting for Collaborative Arrangement.”  EITF 07-1 defines a collaborative arrangement and establishes presentation and disclosure requirements for transactions among participants in a collaborative arrangement and between participants in the arrangement and third parties.  EITF 07-1 defines a collaborative arrangement as a contractual arrangement that involves two or more parties that both:  (1) actively participate in a joint operating activity and (2) are exposed to significant risks and rewards that depend on the commercial success of the joint operating activity.  EITF 07-1 becomes effective for Ashland on October 1, 2009.  Ashland is currently in the process of determining the effect, if any, the adoption of EITF 07-1 will have on the notes to the consolidated financial statements.
 
F-16
 
 
 

NOTE E – SECURITIES AND FINANCIAL INSTRUMENTS
 
Fair values
 
The carrying amounts and fair values of Ashland’s significant financial instruments at September 30, 2008 and 2007 are shown below.  The fair values of cash and cash equivalents, available-for-sale securities and investments of captive insurance companies approximate their carrying amounts based on quoted market prices.  The fair values for auction rate securities were determined using an internal valuation model based on various discounted cash flow models and relevant observable market prices.  Assumptions used in estimating fair value included credit quality, liquidity, estimates on the probability of the issue being called prior to final maturity, and the impact due to extended periods of maximum auction rates.  The fair values of long-term debt are based on quoted market prices or, if market prices are not available, the present values of the underlying cash flows discounted at Ashland’s incremental borrowing rates.
 
   
2008
   
2007
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
(In millions)
 
amount
   
value
   
amount
   
value
 
Assets
                       
Cash and cash equivalents
  $ 886     $ 886     $ 897     $ 897  
Available-for-sale securities
    -       -       155       155  
Auction rate securities (a)
    243       243       -       -  
Investments of captive insurance companies (b)
    26       26       20       20  
Liabilities
                               
Long-term debt (including current portion)
    66       68       69       76  
 
 

 
(a)
Classified as noncurrent in the Consolidated Balance Sheets.  Previously these securities were classified as current and included in the available-for-sale securities caption in the Consolidated Balance Sheets.

(b)
Included in other noncurrent assets in the Consolidated Balance Sheets.
 
In September 2006, the FASB issued Statement No. 157 (FAS 157), “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  This Statement applies under other accounting pronouncements that require or permit fair value measurements because the FASB has previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute.  FAS 157 becomes effective for Ashland on October 1, 2008.  Ashland has evaluated the impact of adopting FAS 157 and anticipates the adoption will not have a significant impact on Ashland’s fair value measurements.
 
Investment securities
 
At September 30, 2008, Ashland held at par value $275 million of student loan auction rate securities for which there was not an active market.  In February 2008, the auction rate securities market became largely illiquid, as there was not enough demand to purchase all of the securities that holders desired to sell at par value during certain auctions.  Since this time the market for auction rate securities has failed to achieve equilibrium.  As a result, Ashland determined that a temporary adjustment to the par value of these high quality instruments was required until the liquidity of the market returns.  As of September 30, 2008, Ashland had recorded, as a component of stockholders’ equity, a temporary $32 million unrealized loss on the portfolio.  As of this date, all the student loan instruments held by Ashland were AAA rated and collateralized by student loans which are substantially guaranteed by the U.S. government under the Federal Family Education Loan Program.  Ashland considers the decline in the fair value of its investment securities to be temporary, resulting from the current lack of liquidity relating to these instruments.  Ashland’s current estimate of fair value for auction rate securities is based on various internal discounted cash flow models and relevant observable market prices.  The assumptions within the models include credit quality, liquidity, estimates on the probability of each valuation model and the impact due to extended periods of maximum auction rates.
 
At September 30, 2008, auction rate securities totaled $243 million and were classified as noncurrent assets in the Consolidated Balance Sheet.  Due to the current uncertainty as to when active trading will resume in the auction rate securities market, Ashland believes the recovery period for certain of these securities may extend over a twelve-month period.  As a result, Ashland has classified these instruments as long-term auction rate securities at September 30, 2008 in Ashland’s Consolidated Balance Sheet.

F-17
 
 
 
NOTE E – SECURITIES AND FINANCIAL INSTRUMENTS (continued)
 
The following table provides a summary of the investment securities portfolio as of September 30, 2008 and 2007.
 

 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
As of  September 30, 2008
 
cost
   
gain
   
loss
   
value
 
Student loan auction rate securities
  $ 275     $ -     $ (32 )   $ 243  
                                 
                                 
(In millions)
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
As of  September 30, 2007
 
cost
   
gain
   
loss
   
value
 
U.S. Treasury and government agencies
  $ 45     $ -     $ -     $ 45  
Obligations of states and political subdivisions
    70       -       -       70  
Corporate debt securities
    10       -       -       10  
Other securities
    30       -       -       30  
Total
  $ 155     $ -     $ -     $ 155  
 


 
The net unrealized loss on investment securities included in accumulated other comprehensive income as of September 30, 2008 was $20 million (net of tax) and was not significant at September 30, 2007.  Ashland sold $315 million and $680 million of available-for-sale securities during 2008 and 2007, respectively.  Realized gross gains and losses were not significant in 2008.  In 2007 realized gross gains on sales were $2 million.  The net carrying value and estimated fair value of investment securities at September 30, 2008 by contractual maturity are shown below.  Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with or without call or prepayment penalties.
 

   
Investment securities
 
   
Amortized
   
Fair
 
(In millions)
 
cost
   
value
 
Other securities:
           
5-10 years
  $ 15     $ 14  
Over 10 years
    260       229  
Total
  $ 275     $ 243  
 
 
Derivative instruments
 
Ashland uses foreign currency derivative instruments as described in Note A.  The fair value of open contracts for these instruments was not significant at September 30, 2008 and 2007.

 
NOTE F – GOODWILL AND OTHER INTANGIBLES
 
In accordance with FAS 142, Ashland reviews goodwill and other intangible assets for impairments either annually or when events and circumstances indicate an impairment may have occurred.  As of September 30, 2008 Ashland has determined no impairments exist.
 
The following is a progression of goodwill by segment for the years ended September 30, 2008 and 2007.

 

   
Performance
               
Water
       
(In millions)
 
Materials
   
Distribution
   
Valvoline
   
Technologies
   
Total
 
Balance at September 30, 2006
  $ 110     $ 1     $ 29     $ 70     $ 210  
Acquisitions
    51       -       1       (3 )     49  
Currency translation adjustment
    5       -       -       4       9  
Balance at September 30, 2007
    166       1       30       71       268  
Acquisitions
    28       -       -       1       29  
Currency translation adjustment
    2       -       -       -       2  
Balance at September 30, 2008
  $ 196     $ 1     $ 30     $ 72     $ 299  
 

 
Intangible assets consist of trademarks and trade names, patents and licenses, non-compete agreements, sale contracts, customer lists and intellectual property.  Intangibles are amortized on a straight-line basis over their estimated useful lives.  The cost of trademarks and trade names is amortized principally over 15 to 25 years, intellectual property over 5 to 17 years
 
 
F-18
 
 
 
and other intangibles over 2 to 30 years.  Ashland reviews intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.
 
Intangible assets were comprised of the following as of September 30, 2008 and 2007.

   
2008
   
2007
 
   
Gross
         
Net
   
Gross
         
Net
 
   
carrying
   
Accumulated
   
carrying
   
carrying
   
Accumulated
   
carrying
 
(In millions)
 
amount
   
amortization
   
amount
   
amount
   
amortization
   
amount
 
Trademarks and trade names
  $ 67     $ (22 )   $ 45     $ 63     $ (21 )   $ 42  
Intellectual property
    54       (21 )     33       49       (18 )     31  
Other intangibles
    51       (20 )     31       49       (13 )     36  
Total intangible assets
  $ 172     $ (63 )   $ 109     $ 161     $ (52 )   $ 109  
 
 
Amortization expense recognized on intangible assets was $11 million for 2008, $11 million for 2007 and $6 million for 2006, and is primarily included in the selling, general and administrative expense caption of the Statements of Consolidated Income.  As of September 30, 2008, all of Ashland’s intangible assets that had a carrying value were being amortized except for certain trademarks and trade names that currently have been determined to have indefinite lives.  These assets had a balance of $35 million as of September 30, 2008 and 2007.  In accordance with FAS 142, Ashland annually reviews these assets to determine whether events and circumstances continue to support the indefinite useful life designation.  Estimated amortization expense for future periods is $12 million in 2009, $8 million in 2010, $7 million in 2011, $6 million in 2012 and $6 million in 2013.

 
NOTE G – DEBT
 

 
2008
   
2007
 
Medium-term notes, due 2013-2019, interest at a weighted-
           
average rate of 8.4% at September 30, 2008 (7.7% to 9.4%)
  $ 21     $ 21  
8.80% debentures, due 2012
    20       20  
6.86% medium-term notes, Series H, due 2009
    17       17  
6.625% senior notes, due 2008
    -       3  
Other
    8       8  
Total debt
    66       69  
Current portion of debt
    (21 )     (5 )
Long-term debt (less current portion)
  $ 45     $ 64  
 
 
 
 
Aggregate maturities of long-term debt are $21 million in 2009, $3 million in 2010, less than $1 million in 2011 and 2012 and $28 million in 2013.  No short-term borrowings were outstanding at September 30, 2008 and 2007.
 
During 2007, Ashland replaced its revolving credit agreement with a new five year revolving credit facility which provides for up to $300 million in borrowings.  Up to an additional $100 million in borrowings is available with the consent of one or more of the lenders.  The borrowing capacity under this new facility was reduced by $102 million for letters of credit outstanding under the credit agreement at September 30, 2008.  The revolving credit agreement contains a covenant limiting the total debt Ashland may incur from all sources as a function of Ashland’s stockholders’ equity.  The covenant’s terms would have permitted Ashland to borrow $4.7 billion at September 30, 2008, in addition to the actual total debt incurred at that time.  Permissible total Ashland debt under the covenant’s terms increases (or decreases) by 150% for any increase (or decrease) in stockholders’ equity.  No amounts were outstanding under either revolving credit agreement as of September 30, 2008 and 2007.  In November 2008, Ashland completed the acquisition of Hercules Incorporated (Hercules).  As part of the financing arrangement for this transaction, this revolving credit agreement was terminated and replaced with a new credit facility.  For further information on this new financing arrangement see Note Q.
 
During 2006, Ashland entered into an in-substance defeasance of approximately $49 million to repay current and long-term debt that had a carrying value of $44 million on the balance sheet.  Because the transaction was not a legal defeasance the investment has been placed into a trust and will be exclusively restricted to future obligations and repayments related to these debt instruments.  The investments have been classified on the balance sheet as other current assets or other noncurrent assets based on the contractual debt repayment schedule.  At September 30, 2008 and 2007, the carrying value of the investments to defease debt, including other defeasements that occurred in fiscal 2006, was $36 million and $40 million, respectively.  The carrying value of the debt was $31 million and $34 million as of September 30, 2008 and 2007, respectively.
 
 
F-19
 
 
 
NOTE G – DEBT (continued)
 
Net interest and other financing income (costs)

(In millions)
 
2008
   
2007
   
2006
 
Interest income
  $ 40     $ 59     $ 59  
Interest expense
    (9 )     (10 )     (8 )
Other financing costs
    (3 )     (3 )     (4 )
    $ 28     $ 46     $ 47  

 
NOTE H – OTHER NONCURRENT ASSETS AND LIABILITIES
 
The following table provides the components of other noncurrent assets in the Consolidated Balance Sheets as of September 30.

 
(In millions)
 
2008
   
2007
 
Deferred compensation investments
  $ 127     $ 152  
Equity investments
    81       73  
Tax receivables
    49       49  
Environmental insurance receivables
    40       44  
Investments of captive insurance companies
    26       20  
Note receivables
    20       30  
Debt defeasance assets
    18       37  
Other
    33       30  
    $ 394     $ 435  
 

 
The following table provides the components of other noncurrent liabilities in the Consolidated Balance Sheets as of September 30.
 

(In millions)
 
2008
   
2007
 
Environmental remediation reserves
  $ 112     $ 153  
Deferred compensation
    101       144  
Reserves of captive insurance companies (excluding environmental remediation reserves)
    82       74  
Other
    133       130  
    $ 428     $ 501  
 
 
NOTE I – LEASES
 
Ashland and its subsidiaries are lessees of office buildings, retail outlets, transportation equipment, warehouses and storage facilities, and other equipment, facilities and properties under leasing agreements that expire at various dates.  Capitalized lease obligations are not significant and are included in long-term debt and capital lease assets are included in property, plant and equipment.  Future minimum rental payments at September 30, 2008 and rental expense under operating leases follow.
 

(In millions)
                               
Future minimum rental payments
 
Rental expense
 
2008
     
2007
     
2006
 
2009
 
$
42
   
Minimum rentals
                     
2010
   
37
   
(including rentals under
                     
2011
   
30
   
short-term leases)
$
59
   
$
60
   
$
53
 
2012
   
26
   
Contingent rentals
 
3
     
3
     
3
 
2013
   
23
   
Sublease rental income
 
(1
   
(2
   
(2
Later years
 
57
     
$
61
   
$
61
   
$
54
 
   
$
215
                           
 

F-20
 
 
 
NOTE J – ACQUISITIONS AND DIVESTITURES
 
Acquisitions
 
On November 13, 2008, Ashland completed the acquisition of Hercules, through a subsidiary merger transaction.  As a result of this transaction, Hercules has become a wholly owned subsidiary of Ashland.  Each share of Hercules Common Stock outstanding at the effective time of the merger was exchanged for (i) 0.0930 of a share of Ashland Common Stock and (ii) $18.60 in cash.  The cash portion of the consideration was funded through a combination of cash on hand and committed debt financing from Bank of America Securities LLC and Scotia Capital (USA) Inc., subject to customary terms and conditions.  For further information on this acquisition and the related approval by Hercules’ shareholders see Note Q.
 
Hercules is a manufacturer of specialty additives and ingredients that modify the physical properties of water-based systems and is a worldwide supplier of specialty chemicals to the pulp and paper industry with reported net sales of $2.3 billion for the twelve months ended September 30, 2008.  The primary markets the company serves include pulp and paper, paints and adhesives, construction materials, food, pharmaceutical, personal care and industrial specialties which include oilfield, textiles and other general industries.
 
In June 2008, Ashland acquired the assets of the pressure-sensitive adhesive business and atmospheric emulsions business of Air Products and Chemicals, Inc.  The $92 million transaction included manufacturing facilities in Elkton, Maryland and Piedmont, South Carolina.  The purchased operations, which merged into Performance Materials, had sales of $126 million in calendar year 2007, principally in North America.
 
In December 2006, Ashland acquired Northwest Coatings of Oak Creek, Wisconsin, a formulator and manufacturer of adhesives and coatings employing ultraviolet and electron beam (UV/EB) polymerization technologies from Caltius Equity Partners.  The transaction, which includes production facilities in Milwaukee, Wisconsin and Greensboro, North Carolina that was merged into Performance Materials, was valued at $74 million.  At the time this purchase transaction was announced, Northwest Coatings had trailing twelve month sales of approximately $40 million.
 
In May 2006, Ashland acquired the water treatment business of Degussa AG (Degussa), branded under the Stockhausen name, with five manufacturing facilities operating in Germany, China, Brazil, Russia and the United States.  The acquisition allows Ashland’s Water Technologies segment to expand its technology base, product line and service levels while continuing to develop its presence in key emerging international markets.  For its fiscal year ended December 31, 2005, Degussa reported sales and operating revenues (translated to U.S. dollars) of $258 million and operating income of $10 million.  The transaction, denominated in Euros, was valued at $161 million at the exchange rate on the acquisition date.  A summary of the purchase price allocation follows.
 
   
Assets
 
(In millions)
 
(liabilities)
 
Accounts receivable
  $ 57  
Inventories
    33  
Property, plant and equipment
    56  
Goodwill and other intangibles
    59  
Trade and other payables
    (20 )
Other noncurrent assets (liabilities) - net
    (24 )
    $ 161  
 
 
Several other acquisitions were completed by Performance Materials, Distribution, Valvoline and Water Technologies during the three years ended September 30, 2008.  These acquisitions, individually and in the aggregate, did not have a significant effect on Ashland’s consolidated financial statements.  All acquisitions are accounted for under the purchase method of accounting.
 
Divestitures
 
In August 2006, Ashland completed the sale of the stock of its wholly owned subsidiary, APAC, to Oldcastle.  The operating results and assets and liabilities related to APAC have been reflected as discontinued operations in the consolidated financial statements for all periods presented.  For further information on this transaction see Note B.
 
As a result of the APAC divestiture certain identified remaining corporate costs that had been previously allocated to this business needed to be eliminated to maintain Ashland’s overall competitiveness.  Consequently, in 2007 Ashland offered an enhanced early retirement or voluntary severance opportunity to administrative and corporate employees.  In total,
 
 
 

 
F-21
 
 
 
NOTE J – ACQUISITIONS AND DIVESTITURES (continued)
 
Ashland accepted voluntary severance offers from 172 employees under the program.  As a result, a $25 million pretax charge was recorded for severance, pension and other postretirement benefit costs during 2007.  This cost is classified in the selling, general and administrative expense caption of the Statements of Consolidated Income and grouped within “Unallocated and other” for segment presentation purposes.  The termination dates for employees participating in the program were completed and all amounts paid during 2008.

 
NOTE K – INCOME TAXES
 
A summary of the provision for income taxes related to continuing operations follows.
 

(In millions)
 
2008
   
2007
   
2006
 
Current
                 
Federal
  $ 13     $ 5     $ (5 )
State
    3       (7 )     -  
Foreign
    26       38       35  
      42       36       30  
Deferred
    44       22       (1 )
Income tax expense
  $ 86     $ 58     $ 29  
 
 
Deferred income taxes are provided for income and expense items recognized in different years for tax and financial reporting purposes.  Ashland has not recorded deferred income taxes on the undistributed earnings of certain foreign subsidiaries and foreign corporate joint ventures.  As of September 30, 2008, management intends to indefinitely reinvest such earnings, which amounted to $353 million.  Because of significant foreign tax credits, it is estimated that U.S. federal income taxes of approximately $33 million would be incurred if those earnings were repatriated.  Foreign net operating loss carryforwards primarily relate to certain European operations and generally may be carried forward indefinitely.  Temporary differences that give rise to significant deferred tax assets and liabilities follow.
 

(In millions)
 
2008
   
2007
 
Deferred tax assets
           
Employee benefit obligations
  $ 124     $ 92  
Environmental, self-insurance and litigation reserves (net of receivables)
    78       83  
Compensation accruals
    75       90  
Foreign net operating loss carryforwards (a)
    29       25  
Uncollectible accounts receivable
    9       11  
Other items
    47       28  
Valuation allowances (b)
    (26 )     (23 )
Total deferred tax assets
    336       306  
Deferred tax liabilities
               
Property, plant and equipment
    75       75  
Investment in unconsolidated affiliates
    10       5  
Total deferred tax liabilities
    85       80  
Net deferred tax asset
  $ 251     $ 226  
 
 

 
(a)  
Foreign net operating loss carryforwards will expire in future years as follows:  $1 million in 2009, $1 million in 2010 and the remaining balance in other future years.

(b)  
Valuation allowances primarily relate to the realization of recorded tax benefits on foreign net operating loss carryforwards.
 
Ashland’s income tax expense for 2008, 2007 and 2006 included $9 million of tax benefit, $9 million of tax expense and $16 million of tax benefit, respectively, due to the resolution of domestic and foreign tax matters and the reevaluation of income tax reserves related to tax positions taken in prior years.  During 2007, Ashland recorded a $15 million tax benefit related to dividends held within the employee stock ownership plan, primarily due to the special dividend of $10.20 paid on October 25, 2006 as part of the distribution to shareholders of a substantial portion of the APAC divestiture proceeds.  For further information on this special dividend see Note L.
 
The U.S. and foreign components of income from continuing operations before income taxes and a reconciliation of the statutory federal income tax with the provision for income taxes follow.  The foreign components of income from continuing operations disclosed below exclude any allocations of certain corporate expenses incurred in the U.S.
 
 
F-22
 
 
 
 
2008
   
2007
   
2006
 
Income from continuing operations before income taxes
                 
United States
  $ 174     $ 163     $ 138  
Foreign
    87       96       74  
    $ 261     $ 259     $ 212  
                         
Income taxes computed at U.S. statutory rate (35%)
  $ 91     $ 91     $ 74  
Increase (decrease) in amount computed resulting from
                       
Resolution and reevaluation of tax positions taken in prior years
    (9 )     9       (16 )
Life insurance (income) loss
    9       (7 )     (4 )
(Gain) loss on MAP Transaction
    (7 )     1       2  
Net impact of foreign results
    5       (2 )     (5 )
State income taxes
    3       (4 )     -  
Business meals and entertainment
    1       1       1  
Claim for research and development credits
    (1 )     (3 )     (1 )
Deductible dividends under employee stock ownership plan
    (1 )     (15 )     (2 )
Other items
    (5 )     (13 )     (20 )
Income tax expense
  $ 86     $ 58     $ 29  

 
Ashland adopted the provisions of FIN 48 as of October 1, 2007.  The cumulative effect of adoption of FIN 48 resulted in a reduction to the October 1, 2007 opening retained earnings balance of less than $1 million.  FIN 48 prescribes a recognition threshold and measurement attribute for the accounting and financial statement disclosure of tax positions taken or expected to be taken in a tax return.  The evaluation of a tax position is a two-step process.  The first step requires Ashland to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position.  The second step requires Ashland to recognize in the financial statements each tax position that meets the more likely than not criteria, measured at the largest amount of benefit that has a greater than 50-percent likelihood of being realized.  Ashland had $79 million and $69 million of unrecognized tax benefits, of which $47 million and $38 million relates to discontinued operations, at September 30, 2008 and October 1, 2007, respectively.  As of September 30, 2008, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate for continuing and discontinued operations was $23 million.  The remaining unrecognized tax benefits relate to tax positions for which ultimate deductibility is highly certain but for which there is uncertainty as to the timing of such deductibility.  Recognition of these tax benefits would not have an impact on the effective tax rate.  Ashland includes the full amount of unrecognized tax benefits in other noncurrent liabilities in the Consolidated Balance Sheets.
 
Ashland recognizes interest and penalties related to uncertain tax positions as a component of income tax expense in the Statements of Consolidated Income and such interest and penalties totaled a net $3 million in 2008.  Ashland had approximately $15 million in interest and penalties related to unrecognized tax benefits accrued as of October 1, 2007 and $15 million as of September 30, 2008.
 
During the twelve month period ended September 30, 2008, changes in unrecognized tax benefits were as follows.
 
 
(In millions)
 
2008
 
Balance at October 1, 2007
  $ 69  
Increases related to positions taken on items from prior years
    7  
Decreases related to positions taken on items from prior years
    (8 )
Increases related to positions taken in 2008
    13  
Settlement of uncertain tax positions with tax authorities
    (2 )
Balance at September 30, 2008
  $ 79  
 
 
It is reasonably possible that the amount of unrecognized tax benefits may increase or decrease within the next twelve months as the result of settlement of ongoing audits.  However, Ashland does not presently anticipate that any increase or decrease in unrecognized tax benefits will be material to the consolidated financial statements.
 
Ashland or one of it subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  Foreign taxing jurisdictions significant to Ashland include Australia, Canada and the Netherlands.  Ashland is subject to U.S. federal and state income tax examinations by tax authorities for periods after July 1, 2005.  With respect to countries outside of the United States, with certain exceptions, Ashland’s foreign subsidiaries are subject to income tax audits for years after 1999.
 
 
F-23
 
 
 
NOTE K – INCOME TAXES (continued)
 
In June 2008, Ashland received two Revenue Agents Reports (RAR) from the Internal Revenue Service (IRS) that included the results of the IRS audits for the tax periods ended September 30, 2004, June 30, 2005 (the date of the completed MAP Transaction) and September 30, 2005.  The first RAR for the tax years ended September 30, 2004 and June 30, 2005 reflected a refund of approximately $4 million for the September 2004 tax year and additional federal taxes owed of approximately $14 million (of which approximately $11 million related to the MAP Transaction) for the June 2005 tax year.  Under the terms of the previously referred to TMA, Marathon was responsible for this payment and paid Ashland $11 million.  Ashland paid the IRS approximately $12 million in additional federal taxes and interest for the September 2004 and June 2005 tax years in July of 2008.  The second RAR for the tax year ended September 30, 2005 reflected a refund to Ashland of approximately $4 million.
 
As a result of the structure of the MAP Transaction, Marathon became primarily responsible for certain of Ashland’s federal and state tax obligations for positions taken prior to June 30, 2005.  However, pursuant to the terms of the TMA, Ashland has agreed to indemnify Marathon for any obligations which arise from those positions.  Upon adoption of FIN 48, these positions, which were previously accounted for as income tax contingencies by Ashland, are no longer treated in that manner under the provisions of FIN 48.  Subsequent adjustments to these liabilities will be recorded as a component of selling, general and administrative expenses within the Statements of Consolidated Income.  In accordance with the prospective adoption requirements under the provisions of FIN 48, Ashland did not reclassify prior period expenses or income relating to these items that would have been classified within the selling, general and administrative caption if FIN 48 was applied retrospectively.  For the twelve months ended September 30, 2008, Ashland recorded $2 million of income relating to these items that was recognized as a component of income tax expense in previous periods.

 
NOTE L – CAPITAL STOCK
 
On September 14, 2006 Ashland’s Board of Directors authorized the distribution of a substantial portion of the proceeds of the sale of APAC to the Ashland Common Stock shareholders as a one-time special dividend.  Each shareholder of record as of October 10, 2006, received $10.20 per share, for a total of $674 million.  This amount was accrued as dividends payable in the Consolidated Balance Sheet at September 30, 2006 and was subsequently paid during 2007.  Substantially all of the remaining proceeds were directed to be used to repurchase Ashland Common Stock in accordance with the terms authorized by Ashland’s Board of Directors and as further described below.
 
Stock repurchases were made pursuant to two different programs authorized by Ashland’s Board of Directors.  The first program, originally approved on July 21, 2005, authorized the purchase of $270 million of Ashland Common Stock in the open market.  After 3.5 million shares at a cost of $196 million had been purchased under the initial authorization, on January 25, 2006, Ashland’s Board of Directors increased the remaining authorization by $176 million to $250 million.  As of September 14, 2006, Ashland had completed all repurchases to be made under this program.
 
The second program was authorized by Ashland’s Board of Directors on September 14, 2006, employing proceeds from the sale of APAC to repurchase up to an additional 7 million shares.  To facilitate this repurchase program, Ashland entered into a stock trading plan with Credit Suisse Securities (USA) LLC (Credit Suisse).  The stock trading plan, amended and restated on September 20, 2006, allowed Credit Suisse to make daily repurchases of stock starting on October 2, 2006, in accordance with the instructions set forth in the plan and within the safe harbor from insider trading liability provided under Exchange Act Rule 10b5-1.
 
Ashland did not repurchase any shares during 2008, but did repurchase 4.7 million shares for $288 million during 2007 and 6.7 million shares for $405 million during 2006.  Since the inception of the first described share repurchase program on July 21, 2005 through the completion of the second share repurchase program on December 19, 2006, Ashland has repurchased a total of 13.2 million shares at a cost of $793 million.  These repurchases represent approximately 18% of the shares outstanding on June 30, 2005.  The stock repurchase actions were consistent with certain representations of intent made to the Internal Revenue Service with respect to the transfer of MAP.  At September 30, 2008, 8.4 million common shares are reserved for issuance under stock incentive and deferred compensation plans.

 
NOTE M – STOCK INCENTIVE PLANS
 
Ashland has stock incentive plans under which key employees or directors are granted stock options, stock-settled stock appreciation rights (SARs), performance share awards or nonvested stock awards.  Each program is typically a long-term incentive plan designed to link employee compensation with increased shareholder value over time or reward superior performance and encourage continued employment with Ashland.  As discussed in Note A, Ashland began expensing stock awards on October 1, 2002 and recognizes compensation expense for the grant date fair value of stock-based awards over the applicable vesting period.  The components of Ashland’s pretax stock-based awards (net of forfeitures), which is included in
 
 
 
F-24
 
 
 

the selling, general and administrative expense caption of the Statements of Consolidated Income, and associated income tax benefits are as follows:

(In millions)
 
2008
   
2007
   
2006
 
Stock options
  $ -     $ -     $ 1  
SARs
    7       7       7  
Performance share awards
    3       6       13  
Nonvested stock awards
    2       3       4  
    $ 12     $ 16     $ 25  
                         
Income tax benefit
  $ 5     $ 6     $ 10  
 

 
Stock options and SARs
 
Stock options and SARs are granted to employees or directors at a price equal to the fair market value of the stock on the date of grant and become exercisable over periods of one to three years.  Unexercised stock options and SARs lapse ten years after the date of grant.  In accordance with FAS 123(R) Ashland estimates the fair value of stock options and SARs granted using the Black-Scholes option-pricing model.  This model requires several assumptions, which Ashland has developed and updates based on historical trends and current market observations.  The accuracy of these assumptions is critical to the estimate of fair value for these equity instruments.  The following table illustrates the assumptions used within the Black-Scholes option-pricing model.  The risk free interest rate assumption was based on the U.S. Treasury yield curve in effect at the time of the grant for the expected term of the instrument.  The dividend yield reflects the assumption that the current dividend payout will continue with no anticipated increases.  The volatility assumption was calculated by utilizing an unbiased standard deviation of Ashland’s common stock closing price for the past five years.  The expected life is based on historical data and is not necessarily indicative of exercise patterns that may occur.
 

(In millions except per share data)
   
2008
     
2007
     
2006
 
Weighted-average fair value per share of options or SARs granted
 
$
12.62
   
$
17.67
   
$
17.24
 
Assumptions (weighted-average)
                       
 
Risk-free interest rate
      3.8
    
     4.2 %
   
         4.4 %
 
Expected dividend yield
      2.1 %
    
     1.7 %
   
         1.7 %
 
Expected volatility
       25.8 %
 
    27.3 %
  
       26.3 %
 
Expected life (in years)
   
     5.0
     
     5.0
     
     5.0
 
 
 
A progression of activity and various other information relative to stock options and SARs is presented in the following table.
 

   
2008
     
2007
     
2006
 
   
Number
   
Weighted-
     
Number
   
Weighted-
     
Number
   
Weighted-
 
   
of
   
average
     
of
   
average
     
of
   
average
 
   
common
   
exercise price
     
common
   
exercise price
     
common
   
exercise price
 
(In thousands except per share data)
shares
   
per share
     
shares
   
per share
     
shares
   
per share
 
Outstanding - beginning of year (a)
  2,674     $ 36.07         2,602     $ 41.56         3,274     $ 39.74  
Granted
    434       53.33         482       65.78         23       65.48  
Exercised
    (173 )     35.37         (829 )     31.15         (678 )     33.37  
Forfeitures and expirations
    (47 )     52.51         (36 )     53.63         (17 )     48.30  
Special dividend adjustment (b)
    -       -         455       -         -       -  
Outstanding - end of year (a)
    2,888       43.92  
(b)
    2,674       41.99  
(b)
    2,602       41.56  
Exercisable - end of year
    2,234       39.91         2,064       36.07         2,181       39.21  
 

 
(a)
Exercise prices per share for options and SARs outstanding at September 30, 2008 ranged from $19.11 to $19.75 for 161,000, $23.21 to $25.71 for 503,000 shares, from $32.28 to $38.47 for 660,000 shares, from $42.58 to $49.79 for 660,000 shares, and from $53.33 to $65.78 for 904,000 shares.  The weighted-average remaining contractual life of outstanding stock options and SARs was 6.1 years and exercisable stock options and SARs was 5.5 years.
 
(b)
As described in Note M, Ashland distributed a special $10.20 dividend to each shareholder of record as of October 10, 2006.  Adjustments were made to outstanding grants of stock options and SARs to maintain their intrinsic values.  The number of shares was increased by a factor of 1.18 and the exercise prices were decreased by a factor of .85.  These adjustments did not result in an increase in the fair value of outstanding grants or any adjustment to expense recognition.
 
 

 
F-25
 
 
 
NOTE M – STOCK INCENTIVE PLANS (continued)
 
The total intrinsic value of stock options and SARs exercised was $5 million in 2008, $28 million in 2007 and $20 million in 2006, respectively.  The actual tax benefit realized from the exercised stock options and SARs was $2 million in 2008, $12 million in 2007 and $8 million in 2006.  The total grant date fair value of stock options and SARs that vested during 2008, 2007 and 2006 was $7 million, $2 million and $1 million, respectively.  As of September 30, 2008, there was $5 million of total unrecognized compensation costs related to stock options and SARs.  That cost is expected to be recognized over a weighted-average period of 1.7 years.  As of September 30, 2008, the aggregate intrinsic value of outstanding stock options and SARs was $4 million and exercisable stock options and SARs was $4 million.
 
Nonvested stock awards
 
Nonvested stock awards are granted to employees or directors at a price equal to the fair market value of the stock on the date of grant and generally vest over a one to seven year period.  However, such shares are subject to forfeiture upon termination of service before the vesting period ends.  Nonvested stock awards entitle employees or directors to vote the shares and to receive any dividends thereon.
 
A progression of activity and various other information relative to nonvested stock awards is presented in the following table.
 
   
2008
   
2007
   
2006
 
   
Number
   
Weighted-
   
Number
   
Weighted-
   
Number
   
Weighted-
 
   
of
   
average
   
of
   
average
   
of
   
average
 
   
common
   
grant date
   
common
   
grant date
   
common
   
grant date
 
(In thousands except per share data)
 
shares
   
fair value
   
shares
   
fair value
   
shares
   
fair value
 
Nonvested - beginning of year
    424     $ 40.28       453     $ 39.19       459     $ 37.37  
Granted
    18       56.74       32       63.99       35       63.68  
Vested
    (136 )     39.34       (56 )     43.70       (25 )     36.32  
Forfeitures
    (6 )     59.62       (5 )     55.71       (16 )     45.07  
Nonvested - end of year
    300       40.86       424       40.28       453       39.19  
 

 
The total fair value of nonvested stock awards that vested during 2008, 2007 and 2006 was $7 million, $3 million and $2 million, respectively.  As of September 30, 2008, there was $3 million of total unrecognized compensation costs related to nonvested stock awards.  That cost is expected to be recognized over a weighted-average period of 1.6 years.
 
Performance shares/units
 
Ashland sponsors a long-term incentive plan that awards performance shares/units to certain key employees that are tied to Ashland’s overall financial performance relative to the financial performance of a selected industry peer group.  Ashland believes that the focus on relative performance encourages management to make decisions that create shareholder value.  Awards under this plan are granted annually, with each award covering a three-year performance cycle.  Historically, each performance share/unit is convertible to one share of Ashland Common Stock or cash.  As a result, these plans were recorded as a liability in the Consolidated Balance Sheet within the other noncurrent liabilities caption.  As of September 30, 2008 and 2007, the recorded liability for these plans was $2 million and $11 million, respectively.  Effective with the 2007-2009 grant and going forward, all performance shares/units are payable only in Ashland Common Stock.  Performance measures used to determine the actual number of performance shares/units issuable upon vesting include an equal weighting of Ashland’s total shareholder return (TSR) performance and Ashland’s return on investment (ROI) performance as compared to the performance peer group over the three-year performance cycle.  TSR relative to peers is considered a market condition while ROI is considered a performance condition under applicable accounting guidance.  Nonvested performance shares/units do not entitle employees to vote the shares or to receive any dividends thereon.  The following table shows the performance shares/units granted for all plans that award Ashland Common Stock.


             
Weighted-
 
     
Target
   
average
 
     
shares
   
fair value
 
(In thousands except per share data)
Performance period
 
granted
(a)  
per share
 
Fiscal Year 2008
October 1, 2007 - September 30, 2010
    118     $ 50.55  
Fiscal Year 2007
October 1, 2006 - September 30, 2009
    142     $ 72.52  

 
(a)
At the end of the performance period, the actual number of shares issued can range from zero to 200 percent of the target shares granted.
 
The fair value of the ROI portion of the performance share awards is equal to the fair market value of Ashland’s Common Stock on the date of the grant discounted for the dividends forgone during the vesting period of the three-year performance cycle.  Compensation cost is recognized over the requisite service period if it is probable that the performance
 
 
F-26
 
 
 
 

condition will be satisfied.  The fair value of the TSR portion of the performance share awards is calculated using a Monte Carlo simulation valuation model using the assumptions included in the following table.  Compensation cost is recognized over the requisite service period regardless of whether the market condition is satisfied.

 

     
2008
 
2007
 
Risk-free interest rate
   
3.5% - 3.7
%   4.7% - 5.0 %
Expected dividend yield
      1.7 %        1.8 %
Expected life (in years)
   
       3.0
 
     3.0
 
Expected volatility
      26.3 %      24.4 %
 

 
The performance share awards expense for all plans that award Ashland Common Stock during 2008 and 2007 was $4 million and $2 million, respectively.  The following table shows changes in nonvested performance shares/units for all plans that award Ashland Common Stock.

 
   
2008
   
2007
 
         
Weighted-
         
Weighted-
 
         
average
         
average
 
         
grant date
         
grant date
 
(In thousands except per share data)
 
Shares
   
fair value
   
Shares
   
fair value
 
Nonvested - beginning of year
    119     $ 72.52       -     $ -  
Granted
    118       50.55       142       72.52  
Forfeitures
    (10 )     54.94       (23 )     72.52  
Nonvested - end of year
    227       61.87       119       72.52  
 
As of September 30, 2008, there was $6 million of total unrecognized compensation costs related to nonvested performance share awards.  That cost is expected to be recognized over a weighted-average period of approximately 1.5 years.

 
NOTE N – EMPLOYEE BENEFIT PLANS
 
Pension plans
 
Ashland and its subsidiaries sponsor contributory and noncontributory qualified and non-qualified defined benefit pension plans that cover substantially all employees in the United States and in a number of other countries.  Ashland’s funding policy is to fully fund the accumulated benefit obligations of its qualified U.S. plans with the level of contributions being determined annually to achieve that objective over time.  In addition, Ashland has non-qualified unfunded pension plans which provide supplemental defined benefits to those employees whose benefits under the qualified pension plans are limited by the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code.  Ashland funds the costs of the non-qualified plans as the benefits are paid.  Pension obligations for employees of non-U.S. consolidated subsidiaries are provided for by depositing funds with trustees or by book reserves in accordance with local practices and regulations of the respective countries.
 
Prior to July 1, 2003, benefits under Ashland’s U.S. pension plans generally were based on employees’ years of service and compensation during the years immediately preceding their retirement.  Although certain changes were implemented on that date, the pension benefits of employees with at least ten years of service were not affected.  As of July 1, 2003, the pension benefits of affected employees were converted to cash balance accounts.  Such employees received an initial account balance equal to the present value of their accrued benefits under the previous plan on that date.  Pension benefits for these employees are based on the balances in their accounts upon retirement.
 
Other postretirement benefit plans
 
Ashland and its subsidiaries sponsor health care and life insurance plans for eligible employees who retire or are disabled.  Ashland’s retiree life insurance plans are noncontributory, while Ashland shares the costs of providing health care coverage with its retired employees through premiums, deductibles and coinsurance provisions.  Ashland funds its share of the costs of the postretirement benefit plans as the benefits are paid.
 
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law.  Among other things, the Act expands Medicare to include an outpatient prescription drug benefit beginning in 2006, as well as provide a subsidy for sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to the Medicare Act benefits.  In May 2004, the FASB issued Staff Position (FSP) No. FAS 106-2, “Accounting
 
 
F-27
 
 
 
 

NOTE N – EMPLOYEE BENEFIT PLANS (continued)
 
and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.”  The FSP provided accounting guidance for the effects of the Act to a sponsor of a postretirement health care plan.  Regulations implementing major provisions of the Act, including the determination of actuarial equivalency, were issued in January 2005.  Effective May 1, 2005, Ashland amended its health care plan for retirees age 65 or older so that the company will always qualify for the subsidy and remeasured its postretirement benefit obligation as of that date.  The remeasurement reduced the postretirement benefit obligation by $58 million.
 
On July 1, 2003, Ashland implemented changes in the way it shares the cost of health care coverage with future retirees.  These changes did not affect the previous cost-sharing program for retirees or for employees meeting certain qualifications at that date.  However, Ashland did amend that program to limit its annual per capita costs to an amount equivalent to base year per capita costs, plus annual increases of up to 1.5% per year for costs incurred after January 1, 2004.  Under a previous amendment, base year costs were limited to the amounts incurred in 1992, plus annual increases of up to 4.5% per year thereafter.  As a result, health care cost trend rates have no significant effect on the amounts reported for the health care plans.  Premiums for retiree health care coverage are equivalent to the excess of the estimated per capita costs over the amounts borne by Ashland.
 
Employees who were employed on June 30, 2003 who did not meet the required qualifications were allocated notional accounts that can only be used to pay all or part of the premiums for retiree health care coverage.  Such premiums represent the full costs of providing that coverage, without any subsidy from Ashland.  Employees must meet certain requirements upon separation in order to have access to their notional accounts.  Retirees will continue to have access to Ashland coverage after their notional accounts are exhausted, but they will be responsible for paying the full premiums.  New hires after June 30, 2003 will have access to any retiree health care coverage that may be provided, but will have no company funds available to help pay for such coverage.
 
Adoption of FAS 158
 
On September 30, 2007, Ashland adopted the recognition and disclosure provisions of FAS 158.  See Note A for further discussion of FAS 158’s provisions.  The adoption of FAS 158 had no effect on Ashland’s Statement of Consolidated Income for the year ended September 30, 2007, or for any prior periods represented.  FAS 158 did have an incremental effect on individual line items in Ashland’s Consolidated Balance Sheet at September 30, 2007, as shown in the following table.  Had Ashland not been required to adopt FAS 158 at September 30, 2007, an additional minimum liability would have been recognized pursuant to the provisions of FAS 87.  The effect of recognizing the additional minimum liability is included in the table below in the column labeled “Prior to Adopting FAS 158.”

   
At September 30, 2007
 
   
Prior to
   
Effect of
   
Consolidated
 
Consolidated Balance Sheet Caption
 
adopting
   
adopting
   
Balance
 
(In millions)
 
FAS 158
   
FAS 158
   
Sheet
 
Assets
                 
Goodwill and other intangibles (pension intangible assets)
  $ 2     $ (2 )   $ -  
Deferred income taxes
    57       27       84  
Liabilities
                       
Employee benefit obligations (current and long-term)
    194       68       262  
Equity
                       
Accumulated other comprehensive income (loss)
    (12 )     (43 )     (55 )

 
Components of net periodic benefit costs
 
The plan amendments in 2003 previously discussed under other postretirement benefit plans reduced Ashland’s accrued obligations under those plans, and the reductions are being amortized to income over future periods.  Such amortization reduced Ashland’s net periodic benefit costs for other postretirement benefits by $4 million in 2008, $4 million in 2007 and $8 million in 2006.  At September 30, 2008, the remaining unrecognized prior service credit resulting from the changes amounted to $25 million, and will reduce future costs by $4 million in 2009 and approximately $4 million annually thereafter through 2014.  As a result of the sale of APAC to Oldcastle during 2006, a curtailment gain of $34 million ($21 million after-tax) was recognized to account for this divestiture’s impact on the plans.
 
The following table summarizes the components of pension and other postretirement benefit costs, and the assumptions used to determine net periodic benefit costs for the plans.
 
F-28
 
 
 

 
   
Pension benefits
   
Other postretirement benefits
 
(In millions)
 
2008
   
2007
   
2006
   
2008
   
2007
   
2006
 
Net periodic benefit costs
                                   
Service cost
  $ 36     $ 37     $ 57     $ 5     $ 4     $ 7  
Interest cost
    93       87       84       12       11       12  
Curtailment
    -       -       (1 )     -       3       (33 )
Special termination benefits - Note J
    -       8       -       -       -       -  
Expected return on plan assets
    (113 )     (102 )     (99 )     -       -       -  
Amortization of prior service cost (credit)
    -       -       -       (3 )     7       (8 )
Amortization of net actuarial loss (gain)
    5       17       40       (3 )     (3 )     1  
    $ 21     $ 47     $ 81     $ 11     $ 22     $ (21 )
Weighted-average plan assumptions (a)
                                               
Discount rate
    6.16 %     5.66 %     5.42 %     5.96 %     5.64 %     5.33 %
Rate of compensation increase
    3.74 %     3.74 %     4.46 %     -       -       -  
Expected long-term rate of
                                               
       return on plan assets     7.62 %     7.58 %     8.26 %     -       -       -  
 

(a)
The plan assumptions disclosed are a blended weighted-average rate for Ashland’s U.S. and non-U.S. plans.  The U.S. pension plan represented approximately 87% of the projected benefit obligation at September 30, 2008.  Other postretirement benefit plans consist of U.S. and Canada, with the U.S. plan representing approximately 92% of the accumulated postretirement benefit obligation at September 30, 2008.  Non-U.S. plans use assumptions generally consistent with those of U.S. plans.
 
The following table shows the amounts in accumulated other comprehensive income at September 30, 2008 that are expected to be recognized as components of net periodic benefit cost (income) during the next fiscal year.
 

         
Other
 
   
Pension
   
postretirement
 
(In millions)
 
benefits
   
benefits
 
Net actuarial loss (gain)
  $ 16     $ (3 )
Prior service cost (credit)
    1       (3 )
Total
  $ 17     $ (6 )
 
 
Obligations and funded status
 
Actuarial valuations are performed for the pension and other postretirement benefit plans to determine Ashland’s obligation for each plan.  Summaries of the change in benefit obligations, plan assets, funded status of the plans, amounts recognized in the balance sheet, and assumptions used to determine the benefit obligations for 2008 and 2007 follow.
 
 
F-29
 
 
 
NOTE N – EMPLOYEE BENEFIT PLANS (continued)


               
Other postretirement
 
   
Pension plans
   
benefit plans
 
(In millions)
 
2008
   
2007
   
2008
   
2007
 
Change in benefit obligations
                       
Benefit obligations at October 1
  $ 1,562     $ 1,549     $ 205     $ 245  
Service cost
    36       37       5       4  
Interest cost
    93       87       12       11  
Curtailment
    -       (2 )     -       3  
Special termination benefits
    -       8       -       -  
Participant contributions
    2       1       11       11  
Benefits paid
    (80 )     (75 )     (31 )     (28 )
Medicare Part D Act
    -       -       2       4  
Actuarial gain
    (267 )     (63 )     (24 )     (59 )
Foreign currency exchange rate changes
    (8 )     17       -       1  
Other
    5       3       -       13  
Benefit obligations at September 30
  $ 1,343     $ 1,562     $ 180     $ 205  
Change in plan assets
                               
Value of plan assets at October 1
  $ 1,505     $ 1,311     $ -     $ -  
Actual (loss) return on plan assets
    (261 )     187       -       -  
Employer contributions
    25       58       20       17  
Participant contributions
    2       1       11       11  
Benefits paid
    (80 )     (75 )     (31 )     (28 )
Foreign currency exchange rate changes
    (7 )     13       -       -  
Other
    3       10       -       -  
Value of plan assets at September 30
  $ 1,187     $ 1,505     $ -     $ -  
                                 
Unfunded status of the plans
  $ (156 )   $ (57 )   $ (180 )   $ (205 )
Amounts recognized in the balance sheet
                               
Noncurrent benefit assets
  $ -     $ 74     $ -     $ -  
Current benefit liabilities
    (6 )     (11 )     (14 )     (17 )
Noncurrent benefit liabilities
    (150 )     (120 )     (166 )     (188 )
Net amount recognized
  $ (156 )   $ (57 )   $ (180 )   $ (205 )
Weighted-average plan assumptions
                               
Discount rate
    7.81 %     6.16 %     7.78 %     5.96 %
Rate of compensation increase
    3.73 %     3.74 %     -       -  

 
At September 30, 2008 and 2007, the amounts recognized in accumulated other comprehensive income, before income tax benefits, are shown in the following table.

               
Other postretirement
 
   
Pension plans
   
benefit plans
 
(In millions)
 
2008
   
2007
   
2008
   
2007
 
Net actuarial loss (gain)
  $ 98     $ 159     $ (21 )   $ (45 )
Prior service cost (credit)
    4       2       3       (26 )
Total
  $ 102     $ 161     $ (18 )   $ (71 )


The accumulated benefit obligation for all pension plans was $1,245 million at September 30, 2008 and $1,437 million at September 30, 2007.  Information for pension plans with an accumulated benefit obligation in excess of plan assets follows:

   
2008
   
2007
 
         
Non-
               
Non-
       
   
Qualified
   
qualified
         
Qualified
   
qualified
       
(In millions)
 
plans (a)
   
plans
   
Total
   
plans (a)
   
plans
   
Total
 
Projected benefit obligation
  $ 44     $ 75     $ 119     $ 48     $ 85     $ 133  
Accumulated benefit obligation
    41       67       108       45       74       119  
Fair value of plan assets
    15       -       15       19       -       19  

 
(a)
Includes qualified U.S. and non-U.S. pension plans.
 
F-30
 
 
 
Plan assets
 
The expected long-term rate of return on U.S. pension plan assets for 2008 was 7.75%.  The basis for determining the expected long-term rate of return is a combination of future return assumptions for various asset classes in Ashland’s investment portfolio, historical analysis of previous returns, market indices and a projection of inflation.
 
Ashland’s U.S. pension plan assets are managed by outside investment managers, which are monitored monthly against investment return benchmarks and Ashland’s established investment strategy.  Ashland’s investment strategy is designed to promote diversification, to moderate volatility and to balance the expected long-term rate of return with an acceptable risk level.  Investment managers are selected based on an analysis of, among other things, their investment process, historical investment results, frequency of management turnover, cost structure and assets under management.  Assets are periodically reallocated between investment managers to maintain an appropriate asset mix, diversification of investments and to maximize returns.
 
Ashland’s investment strategy and management practices relative to plan assets of non-U.S. plans generally are consistent with those for U.S. plans, except in those countries where investment of plan assets is dictated by applicable regulations.
 
The weighted-average asset allocations for Ashland’s U.S. and non-U.S. plans at September 30, 2008 and 2007 by asset category follow.
 

           Actual at September 30
(In millions)
Target
   
2008
      2007 
Plan assets allocation
             
Equity securities
55 - 75 %     55 %     72 %
Debt securities
25 - 35 %     29 %     25 %
Other
5 - 15 %     16 %     3 %
          100          100
 

 
Cash flows
 
In fiscal 2009, Ashland expects to contribute $12 million to its non-U.S. pension plans and $5 million to its U.S. pension plans.  The Pension Protection Act of 2006, enacted in August 2006, introduced new minimum funding requirements that become effective for Ashland during fiscal 2009.  As a result, Ashland’s required contributions to its non-U.S. and U.S. pension plans may vary in the future.  The following benefit payments, which reflect future service, are expected to be paid in each of the next five years and in aggregate for five years thereafter.
 
 

           
Other postretirement benefits
     
Pension
   
With Medicare
   
Without Medicare
 
(In millions)
   
benefits
   
Part D subsidy
   
Part D subsidy
 
2009
    $ 78     $ 15     $ 19  
2010
      81       16       20  
2011
      86       17       21  
2012
      91       17       22  
2013
      98       18       23  
2014-2018
      570       92       120  
 

 
Other plans
 
Ashland sponsors qualified savings plans to assist eligible employees in providing for retirement or other future needs.  Under such plans, company contributions amounted to $17 million in 2008, $18 million in 2007 and $17 million in 2006.  Ashland also sponsors various other benefit plans, some of which are required by different countries.  The total noncurrent liabilities associated with these plans totaled $28 million and $21 million as of September 30, 2008 and 2007, respectively.
 

F-31
 
 
 
NOTE O – LITIGATION, CLAIMS AND CONTINGENCIES
 
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.  Although Riley was neither a producer nor a manufacturer of asbestos, its industrial boilers contained some asbestos-containing components provided by other companies.
 
Because claims are frequently filed and settled in large groups, the amount and timing of settlements and number of open claims can fluctuate significantly from period to period.  Since October 1, 2005, Ashland has been dismissed as a defendant in 92% of the resolved claims.  A summary of asbestos claims activity follows.
 

(In thousands)
 
2008
     
2007
     
2006
 
Open claims - beginning of year
 
134
     
162
     
184
 
New claims filed
 
4
     
4
     
6
 
Claims settled
 
(2
   
(2
)    
(3
Claims dismissed
 
(21
   
(30
   
(25
Open claims - end of year
 
115
     
134
     
162
 
 
 
A progression of activity in the asbestos reserve is presented in the following table.
 

(In millions)
2008
   
2007
   
2006
 
Asbestos reserve - beginning of period
$ 610     $ 635     $ 571  
Reserve adjustment
  2       5       104  
Amounts paid
  (40 )     (30 )     (40 )
Asbestos reserve - end of period
$ 572     $ 610     $ 635  
 
 
Ashland retained HR&A to assist in developing and annually updating independent reserve estimates for future asbestos claims and related costs given various assumptions.  The methodology used by HR&A to project future asbestos costs is based largely on Ashland’s recent experience, including claim-filing and settlement rates, disease mix, enacted legislation, open claims, and litigation defense and claim settlement costs.  Ashland’s claim experience is compared to the results of previously conducted epidemiological studies estimating the number of people likely to develop asbestos-related diseases.  Those studies were undertaken in connection with national analyses of the population expected to have been exposed to asbestos.  Using that information, HR&A estimates a range of the number of future claims that may be filed, as well as the related costs that may be incurred in resolving those claims.
 
From the range of estimates, Ashland records the amount it believes to be the best estimate of future payments for litigation defense and claim settlement costs.  During the most recent update of this estimate completed during 2008, it was determined that the reserve for asbestos claims should be increased by $2 million.  This increase in the reserve was based on the results of a non-inflated, non-discounted 51-year model developed with the assistance of HR&A.  This increase resulted in total reserves for asbestos claims of $572 million at September 30, 2008, compared to $610 million at September 30, 2007.
 
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 its asbestos reserve represents the best estimate within a range of possible outcomes.  As a part of the process to develop Ashland’s estimates of future asbestos costs, a range of long-term cost models is 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.  Ashland has estimated that it is reasonably possible that total future litigation defense and claim settlement costs on an inflated and undiscounted basis could range as high as approximately $1 billion, depending on the combination of assumptions selected in the various models.  If actual experience is worse than projected relative to the number of claims filed, the severity of alleged disease associated with those claims or costs incurred to resolve those claims, Ashland may need to increase further the estimates of the costs associated with asbestos claims and these increases could potentially be material over time.
 
 
F-32
 
 
 
Ashland has insurance coverage for most of the litigation defense and claim settlement costs incurred in connection with its asbestos claims, and coverage-in-place agreements exist with the insurance companies that provide most of the coverage currently being accessed.  As a result, increases in the asbestos reserve have been largely offset by probable insurance recoveries.  The amounts not recoverable generally are due from insurers that are insolvent, rather than as a result of uninsured claims or the exhaustion of Ashland’s insurance coverage.
 
Ashland has estimated the value of probable insurance recoveries associated with its asbestos reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage, including an assumption that all solvent insurance carriers remain solvent.  Approximately 65% of the estimated receivables from insurance companies are expected to be due from domestic insurers, of which 83% have a credit rating of B+ or higher by A. M. Best as of September 30, 2008.  The remainder of the insurance receivable is due from London insurance companies, which generally have lower credit quality ratings, and from Underwriters at Lloyd’s, which is reinsured by Equitas (Limited).  Ashland discounts a substantial portion of this piece of the receivable based upon the projected timing of the receipt of cash from those insurers.  During 2007 a significant amount of Equitas’ reinsurance of liabilities became reinsured by National Indemnity Corporation, a member of the Berkshire Hathaway group of insurance companies with a current A. M. Best rating of A++.  As a result Ashland reassessed its assumptions for the receivable recorded from Equitas, and due to the improved credit quality of this portion of the receivable, Ashland increased its recorded receivable by $21 million during 2007.
 
At September 30, 2008, Ashland’s receivable for recoveries of litigation defense and claim settlement costs from insurers amounted to $458 million, of which $77 million relate to costs previously paid.  Receivables from insurers amounted to $488 million at September 30, 2007.  During 2008, the model used for purposes of valuing the asbestos reserve described above, and its impact on the valuation of future recoveries from insurers was updated, which caused an additional $8 million increase in the receivable for probable insurance recoveries.
 
Environmental remediation
 
Ashland is subject to various federal, state and local environmental laws and regulations that require environmental assessment or remediation efforts (collectively environmental remediation) at multiple locations.  At September 30, 2008, such locations included 62 waste treatment or disposal sites where Ashland has been identified as a potentially responsible party under Superfund or similar state laws, 105 current and former operating facilities (including certain operating facilities conveyed to MAP) and about 1,220 service station properties, of which 177 are being actively remediated.  Ashland’s reserves for environmental remediation amounted to $149 million at September 30, 2008, compared to $174 million at September 30, 2007, of which $112 million at September 30, 2008 and $153 million at September 30, 2007 were classified in other noncurrent liabilities on the Consolidated Balance Sheets.  The total reserves for environmental remediation reflect 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, probability techniques, historical experience and other factors are used to identify and evaluate remediation alternatives and their related costs in determining the estimated reserves for environmental remediation.  Ashland regularly adjusts its reserves as environmental remediation continues.  Ashland has estimated the value of its probable insurance recoveries associated with its environmental reserve based on management’s interpretations and estimates surrounding the available or applicable insurance coverage.  At September 30, 2008 and 2007 Ashland’s recorded receivable for these probable insurance recoveries was $40 million and $44 million, respectively.  Environmental remediation expense is included within the selling, general and administrative expense caption of the Statements of Consolidated Income and on an aggregate basis amounted to $11 million in 2008, $15 million in 2007 and $59 million in 2006.  Environmental remediation expense, net of receivable activity, was $7 million in 2008, $7 million in 2007 and $47 million in 2006.
 
