NOTES TO FINANCIAL STATEMENTS
(Dollars in millions except per share data)

SUMMARY OF ACCOUNTING POLICIES

Ralston Purina Company's (the Company) significant accounting policies, which conform to generally accepted accounting principles and are applied on a consistent basis among years, except as indicated, are described below:

NATURE OF OPERATIONS -- The Company manufactures and markets pet products and battery products throughout the world. Pet products include dry dog foods, dry and soft-moist cat foods, pet treats and pet litter products. These products are marketed primarily through a direct sales force to grocery, mass merchandisers, specialty retailers, wholesalers and other customers. Battery products include dry cell batteries, including alkaline, carbon zinc and miniatures, and flashlights and other lighting products. These products are marketed primarily through a direct sales force, and also through distributors, to mass merchandisers, wholesalers and other customers.

PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions are eliminated. Investments in affiliated companies, 20% through 50%-owned, are carried at equity.

USE OF ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

FOREIGN CURRENCY TRANSLATION -- Financial statements of foreign operations where the local currency is the functional currency are translated using exchange rates in effect at period end for assets and liabilities and average exchange rates during the period for results of operations. Related translation adjustments are reported as a separate component within Accumulated Other Comprehensive Income in the shareholders equity section of the Consolidated Balance Sheet. For foreign operations where the U.S. dollar is the functional currency and for countries which are considered highly inflationary, translation practices differ in that inventories, properties, accumulated depreciation and depreciation accounts are translated at historical rates of exchange while translation adjustments for other accounts are included in earnings. Gains and losses from foreign currency transactions are generally included in earnings.

FINANCIAL INSTRUMENTS -- The Company uses financial and commodities derivatives in the management of foreign currency, commodities price and interest rate risks that are inherent to its business operations. Such instruments are not held or issued for trading purposes.

The Company uses foreign exchange (F/X) instruments, including currency forwards, futures and options, to reduce transaction and translation exposures resulting from its foreign currency activities. F/X instruments used are selected based on their risk reduction attributes and the related market conditions. Such instruments are marked-to-market, and the terms generally do not exceed twelve months. Realized and unrealized gains and losses from instruments that hedge firm commitments are deferred as part of the cost basis of the asset or liability being hedged and are recognized in the statement of earnings in the same period as the underlying transaction. Realized and unrealized gains or losses from F/X instruments used as hedges of existing balance sheet exposures or anticipated transactions that are not firmly committed are recognized currently in the statement of earnings. However, gains and losses from F/X instruments that hedge existing balance sheet exposures are offset by gains and losses recorded on these hedged exposures. F/X instruments are generally not disposed of prior to the settlement date; however, if an F/X instrument and the underlying hedged transaction were disposed of prior to the settlement date, any gain or loss would be recognized immediately in the statement of earnings.

The Company uses commodities hedging instruments, including futures and options, to reduce the risk of price fluctuations related to future raw material requirements for commodities such as corn, wheat and soybean meal. The terms of such instruments generally do not exceed twelve months, and depend on the commodity and other market factors. The instruments are marked-to-market, and the gains and losses are deferred. Deferred gains and losses are subsequently recorded as cost of products sold in the statement of earnings when the inventory is sold. If the inventory is not acquired and the hedge is disposed of, the deferred gain or loss is recognized immediately in cost of products sold.

CASH EQUIVALENTS for purposes of the statement of cash flows are considered to be all highly liquid investments with a maturity of three months or less when purchased.

INVENTORIES are valued generally at the lower of cost or market, with cost being determined using average cost or the first-in, first-out (FIFO) method.

CAPITALIZED SOFTWARE COSTS -- In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement requires that certain internal and external costs associated with the purchase and/or development of internal use software be capitalized rather than expensed. The Company adopted this statement as of the beginning of fiscal year 1998.

Capitalized software costs are included in Investments and Other Assets. These costs are amortized using the straight line method over periods of related benefit ranging primarily from 3 to 7 years.

NOTES TO FINANCIAL STATEMENTS (continued)
(Dollars in millions except per share data)

PROPERTY AT COST -- Expenditures for new facilities and expenditures which substantially increase the useful lives of the property, including interest during construction, are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and gains or losses on the dispositions are reflected in earnings.

DEPRECIATION is generally provided on the straight-line basis by charges to costs or expenses at rates based on the estimated useful lives of the properties. Estimated useful lives range from 3 to 25 years for machinery and equipment and 10 to 50 years for buildings.

GOODWILL AND OTHER INTANGIBLE ASSETS -- Amortization of goodwill, representing the excess of cost over the net tangible assets of acquired businesses, is recorded on a straight-line basis primarily over a period of 25 years, with some amounts being amortized over 40 years. The cost to purchase or develop other intangible assets, which consist primarily of patents, tradenames and trademarks, is amortized on a straight-line basis over estimated periods of related benefit ranging from 7 to 40 years.

IMPAIRMENT OF LONG-LIVED ASSETS -- The Company reviews long-lived assets, including goodwill and other intangible assets, for impairment whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. The Company performs undiscounted cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

STOCK APPRECIATION INCOME LINKED SECURITIES (SAILS) -- SAILS debt was initially recorded on the balance sheet at the principal amount of the issuance. At each subsequent balance sheet date, the SAILS are marked to the cash value of the underlying Interstate Bakeries Corporation (IBC) shares for which the SAILS may be exchanged. Any changes in value are recorded in