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 could be as high as approximately $230 million.  No individual remediation location is material to Ashland, as its largest reserve for any site does not exceed 15% of the remediation reserve.
 
Other legal proceedings
 
In addition to the matters described above, there are various claims, lawsuits and administrative proceedings pending or threatened against Ashland and its current and former subsidiaries.  Such actions are with respect to commercial matters, product liability, toxic tort liability, and other environmental matters, which seek remedies or damages, some of which are for substantial amounts.  While these actions are being contested, their outcome is not predictable.
 
 
F-33
 
 
 
NOTE P SEGMENT INFORMATION
 
Ashland’s businesses are managed along four industry segments:  Performance Materials, Distribution, Valvoline and Water Technologies.  Previously, Ashland operated its wholly owned subsidiary, APAC, as a separate industry segment before it was divested on August 28, 2006, qualifying for discontinued operation treatment in the Consolidated Financial Statements for all periods presented.  Ashland also held, through June 30, 2005, a 38% interest in MAP, which was the primary component of its Refining and Marketing segment.  For further information on this transaction see Note C.
 
Ashland Performance Materials is a worldwide manufacturer and supplier of specialty chemicals and customized services to the building and construction, transportation, metal casting, marine, and packaging and converting markets.  It is a technology leader in metal casting consumables and design services; unsaturated polyester and vinyl ester resins and gelcoats; and high-performance adhesives and specialty resins.  Through this segment, Ashland owns and operates 34 manufacturing facilities and participates in eight manufacturing joint ventures in 15 countries.  This segment competes globally in selected niche markets, largely on the basis of technology and service.
 
Ashland Distribution distributes chemicals, plastics and composite raw materials in North America and plastics in Europe.  Ashland Distribution also provides environmental services, including hazardous and nonhazardous waste collection, recovery, recycling and disposal, in North America.  Deliveries are made in North America through a network of 60 owned or leased facilities, 70 third-party warehouses, rail terminals and tank terminals and 4 locations that perform contract packaging activities for Ashland Distribution.  Distribution of thermoplastic resins in Europe is conducted in 18 countries primarily through 14 third-party warehouses and one owned warehouse.
 
Valvoline is a marketer of premium-branded automotive and commercial oils, automotive chemicals, automotive appearance products and automotive services, with sales in more than 100 countries.  The Valvoline ® trademark was federally registered in 1873 and is the oldest trademark for lubricating oil in the United States.  Valvoline is also engaged in the “fast oil change” business through owned and franchised service centers operating under the VIOC name.
 
Ashland Water Technologies provides specialized chemicals and consulting services for the utility water treatment market, which includes boiler water, cooling water, fuel and waste streams.  Programs include performance-based feed and control automation and remote system surveillance.  This segment also provides process water treatments for the municipal, extraction/mining, pulp and paper processing, food processing, oil refining and chemical processing markets.  It also provides technical products and shipboard services for the ocean-going marine market.  Comprehensive marine programs include water and fuel treatment; maintenance, including specialized cleaners, welding and refrigerant products and sealants; and fire fighting, safety and rescue products and services.  Ashland Water Technologies also provides specialized chemical additives for the paint and coatings industry.  Ashland Water Technologies owns and operates 11 manufacturing facilities in eight countries and participates in three joint ventures.
 
Information about Ashland’s domestic and international operations follows.  Ashland has no material operations in any individual international country and no single customer represented more than 10% of sales and operating revenues in 2008, 2007 or 2006.
 
   
Revenues from
               
Property, plant
 
   
external customers
   
Net assets
   
and equipment - net
 
(In millions)
 
2008
   
2007
   
2006
   
2008
   
2007
   
2008
   
2007
 
United States
  $ 5,549     $ 5,188     $ 5,312     $ 2,226     $ 2,211     $ 775     $ 720  
International
    2,832       2,597       1,921       976       943       337       263  
    $ 8,381     $ 7,785     $ 7,233     $ 3,202     $ 3,154     $ 1,112     $ 983  
 
 
F-34
 
 
 
 
                 
Segment Information
                 
Years Ended September 30
                 
                   
(In millions)
 
2008
   
2007
   
2006
 
Sales and operating revenues
                 
Performance Materials
  $ 1,621     $ 1,580     $ 1,425  
Distribution
    4,374       4,031       4,070  
Valvoline
    1,662       1,525       1,409  
Water Technologies
    893       818       502  
Intersegment sales (a)
                       
Performance Materials
    (151 )     (154 )     (145 )
Distribution
    (12 )     (12 )     (23 )
Valvoline
    (6 )     (1 )     (3 )
Water Technologies
    -       (2 )     (2 )
    $ 8,381     $ 7,785     $ 7,233  
Equity income
                       
Performance Materials
  $ 16     $ 10     $ 10  
Valvoline
    5       4       1  
Water Technologies
    1       1       -  
Unallocated and other
    1       -       -  
      23       15       11  
Other income
                       
Performance Materials
    3       4       4  
Distribution
    3       3       4  
Valvoline
    7       8       7  
Water Technologies
    2       3       4  
Unallocated and other
    16       16       14  
      31       34       33  
    $ 54     $ 49     $ 44  
Operating income
                       
Performance Materials
  $ 52     $ 89     $ 112  
Distribution
    51       41       120  
Valvoline
    83       86       (21 )
Water Technologies
    10       16       14  
Unallocated and other
    17       (16 )     (55 )
    $ 213     $ 216     $ 170  
Assets
                       
Performance Materials
  $ 1,080     $ 997     $ 841  
Distribution
    1,090       1,218       1,148  
Valvoline
    750       751       742  
Water Technologies
    495       514       468  
Unallocated and other (b)
    2,356       2,206       3,391  
    $ 5,771     $ 5,686     $ 6,590  

 
(a)
Intersegment sales are accounted for at prices that approximate market value.
 
(b)
Includes cash, cash equivalents, available-for-sale securities, property and other assets.
 
 
F-35
 
 
 
 
NOTE P SEGMENT INFORMATION (continued)


Ashland Inc. and Consolidated Subsidiaries
                 
Segment Information (continued)
                 
Years Ended September 30
                 
                   
(In millions)
 
2008
   
2007
   
2006
 
Investment in equity affiliates
                 
Performance Materials
  $ 59     $ 49     $ 44  
Valvoline
    15       14       11  
Water Technologies
    3       4       3  
Unallocated and other
    4       6       3  
    $ 81     $ 73     $ 61  
Expense (income) not affecting cash
                       
Depreciation and amortization
                       
Performance Materials
  $ 42     $ 36     $ 31  
Distribution
    24       22       21  
Valvoline
    32       31       28  
Water Technologies
    26       27       17  
Unallocated and other
    21       17       14  
      145       133       111  
Other noncash items (c)
                       
Performance Materials
    (4 )     7       (12 )
Distribution
    2       3       12  
Valvoline
    -       7       6  
Water Technologies
    1       -       (1 )
Unallocated and other
    27       19       15  
      26       36       20  
    $ 171     $ 169     $ 131  
Property, plant and equipment - net
                       
Performance Materials
  $ 393     $ 318     $ 290  
Distribution
    205       204       192  
Valvoline
    232       228       237  
Water Technologies
    104       111       120  
Unallocated and other
    178       122       111  
    $ 1,112     $ 983     $ 950  
Additions to property, plant and equipment
                       
Performance Materials
  $ 48     $ 56     $ 58  
Distribution
    27       29       36  
Valvoline
    42       28       38  
Water Technologies
    17       24       23  
Unallocated and other
    71       17       20  
    $ 205     $ 154     $ 175  

 
(c)
Includes deferred income taxes, equity income from affiliates net of distributions and other items not affecting cash.

 
NOTE Q SUBSEQUENT EVENTS
 
Acquisition
 
On November 13, 2008, Ashland completed its acquisition of Hercules, creating a leading specialty chemicals company.  The acquisition creates a defined core for Ashland composed of three specialty chemical businesses which includes paper and water technologies, specialty resins, and specialty additives and ingredients.
 
The cost to acquire the 112.7 million shares of outstanding Hercules Common Stock at November 13, 2008, paid in cash and Ashland Common Stock, was approximately $2.6 billion, consisting of cash consideration of $2.1 billion and stock consideration, valued as of the original announcement date, of $0.5 billion.  Ashland Common Stock issued as part of the merger acquisition was approximately 10.5 million shares.  In addition, Ashland assumed debt that had a carrying value of approximately $0.8 billion as of the closing date.
 
 
F-36
 
 
 
The merger will be recorded by Ashland during the first quarter of 2009 using the purchase method of accounting in accordance with FASB Statement No. 141 “Business Combinations,” whereby the total purchase price, including qualifying transaction related expenses, will be allocated to tangible and intangible assets acquired based upon their respective fair values.  Due to the timing of the completed merger, a preliminary purchase price allocation was unavailable due to various ongoing tangible and intangible asset and liability appraisals and valuations.
 
Hercules reported net sales of $2.3 billion for the trailing twelve months ended September 30, 2008 and reported assets of $2.7 billion and liabilities of $2.1 billion as of September 30, 2008.
 
Debt issuance
 
In conjunction with the acquisition of Hercules previously described, Ashland secured $2.6 billion in financing from Bank of America Securities LLC and Scotia Capital (USA) Inc. consisting of a $400 million revolving credit facility, a $400 million term loan A facility, an $850 million term loan B facility, a $200 million accounts receivable securitization facility, and a $750 million bridge loan.  The total debt drawn upon the closing of the completed merger was $2.3 billion resulting in ongoing Ashland total debt of approximately $2.6 billion, which included amounts used to fund the extinguishment of certain debt instruments that Hercules held as of the closing date.
 
As a result of the financing and subsequent debt issued to complete this merger, Standard & Poor’s downgraded Ashland’s corporate credit rating to BB- and Moody’s Investor Services downgraded Ashland’s corporate credit rating to Ba2.  In addition, Ashland is now subject to cash and other restrictions from various debt covenants.  These covenants include certain affirmative covenants such as various internal certifications, maintenance of property and applicable insurance coverage as well as negative covenants that include financial covenant restrictions associated with leverage and fixed charge coverage ratios and total net worth.
 
Dividend reduction
 
On November 20, 2008, the Board of Directors of Ashland declared a quarterly cash dividend of 7.5 cents per share, payable December 15, 2008, to shareholders of record at the close of business on December 1, 2008.  This is reduced from the previous quarterly dividend of 27.5 cents per share.

F-37
 
 
 
 
QUARTERLY FINANCIAL INFORMATION
 
The following table presents quarterly financial information and per share data relative to Ashland’s Common Stock.
 

Quarters ended
 
December 31
   
March 31
   
June 30
   
September 30
 
(In millions except per share data)
 
2007
   
2006
   
2008
   
2007
   
2008
   
2007
   
2008
(a)   
2007
(b) 
Sales and operating revenues
  $ 1,905     $ 1,803     $ 2,059     $ 1,915     $ 2,201     $ 1,983     $ 2,216     $ 2,085  
Operating income
    46       58       52       41       87       91       28       26  
Income (loss) from continuing
                                                               
operations
    38       53       72       31       66       86       (1 )     32  
Net income (loss)
    33       49       72       49       72       100       (10 )     32  
                                                                 
Basic earnings per share
                                                               
Continuing operations
  $ .61     $ .82     $ 1.14     $ .49     $ 1.04     $ 1.37     $ (.01 )   $ .52  
Net income
    .52       .76       1.14       .78       1.15       1.60       (.15 )     .52  
                                                                 
Diluted earnings per share
                                                               
Continuing operations
  $ .60     $ .81     $ 1.13     $ .49     $ 1.03     $ 1.35     $ (.01 )   $ .51  
Net income
    .52       .75       1.13       .77       1.13       1.58       (.15 )     .51  
                                                                 
Regular cash dividends per share
  $ .275     $ .275     $ .275     $ .275     $ .275     $ .275     $ .275     $ .275  
Special cash dividend per share (c)
-     $ 10.20       -       -       -       -       -       -  
                                                                 
Market price per common share
                                                               
     High
  $ 68.99     $ 71.04     $ 49.88     $ 70.20     $ 58.58     $ 66.03     $ 48.97     $ 66.77  
     Low
    45.79       57.26       39.82       61.66       47.01       58.44       26.81       50.23  
 

 
(a)  
Fourth quarter results include a decrease in operating income of $7 million for severance costs associated with cost structure efficiency initiatives in Performance Materials and Water Technologies.
 
(b)  
Fourth quarter results include an increase in operating income of $5 million related to the elimination of a one-month financial reporting lag for foreign operations and a decrease in income of $11 million related to foreign postretirement medical plans.
 
(c)  
Ashland paid an additional dividend in October 2006 of $10.20 per share as part of the use of proceeds from the APAC divestiture.  See Note B for further information.





 
                               
Ashland Inc. and Consolidated Subsidiaries
                             
Schedule II - Valuation and Qualifying Accounts
                             
                               
   
Balance at
   
Provisions
               
Balance
 
   
beginning
   
charged to
   
Reserves
   
Other
   
at end
 
(In millions)
 
of year
   
earnings
   
utilized
   
changes
   
of year
 
Year ended September 30, 2008
                             
Reserves deducted from asset accounts
                             
Accounts receivable
  $ 41     $ 10     $ (21 )   $ 3     $ 33  
Inventories
    13       2       (4 )     -       11  
Year ended September 30, 2007
                                       
Reserves deducted from asset accounts
                                       
Accounts receivable
  $ 40     $ 24     $ (15 )   $ (8 )   $ 41  
Inventories
    16       2       (4 )     (1 )     13  
Year ended September 30, 2006
                                       
Reserves deducted from asset accounts
                                       
Accounts receivable
  $ 33     $ 12     $ (11 )   $ 6     $ 40  
Inventories
    11       6       (1 )     -       16  

 
F-38
 
 
 
 
Ashland Inc. and Consolidated Subsidiaries
                             
Five-Year Selected Financial Information
                             
Years Ended September 30
                             
                               
(In millions except per share data)
 
2008
   
2007
   
2006
   
2005
   
2004
 
Summary of operations
                             
Sales and operating revenues
  $ 8,381     $ 7,785     $ 7,233     $ 6,731     $ 5,776  
Costs and expenses
                                       
Cost of sales and operating expenses
    7,056       6,447       6,030       5,545       4,721  
Selling, general and administrative expenses
    1,166       1,171       1,077       1,079       968  
      8,222       7,618       7,107       6,624       5,689  
Equity and other income
    54       49       44       564       438  
Operating income
    213       216       170       671       525  
Gain (loss) on the MAP Transaction
    20       (3 )     (5 )     1,284       -  
Loss on early retirement of debt
    -       -       -       (145 )     -  
Net interest and other financing income (costs)
    28       46       47       (82 )     (114 )
Income from continuing operations
                                       
before income taxes
    261       259       212       1,728       411  
Income tax (expense) benefit
    (86 )     (58 )     (29 )     230       (100 )
Income from continuing operations
    175       201       183       1,958       311  
Income (loss) from discontinued operations
    (8 )     29       224       46       67  
Net income
  $ 167     $ 230     $ 407     $ 2,004     $ 378  
                                         
Balance sheet information (as of September 30)
                                       
Current assets
  $ 3,032     $ 3,276     $ 4,250     $ 3,757     $ 2,302  
Current liabilities
    1,230       1,152       2,041       1,545       1,815  
Working capital
  $ 1,802     $ 2,124     $ 2,209     $ 2,212     $ 487  
                                         
Total assets
  $ 5,771     $ 5,686     $ 6,590     $ 6,815     $ 7,502  
                                         
Short-term debt
  $ -     $ -     $ -     $ -     $ 40  
Long-term debt (including current portion)
    66       69       82       94       1,508  
Stockholders’ equity
    3,202       3,154       3,096       3,739       2,706  
Capital employed
  $ 3,268     $ 3,223     $ 3,178     $ 3,833     $ 4,254  
                                         
Cash flow information
                                       
Cash flows from operating activities from
                                       
continuing operations
  $ 478     $ 189     $ 145     $ (76 )   $ 33  
Additions to property, plant and equipment
    205       154       175       180       137  
Cash dividends
    69       743       78       79       77  
                                         
Common stock information
                                       
Diluted earnings per share
                                       
Income from continuing operations
  $ 2.76     $ 3.15     $ 2.53     $ 26.23     $ 4.36  
Net income
    2.63       3.60       5.64       26.85       5.31  
Regular cash dividends per share
    1.10       1.10       1.10       1.10       1.10  
Special cash dividend per share - Note L
    -       10.20       -       -       -  
 

 
F-39
 
EXHIBIT 4.2

[EXECUTION COPY]








ASHLAND OIL, INC.

and

CITIBANK, N.A.,
Trustee




Amendment and Restatement

as of August 15, 1990

of the

Indenture

Dated as of August 15, 1989




Debt Securities



 
 
 
 

AMENDMENT AND RESTATEMENT as of August 15, 1990, of the INDENTURE, dated as of August 15, 1989, between ASHLAND OIL, INC., a corporation duly organized and existing under the laws of the Commonwealth of Kentucky (herein called the “Company”), having its principal office at 1000 Ashland Drive, Russell, Kentucky 41169 and CITIBANK, N.A., a national banking association duly incorporated and existing under the laws of the United States (herein called the “Trustee”).

 
RECITALS OF THE COMPANY

The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (herein called the “Securities”), to be issued in one or more series as provided in this Indenture.

All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done.


NOW, THEREFORE, THIS INDENTURE WITNESSETH:

For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities or of series thereof, as follows:


ARTICLE ONE

Definitions and Other Provisions
of General Application

SECTION 1.01. Definitions . For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:

(1)          the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular;

(2)          all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein;

(3)          all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term “generally accepted accounting principles” with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and

(4)          the words “herein”, “hereof” and “hereunder” and other words of similar import refer to this Inden­ture as a whole and not to any particular Article, Section or other subdivision.

Certain terms, used solely or principally within an Article of this Indenture, may be defined in that Arti­cle.

“Act”, when used with respect to any Holder, has the meaning specified in Section 1.04.

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or con­trolled by or under direct or indirect common control with such specified Person.  For the purposes of this definition, “controls” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Authenticating Agent” means any Person authorized by the Trustee pursuant to Section 6.14 to act on behalf of the Trustee to authenticate securities of one or more series.

“Authorized Newspaper” means a newspaper of general circulation in the place of publication, printed in the English Language or official language of the country of publication and customarily published on each Business Day, whether or not published on Saturdays, Sundays or holidays.  Whenever successive weekly publications in an Authorized Newspaper are authorized or required hereunder, they may be made (unless otherwise expressly provided herein) on the same or different days of the week and in the same or different Authorized Newspapers.

“Bearer Security” means any Security which is not registered in the Security Register as to Principal (including without limitation any Security in temporary or definitive global bearer form).

“Board of Directors” means either the board of directors of the Company or any duly authorized committee of that board.

“Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee.

“Business Day”, when used with respect to any Place of Payment or place of publication, means any day which is not a day on which banking institutions generally in that Place of Payment or place of publication are autho­rized or obligated by or pursuant to law, regulation or executive order to close or as specified for a series of Securities pursuant to Section 3.01 or as specified for any Security in such Security.

“Change in Control” has the meaning specified in Section 11.07.

“Commission” means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time.

“Company” means the Person named as the “Company” paragraph this
in the first of instrument until a successor corporation shall have become such pursuant to the appli­cable provisions of this Indenture, and thereafter “Company” shall mean such successor corporation, and shall also mean any obligor upon the Securities authenticated and delivered under this Indenture.

“Company Request”, “Request of the Company”, “Company Order” or “Order of the Company” means a written request or order signed in the name of the Company by its Chairman of the Board, the Vice Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Controller, an Assistant Con­troller, its Secretary or an Assistant Secretary, and delivered to the Trustee.

“Corporate Trust Office” means the office of the Trustee in New York, New York, at which at any particular time its corporate trust business shall be principally administered, which office at the date hereof is located at 120 Wall Street, New York, N.Y. 10043, except that, with respect to presentation of Securities for payment or regis­tration of transfers and exchanges and the location of the Security Registrar, such term means the office or agency of the Trustee in said city at which at any particular time its corporate agency business shall be conducted, which at the date hereof is located at 111 Wall Street, New York, N.Y. 10043.

“corporation” includes corporations, associations, companies and business trusts.

“Coupon” or “coupon” means any interest coupon appertaining to a Bearer Security.

“Defaulted Interest” has the meaning specified in Section 3.07.

“Depositary” means, with respect to the Securities of any series issuable or issued in whole or in part in the form of one or more Global Securities, the Person designated as Depositary by the Company pursuant to Section 3.01 until a successor Depositary shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Depositary” shall mean or include each Person who is then a Depositary hereunder, and if at any time there is more than one such Person, “Depositary” as used with respect to the Securities of any such series shall mean the Depositary with respect to the Securities of that series.

“Dollar” means the coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts.

“ECU” means the European Currency Unit as defined and revised from time to time by the Council of the European Communities.

“Euroclear” means the operator of the Euroclear System.

“European Communities” means the European Economic Community, the European Coal and Steel Community and the European Atomic Energy Community.

“Event of Default” has the meaning specified in Section 5.01.

“Foreign Currency” means a currency issued by the government of any country other than the United States of America.

“Full Rating Category” has the meaning specified in Section 11.07.

“Global Security” means a Registered Security or a Bearer Security evidencing all or part of a series of Securities issued to the Depositary for such series in accordance with Section 3.03.

“Holder” or “holder” means, with respect to a Registered Security, the Person in whose name at the time a particular Registered Security is registered in the Security Register and, with respect to a Bearer Security and/or Coupon, the bearer thereof.

“Indenture” means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of particular series of Securi­ties established as contemplated by Section 3.01.

“Interest Payment Date”, when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security.

“Maturity”, when used with respect to any Secur­ity, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise.

“Officers’ Certificate” means a certificate signed by the Chairman of the Board, the Vice Chairman of the Board, the President or any Vice President, and by the Treasurer, the Controller, the Secretary or any Assistant Treasurer, Assistant Controller or Assistant Secretary, of the Company, and delivered to the Trustee. Each such Officers’ Certificate shall contain the statements Provided in Section 1.02, if applicable.

“Opinion of Counsel” means a written opinion of counsel, who may be counsel for or an employee of the Company and who shall be reasonably acceptable to the Trustee. Each Opinion of Counsel shall contain the state­ments provided in Section 1.02, if applicable.

“Outstanding” or “outstanding”, when used with respect to Securities, means, as of the date of determi­nation, all Securities theretofore authenticated and deliv­ered under this Indenture, except:

(i)   Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation;

(ii)   Securities for whose payment or redemption money in the necessary amount and in the required currency or currency unit has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Secur­ities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and

(iii) Securities which have been paid pursuant to Section 3.06 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securi­ties in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a .bona fide purchaser in whose hands such Securities are valid obligations of the Company;

provided, however , that in determining whether the Holders of the requisite principal amount of the Outstanding Securi­ties have given any request, demand, authorization, direc­tion, notice, .consent or waiver hereunder or whether a quorum is present at a meeting of Holders of Outstanding Securities or the number of votes entitled to be cast by each Holder of a Security in respect of such security at any such meeting (1) the principal amount of a Security denom­inated in a Foreign Currency or currency unit shall be the Dollar equivalent (as determined by the Company in good faith) as of the date of original issuance of such Security of the principal amount of such Security and (ii) Securities owned by the Company or any other obligor upon the Secur­ities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstand­ing, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, or upon any such determination as to the presence of a quorum, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledge establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor.

“Paying Agent” means any Person authorized by the Company to pay the Principal of (and Premium, if any) or interest, if any, on any Securities on behalf of the Company.

“Person” or “person” means any individual, corpo­ration, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

“Place of Payment”, when used with respect to the Securities of any series, means the place or places where, subject to the provisions of Section 10.02, the principal of (and premium, if any) and interest on the Securities of that series are payable as specified in accordance with Section 3.01.

“Predecessor Security” of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such Particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security or a Security to which a mutilated, destroyed, lost or stolen coupon appertains shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security or the Security to which the mutilated, destroyed, lost or stolen coupon appertains, as the case may be.

“Redemption Date”, when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture.

“Redemption Price”, when used with respect to any Security to be redeemed, means the price, in the currency or currency unit in which such Security is payable, at which it is to be redeemed pursuant to this Indenture.

“Registered Security” means any Security (includ­ing without limitation any Security in temporary or defin­itive global registered form) which is registered in the Security Register.

“Regular Record Date” for the interest payable on any Interest Payment Date on the Registered Securities of any series means she date specified for that purpose as contemplated by Section 3.01, which date shall be, unless otherwise specified pursuant to Section 3.01, the fifteenth day preceding such Interest Payment pate, whether or not such day shall be a Business Day.
 
“Required Currency” has the meaning specified in Section 1.15.

“Responsible Officer”, when used with respect to the Trustee, means the chairman or any vice chairman of the board of directors, the chairman or any vice chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, any assistant vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any senior trust officer, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular appropriate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the partic­ular subject.

“Securities” has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture.

“Security Register” and “Security Registrar” have the respective meanings specified in Section 3.05.

“Special Record Date” for the payment of any Defaulted Interest means a date fixed by the Trustee pursu­ant to Section 3.07.

“Stated Maturity”, when used with respect to any Security (or Coupon, if any, representing an installment of interest) or any installment of principal thereof or interest thereon, means the date specified in such Security (or Coupon) as the fixed date on which the Principal of such Security or such installment of principal or interest is due and payable.

“Subsidiary” means any corporation (a) substan­tially all the property of which is located, and substan­tially all the operations of which are conducted, in the continental United States of America, and (b) of which the Company, directly or indirectly, owns more than fifty percent (50%) of the outstanding stock which at the time shall have by the terms thereof ordinary voting power to elect directors of such corporation, irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency, or (c) any such corporation of which such percentage of shares of outstand­ing stock of the character described in the foregoing clause (b) shall at the time be owned, directly or indi­rectly, by the Company and one or more Subsidiaries as defined in the foregoing clauses (a) and (b) or by one or more such Subsidiaries.

“Trustee” means the Person named as the “Trustee” in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Trustee” shall mean or include each Person who is then a Trustee hereunder, and if at any time there is more than one such Person, “Trustee” as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series.

“Trust Indenture Act” means the Trust Indenture Act of 1939 as in force at the date as of which this instru­ment was executed, except as provided in Section 9.05.

“United States” means the United States of America (including the states and the District of Columbia), its territories, its possessions, the Commonwealth of Puerto Rico and other areas subject to its jurisdiction.

“United States Alien” means any Person who, for United States Federal income tax purposes, is a foreign corporation, a nonresident alien individual, a nonresident alien fiduciary of a foreign estate or trust, or a foreign partnership one or more of the members of which is, for United States Federal income tax purposes, a foreign cor­poration, a nonresident alien individual or a nonresident alien fiduciary of a foreign estate or trust.

“Vice President”, when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title “vice president”.

“Voting Stock” means stock of any class or classes (however designated) the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or persons perform­ing similar functions) of the corporation, association or other business entity in question, even though the right so to vote is at the time suspended by reasons of the happening of such a contingency.

SECTION 1.02. Compliance Certificates and Opinions . Except as otherwise expressly provided by this Indenture, upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers’ Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished.

Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include:

(1)          a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto;

(2)          a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

(3)          a statement that, in the opinion of each such individual, he has made such examination or investi­gation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(4)          a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with.

SECTION 1.03. Form of Documents Delivered to Trustee . In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certi­fied by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one docu­ment, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.

Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal mat­ters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or repre­sentations with respect to such matters are erroneous.

Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.

SECTION 1.04. Acts of Holders . (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing, or by any Person duly authorized by means of any written certification, proxy or other authorization furnished by a Depositary. If Securities of a series are issuable as Bearer Securities, any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders of such the record of Holders of Securities of such series voting in series may, alternatively, be embodied in and evidenced by the record of Holders of Securities of such series voting in favor thereof, either in person or by proxies duly appointed in writing, at any meeting of Holders of Securities of such series duly called and held in accordance with the provi­sions of Article Thirteen, or a combination of such instru­ments and any such record. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments or record are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments or record (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments or so voting at any such meeting or, in the case of the Depositary, furnishing the written certification, proxy or other authorization pursuant to which such instrument or instruments are signed. Proof of execution of any such instrument or of a writing appointing any such agent or authorizing any such Person or any such written certification or proxy shall be sufficient for any purpose of this Indenture and (subject to Sec­tion 6.01) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. The record of any meeting of Holders of Securities shall be proved in the manner Provided in Section 13.06.

(b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certif­icate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also consti­tute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems suffi­cient.

(c) The principal amount and serial numbers of Bearer Securities held by any Person, and the date of holding the same, may be proved by the production of such Bearer Securities or by a certificate executed by any trust company, bank, banker or other depositary, wherever situated, showing that at the date therein mentioned such Person had on deposit with such depositary, or exhibited to it, the Bearer Securities therein described; or such facts may be proved by the certificate or affidavit of the Person holding such Bearer Securities, if such certificate or affidavit is deemed by the Trustee to be satisfactory. The Trustee and the Company may assume that such ownership of any Bearer Security continues until (1) another certificate or affidavit bearing a later date issued in respect of the same Bearer Security is produced, (2) such Bearer Security is produced to the Trustee by some other Person, (3) such Bearer Security is surrendered in exchange for a Registered Security or (4) such Bearer Security is no longer Outstand­ing.

(d) The fact and date of execution of any such instrument or writing pursuant to clause (c) above, the authority of the Person executing the same and the principal amount and serial numbers of Bearer Securities held by the Person so executing such instrument or writing and the date of holding the same may also be proved in any other manner which the Trustee deems sufficient; and the Trustee may in any instance require further proof with respect to any of the matters referred to in this clause.

(e) The Principal amount and serial numbers of Registered Securities held by any Person and the date of holding the same shall be proved by the Security Register.

(f) Any request, demand, authorization, direc­tion, notice, consent, waiver or other Act of a Holder shall bind every future Holder of the same Security and/or Coupon and the Holder of every Security and/or Coupon issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reli­ance thereon, whether or not notation of such action is made upon such Security and/or Coupon.

(g) If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of busi­ness on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Securities shall be computed as of such record date; provided that no such authorization, agreement or consent by the holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date.

SECTION 1.05. Notices. etc.. to Trustee and Company . Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with,

(1)          the Trustee by any Holder or by the Company shall be made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office,
Attention:  Corporate Trust Administration and unless otherwise herein expressly provided, any such document shall be deemed to be sufficiently made, given, fur­nished or filed upon its receipt by a Responsible Officer of the Trustee assigned to its Corporate Trust Administration, or

(2)          the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company, Attention: Secretary.

SECTION 1.06. Notice to Holders; Waiver . Where this Indenture provides for notice to Holders of any event:

(i)          if any of the Securities affected by such event are Registered Securities, such notice shall be sufficiently given (unless otherwise herein expressly Provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, within the time prescribed for the giving of such notice, and

(ii)          if any of the Securities affected by such event are Bearer Securities, such notice shall be sufficiently given (unless otherwise herein expressly provided or unless otherwise specified in such Securi­ties) if published once in an Authorized Newspaper in New York City and London and such other cities as shall be specified with respect to such Securities and mailed to such Persons whose names and addresses were previ­ously filed with the Trustee within the two preceding years pursuant to Section 7.03(d), within the time prescribed for the giving of such notice.

In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice to Holders of Registered Securities by mail, then such notification as shall be made with the approval of the Trustee shall constitute a suffi­cient notification for every purpose hereunder. In any case where notice to Holders of Registered Securities is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder of a Registered Security shall affect the sufficiency of such notice with respect to other Holders of Registered Securi­ties or the sufficiency of any notice to Holders of Bearer Securities given as provided herein.

In case by reason of the suspension of publication of any Authorized Newspaper or Authorized Newspapers or by reason of any other cause it shall be impracticable to publish any notice to Holders of Bearer Securities as provided above, then such notification to Holders of Bearer Securities as shall be given with the approval of the Trustee shall constitute sufficient notice to such Holders for every purpose hereunder. Neither the failure to give notice by publication to Holders of Bearer Securities as provided above, nor any defect in any notice so published, shall affect the sufficiency of any notice to Holders of Registered Securities given as provided herein.

Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders of Securities shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.

SECTION 1.07. Conflict with Trust Indenture Act . If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Indenture by any of the provisions of the Trust Inden­ture Act, such required provision shall control.

SECTION 1.08. Effect of Headings and Table of Contents . The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.

SECTION 1.09. Successors and Assigns . All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.

SECTION 1.10. Separability Clause . In case any provision in this Indenture or in the Securities or Coupons shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

SECTION 1.11. Benefits of Indenture . Nothing in this Indenture or in the Securities or Coupons, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture.

SECTION 1.12. Governing Law . This Indenture and the Securities and Coupons shall be governed by and con­strued in accordance with the laws of the State of New York.

SECTION 1.13. Legal Holidays . Except as other­wise specified as contemplated by Section 3.01, in any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities or Coupons, if any) payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity, and, if so made, no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be, to the next succeeding Business Day at such Place of Payment.

SECTION 1.14. Moneys of Different Currencies To Be Segregated . The Trustee shall segregate moneys, funds and accounts held by the Trustee hereunder in one currency (or unit thereof) from any moneys, funds or accounts in any other currencies (or units thereof) notwithstanding any provision herein which would otherwise permit the Trustee to commingle such amounts.

SECTION 1.15. Payment To Be in Proper Currency . In the case of any Security denominated in any particular currency or currency unit (the “Required Currency”), except as otherwise provided herein, therein or in or pursuant to the related Board Resolution or supplemental indenture, the obligation of the company to make any payment of principal, premium or interest thereon shall not be discharged or satisfied by any tender by the Company, or recovery by the Trustee, in any currency or currency unit other than the Required Currency, except to the extent that such tender or recovery shall result in the Trustee timely holding the full amount of the Required Currency then due and payable. If any such tender or recovery is made in other than the Required Currency, the Trustee may take such actions as it considers appropriate to exchange such other currency or currency unit for the Required Currency. The costs and risks of any such exchange, including without limitation the risks of delay and exchange rate fluctuation, shall be borne by the Company, the Company shall remain fully liable for any shortfall or delinquency in the full amount of the Required Currency then due and payable and in no circum­stances shall the Trustee be liable therefor. The Company hereby waives any defense of payment based upon any such tender or recovery which is not in the Required Currency, or which, when exchanged for the Required Currency by the Trustee, is less than the full amount of the Required Currency then due and payable.

SECTION 1.16. Language of Notices, etc . Any request, demand, authorization, direction, notice, consent or waiver required or permitted under this Indenture shall be in the English language, except that any published notice may be in an official language of the country of publica­tion.

ARTICLE TWO

Security Forms

SECTION 2.01. Forms Generally . The Securities of each series and the Coupons, if any, to be attached thereto shall be in substantially the forms (including temporary or definitive global form) as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities and Coupons, if any, as evidenced by their execution of the Securities and Coupons, if any. If the forms of Securities or Coupons of any series (or any such temporary or definitive Global Security) are established by, or by action taken pursuant to a Board Resolution, a copy of the Board Resolution together with an appropriate record of any action taken pursuant thereto, which Board Resolution or record of such action shall have attached thereto a true and correct copy of the forms of Security approved by or pursuant to such Board Resolution, shall be certified by the Secretary or an Assistant Secre­tary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Sec­tion 3.03 for the authentication and delivery of such Securities (or any such temporary or definitive Global Security) or Coupons.

Unless otherwise specified as contemplated by Section 3.01, Securities in bearer form shall have interest Coupons attached.

The definitive Securities and Coupons, if any, shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities and Coupons, if any, as evidenced by their execution of such Securities and Coupons, if any.

SECTION 2.02. Form of Trustee’s Certificate of Authentication . The Trustee’s certificate of authentication shall be in substantially the following form:

This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

[full name of Trustee]
as Trustee


By ___________________________________________
     Authorized Officer

SECTION 2.03. Securities in Global Form . If Securities of a series are issuable in global form, as specified as contemplated by Section 3.01, then, notwith­standing clause (8) of Section 3.01 and the provisions of Section 3.02, such Security shall represent such of the Outstanding Securities of such series as shall be specified therein and may provide that it shall represent the aggre­gate amount of Outstanding Securities from time to time endorsed thereon and that the aggregate amount of Outstand­ing Securities represented thereby may from time to time be reduced to reflect exchanges. Any endorsement of a Security in global form to reflect the amount, or any increase or decrease in the amount, of Outstanding Securities repre­sented thereby shall be made by the Trustee in such manner and upon instructions given by such Person or Persons as shall be specified therein or in the Company Order to be delivered to the Trustee pursuant to Section 3.03 or Sec­tion 3.04. Subject to the provisions of Section 3.03 and, if applicable, Section 3.04, the Trustee shall deliver and redeliver any Security in definitive global bearer form in the manner and upon written instructions given by the Person or Persons specified therein or in the applicable Company Order. If a Company Order pursuant to Section 3.03 or 3.04 has been, or simultaneously is, delivered, any instructions by the Company with respect to endorsement or delivery or redelivery of a Security in global form shall be in writing but need not comply with Section 1.02 and need not be accompanied by an Opinion of Counsel. The beneficial owner of a Note represented by a definitive Global Security in bearer form may, upon no less than 30 days’ written notice to the Trustee, given by the beneficial owner through a Depositary, exchange its interest in such definitive Global Security for a definitive Bearer Note or Notes, or a definitive Registered Note or Notes, of any authorized denomination. No individual definitive Bearer Note will be delivered in or to the United States.

The provisions of the last sentence of the third to the last paragraph of Section 3.03 shall apply to any Security represented by a Security in global form if such Security was never issued and sold by the Company and the Company delivers to the Trustee the Security in global form together with written instructions (which need not comply with Section 1.02 and need not be accompanied by an Opinion of Counsel) with regard to the reduction in the principal amount of Securities represented thereby, together with the written statement contemplated by the last sentence of the third to the last paragraph of Section 3.03.

Notwithstanding the provisions of Sections 2.01 and 3.07, unless otherwise specified as contemplated by Section 3.01, payment of principal of and any premium and any interest on any Security in definitive global form shall be made to the Person or Persons specified therein.

ARTICLE THREE

The Securities

SECTION 3.01. Amount Unlimited; Issuable in Series . The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited.

The Securities may be issued in one or more series. There shall be established in or pursuant to a Board Resolution and set forth in an Officers’ Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series,

(1)   the title of the Securities of the series (which shall distinguish the Securities of the series from all other Securities);

(2)          any limit upon the aggregate principal amount of the Securities of the series which may be authenti­cated and delivered under this Indenture (except for Securities authenticated and delivered upon registra­tion of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Sec­tion 3.04, 3.05, 3.06, 9.06 or 11.06 and except for any Securities which, pursuant to Section 3.03 are deemed never to have been authenticated and delivered hereun­der);

(3)        the date or dates on which the principal (and premium, if any) of any of the Securities of the series are payable or the method of determination thereof;

(4)        the rate or rates, or the method of determi­nation thereof, at which any of the Securities of the series shall bear interest, if any, the date or dates from which such interest shall accrue, the Interest Payment Dates on which such interest shall be payable and the Regular Record Date for the interest payable on any Registered Securities on any Interest Payment Date;

(5)        the place or places where the principal of (and premium, if any) and interest, if any, on any of the Securities and Coupons, if any of the series shall be payable and the office or agency for the Securities of the series maintained by the Company pursuant to Section 10.02;

(6)         the period or periods within which, the price or prices at which and the terms and conditions upon which any of the Securities and any Coupons of the series may be redeemed, in whole or in part, at the option of the Company;

(7)         the terms of any sinking fund and the obli­gation, if any, of the Company to redeem or purchase Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which Securities of the series shall be redeemed or purchased, in whole or in part;

(8)        if other than denominations of $1,000, if registered, and $5,000, if bearer, and in any integral multiple of the applicable denominations for Securities denominated in Dollars, the denominations in which the Securities of the series shall be issuable;

(9)        if other than the principal amount thereof, the portion of the principal amount of any of the Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 5.02;

(10)           the application, if any, of Section 4.03, or such other means of satisfaction and discharge as may be specified for the Securities and Coupons, if any, for a series;

(11)           any deletions or modifications of or additions to the Events of Default set forth in Section 5.01 or covenants of the Company set forth in Article Ten pertaining to the Securities of the series (including without limitation whether the provisions of Sec­tion 10.08 or 10.09 shall not be applicable to the Securities of the series);

(12)           the forms of the Securities and Coupons, if any, of the series;

(13)          if other than Dollars, the coin or currency or currencies, or currency unit or units, in which payment of the principal of (and premium, if any) and interest, if any, on any of the Securities of the series shall be payable;

(14)           if the principal of (and premium, if any) or interest, if any, on any of the Securities of the series are to be payable at the election of the Company or a Holder thereof, or under some or all other circum­stances, in a coin or currency or currencies, or currency unit or units, other than that in which the Securities are denominated, the period or periods within which, and the terms and conditions upon which, such election may be made, or the other circumstances under which any of the Securities are to be so payable, and any provision requiring the Holder .to bear currency exchange costs by deduction from such payments;

(15)           if the amount of payments of principal (and premium, if any) or interest, if any, on any of the Securities of the series may be determined with refer­ence to an index based on (i) a coin or currency or currencies, or currency unit or units other than that in which such Securities are stated to be payable or (ii) any method not inconsistent with the provisions of this Indenture specified in or pursuant to such Board Resolution, then in each case (i) and (ii) the manner in which such amounts shall be determined;

(16)           whether the Securities of the series are to be issued as Registered Securities or Bearer Securities (with or without Coupons); whether Bearer Securities may be exchanged for Registered Securities of the series and whether Registered Securities may be exchanged for Bearer Securities of the series (if permitted by applicable laws and regulations) and the circumstances under which and the place or places where any such exchanges, if permitted, may be made; and whether the Securities of the series shall be issued in whole or in part in the form of one or more Global Securities and, in such case, the Depositary for such Global Security or Securities and whether any Global Securities of the series are to be issuable initially in temporary form and whether any Global Securities of the series are to be issuable in definitive form with or without coupons and, if so, whether beneficial owners of interests in any such definitive Global Security may exchange such interests for Securities of such series and of like tenor of any authorized form and denomination and the circumstances under which and the place or places where any such exchanges may occur, if other than in the manner provided in Section 3.05;

(17)           whether and under what circumstances and with what procedures and documentation the Company will pay additional amounts on any of the Securities and Cou­pons, if any, of the series to any Holder who is not a U.S. Person (including a definition of such term), in respect of any tax, assessment or governmental charge withheld or deducted and, if so, whether the Company will have the option to redeem such Securities rather than pay additional amounts (and the terms of any such option);
 
     (18)           the Person to whom any interest on any Registered Security of the series shall be payable, if other than the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, the manner in which, or the Person to whom, any interest on any Bearer Security of the series shall be payable, if otherwise than upon presentation and surrender of the Coupons appertaining thereto as they severally mature and to the extent to which, or the manner in which, any interest payable on a tempo­rary Global Security on an Interest Payment Date will be paid if other than in the manner provided in Sec­tion 3.04; and

(19)           any other terms of any of the Securities of the series.

All Securities of any one series and the Coupons appertaining to any Bearer Securities of such series shall be substantially identical except, in the case of Registered Securities, as to denomination and except as may otherwise be provided in or pursuant to the Board Resolution referred to above and (subject to Section 3.03) set forth in the Officers’ Certificate referred to above or in any such indenture supplemental hereto.

At the option of the Company, interest on the Registered Securities of any series that bears interest may be paid by mailing a check to the address of any Holder as such address shall appear in the Securities Register.

If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of such Board Resolution shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers’ Certif­icate setting forth the terms of the series.

SECTION 3.02. Denominations . The Securities of each series shall be issuable in such denominations as shall be specified as contemplated by Section 3.01. In the absence of any such provisions with respect to the Secur­ities of any series, the Securities of such series denomi­nated in Dollars shall be issuable in denominations of $1,000, if registered, and $5,000, if bearer, and in any integral multiple of the applicable denominations. Secur­ities of each series shall be numbered, lettered or other­wise distinguished in such manner or in accordance with such plan as the officers of the Company executing the same may determine with the approval of the Trustee.

SECTION 3.03. Execution, Authentication. Delivery and Dating . The Securities shall be executed on behalf of the Company by manual or facsimile signatures of its Chairman, its President or any of its Vice Presidents or its Treasurer, under its corporate seal reproduced thereon attested by the manual or facsimile signature of its Secre­tary or one of its Assistant Secretaries. Any Coupons shall be executed on behalf of the Company by the manual or facsimile signature of any such officer of the Company.

Securities and Coupons bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.

At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series, together with any Coupons appertaining thereto, executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authen­ticate and deliver such Securities; provided, however , that, in connection with its original issuance, no Bearer Security (including any temporary Bearer Security issued pursuant to Section 3.04 which is not a Global Security) shall be mailed or otherwise delivered to any location in the United States; and provided; further that a Bearer Security may be delivered outside the United States in connection with its original issuance only if the Person entitled to receive such Bearer Security (including any temporary Bearer Security issued pursuant to Section 3.04 which is not a Global Security) shall have furnished a certificate in the form set forth in Exhibit A.1 to this Indenture, dated on the earlier of the first Interest Payment Date and the date of the delivery -of the Bearer Security in definitive form. If any Security shall be represented by a definitive Global Security in bearer form, then, for purposes of this Section and Sec­tion 3.04, the notation of a beneficial owner’s interest therein upon original issuance of such Security or upon exchange of a portion of a temporary Global Security shall be deemed to be delivery in connection with its original issuance of such beneficial owner’s interest in such definitive Global Security in bearer form. Except as permitted by Section 3.06, the Trustee shall not authenticate and deliver any Bearer Security unless all appurtenant Coupons for interest then matured have been detached and canceled.

If the forms or terms of the Securities of the series and any related Coupons have been established by or pursuant to one or more Board Resolutions as permitted by Sections 2.01 and 3.01, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, an Opinion of Counsel stating:

(a)        if the forms of such Securities and any Coupons have been established by or pursuant to a Board Resolution as permitted by Section 2.01, that such forms have been established in conformity with the provisions of this Indenture;

(b)        if the terms of such Securities and any Coupons have been or are to be established by or pursuant to a Board Resolution as permitted by Sec­tion 3.01, that such terms (or in the case of the issuance of Securities pursuant to the next paragraph, the procedures for determining such terms) have been established in conformity with the provisions of this Indenture; and

(c)        that such Securities, together with any Coupons appertaining thereto, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company, entitled to the benefits of the Indenture and enforceable in accordance with their terms, subject, as to enforce­ment, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting the enforcement of creditors’ rights and to general equity principles.

If such forms or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee’s own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee. Without limiting the generality of the foregoing, the Trustee shall not be required to authenticate Securities denominated in a Foreign Currency if the Trustee reasonably believes that it will be unable to perform its duties with respect to such Securities.

Each Registered Security shall be dated the date of its authentication; and each Bearer Security and any Global Security in bearer form shall be dated as of the date of original issuance of the first Security of such series to be issued.

No Security or Coupon shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certifi­cate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and
such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Security shall have been duly authen­ticated and delivered hereunder but never issued and sold by the Company, and the Company’ shall deliver such Security to the Trustee for cancellation as provided in Section 3.09 together with a written statement (which need not comply with Section 1.02 and need not be accompanied by an Opinion of Counsel) stating that such Security has never been issued and sold by the Company, for all purposes of this Indenture such Security shall be deemed never to have been authenti­cated and delivered hereunder and shall never be entitled to the benefits of this Indenture.

If the Company shall establish pursuant to Sec­tion 3.01 that the Securities of a series are to be issued in whole or in part in the form of a Global Security, then the Company shall execute and the Trustee shall in accor­dance with this Section and the Company Order with respect to such series authenticate and deliver the Global Security that (i) shall represent and shall be denominated in an aggregate amount equal to the aggregate principal amount of Outstanding Securities of such series to be represented by the Global Security, (ii) shall be registered, if in regis­tered form, in the name of the Depositary for such Global Security or the nominee of such Depositary, and (iii) shall be delivered by the Trustee to such Depositary or pursuant to such Depository’s instruction.

Each Depositary designated pursuant to Sec­tion 3.01 for a Global Security in registered form must, at the time of its designation and at all times while it serves as Depositary, be a clearing agency registered under the Securities Exchange Act of 1934 and any other applicable statute or regulation.

SECTION 3.04. Temporary Securities . Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substan­tially of the tenor of the definitive Securities in lieu of which they are issued, in registered form or, if authorized, in bearer form with one or more Coupons or without Coupons, and with such appropriate insertions, omissions, substitu­tions and other variations as the officers executing such Securities may determine, as evidenced conclusively by their execution of such Securities. Such temporary Securities may be in global form.

Except in the case of temporary Global Securities in bearer form (which shall be exchanged in accordance with the provisions of the following paragraphs), if temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company main­tained pursuant to Section 10.02 in a Place of Payment for such series for the purpose of exchanges of Securities of such series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series (accompanied by any unmatured Coupons appertaining thereto) the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like aggre­gate principal amount of definitive Securities of the same series and of like tenor or authorized denominations and having the same terms and conditions; provided, however , that no definitive Bearer Security shall be delivered in exchange for a temporary Registered Security; and provided further that a definitive Bearer Security shall be delivered in exchange for a temporary Bearer Security only in compli­ance with the conditions set forth in Section 3.03.

If temporary Global Securities of any series are issued in bearer form, any such temporary Global Securities in bearer form shall, unless otherwise provided therein, be delivered to the London office of a Depositary (the “Common Depositary”), for the benefit of Euroclear and CEDEL S.A., for credit to the respective accounts of the beneficial owners of such  Securities (or to such other accounts as they may direct).

Without unnecessary delay but not later than the date specified in, or determined pursuant to the terms of, any such temporary Global Security (but in any event in the case of definitive Securities to be delivered in bearer form not before the beneficial owners of interests in the tempo­rary Global Security have provided the certification set forth in Section 3.03) (the “Exchange Date”), the Company shall deliver to the Trustee definitive Securities, in aggregate principal amount equal to the principal amount of such temporary Global Security, executed by the Company. On or after the Exchange Date such temporary Global Security shall be surrendered by the Common Depositary to the Trustee, as the Company’s agent for such purpose, to be exchanged, in whole or from time to time in part, for definitive Securities without charge and the Trustee shall authenticate and deliver, in exchange for each portion of such temporary Global Security, an equal aggregate principal amount of definitive Securities of the same series of authorized denominations and of like tenor as the portion of such temporary Global Security to be exchanged. The defini­tive Securities to be delivered in exchange for any such temporary Global Security in bearer form shall be in bearer form, registered form, definitive global form (registered or bearer), or any combination thereof, as specified as contemplated by Section 3.01, and, if any combination thereof is so specified, as requested by the beneficial owner thereof; provided, however , that, unless otherwise specified in such temporary Global Security in bearer form, upon such presentation by the Common Depositary, such temporary Global Security in bearer form shall be accompa­nied by a certificate dated the Exchange Date or a subse­quent date and signed by Euroclear as to the portion of such temporary Global Security in bearer form held for its account then to be exchanged and a certificate dated the Exchange Date or a subsequent date and signed by CEDEL S.A. as to the portion of such temporary Global Security in bearer form held for its account then to be exchanged, each in the form set forth in Exhibit A.2 to this Indenture; and Provided further that definitive Bearer Securities shall be delivered in exchange for a portion of a temporary Global Security in bearer form only in compliance with the require­ments of Section 3.03.

Unless otherwise specified in such temporary Global Security in bearer form, the interest of a beneficial owner of Securities of a series in a temporary Global Security in bearer form shall be exchanged for definitive Securities of the same series and of like tenor following the Exchange Date when the beneficial owner instructs Euroclear or CEDEL S.A., as the case may be, to request such exchange on his behalf and delivers to Euroclear or CEDEL S.A., as the case may be, a certificate in the form set forth in Exhibit A.1 to this Indenture, dated on the earlier of the first Interest Payment Date and the date of delivery of the Securities in definitive form, copies of which certificate in blank shall be available from the offices of Euroclear, CEDEL S.A., the Trustee, any Authenticating Agent appointed for such series of Securities and any Paying Agent appointed for such series of Securities. Unless otherwise specified in such temporary Global Security in bearer form, any such exchange shall be made free of charge to the beneficial owners of such temporary Global Security in bearer form, except that a Person receiving definitive Securities must bear the cost of insurance, postage, trans­portation and the like in the event that such Person does not take delivery of such definitive Securities in person at the offices of Euroclear or CEDEL S.A. The definitive Securities in bearer form to be delivered in exchange for any portion of a temporary Global Security in bearer form shall be delivered only outside the United States.

Until exchanged in full as hereinabove provided, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of the same series and of like tenor authenticated and delivered hereunder, except that, unless otherwise specified as contemplated by Section 3.01, inter­est payable on a temporary Global Security in bearer form on an Interest Payment Date for Securities of such series occurring prior to the applicable Exchange Date shall be payable to Euroclear and CEDEL S.A. on such Interest Payment Date upon delivery by Euroclear and CEDEL S.A. to the Trustee of a certificate or certificates in the form set forth in Exhibit A.3 to this Indenture, for credit without further interest on or after such Interest Payment Date to the respective accounts of the Persons who are the beneficial owners of such temporary Global Security in bearer form (or to such other accounts as they may direct) on such Interest Payment Date and who have each delivered to Euroclear or CEDEL S.A., as the case may be, a certificate in the form set forth in Exhibit A.4 to this Indenture. Any interest so received by Euroclear and CEDEL S.A. and not paid as herein provided shall be returned to the Trustee immediately prior to the expiration of two years after such Interest Payment Date in order to be repaid to the Company in accordance with Section 10.03.

SECTION 3.05. Registration; Registration of Transfer and Exchange . The Company shall cause to be kept at an office or agency to be maintained by the Company in accordance with Section 10.02 a register (the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Registered Securities and the registration of transfers of Registered Securities. The Trustee is hereby appointed “Security Registrar” for the purpose of registering Registered Securities and transfers of Regis­tered Securities as herein provided.

Upon surrender for registration of transfer of any Registered Security of any series at the office or agency of the Company maintained pursuant to Section 10.02 for such purpose in a Place of Payment for such series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or trans­ferees, one or more new Registered Securities of the same series of any authorized denominations and of a like aggregate principal amount and tenor and having the same terms and conditions.

The Company may establish pursuant to Section 3.01 that, at the option of the Holder, Registered Securities of any series may be exchanged for other Registered Securities of the same series of any authorized denominations and of a like aggregate principal amount and tenor and having the same terms and conditions, upon surrender of the Securities to be exchanged at any such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. Bearer Securities may not be issued in exchange for Registered Securities.

At the option of the Holder (if so provided pursuant to Section 3.01) Bearer Securities of any series may be exchanged for Registered Securities of the same series of any authorized denominations and of a like aggre­gate principal amount and tenor and having the same terms and conditions, upon surrender of the Bearer Securities to be exchanged at any such office or agency, with all unmatured Coupons and all matured Coupons in default thereto appertaining. If the Holder of a Bearer Security is unable to produce any such unmatured Coupon or Coupons or matured Coupon or Coupons in default, such exchange may be effected if the Bearer Securities are accompanied by payment in funds acceptable to the Company in an amount equal to the face amount of such missing Coupon or Coupons, or the surrender of such missing Coupon or Coupons may be waived by the Company and the Trustee if there is furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless. If thereafter the Holder of such Security shall surrender to any Paying Agent any such missing Coupon in respect of which such a payment shall have been made, such Holder shall be entitled to receive the amount of such payment; provided, however , that, except as otherwise provided in Section 10.02, interest represented by Coupons shall be payable only upon presenta­tion and surrender of those Coupons at an office or agency located outside the United States. Notwithstanding the foregoing, in case a Bearer Security of any series is surrendered at any such office or agency in exchange for a Registered Security of the same series and like tenor after the close of Business at such office or agency on (i) any Regular Record Date and before the opening of business at such office or agency on the relevant Interest Payment Date, or (ii) any Special Record Date and before the opening of business at such office or agency on the related proposed date for payment of Defaulted Interest, such Bearer Security shall be surrendered without the Coupon relating to such Interest Payment Date or proposed date for payment, as the case may be, and interest or Defaulted Interest, as the case may be, will not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of the Registered Security issued in exchange for such Bearer Security, but will be payable only to the Holder of such Coupon when due in accordance with the provisions of this Indenture.

Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive.

Notwithstanding the foregoing, except as otherwise specified as contemplated by Section 3.01, any definitive Global Security in bearer form shall be exchangeable only as provided in this paragraph. If the beneficial owners of interests in a definitive Global Security in bearer form are entitled to exchange such interests for Securities of such series and of like tenor and principal amount of another authorized form and denomination, as specified as contem­plated by Section 3.01, then without unnecessary delay but in any event not later than the earliest date on which such interest may be so exchanged, the Company shall deliver to the Trustee definitive Securities in aggregate principal amount equal to the principal amount of such definitive Global Security in bearer form, executed by the Company. On or after the earliest date on which such interest may be so exchanged, such definitive Global Security in bearer form shall be surrendered by the Common Depositary or such other depositary or Common Depositary as shall be specified in the Company Order with respect thereto to the Trustee, as the Company’s agent for such purpose, to be exchanged, in whole or from time to time in part, for definitive Securities without charge and the Trustee shall authenticate and deliver, in exchange for each portion of such definitive Global Security in bearer form, an equal aggregate principal amount of definitive Securities of the same series of authorized denominations and of like tenor as the portion of such definitive Global Security in bearer form to be exchanged which, unless the Securities of the series are not issuable both as Bearer Securities and as Registered Securi­ties, as specified as contemplated by Section 3.01, shall be in the form of Bearer Securities or Registered Securities, or any combination thereof, as shall be specified by the beneficial owner thereof; provided, however , that no such exchanges may occur during a period beginning at the opening of business 15 days before any selection of Securities of that series to be redeemed and ending on the relevant Redemption Date; and provided further that no Bearer Security delivered in exchange for a portion of a definitive Global Security shall be mailed or otherwise delivered to any location in the United States. If a Registered Security is issued in exchange for any portion of a definitive Global Security in bearer form after the close of business at the office or agency where such exchange occurs on (i) any Regular Record Date and before the opening of business at such office or agency on the relevant Interest Payment Date, or (ii) any Special Record Date and the opening of business at such office or agency on the related proposed date for payment of Defaulted Interest, interest or Defaulted Interest, as the case may be, will not be payable on such Interest Payment Date or proposed date for payment, as the case may be, in respect of such Registered Security, but will be payable on such Interest Payment Date or proposed date for payment, as the case may be, only to the Person to whom interest in respect of such portion of such definitive Global Security in bearer form is payable in accordance with the provisions of this Indenture.

All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange.

Every Registered Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee or any transfer agent) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar or any transfer agent duly executed, by the Holder thereof or his attorney duly author­ized in writing.

No service charge shall be made for any registra­tion of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.04, 9.06 or 11.06 not involving any transfer.

The Company shall not be required (i) to issue, register the transfer of or exchange Securities of any series during a period beginning at the opening of business 15 days before any selection of Securities of that series to be redeemed and ending at the close of business on (A) if Securities of the series are issuable only as Registered Securities, the day of the mailing of the relevant notice of redemption and (B) if Securities of the series are issuable as Bearer Securities, the day of the first publication of the relevant notice of redemption or, if Securities of the series are also issuable as Registered Securities and there is no publication, the mailing of the relevant notice of redemption, or (ii) to register the transfer of or exchange of any Registered Security so selected for redemption, in whole or in part, except the unredeemed portion of any Security being redeemed in part, or (iii) to exchange any Bearer Security so selected for redemption except that such a Bearer Security may be exchanged for a Registered Security of that series and like tenor; provided that such Registered Security shall be simultaneously surrendered for redemption.

If at any time the Depositary for the Global Securities of a series notifies the Company that it is unwilling or unable to continue as Depositary for the Global Securities of such series or if at any time the Depositary for the Global Securities of such series shall no longer be eligible under Section 3.03, the Company shall appoint a successor Depositary with respect to the Global Securities of such series. If a successor Depositary for the Global Securities of such series is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such ineligibility, the Company’s election pursuant to Section 3.01 that such Registered Securities be represented by one or more Global Securities shall no longer be effective with respect to the Global Securities of such series and the Company will execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of definitive Securities of such series, will authenticate and deliver, Securities of such series in definitive form in an aggregate principal amount equal to the principal amount of the Global Security or Securities representing such series in exchange for such Global Security or Securities.

If specified by the Company pursuant to Sec­tion 3.01 with respect to a series of Securities, the Company may at any time and in its sole discretion determine that the Securities of any series issued in the form of one or more Global Securities shall no longer be represented by such Global Security or Securities. In such event the Company will execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of defini­tive Securities of such series, will authenticate and deliver Securities of such series in definitive form and in an aggregate principal amount equal to the principal amount of the Global Security or Securities representing such series in exchange for such Global Security or Securities.

If specified by the Company pursuant to Sec­tion 3.01 with respect to a series of Securities, the Depositary for such series of Securities may at its option surrender a Global Security for such series of Securities in exchange in whole or in part for Securities of such series in definitive form on such terms as are acceptable to the Company and such Depositary. Thereupon, the Company shall execute, and the Trustee, upon receipt of a Company Order for the authentication and delivery of definitive Securities of such series, shall authenticate and deliver, without charge to the Holders,

(i)          to each Person specified by such Depositary a new Security or Securities of the series of any autho­rized denomination as requested by such Person in aggregate principal amount equal to and in exchange for such Person’s beneficial interest in the Global Security or Securities; and

(ii)          to such Depositary a new Global Security in a denomination equal to the difference, if any, between the principal amount of the surrendered Global Security and the aggregate principal amount of definitive Securities delivered to Holders thereof.

In any exchange provided for in any of the preced­ing three paragraphs, the Company will execute and the Trustee will authenticate and deliver Securities (a) in definitive registered form in authorized denominations, if the Securities of such series are issuable as Registered Securities, (b) in definitive bearer form in authorized denominations, with coupons attached, if the Securities of such series are issuable as Bearer Securities or (c) as either Registered or Bearer Securities, if the Securities of such series are issuable in either form; provided, however , that a definitive Bearer Security shall be delivered in exchange for a temporary Global Security only in compliance with the conditions set forth in Section 3.04; and provided further that delivery of a Bearer Security shall occur only outside the United States.

Upon the exchange of a Global Security for Securi­ties in definitive form, such Global Security shall be canceled by the Trustee. Registered Securities issued in exchange for a Global Security pursuant to this Section shall be registered in such names and in such authorized denominations as the Depositary for such Global Security, pursuant to instructions from its direct or indirect partic­ipants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Registered Securities to the persons in whose names such Securities are so registered.

Unless otherwise specified by the Company pursuant to Section 3.01, a Global Security representing all or a portion of the Securities of a series may not be transferred except as a whole by the Depositary for such series to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor Depositary for such series or a nominee of such successor Depositary.

SECTION 3.06. Mutilated, Destroyed. Lost and Stolen Securities . If any mutilated Security or Security with a mutilated Coupon appertaining to it is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and with the same terms and conditions and bearing a number not contemporaneously outstanding with Coupons corresponding to the Coupons, if any, appertaining to the surrendered Security.

If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruc­tion, loss or theft of any Security or Coupon and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security or Coupon has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security or in exchange for the Security to which a destroyed, lost or stolen Coupon appertains (upon surrender to the Trustee of such Security with all appurtenant Coupons not destroyed, lost or stolen) a new Security of the same series and of like tenor and principal amount and with the same terms and conditions and bearing a number not contemporaneously outstanding, with Coupons corresponding to the Coupons, if any, appertaining to such destroyed, lost or stolen Security or to the Security to which such destroyed, lost or stolen Coupon appertains.

In case any such mutilated, destroyed, lost or stolen Security or Coupon has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security or Coupon pay such Security or Coupon; provided, however , that principal of (and premium, if any) and any interest on Bearer Securities shall, except as otherwise provided in Section 10.02, be payable only at an office or agency located outside the United States and, unless otherwise specified as contemplated by Section 3.01, any interest on Bearer Securities shall be payable only upon presentation and surrender of the Coupons appertaining thereto.

Upon the issuance of any new Security or Coupon under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.

Every new Security or Coupon of any series issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Security or Coupon shall consti­tute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securi­ties or Coupons of that series duly issued hereunder.

The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities or Coupons.

SECTION 3.07. Payment of Interest; Interest Rights Preserved . Unless otherwise provided as contemplated by Section 3.01 with respect to any series of Securities, interest on any Registered Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is regis­tered at the close of business on the Regular Record Date for such interest.

Any interest on any Registered Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called “Defaulted Interest”) shall cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below:

(1)          The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Registered Securities of such series (or their respec­tive Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided.  Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Securities of such series at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2).

(2)          The Company may make payment of any Defaulted Interest on the Registered Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee.

Subject to the foregoing provisions of this Section and Section 3.05, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.

None of the Company, the Trustee, any Authenti­cating Agent, any Paying Agent or the Security Registrar will have any responsibility or liability for any aspect of the records relating to or payments made on account of any beneficial ownership interest in a Global Security or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest.

SECTION 3.08. Persons Deemed Owners . Prior to due presentment of a Registered Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Registered Security is registered as the owner of such Registered Security for the purpose of receiving payment of principal of (and premium, if any) and (subject to Sec­tions 3.05 and 3.07) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.

Title to any Bearer Security and any Coupons appertaining thereto shall pass by delivery. The Company, the Trustee and any agent of the Company or the Trustee may treat the Holder of any Bearer Security and the Holder of any Coupon as the absolute owner of such Security or Coupon for the purpose of receiving payment thereof or on account thereof and for all other purposes whatsoever, whether or not such Security or Coupon be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.

SECTION 3.09. Cancellation . All Securities and Coupons surrendered for payment, redemption, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee. All Securities and Coupons so delivered shall be promptly canceled by the Trustee. All Bearer Securities and unmatured Coupons held by the Trustee pending such cancellation shall be deemed to be delivered for cancellation for all purposes of this Indenture and the Securities. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenti­cated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Securities and Coupons held by the Trustee shall be destroyed in a manner selected by the Trustee unless otherwise directed by a Company Order.

SECTION 3.10. Computation of Interest . Except as otherwise specified as contemplated by Section 3.01 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360—day year of twelve 30-day months.

SECTION 3.11. Compliance with Certain Laws and Regulations . If any Bearer Securities are to be issued in any series of Securities, the Company will use reasonable efforts to provide for arrangements and procedures designed pursuant to then applicable laws and regulations, if any, to ensure that such Bearer Securities are sold or resold, exchanged, transferred and paid only in compliance with such laws and regulations and without adverse consequences to the Company, the Holders and the Trustee.

SECTION 3.12. Medium-Term Securities . Notwith­standing any contrary provision herein, if all Securities of a series are not to be originally issued at one time, it shall not be necessary to deliver the Company Order, Officers’ Certificate, supplemental indenture or Opinion of Counsel otherwise required pursuant to Sections 1.02, 3.01, 3.03 and 3.04 at or prior to the time of authentication of each Security of such series if such documents are delivered at or prior to the authentication upon original issuance of the first Security of such series to be issued.

An Officers’ Certificate or supplemental inden­ture, delivered pursuant to this Section 3.12 in the circum­stances set forth in the preceding paragraph may provide that Securities which are the subject thereof will be authenticated and delivered by the Trustee on original issue from time to time upon the telephonic or written order of persons designated in such Officers’ Certificate or supple­mental indenture (telephonic instructions to be promptly confirmed in writing by such persons) and that such persons are authorized to determine, consistent with such Officers’ Certificate or any applicable supplemental indenture such terms and conditions of said Securities as are specified in such Officers’ Certificate or supplemental indenture, provided that the foregoing procedure is acceptable to the Trustee.


ARTICLE FOUR

Satisfaction and Discharge

SECTION 4.01. Satisfaction and Discharge of Indenture . This Indenture shall upon Company Request cease to be of further effect with respect to a series of Securi­ties (except as to any surviving rights of (as applicable) registration of transfer or exchange of Securities and Coupons, if any, of such series herein expressly provided for) and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture with respect to such series, when

(1) either

(A)           all Securities and Coupons of such series theretofore authenticated and delivered (other than (i) Coupons appertaining to Bearer Securities surrendered for exchange for Registered Securities and maturing after such exchange, whose surrender is not required or has been waived as provided in Section 3.05, (ii) Securities and Coupons of such series which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06, (iii) Coupons appertaining to Securities called for redemption and maturing after the relevant Redemption Date, whose sur­render has been waived as provided in Sec­tion 11.06, and (iv) Securities and Coupons of such series for whose payment money has thereto­fore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee for cancellation; or

(B)           all such Securities and Coupons of such series not theretofore delivered to the Trustee for cancellation

(i)          have become due and payable, or

(ii)          will become due and payable at their Stated Maturity within one year, or

(iii) are to be called for redemption within one year under arrangements satis­factory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company,

and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount in the currency or currency unit in which such Securities and Coupons of such series are payable sufficient to pay and discharge the entire indebtedness on such Securities and Coupons of such series not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest, if any, to the date of such deposit (in the case of Securities and Coupons of such series which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be;

(2)         the Company has paid or caused to be paid all other sums payable hereunder by the Company; and

(3)         the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.

Notwithstanding the satisfaction and discharge of this Indenture with respect to a series, the obligations of the Company to the Trustee under Section 6.07, the obliga­tions of the Trustee to any Authenticating Agent under Section 6.14 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 4.02 and the last paragraph of Section 10.03 shall survive.

SECTION 4.02. Application of Trust Money . Subject to the provisions of the last paragraph of Sec­tion 10.03, all money deposited with the Trustee pursuant to Sections 4.01 and 4.03 shall be held in trust and applied by it, in accordance with the provisions of the Securities and Coupons, if any, and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may deter­mine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee.

SECTION 4.03. Satisfaction. Discharge and Defeasance of Securities of Any Series . If this Section is specified, as contemplated by Section 3.01, to be applicable to Securities and Coupons, if any, of any series, at the Company’s option, either

(a)         the Company will be deemed to have been Discharged (as defined below) from its obligations with respect to Securities and Coupons, if any, of such series or

(b)         the Company will cease to be under any obli­gation to comply with any term, provision or condition set forth in (x) Sections 8.01, 8.02, 10.08 and 10.09 or (y) the instrument or instruments setting forth the terms, provisions or conditions of such series pursuant to Section 3.01 provided in case of this subclause (y) that such instrument or instruments specify which terms, provisions or conditions, if any, are subject to this clause (b) provided further, however , that no such instrument may specify that the Company may cease to comply with any obligations as to which it may not be Discharged pursuant to the definition of “Discharged”); in each case (a) and (b) with respect to the Securities and Coupons, if any, of such series on the 91st day after the applicable conditions set forth below in (p) and either (q) or (r) have been satisfied:

(p)         (1) the Company has paid or caused to be paid all other sums payable with respect to the Outstanding Securities and Coupons, if any, of such series (in addition to any required under (q) or (r)); and

(2)         the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel , each stating that all conditions precedent herein provided for relating to, as applicable (i) the satisfaction and discharge of the entire indebtedness on all Outstanding Securities and Coupons, if any, of any such series, or (ii) the discharge of the obligations with respect to the Securities of such series set forth in (b) above, have been complied with;

(q)         (1) the Company shall have with respect to (a) or (b) above deposited or caused to be deposited irrevocably with the Trustee as a trust fund specifi­cally pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities and Coupons, if any, of such series (i) money in an amount (in such currency, currencies or currency unit or units in which any Outstanding Securities and Coupons, if any, of such series are payable) or (ii) in the case of Securities and Coupons, if any, denominated in Dollars, U.S. Government Obligations (as defined below) or, in the case of Securities and Coupons, if any, denominated in a Foreign Currency, Foreign Government Securities (as defined below), which through the payment of interest and principal in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment of principal (including any premium) and interest, if any, under the Securities and Coupons, if any, of such series, money in an amount or (iii) a combination of (i) and (ii), sufficient (in the opinion with respect to (ii) and (iii) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee) to pay and discharge each installment of principal of (including any prem­ium), and interest, if any, on, the Outstanding Securi­ties and Coupons, if any, of such series on the dates such installments of interest or principal (including any premium) are due, in the currency, currencies or currency unit or units, in which such Securities and Coupons, if any, are payable;

(2)         (i) no Event of Default or event (including such deposit) which with notice or lapse of time would become an Event of Default shall have occurred and be continuing on the date of such deposit, (ii) no Event of Default as defined in clause (5) or (6) of Sec­tion 5.01, or event which with notice or lapse of time or both would become an Event of Default under either such clause, shall have Occurred within 90 days after the date of such deposit and (iii) such deposit and the related intended consequence under (a) or (b) will not result in any default or event of default under any material indenture, agreement or other instrument binding upon the Company or any Subsidiary or any of their properties; and

(3)         the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that Holders of the Securities and Coupons, if any, of such series will not recognize income, gain or loss for Federal income tax purposes as a result of the Com­pany’s exercise of its option under this Section 4.03 and will be subject to Federal income tax in the same amount, in the same manner and at the same times as would have been the case if such option had not been exercised;
 
(r)          the Company has properly fulfilled such other means of satisfaction and discharge as is specified, as contemplated by Section 3.01, to be applicable to the Securities and Coupons, if any, of such series.

Any deposits with the Trustee referred to in clause (q) (1) above will be made under the terms of an escrow trust agreement in form satisfactory to the Trustee. If any Outstanding Securities and Coupons, if any, of such series are to be redeemed prior to their Stated Maturity, whether pursuant to any mandatory redemption provisions or in accordance with any mandatory sinking fund requirement, the applicable escrow trust agreement will provide therefor and the Company will make arrangements for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company.

SECTION 4.04. Reinstatement . If the Trustee is unable to apply any money, U.S. Government Obligations or Foreign Government Securities in accordance with Sec­tion 4.01 or 4.03 by reason of any legal proceeding or by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company’s obligations under this Indenture and the Securities and Coupons, if any, of such series shall be revived and reinstated as though no deposit had occurred pursuant to Section 4.01 or 4.03 until such time as the Trustee is permitted to apply all such money, U.S. Government Obligations or Foreign Government Securities in accordance with Section 4.01 or 4.03; provided, however , that if the Company has made any payment of interest on or principal of (and premium, if any) on any Securities and Coupons, if any, of such series because of the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such series of Securities and Coupons, if any, to receive such payment from the money, U.S. Government Obligations or Foreign Government Securities held by the Trustee.

SECTION 4.05. Definitions . The following terms, as used in this Article IV, shall have the following mean­ings:

“Discharged” means that the Company will be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Securities and Coupons, if any, of the series as to which this Section is specified as applicable as aforesaid and to have satisfied all the obligations under this Indenture relating to the Securities and Coupons, if any, of such series (and the Trustee, at the expense of the Company, will execute proper instruments acknowledging the same), except (A) the rights of Holders thereof to receive, from the trust fund described in clause (q) (1) above, payment of the principal of (premium, if any) and the interest, if any, on such Securities and Coupons, if any, when such payments are due, (B) the Company’s obligations with respect to such Securities and Coupons, if any, under Sections 3.05 and 3.06 (insofar as applicable to Securities of such series), 4.02, 10.02 and 10.03 (last paragraph only) and the Company’s obligations to the Trustee under Sec­tions 6.07 and 6.10, (C) the rights of Holders of Securities of any series with respect to the currency or currency units in which they are to receive payments of principal, premium, if any, and interest and (D) the rights, powers, trusts, duties and immunities of the Trustee hereunder, will survive such discharge. The Company will reimburse the trust fund for any loss suffered by it as a result of any tax, fee or other charge imposed on or assessed against deposited U.S. Government Obligations or Foreign Government Secur­ities, as the case may be, or any principal or interest paid on such obligations, and, subject to the provi­sions of Section 6.07, will indemnify the Trustee against any claims made against the Trustee in connec­tion with any such loss.

“Foreign Government Securities” means, with respect to Securities and Coupons, if any, of any series that are denominated in a Foreign Currency, securities that are (i) direct obligations of the government that issued or caused to be issued such currency for the payment of which obligations its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of such government the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by such government, which, in either case under clauses (i) or (ii), are not callable or redeemable at the option of the issuer thereof.

“U.S. Government Obligations” means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation of the United States of America, which, in either case under clauses (i) or (ii), are not callable or redeemable at the option of the issuer thereof, and will also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specified payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt.

ARTICLE FIVE

Remedies

SECTION 5.01. Events of Default . “Event of Default”, wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), unless it is either inapplicable to a particular series or it is specifically deleted or modified in or pursuant to the supplemental indenture or Board Resolution establishing such series of Securities or in the form of Security for such series:

(1)         default in the payment of any interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or

(2)         default in the payment. of the principal of (or premium, if any, on) any Security of that series at its Maturity; or

(3)         default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series, and continuance of such default for a period of 30 days; or

(4)         default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in the performance or breach of which is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of a series of Securities other than that series) and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

(5)         the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjust­ment or composition of or in respect of the Company under any applicable Federal or State law, or appoint­ing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or

(6)         the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or - proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insol­vency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorgan­ization or relief under any applicable Federal or State law, or the consent by it to the filing of such peti­tion or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or

(7)         any other Event of Default provided with respect to Securities of that series.

SECTION 5.02. Acceleration of Maturity; Rescis­sion and Annulment . If an Event of Default with respect to Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of that series may declare the principal amount of all of the Securities of that series to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders) and upon any such declaration such principal amount (or speci­fied amount) shall become immediately due and payable.

At any time after such a declaration of accelera­tion with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if
 
          (1)             the Company has paid or deposited with the Trustee a sum sufficient to pay

(A)          all overdue interest on all Securities of that series,

(B)          the principal of (and premium, if any, on) any Securities of that series which have become due otherwise than by such declaration of acceleration and, to the extent that payment of such interest is lawful, interest thereon at the rate or rates prescribed therefor in such Securi­ties,

(C)          to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates prescribed therefor in such Securities, and

(D)          in Dollars all sums paid or advanced by the Trustee hereunder and the reasonable compensa­tion, expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due the Trustee under Section 6.07;

and

(2)         all Events of Default with respect to Securi­ties of that series, other than the nonpayment of the principal of Securities of that: series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13. No such rescission shall affect any subsequent default or impair any right consequent thereon.

SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee . The Company covenants that if

(1)         default is made in the payment of any interest on any Security or Coupon when such interest becomes due and payable and such default continues for the period of grace provided for with respect to such Security,

(2)         default is made in the payment of the princi­pal of (or premium, if any, on) any Security at the Maturity thereof, or

(3)   default is made in the deposit of any sinking fund payment, when and as due by the terms of a Security, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities and Coupons, if any, the whole amount then due and payable on such Securities and Coupons, if any, for principal (and premium, if any) and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest, at the rate or rates prescribed therefor in such Securities and Coupons, if any, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due the Trustee under Section 6.07.

If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon such Securities and Coupons, if any, and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities and Coupons, if any, wherever situated.

If an Event of Default with respect to Securities and Coupons, if any, of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.

SECTION 5.04. Trustee May File Proofs of Claim . In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding rela­tive to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irre­spective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise,

(i)         to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due the Trustee under Section 6.07) and of the Holders allowed in such judicial proceeding, and

(ii)         to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07.

Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securi­ties or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.

SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities . All rights of action and claims under this Indenture or the Securities or Coupons, if any, may be prosecuted and enforced by the Trustee without the possession of any of the Securities or Coupons or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel and all other amounts due the Trustee under Section 6.07, be for the ratable benefit of the Holders of the Securities and Coupons, if any, in respect of which such judgment has been recovered.

SECTION 5.06. Application of Money Collected . Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:

FIRST:                   to the payment of all amounts due the Trustee under Section 6.07;

SECOND:              to the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest, respectively; and

THIRD:                   the balance, if any, to the Person or Persons entitled thereto.

SECTION 5.07. Limitation on Suits . No Holder of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless

(1)         an Event of Default with respect to Securities of such series shall have occurred and be continuing and such Holder has previously given written notice to the Trustee of such continuing Event of Default;

(2)         the Holders of not less than 25% in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;

(3)         such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request;

(4)         the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and

(5)         no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series;

it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture (including without limitation the provisions of Section 5.12) to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders.

SECTION 5.08. Unconditional Right of Holders To Receive Principal. Premium and Interest . Notwithstanding any other provision in this Indenture, the Holder of any Security or any Coupon shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Sec­tion 3.07) interest on such Security or Coupon on the Stated Maturity or Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.

SECTION 5.09. Restoration of Rights and Remedies . If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall). continue as though no such proceeding had been instituted.

SECTION 5.10. Rights and Remedies Cumulative . Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securi­ties in the last paragraph of Section 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.

SECTION 5.11. Delay or Omission Not Waiver . No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be.

SECTION 5.12. Control by Holders . The Holders of not less than a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Securities of such series; provided that

(1)         such direction shall not be in conflict with any rule of law or with this Indenture,

(2)         the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and

(3)         subject to the provisions of Section 6.01, the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith shall, by a Responsible Officer or Officers of the Trustee, deter­mine that the action so directed would involve the Trustee in personal liability.

SECTION 5.13. Waiver of Past Defaults . The Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to such series and its consequences, except a default

(1)         in the payment of the principal of (or premium, if any) or interest on any Security of such series, or

(2)         in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each outstanding Security of such series affected.

Upon any such waiver, such default shall cease to exist with respect to such series, and any Event of Default with respect to such series arising therefrom shall be deemed to have been cured, for every purpose of this Inden­ture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon.

SECTION 5.14. Undertaking for Costs . All parties to this Indenture agree, and each Holder by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securi­ties of any series, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security or the payment of any Coupon on or after the Stated Maturity or Maturities expressed in such Security (or, in the case of redemption, on or after the Redemption Date)

SECTION 5.15. Waiver of Stay or Extension Laws . The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.


ARTICLE SIX
 
The Trustee

SECTION 6.01. Certain Duties and Responsibili­ties . (a) Except during the continuance of an Event of Default with respect to any series:

(1)         the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and

(2)         in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture.

(b) In case an Event of Default has occurred and is continuing with respect to any series, the Trustee shall exercise such of the rights and powers vested in it by this Indenture with respect to such series, and use the same degree of care and skill in their exercise, as •a prudent man would exercise or use under the circumstances in the conduct of his own affairs.

(c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct, except that

(1)         this Subsection shall not be construed to limit the effect of Subsection (a) of this Section;

(2)         the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Offi­cer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts;

(3)         the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities of any series, given pursuant to Section 5.12, relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture with respect to the Securities of such series; and

(4)         no provision of this Indenture shall require the Trustee to expend or risk its own funds or other­wise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reason­able grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it.

(d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section.

SECTION 6.02. Notice of Defaults . Within 90 days after the occurrence of any default hereunder with respect to the Securities of any series, the Trustee shall transmit notice of such default hereunder known to the Trustee to the Holders of such Securities as provided in Section 7.03(d), unless such default shall have been cured or waived; provided, however , that, except in the case of a default in the payment of the principal of (or premium, if any) or interest on any Security of such series or in the payment of any sinking fund installment with respect to Securities of such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders of Securities of such series; provided further , that in the case of any default of the character specified in Section 5.01(4) with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term “default” means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series.

SECTION 6.03. Certain Rights of Trustee . Subject to the provisions of Section 6.01:

(a)         the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

(b)         any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution;

(c)         whenever in the administration of this Inden­ture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers’ Certificate;

(d)         the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;

(e)         the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;

(f)         the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opin­ion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebt­edness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney;

(g)         the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and

(h)         the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discre­tion or rights or powers conferred upon it by this Indenture.

SECTION 6.04. Not Responsible for Recitals or Issuance of Securities . The recitals contained herein and in the Securities, except the Trustee’s certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securi­ties. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of Securities or the proceeds thereof.

SECTION 6.05. May Hold Securities . The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individ­ual or any other capacity, may become the owner or pledgee of Securities or warrants to purchase Securities and, subject to Sections 6.08 and 6.13, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other agent.

SECTION 6.06. Money Held in Trust . Except as provided in Section 1.14, money held by the Trustee or any Paying Agent in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee or any Paying Agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company.

SECTION 6.07. Compensation and Reimbursement . The Company agrees

(1)          to pay to the Trustee from time to time in Dollars reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust)

(2)          except as otherwise expressly provided herein, to reimburse the Trustee in Dollars upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel) except any such expense, disburse­ment or advance as may be attributable to its negli­gence or bad faith; and

(3)          to indemnify the Trustee in Dollars for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the accep­tance or administration of the trust or trusts hereun­der, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.

As security for the performance of the obligations of the Company under this Section the Trustee shall have a lien prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of, premium, if any, or interest, if any, on particular Securities.

SECTION 6.08. Disqualification; Conflicting Interests . (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section, with respect to the Securities and Coupons, if any, of any series, it shall, within 90 days after ascertaining that it has such conflicting interest, either eliminate such conflicting interest or resign with respect to the Securi­ties and Coupons, if any, of that series in the manner and with the effect hereinafter specified in this Article.

(b) In the event that the Trustee shall fail to comply with the provisions of Subsection (a) of this Section with respect to the Securities of any series, the Trustee shall, within 10 days after the expiration of such 90-day period, transmit notice pursuant to Section 1.06, of such failure, to all Holders of such series.

(c) For the purposes of this Section, the Trustee shall be deemed to have a conflicting interest with respect to the Securities of any series if

(1)          the Trustee is trustee under this Indenture with respect to the Outstanding Securities of any series other than that series or is trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Company are outstanding, unless such other indenture is a collateral trust indenture under which the only collateral consists of Securities issued under this Indenture; provided that there shall be excluded from the operation of this paragraph the Indentures dated as of June 1, 1988, August 15, 1977, February 15, 1970 and August 1, 1967, under which the Medium-Term Notes, Series A, 8.20% Sinking Fund Deben­tures Due 2002, 8.80% Sinking Fund Debentures Due 2000 and 6.15% Sinking Fund Debentures Due 1992 of the Company are respectively outstanding and this Indenture with respect to the Securities of any series other than that series or any indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding, if

(i)          this Indenture and such other indenture or indentures are wholly unsecured and such other indenture or indentures are hereafter qualified under the Trust Indenture Act, unless the Commis­sion shall have found and declared by order pursuant to Section 3.05(b) or Section 3.07(c) of the Trust Indenture Act that differences exist between the provisions of this Indenture with respect to Securities of that series and one or more other series or the provisions of such other indenture or indentures which are so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to the Securities of that series and such other series or under such other indenture or indentures, or

(ii)          the Company shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that trusteeship under this Indenture with respect to the Securities of that series and such other series or such other indenture or indentures is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to the Securities of that series and such other series or under much other indenture or indentures;

(2)          the Trustee or any of its directors or execu­tive officers is an obligor upon the Securities or an underwriter for the Company;

(3)         the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with the Company or an underwriter for the Company;

(4)         the Trustee or any of its directors or execu­tive officers is a director, officer partner, employee, appointee or representative of the Company, or of an underwriter (other than the Trustee itself) for the Company who is currently engaged in the business of underwriting, except that (i) one individual may be a director or an executive officer, or both, of the Trustee and a director or an executive officer, or both, of the Company but may not be at the same time an executive officer of both the Trustee and the Company; (ii) if and so long as the number of directors of the Trustee in office is more than nine, one additional individual may be a director or an executive officer, or both, of the Trustee and a director of the Company; and (iii) the Trustee may be designated by the Company or by any underwriter for the Company to act in the Trustee may be designated by the Company or by any underwriter for the Company to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent or depositary, or in any other similar capacity, or, subject to the provisions of paragraph (1) of this Subsection, to act as trustee, whether under an indenture or otherwise;

(5)         10% or more of the voting securities of the Trustee is beneficially owned either by the Company or by any director, partner or executive officer thereof, or 20% or more of such voting securities is benefi­cially owned, collectively, by any two or more of such persons; or 10% or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the Company or by any director, partner or execu­tive officer thereof, or is beneficially owned, collec­tively, by any two or more such persons;

(6)         the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this Subsection defined) (i) 5% or more of the voting securities, or 10% or more of any other class of security, of the Company not including the Securities issued under this Indenture and securities issued under any other indenture under which the Trustee is also trustee, or (ii) 10% or more of any class of security of an underwriter for the Company;

(7)         the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this Subsection defined) 5% or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10% or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the Company;

(8)         the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this Subsection defined), 10% or more of any class of security of any person who, to the knowledge of the Trustee, owns 50% or more of the voting securities of the Company; or

(9)         the Trustee owns, on May 15 in any calendar year, in the capacity of executor, administrator, testamentary or inter vivos trustee, guardian, commit­tee or conservator, or in any other similar capacity, an aggregate of 25% or more of the voting securities, or of any class of security, of any person, the benefi­cial ownership of a specified percentage of which would have constituted a conflicting interest under para­graph (6), (7) or (8) of this Subsection. As to any such securities of which the Trustee acquired ownership through becoming executor, administrator or testamentary trustee of an estate which included them, the provisions of the preceding sentence shall not apply, for a period of two years from the date of such acquisition, to the extent that such securities included in such estate do not exceed 25% of such voting securities or 25% of any such class of security. Promptly after May 15 in each calendar year, the Trustee shall make a check of its holdings of such securities in any of the above-mentioned capacities as of such May 15. If the Company fails to make payment in full of the principal of (or premium, if any) or interest on any of the Securities when and as the same becomes due and payable, and such failure continues for 30 days thereafter, the Trustee shall make a prompt check of its holdings of such securities in any of the above-mentioned capacities as of the date of the expira­tion of such 30-day period, and after such date, notwithstanding the foregoing provisions of this paragraph, all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of paragraphs (6), (7) and (8) of this Subsection.

The specification of percentages in paragraphs (5) to (9), inclusive, of this Subsection shall not be construed as indicating that the ownership of such percentages of the securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of paragraph (3) or (7) of this Subsection.

For the purposes of paragraphs (6), (7), (8) and (9) of this Subsection only, (i) the terms “security” and “securities” shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (ii) an obligation shall be deemed to be “in default” when a default in payment of principal shall have continued for 30 days or more and shall not have been cured; and (iii) the Trustee shall not be deemed to be the owner or holder of (A) any security which it holds as collateral security, as trustee or otherwise, for an obli­gation which is not in default as defined in clause (ii) above, or (B) any security which it holds as collateral security under this Indenture, irrespective of any default hereunder, or (C) any security which it holds as agent for collection, or as custodian, escrow agent or depositary, or in any similar representative capacity.

(d)          For the purposes of this Section:

(1)          The term “underwriter”, when used with reference to the Company, means every person who, within three years prior to the time as of which the determination is made, has purchased from the Company with a view to, or has offered or sold for the Company in connection with, the distribution of any security of the Company outstanding at such time, or has partici­pated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors’ or sellers’ commission.

(2)          The term “director” means any director of a corporation or any individual performing similar functions with respect to any organization, whether incorporated or unincorporated.

(3)          The term “person” means an individual, a corporation, a partnership, an association, a joint stock company, a trust, an unincorporated organization or a government or political subdivision thereof. As used in this paragraph, the term “trust” shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security.

(4)          The term “voting security” means any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust, agreement or arrangement whereby a trustee or trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person.

(5)          The term “Company” means any obligor upon the Securities.

(6)          The term “executive officer” means the president, every vice president, every trust officer, the cashier, the secretary and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or unincorporated, but shall not include the chairman of the board of directors.

(e) The percentages of voting securities and other securities specified in this Section shall be calcu­lated in accordance with the following provisions:

(1)          A specified percentage of the voting securi­ties of the Trustee, the Company or any other person referred to in this Section (each of whom is referred to as a “person” in this paragraph) means such amount of the outstanding voting securities of such person as entitled the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person.

 (2)          A specified percentage of a class of securi­ties of a person means such percentage of the aggregate amount of securities of the class outstanding.

(3)          The term “amount”, when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares and the number of units if relating to any other kind of security.

(4)          The term “outstanding” means issued and not held by or for the account of the issuer. The follow­ing securities shall not be deemed outstanding within the meaning of this definition:

(i)          securities of an issuer held in a sinking fund relating to securities of the issuer of the same class;

(ii)          securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise;

(iii) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; and

(iv) securities held in escrow if placed in escrow by the issuer thereof;

provided, however , that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof.

(5)         A security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges; provided, however , that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes; and provided further that, in the case of unsecured evidences of indebtedness, differences in the interest rates or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single inden­ture.

SECTION 6.09. Corporate Trustee Required; Eligi­bility . There shall at all times be a Trustee hereunder which shall be a Corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, subject to supervision or examination by Federal or State authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.

SECTION 6.10. Resignation and Removal; Appoint­ment of Successor . (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 6.11.

(b) The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 6.11 shall not have been delivered to the resigning Trustee within 30 days after the giving of such notice of resigna­tion, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.

(c)   The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the outstanding Securities of such series, delivered to the Trustee and to the Company.

(d) If at any time:

(1)          the Trustee shall fail to comply with Sec­tion 6.08(a) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or

(2)          the Trustee for a series shall cease to be eligible under Section 6.09 and shall fail to resign after written request therefor by the Company or by any Holder of Securities of such series, or

(3)          the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,

then, in any such case, (i) the Company by a Board Resolu­tion may remove the Trustee with respect to all Securities, or (ii) subject to Section 5.14, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees.

(e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of the Trustee for any cause, with respect to the Securities of one or more series, the Company shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 6.11. If, within one year after such resignation, removal or incapa­bility, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in princi­pal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trust so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 6.11, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 6.11, any Holder who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.

(f) The Company shall give notice of each resig­nation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series by giving notice of such event to all Holders of Securities of such series as provided by Section 1.06. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corpo­rate Trust Office.

SECTION 6.11. Acceptance of Appointment by Successor . (a) In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder.

(b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees cotrustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates.

(c)         Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section, as the case may be.

(d)         No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article.

SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business . Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenti­cating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.

SECTION 6.13. Preferential Collection of Claims Against Company . (a) Subject to Subsection (b) of this Section, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Company within four months prior to a default, as defined in Subsec­tion (c) of this Section, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the Holders of the Securities and Coupons, if any, and the holders of other indenture securities, as defined in Subsection (c) of this
Section:

(1)          an amount equal to any and all reductions in the amount due and owing upon any claim as such credi­tor in respect of principal or interest, effected after the beginning of such four-month period and valid as against the Company and its other creditors, except any such reduction resulting from the receipt or disposi­tion of any property described in paragraph (2) of this Subsection, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Company upon the date of such default; and

(2)          all property received by the Trustee in respect of any claims as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such four-month period, or an amount equal to the proceeds of any such property, if disposed of, subject, however , to the rights, if any, of the Company and its other creditors in such property or such proceeds.

Nothing herein contained, however, shall affect the right of the Trustee:

(A)          to retain for its own account (i) payments made on account of any such claim by any Person (other than the Company) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third-Person, and (iii) distributions made in cash, securities or other property in respect of claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law;

(B)          to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such four-month period;

(C)          to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such four-month period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default, as defined in Subsection (c) of this Section, would occur within four months; or

(D)          to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in paragraph (B) or (C) as the case may be, to the extent of the fair value of such property.

For the purposes of paragraphs (B), (C) and (D), property substituted after the beginning of such four-month period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any pre-existing claim of the Trustee as such creditor, such claim shall have the same status as such pre-existing claim.

If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned among the Trustee, the Holders and the holders of other indenture securities in such manner that the Trustee, the Holders and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the Company in bankruptcy or receiver­ship or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Company of the funds and property in such special account and before crediting to the respec­tive claims of the Trustee and the Holders and the holders of other indenture securities dividends on claims filed against the Company in bankruptcy or receivership or in proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with - respect to any claim, the term “dividends” shall include any distribution with respect to such claim, in bankruptcy or receivership or proceedings for reorganization pursuant to the Federal Bankruptcy Act or applicable State law, whether such distribution is made in cash, securities or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or proceedings for reorganization is pending shall have jurisdiction (i) to apportion among the Trustee, the Holders and the holders of other indenture securities, in accordance with the provi­sions of this paragraph, the funds and property held in such special account and proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in deter­mining the fairness of the distributions to be made to the Trustee and the Holders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula.



Any Trustee which has resigned or been removed after the beginning of such four-month period shall be subject to the provisions of this Subsection as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such four-month period, it shall be subject to the provisions of this Subsection if and only if the following conditions exist:

(i)          the receipt of property or reduction of claim, which would have given rise to the obligations to account, if such Trustee had continued as Trustee, occurred after the beginning of such four-month period; and

(ii)          such receipt of property or reduction of claim occurred within four months after such resignation or removal.

(b)         There shall be excluded from the operation of Subsection (a) of this Section a creditor relationship arising from:

(1)          the ownership or acquisition of securities issued under any indenture, or any security or secur­ities having a maturity of one year or more at the time of acquisition by the Trustee;

(2)          advances authorized by a receivership or bankruptcy court of competent jurisdiction or by this Indenture, for the purpose of preserving any property which shall at any time be subject to the lien of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advances and of the circumstances surrounding the making thereof is given to the Holders at the time and in the manner provided in this Indenture;

(3)          disbursements made in the ordinary course of business in the capacity of trustee under an indenture, transfer agent, registrar, custodian, paying agent, fiscal agent or depositary, or other similar capacity;

(4)          an indebtedness created as a result of ser­vices rendered or premises rented; or an indebtedness created as a result of goods or securities sold in a cash transaction, as defined in Subsection (c) of this Section;

(5)         the ownership of stock or of other securities of a corporation organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Company; and

(6)         the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, accep­tances or obligations which fall within the classifi­cation of self-liquidating paper, as defined in Subsec­tion (c) of this Section.

(c)          For the purposes of this Section only:

(1)         the term “default” means any failure to make payment in full of the principal of (or premium, if any) or interest on any of the Securities or upon the other indenture securities when and as such principal or interest becomes due and payable;

(2)         the term “other indenture securities” means securities upon which the Company is an obligor out­standing under any other indenture (i) under which the Trustee is also trustee, (ii) which contains provisions substantially similar to the provisions of this Section and (iii) under which a default exists at the time of the apportionment of the funds and property held in such special account;

(3)         the term “cash transaction” means any trans­action in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand;

(4)         the term “self-liquidating paper” means any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Company for the purpose of financing the purchase, processing, manufacturing, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the security; provided the security is received by the Trustee simultaneously with the creation of the creditor relationship with the Company arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation;

(5)         the term “Company” means any obligor upon the Securities; and

(6)         the term “Federal Bankruptcy Act” means the Bankruptcy Act or Title II of the United States Code.

SECTION 6.14. Appointment of Authenticating Agent . The Trustee may appoint an Authenticating Agent or Agents with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon original issue or upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 3.06, and Secur­ities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authen­tication and delivery of Securities by the Trustee or the Trustee’s certificate of authentication or the delivery of Securities to the Trustee for authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent and delivery of Securi­ties to the Authenticating Agent on behalf of the Trustee. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation having a combined capital and surplus of not less than the equivalent of $50,000,000 and subject to supervision or examination by Federal or State authority or the equivalent foreign author­ity, in the case of an Authenticating Agent who is not organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accor­dance with the provisions of this Section, such Authenticat­ing Agent shall resign immediately in the manner and with the effect specified in this Section.

Any corporation into which an Authenticated Agent may be merged or converted or with which it may be consoli­dated, or any corporation resulting from any merger, conver­sion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of such Authen­ticating Agent, shall continue to be an Authenticating Agent; provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or such Authenticating Agent.

An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall mail written notice of such appoint­ment by first-class mail, postage prepaid, to all Holders of Registered Securities, if any, of the series with respect to which such Authenticating Agent will serve, as their names and addresses appear in the Security Register. Any succes­sor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No succes­sor Authenticating Agent shall be appointed unless eligible under the provisions of this Section.

The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section.

If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to the Trustee’s certificate of authentication, an alternative certificate of authentication in the following form:

This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture.

[full name of Trustee]


_________________________________
                                                                                                                     As Trustee

By_____________________________
As Authenticating Agent

By_____________________________
Authorized Officer

If all of the Securities of a series may not be originally issued at one time, and if the Trustee does not have an office capable of authenticating Securities upon original issuance located in a Place of Payment or other place where the Company wishes to have Securities of such series authenticated upon original issuance, the Trustee, if so requested by the Company in writing (which writing need not comply with Section 1.02 and need not be accompanied by an Opinion of Counsel), shall appoint in accordance with this Section an Authenticating Agent (which may be an Affiliate of the Company if eligible to be appointed as an Authenticating Agent hereunder) having an office in such Place of Payment or other place designated by the Company with respect to such series of Securities, provided that the procedures for the authentication of such Securities by the Authenticating Agent on original issuance are acceptable to the Trustee.

 
ARTICLE SEVEN

Holders’ Lists and Reports by Trustee and Company

SECTION 7.01. Company To Furnish Trustee Names and Addresses of Holders . The Company will furnish or cause to be furnished to the Trustee:

(a)         semiannually, not later than each Interest Payment Date in each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of each series of Registered Securities as of the preceding Regular Record Date, as the case may be, and

(b)         at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content, such list to be dated as of a date not more than 15 days prior to the time such list is furnished, and

(c)         such information concerning the Holders of Bearer Securities which is known to the Company; provided, however , that the Company shall have no obligation to investigate any matter relating to any Holder of a Bearer Security or a Coupon:

notwithstanding the foregoing subsections (a) and (b), so long as the Trustee is the Security Registrar with respect to a particular series of Securities, no such list shall be required to be furnished in respect of such series.

SECTION 7.02. Preservation of Information; Commu­nications to Holders . (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders of each series (i) contained in the most recent list furnished to the Trustee as provided in Section 7.01, (ii) received by the Trustee in its capacity as Security Registrar and (iii) filed with it within the two preceding years pursuant to Section 7.03(d). The Trustee may destroy any list furnished to it as provided in Sec­tion 7.01 upon receipt of a new list so furnished.

(b) If three or more Holders of any series (herein referred to as “applicants”) apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Security of such series for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders of such series with respect to their rights under this Indenture or under such Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five business days after the receipt of such application, at its election, either

(i)         afford such applicants access to the informa­tion preserved at the time by the Trustee in accordance with Section 7.02(a), or

(ii)         inform such applicants as to the approximate number of Holders of Securities of such series whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Sec­tion 7.02(a), and as to the approximate cost of mailing to such Holders the form of proxy or other communica­tion, if any, specified in such application.

If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Holder of Securities of such series whose name and address appear in the information preserved at the time by the Trustee in accordance with Section 7.02(a) a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interest of the Holders of such series or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections speci­fied in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Holders with reasonable promptness after the’ entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application.

(c) Every Holder of Securities or Coupons, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with Section 7.02(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 7.02(b).

SECTION 7.03. Reports by Trustee . (a) Within 60 days after June 1 of each year following the first issuance of Securities, the Trustee shall transmit to the Holders as provided in Section 7.03(d), a brief report dated as of such date with respect to:

(1)         its eligibility under Section 6.09 and its qualifications under Section 6.08, or in lieu thereof, if to the best of its knowledge it has continued to be eligible and qualified under said Sections, a written statement to such effect;

(2)         the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securi­ties, on any property or funds held or collected by it as Trustee, except that the Trustee shall not be required (but may elect) to report such advances if such advances so remaining unpaid aggregate not more than 1/2 of 1% of the principal amount of the Securi­ties Outstanding on the date of such report;

(3)         the amount, interest rate and maturity date of all other indebtedness owing by the Company (or by any other obligor on the Securities) to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except an indebtedness based upon a creditor relationship arising in any manner described in Section 6.l3(b)(2), (3), (4) or (6);

(4)         the property and funds, if any, physically in the possession of the Trustee (as such) on the date of such report;

(5)         any additional issue of Securities which the Trustee has not previously reported; and

(6)         any action taken by the Trustee in the perfor­mance of its duties hereunder which it has not previ­ously reported and which in its opinion materially affects the Securities, except action in respect of a default, notice of which has been or is to be withheld by the Trustee in accordance with Section 6.02.

(b) The Trustee shall transmit by mail to Holders in accordance with Section 7.03(d), a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surround­ing the making thereof) made by the Trustee (as such) since the date of the last report transmitted pursuant to Subsec­tion (a) of this Section (or if no such report has yet been so transmitted, since the date of execution of this instru­ment) for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Securities, on property or funds held or collected by it as Trustee and which it has not previously reported pursuant to this Subsection, except that the Trustee shall not be required (but may elect) to report such advances if such advances remaining unpaid at any time aggregate 10% or less of the principal amount of the Securities Outstanding at such time, such report to be transmitted within 90 days after such time.

(c) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which any Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when any Securities are listed on any stock exchange.

(d) Reports pursuant to Section 7.03(a) and 7.03(b) shall be transmitted by mail (i) to all Holders, as their names and address’s appear in the Security Register, (ii) to all Holders as have, within two years preceding such transmission, filed their names and addresses with the Trustee for such purpose, and (iii) except in the case of reports pursuant to Section 7.03(b), to all Holders whose names and addresses have been furnished or received by the Trustee pursuant to Sections 7.01 and 7.02.

SECTION 7.04. Reports by Company . The Company shall:

(1)         file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations pre­scribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplemen­tary and periodic information, documents and reports which may be required pursuant to Section 13 of the Securities Exchange Act of 1934 in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations;

(2)         file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional infor­mation, documents and reports with respect to compli­ance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and

(3)         transmit by mail to Holders of Securities, in accordance with Section 7.03(d), within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regula­tions prescribed from time to time by the Commission.

ARTICLE EIGHT

Consolidation. Merger. Sale or Conveyance

SECTION 8.01. Company May Consolidate. etc., Only on Certain Terms . The Company shall not consolidate with or merge into any other corporation or convey or transfer its properties and assets substantially as an entirety to any entity (other than a Wholly Owned Subsidiary (as defined below) except in the event that a Wholly Owned Subsidiary is the surviving corporation in a consolidation or merger) unless: (i) the corporation formed by such consolidation or into which the Company is merged or the entity which acquires by conveyance or transfer the properties and assets of the Company substantially as an entirety shall be a corporation organized and existing under the laws of the United States of America or any State or the District of Columbia, and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed; (ii) immediately after giving effect to such transaction, no Event of Default and no event which, after notice or lapse of time, or both, would become an Event of Default, shall have happened and be continuing; and (iii) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance or transfer and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. The term “Wholly Owned Subsidiary” means any Subsidiary all the stock of every class of which (other than directors’ qualifying shares) is owned by the Company either directly or through one or more Wholly Owned Subsidiaries.

SECTION 8.02. Rights and Duties of Successor Corporation . In case of any such consolidation, merger, sale or conveyance and upon any such assumption by the successor corporation, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part and the predecessor corporation shall be relieved of any further obligation under this Indenture. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of the Company, any or all the Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor corporation, instead of the Company, and subject to all the terms, conditions and limitations in this Inden­ture prescribed, the Trustee shall authenticate and shall deliver any Securities which previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Securities which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securi­ties theretofore or thereafter issued in accordance with the terms of this Indenture as though all such Securities had been issued at the date of the execution hereof.

In case of any consolidation, merger, sale or conveyance such changes in phraseology and form (but not in substance) may be made in the Securities thereafter to be issued as may be appropriate.

ARTICLE NINE

Supplemental Indentures

SECTION 9.01. Supplemental Indentures Without Consent of Holders . Without the consent of any Holders, the Company, when authorized by or pursuant to a Board Resolu­tion, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the follow­ing purposes:

(1)         to evidence the succession of another corpora­tion to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities;

(2)         to add to the covenants of the Company for the benefit of the Holders of all or any series of Securi­ties (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company;

(3)         to add any additional Events of Default with respect to all or any series of the Securities (and, if such Event of Default is applicable to less than all series of Securities specifying the series to which - such Event of Default is applicable);

(4)         to add to or change any of the provisions of this Indenture to such extent as shall be necessary to facilitate the issuance of Securities in bearer form, registrable or not registrable as to principal, and with or without interest coupons; to change or elimi­nate any restrictions on the payment of principal of or any premium or interest on Bearer Securities, to permit Bearer Securities to be issued in exchange for Regis­tered Securities, to permit Bearer Securities to be issued in exchange for Bearer Securities of other authorized denominations; provided that any such addition or change shall not adversely affect the interests of the Holders of Securities of any series or any related Coupons in any material respect;

(5)         to change or eliminate any of the provisions of this Indenture; provided that any such change or elimination shall become effective only when there is no Security outstanding of any series created prior to the execution of such supplemental indenture which is adversely affected by such change in or elimination of such provision;

(6)         to establish the form or terms of Securities of any series as permitted by Sections 2.01 and 3.01;

(7)         to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Inden­ture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Sec­tion 6.11(b);

(8)         if allowed under applicable laws and regula­tions to permit payment in the United States of America (including any of the states and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction, of principal, premium or interest on Bearer Securities or Coupons, if any;

(9)         to provide for the issuance of uncertificated Securities of one or more series in addition to or in place of certificated Securities;

(10)           to cure any ambiguity, to correct or supple­ment any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture; provided such action shall not adversely affect the interests of the Holders of Securities of any series in any material respect; or

(11)           to secure the Securities pursuant to Sec­tion 10.08 or otherwise.

SECTION 9.02. Supplemental Indentures with Consent of Holders . With the consent of the Holders of not less than 66-2/3% in principal amount of the Outstanding Securities of each series affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by or pursuant to a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securi­ties of such series under this Indenture; provided, however , that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby,

(1)         change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or change any obligation of the Company to pay additional amounts pursuant to Section 10.06 (except as contemplated by Sec­tion 8.01(1) and permitted by Section 9.01(1)), or reduce the amount of the principal of an original Issue Discount Security that would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 5.02, or change any Place of Payment where, or the currency, currencies or currency unit or units in which, any Security or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date),

(2)         reduce the percentage in principal amount of the outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture,

(3)         change any obligation of the Company, with respect to outstanding Securities of a series, to maintain an office or agency in the places and for the purposes specified in Section 10.02 for such series, or

(4)    modify any of the provisions of this Section, Section 5.13 or Section 10.05, except to increase any such percentage or to provide with respect to any particular series the right to condition the effective­ness of any supplemental indenture as to that series on the consent of the Holders of a specified percentage of the aggregate principal amount of Outstanding Securi­ties of such series (which provision may be made pursuant to Section 3.01 without the consent of any Holder) or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each outstanding Security affected thereby; provided, however , that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to “the Trustee” and concomitant changes in this Sec­tion and Section 10.05, or the deletion of this proviso, in accordance with the requirements of Sec­tions 6.11(b) and 9.01(7).

A supplemental indenture such changes or elimi­nates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Inden­ture of the Holders of Securities of any other series.

It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.

             SECTION 9.03. Execution of Supplemental Inden­tures . In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, an Opinion of Counsel stating that the execu­tion of such supplemental indenture is authorized or permit­ted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee’s own rights, duties, immunities or liabilities under this Indenture or otherwise.

SECTION 9.04. Effect of Supplemental Indentures . Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.

SECTION 9.05. Conformity with Trust Indenture Act . Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect.

SECTION 9.06. Reference in Securities to Supple­mental Indentures . Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemen­tal indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supple­mental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series.

ARTICLE TEN

Covenants

SECTION 10.01. Payment of Principal. Premium and Interest . The Company covenants and agrees for the benefit of each series of Securities and Coupons, if any, that it will duly and punctually pay the principal of (and premium, if any) and interest on the Securities and Coupons, if any, of that series in accordance with the terms of the Securi­ties and Coupons, if any, of such series and this Indenture.

SECTION 10.02. Maintenance of Office or Agency . If Securities of a series are issuable only as Registered Securities, the Company will maintain in each Place of Payment for such series an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. For Securities having a Place of Payment in the Borough of Manhattan, The City of New York, the Company hereby appoints as such agent the Trustee, acting through its Corporate Trust Office. If Securities of a series are issuable as Bearer Securities, the Company will maintain (A) in the Borough of Manhattan, The City of New York, an office or agency where any Registered Securities of that series may be presented or surrendered for payment, where any Registered Securities of that series may be surrendered for registra­tion of transfer, where Securities of that series may be surrendered for exchange, where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served and where Bearer Securities of that series and related Coupons may be presented or surrendered for payment in the circumstances described in the following paragraph (and not otherwise) (the foregoing Corporate Trust Office of the Trustee being hereby so appointed as such agency), (B) subject to any laws or regulations applicable thereto, in a Place of Payment for that series which is located outside the United States, an office or agency where Securities of that series and related Coupons may be presented and surrendered for payment (including payment of any additional amounts payable on Securities of that series pursuant to Section 10.06); provided, however , that if the Securities of that series are listed on The Stock Exchange of the United Kingdom and the Republic of Ireland, the Luxembourg Stock Exchange or any other stock exchange located outside the United States and such stock exchange shall so require, the Company will maintain a Paying Agent for the Securities of that series in London, Luxembourg or any other required city located outside the United States, as the case may be, so long as the Securities of that series are listed on such exchange, and (C) subject to any laws or regulations applicable thereto, in a Place of Payment for that series located in Europe, an office or agency where any Registered Securities of that series may be surrendered for registration of transfer, where Securities of that series may be surrendered for exchange and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. The Company will give prompt written notice to the Trustee and the Holders of the loca­tion, and any change in the location, of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency in respect of any series of Securities or shall fail to furnish the Trustee with the address thereof, such presentations and surrenders of Securities of that series may be made and notices and demands may be made or served at the Corporate Trust Office of the Trustee, except that Bearer Securities of that series and the related Coupons may be presented and surrendered for payment (including payment of any additional amounts payable on Bearer Securities of that series pursuant to Sec­tion 10.06) at the London office of the Trustee (or an agent with a London office appointed by the Trustee and acceptable to the Company), and the Company hereby appoints the same as its agent to receive such respective presentations, surren­ders, notices and demands.

No payment of principal, premium or interest on Bearer Securities shall be made at any office or agency of the Company in the United States or by check mailed to any address in the United States or by transfer to an account maintained with a bank located in the United States; provided, however , that, if the Securities of a series are denominated and payable in Dollars, payment of principal of and any premium and interest on any Bearer Security (includ­ing any additional amounts payable on Securities of such series pursuant to Section 10.06) shall be made at the office of the Company’s Paying Agent in the Borough of Manhattan, The City of New York, if (but only if) payment in Dollars of the full amount of such principal, premium, interest or additional amounts, as the case may be, at all offices or agencies outside the United States maintained for the purpose by the Company in accordance with this Indenture is illegal or effectively precluded by exchange controls or other similar restrictions.

The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however , that no such designa­tion or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in accor­dance with the requirements set forth above for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee and the Holders of any such designation or rescission and of any change in the location of any such other office or agency.

SECTION 10.03. Money for Securities Payments To Be Held in Trust . If the Company shall at any time act as its own Paying Agent with respect to any series of Securi­ties, it will, on or before each due date of the principal of (and premium, if any) or interest on any of the Securi­ties of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act.

Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, at or prior to the opening of business at each Place of Payment on each due date of the principal of (and premium, if any) or interest on any Securities of that series, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its failure so to act.

The Company will cause each Paying Agent for any series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provi­sions of this Section, that such Paying Agent will:

(1)         hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Securities of that series in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided;

(2)         give the Trustee notice of any default by the Company (or any other obligor upon the Securities of that series) in making of any Payment of principal (and premium, if any) or interest on the Securities of that series; and

(3)         at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent.

The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liabil­ity with respect to such money.

Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of (and premium, if any) or interest on any Security of any series and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall upon written request of the Company be paid to the Company, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security and Coupons, if any, shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease.

SECTION 10.04. Statement by Officers as to Default . The Company will deliver to the Trustee for each series of Securities, within 120 days after the end of each fiscal year of the Company (which as of the date hereof ends on December 31 of each year) ending after the date hereof so long as any Security is outstanding hereunder, an Officers’ Certificate, stating that in the course of the performance by the signers of their duties as such officers of the Company they would normally obtain knowledge of any default by the Company in the performance or fulfillment of any covenant, agreement or condition contained in this Inden­ture, and stating whether or not they have obtained knowl­edge of any such default existing on the date of such statement and, if so, specifying each such default of which the signers have knowledge and the nature thereof.

SECTION 10.05. Waiver of Certain Covenants . The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 10.08, if before the time for such compliance the Holders of not less than 66-2/3% in principal amount of the Outstanding Securities of each series affected thereby shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect.

SECTION 10.06. Additional Amounts . If the Securities of a series provide for the payment of additional amounts, the Company will pay to the Holder of any Security of such series or any Coupon appertaining thereto additional amounts as provided therein. Whenever in this Indenture there is mentioned, in any context, the payment of the principal of or any premium or interest on, or in respect of, any Security of any series or payment of any related Coupon or the net proceeds received on the sale or exchange of any Security of any series, such mention shall be deemed to include mention of the payment of additional amounts provided for in this Section to the extent that, in such context, additional amounts are, were or would be payable in respect thereof pursuant to the provisions of this Section and express mention of the payment of additional amounts (if applicable) in any provisions hereof shall not be construed as excluding additional amounts in those provisions hereof where such express mention is not made.

If the Securities of a series provide for the payment of additional amounts, at least 10 days prior to the first Interest Payment Date with respect to that series of Securities (or if the Securities of that series will not bear interest prior to Maturity, the first day on which a payment of principal and any premium is made), and at least 10 days prior to each date of payment of principal and any premium or interest if there has been any change with respect to the matters set forth in the below-mentioned Officers’ Certificate, the Company will furnish the Trustee and the Company’s Paying Agent or Paying Agents, if other than the Trustee, with an Officers’ Certificate instructing the Trustee and such Paying Agent or Paying Agents whether such payment of principal of and any premium or interest on the Securities of that series shall be made to Holders of Securities of that series or any related Coupons who are United States Aliens without withholding for or on account of any tax, assessment or other governmental charge described in the Securities of that series. If any such withholding shall be required, then such Officers’ Certifi­cate shall specify by country the amount, if any, required to be withheld on such payments to such Holders of Securi­ties or Coupons and the Company will pay to the Trustee or such Paying Agent the additional amounts required by this Section. The Company covenants to indemnify the Trustee and any Paying Agent for, and to hold them harmless against, any loss, liability or expense reasonably incurred without negligence or bad faith on their part arising out of or in connection with actions taken or omitted by any of them in reliance on any Officers’ Certificate furnished pursuant to this Section.

SECTION 10.07. No Lien Created. etc . This Inden­ture and the Securities do not create a Lien, charge or encumbrance on any property of the Corporation or any Subsidiary.

SECTION 10.08. Limitation on Liens . Nothing in this Indenture or in the Securities shall in any way restrict or prevent the Company or any Subsidiary from incurring any indebtedness; provided that the Company covenants and agrees that neither it nor any Subsidiary will issue, assume or guarantee any notes, bonds, debentures or other similar evidences of indebtedness for money borrowed (hereinafter called “Debt”) secured by a mortgage, lien, pledge or other encumbrance (hereinafter called “Mortgages”) upon any of its property or any property of such Subsidiary, real or personal, located in the continental United States of America without effectively providing that the Securities (together with, if the Company so determines, any other indebtedness or obligation then existing and any other indebtedness or obligation, thereafter created, ranking equally with the Securities) shall be secured equally and ratably with (or, at the option of the Company, prior to) such Debt so long as such Debt shall be so secured, except that the foregoing provisions shall not apply to:

(a)         Mortgages existing on the date of this Inden­ture,

(b)         Mortgages affecting property of a corporation existing at the time it becomes a Subsidiary or at the time it is merged into or consolidated with the Company or a Subsidiary,

(c)         Mortgages on property (i) existing at the time of acquisition thereof, or (ii) to secure payment of all or part of the purchase price thereof, or (iii) to secure Debt incurred prior to, at the time of or within 24 months after acquisition thereof for the purpose of financing all or part of the purchase price thereof, or (iv) assumed or incurred in connection with the acqui­sition of such property,

(d)         Mortgages on property to secure all or part of the cost of repairing, altering, constructing, improv­ing, exploring, drilling or developing such property, or to secure Debt incurred to provide funds for any such purpose,

(e)         Mortgages on (i) pipelines, gathering systems, pumping or compressor stations, pipeline storage facilities or other related facilities, (ii) tank cars, tank trucks, tank vessels, barges, tow boats or other vessels or boats, drilling barges, drilling platforms, or other movable railway, automotive, aeronautic or marine facilities, (iii) office buildings, laboratory and research facilities, retail service stations, retail or wholesale sales facilities, terminals, bulk plants, warehouses or storage or distribution facili­ties, (iv) manufacturing facilities other than units for the refining of crude oil, (v) the equipment of any of the foregoing, or (vi) any “margin stock” or “margin security” within the meaning of Regulation U or Regula­tion G of the Board of Governors of the Federal Reserve System as amended from time to time,

(f)         Mortgages on current assets or other personal property (other than shares of stock or indebtedness of Subsidiaries) to secure loans maturing not more than one year from the date of the creation thereof or to secure any renewal thereof for not more than one year at any one time,

(g)         Mortgages which secure indebtedness owing by a Subsidiary to the Company or a Subsidiary,

(h)         Mortgages on property of any Subsidiary principally engaged in a financing or leasing business,

(i)         Mortgages upon the oil, gas or other minerals produced or to be produced (or proceeds thereof) from properties which shall have been acquired or shall have become producing subsequent to August 15, 1977, if, in respect of each such Mortgage it shall have been given to secure indebtedness incurred to pay or to reimburse the cost (incurred subsequent to the date of the acquisition of such property or August 15, 1977, whichever shall be later) of drilling or equipping such property, and

(j)          any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Mortgage referred to in the foregoing clauses (a) to (i) inclusive or of any Debt secured thereby, provided that the principal amount of Debt secured thereby shall not exceed the principal amount of Debt so secured at the time of such exten­sion, renewal or replacement, and that such extension, renewal or replacement Mortgage shall be limited to all or part of substantially the same property which secured the Mortgage extended, renewed or replaced (plus improvements on such property).

Notwithstanding the foregoing provisions of this Section, the Company and any one or more Subsidiaries may issue, assume or guarantee Debt secured by Mortgages which would otherwise be subject to the foregoing restrictions in an aggregate principal amount which, together with the aggregate outstanding principal amount of all other Debt of the Company and its Subsidiaries which would otherwise be subject to the foregoing restrictions, does not at any one time exceed 5% of the stockholders’ equity in the Company and its consolidated subsidiary companies as shown on the audited consolidated balance sheet contained in the latest annual report to stockholders of the Company. For this purpose “stockholders’ equity” shall mean the aggregate of (however designated) capital, capital stock, capital sur­plus, capital in excess of par value of stock, earned surplus and net income retained for use in the business, after deducting the cost of shares of the Company held in its treasury.

The following types of transactions, among others, shall not be deemed to create Debt secured by Mortgages:

(1)         the sale or other transfer of oil, gas or other minerals in place for a period of time until, or in an amount such that, the transferee will realize therefrom a specified amount (however determined) of money or such minerals, or the sale or other transfer o... any other interest in property of the character commonly referred to as an oil payment or a production payment, and

(2)         Mortgages required by any contract or statute in order to permit the Company or a subsidiary to perform any contract or subcontract made by it with or at the request of the United States, any State or any department, agency or instrumentality of either.

SECTION 10.09. Limitations on Sale and Lease-Back . The Company covenants and agrees that neither it nor any Subsidiary will enter into any arrangement with any bank, insurance company or other lender or investor, or to which any such lender or investor is a party, providing for the leasing to the Company or a Subsidiary for a period of more than three years or any real property located in the continental United States of America (except a lease for a temporary period not to exceed three years by the end of which it is intended that the use of such real property by the lessee will be discontinued) which has been or is to be sold or transferred by the Company or a Subsidiary to such lender or investor or to any Person or organization to which funds have been or are to be advanced by such lender or investor on the security of the leased property (hereinafter called “Sale and Lease-Back Transactions”) unless either:

(a)         the Company or such Subsidiary would be entitled, pursuant to the provisions of Section 10.08, to create Debt secured by a Mortgage on the property to be leased, without equally and ratably securing the Securities, or

(b)         the Company (and in any such case the Company covenants and agrees that it will do so), within four months after the effective date of such Sale and Lease-Back Transactions (whether made by the Company or a Subsidiary), applies to the retirement of Debt of the Company maturing by the terms thereof more than one year after the original creation thereof (herein called “Funded Debt”) an amount equal to the greater of (i) the net proceeds of the sale of the real property leased pursuant to such arrangement or (ii) the fair value of the real property so leased at the time of entering into such arrangement (as determined by the Board of Directors); provided that the amount to be applied to the retirement of Funded Debt shall be reduced by an amount equal to the sum of (a) the principal amount of Securities delivered, within four months after the effective date of such arrangement, to the Trustee for retirement and cancellation and (b) the principal amount of other Funded Debt voluntarily retired by the Company within such four-month period, excluding retirements of Securities and other Funded Debt pursuant to mandatory sinking fund or prepayment provisions or by payment at maturity. No provision of Article Eleven hereof shall restrict the retirement of Funded Debt pursuant to this Section.

ARTICLE ELEVEN

Redemption of Securities

SECTION 11.01. Applicability of Article . Securi­ties of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 3.01 for Securities of any series) in accordance with this Article.

SECTION 11.02. Selection by Trustee of Securities To Be Redeemed . If less than all the Securities of any series are to be redeemed, the Company shall give the Trustee notice not less than 60 days prior to the Redemption Date (unless a shorter notice shall be satisfactory to the Trustee) of such Redemption Date and the principal amount of the Securities of such series to be redeemed and the Trustee shall select the particular Securities to be redeemed from the outstanding Securities of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series.

The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed.

For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed.

SECTION 11.03. Notice of Redemption . Notice of redemption shall be given not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securi­ties to be redeemed, as provided in Section 1.06.

Each such notice of redemption shall specify the Redemption Date, the Redemption Price, the Place or Places of Payment, that the Securities of such series are being redeemed at the option of the Company pursuant to provisions contained in the terms of the Securities of such series or in a supplemental indenture establishing such series, if such be the case, that on the Redemption Date the Redemption Price will become due and payable upon each Security redeemed, that payment will be made upon presentation and surrender of the applicable Securities, that all Coupons, if any, maturing subsequent to the date fixed for redemption shall be void, that any interest accrued to the Redemption Date will be paid as specified in said notice, and that on and after said Redemption Date any interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Securities of any series are to be redeemed the notice of redemption shall specify the numbers of the Securities of such series to be redeemed, and, if only Bearer Securities of any series are to be redeemed, and if such Bearer Securities may be exchanged for Registered Securities, the last date on which exchanges of Bearer Securities for Registered Securities not subject to redemp­tion may be made. In case any Security of any series is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to redeemed and shall state that on and after the Redemption Date, upon surrender of such Security and any Coupons appertaining thereto, a new Security or Securities of such series in principal amount equal to the unredeemed portion thereof and with appropriate Coupons will be issued.

Notice of redemption of Securities and Coupons, if any, to be redeemed at the election of the Company shall be given by or on behalf of the Company.

SECTION 11.04. Deposit of Redemption Price . On or before (but at least one Business Day before in the Place of Payment in the case of payments not in Dollars) the opening of business on any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) an amount of money in the relevant currency (or a sufficient number of currency units, as the case may be) sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities and Coupons, if any, which are to be redeemed on that date.

SECTION 11.05. Securities Payable on Redemption Date . Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest and the Coupons for such interest appertaining to any Bearer Securities so to be redeemed, except to the extent provided below, shall be void. Upon surrender of any such Security for redemption in accordance with said notice, together with all Coupons, if any, appertaining thereto maturing after the Redemption Date, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however , that installments of interest on Bearer Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable only at an office or agency located outside the United States (except as otherwise provided in Sec­tion 10.02) and, unless otherwise specified as contemplated by Section 3.01, only upon presentation and surrender of Coupons for such interest; and provided further that, unless otherwise specified as contemplated by Section 3.01, installments of interest on Registered Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 3.07.

If any Bearer Security surrendered for redemption shall not be accompanied by all appurtenant Coupons maturing after the Redemption Date, such Security may be paid after deducting from the Redemption Price an amount equal to the face amount of all such missing Coupons, or the surrender of such missing Coupon or Coupons may be waived by the Company and the Trustee if there be furnished to them such security or indemnity as they may require to save each of them and any Paying Agent harmless. If thereafter the Holder of such Security shall surrender to the Trustee or any Paying Agent any such missing Coupon in respect of which a deduction shall have been made from the Redemption Price, such Holder shall be entitled to receive the amount so deducted; provided, however , that interest represented by Coupons shall be payable only at an office or agency located outside the United States (except as otherwise provided in Sec­tion 10.02) and, unless otherwise specified as contemplated by Section 3.01, only upon presentation and surrender of those coupons.

If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and any premium shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security.

SECTION 11.06. Securities Redeemed in Part . Any Security (including any Coupons appertaining thereto) which is to be redeemed only in part shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security (including any Coupons appertaining thereto) or Securities (including any Coupons appertaining thereto) of the same series and having the same terms and conditions, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security (includ­ing any Coupons appertaining thereto) so surrendered.

SECTION 11.07. Right To Require Repurchase of Securities by the Company upon Change in Control and Decline in Debt Rating . (a) In the event that (i) there shall occur any Change in Control and (ii) the prevailing rating of the Securities by Standard & Poor’s Corporation or its successors (“S&P”) or Moody’s Investors Service, Inc. or its successors (“Moody’s”) or another nationally recognized rating agency selected by the Company, on any date within 90 days following public notice of the occurrence of such Change in Control shall be less than the rating of the Securities on the date 60 days prior to the occurrence of such Change in Control by at least one Full Rating Category (“Rating Decline”), each holder of Securities shall have the right, at such holder’s option, to require the Company to purchase, and upon the exercise of such right the Company shall purchase, all or any part of such holder’s Securities on the date (the “Repurchase Date”) that is 100 days after the last to occur of (i) public notice of such Change in Control and (ii) the Rating Decline, at 100% of the princi­pal amount on the Repurchase Date, plus any accrued and unpaid interest to the Repurchase Date.

(b) On or before the 28th day following the last to occur of (i) public notice of such Change in Control and (ii) the Rating Decline, the Company shall give notice of a Change in Control and Rating Decline and of the repurchase right set forth herein arising as a result thereof by first-class mail, postage prepaid to each holder of Securi­ties at such holder’s address appearing in the Securities Register. The Company shall also cause a copy of such notice of a repurchase right to be published in an Author­ized Newspaper in the Borough of Manhattan, The City of New York and, if any Bearer Securities are then Outstanding, in London and such other cities as shall be specified with respect to such Bearer Securities.

Each notice of a repurchase right shall state:

(1)         the Repurchase Date,

(2)         the date by which the repurchase right must be exercised,

(3)         the price at which the repurchase is to be made, if the repurchase right is exercised, and

(4)         a description of the procedure which a holder of Securities must follow to exercise a repurchase right.

No failure of the Company to give the foregoing notice shall limit any holder’s right to exercise a repur­chase right.

(c) To exercise a repurchase right, a holder of Securities shall deliver to the Company (or an agent desig­nated by the Company for such purpose in the notice referred to in (b) above) at least ten days prior to the Repurchase Date (i) written notice of the holder’s exercise of such right, which notice shall set forth the name of the holder, the principal amount of the Security or Securities (or portion of a Security) to be repurchased, and a statement that the option to exercise the repurchase right is being made thereby, and (ii) the Security with respect to which the repurchase right is being exercised, duly endorsed for transfer to the Company. Such written notice shall be irrevocable.

(d)         In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid the price payable with respect to the Security or Securities as to which the repurchase right has been exercised in cash to the holder of such - Security or Securities, on the Repurchase Date. In the event that a repurchase right is exercised with respect to less than the entire principal amount of a surrendered Security, the Company shall execute and deliver to the Trustee and the Trustee shall authenticate for issuance, against surrender of such surrendered Security, (x) in the name of the holder a new Security or Securities in the aggregate principal amount of the unrepurchased portion of such surrendered Security and (y) in the name of the Company a new Security or Securities in the aggregate principal amount of the repurchased portion of such surrendered Security.

(e)         As used in this Section 11.07:

(1)         a “Change in Control” shall be deemed to have occurred at such time as (i) a “person” or “group” (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended) becomes the “beneficial owner” (as defined in Rule l3d-3 under such Exchange Act) of more than fifty percent (50%) of the then outstanding Voting Stock of the Company, otherwise than through a transaction consummated with the prior approval of the Board of Directors of the Company, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Company’s Board of Directors (together with any new Director whose elec­tion by the Company’s Board of Directors or whose nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the Directors then still in office who either were Direc­tors at the beginning of such period or whose election or nomination for election was previously so approved) cease f or any reason to constitute a majority of the Directors then in office.

(2)         the term “Full Rating Category” shall mean (i) with respect to S&P, any of the following categories:
AAA, AA, A, BBB, BB, B, CCC, CC and C, (ii) with respect to Moody’s, any of the following catego­ries: Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C, (iii) the equivalent of any such category by S&P or Moody’s and (iv) the equivalent of such ratings by any other nationally recognized securities rating agency selected by the Company. In determining whether the rating of the Debt Securities has decreased by the equivalent of one full Rating Category, graduations within Full Rating Categories (-I- and - S&P; 1, 2 and 3 for Moody’s; or the equivalent for S&P or Moody’s or any such other rating agency) shall be taken into account.

(3)         the term “public notice” shall, without limitation, include any filing or report made in accordance with the requirements of the Securities and Exchange Commission or any press release or public announcement made by the Company.

(f)         Notwithstanding anything to the contrary contained in this Section 11.07, if a Rating Decline shall apply to less than all series of the Securities, the repur­chase rights described herein shall apply only to the series with respect to which there has been a Rating Decline.

ARTICLE TWELVE

Sinking Funds

SECTION 12.01. Applicability of Article . The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Sec­tion 3.01 for Securities of such series.

The minimum amount of any sinking fund payment provided for by the terms of Securities of any series is herein referred to as a “mandatory sinking fund payment”, and any payment in excess of such minimum amount provided for by the terms of Securities of any series is herein referred to as an “optional sinking fund payment”. If provided for by the terms of Securities of any series, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 12.02. Each sinking fund payment shall be applied to the redemption of Securities of any series as provided for by the terms of Securities of such series.

SECTION 12.02. Satisfaction of Sinking Fund Payments with Securities . The Company (1) may deliver Outstanding Securities (including any Coupons) of a series (other than any previously called for redemption) and (2) may apply as a credit Securities of a series which have been redeemed either at the election of the Company pursuant to the terms of such Securities (including any Coupons) or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to the Securities of such series required to be made pursuant to the terms of such Securities as provided for by the terms of such series; provided that such Securities have not been previously so credited. Such Securities shall be received and credited for such purpose by the Trustee at the Redemption Price specified in such Securities for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly.

SECTION 12.03. Redemption of Securities for Sinking Fund . Not less than 60 days prior to each sinking fund payment date for any series of Securities, the Company will deliver to the Trustee an Officers’ Certificate speci­fying the amount of the next ensuing sinking fund payment for that series pursuant to the terms of that series, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities (including any Coupons) of that series pursuant to Section 12.02 and stating the basis for such credit and that such Securities have not been previously so credited and will also deliver to the Trustee any Securities (including any coupons) to be so delivered. Not less than 30 days before each such sinking fund payment date the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 11.02 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 11.03. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Section 11.05 and 11.06.


ARTICLE THIRTEEN

Meetings of Holders of Securities

SECTION 13.01. Purposes for Which Meetings May Be Called . If Securities of a series are issuable as Bearer Securities, a meeting of Holders of Securities of such series may be called at any time and from time to time pursuant to this Article to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be made, given or taken by Holders of Securities of such series.

SECTION 13.02. Call. Notice and Place of Meet­ings . (a) The Trustee may at any time call a meeting of Holders of Securities of any such series for any purpose specified in Section 13.01, to be held at such time and at such place in the Borough of Manhattan, The City of New York, or in London, as the Trustee shall determine. Notice of every meeting of Holders of Securities of any such series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the manner provided in Sec­tion 1.06, not less than 21 nor more than 180 days prior to the date fixed for the meeting.

(b) In case at any time the Company, by or pursuant to a Board Resolution, or the Holders of at least 10% in principal amount of the Outstanding Securities of any such series shall have requested the Trustee to call a meeting of the Holders of Securities of such series for any purpose specified in Section 13.01, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have made the first publication of the notice of such meeting within 21 days after receipt of such request or shall not thereaf­ter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of Securities of such series in the amount above specified, as the case may be, may determine the time and the place in the Borough of Manhattan, The City of New York, or in London, for such meeting and may call such meeting for such purposes by giving notice thereof as provided in subsection (a) of this Section.

SECTION 13.03. Persons Entitled To Vote at Meetings . To be entitled to vote at any meeting of Holders of Securities of any series, a Person shall be (1) Holder of one or more Outstanding Securities of such series, or (2) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Securities of such series by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at any meeting of Holders of Securities of any series shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.

SECTION 13.04. Quorum; Action . The Persons entitled to vote a majority in principal amount of the Outstanding Securities of a series shall constitute a quorum for a meeting of Holders of Securities of such series; provided, however , that if any action is to be taken at such meeting with respect to a consent or waiver which this Indenture expressly provides may be given by the Holders of Securities of not less than 66-2/3/% in principal amount of Outstanding Securities of a series, the Persons entitled to vote 66-2/3% in principal amount of the Outstanding Securi­ties of such series shall constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of Securities of such series, be dis­solved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Sec­tion 13.02(a), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting which was adjourned for lack of a quorum shall state expressly the percentage, as provided above, of the principal amount of the Outstanding Securities of such series which shall constitute a quorum.

Any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action which this Indenture expressly provides may be made, given or taken by the Holders of a specified percent­age in principal amount of the Outstanding Securities of a series may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as afore­said by the affirmative vote of the Holders of such speci­fied percentage in principal amount of the outstanding Securities of that series.

Any resolution passed or decision taken at any meeting of Holders of Securities of any series duly held in accordance with this Section shall be binding on all the Holders of Securities of such series and the related Cou­pons, whether or not present or represented at the meeting.

SECTION 13.05. Determination of Voting Rights; Conduct and Adjournment of Meetings . (a) Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders of Securities of a series in regard to proof of the holding of Securities of such series and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examina­tion of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. Except as otherwise permitted or required by any such regulations, the holding of Securities shall be proved in the manner speci­fied in Section 1.04 and the appointment of any proxy shall be proved in the manner specified in Section 1.04 or by having the signature of the person executing the proxy witnessed or guaranteed by any trust company, bank or banker authorized by Section 1.04 to certify to the holding of Bearer Securities. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified in Section 1.04 or other proof.

(b) The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Holders of Securities as provided in Section 13.02(b), in which case the Company or the Holders of Securities of the series calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote or the Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting.

(c) At any meeting each Holder of a Security of such series or proxy shall be entitled to one vote for each $1 (or the equivalent thereof) principal amount of the Outstanding Securities of such series held or represented by him; provided, however , that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote, except as a Holder of a Security of such series or proxy.

(d) Any Meeting of Holders of Securities of any series duly called pursuant to Section 13.02 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting; and the meeting may be held as so adjourned without further notice.

SECTION 13.06. Counting Votes and Recording - Action of Meetings . The vote upon any resolution submitted to any meeting of Holders of Securities of any series shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities of such series or of their representatives by proxy and the principal amounts and serial numbers of the Outstanding Securities of such series held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record, at least in duplicate, of the proceedings of each meeting of Holders of Securities of any series shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was given as provided in Section 13.02 and, if applicable, Section 13.04. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one such copy shall be delivered to the Company, and another to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated.

This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

IN WITNESS THEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, of the day and year first above written.

ASHLAND OIL, INC.,
by

_________________________________
Title:                  Assistant Treasurer
Attest:

_____________________________________
Assistant Secretary

CITIBANK, N.A.,
by

_________________________________
Title:                  Vice President

Attest:


_____________________________________
Assistant Secretary




 
 
 
 

EXHIBIT A

[FORMS OF CERTIFICATION]

EXHIBIT A.l

(FORM OF CERTIFICATE TO BE GIVEN BY
PERSON ENTITLED TO RECEIVE BEARER SECURITY]

CERTIFICATE

ASHLAND OIL, INC.

[Insert title or sufficient description
of Securities to be delivered]

This is to certify that as of the date hereof, and except as set forth below, the above-captioned Securities held by you for our account (i) are owned by a person that is not a United States person, (ii) are owned by a United States person that is (A) the foreign branch of a United States financial institution (as defined in U.S. Treasury Regulations Section l.165-l2(c)(1)(v)) (a “financial insti­tution”) purchasing for its own account or for resale, or (B) a United States person who acquired the Securities through the foreign branch of a financial institution and who holds the Securities through the financial institution on the date hereof (and in either case (A) or (B), the financial institution hereby agrees to comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regula­tions thereunder), or (iii) are owned by a financial insti­tution for purposes of resale during the Restricted Period (as defined in U.S. Treasury Regulations Sec­tion 1.163-5(c) (2) (i) (D) (7)). In addition, financial institutions described in clause (iii) of the preceding sentence (whether or not also described in clause (i) or (ii)) certify that they have not acquired the Securities for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.

As used herein, “United States person” means any citizen or resident of the United States, any corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or any estate or trust the income taxation of which is subject to United States Federal income regardless of its source, and “United States” means the United States of America (including the states and the District of Columbia), its territories, its possessions, the Commonwealth of Puerto Rico and other areas subject to its jurisdiction.

We undertake to advise you by telex if the above statement as to beneficial ownership is not correct on the date of delivery of the above-captioned Securities in bearer form as to all of such Securities.

We understand that this certificate may be required in connection with certain tax legislation in the United States. If administrative or legal proceedings are com­menced or threatened in connection with which this certifi­cate is or would be relevant, we irrevocably authorize you to produce this certificate or a copy thereof to any inter­ested party in such proceedings.


Dated:  __________________ 2001

[ To be dated on the earlier of the first Interest Payment Date and the date of the delivery of the Securities in definitive form ]


[Name of Person Entitled to
Receive Bearer Security]


________________________________
(Authorized Signature)
Name:
Title:





 
 
 
 

EXHIBIT A.2

[FORM OF CERTIFICATE TO BE GIVEN BY EUROCLEAR
AND CEDEL S.A. IN CONNECTION WITH THE
EXCHANGE OF A PORTION OF A TEMPORARY GLOBAL SECURITY]

CERTIFICATE

ASHLAND OIL, INC.


[Insert title or sufficient description
of Securities to be delivered)

This is to certify with respect to $___________ principal amount of the above-captioned Securities (i) that we have received from each of the persons appearing in our records as persons entitled to a portion of such principal amount (our “Qualified Account Holders”) a certificate with respect to such portion substantially in the form attached hereto, and (ii) that we are not submitting herewith for exchange any portion of the temporary global Security representing the above-captioned Securities excepted in such certificates.

We further certify that as of the date hereof we have not received any notification from any of our Qualified Account Holders to the effect that the statements made by such Qualified Account Holders with respect to any portion of the part submitted herewith for exchange are no longer true and cannot be relied upon as of the date hereof.

Date:                 __________ 2001


[ To be dated no earlier than the Exchange Date ]


[MORGAN GUARANTY TRUST COMPANY OF NEW YORK, BRUSSELS OFFICE, as Operator of the Euroclear System]

[CEDEL S.A.]

by

(Authorized Signature)
Name:
Title:


 
 
 
 


EXHIBIT A.3
[FORM OF CERTIFICATE TO BE GIVEN BY EUROCLEAR
AND CEDEL S.A. TO OBTAIN
INTEREST PRIOR TO AN EXCHANGE DATE)


CERTIFICATE

ASHLAND OIL, INC.

[Insert title or sufficient
description of Securities ]

We confirm that the interest payable on the Interest Payment Date on [Insert Date] will be paid to each of the persons appearing in our records as being entitled to interest payable on such date from whom we have received a written certification, dated not earlier than such Interest Payment Date, substantially in the form attached hereto. We undertake to retain certificates received from our member organizations in connection herewith for four years from the end of the calendar year in which such certificates are received.

We undertake that any interest received by us and not paid as provided above shall be returned to the Trustee for the above Securities immediately prior to the expiration of two years after such Interest Payment Date in order to be repaid by such Trustee to the above issuer at the end of two years after such Interest Payment Date.


Date:                 ___________ 2001 [To be dated on or after the relevant Interest Payment Date]


[MORGAN GUARANTY TRUST COMPANY OF NEW YORK, BRUSSELS OFFICE, as Operator of the Euroclear System]
[CEDEL S.A.]

by

(Authorized Signature)
Name:
Title:






 
 
 
 

EXHIBIT A.4
[FORM OF CERTIFICATE TO BE GIVEN BY BENEFICIAL OWNERS
TO OBTAIN INTEREST PRIOR TO AN EXCHANGE DATE]

CERTIFICATE

ASHLAND OIL, INC.

[Insert title or sufficient

description of Securities]

This is to certify that as of the Interest Payment Date on [Insert Date] and except as provided in the third paragraph hereof, the above-captioned Securities held by you for our account are beneficially owned by (i) a person that is not a United States person, (ii) a United States person that is (A) the foreign branch of a United States financial institution (as defined in U.S. Treasury Regulations Sec­tion 1.l65-l2(c)(l)(v)) (a “financial institution”) purchas­ing for its own account or for resale, or (B) a United States person who acquired the Securities through the foreign branch of a financial institution and who holds the Securities through the financial institution on the date hereof (and in either case (A) or (B), the financial insti­tution hereby agrees to comply with the requirements of Section 165(j) (3) (A), (B) or (C) of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), or (iii) a financial institution for purposes of resale during the Restricted Period (as defined in U.S. Treasury Regulations Section 1.163-5(c) (2) (i) (D) (7)). In addition, if the beneficial owner is a financial institution described in clause (iii) of the preceding sentence (whether or not also described in clause (i) or (ii)) it certifies that it has not acquired the Securities for purposes of resale directly or indirectly to a United States person or to a person within the United States or its possessions.

As used herein, “United States person” means any citizen or resident of the United States, any corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or any estate or trust the income of which is subject to United States Federal income taxation regardless of its source, and “United States” means the United States of America (including the states and the District of Colum­bia), its territories, its possessions, the Commonwealth of Puerto Rico and other areas subject to its jurisdiction.

This certificate excepts and does not relate to U.S. $__________ principal amount of the above-captioned Securities appearing in your books as being held for our account as to which we are not yet able to certify and as to which we understand interest cannot be credited unless and until we are able to so certify.

We understand that this certificate may be required in connection with certain tax legislation in the United States. If administrative or legal proceedings are commenced or threatened in connection with which this certificate is or would be relevant, we irrevocably author­ize you to produce this certificate or a copy thereof to any interested party in such proceedings.

Date:                       _________ 2001
To be dated on or after the
15th day before the relevant
Interest Payment Date]

[Name of Person Entitled to
Receive interest]

_____________________________
(Authorized Signature)
    Name:
                                                                                                  Title:

EXHIBIT 10.3
ASHLAND INC.
DEFERRED COMPENSATION PLAN FOR EMPLOYEES (2005)
(Effective as of January 1, 2005)
 
Whereas , the Ashland Inc. Deferred Compensation Plan for Employees (2005) (hereinafter the “Plan”) was approved by the Board of Directors of Ashland Inc. (“Ashland”) on November 4, 2004 to be effective January 1, 2005;
 
Whereas , the Plan as approved and effective reserved the right to amend it;
 
Whereas , the right to amend the Plan was exercised on April 21, 2005 by amending and restating the Plan effective January 1, 2005 and further amending the Plan on October 28, 2005 effective January 1, 2005;
 
Whereas , it is again desired to exercise the right to amend the Plan and thereby institute the second amendment and restatement of the Plan;
 
Now, Therefore , effective January 1, 2005, except as otherwise provided herein, the Plan is amended and restated as follows:
 
1.            PURPOSE
 
The Ashland Inc. Deferred Compensation Plan for Employees (2005) (the “Plan”) is maintained primarily for the purpose of providing an opportunity to defer compensation for retirement or other future purposes to a select group of management or highly compensated employees (including former employees that met these criteria when employed).  The obligations of the Company hereunder constitute a mere promise to make the payments provided for in this Plan.  No employee, his or her spouse or the estate of either of them shall have, by reason of this Plan, any right, title or interest of any kind in or to any property of the Company.  To the extent any Participant has a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company.
 
This Plan is a replacement of the prior Ashland Inc. Deferred Compensation Plan amended and restated as of April 1, 2003 (the “Former Plan”).  Compensation deferred under the Former Plan that was vested as of December 31, 2004 shall remain subject to all of the rules, terms and conditions in effect under the Former Plan as of December 31, 2004.  For this purpose, the Compensation deferred under the Former Plan shall include all income, gains and losses connected to such Compensation.
 
The rules, terms and conditions of this Plan shall apply to Compensation deferred after December 31, 2004, including any Election to defer such Compensation made in 2004.  For this purpose, the Compensation deferred after December 31, 2004 shall include all income, gains and losses connected to such Compensation.  Additionally, the rules, terms and conditions of this Plan shall apply to any Compensation that was deferred before January 1, 2005 and that was not vested at December 31, 2004.
 
2.            DEFINITIONS
 
The following definitions shall be applicable throughout the Plan:
 
(a)           “Accounting Date” means the Business Day on which a calculation concerning a Participant’s Compensation Account is performed, or as otherwise defined by the Committee.
 
(b)           “Beneficiary” means the person(s) designated by the Participant in accordance with Section 10, or if no person(s) is/are so designated, the estate of a deceased Participant.
 
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(c)           “Board” means the Board of Directors of Ashland Inc. or its designee.
 
(d)           “Business Day” means a day on which the New York Stock Exchange is open for trading activity.
 
(e)           “Change in Control” shall be deemed to occur (1) upon approval of the shareholders of Ashland (or if such approval is not required, upon the approval of the Board) of (A) any consolidation or merger of the Company (a “Business Combination”), other than a consolidation or merger of the Company into or with a direct or indirect wholly-owned subsidiary, in which the shareholders of the Company own, directly or indirectly, less than 50% of the then outstanding shares of common stock of the Business Combination that are entitled to vote generally for the election of directors of the Business Combination or pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (B) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of Ashland, provided, however, that no sale, lease, exchange or other transfer of all or substantially all the assets of Ashland shall be deemed to occur unless assets constituting 80% of the total assets of Ashland are transferred pursuant to such sale, lease exchange or other transfer, or (C) adoption of any plan or proposal for the liquidation or dissolution of Ashland, (2) when any person (as defined in Section 3(a)(9) or 13(d) of the Exchange Act), other than Ashland or any subsidiary or employee benefit plan or trust maintained by Ashland, shall become the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 25% of Ashland’s Common Stock outstanding at the time, without the approval of the Board, or (3) at any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board shall cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by Ashland’s shareholders of each new director during such two-year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such two-year period.
 
(f)           “Code” means the Internal Revenue Code of 1986, as amended.
 
(g)           “Committee” means the Personnel and Compensation Committee of the Board or its designee.
 
(h)           “Common Stock” means the common stock, $.01 par value, of Ashland Inc.
 
(i)           “Common Stock Fund” means that investment option, approved by the Committee, in which a Participant’s Compensation Account may be deemed to be invested and may earn income based on a hypothetical investment in Common Stock.
 
(j)           “Company” means, on and after June 30, 2005, Ashland Inc., its divisions, subsidiaries and affiliates.
 
(k)           “Compensation” means any employee compensation determined by the Committee to be properly deferrable under the Plan.
 
(l)           “Compensation Account(s)” means the Retirement Account, the In-Service Account(s), the Excess Plan Account and/or the SERP Account.  In-Service Accounts created on and after January 1, 2006, shall be referred to as Flexible Distribution Accounts.
 
(m)           “Corporate Human Resources” means the Corporate Human Resources Department of the Company.
 
 
 
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(n)           “Credit Date” means the date Compensation otherwise would have been paid to the Participant.
 
(o)           “Deferred Compensation” means the Compensation the Participant elects to defer pursuant to the Plan.
 
(p)           “Disability” means that a Participant is either:
 
1.  
Unable to engage in any substantial gainful activity because of a medically determinable physical or mental impairment that is expected to result in death or last for a continuous period of 12 or more months; or
2.  
Receiving income replacement benefits for a period of at least three months under an accident and health plan covering employees of the Company because of a medically determinable physical or mental impairment that is expected to result in death or last for a continuous period of 12 or more months.
Corporate Human Resources or its delegate shall determine whether a Participant has incurred a Disability.
 
(q)           “Election” means a Participant’s delivery of a notice of election to defer payment of all or a portion of his or her Compensation, Excess Payments or SERP Payments under the terms of the Plan.  Such notice shall also include instructions specifying the time the deferred Compensation, Excess Payments or SERP Payments will be paid and the form in which it will be paid.  Such elections shall be irrevocable except as otherwise provided in the Plan or pursuant to Treasury guidance.  Elections shall be made and delivered as prescribed by the Committee or the Company.
 
(r)           “Employee” means a full-time, regular salaried employee (which term shall be deemed to include officers) of the Company, its present and future subsidiary corporations as defined in Section 424 of the Internal Revenue Code of 1986, as amended or its affiliates.
 
(s)           “Excess Payments” means payments made to a Participant pursuant to the Plan and the Excess Plan.  These are amounts that a Participant deferred from the Excess Plan to this Plan which were transferred to this Plan at a time when the amounts were payable under the Excess Plan and held in an Excess Plan Account for the Participant.
 
(t)           “Excess Plan” means the Ashland Inc. Nonqualified Excess Benefit Pension Plan, as it now exists or as it may hereafter be amended.
 
(u)           “Fair Market Value” means the price of a share of Common Stock, as reported on the Composite Tape for New York Stock Exchange issues on the date and at the time designated by the Company.
 
 
(v)           “In-Service Account” means the account(s) to which the Participant’s Deferred Compensation is credited and from which distributions are made.  In-Service Accounts created on and after January 1, 2006, are referred to as Flexible Distribution Accounts.  References to Flexible Distribution Accounts shall include In-Service Accounts created before January 1, 2006.  A Participant may not have more than five Flexible Distribution Accounts outstanding.
 
(w)           “Participant” means an Employee selected by the Committee to participate in the Plan and who has elected to defer payment of all or a portion of his or her Compensation under the Plan or who otherwise has a Compensation Account in the Plan.
 
(x)           “Performance-Based Compensation” means Compensation that meets requirements specified by the Secretary of the Treasury.  Performance-Based Compensation will include the attributes
 
 
3
 
that it is variable, contingent on the satisfaction of pre-established metrics and is not readily ascertainable at the time of the Election to defer such compensation under Section 8(b).
 
(y)           “Plan” means this Ashland Inc. Deferred Compensation Plan for Employees (2005) as it now exists or as it may hereafter be amended.
 
(z)           “Plan Year” means the calendar year.  The first Plan Year of the Plan is 2005.
 
(aa)           “Retirement Account” means the account(s) to which the Participant’s Deferred Compensation is credited and from which distributions are made.
 
(bb)           “Secretary of the Treasury” or “Treasury” means the United States Department of Treasury.
 
(cc)           “Separation from Service” or “Termination” means a termination from employment resulting in a cessation of performing active service for the Company (other than by reason of death or Disability) .  An Employee is considered to incur a Separation from Service on the date the Employee terminates employment with the Company or when it is reasonably anticipated that  the Employee's services to the Company will permanently decrease to 20% or less of the average amount of services performed for the Company during the immediately preceding 36 month period (or period of total employment if less than 36 months).  Notwithstanding anything in the foregoing to the contrary, a Separation from Service does not occur as a result of military leave, sick leave or other bona fide leave of absence not exceeding six months or the period during which the Employee retains a right to reemployment.
 
(dd)           “SERP” means the Ashland Inc. Supplemental Early Retirement Plan for Certain Employees, as it now exists or as it may hereafter be amended.
 
(ee)           “SERP Payments” means payments made to a Participant pursuant to the Plan and the SERP.  These are amounts that a Participant deferred from the SERP to this Plan which were transferred to this Plan at a time when the amounts were payable under the SERP and held in a SERP Account for the Participant.
 
(ff)           “Specified Employee” means, for a particular Plan Year, any Employee who was at anytime during the 12 months ending on the December 31 preceding the start of the particular Plan Year (the Specified Employee identification date) classified on the records of the Company as being in salary grade band 23 or higher.  Such an Employee shall be classified as a Specified Employee as of January 1 of the particular Plan Year (the Specified Employee effective date) and shall remain classified as such for the entirety of such Plan Year.  Notwithstanding anything to the contrary, no more than 200 Employees may be classified as Specified Employees for any Plan Year.  Unless otherwise provided in the particular document, this definition of Specified Employee shall apply to all plans, programs, contracts, agreements and other arrangements maintained by the Company that are subject to Code section 409A.
 
(gg)           “Stock Unit(s)” means the share equivalents credited to the Common Stock Fund of a Participant’s Compensation Account pursuant to Section 6.
 
(hh)           “Unforeseeable Emergency” means a severe financial hardship of a Participant because of
 
1.  
An illness or accident of the Participant, the Participant’s spouse or dependent (as defined in Internal Revenue Code section 152(a));
2.  
A loss of the Participant’s property due to casualty; or
3.  
Such other similar extraordinary unforeseeable circumstances because of events beyond the control of the Participant.
 
 
 
4
 
The meaning of Unforeseeable Emergency shall be interpreted and applied in accordance with applicable guidance that may be issued by the Treasury.
 
3.
SHARES; ADJUSTMENTS IN EVENT OF CHANGES IN CAPITALIZATION
 
(a)            Shares Authorized for Issuance.   There shall be reserved for issuance under the Plan 500,000 shares of Common Stock, subject to adjustment pursuant to subsection (c) below.
 
(b)            Units Authorized for Credit.   The maximum number of Stock Units that may be credited to Participants’ Compensation Accounts under the Plan is 1,500,000, subject to adjustment pursuant to subsection (c) below.
 
(c)            Adjustments in Certain Events.   In the event of any change in the outstanding Common Stock of the Company by reason of any stock split, share dividend, recapitalization, merger, consolidation, reorganization, combination, or exchange or reclassification of shares, split-up, split-off, spin-off, liquidation or other similar change in capitalization, or any distribution to common shareholders other than ordinary cash dividends, the number or kind of shares or Stock Units that may be issued or credited under the Plan shall be automatically adjusted so that the proportionate interest of the Participants shall be maintained as before the occurrence of such event.  Such adjustment shall be conclusive and binding for all purposes of the Plan.
 
4.            ELIGIBILITY
 
The Committee shall have the authority to select from management and/or highly compensated Employees those Employees who shall be eligible to participate in the Plan; provided, however, that employees and/or retirees who have elected to defer an amount into this Plan from another plan sponsored or maintained by the Company, the terms of which allowed such employee or retiree to make such a deferral election into this Plan, shall be considered to be eligible to participate in this Plan.
 
5.            ADMINISTRATION
 
Full power and authority to construe, interpret and administer the Plan shall be vested in the Company and the Committee or one or more of their delegates. This power and authority includes, but is not limited to, selecting Compensation eligible for deferral, establishing deferral terms and conditions and adopting modifications, amendments and procedures as may be deemed necessary, appropriate or convenient by the Committee. This power and authority also includes, without limitation, the ability to construe and interpret provisions of the Plan, make determinations regarding law and fact, reconcile any inconsistencies between provisions in the Plan or between provisions of the Plan and any other statement concerning the Plan, whether oral or written, supply any omissions to the Plan or any document associated with the Plan, and to correct any defect in the Plan or in any document associated with the Plan. Decisions of the Company and the Committee (or their delegates) shall be final, conclusive and binding upon all parties.  Day-to-day administration of the Plan shall be the responsibility of Corporate Human Resources.  The administration of and all interpretations under the Plan shall be made consistent with all applicable law.
 
6.
PARTICIPANT ACCOUNTS
 
Upon election to participate in the Plan, there shall be established a Retirement Account and/or Flexible Distribution Account, as designated by the Participant, to which there shall be credited any Deferred Compensation, as of each Credit Date.  If timely elected by a Participant, there shall also be established an Excess Plan Account and/or a SERP Account to which there shall be credited any distribution from the Excess Plan and/or SERP, as applicable, at the time the Participant is eligible to receive a distribution from such plan and/or plans.  Each such Compensation Account shall be credited (or
 
 
 
5
 
debited) on each Accounting Date with income (or loss) based upon a hypothetical investment in any one or more of the investment options available under the Plan, as prescribed by the Committee, for the particular Compensation credited, which may include a Common Stock Fund, as elected by the Participant under the terms of Section 8.  The crediting or debiting on each Accounting Date of income (or loss) shall be made for the respective amounts that were subject to each Election under Section 8.  All investments of a Participant’s Compensation Account, including, but not limited to Stock Units in which such Participant’s Compensation Account may be invested in the Common Stock Fund, shall be on each relevant Accounting Date valued at fair market value.  Additionally, all distributions, investments and investment exchanges allowed and made under the Plan shall be as of the relevant Accounting Date at fair market value.
 
7.            EARLY   WITHDRAWAL
 
(a)            Unforeseeable Emergency .  A Participant or a Participant’s legal representative may submit an application for a distribution from either a Retirement Account or a Flexible Distribution Account because of an Unforeseeable Emergency.  The amount of the distribution shall not exceed the amount necessary to satisfy the needs of the Unforeseeable Emergency.  Such distribution shall include an amount to pay taxes reasonably anticipated as a result of the distribution.  The amount allowed as a distribution under this Section 7(a) shall take into account the extent to which the Unforeseeable Emergency may be relieved by reimbursement, insurance or liquidation of the Participant’s assets (but only to the extent such liquidation would itself not cause a severe financial hardship).  The distribution shall be made in a single sum and paid as soon as practicable after the application for the distribution on account of the Unforeseeable Emergency is approved.  The provisions of this Section 7(a) shall be interpreted and administered in accordance with applicable guidance that may be issued by the Treasury.
 
(b)            Disability .  A Participant or a Participant’s legal representative may submit an application for a distribution from the Retirement Account and Flexible Distribution Account because of the Participant’s Disability.  The distribution shall be made in a single sum and paid as soon as practicable after the application for the distribution on account of the Participant’s Disability is approved.  The provisions of this Section 7(b) shall be interpreted and administered in accordance with applicable guidance that may be issued by the Treasury.  If such guidance should allow an election of a period or form of distribution at the time of the application for a distribution on account of the Participant’s Disability then the Plan shall allow such elections.
 
(c)            Prohibition on Acceleration .  Except as otherwise provided in the Plan and except as may be allowed in guidance from the Secretary of the Treasury, distributions from a Participant’s Compensation Account(s) may not be made earlier than the time such amounts would otherwise be distributed pursuant to the terms of the Plan.
 
8.
DEFERRAL ELECTION
 
(a)            General. The Company or the Committee shall determine the timing of the filing of the appropriate Election forms.  An effective Election may not be revoked or modified except as otherwise determined by the Company or the Committee or as stated herein.  In addition to the provisions contained in this Plan, any deferrals of SERP Payments or Excess Payments must be in accordance with the terms of the SERP or the Excess Plan.
 
(b)            Permissible Deferral Election .
(i)              A Participant’s Election to defer Compensation may only be made in the taxable year before the Compensation is earned, with two exceptions.  The first exception applies to a Participant during his or her first year of eligibility to participate in the Plan.  In that event such a Participant may, if so offered by the Company or the Committee, elect to defer Compensation for services performed after the Election, provided that the Election is made within 30 days of the date the Participant becomes eligible to participate in the Plan.
 
 
 
6
 
 
The second exception is with respect to an election to defer Performance-Based Compensation.  If Performance-Based Compensation is based on services of a Participant performed over a period of at least 12 months, then the Participant may make an Election to defer all or part of such Compensation not later than six months before the end of such service period.  A Participant’s Election under this Section 8(b) shall specify the amount or percentage of Compensation deferred and specify the time and form of distribution from among those described in Section 9 of the Plan.  Each Election to defer Compensation is a separate election regarding the time and form of distribution.
(ii)              An Election to defer Excess Payments or SERP Payments to this Plan must be made pursuant to the terms of the applicable plan.  Such an Election must be made either in a taxable year before the Employee is eligible to participate in the applicable plan or within 30 days of the date the Employee first became eligible to participate in the applicable plan.  Failure to make an Election results in a default Election.  If the Employee fails to make an Election under both the Excess Plan and the SERP, then the Employee’s benefit under both such plans will be transferred at the time such Employee is eligible for a distribution under each such plan to an Excess Plan Account and a SERP Account, as applicable, and shall thereafter be distributed in three annual payments beginning with the January 1 after the Excess Account and/or SERP Account were established (33 1/3% in the first year, 50% of the remaining amount in the second year and the remaining amount in the third year).  If the Employee makes an election under either the Excess Plan or the SERP, but fails to make an election under the other plan, the plan payment for which no election was made shall be the same as the election the Employee made for the other plan.
 
(c)            Investment Alternatives — Existing Balances.   A Participant may elect to change an existing selection as to the investment alternatives in effect with respect to an existing Compensation Account (in increments prescribed by the Committee or the Company) as often, and with such restrictions, as determined by the Committee or by the Company.  If a Participant fails to make an investment selection for his or her Compensation Account, the Committee or the Company may prescribe a default selection or selections in any manner that appears reasonable in their discretion.
 
(d)            Change of Beneficiary.   A Participant may, at any time, elect to change the designation of a Beneficiary in accordance with Section 10 of the Plan.
 
(e)            Transition Relief.   The Company and the Committee, acting either singly or in concert, have the discretion to grant one or more Participants the right to cancel any outstanding deferral election prior to December 31, 2005, pursuant to and in accordance with Q/A-20 of IRS Notice 2005-1, 2005-2 I.R.B. 274, the terms of which are incorporated herein by reference.
 
9.            DISTRIBUTION
 
(a)            Retirement Account.   In accordance with a Participant’s Election under Section 8, but subject to Sections 7 and 11, amounts subject to such Election in the Retirement Account (determined in accordance with Section 6) shall be distributed -
 
1.  
Upon a Participant’s Separation from Service as either a lump sum or in installments not exceeding 15 years; provided, however, that the distribution to a Participant who is a Specified Employee must not be made before the earliest of the date that is six months after the Participant’s Separation from Service or the date of the Participant’s death;
2.  
Upon a Participant’s death to the Participant’s Beneficiary as either a lump sum or in installments not exceeding 15 years from the date of the Participant’s death; or
3.  
At a specified time or under a fixed schedule not exceeding 15 years from the Participant’s Separation from Service.
 
 
 
7
 
(b)            Flexible Distribution Account.    In accordance with a Participant’s Election under Section 8, but subject to Sections 7 and 11, amounts subject to such Election in the Flexible Distribution Account (determined in accordance with Section 6) shall be distributed -
 
1.  
Upon a Participant’s death to the Participant’s Beneficiary as either a lump sum or in installments not exceeding 15 years; or
2.  
At a specified time or under a fixed schedule not less than two years measured from the beginning of the Plan Year after the Plan Year in which the Election is made and not exceeding 15 years measured from the beginning of the Plan Year after the Plan Year in which the Election is made.
 
(c)            Excess Plan and SERP Accounts.   In accordance with a Participant’s Election under Section 8, but subject to Sections 7 and 11, amounts subject to such Election in either the Excess Plan Account or SERP Account, or both (determined in accordance with Section 6) shall be distributed -
 
1.  
Upon a Participant’s Separation from Service and entitlement to a distribution under the Excess Plan and/or SERP, as applicable, as either a lump sum or in installments not exceeding 15 years from the date the Participant was entitled to a distribution under the Excess Plan and/or SERP, as applicable; provided, however, that the distribution to a Participant who is a Specified Employee must not be made before the earliest of the date that is six months after the Participant was entitled to a distribution under the Excess Plan and/or SERP, as applicable or the date of the Participant’s death;
2.  
Upon a Participant’s death to the Participant’s Beneficiary as either a lump sum or in installments not exceeding 15 years from the date of the Participant’s death; or
3.  
At a specified time or under a fixed schedule not exceeding 15 years from the date the Participant incurred a Separation from Service and was entitled to a distribution under the Excess Plan and/or SERP, as applicable.
 
(d)            Medium of Distribution and Default Method .  In accordance with the Participant’s Election and within the guidelines established by the Committee or the Company, a Participant’s Retirement Account, Flexible Distribution Account, Excess Plan Account and/or SERP Account shall be distributed in cash or shares of Common Stock (or a combination of both).  To the extent permissible under law, a Participant may make this Election at any time before a distribution is to be made.  If no Election is made by a Participant as to the distribution or form of payment from one or more of his or her Compensation Account(s), upon the earliest time that a distribution from such account is to be made pursuant to the terms of the Plan, such account shall be paid in cash or shares of Common Stock (or a combination of both) in (i) a lump sum in the case of the Retirement Account or Flexible Distribution Account, or (ii) as prescribed under the default rules for the Excess Account and SERP Account in Section 8(b)(ii).
 
(e)            Election to Delay the Time or Change the Form of Distribution.   A Participant may make an Election to delay the time of a distribution or change the form of a distribution, or may elect to do both, with respect to an amount that would be payable pursuant to an Election under paragraphs (a), (b) or (c) of this Section 9, except in the event of a distribution on account of the Participant’s death, if all of the following requirements are met -
 
1.  
Such an Election may not take effect until at least 12 months after it is made;
2.  
Any delay to the distribution that would take effect because of the Election is at least to a date five years after the date the distribution otherwise would have begun; and
3.  
In the case of a distribution that would be made under paragraphs (a)(3), (b)(2) or (c)(3) of this Section 9 such an Election may not be made less than 12 months before the date of the first scheduled payment.
 
(f)            Distribution Exceptions.   Notwithstanding anything in the Plan to the contrary, the following shall apply to the distribution of Contribution Accounts:
 
 
 
8
 
1.  
Distribution pursuant to a domestic relations order as described in Section 12;
2.  
Distribution of a Participant’s or Beneficiary’s Compensation Accounts shall be made in a single lump sum payment as soon as possible provided the distribution will be of the entirety of the Participant’s or Beneficiary’s Compensation Accounts and the distribution does not exceed the adjusted Code section 402(g) limit; and
3.  
Distribution or suspension of contributions may be made in the discretion of the Company for any other permitted purpose under Treas. Reg. section 1.409A-3(j)(4)(ii)-(xiv).
 
10.            BENEFICIARY DESIGNATION
 
A Participant may designate one or more persons (including a trust) to whom or to which payments are to be made if the Participant dies before receiving distribution of all amounts due hereunder.  A designation of Beneficiary will be effective only after the signed Election is filed with Corporate Human Resources while the Participant is alive and will cancel all designations of Beneficiary signed and filed earlier. If the Participant fails to designate a Beneficiary as provided above or if all of a Participant’s Beneficiaries predecease him or her and he or she fails to designate a new Beneficiary, the remaining unpaid amounts shall be paid in one lump sum to the estate of such Participant. If all Beneficiaries of the Participant die after the Participant but before complete payment of all amounts due hereunder, the remaining unpaid amounts shall be paid in one lump sum to the estate of the last to die of such Beneficiaries.
 
11.            CHANGE IN CONTROL
 
In the event of a Change in Control, the Company shall reimburse a Participant for the legal fees and expenses incurred if the Participant is required to seek to obtain or enforce any right to distribution.  In the event that it is determined that such Participant is properly entitled to a cash or other distribution hereunder, such Participant shall also be entitled to interest thereon payable in an amount equivalent to the Prime Rate of Interest quoted by Citibank, N.A. as its prime commercial lending rate on the subject date from the date such distribution should have been made to and including the date it is made.  Notwithstanding any provision of this Plan to the contrary, this Section 11 may not be amended after a Change in Control occurs without the written consent of a majority in number of Participants.
 
12.            INALIENABILITY OF BENEFITS
 
The interests of the Participants and their Beneficiaries under the Plan may not in any way be voluntarily or involuntarily transferred, alienated or assigned, nor subject to attachment, execution, garnishment or other such equitable or legal process.  A Participant or Beneficiary cannot waive the provisions of this Section 12.  Notwithstanding anything contained herein to the contrary, valid court ordered divisions of a Participant’s Compensation Account(s) pursuant to a domestic relations order may be recognized and distributions may be made pursuant to such an order provided that such distributions are consistent with this Section 12.  A domestic relations order intended to assign a benefit hereunder to a former spouse of a Participant must be delivered to the Company.  The Company will review the order to determine if it is qualified.  Upon notification by the Company that the order is qualified, the spouse will be able to elect a distribution of the assigned benefit by the end of the fifth calendar year following the calendar year during which the Company notifies the former spouse that the order is qualified.  In all events, the entire assigned benefit must be distributed by the end of the fifth calendar year following the calendar year during which the Company notifies the former spouse that the order is qualified.  Notwithstanding anything in the Plan to the contrary, if an assigned benefit is equal to or less than the adjusted Code section 402(g) limit it shall be distributed to the former spouse as soon as administratively possible.  The Company may prescribe procedures that are consistent with this Section 12 and applicable law to implement benefit assignments pursuant to qualified orders.
 
 
 
9
 
13.                       CLAIMS
 
(a)
Initial Claim – Notice of Denial .  If any claim for benefits (within the meaning of section 503 of ERISA) is denied in whole or in part, the Company (which shall include the Company or its delegate throughout this Section 13) will provide written notification of the denied claim to the Participant or beneficiary, as applicable, (hereinafter referred to as the claimant) in a reasonable period, but not later than 90 days after the claim is received.  The 90-day period can be extended under special circumstances.  If special circumstances apply, the claimant will be notified before the end of the 90-day period after the claim was received. The notice will identify the special circumstances.  It will also specify the expected date of the decision.  When special circumstances apply, the claimant must be notified of the decision not later than 180 days after the claim is received.
 
The written decision will include:
 
(i)   The reasons for the denial.
(ii)   Reference to the Plan provisions on which the denial is based.  The reference need not be to pagenumbers or to section headings or titles.  The reference only needs to sufficiently describe the provisions so that the provisions could be identified based on that description.
(iii)   A description of additional materials or information needed to process the claim.  It will also explain why those materials or information are needed.
(iv)   A description of the procedure to appeal the denial, including the time limits applicable to those procedures.  It will also state that the claimant may file a civil action under section 502 of ERISA (ERISA – §29 U.S.C. 1132).  The claimant must complete the Plan’s appeal procedure before filing a civil action in court.
 
If the claimant does not receive notice of the decision on the claim within the prescribed time periods, the claim is deemed denied.  In that event the claimant may proceed with the appeal procedure described below.
(b)
Appeal of Denied Claim .  The claimant may file a written appeal of a denied claim with the Company in such manner as determined from time to time.  The Company is the named fiduciary under ERISA for purposes of the appeal of the denied claim.  The Company may delegate its authority to rule on appeals of denied claims and any person or persons or entity to which such authority is delegated may re-delegate that authority.  The appeal must be sent at least 60 days after the claimant received the denial of the initial claim.  If the appeal is not sent within this time, then the right to appeal the denial is waived.
 
The claimant may submit materials and other information relating to the claim.  The Company will appropriately consider these materials and other information, even if they were not part of the initial claim submission.  The claimant will also be given reasonable and free access to or copies of documents, records and other information relevant to the claim.
 
Written notification of the decision on the appeal will be delivered to the claimant in a reasonable period, but not later than 60 days after the appeal is received.  The 60-day period can be extended under special circumstances.  If special circumstances apply, the claimant will be notified before the end of the 60-day period after the appeal was received. The notice will identify the special circumstances.  It will also specify the expected date of the decision.  When special circumstances apply, the claimant must be notified of the decision not later than 120 days after the appeal is received.
 
Special rules apply if the Company designates a committee as the appropriate named fiduciary for purposes of deciding appeals of denied claims.  For the special rules to apply, the committee must meet regularly on at least a quarterly basis.
 
 
 
10
 
When the special rules for committee meetings apply the decision on the appeal must be made not later than the date of the committee meeting immediately following the receipt of the appeal.  If the appeal is received within 30 days of the next following meeting, then the decision must not be made later than the date of the second committee meeting following the receipt of the appeal.
 
The period for making the decision on the appeal can be extended under special circumstances.  If special circumstances apply, the claimant will be notified by the committee or its delegate before the end of the otherwise applicable period within which to make a decision.  The notice will identify the special circumstances.  It will also specify the expected date of the decision.  When special circumstances apply, the claimant must be notified of the decision not later than the date of the third committee meeting after the appeal is received.
 
In any event, the claimant will be provided written notice of the decision within a reasonable period after the meeting at which the decision is made.  The notification will not be later than 5 days after the meeting at which the decision is made.
 
Whether the decision on the appeal is made by a committee or not, a denial of the appeal will include:
 
(i)    
The reasons for the denial.
(ii)    
Reference to the Plan provisions on which the denial is based.  The reference need not be to page numbers or to section headings or titles.  The reference only needs to sufficiently describe the provisions so that the provisions could be identified based on that description.
(iii)    
A statement that the claimant may receive free of charge reasonable access to or copies of documents, records and other information relevant to the claim.
(iv)    
A description of any voluntary procedure for an additional appeal, if there is such a procedure.  It will also state that the claimant may file a civil action under section 502 of ERISA (ERISA – §29 U.S.C. 1132).
 
If the claimant does not receive notice of the decision on the appeal within the prescribed time periods, the appeal is deemed denied.  In that event the claimant may file a civil action in court.  The decision regarding a denied claim is final and binding on all those who are affected by the decision.  No additional appeals regarding that claim are allowed.
 
14.            GOVERNING LAW
 
The provisions of this plan shall be interpreted and construed in accordance with the laws of the Commonwealth of Kentucky, except to the extent preempted by Federal law.
 
15.            AMENDMENTS
 
The Committee may amend, alter or terminate this Plan at any time without the prior approval of the Board; provided, however, that the Committee may not, without approval by the Board:
 
(a)           increase the number of securities that may be issued under the Plan (except as provided in Section 3(c));
 
(b)           materially modify the requirements as to eligibility for participation in the Plan; or
 
(c)           otherwise materially increase the benefits accruing to Participants under the Plan.
 
 
 
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16.            COMPLIANCE WITH RULE 16b-3
 
It is the intention of the Company that the Plan comply in all respects with Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and that Plan Participants remain non-employee directors (“Non-Employee Directors”) for purposes of administering other employee benefit plans of the Company and having such other plans be exempt from Section 16(b) of the Exchange Act.  Therefore, if any Plan provision is found not to be in compliance with Rule 16b-3 or if any Plan provision would disqualify Plan participants from remaining Non-Employee Directors, that provision shall be deemed amended so that the Plan does so comply and the Plan participants remain Non-Employee Directors, to the extent permitted by law and deemed advisable by the Committee, and in all events the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3.
 
17.            COMPLIANCE WITH 409A
 
It is the intention of the Company and the Committee that the Plan be administered in compliance with Code section 409A and the applicable guidance issued thereunder by the Secretary of the Treasury.  Any provision that is found to be inconsistent with Code section 409A or the applicable guidance issued thereunder by the Secretary of the Treasury shall be reformed and applied by the Company in a manner consistent with applicable law, as determined by the Company.
 
18.
EFFECTIVE DATE
 
The Plan was approved and originally became effective as of January 1, 2005.
 
 
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EXHIBIT 10.4
ASHLAND INC.
DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS (2005)
(Effective generally as of January 1, 2005)
 
Whereas , the Ashland Inc. Deferred Compensation Plan for Non-Employee Directors (2005) (hereinafter the “Plan”) was approved by the Board of Directors of Ashland Inc. on November 4, 2004 to be effective January 1, 2005;
 
Whereas , the Plan as approved and effective reserved the right to amend it;
 
Whereas , the right to amend the Plan was exercised on November 15, 2006 in the first amendment and restatement of the Plan with changes identified therein effective January 26, 2007 and the right to amend the Plan was again exercised on November 15, 2007 with changes thereto effective January 1, 2008;
 
Whereas , it is again desired to exercise the right to amend and restate the Plan and thereby institute the second amendment and restatement of the Plan;
 
Now, Therefore , effective January 1, 2005, except as the Plan had been amended after that date and except as otherwise provided herein, the second amendment and restatement of the Plan is as follows:
 
ARTICLE I.  GENERAL PROVISIONS
 
1.            PURPOSE
 
The purpose of this Ashland Inc. Deferred Compensation Plan for Non-Employee Directors (2005) (the "Plan") is to provide each Director with an opportunity to defer some or all of the Director's Fees as a means of saving for retirement or other purposes.  In addition, the Plan provides Directors with the ability to increase their proprietary interest in the Company’s long-term prospects by permitting Directors to receive all or a portion of their Fees in Ashland Common Stock.  The obligations of the Company hereunder constitute a mere promise to make the payments provided for in this Plan.  No Director, his or her spouse or the estate of either of them shall have, by reason of this Plan, any right, title or interest of any kind in or to any property of the Company.  To the extent any Participant has a right to receive payments from the Company under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Company.
 
This Plan is a replacement of the prior Ashland Inc. Deferred Compensation Plan for Non-Employee Directors amended as of April 1, 2003 (the “Former Plan”).  Fees deferred under the Former Plan shall remain subject to all of the rules, terms and conditions in effect under the Former Plan as of December 31, 2004.  For this purpose, the Fees deferred under the Former Plan shall include all income, gains and losses connected to such Deferred Fees.
 
The rules, terms and conditions of this Plan shall apply to Fees deferred after December 31, 2004, including any Election to defer such Fees made in 2004.  For this purpose, the Fees deferred after December 31, 2004 shall include all income, gains and losses connected to such Fees.
 
2.            DEFINITIONS
 
The following definitions shall be applicable throughout the Plan:
 
(a)  
"Accounting Date" means the Business Day on which a calculation concerning a Participant's Deferral Account is performed, or as otherwise defined by the Committee.
 
1
 
 
 
(b)  
"Beneficiary" means the person(s) designated by a Participant in accordance with Article IV, Section 1.
 
(c)  
"Board" means the Board of Directors of Ashland Inc. or its designee.
 
(d)  
"Business Day" means a day on which the New York Stock Exchange is open for trading activity.
 
(e)  
“Change in Control” shall be deemed to occur (1) upon approval of the shareholders of Ashland (or if such approval is not required, upon the approval of the Board) of (A) any consolidation or merger of the Company (a “Business Combination”), other than a consolidation or merger of the Company into or with a direct or indirect wholly-owned subsidiary, in which the shareholders of the Company own, directly or indirectly, less than 50% of the then outstanding shares of common stock of the Business Combination that are entitled to vote generally for the election of directors of the Business Combination or pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (B) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of Ashland, provided, however, that no sale, lease, exchange or other transfer of all or substantially all the assets of Ashland shall be deemed to occur unless assets constituting 80% of the total assets of Ashland are transferred pursuant to such sale, lease exchange or other transfer, or (C) adoption of any plan or proposal for the liquidation or dissolution of Ashland, (2) when any person (as defined in Section 3(a)(9) or 13(d) of the Exchange Act), other than Ashland or any subsidiary or employee benefit plan or trust maintained by Ashland, shall become the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 25% of Ashland’s Common Stock outstanding at the time, without the approval of the Board, or (3) at any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board shall cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by Ashland’s shareholders of each new director during such two-year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such two-year period.
 
(f)  
“Code” means the Internal Revenue Code of 1986, as amended from time to time.
 
(g)  
"Committee” means the Governance and Nominating Committee of the Board or its designee.
 
(h)  
"Common Stock" means the common stock, $.01 par value, of Ashland Inc.
 
(i)  
"Common Stock Fund" means that investment option, approved by the Committee, in which a Participant's Deferral Account may be deemed to be invested and may earn income based on a hypothetical investment in Common Stock.
 
(j)  
"Company" means Ashland Inc., its divisions and subsidiaries.
 
(k)  
"Corporate Human Resources" means the Corporate Human Resources Department of the Company.
 
(l)  
"Credit Date" means the date on which any Fees would otherwise have been paid to the Participant.
 
 
 
2
 
(m)  
"Deferral Account" means the account(s) to which the Participant's Deferred Fees, Stock Units and Restricted Stock Units are credited and from which distributions are made.  A Director who does not elect to defer Fees may still have a Deferral Account with a Restricted Stock Account (as defined in (z) of this Section 2).
 
(n)  
"Deferred Fees" mean the Fees elected by the Participant to be deferred pursuant to the Plan.
 
(o)  
"Director" means any non-employee director of the Company.
 
(p)  
“Disability” means that a Participant is unable to engage in any substantial gainful activity because of a medically determinable physical or mental impairment that is expected to result in death or last for a continuous period of 12 or more months. Corporate Human Resources or its delegate shall determine whether a Participant has incurred a Disability.
 
(q)  
"Election" means a Participant's delivery of a written notice to the Vice-President of Human Resources for the Company (or his or her delegate) directing how his or her Fees will be paid under the terms of the Plan.  The Committee or the Company may prescribe other means of making and delivering an Election.  An Election shall also include instructions specifying the time and form under which the Participant’s Deferral Account will be paid.  Such elections shall be irrevocable except as otherwise provided in the Plan.
 
(r)  
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
 
(s)  
"Fair Market Value" means the price of a share of Common Stock, as reported on the Composite Tape for New York Stock Exchange on the date and at the time designated by the Company.
 
(t)  
"Fees" mean the annual retainer and, as applicable, other additional retainers earned by a Director for service as a member of the Board during all or part of a calendar year.
 
(u)  
"Participant" means a Director, regardless of whether the Director elects to defer the payment of any Fees.
 
(v)  
"Payment Commencement Date" means the date payments of amounts deferred begin pursuant to Article III, Section 5.
 
(w)  
“Personal Representative” means the person or persons who, upon the disability or incompetence of a Participant, have acquired on behalf of the Participant, by legal proceeding or otherwise, the right to receive the benefits specified in this Plan.
 
(x)  
"Plan" means this Ashland Inc. Deferred Compensation Plan for Non-Employee Directors (2005) as it now exists or may be hereafter amended.
 
(y)  
“Restricted Stock Account” means the portion of a Participant’s Stock Account that is separately accounted for and to which Restricted Stock Units are credited.
 
(z)  
“Restricted Stock Unit(s)” means the share equivalents credited to a Participant’s Restricted Stock Account pursuant to Article III, Section 1.
 
(aa)  
“Secretary of the Treasury” or “Treasury” means the United States Department of Treasury.
 
(bb)  
"Stock Account” means the portion of a Participant’s Deferral Account that is separately accounted for and to which Stock Units are credited.
 
 
 
3
 
(cc)  
"Stock Unit(s)" means the share equivalents credited to a Participant's Stock Account pursuant to Article III, Section 1.
 
(gg)  
"Termination" means retirement from the Board or termination of service as a Director for any other reason.
 
(hh)  
“Unforeseeable Emergency” means a severe financial hardship of a Participant because of -
 
1.  
An illness or accident of the Participant, the Participant’s spouse or dependent (as defined in Internal Revenue Code section 152(a));
2.  
A loss of the Participant’s property due to casualty; or
3.  
Such other similar extraordinary unforeseeable circumstances because of events beyond the control of the Participant.
 
Corporate Human Resources or its delegate shall determine whether a Participant has incurred an Unforeseeable Emergency.
 
3.
SHARES; ADJUSTMENTS IN EVENT OF CHANGES IN CAPITALIZATION
 
(a)            Shares Authorized for Issuance .  There shall be reserved for issuance under the Plan 500,000 shares of Common Stock, subject to adjustment pursuant to subsection (b) below.  Such shares shall be authorized but unissued shares of Common Stock.
 
(b)            Adjustments in Certain Events .  In the event of any change in the outstanding Common Stock of the Company by reason of any stock split, stock dividend, recapitalization, merger, consolidation, reorganization, combination, or exchange of shares, split-up, split-off, spin-off, liquidation or other similar change in capitalization, or any distribution to common shareholders other than ordinary cash dividends, the number or kind of shares that may be issued under the Plan shall be automatically adjusted so that the proportionate interest of the Directors shall be maintained as before the occurrence of such event.  Such adjustment shall be conclusive and binding for all purposes of the Plan.
 
4.            ELIGIBILITY
 
Any non-employee Director of the Company shall be eligible to participate in the Plan.
 
5.            ADMINISTRATION
 
Full power and authority to construe, interpret and administer the Plan shall be vested in the Company and the Committee or one or more of their delegates.  This power and authority includes, but is not limited to, establishing deferral terms and conditions and adopting modifications and amendments to procedures as may be deemed necessary or appropriate.  This power and authority also includes, without limitation, the ability to construe and interpret provisions of the Plan, make determinations regarding law and fact, reconcile any inconsistencies between provisions in the Plan or between provisions of the Plan and any other statement concerning the Plan, whether oral or written, supply any omissions to the Plan or any document associated with the Plan, and to correct any defect in the Plan or in any document associated with the Plan.  Decisions of the Company and the Committee (or their delegates) shall be final, conclusive and binding upon all parties.  Day-to-day administration of the Plan shall be the responsibility of Corporate Human Resources.  This responsibility includes authority to create new administrative forms or modify existing forms for use under this Plan so long as any such modified or new forms are not inconsistent with the terms of the Plan.  The administration of and all interpretations under the Plan shall be made consistent with all applicable law.

 
 
 
 
 

 
ARTICLE II.  COMMON STOCK PROVISION
 
Each Participant may make an Election to receive all or a portion of his or her Fees in shares of Common Stock or make an Election to defer Fees pursuant to Article III, Section 3.  A Participant who elects to receive Fees in shares of Common Stock shall receive such shares at the end of each quarter beginning in the quarter the Election is effective.  The number of shares of Common Stock so issued shall be equal to the amount of Fees which otherwise would have been payable during the quarter divided by the Fair Market Value.  Only whole number of shares of Common Stock will be issued, with any fractional shares to be paid in cash.
 
ARTICLE III.  DEFERRED COMPENSATION
 
1.            PARTICIPANT ACCOUNTS
 
(a)           For each Participant, there shall be established a Deferral Account to which there shall be credited any Deferred Fees as of each Credit Date.  The Deferral Account shall be credited (or debited) on each Accounting Date with income (or loss) based upon a hypothetical investment in any one or more of the investment options available under the Plan, as prescribed by the Committee, which may include a Common Stock Fund, as elected by the Participant under the terms of Article III, Section 3.  The crediting or debiting on each Accounting Date of income (or loss) shall be made for the respective amounts that were subject to each Election under Article III Section 3.
 
(b)           The Stock Account of a Participant shall be credited on each Accounting Date with Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased with the amount of such Deferred Fees as to which a stock deferral election has been made at the Fair Market Value on the Accounting Date.  As of the date of any dividend distribution date for the Common Stock, the Participant’s Stock Account shall be credited with additional Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased, at the Fair Market Value on such date, with the amount which would have been paid as dividends on that number of shares (including fractions of a share) of Common Stock which is equal to the number of Stock Units then credited to the Participant’s Stock Account with respect to a particular Election under Article III Section 3.
 
(c)           Each Participant may have his or her Stock Account credited on an Accounting Date determined by the Committee with the number of Restricted Stock Units approved for such allocation equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased with the dollar amount of the approved grant for this purpose at the Fair Market Value on the Accounting Date.  The Stock Units so credited shall be separately maintained and accounted for in a Restricted Stock Account for the Participant.  Amounts credited to the Restricted Stock Account shall be forfeitable until the earlier of (i) one year anniversary of the date on which such amounts were so credited, or (ii) the date of the next annual shareholders’ meeting of the Company.  As of the date of any dividend distribution date for the Common Stock, the Participant’s Restricted Stock Account shall be credited with additional Restricted Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased, at the Fair Market Value on such date, with the amount which would have been paid as dividends on that number of shares (including fractions of a share) of Common Stock which is equal to the number of Restricted Stock Units then credited to the Participant’s Restricted Stock Account.  The additional Restricted Stock Units so allocated shall remain forfeitable until the date on which the Restricted Stock Units with respect to which the additional Restricted Stock Units were credited become non-forfeitable.  On the date that a Participant ceases to be a Director, all Stock Units (including fractional Stock Units) that have not become non-forfeitable shall be forfeited.  Upon a Change in Control, all forfeitable amounts in the Restricted Stock Account shall become non-forfeitable.

 
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2.            EARLY WITHDRAWAL
 
(a)            Unforeseeable Emergency .  A Participant or a Participant’s legal representative may submit an application for a distribution from the Participant’s Deferral Account (including the non-forfeitable portion of the Restricted Stock Account) because of an Unforeseeable Emergency.  The amount of the distribution shall not exceed the amount necessary to satisfy the needs of the Unforeseeable Emergency.  Such distribution shall include an amount to pay taxes reasonably anticipated as a result of the distribution.  The amount allowed as a distribution under this Section 2(a) shall take into account the extent to which the Unforeseeable Emergency may be relieved through reimbursement or compensation from insurance or liquidation of the Participant’s assets (but only to the extent such liquidation would itself not cause a severe financial hardship).  The distribution shall be made in a single sum and paid as soon as practicable after the application for the distribution on account of the Unforeseeable Emergency is approved.  The provisions of this Section 2(a) shall be interpreted and administered in accordance with applicable guidance that may be issued by the Treasury.
 
(b)            Disability .  A Participant or a Participant’s legal representative may submit an application for a total distribution from the Participant’s Deferral Account (including the non-forfeitable portion of the Restricted Stock Account) because of the Participant’s Disability.  The distribution shall be made in a single sum and paid as soon as practicable after the application is approved.
 
(c)            Prohibition on Acceleration .  Except as otherwise provided in the Plan and except as may be allowed in guidance from the Secretary of the Treasury, distributions from a Participant’s Deferral Account may not be made earlier than the time such amounts would otherwise be distributed pursuant to the terms of the Plan.  Notwithstanding anything herein to the contrary, distribution or suspension of contributions may be made in the discretion of the Company for any permitted purpose under Treas. Reg. section 1.409A-3(j)(4)(ii)-(xiv).
 
3.            DEFERRAL ELECTION
 
(a)            General .  Any Participant wishing to defer Fees under the Plan may elect to do so by delivering to the Vice-President of Human Resources of the Company (including a delegatee thereof) an Election on a form prescribed by Corporate Human Resources designating the manner in which such Deferred Fees are to be invested in accordance with Article III, Section 1 and electing the timing and form of distribution.  The timing of the filing of the appropriate form with Corporate Human Resources shall be determined by the Company or the Committee.  An effective election to defer Fees may not be revoked or modified except as otherwise determined by the Company or the Committee in a manner consistent with applicable law or as stated herein.
 
(b)            Permissible Deferral Election .  A Participant’s Election to defer Fees may only be made in the taxable year before the Fees are earned, with one exception.  The exception applies to a Participant during his or her first year of eligibility to participate in the Plan.  In that event such a Participant may, if so offered by the Company or the Committee, elect to defer Fees for services performed after the Election, provided that the Election is made within 30 days of the date the Participant becomes eligible to participate in the Plan.  A Participant’s Election under this Section 3(b) shall specify the amount or percentage of Fees deferred and the time and form of distribution from among those described in Article III Section 4 of the Plan.  Each Election to defer Fees may be treated as a separate election regarding the time and form of distribution, if so determined at the time of a particular election by the Company.
 
(c)            Investment Alternatives - Existing Balances .  Subject to the following, a Participant may elect to change an existing selection as to the investment alternatives in effect with respect to existing deferred Fees and other amounts credited to the Participant’s Deferral Account (in increments prescribed by the Committee or the Company) as often, and with such restrictions, as determined by the Committee or by the Company.  Effective January 1, 2008, the following rules shall apply to investments of Stock Units and Restricted Stock Units in the Common Stock Fund:
 
 
 
6
 
1.   Former Directors – Participants who are former Directors on January 1, 2008 shall continue to be eligible to elect to transfer amounts they may have invested in the Common Stock Fund among the other investment alternatives available under the Plan.
 
2.  All other Participants –
 
(i)   Scope .  The provisions of this Article III, Section 3(c)(2) shall apply to all Participants not described in (c)(1) immediately above.
 
(ii)   Stock Units that Remain Transferable .  Stock Units credited to a Participant’s Stock Account on December 31, 2007 and dividends credited thereto after that date as additional Stock Units pursuant to Article III, Section 1(b) of the Plan can, at the election of the Participant, be transferred to the other investment alternatives available under the Plan.  The first grant of Restricted Stock Units and dividends paid thereon and credited as additional Restricted Stock Units under Article III, Section 1(c) shall, when they vest, be treated the same as Stock Units in a Participant’s Stock Account on December 31, 2007.
 
(iii)   Stock Units that Are Not Transferable .  Except as otherwise provided in (i) and (ii) immediately above, Stock Units allocated to a Participant’s Stock Account after December 31, 2007 cannot be transferred to another investment alternative under the Plan.
 
(iv)   Special Rule for Certain Restricted Stock Units .  Restricted Stock Units that are granted after December 31, 2007 may be transferred to an investment alternative available under the Plan other than Stock Units upon becoming vested, provided that the Participant whose Stock Account received the grant elects to make such a transfer before such Restricted Stock Units vest at such time and under such rules as the Committee or the Company may prescribe.  If a Participant fails to make such an election, then the vested Restricted Stock Units (which become Stock Units upon vesting) and dividends credited with respect to such Units shall be subject to the restrictions on investment transfer described in (iii) immediately above.
 
(d)            Change of Beneficiary .  A Participant may, at any time, elect to change the designation of a Beneficiary in accordance with Article IV, Section 1 hereof.
 
4.
DISTRIBUTION
 
(a)            Deferral Account .  In accordance with the Participant's Election and as prescribed by the Committee, Deferred Fees credited to a Participant's Deferral Account, which shall include the non-forfeitable portion of the Participant’s Restricted Stock Account, shall be distributed in cash or shares of Common Stock (or a combination of both).  Unless otherwise directed by the Committee, if no Election is made by a Participant as to the distribution or form of payment of his or her Deferral Account, upon Termination such account shall be paid in cash in a lump sum.  The entire Deferral Account must be paid out within fifteen years following the date of the Participant's Termination.  In accordance with a Participant’s Election under Article III Section 3, but subject to Sections 2 and 6 of Article III, amounts subject to such Election in the Deferred Account (determined in accordance with Article III Section 1) shall be distributed -
 
1.  
Upon a Participant’s separation from service, including death, as a Director as either a lump sum or in installments not exceeding 15 years; or
2.  
At a specified time or under a fixed schedule not exceeding 15 years.
 
(b)            Medium of Distribution and Default Method .  In accordance with the Participant’s Election and within the guidelines established by the Committee or the Company, a Participant’s Deferral Account (including the non-forfeitable portion of the Restricted Stock Account) shall be distributed in cash or shares of Common Stock (or a combination of both).  To the extent permissible under law, a Participant
 
 
 
7
 
may make this Election at any time before a distribution is to be made.  If no Election is made by a Participant as to the distribution or form of payment of his or her Deferral Account, upon the earliest time that a distribution from such account is to be made pursuant to the terms of the Plan, such account shall be paid in cash or shares of Common Stock (or a combination of both) in lump sum.  Notwithstanding anything in the foregoing to the contrary, all of a Participant’s Stock Units that are subject to the restrictions on investment transfer described in Article III, Section 3(c)(2)(iii) shall be distributed to the Participant or the Participant’s Beneficiary in whole shares of Common Stock, with any remainder distributed in cash.  The amounts so distributed shall be paid first under the timing of distributions that applies to the benefit being distributed.
 
(c)            Election to Delay the Time or Change the Form of Distribution.   A Participant may make an Election to delay the time of a distribution or change the form of a distribution, or may elect to do both, with respect to an amount that would be payable pursuant to an Election under paragraph (a) of this Section 4, except in the event of a distribution on account of the Participant’s death, if all of the following requirements are met -
 
1.  
Such an Election may not take effect until at least 12 months after it is made;
2.  
Any delay to the distribution that would take effect because of the Election is at least to a date five years after the date the distribution otherwise would have begun; and
3.  
In the case of a distribution that would be made under paragraph (a)(2) of this Section 4 such an Election may not be made less than 12 months before the date of the first scheduled payment.
 
5.            PAYMENT COMMENCEMENT DATE
 
Payments of amounts deferred pursuant to a valid Election shall commence in accord with the Participant’s Election.  If a Participant dies prior to the first deferred payment specified in an Election, payments shall commence to the Participant’s Beneficiary on the first payment date so specified.
 
6.            CHANGE IN CONTROL
 
In the event of a Change in Control, the Company shall reimburse a Participant for the legal fees and expenses incurred if the Participant is required to seek to obtain or enforce any right to distribution.  In the event that it is determined that such Participant is properly entitled to a cash or other distribution hereunder, such Participant shall also be entitled to interest thereon payable in an amount equivalent to the Prime Rate of Interest quoted by Citibank, N.A. as its prime commercial lending rate on the subject date from the date such distribution should have been made to and including the date it is made.  Notwithstanding any provision of this Plan to the contrary, Article I, Section 2 (f) and this Section 6 may not be amended after a Change in Control occurs without the written consent of a majority in number of Participants.
 
ARTICLE IV.  MISCELLANEOUS PROVISIONS
 
1.            BENEFICIARY DESIGNATION
 
A Participant may designate one or more persons (including a trust) to whom or to which payments are to be made if the Participant dies before receiving payment of all amounts due hereunder.  A designation of Beneficiary will be effective only after the signed Election is filed with the Vice-President of Human Resources for the Company (or a delegate thereof) while the Participant is alive and will cancel all designations of a Beneficiary signed and filed earlier.  If the Participant fails to designate a Beneficiary as provided above or if all of a Participant’s Beneficiaries predecease him or her and he or she fails to designate a new Beneficiary, remaining unpaid amounts shall be paid in one lump sum to the estate of such Participant.  If all Beneficiaries of the Participant die before the Participant or before complete payment of all amounts due hereunder, the remaining unpaid amounts shall be paid in one lump sum to the estate of the last to die of such Beneficiaries.
 
 
 
8
 
2.            INALIENABILITY OF BENEFITS
 
The interests of a Participant and his or her Beneficiaries under the Plan may not in any way be voluntarily or involuntarily transferred, alienated or assigned, nor be subject to attachment, execution, garnishment or other such equitable or legal process.
 
3.            GOVERNING LAW
 
The provisions of this Plan shall be interpreted and construed in accordance with the laws of the Commonwealth of Kentucky.
 
4.            AMENDMENTS
 
The Committee may amend, alter or terminate this Plan at any time; provided, however, that the Committee may not, without approval by the Board:
 
(a)           materially increase the number of securities that may be issued under the Plan (except as provided in Article I, Section 3),
 
(b)           materially modify the requirements as to eligibility for participation in the Plan, or
 
(c)           otherwise materially increase the benefits accruing to participants under the Plan.
 
5.            COMPLIANCE WITH RULE 16b-3
 
It is the intention of the Company that the Plan comply in all respects with Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and that Plan Participants remain non-employee directors (“Non-Employee Directors”) for purposes of administering other employee benefit plans of the Company and having such other plans be exempt from Section 16(b) of the Exchange Act.  Therefore, if any Plan provision is found not to be in compliance with Rule 16b-3 or if any Plan provision would disqualify Plan participants from remaining Non-Employee Directors, that provision shall be deemed amended so that the Plan does so comply and the Plan participants remain Non-Employee Directors, to the extent permitted by law and deemed advisable by the Committee, and in all events the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3.
 
6.            COMPLIANCE WITH 409A
 
It is the intention of the Company and the Committee that the Plan be administered in compliance with Code section 409A and the applicable guidance issued thereunder by the Secretary of the Treasury.  Any provision that is found to be inconsistent with Code section 409A or the applicable guidance issued thereunder by the Secretary of the Treasury shall be reformed and applied by the Company in a manner consistent with applicable law, as determined by the Company.

 
9
 
 
 
 

 
7.            EFFECTIVE DATE
 
The Plan was approved and originally became effective as of January 1, 2005; provided, however, that Article I Sections 2 (m), (t), (u), (y) and (z); and Article III Section 1 (c) were effective January 26, 2007 and Article III, Section 3(c) and the last sentence of Article III, Section 4(b) were effective January 1, 2008.
 

 
10

EXHIBIT 10.5
AMENDED AND RESTATED
ASHLAND INC.
SUPPLEMENTAL EARLY RETIREMENT PLAN
FOR CERTAIN EMPLOYEES
Generally Effective as of January 1, 2005
 
ARTICLE I .                                 PURPOSE AND EFFECTIVE DATE .
1.01
Purpose
The purpose of the Plan is to allow designated employees to retire prior to their sixty-fifth birthday without an immediate substantial loss of income.  This Plan is a supplemental retirement arrangement for a select group of management.
1.02
Effective Date
 
The Amended and Restated Ashland Inc. Supplemental Early Retirement Plan for Certain Employees is effective January 1, 2005, except as otherwise provided.  This amended and restated Plan supersedes all prior versions of this Plan that were effective before January 1, 2005 with respect to Effective Retirement Dates that occur on or after such date, except as may otherwise be provided herein.  The rights and obligations of former Employees receiving Plan benefits before January 1, 2005 shall be governed by the terms of the Plan in effect at the time of each such former Employee’s Effective Retirement Date or at the time such an Employee otherwise ceased to be an Employee.  Notwithstanding anything herein to the contrary, amendments to the Plan that were executed since July 1, 2003 through the date of the adoption of this amendment and restatement shall continue to apply hereafter according to their respective terms; provided, however, that Amendment No. 1 to the Eleventh restatement of the Plan that was effective December 31, 2004 shall be null and void and treated as though never adopted.
ARTICLE II .
DEFINITIONS .
 
The following terms used herein shall have the following meanings unless the context otherwise requires:
2.01
“Age” - means the age of an Employee as of his or her last birthday, except as may otherwise be provided under Sections 5.01 and 5.02 in the event of a Change in Control.
2.02
“Annual Retirement Income” - means the lifetime annual income that would be payable to a Participant that is converted to the equivalent lump sum benefit payable under this Plan by Ashland commencing on such Participant’s Effective Retirement Date, subject to the provisions of Section 5.04.
2.03
“Ashland” - means Ashland Inc. and its present or future subsidiary corporations.
2.04
“Board” - means the Board of Directors of Ashland and its designees.
 
 
1
 
 
2.05
“Change in Control” –shall be deemed to occur (1) upon approval of the shareholders of Ashland (or if such approval is not required, upon the approval of the Board) of (A) any consolidation or merger of the Company (a “Business Combination”), other than a consolidation or merger of the Company into or with a direct or indirect wholly-owned subsidiary, in which the shareholders of the Company own, directly or indirectly, less than 50% of the then outstanding shares of common stock of the Business Combination that are entitled to vote generally for the election of directors of the Business Combination or pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (B) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of Ashland, provided, however, that no sale, lease, exchange or other transfer of all or substantially all the assets of Ashland shall be deemed to occur unless assets constituting 80% of the total assets of Ashland are transferred pursuant to such sale, lease exchange or other transfer, or (C) adoption of any plan or proposal for the liquidation or dissolution of Ashland, (2) when any person (as defined in Section 3(a)(9) or 13(d) of the Exchange Act), other than Ashland or any subsidiary or employee benefit plan or trust maintained by Ashland, shall become the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 25% of Ashland’s Common Stock outstanding at the time, without the approval of the Board, or (3) at any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board shall cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by Ashland’s shareholders of each new director during such two-year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such two-year period.
2.06   
“Change in Control Agreements” - means those contractual agreements, in effect from time to time, which are approved by the Board and which provide an Employee with benefits in the event of a change in control as defined in such agreement or other benefits that may be included in such an agreement.
2.07  
“Committee” - means the Personnel and Compensation Committee of the Board and its designees.
2.08  
“Continuous Service” – means Continuous Service as defined in the Ashland Inc. and Affiliates Pension Plan, except as the determination of Continuous Service is modified for purposes of this Plan.
2.09
“Effective Retirement Date” – means:
 
 
2
 
 
(a)
In General .  The Effective Retirement Date of an Employee that is a Participant under Section 3.01 is whichever of the following applies, so long as the Participant has at least five years of Continuous Service.
 
(1)  
The Effective Retirement Date is the first day of the month following the date a Participant incurs a Termination of Employment -
(i)  
on or after the date the sum of the Participant’s Age and Continuous Service is 80; or
(ii)  
on or after the date the Participant attains Age 55.
(2)  
The Effective Retirement Date of a Participant that incurs a Termination of Employment before the dates specified in (1) above is the first day of the month following the date the Participant attains Age 55.
 
(b)
Change in Control .  The Effective Retirement Date in the event of a Change in Control of a Participant considered to be a Level I or II Participant who has a Change in Control Agreement shall be the first day of the month following (i) such Participant’s termination for reasons other than “Cause” or (ii) such Participant’s resignation for “Good Reason” (as they are defined in the applicable Change in Control Agreement).  The Effective Retirement Date in the event of a Change in Control of a Participant considered to be a Level III, IV or V Participant, or who is considered to be a Level I or II Participant and who does not have a Change in Control Agreement, shall be the first day of the month following such Participant’s termination for reasons other than “Cause”.  For Participant’s who do not have a Change in Control Agreement with Ashland, “Cause” shall have the meaning given to that word in Section 3.02.  In the event a Change in Control, all Participants shall be completely vested in their Plan benefits, regardless of the number of their years of Continuous Service
2.10
“Employee” – means, a common law employee of Ashland who is paid on the United States payroll of Ashland Inc.
2.11
“Final Average Bonus” - means the Participant’s average bonus paid under the Incentive Compensation Plan (including amounts that may have been deferred) during the highest thirty-six (36) months out of the final eighty-four-month (84) period.  The calculation of the eighty-four month period shall be measured back from the Participant’s Termination of Employment that is nearest to or which is coincident with the Participant’s Effective Retirement Date.  If the Participant becomes classified below a Level V Employee before the Termination of Employment identified in the preceding sentence, then the date of such change in classification is substituted for the said Termination Date.  For these purposes, the “bonus paid” for a particular month within a particular fiscal year under such plan shall be equal to the amount of such bonus actually paid
 
 
3
 
 
  (regardless of the date paid, but excluding any adjustment for the deferral of such payment) to such Participant on account of such fiscal year divided by the number of months contained in such fiscal year which were used in determining the amount of such bonus actually paid to such Participant.  The bonus paid that is used to compute the average described in this Section 2.11 shall only be a bonus that is paid to the Participant when such Participant is considered a Level III, IV or V Participant.
2.12
“Final Average Compensation” - means the average total compensation paid during the highest thirty-six months (36) out of the final eighty-four-month (84) period.  The calculation of the eighty-four month period shall be measured back from the Participant’s Termination of Employment that is nearest to or which is coincident with the Participant’s Effective Retirement Date.  If the Participant becomes classified below a Level II Employee before the Termination of Employment identified in the preceding sentence, then the date of such change in classification is substituted for the said Termination Date.  For these purposes, “total compensation paid” is the sum of the “compensation paid” and the “bonus paid” during a particular month. “Compensation paid” shall be the base rate of compensation for such Participant in effect on the first day of such calendar month.  “Bonus paid” shall have the same meaning as set forth in Section 2.11.  In the event a payment is due under the Plan after a Change in Control because the Participant was terminated other than for “Cause” or resigned for “Good Reason,” the calculation of Final Average Compensation shall include the amount paid under such Participant’s Change in Control Agreement.  The amount so paid shall be divided by 36 to derive the monthly “total compensation paid” it represents.  The total compensation paid that is used compute the average described in this Section 2.12 shall only be total compensation that is paid to the Participant when such Participant is considered a Level I or II Participant.
2.13
“Incentive Compensation Plan” - means the annual bonus paid to Employees in base salary pay band grades 21 and above under the applicable incentive compensation plan.
2.14
“Level I, II, III, IV or V Participant or Employee” – means, the following corresponding base salary pay band grades on the records of the Company or any succeeding equivalent compensation grade designations:
 
Level
Base Salary Pay Band Grade
 
Level I
2727-30
 
Level II
2525-26
 
Level III
2323-24
 
Level IV
2222
 
Level V
2121
 
 
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2.15
“Participant” – means an Employee that meets the applicable requirements of Article III and who has not incurred a Termination of Employment for Cause, as defined in Section 3.02.  A former Employee that did not incur a Termination of Employment for Cause and who has a benefit being paid or payable from the Plan is also a Participant.  The term Participant includes Transition Participants, unless the context otherwise requires or unless expressly otherwise provided.
2.16
“Plan” - means the Amended and Restated Ashland Inc. Supplemental Early Retirement Plan for Certain Employees, generally effective as of January 1, 2005, as set forth herein.
2.17
“Service” - means the number of years and fractional years of employment by Ashland of an Employee, measured from the first day of the month coincident with or next succeeding his or her initial date of employment up to and including such Employee’s Effective Retirement Date.  For purposes of this Section 2.17, Service shall include an Employee’s employment with a subsidiary or an affiliate of Ashland determined in accordance with rules from time to time adopted or approved by the Board, or its delegate.  Service shall be calculated based on the rules for calculating Periods of Service under the Ashland Inc. and Affiliates Pension Plan, except as the determination of Service is modified for purposes of this Plan or under any other document that either directly or indirectly references the calculation of Service for purposes of the Plan.
2.18
“Specified Employee” - means, for a particular calendar year, any Employee who was at anytime during the 12 months ending on the December 31 preceding the start of the particular calendar year (the Specified Employee identification date) classified on the records of Ashland as being in base salary pay band grade 23 or higher.  Such an Employee shall be classified as a Specified Employee as of January 1 of the particular calendar year (the Specified Employee effective date) and shall remain classified as such for the entirety of such calendar year.  Notwithstanding anything to the contrary, no more than 200 Employees may be classified as Specified Employees for any calendar year.  Unless otherwise provided in the particular document, this definition of Specified Employee shall apply to all plans, programs, contracts, agreements and other arrangements maintained by the Company that are subject to Code section 409A.
2.19
“Termination of Employment” – means a termination from employment resulting in a cessation of performing active service for Ashland (other than by reason of death or disability) .  An Employee is considered to incur a Termination of Employment on the date the Employee terminates employment with Ashland or when it is reasonably anticipated that the Employee's services to Ashland will permanently decrease to 20% or less of the average amount of services performed for Ashland during the immediately preceding 36 month period (or period of total employment if less than 36 months).  Notwithstanding anything in the foregoing to the contrary, a Termination of Employment does not occur as a result of military leave, sick leave or other
 
 
5
 
 
  bona fide leave of absence not exceeding six months or the period during which the Employee retains a right to reemployment.    
  2.20   “Transition Participant” - means. the Employees on June 30, 2003 that were in an employment classification that potentially made them eligible for the Plan and that –
  (a)   were at least age 55 on June 30, 2003; or
  (b)   the sum of whose Age and Continuous Service was 80.
  Transition Participants shall remain subject to the terms of the Plan in effect before July 1, 2003 addressing the calculation and amount of benefits.  These Employees shall, however, be subject to the other changes that became effective thereafter and that apply to them as provided in the Plan as amended from time to time, such as those addressing the vesting of benefits and the change to the Effective Retirement Date.
ARTICLE III .
PARTICIPATION IN PLAN .
 
Eligibility for benefits shall be determined as follows:
3.01
Participation after June 30, 2003
All Employees classified on the records of Ashland as a Level I, II, III, IV or V Employee shall be Participants in the Plan.  After earning five years of Continuous Service, whenever earned, a Participant shall be completely vested in the applicable benefit under Plan.  The determination of whether a Level III, IV or V Employee receives a reduced benefit for commencement before age 62 under Section 5.02(c) is made based on the Employee’s deemed status on the Effective Retirement Date.  Notwithstanding such vesting, a Participant forfeits the right to receive any benefit under this Plan if the Participant incurs a Termination of Employment for Cause, as defined in Section 3.02.  A Participant may also forfeit the right to the Plan benefit and may have to repay a prior distribution pursuant to the provisions of Section 4.02.  Participation in the Plan is not subject to an election by an Employee.  Participation is automatic and is based on the Employee’s status on Ashland’s records at the applicable time.
3.02
Termination for Cause
Ashland reserves the right to terminate any Participant for “Cause” prior to his or her Effective Retirement Date, with a resulting forfeiture of the payment of benefits under the Plan.  Ashland also reserves the right to terminate any Participant’s participation in the Plan for “Cause” subsequent to his or her Effective Retirement Date.  For purposes of this Section 3.02, “Cause” shall mean the willful and continuous failure of a Participant to substantially perform his or her duties to Ashland (other than any such failure resulting from incapacity due to physical or mental illness), or the willful engaging by a Participant in gross misconduct materially and demonstrably injurious to Ashland, each to be determined by Ashland in its sole discretion.
3.03
Automatic Vesting for Change in Control
 
 
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Subject to the provisions of Article VI, in the event of a Change in Control (as defined in Section 2.05), an Employee who is deemed to be a Level I, II, III, IV or V Participant shall automatically be completely vested in his or her benefits, regardless of the number of years of Continuous Service.
ARTICLE IV .
INTERACTION WITH CHANGE IN CONTROL AGREEMENTS .
4.01
Terminations - General
Notwithstanding any provision of this Plan to the contrary, an Employee who has entered into an Change in Control Agreement with Ashland and who is terminated without “Cause” or resigns for “Good Reason” following a “change in control of Ashland” (each quoted term as defined in the applicable Change in Control Agreement) shall be entitled to receive the benefits as provided pursuant to this Plan.  Benefits payable hereunder in such a situation shall be calculated in accordance with the payment option elected by the Employee.
4.02
Subsequent Activity in Conflict with Ashland
The provisions of this Section 4.02 shall apply to Level I, II, III, IV and V Participants, regardless of whether such a Participant has a Change in Control Agreement; except that the provisions of this Section 4.02 shall not apply to any Participant after a Change in Control.  If a Participant accepts, during a period of five (5) years subsequent to his or her Effective Retirement Date, or Termination of Employment, if earlier, any consulting or employment activity which is in direct and substantial conflict with the business of Ashland at such time (such determination regarding conflicting activity to be made in the sole discretion of the Board), he or she shall be considered in breach of the provisions of this Section 4.02; provided, however, he or she shall not be restricted in any manner with respect to any other non-conflicting activity in which he or she is engaged.
 
If a Participant wishes to accept employment or consulting activity which may be prohibited under this Section 4.02, such Participant may submit to Ashland written notice (Attention: Vice President Human Resources and Communications or any successor position thereto) of his or her wish to accept such employment or consulting activity.  If within ten (10) business days following receipt of such notice Ashland does not notify the Participant in writing of Ashland’s objection to his or her accepting such employment or consulting activity, then such Participant shall be free to accept such employment or consulting activity for the period of time and upon the basis set forth in his or her written request.
 
In the event the provisions of this Section 4.02 are breached by a Participant, the Participant shall not be entitled to any additional payments hereunder (whether directly from this Plan or from a SERP Account for such Participant from the Ashland Inc. Deferred Compensation Plan for Employees (2005)) and shall be liable to repay to Ashland all amounts such Participant received prior to such breach.  If a Participant who breaches the provisions of this Section 4.02 received a
 
 
7
 
 
  lump sum distribution of his or her benefit prior to such breach, such Participant shall be liable to repay to Ashland the amount of such distribution.  If a Participant who breaches the provisions of this Section 4.02 deferred all or any part of a lump sum distribution hereunder to the Ashland Inc. Deferred Compensation Plan for Employees (2005), the amount so deferred shall be forfeited, and if any amount of the amount so deferred was distributed from the Ashland Inc. Deferred Compensation Plan for Employees (2005) before the breach occurred, the amount so distributed shall be repaid to Ashland.  Any repayment of benefits hereunder shall be assessed interest at the rate applicable for the calculation of a lump sum payment under Section 5.04(b) for the month in which the breach occurs, with such interest compounded monthly from the month in which the breach occurs to the month in which such repayment is made to Ashland.  Ashland shall have available to it all other remedies at law and equity to remedy a breach of this Section 4.02.
ARTICLE V .
RETIREMENT INCOME AND OTHER BENEFITS .
5.01
LEVELS I AND II .
 
The Transition Participants who are Level I or II Participants are eligible to receive Annual Retirement Income equal to:
 
(a)
Pre-Age 62 Benefit
 
A Transition Participant who retires under this Plan, including a Transition Participant to whom the provisions of paragraph (d) of this Section 5.01 apply, shall receive an Annual Retirement Income lump sum benefit for the period from and after the first day of the calendar month next following his or her Effective Retirement Date until the end of the month in which he or she attains age 62 equal to the greater of (1) the amounts provided in the following schedule or (2) 50% of Final Average Compensation. Notwithstanding the previous sentence, in the event such Transition Participant retired with less than 20 years of Service, such Annual Retirement Income lump sum benefit amount shall be multiplied by a fraction (A) the numerator of which is such Transition Participant’s years of and fractional years of Service, and (B) the denominator of which is twenty (20).
 
 
        % of
 
Retirement
Compensation
 
 
1st
-
Year After Effective
Retirement Date
75%
 
2nd
-
"
70%
 
3rd
-
"
65%
 
4th
-
"
60%
 
 
 
8
 
 
5th
-
"
55%
 
6th
-
Year and thereafter
to Age 62
50%
 
 
For purposes of this Section 5.01(a), “% of Compensation” shall mean the annualized average of the Transition Participant’s base monthly compensation rates (excluding incentive awards, bonuses, and any other form of extraordinary compensation) in effect with respect to Ashland on the first day of the thirty-six (36) consecutive calendar months which will give the highest average out of the one-hundred twenty (120) consecutive calendar month period ending on the Transition Participant’s Effective Retirement Date.
 
(b)
Age 62 Benefit and Thereafter
 
From and after the first day of the calendar month next following his or her Effective Retirement Date, or the attainment of age 62, whichever is later, the Transition Participant’s Annual Retirement Income lump sum benefit amount shall be equal to 50% of Final Average Compensation; provided, however, that in the event such Transition Participant retired with less than 20 years of Service, such Annual Retirement Income shall be 50% of Final Average Compensation multiplied by a fraction (A) the numerator of which is such Transition Participant’s years of and fractional years of Service, and (B) the denominator of which is twenty (20).
 
(c)
Benefit Reduction
 
The amount of benefit provided in paragraphs (a) and (b) of this
 
Section 5.01 shall be reduced by the sum of the following:
 
(1)
the Transition Participant’s benefit under the Ashland Inc. and Affiliates Pension Plan (the “Pension Plan”) (assuming 50% of such Transition Participant’s account under the Ashland Inc. Leveraged Employee Stock Ownership Plan were transferred to the Pension Plan, as allowed under the terms of each of the said plans and disregarding any benefit assignment under an approved qualified domestic relations order affecting either the Pension Plan or the Ashland Inc. Leveraged Employee Stock Ownership Plan), determined on the basis of a single life annuity form of benefit;
 
(2)
the Transition Participant’s benefit under any other defined benefit pension plan qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended which is maintained by Ashland, determined by disregarding any benefit assignment under an approved qualified domestic relations order and on the basis of a single life annuity form of benefit (said plans referred to in sub-paragraphs (1)
 
 
 
9
 
    and (2) of this paragraph (c) are hereinafter referred to jointly and severally as the “Affected Plans”);
 
(3)
the Transition Participant’s benefit under the Ashland Inc. Nonqualified Excess Benefit Pension Plan, determined on the basis of a single life annuity form of benefit; and
 
(4)
the Transition Participant’s benefit under the Ashland Inc. ERISA Forfeiture Plan attributable to amounts which were forfeited under the Ashland Inc. Leveraged Employee Stock Ownership Plan, multiplied by 50%, and determined on the basis of a single life annuity benefit.
 
Because a Transition Participant’s benefit hereunder is payable as a lump sum, the reduction to such benefit shall be calculated based upon the lump sum actuarial present value of the benefits referred to in subparagraphs (1)-(4) of this paragraph (c).  Such calculation shall be conducted on the basis that the benefits referred to in said subparagraphs (1)-(4) commence at the same time as of which the benefit in this Plan is paid as a lump sum, using the Transition Participant’s attained age at the time of such commencement, unless otherwise required in paragraph (d) of this Section 5.01.
(d)            Benefit After a Change in Control
 
(1)
Participants Having Change in Control Agreements .  A Participant having a Change in Control Agreement who either is terminated without “Cause” or resigns for “Good Reason” after a Change in Control shall have the benefit payable under this Section 5.01 computed by adding 3 years to the Participant’s Age and Service at the Participant’s Effective Retirement Date.  These additions to Age and Service shall, except as otherwise provided, apply for purposes of computing the single life annuity payment to the Participant that is converted to Annual Retirement Income lump sum benefit amount, if applicable.  A Participant subject to this paragraph (d)(1) whose Effective Retirement Date occurs before attaining an actual age of 55 shall have the 3 year addition to Age apply when converting the single life annuity amount (if applicable) to the Annual Retirement Income lump sum benefit amount.  If the Effective Retirement Date of a Participant subject to this paragraph (d)(1) occurs on or after the Participant attains an actual age of 55, then the Participant's actual age shall be used when making such a conversion.  Notwithstanding anything to the contrary contained herein, when converting a Participant's single life annuity (if applicable) to the lump sum payment, the Participant's actual age shall be used without reference to the additional 3 years.  If the addition of 3 years to the Participant’s age results in an Age less
 
 
 
10
 
    than 55 and the Participant commences the benefit, the amount of the benefit shall be adjusted to account for the fact it is paid before the Participant’s attainment of Age 55.  This adjustment shall be based upon the early retirement table in Section 6.2 of the Ashland Inc. and Affiliates Pension Plan as it existed on September 30, 1999.  When applying this table under these circumstances, age 55 shall be substituted for age 62 and adjustments for ages younger than those on the table shall be reasonably determined by an actuary or actuarial firm who regularly performs services in connection with the Plan.
 
(2)
Participants Without Change in Control Agreements .  A Participant without a Change in Control Agreement who is terminated without “Cause” after a Change in Control shall have the benefit payable under this Section 5.01 computed by adding the applicable amount to the Participant’s Age and Service at the Participant’s Effective Retirement Date.  For these purposes, the applicable amount is derived from the following table.
 
Length of Participant’s Service at Separation from Employment
Number of Years
(the Applicable Amount)
Up to 5 years
3 months
More than 5 and up to 10 years
6 months
More than 10 and up to 15 years
1 year
More than 15 and up to 20 years
1 year and 6 months
More than 20 years
2 years
 
These additions to Age and Service shall, except as otherwise provided, apply for purposes of computing the single life annuity payment (if applicable) to the Participant that would be converted to the Annual Retirement Income lump sum benefit amount.  A Participant subject to this paragraph (d)(2) whose Effective Retirement Date occurs before attaining an actual age of 55 shall have the applicable amount added to such Participant’s Age apply when converting the single life annuity amount (if applicable) to the Annual Retirement Income lump sum benefit amount.  If the Effective Retirement Date of a Participant subject to this paragraph (d)(2) occurs on or after the Participant attains an actual age of 55, then the Participant's actual age shall be used when making such a conversion.  Notwithstanding anything to the contrary contained herein, when converting a Participant's single life annuity (if applicable) to a lump sum payment option, the Participant's actual age shall be
 
 
 
11
 
used without reference to the addition of the applicable amount.  If the addition of the applicable amount to the Participant’s age results in an Age less than 55 and the Participant commences the benefit, the amount of the benefit shall be adjusted to account for the fact it is paid before the Participant’s attainment of Age 55.  This adjustment shall be based upon the early retirement table in Section 6.2 of the Ashland Inc. and Affiliates Pension Plan as it existed on September 30, 1999.  When applying this table under these circumstances, age 55 shall be substituted for age 62 and adjustments for ages younger than those on the table shall be reasonably determined by an actuary or actuarial firm who regularly performs services in connection with the Plan.
 
 
(e)
Benefit after June 30, 2003 .  Subject to the applicable provisions of paragraph (d) above, the vested benefit payable to a Participant on the Effective Retirement Date for the period such Participant was deemed classified as a Level I or II Participant is equal to 25% of Final Average Compensation multiplied by years of Service not to exceed 20 years of Service.  Service includes full and fractional years.  There is no reduction for commencement before age 62 and there is no increase for commencement after age 62.  The normal form of the benefit so computed is a single lump sum payment.  The benefit so payable shall be reduced by the actuarially equivalent (as defined below) lump sum benefit from the following plans from which the Participant is entitled to a distribution:
(1)  
the Ashland Inc. and Affiliates Pension Plan (the “Pension Plan”) (assuming 50% of such Participant’s account – if any - under the Ashland Inc. Leveraged Employee Stock Ownership Plan were transferred to the Pension Plan, as allowed under the terms of each of the said plans and disregarding any benefit assignment under an approved qualified domestic relations order affecting either the Pension Plan or the Ashland Inc. Leveraged Employee Stock Ownership Plan);
(2)  
the benefit under any other defined benefit pension plan qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended which is maintained by Ashland, determined by disregarding any benefit assignment under an approved qualified domestic relations order (said plans referred to in sub-paragraphs (1) and (2) of this paragraph (e) are hereinafter referred to jointly and severally as the “Affected Plans”);
(3)  
the benefit under the Ashland Inc. Nonqualified Excess Benefit Pension Plan; and
 
 
 
12
 
   
(4)  
the benefit under the Ashland Inc. ERISA Forfeiture Plan attributable to amounts which were forfeited under the Ashland Inc. Leveraged Employee Stock Ownership Plan, multiplied by 50%.
An interest rate assumption of 8% and the Section 415/417 Mortality Table in the Ashland Inc. and Affiliates Pension Plan shall be used for purposes of computing the actuarial equivalence of the reductions in the above numbered paragraphs, except for computing the actuarial equivalence of the benefit under the Ashland Inc. Nonqualified Excess Benefit Pension Plan under above paragraph (3).  Effective for Effective Retirement Dates on and after October 1, 2007, the computation under said paragraph (3) shall be conducted using the same assumptions as apply to the computation of the benefit payable under the Ashland Inc. Nonqualified Excess Benefit Pension Plan.  Actuarial equivalence shall be determined as of the Effective Retirement Date.
 
(f)
Changes in Status .
(1)  
Subject to the applicable provisions of paragraph (d) above, a Participant that earned a benefit under this Section 5.01 and that also earned a benefit under Section 5.02 shall receive the greater of the two benefits produced.
(2)  
If a Participant that earns a benefit hereunder is not considered to be a Level I, II, III, IV or V Participant on the earlier of the Participant’s Effective Retirement Date or Termination of Employment, then the Service after such Participant ceased to be considered a Level I, II, III, IV or V Participant shall be disregarded for purposes of computing the benefit payable under the Plan.  In that event, the only Service that shall be counted for purposes of computing the benefit payable under the Plan shall be the Service the Participant earned while considered to be a Level I, II, III, IV or V Participant.  Notwithstanding anything in the foregoing to the contrary, such a Participant shall be credited with a minimum of five years of Service, so long as such Participant has at least five years of Continuous Service.
 
(g)
Specified Employee .  Notwithstanding anything contained in the Plan to the contrary, a Transition Participant or a Participant who is a Specified Employee shall have the distribution of his or her benefit which is made on account of a Termination of Employment commence on a date that is not earlier than six months after his or her Termination of Employment.
5.02
LEVELS III, IV AND V .
 
(a)
General
 
 
 
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The Annual Retirement Income lump sum benefit amount of a Transition Participant (including a Transition Participant to whom the provisions of paragraph (b) of this Section 5.02 apply) who on his or her Effective Retirement Date was deemed to be a Level III, IV, or V Participant shall, from and after the first day of the calendar month next following his or her 62nd birthday, be equal to 50% of the Transition Participant’s Final Average Bonus; provided, however, that in the event such Transition Participant retired with less than 20 years of Service, such Annual Retirement Income after age 62 shall be 50% of Final Average Bonus multiplied by a fraction (A) the numerator of which is such Participant’s years of and fractional years of Service, and (B) the denominator of which is twenty (20).  Although a Transition Participant may elect to commence benefits under this Plan upon his or her Effective Retirement Date, there shall be an actuarial adjustment (consistent with that applied under Ashland’s qualified pension plan, as from time to time in effect) for Participants receiving benefits under this Section 5.02 whose Effective Retirement Date is prior to age 62.
(b)            Benefit After a Change in Control
A Participant who is terminated other than for “Cause” after a Change in Control shall have the benefit payable under this Section 5.02 computed by adding to the Participant’s Age and Service at the Participant’s Effective Retirement Date the number of years equal to the applicable amount for the Participant derived from the following table.
 
Length of Participant’s Service at Separation from Employment
Number of Years
(the Applicable Amount)
Up to 5 years
3 months
More than 5 and up to 10 years
6 months
More than 10 and up to 15 years
1 year
More than 15 and up to 20years
1 year and 6 months
More than 20 years
2 years
 
These additions to Age and Service shall, except as otherwise provided, apply for purposes of computing the single life annuity payment (if applicable) to the Participant that would be converted to the Annual Retirement Income lump sum benefit amount.  A Participant subject to this paragraph (b) whose Effective Retirement Date occurs before attaining an actual age of 62 shall have the applicable amount from the table hereinabove added to his or her Age apply when converting the single life annuity amount (if applicable) to the Annual Retirement Income lump sum benefit amount.  If the Effective Retirement Date of a Participant subject to this paragraph (b) occurs on or
 
 
 
14
 
after the Participant attains an actual age of 62, then the Participant's actual age shall be used when making such a conversion.  Notwithstanding anything to the contrary contained herein, when converting a Participant's single life annuity (if applicable) to the lump sum payment, the Participant's actual age shall be used without reference to the applicable amount derived from the table hereinabove.  If the addition of the applicable amount from the table hereinabove to the Participant’s age results in an Age less than 62 and the Participant commences the benefit, the amount of the benefit shall be adjusted to account for the fact it is paid before the Participant’s attainment of Age 62.  This adjustment shall be based upon the early retirement table in Section 6.2 of the Ashland Inc. and Affiliates Pension Plan as it existed on September 30, 1999, and adjustments for ages younger than those on the table shall be reasonably determined by an actuary or actuarial firm who regularly performs services in connection with the Plan.
(c)
Benefit after June 30, 2003 .  Subject to the applicable provisions of paragraph (b) above, the vested benefit payable to a Participant on the Effective Retirement Date for the period such Participant was deemed classified as a Level III, IV or V Participant is equal to 25% of Final Average Bonus multiplied by years of Service not to exceed 20 years of Service.  Service includes full and fractional years.  There is no reduction for commencement before age 62 for Participants deemed classified as a Level III Participant at the Effective Retirement Date.  There is no increase for commencement after age 62 for any Participant.  There is an actuarial reduction to the benefit of a Participant that is deemed classified as a Level IV or V Participant at the Effective Retirement Date.  The actuarial reduction shall be made on the same basis as in the Ashland Inc. and Affiliates Pension Plan for the early commencement of a benefit in Articles 5, 6, and 7, as applicable.  The appropriate actuarial reduction shall be determined as of the Effective Retirement Date.  The normal form of the benefit so computed under this paragraph (c) is a single lump sum payment.
 
(d)
Changes in Status .
(1)  
Subject to the applicable provisions of paragraph (b) above, a Participant that earned a benefit under Section 5.02 and that also earned a benefit under Section 5.01 shall receive the greater of the two benefits produced.
(2)  
If a Participant that earns a benefit hereunder is not considered to be a Level I, II, III, IV or V Participant on the earlier of the Participant’s Effective Retirement Date or Termination of Employment, then the Service after such Participant ceased to be considered a Level I, II, III, IV or V Participant shall be disregarded for purposes of computing the benefit payable under the Plan.  In that event, the only Service that shall be counted for purposes of computing
 
 
 
15
 
  the benefit payable under the Plan shall be the Service the Participant earned while considered to be a Level I, II, III, IV or V Participant.  Notwithstanding anything in the foregoing to the contrary, such a Participant shall be credited with a minimum of five years of Service, so long as such Participant has at least five years of Continuous Service.
5.03
Benefits Payable for Less Than 12 Months
Annual Retirement Income benefits that would be payable under Sections 5.01 and 5.02 for a period of less than 12 months if such benefits were payable as an annuity due to a Participant’s attainment of age 62 or death will be computed as if payable on a pro-rata basis, with months taken as a fraction of a year.
5.04            Payment Options
(a)            Election
 
Subject to applicable transition rules under guidance issued by the Treasury under section 409A of the Code, Participants will have 30 days following the earlier of January 1, 2005 or the date they are first eligible for the Plan to elect a form of distribution from among those available under Section 5.04(b).  Any subsequent change to that election shall be subject to the provisions of this paragraph (a), sub-parts (1), (2) and (3), as applicable.  In all other events, a Participant’ election is irrevocable.  Notwithstanding anything in the foregoing to the contrary, any Participant who elects to change his or her election must meet the following requirements, as applicable –
(1)  
The election may not take effect until at least 12 months after it is made;
(2)  
If the distribution relates to a Termination of Employment, the first payment that would be made pursuant to the election would be at least five years after the amount otherwise would have been distributed but for this election, except in the event of the Participant’s death; and
(3)  
The election must be made at least 12 months before the first scheduled payment that would have been payable at a specified time or pursuant to a fixed schedule.
 
A Participant may not accelerate the time or schedule of any payment under the Plan, except as provided in guidance from the Treasury under Internal Revenue Code section 409A.
  (b)   Optional Forms of Payment
 
(1)
Lump Sum Option   All benefits provided by the Plan shall be payable in a single lump sum payment, computed under the applicable provisions of Article V.  A Participant’s benefit is payable as a lump sum on the Effective Retirement Date (or as soon thereafter as reasonably possible), in a manner pursuant to a
 
 
 
16
 
    Participant’s election under Section 5.04(a) under an option identified in one of the following sub-paragraphs of this Section 5.04(b).  A lump sum benefit payable under the Plan to a Transition Participant shall be computed on the basis of the actuarially equivalent present value of such Transition Participant’s benefit under Article V based upon such actuarial assumptions as determined by the Committee.
 
(2)
Default Lump Sum Deferral Option   If the Participant fails to make an election under Section 5.04(a) then the Participant’s benefit shall be transferred upon the Participant’s Effective Retirement Date (or as soon thereafter as possible) to the Ashland Inc. Deferred Compensation for Employees (2005), or its successor, and held pursuant to the terms of such plan and thereafter distributed as provided thereunder.  Notwithstanding the foregoing, if a Participant fails to make an election under this Plan, but does make an effective election for the distribution of a benefit under the Ashland Inc. Nonqualified Excess Benefit Pension Plan, then the distribution of the benefit hereunder shall be made in the same manner as the Participant had elected under the said plan.  In all events, a Participant who is a Specified Employee shall have the transfer or other distribution of his or her benefit which is made on account of a Termination of Employment commence on a date that is not earlier than six months after his or her Termination of Employment.
 
(3)
Lump Sum Payment Option   A Participant may elect to have his or her benefit paid as a single lump sum upon reaching his or her Effective Retirement Date.  The benefit pursuant to such an election shall be paid as soon thereafter as possible.  In all events, a Participant who is a Specified Employee shall have the distribution of his or her benefit which is made on account of a Termination of Employment commence on a date that is not earlier than six months after his or her Termination of Employment.
 
(4)
Elective Lump Sum Deferral Option   A Participant may elect to have his or her benefit transferred to the Ashland Inc. Deferred Compensation Plan for Employees (2005), or any successor thereto, as a single lump sum upon reaching his or her Effective Retirement Date, and held pursuant to the terms of such plan and thereafter distributed as provided thereunder.  The benefit pursuant to such an election shall be transferred as soon as possible after the Effective Retirement Date.  In all events, a Participant who is a Specified Employee shall have the transfer of his or her benefit which is made on account of a Termination of
 
 
 
17
 
    Employment commence on a date that is not earlier than six months after his or her Termination of Employment.
 
(5)
Time of Distribution or Transfer   Subject to the required delay of a distribution or transfer of a Plan benefit for a Participant who is a Specified Employee, the distribution or transfer of a benefit in the foregoing sub-paragraphs of this Section 5.04(b) shall be paid by the later of (i) the end of the calendar year in which occurs the Participant’s Effective Retirement Date or (ii) the 15 th day of the third calendar month following the Participant’s Effective Retirement Date.
 
5.05.
Distribution Exceptions
Notwithstanding anything in the Plan to the contrary, the following shall apply to the distribution of benefits under the Plan:
 
(1)
Distribution shall be made pursuant to a domestic relations order as described in Section 7.04;
 
(2)
Distribution of a benefit shall be made in a single lump sum payment as soon as possible after a Participants Termination of Employment if the distribution, when added to the amount that would be payable from the Ashland Inc. Nonqualified Excess Benefit Pension Plan will not exceed the adjusted Code section 402(g) limit; and
 
(3)
Distribution may be made in the discretion of Ashland for any other permitted purpose under Treas. Reg. section 1.409A-3(j)(4)(ii)-(xiv).
 
5.06.            Survivor Benefits
For deaths occurring after the approval of this restatement, if a Participant with a vested benefit dies before his or her Effective Retirement Date, the benefit that would have been paid to the Participant had the Participant survived to his or her Effective Retirement Date shall be paid to the beneficiary designated by the Participant as elected by the Participant from those options made available by Ashland; provided, however, that the benefit must be completely distributed by the end of the fifth calendar year following the calendar year in which the Participant died.  In the absence of an election, the benefit shall be paid in January of the calendar year following the calendar year in which the Participant died.  If the Participant dies before he or she attained age 55 and before the sum of his or her age and years of Continuous Service equaled 80, the benefit payable hereunder shall be actuarially adjusted using the assumptions under the Ashland Inc. and Affiliates Pension Plan that applied at the time of the Participant’s death.
5.07
Participation in Other Benefits
 
 
 
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After the Effective Retirement Date, a Participant may continue to participate in the benefits offered by Ashland to former Employee’s and retiree’s similarly situated to the Participant.  Ashland reserves all rights to change those benefits at any time, including the right to terminate them.  Except as otherwise expressly provided in this Plan, a Participant’s active participation in all employee benefit programs maintained by Ashland derived from his or her employment status with Ashland shall be discontinued.
ARTICLE V-A            LIMITED TEMPORARY ENHANCED RETIREMENT PROGRAM BENEFIT .
5.01A       G ENERAL.
For Participants whose Effective Retirement Date is March 1, 2007 (except as may otherwise be provided in Section 5.04A below), the retirement benefits payable under Article V shall be computed as modified under Section 5.03A below, provided that such Participants satisfy all of the requirements specified in Section 5.02A.  For purposes of this Article V-A, the limited enhanced retirement program benefit described herein is referred to as the Voluntary Severance Offer (VSO).
5.02A       ELIGIBILITY .
Subject to Section 3.01, the Employees who are eligible to have their benefits computed with the modifications described in Section 5.03A are those who would have been eligible for the pension benefit described in section 18.7B of the Ashland Inc. and Affiliates Pension Plan, but who are not so eligible because they are in pay classification band 21 or higher.
5.03A       ENHANCED BENEFIT .
Each Participant described in Section 5.02A(a) who elects an Effective Retirement Date of March 1, 2007 (or at the Delayed Effective Retirement Date under Section 5.04A), hereinafter called "Electing Participant", shall have his or her benefit computed under Section 5.01 or Section 5.02 (whichever is applicable) by adding 2 years to his or her Age and 2 years to his or her Service at the Effective Retirement Date (or at the Delayed Effective Retirement Date under Section 5.04A).  These additions to Age and Service shall apply for purposes of computing the single life annuity amount with regard to the Electing Participant; for purposes of any actuarial reduction for early commencement; and for purposes of applying the Section 2.08 definition of Effective Retirement Date to this Article V-A.  Notwithstanding anything to the contrary contained herein, when converting an Electing Participant's benefit to the lump sum payment option, the Electing Participant's actual age shall be used without reference to the additional 2 years.
 
5.04A       DELAYED EFFECTIVE RETIREMENT DATE .
Ashland Inc. reserves the right to require an Electing Participant or a Special Participant (as defined in Section 5.05A) to remain employed and delay his or her Effective Retirement Date (or other termination date) until, at the latest, to November 30, 2007 (hereinafter referred to as the "Delayed Effective Retirement Date").
 
 
 
19
 
(a)           If an Electing Participant's or Special Participant’s employment is terminated on or before his or her Delayed Effective Retirement Date by reason of discharge for cause, such Electing Participant or Special Participant shall not be entitled to any benefit computed under this Plan.
(b)           If an Electing Participant or Special Participant terminates employment by reason of death on or before his or her Delayed Effective Retirement Date, but after February 28, 2007, the benefit shall be determined as if he or she had the Delayed Effective Retirement Date on the day before death with any election of an optional form of benefit made by such Electing Participant or Special Participant given effect.
(c)           An Electing Participant or Special Participant who terminates employment on his or her Delayed Effective Retirement Date (except by reason of discharge for cause or death), shall have the benefit determined as provided under Section 5.03A by applying the rules contained therein to such Electing Participant or Special Participant at such Electing Participant's or Special Participant’s Delayed Effective Retirement Date; provided, however, that such Electing Participant's or Special Participant’s benefit, as so determined and payable effective as of the first of the calendar month immediately following the Delayed Effective Retirement Date, shall not be less than the amount of the benefit that would have been payable to such Electing Participant or Special Participant as of March 1, 2007.
 
5.05A       LIMITED TEMPORARY ENHANCED UNFUNDED PENSION BENEFIT
(a)           Persons described in paragraph (b) of this Section 5.05A who constitute a select group of management or highly paid employees shall be entitled to the applicable benefit described in paragraph (c) of this Section 5.05A.  Such benefit shall constitute an unfunded promise to be paid from the general assets of Ashland Inc., and the payment of such benefit shall have no priority with respect to the claims of unsecured general creditors of Ashland Inc.
(b)           The benefit described in paragraph (c) of this Section 5.05A shall be paid with respect to those persons who would be entitled to the enhanced benefit payment under section 18.7B of the Ashland Inc. and Affiliates Pension Plan but for the exception contained in section 18.7B (b)(2)(i) of such Pension Plan (relating to highly compensated employees and employees in pay code band 21 and above).  For purposes of the benefit described in paragraph (c) of this Section 5.05A, these persons shall be referred to as Special Participants.  Such designation includes individuals who are otherwise Participants in this Plan and individuals who would not otherwise have a benefit paid through this Plan.
         (c)           The determination of the benefit payable under this paragraph (c) is different for Special Participants who, without the addition to age and service described in section 18.7B of the said Pension Plan and as of February 28, 2007, either (i) are age 55 or older; or (ii) have age and Continuous Service under the said Pension Plan equaling at least 80 (referred to as retirement eligible Special Participants) and Special Participants who require the addition to age and service described in section 18.7B of the said
 
 
20
 

Pension Plan to fall within either clause (i) or (ii) as of February 28, 2007 (referred to as not retirement eligible Special Participants).
         (1)   Retirement Eligible Special Participants .  For a retirement eligible Special Participant, the benefit payable under this paragraph (c) is calculated as the difference between two amounts calculated under the said Pension Plan.  This calculation is made as of the later of February 28, 2007 or the Delayed Termination Date (as defined in said Pension Plan).  This date is referred to as the Calculation Date.  The difference is between (i) the amount payable under the said Pension Plan on the Calculation Date adding the additional age and service pursuant to section 18.7B of said Pension Plan as though the retirement eligible Special Participant were eligible to receive the additional benefit described in said section 18.7B; and (ii) the amount payable under the said Pension Plan on the Calculation Date based on the retirement eligible Special Participant’s actual age and service.  This difference (which cannot be a negative number) is converted to an actuarially equivalent lump sum using the actuarial assumptions in the said Pension Plan, as determined by Ashland Inc., based on the actual age of the retirement eligible Special Participant.
                 (2)   Not Retirement Eligible Special Participants .  By definition, a not retirement eligible Special Participant cannot begin payments under the said Pension Plan because the not retirement eligible Special Participant is not eligible to commence benefits thereunder based on his or her actual age and service on the first of the month after the relevant Calculation Date.  To facilitate the commencement of a benefit equivalent to what could have been paid under the said Pension Plan had the not retirement eligible Special Participant actually been retirement eligible, such Special Participant will be offered an election to commence an equivalent benefit through this Plan, determined based on rules that would have applied under the said Pension Plan.  For this purpose, the not retirement eligible Special Participant’s actual age and service will be used.  Any such payments will only last through the end of the calendar month during which such Special Participant attains age 55.  Such Special Participant will then be able to make a separate election under the rules of the said Pension Plan for the benefit to commence payment from the said Pension Plan.  The not retirement eligible Special Participant is also entitled to a lump sum payment computed as the difference between (i) the amount payable under the said Pension Plan on the Calculation Date adding the additional age and service pursuant to section 18.7B of said Pension Plan as though the not retirement eligible Special Participant were eligible to receive the additional benefit described in said section 18.7B; and (ii) the amount payable under this Plan (as determined hereinabove) on the Calculation Date based on the not retirement eligible Special Participant’s actual age and service.  This difference (which cannot be a negative number) is converted to an actuarially equivalent lump sum using the actuarial assumptions in the said Pension Plan, as determined by Ashland Inc., but assuming that the not retirement eligible Special Participant had age and Continuous Service under the said Pension Plan that equaled 80 as of the Calculation Date and using such Special Participant’s actual age.
 
 
 
21
 
(3)   Payment of Lump Sum .  The lump sum amounts described in the preceding sub-paragraphs (1) and (2) are paid as soon as administratively feasible in January 2008, with certain exceptions that are described below.  Before the lump sum is paid, it will earn interest at the same rate and under the same terms that apply to the Retirement Growth Account benefit under the said Pension Plan.  The lump sum of a Special Participant who is also a Participant in this Plan shall be paid pursuant to the valid election such Participant has made for the rest of his or her benefit that is payable hereunder.  Additionally, payments shall comply with the provisions of Internal Revenue Code section 409A.  For purposes of computing any benefit under this Plan or the Ashland Inc. Nonqualified Excess Benefit Pension Plan that is coordinated with the said Pension Plan benefit, the lump sum payable under this paragraph (c) shall be considered to be part of the benefit payable under the said Pension Plan.  If a Special Participant dies before January 1, 2008, the death benefit that may be payable with respect to the benefit described in this Section 5.05A shall be based upon the Appendix A that is attached hereto and made a part of hereof, as interpreted and applied by Ashland Inc.
(d)           Elections by Special Participants for the benefit described in paragraph (c) of this Section 5.05A shall be made in such form and at such time as Ashland Inc., or its delegate, shall prescribe and such elections shall be subject to such rules and procedures, including the prior execution of a general release, as may be from time to time prescribed by Ashland Inc.
 
5.06A      Administration .
Ashland Inc. has plenary power and authority to interpret, administer and apply all provisions of the Plan relating to or associated with the VSO.  The provisions of this Article V-A were effective February 28, 2007.
 
ARTICLE VI .        CHANGE IN CONTROL .
 
Notwithstanding any provision of this Plan to the contrary, in the event of a Change in Control, an Employee who is deemed to be a Level I, II, III, IV or V Participant shall, in accordance with Section 3.03, automatically be deemed approved for participation under this Plan and shall be completely vested in his or her benefit.  Consistent with the applicable terms of Sections 5.01 and 5.02, such a Participant may, in his or her sole discretion, elect to retire prior to Age 62.  In addition, Ashland (or its successor after the Change in Control) shall reimburse an Employee for legal fees, fees of other experts and expenses incurred by such Employee if he or she is required to, and is successful in, seeking to obtain or enforce any right to payment pursuant to the Plan.  In the event that it shall be determined that such Employee is properly entitled to the payment of benefits hereunder, such Employee shall also be entitled to interest thereon payable in an amount equivalent to the prime rate of interest (quoted by Citibank, N.A. as its prime commercial lending rate on the latest date practicable prior to the date of the actual commencement of
 
 
 
22
 
  payments) from the date such payment(s) should have been made to and including the date it is made.  Notwithstanding any provision of this Plan to the contrary, the provisions of this Plan or any other plan of Ashland Inc. having a material impact on the benefits payable under this Plan may not be amended after a Change in Control occurs without the written consent of a majority of the Board who were directors prior to the Change in Control.
ARTICLE VII .
MISCELLANEOUS .
7.01
The obligations of Ashland hereunder constitute merely the promise of Ashland to make the payments provided for in this Plan.  No employee, his or her spouse or the estate of either of them shall have, by reason of this Plan, any right, title or interest of any kind in or to any property of Ashland.  To the extent any Participant has a right to receive payments from Ashland under this Plan, such right shall be no greater than the right of any unsecured general creditor of Ashland.
7.02
Full power and authority to construe, interpret and administer this Plan shall be vested in the Board or its delegate.  This includes, without limitation, the ability to make factual determinations, construe and interpret provisions of the Plan, reconcile any inconsistencies between provisions in the Plan or between provisions of the Plan and any other statement concerning the Plan, whether oral or written, supply any omissions to the Plan or any document associated with the Plan, and to correct any defect in the Plan or in any document associated with the Plan.  Decisions of the Board or its delegate shall be final, conclusive and binding upon all parties, provided, however, that no such decision may adversely affect the rights of any Participant who has been approved for participation in the Plan under the terms of Section 3.03 and whose benefit is determined under the terms of Section 5.01(d) or Section 5.02(b).
7.03
This Plan shall be binding upon Ashland and any successors to the business of Ashland and shall inure to the benefit of the Participants and their beneficiaries, if applicable.  Except as otherwise provided in Article VI, the Board or its delegate may, at any time, amend this Plan, retroactively or otherwise, but no such amendment may adversely affect the rights of any Participant who has been approved for participation in the Plan except to the extent that such action is required by law.
7.04
Except as otherwise provided in Section 5.04 and in connection with a division of property under a domestic relations proceeding under state law, no right or interest of the Participants under this Plan shall be subject to involuntary alienation, assignment or transfer of any kind.  A Participant may voluntarily assign the Participant’s rights under the Plan.  Ashland, the Board, the Committee and any of their delegates shall not review, confirm, guarantee or otherwise comment on the legal validity of any voluntary assignment.  Ashland and its delegates may review, provide recommendations and approve submitted domestic relations orders using procedures similar to those that apply to qualified domestic relations orders under the qualified pension plans
 
 
 
23
 
  sponsored by Ashland.  A domestic relations order intended to assign a benefit hereunder to a former spouse of a Participant must be delivered to the Company.  The Company will review the order to determine if it is qualified.  Upon notification by the Company that the order is qualified, the spouse will be able to elect a distribution of the assigned benefit by the end of the fifth calendar year following the calendar year during which the Company notifies the former spouse that the order is qualified.  In all events, the entire assigned benefit must be distributed by the end of the fifth calendar year following the calendar year during which the Company notifies the former spouse that the order is qualified.  Notwithstanding anything in the Plan to the contrary, if an assigned benefit is equal to or less than the adjusted Code section 402(g) limit it shall be distributed to the former spouse as soon as administratively possible.  The amount of assigned benefits shall be calculated in a manner consistent with the table summary attached hereto and incorporated herein as Appendix B.  The Company may prescribe procedures that are consistent with this Section 7.04 and applicable law to implement benefit assignments pursuant to qualified orders.
7.05
This Plan shall be governed for all purposes by the laws of the Commonwealth of Kentucky.
7.06
If any term or provision of this Plan is determined by a court or other appropriate authority to be invalid, void, or unenforceable for any reason, the remainder of the terms and provisions of this Plan shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
7.07
(a)
Initial Claim – Notice of Denial .  If any claim for benefits (within the meaning of section 503 of ERISA) is denied in whole or in part, Ashland (which shall include Ashland or its delegate throughout this Section 7.07) will provide written notification of the denied claim to the Participant or beneficiary, as applicable, (hereinafter referred to as the claimant) in a reasonable period, but not later than 90 days after the claim is received.  The 90-day period can be extended under special circumstances.  If special circumstances apply, the claimant will be notified before the end of the 90-day period after the claim was received. The notice will identify the special circumstances.  It will also specify the expected date of the decision.  When special circumstances apply, the claimant must be notified of the decision not later than 180 days after the claim is received.
 
The written decision will include:
(i)      The reasons for the denial
(ii)      Reference to the Plan provisions on which the denial is based.  The reference need not be to page numbers or to section headings or titles.  The reference only needs to sufficiently describe the provisions so that the provisions could be identified based on that description.
 
24
(iii)      A description of additional materials or information needed to process the claim.  It will also explain why those materials or information are needed.
(iv)      A description of the procedure to appeal the denial, including the time limits applicable to those procedures.  It will also state that the claimant may file a civil action under section 502 of ERISA (ERISA -- §29 U.S.C. 1132).  The claimant must complete the Plan's appeal procedure before filing a civil action in court.
 
 
          If the claimant does not receive notice of the decision on the claim within the prescribed time periods, the claim is deemed denied.  In that event the claimant may proceed with the appeal procedure described below.
(b)
Appeal of Denied Claim .  The claimant may file a written appeal of a denied claim with Ashland in such manner as determined from time to time.  Ashland is the named fiduciary under ERISA for purposes of the appeal of the denied claim.  Ashland  may delegate its authority to rule on appeals of denied claims and any person or persons or entity to which such authority is delegated may re-delegate that authority.  The appeal must be sent at least 60 days after the claimant received the denial of the initial claim.  If the appeal is not sent within this time, then the right to appeal the denial is waived.
 
The claimant may submit materials and other information relating to the claim.  Ashland will appropriately consider these materials and other information, even if they were not part of the initial claim submission.  The claimant will also be given reasonable and free access to or copies of documents, records and other information relevant to the claim.
 
Written notification of the decision on the appeal will be delivered to the claimant in a reasonable period, but not later than 60 days after the appeal is received.  The 60-day period can be extended under special circumstances.  If special circumstances apply, the claimant will be notified before the end of the 60-day period after the appeal was received. The notice will identify the special circumstances.  It will also specify the expected date of the decision.  When special circumstances apply, the claimant must be notified of the decision not later than 120 days after the appeal is received.
 
Special rules apply if Ashland designates a committee as the appropriate named fiduciary for purposes of deciding appeals of denied claims.  For the special rules to apply, the committee must meet regularly on at least a quarterly basis.
 
 
 
 
25
 
 
When the special rules for committee meetings apply the decision on the appeal must be made not later than the date of the committee meeting immediately following the receipt of the appeal.  If the appeal is received within 30 days of the next following meeting, then the decision must not be made later than the date of the second committee meeting following the receipt of the appeal.
 
The period for making the decision on the appeal can be extended under special circumstances.  If special circumstances apply, the claimant will be notified by the committee or its delegate before the end of the otherwise applicable period within which to make a decision.  The notice will identify the special circumstances.  It will also specify the expected date of the decision.  When special circumstances apply, the claimant must be notified of the decision not later than the date of the third committee meeting after the appeal is received.
 
In any event, the claimant will be provided written notice of the decision within a reasonable period after the meeting at which the decision is made.  The notification will not be later than 5 days after the meeting at which the decision is made.
 
Whether the decision on the appeal is made by a committee or not, a denial of the appeal will include:
 
(i)  
The reasons for the denial.
(ii)  
Reference to the Plan provisions on which the denial is based.  The reference need not be to page numbers or to section headings or titles.  The reference only needs to sufficiently describe the provisions so that the provisions could be identified based on that description.
(iii)  
A statement that the claimant may receive free of charge reasonable access to or copies of documents, records and other information relevant to the claim.
(iv)  
A description of any voluntary procedure for an additional appeal, if there is such a procedure.  It will also state that the claimant may file a civil action under section 502 of ERISA (ERISA – §29 U.S.C. 1132).
 
If the claimant does not receive notice of the decision on the appeal within the prescribed time periods, the appeal is deemed denied.  In that event the claimant may file a civil action in court.  The decision regarding a denied claim is final and binding on all those who are affected by the decision.  No additional appeals regarding that claim are allowed.

 
 
  26
 

APPENDIX A
 
See Section 5.05A(c)(3).
 
Form of Benefit Payment under Ashland Pension Plan
Manner of Paying the Enhanced Pension through the SERP
Straight Life Annuity
The sum of the difference between the monthly payments under the elected benefit option using the additional two years age/service and the monthly payments under the elected benefit option not using the additional two years age/service from the Calculation Date through the month of death in 2007 is paid in a lump sum to the employee’s estate.  That amount will earn the applicable amount of interest until paid.  Payment will not occur before 2008.
Life 10-Year Term Certain Annuity
The sum of the difference between the monthly payments under the elected benefit option using the additional two years age/service and the monthly payments under the elected benefit option not using the additional two years age/service from the Calculation Date through the month of death in 2007.  The payment will be to the beneficiary as would be determined under the Ashland Pension Plan.  That amount will earn the applicable amount of interest until paid.  Payment will not occur before 2008.
Survivor Annuity (including qualified joint and survivor annuity)
The lump sum that would have been paid had the employee survived is paid to the designated survivor annuitant in January 2008.  That amount will earn the applicable amount of interest until paid.
Survivor Annuity (including qualified joint and survivor annuity) assuming neither survives to January 2008
The sum of the difference between the monthly payments under the elected benefit option using the additional two years age/service and the monthly payments under the elected benefit option not using the additional two years age/service from the Calculation Date through the month of death in 2007.  The payment will be to the estate of the last to die between the employee and the designated survivor annuitant.  If the deaths were simultaneous or the order of death was otherwise unable to be determined, then the payment would be to the employee’s estate.  That amount will earn the applicable amount of interest until paid.  Payment will not occur before 2008.
 

 
 
 
 
 

APPENDIX B
 
Actuarial Assumptions for SERP/Excess Plan for Domestic Relations Orders*
 
Employee Base Salary Pay Band
Employee Age
Former Spouse’s Age
Actuarial Assumptions
23**
≥ Effective Retirement Date*** if had terminated on date the order is approved
≥ Employee’s age at Effective Retirement Date*** if employee had terminated on date the order is approved
No actuarial adjustment
≥ 23**
Employee or former spouse or both < above age on date the order is approved
Employee or former spouse or both < above age on date the order is approved
Use Ashland Pension Plan assumptions that would apply to employee under the Pension Plan
21, 22 (23)**
≥ 62
≥ 62
No actuarial adjustment
21, 22 (23)**
Employee or former spouse or both < above age on date the order is approved
Employee or former spouse or both < above age on date the order is approved
Use Ashland Pension Plan assumptions that would apply to employee under the Pension Plan
*The Excess Plan would rarely be affected because, at least for those employees still under the traditional qualified pension plan formula, it is truly unknown whether a benefit is payable under the Excess Plan until the employee actually terminates employment.  Therefore, for an employee covered under the traditional qualified pension plan formula, the Excess Plan could only be subject to an order that is entered after the employee terminated employment.  Employees in the RGA formula have a determinable Excess Plan benefit each year because it is known each year whether they have missed contribution credits due to base compensation exceeding the Code §401(a)(17) limit.  Any actuarial adjustments to the Excess Plan benefit would use the applicable adjustments from the qualified pension plan.
 
**Band 23 employees under the old formula are treated the same as bands 21 and 22 employees.
 
***The Effective Retirement Date is the earliest date the employee could elect to commence SERP payments if the employee had actually terminated from employment.

 
 
 

EXHIBIT 10.6
ASHLAND INC. NONQUALIFIED EXCESS BENEFIT
PENSION PLAN
Effective January 1, 2005  
WHEREAS , the Employee Retirement Income Security Act of 1974 (“ERISA”) establishes maximum limitations on benefits and contributions for retirement plans which meet the requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended (“Code”);
WHEREAS , Ashland Inc. (“Ashland” or the “Company”) maintains certain pension plans which are subject to the aforesaid limitations on benefits and contributions;
WHEREAS , new rules were enacted effective January 1, 2005 affecting certain nonqualified plans;
WHEREAS , Ashland desires to comply with those new rules;
NOW, THEREFORE , effective January 1, 2005, except as may otherwise be provided, Ashland does hereby amend and restate the Ashland Inc. Nonqualified Excess Benefit Plan in accordance with the following terms and conditions:
1.            Designation and Purpose of Plan .  The Plan is designated the “Ashland Inc. Nonqualified Excess Benefit Pension Plan” (“Plan”).  The purpose of the Plan is to provide benefits for certain employees in excess of the limitations on contributions, benefits, and compensation imposed by Sections 415 and 401(a)(17) of the Code (including successor provisions thereto) on the plans to which those Sections apply.  The portion of the Plan providing benefits in excess of the Section 415 limits is an “excess benefit plan” as that term is defined in Section 3(36) of ERISA.  It is intended that the portion, if any, of the Plan that is not an excess benefit plan shall be maintained primarily for a select group of management or highly compensated employees.
 
This Plan is effective January 1, 2005, except as may otherwise be provided.  Amendment No. 1 to the Plan that was effective December 31, 2004 shall be null and void and treated as though never adopted.  For purposes of the Plan, the terms “Specified Employee,” “Termination of Employment” and “Effective Retirement Date” shall have the same definitions as they have in the Ashland Inc. Supplemental Early Retirement Plan for Certain Employees, or its successor (“SERP”); provided, however, effective on and after October 1, 2008, and for Terminations of Employment occurring thereafter, such term shall be applied by substituting “three years” for “five years.”
2.            Eligibility .  Subject to Section 11, the Plan shall apply to those employees (referred to as eligible employees) -
(i)           who have retired as an early, normal, or deferred normal retiree under the provisions of the Ashland Inc. and Affiliates Pension Plan (“Ashland Pension Plan”), as it may be amended, from time to time, or under provisions of any other retirement plan, as such other plan may be
 
 
 
1
 
amended from time to time, which, from time to time, is specifically designated by Ashland for purposes of eligibility and benefits under the Plan (all such plans, including the Ashland Pension Plan, are hereinafter referred to jointly and severally as “Affected Plans”) with a benefit as computed under Section 3; and
(ii)           who have not been terminated from employment due to Cause.  Cause shall mean the willful and continuous failure of an employee to substantially perform his or her duties to Ashland (other than any such failure resulting from incapacity due to physical or mental illness), or the willful engaging by an employee in gross misconduct materially and demonstrably injurious to Ashland, each to be determined by Ashland in its sole discretion.
 
Notwithstanding anything to the contrary contained herein, any employee who would be entitled to participate in this Plan, but who is not a member of a select group of management or a highly compensated employee, shall be entitled to a benefit amount payable under the Plan based solely on the limitations on benefits imposed under Section 415 of the Code.  The potential benefit of an eligible employee before such employee becomes a retiree may be computed under Section 3 at any point in time using assumptions deemed reasonable or convenient by Ashland.  Participation in the Plan is not subject to an election by an eligible employee.  Participation is automatic and is based on the employee’s status on Ashland’s records at the applicable time.  An eligible employee hereunder is referred to as a retiree at the time such eligible employee would have his or her benefit hereunder commence pursuant to the terms of Section 3(iii).
3.            Benefit Amount .
(i)            Computation if not Eligible for Retirement Growth Account .  The computation described in this paragraph (i) applies to the portion of a retiree’s benefit that is not eligible for the Retirement Growth Account in the Ashland Inc. and Affiliates Pension Plan.  At any particular time, the benefit payable to a retiree eligible to participate in this Plan pursuant to the provisions in Section 2 shall be computed by subtracting from (A) the sum of (B) and (C) where -
(A)           shall be the single life annuity that would be payable at age 62 to such retiree under the Affected Plans -
(1)           with the benefit so payable thereunder calculated by disregarding any salary deferrals that may have been made by such retiree under the Ashland Inc. Deferred Compensation Plan and thereby restoring any salary that may have been so deferred to such retiree’s compensation for purposes of the Affected Plans, and
(2)           prior to any reductions made because of the limits imposed by Sections 415 and 401(a)(17) of the Code;
provided that the single life annuity that would be so payable under the Ashland Pension Plan shall be computed without applying any offset attributable to the Ashland Inc. Leveraged Employee Stock
 
 
2
 
 
 
Ownership Plan (“LESOP”), and such single life annuity shall be actuarially adjusted to be equivalent to a single life annuity payable at the particular time applicable based upon the applicable actuarial assumptions and other relevant provisions used for the same in the Affected Plans;
(B)           shall be the single life annuity that would be payable at age 62 to such retiree under the Affected Plans after reducing the amount so payable for the limits imposed by Sections 415 and 401(a)(17) of the Code, provided that such single life annuity that would be so payable under the Ashland Pension Plan shall be computed after first applying the offset attributable to the Offset Account (as that term is defined under the LESOP) in the LESOP, and each such single life annuity shall be actuarially adjusted to be equivalent to a single life annuity payable at the particular time applicable based upon the applicable actuarial assumptions and other relevant provisions used for the same in the Affected Plans; and
(C)           shall be the single life annuity that would be actuarially equivalent to such retiree’s non-forfeitable portion of the Offset Account under the LESOP as of the valuation date thereunder coincident with or next preceding such retiree’s termination of employment using the actuarial assumptions prescribed for this purpose in the Ashland Pension Plan.
(ii)            Computation if Eligible for Retirement Growth Account .  The computation described in this paragraph (ii) applies to the portion of a retiree’s benefit that is eligible for the Retirement Growth Account in the Ashland Pension Plan.  At any particular time, the benefit payable to a retiree eligible to participate in this Plan pursuant to the provisions in Section 2 shall be computed by subtracting from (A) the sum of (B) and (C) where -
(A)           shall be the balance of the Retirement Growth Account added to the actuarially equivalent lump sum of any single life annuity that would be payable at age 62 to such retiree under the Affected Plans (other than the Ashland Pension Plan) based upon the applicable actuarial assumptions and other relevant provisions used for the same in the Affected Plans -
(1)           with the benefit so payable thereunder calculated by disregarding any salary deferrals that may have been made by such retiree under the Ashland Inc. Deferred Compensation Plan and thereby restoring any salary that may have been so deferred to such retiree’s compensation for purposes of the Affected Plans, and
(2)           prior to any reductions made because of the limits imposed by Sections 415 and 401(a)(17) of the Code;
provided that the Retirement Growth Account balance that would be so payable under the Ashland Pension Plan shall be computed without applying any offset attributable to the Ashland Inc. Leveraged Employee Stock Ownership Plan (“LESOP”);
(B)           shall be the balance of the Retirement Growth Account added to the actuarially equivalent lump sum of any single life annuity that would be payable at age 62 to such retiree under the Affected Plans (other than the Ashland Pension Plan) based upon the applicable actuarial assumptions
 
3
 
 
 
 
and other relevant provisions used for the same in the Affected Plans after reducing the amount so payable for the limits imposed by Sections 415 and 401(a)(17) of the Code, provided that such Retirement Growth Account balance that would be so payable under the Ashland Pension Plan shall be computed after first applying the offset attributable to the Offset Account (as that term is defined under the LESOP) in the LESOP; and
(C)           shall be such retiree’s non-forfeitable portion of the Offset Account under the LESOP as of the valuation date thereunder coincident with or next preceding such retiree’s termination of employment.
(iii)            Commencement .  The benefit computed under paragraph (i) or (ii) of this Section 3 shall commence or otherwise be paid or transferred on or after the eligible employee’s Effective Retirement Date pursuant to the eligible employee’s election as to the time of payment, as provided in Section 4.  Notwithstanding anything contained in the Plan to the contrary, an eligible employee who is a Specified Employee shall have the distribution of his or her benefit which is made on account of a Termination of Employment commence on a date that is not earlier than six months after his or her Termination of Employment.
(iv)            Vesting .  Unless an eligible employee is terminated due to Cause as defined in Section 2 and subject to Section 10, an eligible employee who has a benefit hereunder shall have a non-forfeitable right to that benefit to the extent such an employee has a non-forfeitable benefit under an Affected Plan.
4.            Payment Options .
(i)
Election .  Subject to applicable transition rules under guidance issued by the Treasury under section 409A of the Code, eligible employees will have 30 days following the earlier of January 1, 2005 or the date they are first eligible for the Plan to elect a form of distribution from among those available under Section 4(ii).  For this purpose, an eligible employee is first eligible for the Plan on the first day of the calendar year following the calendar year during which the eligible employee first accrued a benefit hereunder.  Any subsequent change to that election shall be subject to the provisions of this paragraph (i), sub-parts (A), (B) and (C), as applicable.  In all other events, an eligible employee’s election is irrevocable.  Notwithstanding anything in the foregoing to the contrary, any eligible employee who elects to change his or her election must meet the following requirements, as applicable –
(A)  
The election may not take effect until at least 12 months after it is made;
(B)  
If the distribution relates to a Termination of Employment, the first payment that would be made pursuant to the election would be at least five years after the amount otherwise would have been distributed but for this election, except in the event of the eligible employee’s death; and
 
 
 
4
 
   
(C)  
The election must be made at least 12 months before the first scheduled payment that would have been payable at a specified time or pursuant to a fixed schedule.
An eligible employee may not accelerate the time or schedule of any payment under the Plan, except as provided in guidance from the Treasury under Internal Revenue Code section 409A as may be allowed by Ashland in a manner consistent therewith.  A retiree eligible under Section 2 for the benefit under Section 3 shall elect the form in which such benefit shall be paid from among those identified in this Section 4 consistent with time for making such an election in this paragraph (i).
(ii)            Optional Forms of Payment .
(A)            Lump Sum Option .  All benefits provided by the Plan shall be payable in a single lump sum payment, computed under the applicable provisions of Section 3.  A retiree’s benefit is payable as a lump sum at the time specified under Section 3(iii) (or as soon thereafter as reasonably possible), in a manner pursuant to the election under Section 4(i) under an option identified in one of the following sub-paragraphs of this Section 4(ii), but only if the retiree was eligible for the Ashland Inc. Deferred Compensation Plan for Employees (2005), or its successor.  In all other events, the retiree’s benefit shall be distributed as a lump sum at the time specified under Section 3(iii) (or as soon thereafter as reasonably possible).  A lump sum benefit payment of a benefit under Section 3(i) shall be computed on the basis of the actuarially equivalent present value of such retiree’s benefit under Section 3(i) of the Plan payable at the particular time applicable based upon such actuarial assumptions (including the interest rate) as determined from time to time by the Personnel and Compensation Committee of Ashland’s Board of Directors (Committee).
(B)            Default Lump Sum Deferral Option .  If the eligible employee fails to make an election under Section 4(i) then the benefit shall be transferred at the time specified under Section 3(iii) (or as soon thereafter as reasonably possible) to the Ashland Inc. Deferred Compensation Plan for Employees (2005), or its successor, and held pursuant to the terms of such plan and thereafter distributed as provided thereunder.  Notwithstanding the foregoing, if an eligible employee fails to make an election under this Plan, but does make an effective election for the distribution of a benefit under the SERP, then the distribution of the benefit hereunder shall be made in the same manner as the eligible employee had elected under the SERP.  In all events, an eligible employee who is a Specified Employee shall have the transfer or other distribution of his or her benefit which is made on account of a Termination of Employment commence on a date that is not earlier than six months after his or her Termination of Employment.
(C)            Lump Sum Payment Option.   An eligible employee may elect to have his or her benefit paid as a single lump sum at the time specified under Section 3(iii) (or as soon thereafter as
 
 
 
5
 
reasonably possible).  In all events, an eligible employee who is a Specified Employee shall have the distribution of his or her benefit which is made on account of a Termination of Employment commence on a date that is not earlier than six months after his or her Termination of Employment.
(D)            Elective Lump Sum Deferral Option .  An eligible employee may elect to have his or her benefit transferred to the Ashland Inc. Deferred Compensation Plan for Employees (2005), or any successor thereto, as a single lump sum at the time specified under Section 3(iii) (or as soon thereafter as reasonably possible), and held pursuant to the terms of such plan and thereafter distributed as provided thereunder.  In all events, an eligible employee who is a Specified Employee shall have the transfer of his or her benefit which is made on account of a Termination of Employment commence on a date that is not earlier than six months after his or her Termination of Employment.
(E)            Time of Distribution or Transfer .  Subject to the required delay of a distribution or transfer of a Plan benefit for an eligible employee who is a Specified Employee, the distribution or transfer of a benefit in the foregoing sub-paragraphs of this Section 4(ii) shall be paid by the later of (a) the end of the calendar year in which occurs the date specified under Section 3(iii) or (b) the 15 th day of the third calendar month following such date.
(F)            Death Before Payment .  For deaths occurring after the approval of this restatement, if an eligible employee or a retiree with a vested benefit eligible under Section 2 for the benefit under Section 3 dies before his or her Effective Retirement Date, the benefit that would have been paid to such eligible employee or retiree had he or she survived to his or her Effective Retirement Date shall be paid to the beneficiary designated by such eligible employee or retiree as he or she elected from the options made available by Ashland; provided, however, that the benefit must be completely distributed by the end of the fifth calendar year following the calendar year in which the eligible employee or retiree died.  In the absence of an election, the benefit shall be paid in January of the calendar year following the calendar year in which the eligible employee or retiree died.  If the eligible employee or retiree dies before he or she attained age 55 and before the sum of his or her age and years of continuous service equaled 80, the benefit payable hereunder shall be actuarially adjusted using the assumptions under the Affected Plan that applied at the time of the eligible employee’s or retiree’s death
(G)            Distribution Exceptions .  Notwithstanding anything in the Plan to the contrary, the following shall apply to the distribution of benefits under the Plan:
(a)           Distribution shall be made pursuant to a domestic relations order as described in Section 5;
(b)           Distribution of a benefit shall be made in a single lump sum payment as soon as possible after a retiree’s Termination of Employment or death if the distribution, when added to the amount that would be payable from the Ashland Inc. Supplemental Early Retirement Plan for Certain Employees will not exceed the adjusted Code section 402(g) limit; and
 
 
 
6
 
(c)           Distribution may be made in the discretion of Ashland for any other permitted purpose under Treas. Reg. section 1.409A-3(j)(4)(ii)-(xiv).
5.            Non-Assignment Except for Domestic Relations Order .  Except as otherwise provided in connection with a division of property under a domestic relations proceeding under state law and subject to Section 9(iii), no right or interest of the eligible employees or retirees under this Plan shall be subject to involuntary alienation, assignment or transfer of any kind.  An eligible employee may voluntarily assign his or her rights under the Plan.  Ashland, the Board, the Committee and any of their delegates shall not review, confirm, guarantee or otherwise comment on the legal validity of any voluntary assignment.  Ashland and its delegates may review, provide recommendations and approve submitted domestic relations orders using procedures similar to those that apply to qualified domestic relations orders under the qualified pension plans sponsored by Ashland.  A domestic relations order intended to assign a benefit hereunder to a former spouse of an eligible employee must be delivered to the Company.  The Company will review the order to determine if it is qualified.  Upon notification by the Company that the order is qualified, the spouse will be able to elect a distribution of the assigned benefit by the end of the fifth calendar year following the calendar year during which the Company notifies the former spouse that the order is qualified.  In all events, the entire assigned benefit must be distributed by the end of the fifth calendar year following the calendar year during which the Company notifies the former spouse that the order is qualified.  Notwithstanding anything in the Plan to the contrary, if an assigned benefit is equal to or less than the adjusted Code section 402(g) limit it shall be distributed to the former spouse as soon as administratively possible.  The amount of assigned benefits shall be calculated in a manner consistent with the table summary attached hereto and incorporated herein as Appendix A.  The Company may prescribe procedures that are consistent with this Section 5 and applicable law to implement benefit assignments pursuant to qualified orders.
6.            Costs .  In appropriate cases, Ashland may cause an affiliate to make the payment (or an allocable portion thereof) called for by the Plan directly to the person eligible to receive such payments.
7.            Confidentiality and No Competition   All benefits under the Plan shall be forfeited by anyone who discloses confidential information to others outside of Ashland’s organization without the prior written consent of Ashland or who accepts, during a period of five (5) years following his or her retirement, any employment or consulting activity which is in direct conflict with the business of Ashland at such time.  Such determination shall be made in the sole discretion of Ashland.  A breach of this Section 8 shall result in an immediate forfeiture of benefits payable to any retiree under the Plan.
8.            Lost Participant/Beneficiary .  In the event Ashland, after reasonable effort, is unable to locate a person to whom a benefit is payable under the Plan, such benefit shall be forfeited; provided, however, that such benefit shall be reinstated (in the same amount and form as that of the benefit forfeited without any obligation to pay amounts which would otherwise have previously come due) upon proper claim made by such person prior to termination of the Plan.
 
 
 
7
 
 
9.            Miscellaneous .
(i)           The obligations of Ashland and any affiliate thereof with respect to benefits under this Plan constitute merely the unsecured promise of Ashland and/or its affiliates, as the case may be, to make the payments provided for in this Plan.  No property of Ashland or any affiliate is or shall, by reason of the Plan, be held in trust or be deemed to be held in trust for any person and any participant or beneficiary under the Plan, the estate of either of them and any person claiming under or through them shall not have, by reason of the Plan, any right, title or interest of any kind in or to any property of Ashland and its affiliates.  To the extent any person has a right to receive payments under the Plan, such right shall be no greater than the right of any unsecured general creditor of Ashland/ or its affiliates.
(ii)           Ashland shall administer the Plan.  Ashland shall have full power and authority to amend, modify, or terminate the Plan and shall have all powers and the discretion necessary and convenient to administer the Plan in accor­dance with its terms, including, but not limited to, all neces­sary, appropriate, discretionary and convenient power and authority to inter­pret, administer and apply the provisions of the Plan with respect to all persons having or claiming to have any rights, benefits, entitlements or obligations under the Plan.  This includes, without limitation, the ability to construe and inter­pret provisions of the Plan, make determinations regarding law and fact, reconcile any inconsistencies between provisions in the Plan or between provisions of the Plan and any other statement concerning the Plan, whether oral or written, supply any omissions to the Plan or any document asso­ciated with the Plan, and to correct any defect in the Plan or in any document associated with the Plan.  All such interpretations of the Plan and documents associated with the Plan and questions concerning its administration and application, as determined by Ashland, shall be binding on all persons having an interest under the Plan.  Ashland may delegate (and may give to its delegatee the power and authority to redelegate) to any person or persons any responsibility, power or duty under the Plan.  Decisions of Ashland or its delegatee shall be final, conclusive, and binding on all parties.
(iii)           Ashland or any affiliate may, offset or cause an offset to be made against any payment to be made under the Plan in regard to amounts due and owing from such person to Ashland or any affiliate.  Notwithstanding anything to the contrary in this paragraph (iii), legally required tax withholding on benefit payments, the recovery, by any means, of previously made overpayments of Plan benefits, or the direct deposit of Plan benefit payments in a bank or similar account, provided that such direct deposits are allowed by Ashland in the administration of the Plan and provided that such direct deposit is not part of an arrangement constituting an assignment or alienation, shall not be considered to be prohibited under this paragraph (iii).
(iv)           No amount paid or payable under the Plan shall be deemed salary or other compensation to any employee for the purpose of computing benefits to which such employee or any other person may be entitled under any employee benefit plan of Ashland or any affiliate.
 
 
 
8
 
 
(v)           To the extent that state law shall not have been preempted by ERISA or any other law of the United States, the Plan shall be governed by the laws of the Commonwealth of Kentucky.
10.    Change in Control .  Notwithstanding any provision of this Plan to the contrary, in the event of a Change in Control (as defined hereinafter in this Section 10), any employee who would or will meet the requirements of Section 2, except that such employee has not or is not eligible to retire or terminate with a vested early, normal or deferred retirement benefit under any Affected Plan, shall be deemed to have a vested benefit hereunder, regardless of when such employee actually retires and commences benefits under an Affected Plan and such entitlement shall be vested from and after the time of such Change in Control.  Ashland shall reimburse an employee for legal fees and expenses incurred if he or she is required to, and is successful in, seeking to obtain or enforce any right to payment pursuant to the Plan after a Change in Control.  In the event that it shall be determined that such employee is properly entitled to the payment of benefits hereunder, such employee shall also be entitled to interest thereon payable in an amount equivalent to the prime rate of interest (quoted by Citibank, N.A. as its prime commercial lending rate on the latest date practicable prior to the date of the actual commencement of payments) from the date such payment(s) should have been made to and including the date it is made.  Notwithstanding any provision of this Plan to the contrary, the Plan may not be amended after a Change in Control without the written consent of a majority of the Board of Directors of Ashland (hereinafter “Board”) who were directors prior to the Change in Control.  For purposes of this Section 10, Change in Control shall be deemed to occur (1) upon approval of the shareholders of Ashland (or if such approval is not required, upon the approval of the Board) of (A) any consolidation or merger of the Company (a “Business Combination”), other than a consolidation or merger of the Company into or with a direct or indirect wholly-owned subsidiary, in which the shareholders of the Company own, directly or indirectly, less than 50% of the then outstanding shares of common stock of the Business Combination that are entitled to vote generally for the election of directors of the Business Combination or pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, other than a merger of the Company in which the holders of the Company's Common Stock immediately prior to the merger have substantially the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (B) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of Ashland, provided, however, that no sale, lease, exchange or other transfer of all or substantially all the assets of Ashland shall be deemed to occur unless assets constituting 80% of the total assets of Ashland are transferred pursuant to such sale, lease exchange or other transfer, or (C) adoption of any plan or proposal for the liquidation or dissolution of Ashland, (2) when any person (as defined in Section 3(a)(9) or 13(d) of the Exchange Act), other than Ashland or any subsidiary or employee benefit plan or trust maintained by Ashland, shall become the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 25% of Ashland’s Common Stock outstanding at the time, without the approval of
 
 
 
9
 
the Board, or (3) at any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board shall cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by Ashland’s shareholders of each new director during such two-year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such two-year period.
11.
(a)     Initial Claim – Notice of Denial .  If any claim for benefits (within the meaning of section 503 of ERISA) is denied in whole or in part, Ashland (which shall include Ashland or its delegate throughout this Section 11) will provide written notification of the denied claim to the participant or beneficiary, as applicable, (hereinafter referred to as the claimant) in a reasonable period, but not later than 90 days after the claim is received.  The 90-day period can be extended under special circumstances.  If special circumstances apply, the claimant will be notified before the end of the 90-day period after the claim was received. The notice will identify the special circumstances.  It will also specify the expected date of the decision.  When special circumstances apply, the claimant must be notified of the decision not later than 180 days after the claim is received.
 
The written decision will include:
 
(i)  
The reasons for the denial.
(ii)  
Reference to the Plan provisions on which the denial is based.  The reference need not be to page numbers or to section headings or titles.  The reference only needs to sufficiently describe the provisions so that the provisions could be identified based on that description.
(iii)  
A description of additional materials or information needed to process the claim.  It will also explain why those materials or information are needed.
(iv)  
A description of the procedure to appeal the denial, including the time limits applicable to those procedures.  It will also state that the claimant may file a civil action under section 502 of ERISA (ERISA – §29 U.S.C. 1132).  The claimant must complete the Plan’s appeal procedure before filing a civil action in court.
 
If the claimant does not receive notice of the decision on the claim within the prescribed time periods, the claim is deemed denied.  In that event the claimant may proceed with the appeal procedure described below.
(b)
Appeal of Denied Claim .  The claimant may file a written appeal of a denied claim with Ashland in such manner as determined from time to time.  Ashland is the named fiduciary under ERISA for purposes of the appeal of the denied claim.  Ashland  may delegate its authority to rule on
 
 
 
10
 
  appeals of denied claims and any person or persons or entity to which such authority is delegated may re-delegate that authority.  The appeal must be sent at least 60 days after the claimant received the denial of the initial claim.  If the appeal is not sent within this time, then the right to appeal the denial is waived.
 
The claimant may submit materials and other information relating to the claim.  Ashland will appropriately consider these materials and other information, even if they were not part of the initial claim submission.  The claimant will also be given reasonable and free access to or copies of documents, records and other information relevant to the claim.
 
Written notification of the decision on the appeal will be delivered to the claimant in a reasonable period, but not later than 60 days after the appeal is received.  The 60-day period can be extended under special circumstances.  If special circumstances apply, the claimant will be notified before the end of the 60-day period after the appeal was received. The notice will identify the special circumstances.  It will also specify the expected date of the decision.  When special circumstances apply, the claimant must be notified of the decision not later than 120 days after the appeal is received.
 
Special rules apply if Ashland designates a committee as the appropriate named fiduciary for purposes of deciding appeals of denied claims.  For the special rules to apply, the committee must meet regularly on at least a quarterly basis.
 
When the special rules for committee meetings apply the decision on the appeal must be made not later than the date of the committee meeting immediately following the receipt of the appeal.  If the appeal is received within 30 days of the next following meeting, then the decision must not be made later than the date of the second committee meeting following the receipt of the appeal.
 
The period for making the decision on the appeal can be extended under special circumstances.  If special circumstances apply, the claimant will be notified by the committee or its delegate before the end of the otherwise applicable period within which to make a decision.  The notice will identify the special circumstances.  It will also specify the expected date of the decision.  When special circumstances apply, the claimant must be notified of the decision not later than the date of the third committee meeting after the appeal is received.
 
 
 
11
 
 
In any event, the claimant will be provided written notice of the decision within a reasonable period after the meeting at which the decision is made.  The notification will not be later than 5 days after the meeting at which the decision is made.
 
Whether the decision on the appeal is made by a committee or not, a denial of the appeal will include:
 
(i)  
The reasons for the denial.
(ii)  
Reference to the Plan provisions on which the denial is based.  The reference need not be to page numbers or to section headings or titles.  The reference only needs to sufficiently describe the provisions so that the provisions could be identified based on that description.
(iii)  
A statement that the claimant may receive free of charge reasonable access to or copies of documents, records and other information relevant to the claim.
(iv)  
A description of any voluntary procedure for an additional appeal, if there is such a procedure.  It will also state that the claimant may file a civil action under section 502 of ERISA (ERISA – §29 U.S.C. 1132).
 
If the claimant does not receive notice of the decision on the appeal within the prescribed time periods, the appeal is deemed denied.  In that event the claimant may file a civil action in court.  The decision regarding a denied claim is final and binding on all those who are affected by the decision.  No additional appeals regarding that claim are allowed.
 

 
 
12 
 

 
APPENDIX A
 
Actuarial Assumptions for SERP/Excess Plan for Domestic Relations Orders*
 
Employee Base Salary Pay Band
 
Employee Age
 
Former Spouse’s Age
 
Actuarial Assumptions
≥ 23**
 
≥ Effective Retirement Date*** if had terminated on date the order is approved
 
≥ Employee’s age at Effective Retirement Date*** if employee had terminated on date the order is approved
 
No actuarial adjustment
≥ 23**
 
Employee or former spouse or both < above age on date the order is approved
 
Employee or former spouse or both < above age on date the order is approved
 
Use Ashland Pension Plan assumptions that would apply to employee under the Pension Plan
21, 22 (23)**
 
≥ 62
 
≥ 62
 
No actuarial adjustment
21, 22 (23)**
 
Employee or former spouse or both < above age on date the order is approved
 
Employee or former spouse or both < above age on date the order is approved
 
Use Ashland Pension Plan assumptions that would apply to employee under the Pension Plan
 
 
*The Excess Plan would rarely be affected because, at least for those employees still under the traditional qualified pension plan formula, it is truly unknown whether a benefit is payable under the Excess Plan until the employee actually terminates employment.  Therefore, for an employee covered under the traditional qualified pension plan formula, the Excess Plan could only be subject to an order that is entered after the employee terminated employment.  Employees in the RGA formula have a determinable Excess Plan benefit each year because it is known each year whether they have missed contribution credits due to base compensation exceeding the Code §401(a)(17) limit.  Any actuarial adjustments to the Excess Plan benefit would use the applicable adjustments from the qualified pension plan.
 
**Band 23 employees under the old formula are treated the same as bands 21 and 22 employees.
 
 
***The Effective Retirement Date is the earliest date the employee could elect to commence SERP payments if the employee had actually terminated from employment.
 
13


EXHIBIT 10.12
ASHLAND INC.
SALARY CONTINUATION PLAN
(as amended as of November 7, 2002)


The Ashland Inc. Salary Continuation Plan (the "Plan"), effective July 21, 1988,  is an employee  benefit plan which  provides  eligible  salaried employees of Ashland Inc. and its majority-owned subsidiaries (collectively referred to herein as the "Company") with certain severance benefits if the individual's  employment  with the  Company  is  terminated  under  defined circumstances  after a Change in Control,  as defined in Section 4(b).  The details and purpose of the Plan are more fully explained below.

SECTION 1. PURPOSE

The  purpose  of the Plan is to  reduce  employee  concerns  about the possibility of a Change in Control, as defined below in Section 4(b). It is important that each employee be able to focus his or her full attention and energy  toward the goals and  objectives  of the Company.  The Plan is also designed  to permit the  Company to retain its high  quality  work force by increasing  stability and improving morale and  productivity.  In addition, the Plan will  allow the  company  to  attract  and  retain  new  qualified employees.

SECTION 2. ADMINISTRATION

Ashland Inc.  ("Ashland")  shall be the Plan  Administrator  and shall administer  the  Plan.  Any  determinations  by the Vice  President,  Human Resources - Programs and Services, or his or her designee, in carrying out, administering, or interpreting this Plan shall be final and binding for all purposes and upon all interested persons and their heirs,  successors,  and personal representatives. All costs associated with the Plan shall be borne by the Company.

SECTION 3. ELIGIBILITY

An  employee  who is  classified  on the  records of the  Company as a regular,  full-time  salaried  employee,  whether  exempt or  non-exempt as specified in the Fair Labor  Standards  Act, as from time to time  amended, (excluding  hourly employees;  employees  covered by collective  bargaining agreements;  employees of subsidiaries,  entities, or partnerships in which the  Company  has a 50%  or  less  ownership  interest;  and  international employees,  except foreign nationals who are located in Canada or those who are  U.S.  expatriates)  will  be  entitled  to  participate  in the  Plan, regardless of length of service. Employees who have entered into employment contracts with the Company will not be eligible to participate in the Plan.

At any time prior to a Change in Control,  as defined in Section 4(b), Ashland  reserves,  in its  complete  discretion,  the  right to amend  the eligible classes of employees.

SECTION 4. CONDITIONS FOR BENEFIT PAYMENTS

(a) A participant shall not be entitled to receive benefits under this Plan  prior  to  a  Change  in  Control,   as  defined  in  Section   4(b). Participation in the Plan does not create a contract of employment  between the Company and its employees.  The Company reserves the right to terminate employees at any time for any reason,  just as employees  have the right to terminate their employment at any time for any reason.

(b) For purposes of the Plan,  a change in control of Ashland  (herein after  referred  to as a  "Change  in  Control")  shall be  deemed  to have occurred if:

(i) there shall be consummated (A) any  consolidation or merger of the Company, other than a consolidation or merger of the Company into or with a direct or indirect wholly-owned subsidiary, in which the Company is not the continuing  or  surviving  corporation  or pursuant to which  shares of the Company's common stock would be converted into cash,  securities,  or other property,  other  than a merger  of the  Company  in which  the  individual holders of the Company's common stock  immediately prior to the merger have the  same  proportionate   ownership  of  common  stock  of  the  surviving corporation immediately after the merger, or (B) any sale, lease, exchange, or transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Company, provided,  however, that no sale,  lease,  exchange or other transfer of all or  substantially  all the assets of the Company shall be deemed to occur unless  assets  constituting 80% of the total  assets of the  Company are  transferred  pursuant to such sale, lease, exchange or other transfer; or

(ii)  the  Shareholders  of the  Company  shall  approve  any  plan or proposal for the liquidation or dissolution of the Company; or

(iii)  any  "person"  (as  such  term is used in  Sections  13(d)  and 14(d)(2) of the Securities  Exchange Act of 1934, as amended (the "Exchange Act")),  other than the  Company or a  subsidiary  thereof or any  employee benefit plan sponsored by the Company or a subsidiary thereof, shall become the  beneficial  owner (within the meaning of Rule 13d-3 under the Exchange Act) of  securities  of Ashland  representing  50% or more of the  combined voting power of Ashland's then outstanding securities ordinarily (and apart from rights accruing in special  circumstances) having the right to vote in the election of directors,  as a result of a tender or exchange offer, open market purchases, privately-negotiated purchases or otherwise; or

(iv) at any time during a period of two consecutive years, individuals who at the beginning of such period  constituted  the Board of Directors of Ashland  shall  cease for any  reason  to  constitute  at least a  majority thereof,  unless the election or the  nomination  for election by Ashland's shareholders  of each new director during such two-year period was approved by a vote of at least  two-thirds of the directors then still in office who were directors at the beginning of such two-year period.

Notwithstanding   the  foregoing,   any  transaction,   or  series  of transactions,  that  shall  result  in the  disposition  of  the  Company's interest in Marathon Ashland Petroleum LLC,  including  without  limitation any transaction  arising out of that certain Put/Call,  Registration Rights and Standstill  Agreement dated January 1, 1998 among Marathon Oil Company, USX Corporation, the Company and Marathon Ashland Petroleum LLC, as amended from time to time, shall not be deemed to constitute a Change in Control.

(c) Benefits shall be payable to a participant under the Plan after a Change in Control has occurred if a participant's employment is terminated by the Company without Cause, as defined below, within two (2) years from the date of the Change in Control. For purposes of the Plan, "cause" shall mean (i) the willful and continued failure of an employee to substantially perform his or her duties with the company (other than such failure resulting from the employee's incapacity due to physical or mental illness), or (ii) willful engaging by an employee in gross misconduct materially injurious to the Company.

SECTION 5.  AMOUNT OF BENEFITS

Following  a Change in  Control  and a  participant's  termination  of employment  within two (2) years  thereafter  without  Cause, a participant shall be entitled to receive benefits under the Plan as described below:

(a) A participant shall be entitled to be paid in an undiscounted lump sum, within ten (10) business days after such participant's  termination of employment  without Cause, an amount equal to a specified portion of his or her current base compensation (excluding any bonus compensation) based upon the greater of such participant's (a) aggregate years and months of service (whether or not  continuous),  or (b) current Job Band (or, if higher,  the Job  Band  of  such  participant  at the  time of the  Change  in  Control) calculated as follows:

 
Length of Service
 
Payment
 
 
Up to 5 full years
 
3 months' base compensation
 
 
More than 5 and up to 10 full years
 
6 months' base compensation
 
 
More than 10 and up to 15 full years
 
1 year's base compensation
 
 
More than 15 and up to 20 full years
 
1-1/2 year's base compensation 
 
 
More than 20 full years
 
2 years' base compensation
 
         
 
 Job Band
 
Payment
 
 
Band 1 - 10
 
3 months' base compensation
 
 
Band 11 - 22
 
6 months' base compensation
 
 
Band 23 and above
 
1 year's base compensation
 

(b) At the  sole  expense  of the  Company,  a  participant  shall  be entitled to the continuation of his or her medical,  dental, and group life benefits  in  effect  at the  time of  such  participant's  termination  of employment  without  Cause for a period of six (6)  months  following  such participant's termination of employment.

(c) A participant  shall be reimbursed  for any legal fees or expenses incurred by the  participant to enforce the payment of Plan benefits within ten (10)  business days of providing  copies of applicable  invoices to the Company.

(d) A  participant  shall be entitled to interest on the amount of any payments due under the Plan (but not timely  paid) in an amount  equivalent to the prime  rate of  interest  (quoted  by  Citibank,  N.A.  as its prime commercial  lending rate) on the latest date practicable  prior to the date such payments should have been made, to and including the date it is made.

(e) Within ten (10) business days of the participant's  termination of employment  following a Change in Control, the Company shall provide, at no cost to the  participant,  individual  outside  assistance in finding other employment.  Such  obligation  may be fulfilled by the Company  through the retention of an outplacement service for use by individual participants.

(f) Participants shall be entitled to receive any pension, disability, workers' compensation, other Company benefit plan distribution, payment for vacation accrued but not taken, statutory employment termination benefit, or any other compensation plan payment otherwise independently due; however, in no event shall a participant who receives benefit under this Plan be entitled to additional severance payment pursuant to any other existing severance policy of the Company.

SECTION 6. ACCEPTANCE OF BENEFITS

If a participant receives and accepts all of the benefits provided under Section 5 of the Plan, he or she shall be deemed thereby to have waived any right or cause of action against the Company and its directors, officers, or employees arising from the termination of the participant's employment.

SECTION 7. CLAIMS PROCEDURE

(a) Following a Change in Control and a  participant's  termination of employment,  the benefits  described in Section 5 of the Plan shall be paid as  described  therein  without  any  required  action  on the part of such participant.

(b) If any participant believes that he or she is entitled to benefits provided under the Plan and has not received such benefits  within the time prescribed  by the Plan,  such  participant  may submit a written claim for payment of such  benefits  to the  Company.  If such claim for  benefits is wholly or partially denied, the Company shall,  within thirty (30) business days after receipt of the claim,  notice the  participant  of the denial of the claim.  Such  notice of denial (i) shall be in  writing,  (ii) shall be written in a manner  calculated to be understood  by the  participant,  and (iii) shall  contain (A) the  specific  reason or reasons for denial of the claim, (B) a specific reference to the pertinent Plan provisions upon which the  denial is based,  (C) a  description  of any  additional  material  or information  necessary to perfect the claim,  along with an  explanation of why such material or  information  is necessary,  and (D) an explanation of the claim review  procedure,  in  accordance  with the  provisions  of this Section 7.

(c)  Within  sixty  (60)  business  days  after  the  receipt  by  the participant of a written notice of denial of the claim,  or such later time as shall be deemed reasonable taking into account the nature of the benefit subject to the claim and any other attendant circumstances, the participant may file a written request with the Company that it conduct a full and fair review of the denial of the claim for benefits.  As a part of such full and fair  review,  the  participant  (or  such  participant's  duly  authorized representative) may review and photocopy pertinent documents (including but not limited to the  participant's  personal history file) and submit issues and  comments  to the  Company  in  writing.  The  Company  shall  make its determination  in accordance with the documents  governing the Plan insofar as such  documents  are  consistent  with the  provisions  of the  Employee Retirement Income Security Act of 1914 (herein "ERISA").

The Company  shall  promptly  deliver to the  participant  its written decision on the claim (in no event later than  thirty  (30)  business  days after the receipt of the aforesaid request for review, except that if there are special circumstances (such as a conference with the participant or his or her  representative)  which require an extension of time,  the aforesaid thirty (30) business day period shall be extended to a reasonable period of time not to exceed sixty (60) business  days).  Such decision  shall (i) be written in a manner  calculated to be understood by the  participant,  (ii) include the specific reason or reasons for the decision,  and (iii) contain a  specific  reference  to the  pertinent  Plan  provisions  upon which the decision is based.  If the decision on review is not  furnished  within the time  prescribed by this Section 7(c), the claim shall be deemed granted on review.

SECTION 8. AMENDMENTS AND TERMINATIONS

Ashland's  Board  of  Directors   shall  have  plenary   authority  to terminate,  modify,  or amend this Plan in such  respects  as it shall deem advisable at any time prior to a Change in Control.

SECTION 9. SUCCESSORS BINDING AGREEMENT

(a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to eligible participants, expressly to assume and agree to provide benefits pursuant to this Plan in the same manner and to the same extent that the Company would be required to perform its obligations under the Plan if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a violation of this Plan and shall entitle eligible participants to compensation from the Company in the same amount and on the same terms as the participant would be entitled pursuant to Section 5, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of the participant's termination of employment without Cause. As used in this Plan, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 9 or which otherwise becomes bound by all the terms and provisions of this Plan by operation of law.

(b) This Plan shall  inure to the benefit of and be  enforceable  by a participant's personal or legal representatives, executors, administrators, successors,  heirs, distributees,  devisees, and legatees. If a participant should die while any amounts would still be payable to him or her hereunder if he or she had  continued to live,  all such  amounts,  unless  otherwise provided herein, shall be paid in accordance with the terms of this Plan to such participant's  devisee,  legatee, or other designee or, if there be no such designee, to his or her estate.

SECTION 10. WITHHOLDING TAXES

The Company is  authorized to withhold any tax required to be withheld from the amounts  payable to a participant  pursuant to this Plan which are considered taxable compensation to the participant.

SECTION 11. GOVERNING LAW

The  Plan  shall  be  governed  by the  laws  of the  Commonwealth  of Kentucky.

 
EXHIIT 10.14
 
EMPLOYMENT AGREEMENT
 
THIS EMPLOYMENT AGREEMENT (the “Agreement”), dated this 8 day of July 2008, is between Ashland Inc., a Kentucky corporation (“Ashland”), having its principal place of business at 50 E. RiverCenter Boulevard, Covington, KY 41011 and John E. Panichella (“Employee”).
 
WHEREAS, it is anticipated that Ashland will acquire all the stock of Hercules Incorporated (“Hercules”), pursuant to and in accordance with a Merger Agreement, to be executed by and between Hercules and Ashland (the “Merger Agreement”); and
 
Employee currently serves as President Aqualon Division of Hercules and Vice President, Hercules Incorporated, and has substantial experience, knowledge and skill associated with the operations and administration of this business unit and of Hercules; and
 
Ashland wishes to retain Employee upon the terms and conditions set forth in this Agreement, upon the completion of the acquisition of Hercules.
 
NOW THEREFORE, in consideration of the recitals and mutual covenants contained in this Agreement, the parties agree as follows:
 
1.            Employment .
 
1.1
Duties and Responsibilities .  Employee shall be employed by Ashland on a full-time basis effective as of the closing date of the transactions contemplated by the Merger Agreement (the “Commencement Date”).  Employee shall serve as an executive officer of Ashland, in the role of President Aqualon and Vice President of Ashland Inc.  Employee shall also serve as a member of Ashland’s operating committee.  Employee shall faithfully, industriously and to the best of his ability perform the duties that may be required of him and shall devote his full business time, effort, skill and attention to the affairs of Ashland during his employment.  It is agreed that Employee’s performance during the term of this Agreement will be measured in accordance with Ashland’s performance appraisal process.
 
1.2
Term .  The term of this Agreement shall be three (3) years from the Commencement Date (the “Term”). Employee understands and agrees that in the event this Agreement is not extended for a subsequent term, then upon its expiration he will become an employee “at-will,” which means that either Employee or Ashland will be free to discontinue the employment relationship without penalty at any time thereafter, with or without notice and with or without Cause; provided that in the event the merger with Hercules does not
 
-1-
 
 
 
 
 
occur on or before June 30, 2009, this Agreement will lapse and no further obligations will be owed by either party hereunder.
 
1.3
Effect of Prior Agreements .  Employee acknowledges that except for those obligations Ashland has specifically assumed under the terms of the Merger Agreement with Hercules, Ashland and Hercules shall have no obligations to Employee pursuant to any previous employment agreements between Employee and Hercules, or any of its subsidiaries, affiliates or predecessors in interest.
 
2.            Compensation and Benefits .
 
2.1
Base Compensation .  Ashland shall pay Employee an annual salary (“Base Compensation”) of Three Hundred Sixty Thousand Dollars ($360,000), less applicable withholdings, which shall be payable in accordance with its customary payroll practices with respect to time and manner of payment.
 
2.2
Vacation .  Employee’s vacation eligibility will be in accordance with Ashland’s Vacation Benefit program, provided that Employee’s years of service with Hercules shall be counted for purposes of determining his eligibility for vacation accrual under said vacation policy.
 
2.3
Periods not Worked .  Employee understands and agrees that except where some form of paid leave is provided under the regular policies of Ashland, Employee shall not receive compensation for workweeks in which no work is performed.
 
2.4
Employee Benefits . Employee’s position is in salary band 26, and as a regular, full-time employee of Ashland, he shall be entitled to participate in all benefits offered to employees in this band according to the terms and conditions of such programs, as they may be amended from time to time.
 
2.5
Restricted Stock .  In order to assist Employee in meeting the stock ownership requirements applicable to his position and to encourage Employee to remain with Ashland, within 90 days of the Commencement Date Ashland will provide Employee with a grant of shares of Ashland Inc. restricted stock equivalent in value to one and one-half (1.5) times Employee’s Base Compensation, the number of shares granted to be determined based on the closing price of Ashland Inc. common stock as reflected on the New York Stock Exchange (“NYSE”) composite tape as of the Commencement Date.  These shares of restricted stock will vest in full 48 months from the Commencement Date.  In the event Employee’s employment is terminated less than 48 months from the Commencement Date either by Ashland without Cause and in its sole discretion, or due to Employee’s death or disability, then Employee shall receive accelerated pro-rata vesting of these shares of restricted stock, based on the number of months of employment completed as of the date his employment ended.  In the event Employee voluntarily elects to terminate
 
-2-
 
 
 
 
 
his employment or Ashland terminates his employment for Cause, as provided herein, less than 48 months from the Commencement Date, then all shares of restricted stock will not vest, and will be forfeited in their entirety.  Employee and Ashland agree that Ashland’s obligations under this section of the Agreement shall survive the expiration of the term of this Agreement.
 
2.6
Retention Bonus .  In order to encourage Employee’s continued service during the term of this Agreement, Ashland will provide Employee with a bonus (“Retention Bonus”) equal to Three Hundred Sixty Thousand Dollars ($360,000), less applicable withholdings, to be paid as follows:  one-third of the Retention Bonus will be due upon Employee’s 12-month anniversary of service with Ashland; one-third of the Retention Bonus will be due upon Employee’s 24-month anniversary of service with Ashland, and the final one-third payment will be due as of Employee’s 36-month anniversary of service with Ashland.  Each Retention Bonus payment shall be made within 30 days of the date on which Employee becomes entitled to receive said payment.
 
In the event Employee’s employment is terminated prior to the payment of one or more of these Retention Bonus payments, either by Ashland without Cause and in its sole discretion, or due to Employee’s death or disability, then Employee shall immediately receive payment of the balance of the Retention Bonus.  However Employee agrees that Ashland shall have no further obligation to make any Retention Bonus payment(s) under this section if, prior to the date on which a Retention Bonus payment would become due, Employee voluntarily elects to terminate his employment, or Ashland terminates his employment for Cause, as provided herein.
 
2.7
Incentive Compensation .  During the term of this Agreement, Employee shall be eligible to receive incentive compensation as follows:
 
 
(a)
2008 Incentive Compensation .  If the Commencement Date occurs on or before December 31, 2008, then for the remainder of calendar year 2008, Employee will remain eligible to receive incentive pay under the annual incentive compensation program in which Employee was a participant immediately prior to the Commencement Date.
 
 
(b)
Ashland Incentive Compensation Plan .   Employee shall become eligible to participate in Ashland’s Incentive Compensation Plan as of the Commencement Date.  All terms and conditions governing Employee’s annual incentive pay opportunity will be determined according to the terms and conditions of said plan.
 
 
(c)
Long-Term Incentive Plan . Employee will become eligible to participate in Ashland’s Long-Term Incentive Plan as of the Commencement Date. All terms and conditions governing Employee’s long-term incentive pay opportunity will be determined according to the terms and conditions of said plan.
 
 
-3-
 
 
 
 
2.8
Severance Benefits . In addition to those termination benefits otherwise provided for hereunder, Employee shall be eligible to receive benefits under Ashland’s normal severance pay policies in the event his employment is terminated by Ashland without Cause and in its sole discretion during the term of this Agreement; provided that the severance benefit Employee is eligible to receive shall be not less than 18 months of Base Compensation. All other terms and conditions for payment of the above benefits shall be made in accordance with the terms and conditions of the applicable plan(s).
 
2.9
Change in Control .  Employee shall be eligible to receive those benefits offered to employees in his salary band in the event of a “Change in Control” of Ashland (as defined in the applicable plan) during the term of this Agreement; provided that the minimum benefit Employee shall receive in the event of such Change in Control shall be two (2) years of Employee’s Base Compensation, a payment equal to Employee’s annual incentive pay target, and all  unvested equity compensation provided to Employee shall immediately vest.  All other terms and conditions for payment of the above benefits shall be made in accordance with the terms and conditions of the applicable plan(s).
 
3.
Non-Competition .  Employee understands and agrees that as a condition of his employment, contemporaneous with the execution of this Agreement, he will also execute the Ashland Service Agreement, a copy of which is attached hereto as Exhibit I, and the terms and conditions of which are incorporated by reference as if fully set forth herein.  Provided however, that Employee specifically agrees that the restrictions provided in said Service Agreement shall extend for the greater of three (3) years from the date of the execution of this Agreement, or 18 months from the date Employee is no longer employed by Ashland in any capacity.
 
Employee understands that his obligations under the Ashland Service Agreement and the provisions of this section of this Agreement shall survive the expiration or early termination of this Agreement.  Employee further understands that his obligations under the Ashland Service Agreement will be in addition to any obligations under any confidentiality and/or non-competition agreements executed by Employee prior to or during his employment with Hercules which are assumed by Ashland under the terms of the Merger Agreement.
 
4.            Confidentiality .
 
4.1
No Disclosure or Use of Confidential Information . During Employee’s employment with Ashland and thereafter, Employee shall not, directly or indirectly, (a) disclose or permit the disclosure of any Confidential Information to any person or entity, or (b) use or permit the use of Confidential Information:  (i) in any way detrimental to Ashland, including in competition with Ashland; or (ii) for any purpose other than to benefit Ashland.   Upon Ashland’s request or termination of Employee’s employment, Employee shall
 
 
-4-
 
 
 
 
 
promptly return to Ashland all written or tangible Confidential Information.  For purposes hereof, “Confidential Information” means all information about Ashland and/or Hercules, and any subsidiaries, affiliates or predecessors in interest of either, which is disclosed to Employee, directly or indirectly, before or during Employee’s employment with Ashland and/or Hercules,  includ­ing: product design and manufacturing information; any communications or corres­pondence identifying customers, prospects or projects; pricing and sales lists, business plans and strategies; pol­icies, techniques and concepts; employee compensation; financial reports; proprietary technology, trade secrets, research and development data and know-how; copyrighted and unprotected materials; and other secret or confidential information or data which pertains to Ashland.  Confidential Information does not include information which is or becomes publicly available through an authorized or lawful disclosure.
 
4.2
Ownership of Works .  All ideas, discoveries, inventions, improvements, artworks, compositions, conceptions, and materials (including materials within the scope of the copyright laws) (“Works”) prepared or conceived by Employee during the term of this Agreement and usable in or relating to Ashland’s business shall be the property of Ashland and Employee hereby assigns and agrees to assign to Ashland all of Employee’s right, title and interest in such Works.  Employee shall not use, or transfer to others, any Works other than in connection with Ashland’s business or with Ashland’s written consent.  Employee agrees to execute all papers, and otherwise provide proper assistance, at Ashland’s request and expense, during and subsequent to Employee’s employment by Ashland to enable Ashland or its nominees to obtain patents, copyrights, and other legal protection for the Works in any country.
 
4.3
Confidentiality of this Agreement .  Employee agrees that he will keep the terms of this Agreement completely confidential, and will not hereafter disclose any information concerning this Agreement to anyone except his immediate family, financial advisors and/or attorney: provided that they agree in advance of said disclosure to keep this information confidential and not disclose it to others.  However, the obligation to treat information contained herein as confidential will not apply to any information Ashland has disclosed pursuant to United States securities laws, the rules of the New York Stock Exchange, or the rules of any other stock exchange on which Ashland stock is listed.
 
5.  
Injunctive Relief .  Employee agrees that (a) the provisions of Sections 3 and 4 are reasonable and necessary to protect the legitimate interests of Ashland and (b) any violation of Sections 3 or 4 will result in irreparable injury to Ashland, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such violation would not be reasonable or adequate compensation to Ashland for such a violation.  Accordingly, Employee agrees that if he violates any provisions of Sections 3 or 4, Ashland shall be entitled to specific performance and injunctive relief, without posting bond or other security, and without the necessity of proving actual damages.
 
 
-5-
 
 
 
Employee and Ashland agree that any controversy or claim arising out of or relating to other sections of this Agreement, or the breach thereof, shall be settled exclusively by arbitration in accordance with the Center for Public Resources’ Model ADR Procedures and Practices, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
 
6.             Early Termination .
 
6.1
Termination for Cause. Ashland may terminate this Agreement for Cause at any time during its term.  Upon a termination for Cause, no further compensation under this Agreement will be owed to Employee. “Cause” shall be defined for the purposes of this Agreement as being:
 
 
(a)
any act or omission by Employee which reasonably constitutes dishonesty, disloyalty, fraud, deceit, gross negligence, willful misconduct or recklessness, including, but not limited to the willful violation of Ashland’s by-laws, Business Responsibilities of an Ashland Employee, or other corporate policies and procedures governing employee conduct;
 
 
(b)
Employee’s insubordination; “Insubordination” shall be defined as Employee’s refusal or willful failure to perform specifically assigned duties relating to his position;
 
 
(c)
Employee’s inattention to, neglect of or any other failure to competently perform any assigned duties, unless such failure is due to Employee’s incapacity as a result of the Employee’s physical or mental illness;
 
 
(d)
any act by Employee that constitutes a conviction of any felony under the laws of the United States; or
 
 
(e)
Employee’s breach of any material portion of this Agreement.
 
6.2
Termination due to Death or Disability . In addition, this agreement will automatically terminate, and except for those benefits specified under paragraphs 2.5 and 2.6 of this Agreement, no further compensation under this Agreement will be owed to Employee in the event either of the following should occur during its term:
 
 
(a)
Employee becomes disabled and subsequently becomes eligible to receive payments under Ashland’s Long Term Disability Plan; or
 
 
(b)
In the event of the Employee’s death.   Provided, however, that Ashland will not be relieved of any obligations under its employee benefits plans which arise due to Employee’s death.
 
 
-6-
 
 
 
Any payments owed under this Agreement following Employee’s death will be paid to Employee’s estate.
 
6.3
Termination for Other Reasons .  Ashland may terminate this contract at any time during its term, for any reason other than those enumerated above, and shall thereafter only be obligated to provide the following to Employee:
 
(a)  
payment of the greater of (i) the balance of the Base Compensation Employee would have received if his employment had continued for the full term of this Agreement, or (ii) the amount of severance pay payable to employees in his salary band whose employment is terminated without Cause under Ashland’s normal severance pay policies; and
 
(b)  
payment of those amounts Employee would have otherwise been eligible to receive under Ashland’s Incentive Compensation and Long-Term Incentive Pay plans, pro-rated through his last day of active employment, which will be paid in accordance with all other terms and conditions of said plans; and
 
(c)  
pro-rata vesting of those shares of restricted stock granted to Employee pursuant to section 2.5 of this Agreement; and
 
(d)  
payment of the balance of the Retention Bonus provided for in section 2.6 of this Agreement.
 
In such event, Employee’s termination shall be deemed without Cause, and Employee will remain eligible to receive those benefits ordinarily provided under Ashland’s employee benefits plans to employees who are terminated without Cause.
 
7.
Notices . Any notice required or desired to be given under this Agreement shall be deemed given if in writing mailed or delivered as follows:
 
 
If to Employee:
 
With a copy to:
 
 
If to Ashland:
 
With a copy to:
 
 

  -7-
 
 
 

8.
Successors and Assigns .   This Agreement shall be binding upon and inure to the benefit of Ashland and its successors and assigns.
 
9.
Waiver . No waiver of any breach of any term or provision of this Agreement shall be construed to be, nor shall be, a waiver of any other breach of this Agreement.  No waiver shall be binding unless in writing and signed by the party waiving the breach.
 
10.
Modification .   This Agreement may not be amended or modified other than by a written agreement signed by Employee and an authorized representative of Ashland.  No company practice or policy of Ashland shall change the provisions of this Agreement.
 
11.
Severability . The provisions of this Agreement are independent and severable from each other, and no provisions shall be affected or rendered invalid or unenforceable if any other provision or provisions is deemed invalid or unenforceable by a court or arbitrator or competent jurisdiction.
 
12.
No Violation of any Other Contract Binding Upon Employee . Employee warrants and represents to Ashland that Employee is not subject to any covenants, agreements or restrictions, including any covenants, agreements or restrictions arising out of any prior employment that would be breached or violated by Employee’s execution of this Agreement or by his performance of his duties hereunder.
 
13.
Attorney’s Fees .  Any signatory to this Agreement who is the prevailing party in any legal proceeding against any other signatory brought under or with relation to this Agreement shall be entitled to recover court costs, reasonable attorney fees, and all other out-of-pocket costs of litigation, including deposition, trace, and witness costs, from the non-prevailing party.
 
14.
Governing Law .  This Agreement shall be deemed to have been executed and delivered within the state of Ohio, and shall be construed, enforced and governed by, the laws of the State of Ohio without regard to principles of conflict of laws and without regard to any law requiring construction against the party preparing the document.
 

-8- 
 
 
 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement the date first above written.
 
07/08/08
 
         /s/ John E. Panichella          
 John E. Panichella          
           
 
   -- and ---
 
ASHLAND INC.
 
 By: /s/ Susan B. Esler           
 Its:  VP HR & Communications          
             

  -9-
 
 
 

Exhibit I
EMPLOYEE AGREEMENT
 
As an employee of Ashland Inc. or any of its divisions or subsidiaries 1   (collectively call "Ashland"), you may be exposed to Confidential information about Ashland's business processes, products and developments.  In order that you fully understand and accept your responsibilities as an Ashland employee, you are asked to review and agree to the terms printed below by signing this Agreement.
 
In consideration of my employment or continued employment with Ashland, the salary or wages, increase and promotions and other benefits received by me during such employment, and in consideration of being given access to Confidential information when required, I hereby agree as follows:
 
Article 1 - Professional Conduct
I agree to follow Ashland's policies and guidelines with respect to the conduct of its business as described in the Business Responsibilities of an Ashland Employee.  I will use my best efforts to comply with both the letter and the spirit of all laws and regulations applicable to my duties as an employee of Ashland.  I further agree to adhere to the highest ethical standards of conduct in all of my business activities and to act at all times in the best interest of Ashland.
 
Article 2 - Confidential Information
Ashland has defined Confidential Information to mean trade secrets, know-how, and other information relating to Ashland's business practices and prospective business interests (including, but not limited to):  customer lists, fore-casts, business and strategic plans, financial and sales information, products, processes, equipment, manufacturing operations, marketing programs, research, product development, engineering, computer systems, software, personnel and legal records.
 
I agree that I will promptly disclose to Ashland all trade secrets or inventions made or conceived by me, either alone or with others, during my employment with Ashland.  I also agree that I will not use or disclose to anyone any Confidential Information of Ashland, except with the written consent of Ashland or as required in my duties as an employee of Ashland.  This obligation shall continue until such Confidential Information becomes generally known to the public without participation on my part.
 
I agree that the same obligation to protect Confidential Information shall apply to the information of any third party obtained by me as an Ashland employee and with respect to which Ashland has an obligation of secrecy.  Further, I agree not
 
 
_______________________________  
1 Subsidiaries or divisions, which have their own Employee or Service Agreements are not included hereunder.
 
 
 
 
 
to use or disclose to Ashland any confidential information of any previous employer or other third party to whom I have an obligation of secrecy.  I also agree to immediately provide Ashland with a copy of any agreement I may have with a prior employer that affects my employment with Ashland.
 
Article 3 - Intellectual Property Ownership
I understand Intellectual Property of Ashland to mean any invention, discovery, work of authorship, computer program, design, trademark or any other non-physical property, including ownership of copyright as based on the work-for-hire doctrine, which was not developed entirely on my own time or, even if developed on my own time: (1) relates to the business of Ashland or to Ashland's actual or anticipated research or development; or (2) results from any work performed by me for Ashland.
 
Article 4 - Intellectual Property Rights
Upon the request of Ashland and at Ashland's expense, I or my legal representative will assign, and hereby do assign and convey to Ashland, my entire right in and to any patent or inventions or discoveries, and registrations or works of authorship which are the property of Ashland under Article 3; assist Ashland and its agents in preparing documents for the protection of such Intellectual Property in all countries of the world; sign and deliver to Ashland all papers necessary for the assignment or patent applications and patents the registration of copy-rights; and will give all information and testimony, sign all papers and do all things which may be needed or requested by Ashland to obtain, extend, re-issue, maintain for enforce such Intellectual Property Rights.  When any assistance relating to such Intellectual Property Rights is rendered after my employment, I understand that Ashland will pay me a reasonable sum for my time and expenses.
 
Article 5 - Documents
I acknowledge that all originals and copies of drawings, blueprints, manuals, reports, notebooks, notes, calendars, photographs, computer programs in whatever form and other data, and any other recorded, written, printed or electronically-stored matter, whether considered confidential or not, relating to research, operations and/or the business of Ashland, made or received by me during my employment, are the property of Ashland.  I will upon termination of my employment, return such information or documents to Ashland, retaining no copies for myself.  I also agree to return to Ashland all other physical or personal property of Ashland.
 
Article 6 - Noncompetition
I agree that for a period of eighteen (18) months from the date of my termination of employment with Ashland for any reason, I will not be employed by or participate in, or have any interest (directly or indirectly) in any business which
 
 
 
 
 
 
involves an area of technology or business in which I worked for Ashland during the last two (2) years of my employment with Ashland and which might require me to disclose or misuse any Confidential Information of Ashland.  I further agree that for a period of eighteen (18) months, I will not interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, with respect to the business carried on by Ashland with any other party, including other Ashland employees.  I agree that these restrictions are reasonable and shall apply to the same geographical area over which I had primary responsibility during the last two (2) years of my employment with Ashland.
 
Article 7 - Employment at Will
I understand that I have the right to terminate my employment with Ashland for any reason at any time, with or without notice.  I understand that Ashland has the same right.  I further acknowledge that I do not have a contract of employment with Ashland and that, in the future, I will not have any contractual rights of employment unless such rights are made part of a written agreement executed by me and by a Vice President or a higher level officer of Ashland.
 
Article 8 - Acceptance
I have read this Agreement carefully and I understand and voluntarily agree to comply with its terms.  I understand that in the event that Ashland should waive any part of this Agreement of that any part should be determined to be unenforceable, the remaining provisions shall remain in effect.
 
 
DATE THIS 8 DAY OF JULY 2008
 
WITNESS:
 
__________________________
 
   /s/ John E. Panichella    
  (SIGNATURE)    
       
       
   John E. Panichella    
  (PRINT NAME)    
 
:
 
   ACCEPTED    
 ASHLAND INC.    
       
       
       
 BY: /s/ Susan B. Esler     
 TITLE:  Vice President, Human Resources & Communications    
       
 
 
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
 
THIS EMPLOYMENT AGREEMENT (the “Agreement”), dated this 9 day of July 2008, is between Ashland Inc., a Kentucky corporation (“Ashland”), having its principal place of business at 50 E. RiverCenter Boulevard, Covington, KY 41011 and Paul C. Raymond, III (“Employee”).
 
WHEREAS, it is anticipated that Ashland will acquire all the stock of Hercules Incorporated (“Hercules”), pursuant to and in accordance with a Merger Agreement, to be executed by and between Hercules and Ashland (the “Merger Agreement”); and
 
Employee currently serves as President Paper Technologies and Ventures Division of Hercules and Vice President, Hercules Incorporated, and has substantial experience, knowledge and skill associated with the operations and administration of this business unit and of Hercules; and
 
Ashland wishes to retain Employee upon the terms and conditions set forth in this Agreement, upon the completion of the acquisition of Hercules.
 
NOW THEREFORE, in consideration of the recitals and mutual covenants contained in this Agreement, the parties agree as follows:
 
1.            Employment .
 
1.1
Duties and Responsibilities .  Employee shall be employed by Ashland on a full-time basis effective as of the closing date of the transactions contemplated by the Merger Agreement (the “Commencement Date”).  Employee shall serve as an executive officer of Ashland, in the role of President Paper Technologies, Water Technologies  and Ventures and Vice President of Ashland Inc.  Employee shall also serve as a member of Ashland’s operating committee.  Employee shall faithfully, industriously and to the best of his ability perform the duties that may be required of him and shall devote his full business time, effort, skill and attention to the affairs of Ashland during his employment.  It is agreed that Employee’s performance during the term of this Agreement will be measured in accordance with Ashland’s performance appraisal process.
 
1.2
Term .  The term of this Agreement shall be three (3) years from the Commencement Date (the “Term”). Employee understands and agrees that in the event this Agreement is not extended for a subsequent term, then upon its expiration he will become an employee “at-will,” which means that either Employee or Ashland will be free to discontinue the employment relationship without penalty at any time thereafter, with or without notice and with or without Cause; provided that in the event the merger with Hercules does not
 
 
 
 
 
1
 
  occur on or before June 30, 2009, this Agreement will lapse and no further obligations will be owed by either party hereunder.
 
1.3
Effect of Prior Agreements .  Employee acknowledges that except for those obligations Ashland has specifically assumed under the terms of the Merger Agreement with Hercules, Ashland and Hercules shall have no obligations to Employee pursuant to any previous employment agreements between Employee and Hercules, or any of its subsidiaries, affiliates or predecessors in interest.
 
2.            Compensation and Benefits .
 
2.1
Base Compensation .  Ashland shall pay Employee an annual salary (“Base Compensation”) of Three Hundred Sixty Thousand Dollars ($360,000), less applicable withholdings, which shall be payable in accordance with its customary payroll practices with respect to time and manner of payment.
 
2.2
Vacation .  Employee’s vacation eligibility will be in accordance with Ashland’s Vacation Benefit program, provided that Employee’s years of service with Hercules shall be counted for purposes of determining his eligibility for vacation accrual under said vacation policy.
 
2.3
Periods not Worked .  Employee understands and agrees that except where some form of paid leave is provided under the regular policies of Ashland, Employee shall not receive compensation for workweeks in which no work is performed.
 
2.4
Employee Benefits . Employee’s position is in salary band 26, and as a regular, full-time employee of Ashland, he shall be entitled to participate in all benefits offered to employees in this band according to the terms and conditions of such programs, as they may be amended from time to time.
 
2.5
Restricted Stock .  In order to assist Employee in meeting the stock ownership requirements applicable to his position and to encourage Employee to remain with Ashland, within 90 days of the Commencement Date Ashland will provide Employee with a grant of shares of Ashland Inc. restricted stock equivalent in value to one and one-half (1.5) times Employee’s Base Compensation, the number of shares granted to be determined based on the closing price of Ashland Inc. common stock as reflected on the New York Stock Exchange (“NYSE”) composite tape as of the Commencement Date.  These shares of restricted stock will vest in full 48 months from the Commencement Date.  In the event Employee’s employment is terminated less than 48 months from the Commencement Date either by Ashland without Cause and in its sole discretion, or due to Employee’s death or disability, then Employee shall receive accelerated pro-rata vesting of these shares of restricted stock, based on the number of months of employment completed as of the date his employment ended.  In the event Employee voluntarily elects to terminate his
 
 
 
 
 
2
 
  employment or Ashland terminates his employment for Cause, as provided herein, less than 48 months from the Commencement Date, then all shares of restricted stock will not vest, and will be forfeited in their entirety.  Employee and Ashland agree that Ashland’s obligations under this section of the Agreement shall survive the expiration of the term of this Agreement.
 
2.6
Retention Bonus .  In order to encourage Employee’s continued service during the term of this Agreement, Ashland will provide Employee with a bonus (“Retention Bonus”) equal to Three Hundred Sixty Thousand Dollars ($360,000), less applicable withholdings, to be paid as follows:  one-third of the Retention Bonus will be due upon Employee’s 12-month anniversary of service with Ashland; one-third of the Retention Bonus will be due upon Employee’s 24-month anniversary of service with Ashland, and the final one-third payment will be due as of Employee’s 36-month anniversary of service with Ashland.  Each Retention Bonus payment shall be made within 30 days of the date on which Employee becomes entitled to receive said payment.
 
In the event Employee’s employment is terminated prior to the payment of one or more of these Retention Bonus payments, either by Ashland without Cause and in its sole discretion, or due to Employee’s death or disability, then Employee shall immediately receive payment of the balance of the Retention Bonus.  However Employee agrees that Ashland shall have no further obligation to make any Retention Bonus payment(s) under this section if, prior to the date on which a Retention Bonus payment would become due, Employee voluntarily elects to terminate his employment, or Ashland terminates his employment for Cause, as provided herein.
 
2.7
Incentive Compensation .  During the term of this Agreement, Employee shall be eligible to receive incentive compensation as follows:
 
 
(a)
2008 Incentive Compensation .  If the Commencement Date occurs on or before December 31, 2008, then for the remainder of calendar year 2008, Employee will remain eligible to receive incentive pay under the annual incentive compensation program in which Employee was a participant immediately prior to the Commencement Date.
 
 
(b)
Ashland Incentive Compensation Plan .   Employee shall become eligible to participate in Ashland’s Incentive Compensation Plan as of the Commencement Date.  All terms and conditions governing Employee’s annual incentive pay opportunity will be determined according to the terms and conditions of said plan.
 
 
(c)
Long-Term Incentive Plan . Employee will become eligible to participate in Ashland’s Long-Term Incentive Plan as of the Commencement Date. All terms and conditions governing Employee’s long-term incentive pay opportunity will be determined according to the terms and conditions of said plan.
 
 
 
3
 
2.8
Severance Benefits . In addition to those termination benefits otherwise provided for hereunder, Employee shall be eligible to receive benefits under Ashland’s normal severance pay policies in the event his employment is terminated by Ashland without Cause and in its sole discretion during the term of this Agreement; provided that the severance benefit Employee is eligible to receive shall be not less than 18 months of Base Compensation. All other terms and conditions for payment of the above benefits shall be made in accordance with the terms and conditions of the applicable plan(s).
 
2.9
Change in Control .  Employee shall be eligible to receive those benefits offered to employees in his salary band in the event of a “Change in Control” of Ashland (as defined in the applicable plan) during the term of this Agreement; provided that the minimum benefit Employee shall receive in the event of such Change in Control shall be two (2) years of Employee’s Base Compensation, a payment equal to Employee’s annual incentive pay target, and all  unvested equity compensation provided to Employee shall immediately vest.  All other terms and conditions for payment of the above benefits shall be made in accordance with the terms and conditions of the applicable plan(s).
 
3.
Non-Competition .  Employee understands and agrees that as a condition of his employment, contemporaneous with the execution of this Agreement, he will also execute the Ashland Service Agreement, a copy of which is attached hereto as Exhibit I, and the terms and conditions of which are incorporated by reference as if fully set forth herein.  Provided however, that Employee specifically agrees that the restrictions provided in said Service Agreement shall extend for the greater of three (3) years from the date of the execution of this Agreement, or 18 months from the date Employee is no longer employed by Ashland in any capacity.
 
Employee understands that his obligations under the Ashland Service Agreement and the provisions of this section of this Agreement shall survive the expiration or early termination of this Agreement.  Employee further understands that his obligations under the Ashland Service Agreement will be in addition to any obligations under any confidentiality and/or non-competition agreements executed by Employee prior to or during his employment with Hercules which are assumed by Ashland under the terms of the Merger Agreement.
 
4.            Confidentiality .
 
4.1
No Disclosure or Use of Confidential Information . During Employee’s employment with Ashland and thereafter, Employee shall not, directly or indirectly, (a) disclose or permit the disclosure of any Confidential Information to any person or entity, or (b) use or permit the use of Confidential Information:  (i) in any way detrimental to Ashland, including in competition with Ashland; or (ii) for any purpose other than to benefit Ashland.   Upon Ashland’s request or termination of Employee’s employment, Employee shall
 
 
 
 
 
4
 
  promptly return to Ashland all written or tangible Confidential Information.  For purposes hereof, “Confidential Information” means all information about Ashland and/or Hercules, and any subsidiaries, affiliates or predecessors in interest of either, which is disclosed to Employee, directly or indirectly, before or during Employee’s employment with Ashland and/or Hercules,  includ­ing: product design and manufacturing information; any communications or corres­pondence identifying customers, prospects or projects; pricing and sales lists, business plans and strategies; pol­icies, techniques and concepts; employee compensation; financial reports; proprietary technology, trade secrets, research and development data and know-how; copyrighted and unprotected materials; and other secret or confidential information or data which pertains to Ashland.  Confidential Information does not include information which is or becomes publicly available through an authorized or lawful disclosure.
 
4.2
Ownership of Works .  All ideas, discoveries, inventions, improvements, artworks, compositions, conceptions, and materials (including materials within the scope of the copyright laws) (“Works”) prepared or conceived by Employee during the term of this Agreement and usable in or relating to Ashland’s business shall be the property of Ashland and Employee hereby assigns and agrees to assign to Ashland all of Employee’s right, title and interest in such Works.  Employee shall not use, or transfer to others, any Works other than in connection with Ashland’s business or with Ashland’s written consent.  Employee agrees to execute all papers, and otherwise provide proper assistance, at Ashland’s request and expense, during and subsequent to Employee’s employment by Ashland to enable Ashland or its nominees to obtain patents, copyrights, and other legal protection for the Works in any country.
 
4.3
Confidentiality of this Agreement .  Employee agrees that he will keep the terms of this Agreement completely confidential, and will not hereafter disclose any information concerning this Agreement to anyone except his immediate family, financial advisors and/or attorney: provided that they agree in advance of said disclosure to keep this information confidential and not disclose it to others.  However, the obligation to treat information contained herein as confidential will not apply to any information Ashland has disclosed pursuant to United States securities laws, the rules of the New York Stock Exchange, or the rules of any other stock exchange on which Ashland stock is listed.
 
5.  
Injunctive Relief .  Employee agrees that (a) the provisions of Sections 3 and 4 are reasonable and necessary to protect the legitimate interests of Ashland and (b) any violation of Sections 3 or 4 will result in irreparable injury to Ashland, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such violation would not be reasonable or adequate compensation to Ashland for such a violation.  Accordingly, Employee agrees that if he violates any provisions of Sections 3 or 4, Ashland shall be entitled to specific performance and injunctive relief, without posting bond or other security, and without the necessity of proving actual damages.
 
 
 
5
 
Employee and Ashland agree that any controversy or claim arising out of or relating to other sections of this Agreement, or the breach thereof, shall be settled exclusively by arbitration in accordance with the Center for Public Resources’ Model ADR Procedures and Practices, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
 
6.             Early Termination .
 
6.1
Termination for Cause. Ashland may terminate this Agreement for Cause at any time during its term.  Upon a termination for Cause, no further compensation under this Agreement will be owed to Employee. “Cause” shall be defined for the purposes of this Agreement as being:
 
 
(a)
any act or omission by Employee which reasonably constitutes dishonesty, disloyalty, fraud, deceit, gross negligence, willful misconduct or recklessness, including, but not limited to the willful violation of Ashland’s by-laws, Business Responsibilities of an Ashland Employee, or other corporate policies and procedures governing employee conduct;
 
 
(b)
Employee’s insubordination; “Insubordination” shall be defined as Employee’s refusal or willful failure to perform specifically assigned duties relating to his position;
 
 
(c)
Employee’s inattention to, neglect of or any other failure to competently perform any assigned duties, unless such failure is due to Employee’s incapacity as a result of the Employee’s physical or mental illness;
 
 
(d)
any act by Employee that constitutes a conviction of any felony under the laws of the United States; or
 
 
(e)
Employee’s breach of any material portion of this Agreement.
 
6.2
Termination due to Death or Disability . In addition, this agreement will automatically terminate, and except for those benefits specified under paragraphs 2.5 and 2.6 of this Agreement, no further compensation under this Agreement will be owed to Employee in the event either of the following should occur during its term:
 
 
(a)
Employee becomes disabled and subsequently becomes eligible to receive payments under Ashland’s Long Term Disability Plan; or
 
 
(b)
In the event of the Employee’s death.   Provided, however, that Ashland will not be relieved of any obligations under its employee benefits plans which arise due to Employee’s death.
 
 
 
6
 
Any payments owed under this Agreement following Employee’s death will be paid to Employee’s estate.
 
6.3
Termination for Other Reasons .  Ashland may terminate this contract at any time during its term, for any reason other than those enumerated above, and shall thereafter only be obligated to provide the following to Employee:
 
(a)  
payment of the greater of (i) the balance of the Base Compensation Employee would have received if his employment had continued for the full term of this Agreement, or (ii) the amount of severance pay payable to employees in his salary band whose employment is terminated without Cause under Ashland’s normal severance pay policies; and
 
(b)  
payment of those amounts Employee would have otherwise been eligible to receive under Ashland’s Incentive Compensation and Long-Term Incentive Pay plans, pro-rated through his last day of active employment, which will be paid in accordance with all other terms and conditions of said plans; and
 
(c)  
pro-rata vesting of those shares of restricted stock granted to Employee pursuant to section 2.5 of this Agreement; and
 
(d)  
payment of the balance of the Retention Bonus provided for in section 2.6 of this Agreement.
 
In such event, Employee’s termination shall be deemed without Cause, and Employee will remain eligible to receive those benefits ordinarily provided under Ashland’s employee benefits plans to employees who are terminated without Cause.
 
7.
Notices . Any notice required or desired to be given under this Agreement shall be deemed given if in writing mailed or delivered as follows:
 
 
If to Employee:
 
With a copy to:
 
 
If to Ashland:
 
With a copy to:
 
 

 
 
 

8.
Successors and Assigns .   This Agreement shall be binding upon and inure to the benefit of Ashland and its successors and assigns.
 
9.
Waiver . No waiver of any breach of any term or provision of this Agreement shall be construed to be, nor shall be, a waiver of any other breach of this Agreement.  No waiver shall be binding unless in writing and signed by the party waiving the breach.
 
10.
Modification .   This Agreement may not be amended or modified other than by a written agreement signed by Employee and an authorized representative of Ashland.  No company practice or policy of Ashland shall change the provisions of this Agreement.
 
11.
Severability . The provisions of this Agreement are independent and severable from each other, and no provisions shall be affected or rendered invalid or unenforceable if any other provision or provisions is deemed invalid or unenforceable by a court or arbitrator or competent jurisdiction.
 
12.
No Violation of any Other Contract Binding Upon Employee . Employee warrants and represents to Ashland that Employee is not subject to any covenants, agreements or restrictions, including any covenants, agreements or restrictions arising out of any prior employment that would be breached or violated by Employee’s execution of this Agreement or by his performance of his duties hereunder.
 
13.
Attorney’s Fees .  Any signatory to this Agreement who is the prevailing party in any legal proceeding against any other signatory brought under or with relation to this Agreement shall be entitled to recover court costs, reasonable attorney fees, and all other out-of-pocket costs of litigation, including deposition, trace, and witness costs, from the non-prevailing party.
 
14.
Governing Law .  This Agreement shall be deemed to have been executed and delivered within the state of Ohio, and shall be construed, enforced and governed by, the laws of the State of Ohio without regard to principles of conflict of laws and without regard to any law requiring construction against the party preparing the document.
 

 
 
8
 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement the date first above written.
 
 
         /s/ Paul C. Raymond, III          
 Paul C. Raymond, III          
           
 
   -- and ---
 
ASHLAND INC.
 
 By: /s/ Susan B. Esler           
 Its:  VP Human Resources  & Communications          
             
 
Agreed subject to attached term sheet including duties and responsibilities for Ashland Water Technologies
 
 
               /s/ Paul C. Raymond, III    
       Paul C. Raymond, III    
           
       /s/ SBE    
       /s/ PCR    
 
 
 
9
 


 
Exhibit I
EMPLOYEE AGREEMENT
 
As an employee of Ashland Inc. or any of its divisions or subsidiaries 1   (collectively call "Ashland"), you may be exposed to Confidential information about Ashland's business processes, products and developments.  In order that you fully understand and accept your responsibilities as an Ashland employee, you are asked to review and agree to the terms printed below by signing this Agreement.
 
In consideration of my employment or continued employment with Ashland, the salary or wages, increase and promotions and other benefits received by me during such employment, and in consideration of being given access to Confidential information when required, I hereby agree as follows:
 
Article 1 - Professional Conduct
I agree to follow Ashland's policies and guidelines with respect to the conduct of its business as described in the Business Responsibilities of an Ashland Employee.  I will use my best efforts to comply with both the letter and the spirit of all laws and regulations applicable to my duties as an employee of Ashland.  I further agree to adhere to the highest ethical standards of conduct in all of my business activities and to act at all times in the best interest of Ashland.
 
Article 2 - Confidential Information
Ashland has defined Confidential Information to mean trade secrets, know-how, and other information relating to Ashland's business practices and prospective business interests (including, but not limited to):  customer lists, fore-casts, business and strategic plans, financial and sales information, products, processes, equipment, manufacturing operations, marketing programs, research, product development, engineering, computer systems, software, personnel and legal records.
 
I agree that I will promptly disclose to Ashland all trade secrets or inventions made or conceived by me, either alone or with others, during my employment with Ashland.  I also agree that I will not use or disclose to anyone any Confidential Information of Ashland, except with the written consent of Ashland or as required in my duties as an employee of Ashland.  This obligation shall continue until such Confidential Information becomes generally known to the public without participation on my part.
 
I agree that the same obligation to protect Confidential Information shall apply to the information of any third party obtained by me as an Ashland employee and with respect to which Ashland has an obligation of secrecy.  Further, I agree not
 
 
_____________________________________  
1 Subsidiaries or divisions, which have their own Employee or Service Agreements are not included hereunder.
 
 
 
 
to use or disclose to Ashland any confidential information of any previous employer or other third party to whom I have an obligation of secrecy.  I also agree to immediately provide Ashland with a copy of any agreement I may have with a prior employer that affects my employment with Ashland.
 
Article 3 - Intellectual Property Ownership
I understand Intellectual Property of Ashland to mean any invention, discovery, work of authorship, computer program, design, trademark or any other non-physical property, including ownership of copyright as based on the work-for-hire doctrine, which was not developed entirely on my own time or, even if developed on my own time: (1) relates to the business of Ashland or to Ashland's actual or anticipated research or development; or (2) results from any work performed by me for Ashland.
 
Article 4 - Intellectual Property Rights
Upon the request of Ashland and at Ashland's expense, I or my legal representative will assign, and hereby do assign and convey to Ashland, my entire right in and to any patent or inventions or discoveries, and registrations or works of authorship which are the property of Ashland under Article 3; assist Ashland and its agents in preparing documents for the protection of such Intellectual Property in all countries of the world; sign and deliver to Ashland all papers necessary for the assignment or patent applications and patents the registration of copy-rights; and will give all information and testimony, sign all papers and do all things which may be needed or requested by Ashland to obtain, extend, re-issue, maintain for enforce such Intellectual Property Rights.  When any assistance relating to such Intellectual Property Rights is rendered after my employment, I understand that Ashland will pay me a reasonable sum for my time and expenses.
 
Article 5 - Documents
I acknowledge that all originals and copies of drawings, blueprints, manuals, reports, notebooks, notes, calendars, photographs, computer programs in whatever form and other data, and any other recorded, written, printed or electronically-stored matter, whether considered confidential or not, relating to research, operations and/or the business of Ashland, made or received by me during my employment, are the property of Ashland.  I will upon termination of my employment, return such information or documents to Ashland, retaining no copies for myself.  I also agree to return to Ashland all other physical or personal property of Ashland.
 
Article 6 - Noncompetition
I agree that for a period of eighteen (18) months from the date of my termination of employment with Ashland for any reason, I will not be employed by or participate in, or have any interest (directly or indirectly) in any business which involves an area of technology or business in which I worked for Ashland during the last two (2) years of my employment with Ashland and which might require
 
 
 
 
 
 
me to disclose or misuse any Confidential Information of Ashland.  I further agree that for a period of eighteen (18) months, I will not interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, with respect to the business carried on by Ashland with any other party, including other Ashland employees.  I agree that these restrictions are reasonable and shall apply to the same geographical area over which I had primary responsibility during the last two (2) years of my employment with Ashland.
 
Article 7 - Employment at Will
I understand that I have the right to terminate my employment with Ashland for any reason at any time, with or without notice.  I understand that Ashland has the same right.  I further acknowledge that I do not have a contract of employment with Ashland and that, in the future, I will not have any contractual rights of employment unless such rights are made part of a written agreement executed by me and by a Vice President or a higher level officer of Ashland.
 
Article 8 - Acceptance
I have read this Agreement carefully and I understand and voluntarily agree to comply with its terms.  I understand that in the event that Ashland should waive any part of this Agreement of that any part should be determined to be unenforceable, the remaining provisions shall remain in effect.
 
 
DATE THIS 14 DAY OF JULY 2008
 
WITNESS:
 
 
 /s/ Michelle Brackin        
 Michelle Brackin        
     /s/ Paul C. Raymond, III    
           (SIGNATURE)    
         
         
     Paul C. Raymond, III    
           (PRINT NAME)    
 
:
 
   ACCEPTED:
 
   
 ASHLAND INC.    
       
       
       
 BY: /s/ Susan B. Esler     
 TITLE:  V.P. Human Resources & Communications    
       
 
 
 
 
 
 
Term Sheet
for
Mr. Paul Raymond


Position:
President Paper Technologies, Water Technologies and Ventures and Vice President Ashland Inc.

Location:
Wilmington, Delaware

Salary Grade
26

Base Salary:
$360,000

Annual Incentive Opportunity (IC):
 
(all numbers as a % of base salary)
 
 
Percent
 
Value
 
Target
75%
 
$270,000
 
Maximum (150% of target)
112.5%
 
$405,000
 
         

     
Approximate
Percent (of salary)
 
Approximate
Value
 
Approximate
Performance
Shares/Options
@$50 grant
price
Long-Term Incentive
           
  Total Target Value  
135%
 
$486,000
   
  SAR-grant (fixed and rounded by band)  
65%
     
14,000
  Long-Term Incentive Grant (as % of salary)  
70%
     
5,040

Severance Benefit (not for cause)
18 months base salary paid in a lump sum

CIC Agreement
2x base salary + target annual incentive (1 year)
 
immediate vesting of all unvested equity compensation

Retention Bonus
$360,000 paid in 1/3 increments at the completion of 12 months, 24 months and 36 months service.

Restricted Stock Grant
Restricted stock grant valued at 1.5x salary.  Value determined based on share price at close of deal.  Vest in full at completion of 48 months service

Supplemental Early Retirement Plan
 
(SERP) (non-qualified)
- Formula:  Average of highest 3 years base salary and annual bonus (IC) out of last 7 years x .25 x full years of Ashland service (up to a maximum of 20 years)
 
 
(This benefit is offset by value of
Cash Balance Benefit)
- Fully vested in benefit after 5 years (Hercules service counts towards vesting)

 
Estimated value of SERP at various levels assuming target incentive and average salary increases of 2%

 
5 years
$836,000
 
 
7 years
$1,200,000
 
 
10 years
$1,800,000
 
 
15 years
$3,050,000
 
 
20 years
$4,500,000
 

Financial Planning Benefit
AYCO (value approximately $12,000 annual) +  $2,500; or up to $5,000
(benefit is taxable as imputed income)
 
 
 

EXHIBIT 10.17
 
 
ASHLAND INC.
1997 STOCK INCENTIVE PLAN
(Amended as of November 7, 2002)
 
 
Section 1. Purpose
 
The purpose of the Ashland Inc. 1997 Stock Incentive Plan is to promote the interests of Ashland Inc. and its shareholders by providing incentives to its directors, officers and employees.  Accordingly, the Company may grant to selected officers and employees Options, Stock Appreciation Rights, Restricted Stock, Merit Awards and Performance Share Awards in an effort to attract and retain in its employ qualified individuals and to provide such individuals with incentives to continue service with Ashland, devote their best efforts to the Company and improve Ashland’s economic performance, thus enhancing the value of the Company for the benefit of shareholders.  The Plan also provides an incentive for qualified persons, who are not officers or employees of the Company, to serve on the Board of Directors of the Company and to continue to work for the best interests of the Company by rewarding such persons with an automatic grant of Restricted Stock of the Company upon being appointed or elected to the Company’s Board of Directors.  Options, Stock Appreciation Rights, Merit Awards and Performance Shares may not be granted to such Outside Directors under the Plan.
 
 

 
 
Section 2. Definitions
 
(A) “Agreement” shall mean a written agreement setting forth the terms of an Award, to be entered into at the Company’s discretion.
 
(B) “Ashland” shall mean, collectively, Ashland Inc. and its Subsidiaries.
 
(C) “Award” shall mean an Option, a Stock Appreciation Right, a Restricted Stock Award, a Merit Award, or a Performance Share Award, in each case granted under this Plan.
 
 (D) “Beneficiary” shall mean the person, persons, trust or trusts designated by an Employee or Outside Director or if no designation has been made, the person, persons, trust, or trusts entitled by will or the laws of descent and distribution to receive the benefits specified under this Plan in the event of an Employee's or Outside Director's death.
 
(E) “Board” shall mean the Board of Directors of the Company or its designee.
 
(F) “Change in Control” shall be deemed to occur (1) upon approval of the shareholders of Ashland (or if such approval is not required, upon the approval of the Board) of (A) any consolidation or merger of Ashland, other than a consolidation or merger of Ashland into or with a direct or indirect wholly-owned subsidiary, in which Ashland is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property other than a merger in which the holders of Common Stock immediately prior to the merger will have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (B) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of Ashland, provided, however, that no sale, lease, exchange or other transfer of all or substantially all the assets of Ashland shall be deemed to occur unless assets constituting 80% of the total assets of Ashland are transferred pursuant to such sale, lease, exchange or other transfer, or (C) adoption of any plan or proposal for the liquidation or dissolution of Ashland, (2) when any “person” (as defined in Section 3(a)(9) or 13(d) of the Exchange Act), other than Ashland or any Subsidiary or employee benefit plan or trust maintained by Ashland, shall become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 15% of Ashland's Common Stock outstanding at the time, without the approval of the Board, or (3) at any time during a period of two consecutive years, individuals who at the beginning of such period constituted the Board shall cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by Ashland's shareholders of each new director during such two-year period was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such two-year period.  Notwithstanding the foregoing, any transaction, or series of transactions, that shall result in the disposition of Ashland’s interest in Marathon Ashland Petroleum LLC, including without limitation any transaction arising out of that certain Put/Call, Registration Rights and Standstill Agreement dated January 1, 1998 among Marathon Oil Company, USX Corporation, Ashland and
 
Marathon Ashland Petroleum LLC, as amended from time to time, shall not be deemed to constitute a Change in Control.
 
(G) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.
 
(H) “Committee” shall mean the Personnel and Compensation Committee of the Board, as from time to time constituted, or any successor committee of the Board with similar functions, which shall consist of three or more members, each of whom shall be a Non-Employee Director and an “outside director” as defined in the regulations issued under Section 162(m) of the Code or its designee.
 
(I) “Committee on Directors” shall mean the Committee on Directors of the Board, as from time to time constituted, or any successor committee of the Board with similar functions.
 
(J) “Common Stock” shall mean the Common Stock of the Company ($1.00 par value), subject to adjustment pursuant to Section 13.
 
(K) “Company” shall mean, collectively, Ashland Inc. and its Subsidiaries.
 
(L) “Employee” shall mean a regular, full-time or part-time employee of Ashland as selected by the Committee to receive an Award under the Plan.
 
(M) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
 
(N) “Exercise Price” shall mean, with respect to each share of Common Stock subject to an Option, the price fixed by the Committee at which such share may be purchased from the Company pursuant to the exercise of such Option, which price at no time may be less than 100% of the Fair Market Value of the Common Stock on the date the Option is granted.
 
(O) “Fair Market Value” shall mean the price of the Common Stock as reported on the Composite Tape of the New York Stock Exchange on the date and at the time selected by the Company or as otherwise provided in the Plan.
 
(P) “Incentive Stock Option” or “ISO” shall mean an Option that is intended by the Committee to meet the requirements of Section 422 of the Code or any successor provision.
 
(Q) “Merit Award” shall mean an award of Common Stock issued pursuant to Section 9 of the Plan.
 
(R) “Non-Employee Director” shall mean a non-employee director within the meaning of applicable regulatory requirements, including those promulgated under Section 16 of the Exchange Act.
 
(S) “Nonqualified Stock Option” or “NQSO” shall mean an Option granted pursuant to this Plan which does not qualify as an Incentive Stock Option.
 
(T) “Option” shall mean the right to purchase Common Stock at a price to be specified and upon terms to be designated by the Committee or otherwise determined pursuant to this Plan. An Option shall be designated by the Committee as a Nonqualified Stock Option or an Incentive Stock Option.
 
(U) “Outside Director” shall mean a director of the Company who is not also an Employee of the Company.
 
(V)  “Performance Goals” means performance goals as may be established in writing by the Committee which may be based on earnings, stock price, return on equity, return on investment, total return to shareholders, economic value added, debt rating or achievement of business or operational goals, such as drilling or exploration targets or profit per barrel.  Such goals may be absolute in their terms or measured against or in relation to other companies comparably or otherwise situated.  Such performance goals may be particular to an Employee or the division, department, branch, line of business, subsidiary or other unit in which the Employee works and/or may be based on the performance of Ashland generally.
 
(W) “Performance Period” shall mean the period designated by the Committee during which the performance objectives shall be measured.
 
(X) “Performance Share Award” shall mean an award of shares of Common Stock, the issuance of which is contingent upon attainment of performance objectives specified by the Committee.
 
(Y) “Performance Shares” shall mean those shares of Common Stock issuable pursuant to a Performance Share Award.
 
(Z) “Personal Representative” shall mean the person or persons who, upon the disability or incompetence of an Employee or Outside Director, shall have acquired on behalf of the Employee or Outside Director by legal proceeding or otherwise the right to receive the benefits specified in this Plan.
 
(AA) “Plan” shall mean this Ashland Inc. 1997 Stock Incentive Plan.
 
(BB) “Restricted Period” shall mean the period designated by the Committee during which Restricted Stock may not be sold, assigned, transferred, pledged, or otherwise encumbered, which period in the case of Employees shall not be less than one year from the date of grant (unless otherwise directed by the Committee), and in the case of Outside Directors is the period set forth in subsection (B) of Section 8.
 
(CC) “Restricted Stock” shall mean those shares of Common Stock issued pursuant to a Restricted Stock Award which are subject to the restrictions, terms, and conditions set forth in the related Agreement, if any.
 
(DD) “Restricted Stock Award” shall mean an award of Restricted Stock.
 
(EE) “Retained Distributions” shall mean any securities or other property (other than regular cash dividends) distributed by the Company in respect of Restricted Stock during any Restricted Period.
 
(FF) “Retirement” shall mean retirement of an Employee from the employ of the Company at any time as described in the Ashland Inc. and Affiliates Pension Plan or in any successor pension plan, as from time to time in effect.
 
(GG) “Section 16(b) Optionee” shall mean an Employee or former Employee who is subject to Section 16(b) of the Exchange Act.
 
(HH) “Stock Appreciation Right” or “SAR” shall mean the right of the holder to elect to surrender an Option or any portion thereof which is then exercisable and receive in exchange therefor shares of Common Stock, cash, or a combination thereof, as the case may be, with an aggregate value equal to the excess of the Fair Market Value of one share of Common Stock over the Exercise Price specified in such Option multiplied by the number of shares of Common Stock covered by such Option or portion thereof which is so surrendered. An SAR may only be granted concurrently with the grant of the related Option. An SAR shall be exercisable upon any additional terms and conditions (including, without limitation, the issuance of Restricted Stock and the imposition of restrictions upon the timing of exercise) which may be determined as provided in the Plan.
 
(II) “Subsidiary” shall mean any present or future subsidiary corporations, as defined in Section 424 of the Code, of Ashland.
 
(JJ) “Tax Date” shall mean the date the withholding tax obligation arises with respect to the exercise of an Award.
 

 
 
Section 3. Stock Subject To The Plan
 
There will be reserved for issuance under the Plan (upon the exercise of Options and Stock Appreciation Rights, upon awards of Restricted Stock, Performance Shares and Merit Awards and for stock bonuses on deferred awards of Restricted Stock and Performance Shares), an aggregate of 3,212,000 shares of Ashland Common Stock, par value $1.00 per share; provided, however, that of such shares, only 500,000 shares in the aggregate shall be available for issuance for Restricted Stock Awards and Merit Awards.  Such shares shall be authorized but unissued shares of Common Stock. Except as provided in Sections 7 and 8, if any Award under the Plan shall expire or terminate for any reason without having been exercised in full, or if any Award shall be forfeited, the shares subject to the unexercised or forfeited portion of such Award shall again be available for the purposes of the Plan.  During the term of the Plan (as provided in Section 14 hereof), no Employee shall be granted more than a total of 500,000 in Options or Stock Appreciation Rights.
 

 
Section 4. Administration
 
Except as provided in subsection (B) of Section 8 herein, the Plan shall be administered by the Committee.
 
In addition to any implied powers and duties that may be needed to carry out the provisions of the Plan, the Committee shall have all the powers vested in it by the terms of the Plan, including exclusive authority (except as to Awards of Restricted Stock granted to Outside Directors) to select the Employees to be granted Awards under the Plan,
 
to determine the type, size and terms of the Awards to be made to each Employee selected, to determine the time when Awards will be granted, and to prescribe the form of the Agreements embodying Awards made under the Plan. Subject to the provisions of the Plan specifically governing Awards of Restricted Stock granted or to be granted to Outside Directors pursuant to subsection (B) of Section 8 herein, the Committee shall be authorized to interpret the Plan and the Awards granted under the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, to make any other determinations which it believes necessary or advisable for the administration of the Plan, and to correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Award in the manner and to the extent the Committee deems desirable to carry it into effect.  Any decision of the Committee in the administration of the Plan, as described herein, shall be final and conclusive.
 
The Committee (or, in the case of subsection (B) of Section 8 herein, the Committee on Directors) may act only by a majority of its members.  Any determination of the Committee or the Committee on Directors may be made, without notice, by the written consent of the majority of the members of the Committee or the Committee on Directors.  In addition, the Committee or the Committee on Directors may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Committee or the Committee on Directors.  No member of the Committee or the Committee on Directors shall be liable for any action taken or omitted to be taken by him or her or by any other member of the Committee or the Committee on Directors in connection with the Plan, except for his or her own willful misconduct or as expressly provided by statute.
 
 

 
 
Section 5. Eligibility
 
Awards may only be granted (i) to individuals who are Employees of Ashland, and (ii) as expressly provided in subsection (B) of Section 8 of the Plan, to individuals who are duly elected Outside Directors of Ashland.
 
 

 
 
Section 6. Options
 
A. Designation and Price.
 
(a) Any Option granted under the Plan may be granted as an Incentive Stock Option or as a Nonqualified Stock Option as shall be designated by the Committee at the time of the grant of such Option.  Each Option shall, at the discretion of the Company and as directed by the Committee, be evidenced by an Agreement between the recipient and the Company, which Agreement shall specify the designation of the Option as an ISO or a NQSO, as the case may be, and shall contain such terms and conditions as the Committee, in its sole discretion, may determine in accordance with the Plan.
 
(b) Every Incentive Stock Option shall provide for a fixed expiration date of not later than ten years from the date such Incentive Stock Option is granted.  Every Nonqualified Stock Option shall provide for a fixed expiration date of not later than ten years and one month from the date such Nonqualified Stock Option is granted.
 
(c) The Exercise Price of Common Stock issued pursuant to each Option shall be fixed by the Committee at the time of the granting of the Option; provided, however, that such Exercise Price shall in no event be less than 100% of the Fair Market Value of the Common Stock on the date such Option is granted.
 
B. Exercise .
 
The Committee may, in its discretion, provide for Options granted under the Plan to be exercisable in whole or in part; provided, however, that no Option shall be exercisable prior to the first anniversary of the date of its grant, except as provided in Section 11 or as the Committee otherwise determines in accordance with the Plan, and in no case may an Option be exercised at any time for fewer than 50 shares (or the total remaining shares covered by the Option if fewer than 50 shares) during the term of the Option. The specified number of shares will be issued upon receipt by Ashland of (i) notice from the holder thereof of the exercise of an Option, and (ii) payment to Ashland (as provided in this Section 6, subsection (C) below), of the Exercise Price for the number of shares with respect to which the Option is exercised. Each such notice and payment shall be delivered or mailed by postpaid mail, addressed to the Treasurer of Ashland at Ashland Inc., 500 Diederich Boulevard, Russell, Kentucky  41169, or such other place or person as Ashland may designate from time to time.
 
C. Payment for Shares .
 
Except as otherwise provided in this Section 6, the Exercise Price for the Common Stock shall be paid in full when the Option is exercised. Subject to such rules as the Committee may impose, the Exercise Price may be paid in whole or in part (i) in cash, (ii) in whole shares of Common Stock owned by the Employee and evidenced by negotiable certificates, valued at their Fair Market Value (which shares of Common Stock must have been owned by the Employee six months or longer, and not used to effect an Option exercise within the preceding six months, unless the Committee specifically provides otherwise), (iii) by Attestation, (iv) by a combination of such methods of payment, or (v) by such other consideration as shall constitute lawful consideration for the issuance of Common Stock and be approved by the Committee (including, without limitation, effecting a “cashless exercise,” with a broker, of the Option).  “Attestation” means the delivery to Ashland of a completed Attestation Form prescribed by Ashland setting forth the whole shares of Common Stock owned by the Employee which the Employee wishes to utilize to pay the Exercise Price. The Common Stock listed on the Attestation Form must have been owned by the Employee six months or longer, and not have been used to effect an Option exercise within the preceding six months, unless the Committee specifically provides otherwise.  A “cashless exercise” of an option is a procedure by which a broker provides the funds to an Employee to effect an option exercise.  At the direction of the Employee, the broker will either (i) sell all of the shares received when the option is exercised and pay the Employee the proceeds of the sale (minus the option exercise price, withholding taxes and any fees due to the broker) or (ii) sell enough of the shares received upon exercise of the option to cover the exercise price, withholding taxes and any fees due the broker and deliver to the Employee (either directly or through the Company) a stock certificate for the remaining shares.  Dispositions to a broker effecting a cashless exercise are not exempt under Section 16 of the Exchange Act.
 
 

 
 
Section 7. Stock Appreciation Rights
 
The Committee may grant Stock Appreciation Rights pursuant to the provisions of this Section 7 to any holder of any Option granted under the Plan with respect to all or a portion of the shares subject to the related Option. An SAR  may only be granted concurrently with the grant of the related Option.  Subject to the terms and provisions of this Section 7, each SAR shall be exercisable only at the same time and to the same extent the related Option is exercisable and in no event after the termination of the related Option. An SAR shall be exercisable only when the Fair Market Value (determined as of the date of exercise of the SAR) of each share of Common Stock with respect to which the SAR is to be exercised shall exceed the Exercise Price per share of Common Stock subject to the related Option. An SAR granted under the Plan shall be exercisable in whole or in part by notice to Ashland. Such notice shall state that the holder of the SAR elects to exercise the SAR and the number of shares in respect of which the SAR is being exercised.
 
Subject to the terms and provisions of this Section 7, upon the exercise of an SAR, the holder thereof shall be entitled to receive from Ashland consideration (in the form hereinafter provided) equal in value to the excess of the Fair Market Value (determined as of the date of exercise of the SAR) of each share of Common Stock with respect to which such SAR has been exercised over the Exercise Price per share of Common Stock subject to the related Option. The Committee may stipulate in the Agreement the form of consideration which shall be received upon the exercise of an SAR. If no consideration is specified therein, upon the exercise of an SAR, the holder may specify the form of consideration to be received by such holder, which shall be in shares of Common Stock, or in cash, or partly in cash and partly in shares of Common Stock (valued at Fair Market Value on the date of exercise of the SAR) , as the holder shall request; provided, however, that the Committee, in its sole discretion, may disapprove the form of consideration requested and instead authorize the payment of such consideration in shares of Common Stock (valued as aforesaid), or in cash, or partly in cash and partly in shares of Common Stock.
 
Upon the exercise of an SAR, the related Option shall be deemed exercised to the extent of the number of shares of Common Stock with respect to which such SAR is exercised and to that extent a corresponding number of shares of Common Stock shall not again be available for the grant of Awards under the Plan. Upon the exercise or termination of the related Option, the SAR with respect thereto shall be considered to have been exercised or terminated to the extent of the number of shares of Common Stock with respect to which the related Option was so exercised or terminated.
 
 

 
 
Section 8. Restricted Stock Awards
 
A. Awards to Employees
 
The Committee may make an award of Restricted Stock to selected Employees, which may, at the Company’s discretion and as directed by the Committee, be evidenced by an Agreement which shall contain such terms and conditions as the Committee, in its sole discretion, may determine. The amount of each Restricted Stock Award and the respective terms and conditions of each Award (which terms and conditions need not be the same in each case) shall be determined by the Committee in its sole discretion. As a condition to any Award hereunder, the Committee may require an Employee to pay to the Company a non-refundable amount equal to, or in excess of, the par value of the shares of Restricted Stock awarded to him or her.  Subject to the terms and conditions of each Restricted Stock Award, the Employee, as the owner of the Common Stock issued as Restricted Stock, shall have all rights of a shareholder including, but not limited to, voting rights as to such Common Stock and the right to receive dividends thereon when, as and if paid.
 
In the event that a Restricted Stock Award has been made to an Employee whose employment or service is subsequently terminated for any reason prior to the lapse of all restrictions thereon, such Restricted Stock will be forfeited in its entirety by such Employee; provided, however, that the Committee may, in its sole discretion, limit such forfeiture.
 
Employees may be offered the opportunity to defer the receipt of payment of vested shares of Restricted Stock, and Common Stock may be granted as a bonus for deferral, under terms as may be established by the Committee from time to time; however, in no event shall the Common Stock granted as a bonus for deferral exceed 20% of the Restricted Stock so deferred.
 
B. Awards to Outside Directors
 
During the term of the Plan, each person who is duly appointed or elected as an Outside Director shall be granted, effective on the date of his or her appointment or election to the Board, an Award of 1,000 shares of Restricted Stock.  All Awards under this subsection (B) are subject to the limitation on the number of shares of Common Stock available pursuant to Section 3 and to the terms and conditions set forth in this subsection (B) and subsection (C) below.
 
As a condition to any Award hereunder, the Outside Director may be required to pay to the Company a non-refundable amount equal to the par value of the shares of Restricted Stock awarded to him or her. Upon the granting of the Restricted Stock Award, such Outside Director shall be entitled to all rights incident to ownership of Common Stock of the Company with respect to his or her Restricted Stock, including, but not limited to, the right to vote such shares of Restricted Stock and to receive dividends thereon when, as and if paid; provided, however, that, subject to subsection (C) hereof, in no case may any shares of Restricted Stock granted to an Outside Director be sold, assigned, transferred, pledged, or otherwise encumbered during the Restricted Period which shall not lapse until the earlier to occur of the following: (i) retirement from the Board at age 72, (ii) the death or disability of such Outside Director, (iii) a 50% change in the beneficial ownership of the Company as defined in Rule 13d-3 under the Exchange Act, or (iv) voluntary early retirement to take a position in governmental service.  Unless otherwise determined and directed by the Committee on Directors, in the case of voluntary resignation or other termination of service of an Outside Director prior to the occurrence of any of the events described in the preceding sentence, any grant of Restricted Stock made to him or her pursuant to this subsection (B) will be forfeited by such Outside Director.  As used herein, a director shall be deemed “disabled” when he or she is unable to attend to his or her duties and responsibilities as a member of the Board because of incapacity due to physical or mental illness.
 
C. Transferability
 
Subject to subsection (B) of Section 15 hereof, Restricted Stock may not be sold, assigned, transferred, pledged, or otherwise encumbered during a Restricted Period, which, in the case of Employees, shall be determined by the Committee and, unless otherwise determined by the Committee, shall not be less than one year from the date such Restricted Stock was awarded, and, in the case of Outside Directors, shall be determined in accordance with subsection (B) of this Section 8. The Committee may, at any time, reduce the Restricted Period with respect to any outstanding shares of Restricted Stock awarded under the Plan to Employees, but, unless otherwise determined by the Committee,  such Restricted Period shall not be less than one year.
 
During the Restricted Period, certificates representing the Restricted Stock and any Retained Distributions shall be registered in the recipient's name and bear a restrictive legend to the effect that ownership of such Restricted Stock (and any such Retained Distributions), and the enjoyment of all rights appurtenant thereto are subject to the restrictions, terms, and conditions provided in the Plan and the applicable Agreement, if any. Such certificates shall be deposited by the recipient with the Company, together with stock powers or other instruments of assignment, each endorsed in blank, which will permit transfer to the Company of all or any portion of the Restricted Stock and any securities constituting Retained Distributions which shall be forfeited in accordance with the Plan and the applicable Agreement, if any. Restricted Stock shall constitute issued and outstanding shares of Common Stock for all corporate purposes. The recipient will have the right to vote such Restricted Stock, to receive and retain all regular cash dividends, and to exercise all other rights, powers, and privileges of a holder of Common Stock with respect to such Restricted Stock, with the exception that (i) the recipient will not be entitled to delivery of the stock certificate or certificates representing such Restricted Stock until the restrictions applicable thereto shall have expired; (ii) the Company will retain custody of all Retained Distributions made or declared with respect to the Restricted Stock (and such Retained Distributions will be subject to the same restrictions, terms and conditions as are applicable to the Restricted Stock) until such time, if ever, as the Restricted Stock with respect to which such Retained Distributions shall have been made, paid, or declared shall have become vested, and such Retained Distributions shall not bear interest or be segregated in separate accounts; (iii) subject to subsection (B) of Section 15 hereof, the recipient may not sell, assign, transfer, pledge, exchange, encumber, or dispose of the Restricted Stock or any Retained Distributions during the Restricted Period; and (iv) a breach of any restrictions, terms, or conditions provided in the Plan or established by the Committee with respect to any Restricted Stock or Retained Distributions will cause a forfeiture of such Restricted Stock and any Retained Distributions with respect thereto.
 

 
 
Section 9.  Merit Awards
 
The Committee may from time to time make an award of Common Stock under the Plan to selected Employees for such reasons and in such amounts as the Committee, in its sole discretion, may determine.  As a condition to any such Merit Award, the Committee may require an Employee to pay to the Company an amount equal to, or in excess of, the par value of the shares of Common Stock awarded to him or her.
 

 
 
Section 10. Performance Shares
 
The Committee may make awards of Common Stock which may, in the Company’s discretion and as directed by the Committee, be evidenced by an Agreement, to selected Employees on the basis of the Company's financial performance in any given period. Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the Employees who shall receive such Performance Shares, to determine the number of such shares to be granted for each Performance Period, and to determine the duration of each such Performance Period. There may be more than one Performance Period in existence at any one time, and the duration of Performance Periods may differ from each other.
 
The Performance Goals and Performance Period applicable to an award of Performance Shares shall be set forth in writing by the Committee no later than 90 days after the commencement of the Performance Period and shall be communicated to the Employee.  The Committee shall have the discretion to later revise the Performance Goals solely for the purpose of reducing or eliminating the amount of compensation otherwise payable upon attainment of the Performance Goals; provided that the Performance Goals and the amounts payable upon attainment of the Performance Goals may be adjusted during any Performance Period to reflect promotions, transfers or other changes in an Employee’s employment so long as such changes are consistent with the Performance Goals established for other Employees in the same or similar positions.
 
In making a Performance Share award, the Committee may take into account an Employee’s responsibility level, performance, cash compensation level, incentive compensation awards and such other considerations as it deems appropriate.  Each Performance Share award shall be established in shares of Common Stock and/or shares of Restricted Stock in such proportions as the Committee shall determine.  The original amount of any Performance Share award shall not exceed 250,000 shares of Common Stock or Restricted Stock.
 
The Committee shall determine, in its sole discretion, the manner of payment, which may include (i) cash, (ii) shares of Common Stock, or (iii) shares of Restricted Stock in such proportions as the Committee shall determine. Employees may be offered the opportunity to defer the receipt of payment of earned Performance Shares, and Common Stock may be granted as a bonus for deferral under terms as may be established by the Committee from time to time; however, in no event shall the Common Stock granted as a bonus for deferral exceed 20% of the Performance Shares so deferred.
 
An Employee must be employed by the Company at the end of a Performance Period in order to be entitled to payment of Performance Shares in respect of such period; provided, however, that in the event of an Employee's cessation of employment before the end of such period, or upon the occurrence of his or her death, retirement, or disability, or other reason approved by the Committee, the Committee may, in its sole discretion, limit such forfeiture.
 
 

 
 
Section 11. Continued Employment, Agreement To Serve And Exercise Periods
 
(A) Subject to the provisions of subsection (F) of this Section 11, every Option and SAR shall provide that it may not be exercised in whole or in part for a period of one year after the date of granting such Option (unless otherwise determined by the Committee) and if the employment of the Employee shall terminate prior to the end of such one year period (or such other period determined by the Committee), the Option granted to such Employee shall immediately terminate.
 
(B) Every Option shall provide that in the event the Employee dies (i) while employed by Ashland, (ii) during the periods in which Options may be exercised by an Employee determined to be disabled as provided in subsection (C) of this Section 11 or (iii) after Retirement, such Option shall be exercisable, at any time or from time to time, prior to the fixed termination date set forth in the Option, by the Beneficiaries of the decedent for the number of shares which the Employee could have acquired under the Option immediately prior to the Employee’s death.
 
(C) Every Option shall provide that in the event the employment of any Employee shall cease by reason of disability, as determined by the Committee at any time during the term of the Option, such Option shall be exercisable, at any time or from time to time prior to the fixed termination date set forth in the Option by such Employee for the number of shares which the Employee could have acquired under the Option immediately prior to the Employee’s disability.  As used herein, an Employee will be deemed “disabled” when he or she becomes unable to perform the functions required by his or her regular job due to physical or mental illness and, in connection with the grant of an Incentive Stock Option shall be disabled if he or she falls within the meaning of that term as provided in Section 22(e)(3) of the Code.  The determination by the Committee of any question involving disability shall be conclusive and binding.
 
(D)           Every Option shall provide that in the event the employment of any Employee shall cease by reason of Retirement, such Option may be exercised at any time or from time to time, prior to the fixed termination date set forth in the Option for the number of shares which the Employee could have acquired under the Option immediately prior to such Retirement.
 
(E) Except as provided in subsections (A), (B), (C), (D), (F) and (G) of this Section 11, every Option shall provide that it shall terminate on the earlier to occur of the fixed termination date set forth in the Option or thirty (30) days after cessation of the Employee's employment for any cause only in respect of the number of shares which the Employee could have acquired under the Option immediately prior to such cessation of employment; provided, however, that no Option may be exercised after the fixed termination date set forth in the Option.
 
(F) Notwithstanding any provision of this Section 11 to the contrary, any Award granted pursuant to the Plan, except a Restricted Stock Award to Outside Directors, which is governed by Section 8, subsection (B), may, in the discretion of the Committee or as provided in the relevant Agreement (if any), become exercisable, at any time or from time to time, prior to the fixed termination date set forth in the Award for the full number of awarded shares or any part thereof, less such numbers as may have been theretofore acquired under the Award (i) from and after the time the Employee ceases to be an Employee of Ashland as a result of the sale or other disposition by Ashland of assets or property (including shares of any Subsidiary) in respect of which such Employee had theretofore been employed or as a result of which such Employee's continued employment with Ashland is no longer required, and (ii) in the case of a Change in Control of Ashland, from and after the date of such Change in Control.
 
(G)  Notwithstanding any provision of this Section 11 to the contrary, in the event the Committee determines, in its sole and absolute discretion, that the employment of any Employee has terminated for a reason or in a manner adversely affecting the Company (which may include, without limitation, taking other employment or rendering service to others without the consent of the Company), then the Committee may direct that such Employee forfeit any and all Options that he or she could otherwise have exercised pursuant to the terms of this Plan.
 
(H) Each Employee granted an Award under this Plan shall agree by his or her acceptance of such Award to remain in the service of Ashland for a period of at least one year from the date of the Agreement respecting the Award between Ashland and the Employee (or, if no Agreement is entered into, at least one year from the date of the Award). Such service shall, subject to the terms of any contract between Ashland and such Employee, be at the pleasure of Ashland and at such compensation as Ashland shall reasonably determine from time to time. Nothing in the Plan, or in any Award granted pursuant to the Plan, shall confer on any individual any right to continue in the employment of or service to Ashland or interfere in any way with the right of Ashland to terminate the Employee's employment at any time.
 
(I) Subject to the limitations set forth in Section 422 of the Code, the Committee may adopt, amend, or rescind from time to time such provisions as it deems appropriate with respect to the effect of leaves of absence approved by any duly authorized officer of Ashland with respect to any Employee.
 
 

 
 
Section 12. Withholding Taxes
 
Federal, state or local law may require the withholding of taxes applicable to gains resulting from the exercise of an Award. Unless otherwise prohibited by the Committee, each Employee may satisfy any such tax withholding obligation by any of the following means, or by a combination of such means: (i) a cash payment, (ii) authorizing Ashland to withhold from the shares of Common Stock otherwise issuable to the Employee pursuant to the exercise or vesting of an Award a number of shares having a Fair Market Value, as of the Tax Date, which will satisfy the amount of the withholding tax obligation, or (iii) by delivery to Ashland of a number of shares of Common Stock having a Fair Market Value as of the Tax Date which will satisfy the amount of the withholding tax obligation arising from an exercise or vesting of an Award. An Employee's election to pay the withholding tax obligation by (ii) or (iii) above must be made on or before the Tax Date, is irrevocable, is subject to such rules as the Committee may adopt, and may be disapproved by the Committee. If the amount requested is not paid, the Committee may refuse to issue Common Stock under the Plan.
 
 

 
 
Section 13. Adjustments Upon Changes In Capitalization
 
In the event of any change in the outstanding Common Stock of the Company by reason of any stock split, stock dividend, recapitalization, merger, consolidation, reorganization, combination, or exchange of shares, split-up, split-off, spin-off, liquidation or other similar change in capitalization, or any distribution to common stockholders other than cash dividends, the number or kind of shares that may be issued under the Plan pursuant to Section 3 and the number or kind of shares subject to, or the price per share under any outstanding Award shall be automatically adjusted so that the proportionate interest of the Employee or Outside Director shall be maintained as before the occurrence of such event. Such adjustment shall be conclusive and binding for all purposes of the Plan.
 
 

 
 
Section 14. Amendments And Terminations
 
Unless the Plan shall have been earlier terminated as hereinafter provided, no Awards shall be granted hereunder after January 30, 2002.  The Board, the Committee, or the Committee on Directors may at any time terminate, modify or amend the Plan in such respects as it shall deem advisable; provided, however, that the Board or the Committee may not, without approval by the holders of a majority of the outstanding shares of stock present and voting at any annual or special meeting of shareholders of Ashland change the manner of determining the minimum Exercise Price of Options, other than to change the manner of determining the Fair Market Value of the Common Stock as set forth in Section 2.
 
 
Section 15. Miscellaneous Provisions
 
(A) Except as to an Award of 1,000 Restricted Shares to an Outside Director upon being appointed or elected to the Company’s Board of Directors, no Employee or other person shall have any claim or right to be granted an Award under the Plan.
 
(B) An Employee's or Outside Director's rights and interest under the Plan may not be assigned or transferred in whole or in part, either directly or by operation of law or otherwise (except in the event of an Employee's or Outside Director's death, by will or the laws of descent and distribution), including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no such right or interest of any Employee or Outside Director in the Plan shall be subject to any obligation or liability of such individual; provided, however, that an Employee’s or Outside Director’s rights and interest under the Plan may, subject to the discretion and direction of the Committee or, in the case of an Outside Director, the Committee on Directors, be made transferable by such Employee or Outside Director during his or her lifetime. Except as specified in Section 8, the holder of an Award shall have none of the rights of a shareholder until the shares subject thereto shall have been registered in the name of the person receiving or person or persons exercising the Award on the transfer books of the Company.
 
(C) No Common Stock shall be issued hereunder unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable Federal, state, and other securities laws.
 
(D) The expenses of the Plan shall be borne by the Company.
 
(E) By accepting any Award under the Plan, each Employee and Outside Director and each Personal Representative or Beneficiary claiming under or through him or her shall be conclusively deemed to have indicated his or her acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board, the Committee or the Committee on Directors.
 
(F) Awards granted under the Plan shall be binding upon Ashland, its successors, and assigns.
 
(G) The appropriate officers of the Company shall cause to be filed any reports, returns, or other information regarding Awards hereunder or any Common Stock issued pursuant hereto as may be required by Sections 13, 15(d) or 16(a) of the Exchange Act, or any other applicable statute, rule, or regulation.
 
(H) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required.
 
(I)  Each Employee shall be deemed to have been granted any Award on the date the Committee took action to grant such Award under the Plan or such later date as the Committee in its sole discretion shall determine at the time such grant is authorized.
 
 

 
 
Section 16. Effectiveness Of The Plan
 
The Plan was submitted to the shareholders of the Company for their approval and adoption on January 30, 1997 and was approved by the shareholders on that date.
 
 

 
 
Section 17. Governing Law
 
The provisions of this Plan shall be interpreted and construed in accordance with the laws of the Commonwealth of Kentucky.
 

EXHIBIT 10.20
NOTICE OF GRANT OF STOCK APPRECIATION RIGHT (SAR) AWARD
 
Name of Employee:
[Name]
   
Name of Plan:
2006 AI Incentive Plan
   
Number of SAR’s:
xxx,xxx
   
Grant Price Per SAR:
$ XX.XX
   
Date of SAR Grant:
November 19, 2008
   
Vesting Schedule:
50% on 11/19/2009
 
25% on 11/19/2010
 
25% on 11/19/2011
   
Expiration Date:
December 19, 2018
 
ASHLAND INC ("Ashland") hereby confirms the grant of a Stock Appreciation Right (“SAR”) award (“Award”) to the above-named Employee ("Employee"). This Award entitles Employee to receive Ashland stock equal to the excess of the fair market value of Ashland Common Stock, par value $0.01 per share (“Common Stock”), as determined by the closing price of the Common Stock as reported on the Composite Tape of the New York Stock Exchange, on the date the SAR is exercised over the grant price of the Common Stock, with an aggregate value equal to the excess of the fair market value of one share of Common Stock over the exercise price specified in such SAR multiplied by the number of SARs of Common Stock covered by such SAR or portion thereof which is so surrendered.
 
This Award is granted under, and is subject to, all the terms and conditions of the Plan. Copies of the Plan and related Prospectus are available for your review on FirstHand, Ashland’s intranet site.
 
This grant of Options is subject to your on-line acceptance of the terms and conditions of this Agreement through the Fidelity website by December 31, 2008 .
 

 
 ASHLAND INC.        
        
   
 
 
By:__________________________________________
   
 
 
 
   
 
 
EXHIBIT 10.21
RESTRICTED STOCK AGREEMENT
 
  Name of Company: ASHLAND INC.
   
Name of Participant:   [FirstName]  [LastName]
   
Number of Shares of Ashland Inc.  
     Common Stock [x,xxx]
   
Par Value Per Share:       $0.01
   
Vesting Schedule: 50% or  x,xxx on [date]
  25% or  x,xxx on [date]
  25 % or  x,xxx on [date]
   
Date of Award: [GRANT DATE] 
   
   
   
 
WHEREAS, Ashland Inc. (hereinafter called “Ashland”) desires to award to the above-named Participant (hereinafter called the “Participant”), x,xxx shares of Ashland Common Stock, par value $0.01 per share, subject to certain restrictions (hereinafter called “Restricted Stock”), pursuant to the 2006 Ashland Inc. Incentive Plan (hereinafter called the “Plan”), in order to provide the Participant with an additional incentive to continue his/her services to Ashland and to continue to work for the best interests of Ashland;
 
NOW, THEREFORE, Ashland hereby confirms this award to the Participant, as a matter of separate agreement and not in lieu of salary or any other compensation for services, of the number of shares of Restricted Stock set forth above, subject to and upon all the terms, provisions and conditions contained herein and in the Plan, which is incorporated by reference.  Full details of the Plan are in the legal text of the Plan.  If there are any differences between the general description of the restrictions offered herein and the legal text of the Plan, the Plan governs.
 
Your award will be evidenced by the issuance of Restricted Stock Certificates.  Each certificate issued in respect of shares of Restricted Stock shall be registered in the name of the Participant, but held in the custody of Ashland along with a copy of an executed Stock Power (the form of which is attached hereto as Exhibit A), and shall bear the following legend:
 
 
"The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeitures) contained in the Ashland Inc Incentive Plan from which the shares were issued and the Agreement entered into between the registered owner and Ashland Inc."
 
The Restricted Stock will vest according to the Vesting Schedule and may not be sold, assigned, transferred, pledged, or otherwise encumbered (except to the extent such shares shall have vested) until such date.  Unless otherwise determined and
 
 
 
 
 
 
directed by the Personnel and Compensation Committee (the “Committee”), in the case of the Participant's termination for any reason prior to the lapse of all restrictions on the Restricted Stock, all such Restricted Stock which has not vested will be forfeited.  Except for such restrictions described above, the Participant will have all rights of a shareholder with respect to the shares of Restricted Stock including, but not limited to, the right to vote and to receive dividends if and when paid.
 
As the Restricted Stock vests, you will owe applicable federal income and employment taxes and state and local income and employment taxes at the Vesting Date of the shares of Restricted Stock.  The amount of taxes due in each instance is based on the fair market value of the shares on the Vesting Date.
 
Nothing contained in this Agreement or in the Plan shall confer upon the Participant any right to remain in the service of Ashland.
 
Subject to the terms and conditions specified herein and of the Plan, the Restricted Stock shall be confirmed by execution of this Agreement and delivery thereof no later than [RETURN DATE], to Ashland, which is located at 3499 Blazer Parkway, Lexington, KY 40509 Attention: Karen Willett.   The right to the Restricted Stock under the Plan shall expire if not accepted by [RETURN DATE], as set forth above.
 
IN WITNESS WHEREOF, ASHLAND has caused this instrument to be executed and delivered effective as of the day and year first above written.  This Restricted Stock Agreement shall not be valid unless signed by a Vice President, Human Resources of Ashland.
 
 
ASHLAND INC .
 
  By:  
 
 
     
    Susan B. Esler  
    Vice President, Human Resources
 
I hereby elect to receive my award of Restricted Stock subject to the terms and conditions of the 2006 Ashland Inc. Incentive Plan.  My election to accept the award of Restricted Stock is effective [GRANT DATE].
 
 
 
 [Name]     Date
   
 
                                                                                  
 
 
 
 
 
Exhibit A
 
Stock Power
 
 
For Value Received, _________________________________________ hereby sells, assigns and transfers unto Ashland Inc., _____________of the Restricted Capital Stock   of Ashland Inc. standing in ________________ name on the books of said Ashland Inc. represented by Certificate No. _____ herewith and do hereby irrevocably constitute and appoint National City attorney to transfer the said stock on the books of the within named Company with full power of substitution in the premises.
 
Dated: __________, ____                                                                    
 
 
   
  Shareholder signature
  (Note: please sign in the presence of a representative of an institution who is a member of a Medallion Signature Guarantee Program*)
 
 
 
 
 
Medallion Signature Guarantee:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*Shareholder signature must be guaranteed by a Commercial Bank, Trust Company, Securities Dealer or other institution, which is a member of a Medallion Signature Guarantee Program approved by the Securities Transfer Association, Inc.

EXHIBIT 12

 
ASHLAND INC.
 
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
 
(In millions)
 
                               
                               
                               
   
Years ended September 30
 
   
2004
   
2005
   
2006
   
2007
   
2008
 
EARNINGS
                             
                               
Income from continuing operations
  $ 311     $ 1,958     $ 183     $ 201     $ 175  
Income tax expense (benefit)
    100       (230 )     29       58       86  
Interest expense
    112       87       8       9       9  
Interest portion of rental expense
    20       20       18       20       21  
Amortization of deferred debt expense
    2       3       -       1       -  
Distributions less than earnings
                                       
    of unconsolidated affiliates
    (260 )     (246 )     (6 )     (5 )     (10 )
    $ 285     $ 1,592     $ 232     $ 284     $ 281  
                                         
FIXED CHARGES
                                       
                                         
Interest expense
  $ 112     $ 87     $ 8     $ 9     $ 9  
Interest portion of rental expense
    20       20       18       20       21  
Amortization of deferred debt expense
    2       3       -       1       -  
Capitalized interest
    -       1       3       2       -  
    $ 134     $ 111     $ 29     $ 32     $ 30  
                                         
RATIO OF EARNINGS TO FIXED CHARGES
    2.13       14.34       8.00       8.88       9.37  

Exhibit 21

LIST OF SUBSIDIARIES

Subsidiaries of Ashland Inc. (“AI”) at September 30, 2008, included the companies listed below.  Ashland has numerous unconsolidated affiliates, which are primarily accounted for on the equity method, and majority-owned consolidated subsidiaries in addition to the companies listed below.  Such affiliates and subsidiaries are not listed below since they would not constitute a significant subsidiary considered in the aggregate as a single entity.

 
 
Company
 
 
Jurisdiction of
Incorporation
 
 
 
Immediate Parent*
         
ASH GP LLC (“ASH GP”)  ................................................................................................
 
Delaware
 
AIHI
ASH LP LLC (“ASH LP”)   ................................................................................................
 
Delaware
 
AIHI
Ashland Brasil Ltda. (“ABL”)   ........................................................................................
 
Brazil
 
AHBV
Ashland Canada Corp. (“ACC”)   ....................................................................................
 
Nova Scotia, Canada
 
ACHBV
Ashland Canada Holdings B.V. (“ACHBV”)   ...............................................................
 
Netherlands
 
AHBV
Ashland (Changzhou) Advanced Chemical Co., Ltd.   ................................................
 
China
 
ACHC
Ashland (China) Holdings Co., Ltd. (“ACHC”)   ..........................................................
 
China
 
ACC
Ashland Chemical Hispania, S.L.   ...................................................................................
 
Spain
 
AIHI
Ashland Chimie France SAS (“ACF”)   ..........................................................................
 
France
 
AF
Ashland Deutschland GmbH (“ADG”)   .........................................................................
 
Germany
 
AIHI
Ashland-Especialidades Quimicas Ltda.   ......................................................................
 
Brazil
 
AHBV
Ashland Finland Oy   ........................................................................................................
 
Finland
 
AHBV 51% - ACC 49%
Ashland France SAS (“AF”)   ..........................................................................................
 
France
 
AHBV
Ashland Holdings B.V. (“AHBV”)   ................................................................................
 
Netherlands
 
ATCV
Ashland International Holdings, Inc. (“AIHI”)   ...........................................................
 
Delaware
 
AI
Ashland Italia S.p.A.   .......................................................................................................
 
Italy
 
AHBV
Ashland Japan Co., Ltd.   ..................................................................................................
 
Japan
 
AIHI
Ashland Mauritius Corporation (“AMC”)   ...................................................................
 
Mauritius
 
ACC
Ashland Nederland B.V.   ..................................................................................................
 
Netherlands
 
AHBV
Ashland Polyester SAS   ...................................................................................................
 
France
 
ACF
Ashland Resinas Ltda.   ....................................................................................................
 
Brazil
 
ABL
Ashland Sweden AB   .......................................................................................................
 
Sweden
 
AHBV
Ashland UK Limited   ........................................................................................................
 
United Kingdom
 
AHBV
Ashmont Insurance Company, Inc.   ...............................................................................
 
Vermont
 
AI
AshOne C.V. (“AOCV”)   ..................................................................................................
 
Netherlands
 
ASH LP 1% - AIHI 98% - ASH GP 1%
AshTwo C.V. (“ATCV”)   ..................................................................................................
 
Netherlands
 
AIHI 10% - AOCV 89% - ASH GP 1%
AshThree LLC   ..................................................................................................................
 
Delaware
 
AI
Beijing Tianshi Special Chemical Technique Co., Ltd.   ...............................................
 
China
 
AMC
Drew Ameroid Deutschland GmbH   ...............................................................................
 
Germany
 
ADG
Drew Ameroid (Singapore) Pte. Ltd.   ..............................................................................
 
Singapore
 
AHBV
Iberia Ashland Chemical S. A.   ........................................................................................
 
Spain
 
AIHI
Valvoline (Australia) Pty. Limited   ..................................................................................
 
Australia
 
AHBV
Valvoline (Deutschland) GmbH & Co. Kg   ....................................................................
 
Germany
 
ADG
_______________

*100% of the voting securities are owned by the immediate parent except as otherwise indicated.

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We consent to the incorporation by reference in the Registration Statement  (Form S-8 No. 333-33617-99) pertaining to the Ashland Inc. 1997 Stock Incentive Plan, in the Registration Statements (Forms S-8 Nos. 333-54766-99 and 333-127348) pertaining to the Amended and Restated Ashland Inc. Incentive Plan, in the Registration Statement (Form S-8 No. 333-131792) pertaining to the 2006 Ashland Inc. Incentive Plan, in the Registration Statement (Form S-8 No. 33-62091-99) pertaining to the Ashland Inc. Deferred Compensation Plan, in the Registration Statement (Form S-8 No. 33-52125-99) pertaining to the Ashland Inc. Deferred Compensation Plan for Non-Employee Directors, in the Registration Statement (Form S-8 No. 333-122269-99) pertaining to the Ashland Inc. Deferred Compensation Plan for Employees (2005), in the Registration Statement (Form S-8 No. 333-122270-99) pertaining to the Ashland Inc. Deferred Compensation Plan for Non-Employee Directors (2005), in the Registration Statement (Form S-8 No. 33-32612-99) pertaining to the Ashland Inc. Employee Savings Plan, in the Registration Statement (Form S-8 No. 33-49907-99) pertaining to the Ashland Inc. Leveraged Employee Stock Ownership Plan, in the Registration Statement (Form S-8 No. 333-155386) pertaining to the Hercules Incorporated Amended and Restated Long Term Incentive Compensation Plan, the Hercules Incorporated Omnibus Equity Compensation Plan for Non-Employee Directors and the Hercules Incorporated 1993 Non-Employee Director Stock Accumulation Deferred Compensation Plan, and in the Registration Statement (Form S-8 No. 333-155396) pertaining to the Hercules Incorporated Savings and Investment Plan, of our reports dated November 25, 2008, with respect to the consolidated financial statements and schedule of Ashland Inc. and consolidated subsidiaries and the effectiveness of internal control over financial reporting of Ashland Inc. and consolidated subsidiaries, included in this Annual Report (Form 10-K) for the year ended September 30, 2008.


/s/ Ernst & Young LLP

Cincinnati, Ohio
November 25, 2008


EXHIBIT 23.2


CONSENT OF HAMILTON, RABINOVITZ & ASSOCIATES, INC.

We hereby consent to being named in Ashland Inc.’s Annual Report on Form 10-K for the year ended September 30, 2008 in the form and context in which we are named.  We do not authorize or cause the filing of such Annual Report and do not make or purport to make any statement other than as reflected in the Annual Report.



 
/s/ Francine Rabinovitz       
 Hamilton, Rabinovitz & Associates, Inc.      
  November 26, 2008      
       
       
       
 
EXHIBIT 24
Annual Report on Form 10-K

RESOLVED, that the Corporation’s Annual Report to the Securities and Exchange Commission (the “SEC”) on Form 10-K (the “Form 10-K”) in the form previously circulated to the Board in preparation for this meeting be, and it hereby is, approved with such changes as the Chief Executive Officer, Chief Financial Officer, any Vice President, the Corporate Secretary or the Corporation’s counsel (“Authorized Persons”) shall approve, the execution and filing of the Form 10-K with the SEC to be conclusive evidence of such approval;

FURTHER RESOLVED, that the Authorized Persons be, and each of them hereby is, authorized to file with the SEC the Form 10-K and any amendments thereto on Form 10-K/A and/or any other applicable form; and

FURTHER RESOLVED, that the Authorized Persons be, and each of them hereby is, authorized to take all such further actions as in their judgment may be necessary or advisable to accomplish the purposes of the foregoing resolutions.



 
 
 
 

POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors and Officers of ASHLAND INC., a Kentucky corporation, which is about to file an Annual Report on Form 10-K with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934, as amended, hereby constitutes and appoints JAMES J. O’BRIEN, DAVID L. HAUSRATH and LINDA L. FOSS, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power to act without the others to sign and file such Annual Report and the exhibits thereto and any and all other documents in connection therewith, and any such amendments thereto, with the Securities and Exchange Commission, and to do and perform any and all acts and things requisite and necessary to be done in connection with the foregoing as fully as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.

Dated:  November 20, 2008
 
/s/ James J. O’Brien
  /s/ Barry W. Perry 
James J. O’Brien, Chairman of the Board,
Chief Executive Officer and Director
 
 
Barry W. Perry, Director
/s/ Lamar M. Chambers
 
/s/ Mark C. Rohr
Lamar M. Chambers, Senior Vice President,
Chief Financial Officer and Controller 
(Principal Accounting Officer)
 
 
Mark C. Rohr, Director
/s/ Roger W. Hale
 
/s/ George A. Schaefer, Jr.
Roger W. Hale, Director
 
 
George A. Schaefer, Jr., Director
/s/ Bernadine P. Healy
 
/s/ Theodore M. Solso
Bernadine P. Healy, Director
 
 
Theodore M. Solso, Director
/s/ Kathleen Ligocki
   /s/ John F. Turner
Kathleen Ligocki, Director
 
 
John F. Turner, Director
/s/ Vada O. Manager
 
/s/ Michael J. Ward
Vada O. Manager, Director
 
Michael J. Ward, Director


EXHIBIT 31.1
CERTIFICATIONS
 

 
I, James J. O’Brien, certify that:
 

 
1.  
I have reviewed this annual report on Form 10-K of Ashland Inc.;
 
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act  Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.  
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of registrant’s Board of Directors (or persons performing the equivalent functions):
 
a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

 
Date:  November 26, 2008
 

 

 
 
/s/ James J. O’Brien
 
James J. O’Brien
 
Chairman and Chief Executive Officer
 
(Principal Executive Officer)

EXHIBIT 31.2
CERTIFICATIONS
 

 
I, Lamar M. Chambers, certify that:
 

 
1.  
I have reviewed this annual report on Form 10-K of Ashland Inc.;
 
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.  
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act  Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 
5.  
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of registrant’s Board of Directors (or persons performing the equivalent functions):
 
a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

 
Date:  November 26, 2008
 

 

 
 
/s/ Lamar M. Chambers
 
Lamar M. Chambers
 
Chief Financial Officer
 
(Principal Financial Officer)

EXHIBIT 32
ASHLAND INC.


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the Annual Report of Ashland Inc. (the “Company”) on Form 10-K for the period ended September 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, James J. O’Brien, Chief Executive Officer of the Company, and Lamar M. Chambers, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/ James J. O’Brien
James J. O’Brien
Chief Executive Officer
November 26, 2008

/s/ Lamar M. Chambers
Lamar M. Chambers
Chief Financial Officer
November 26, 2008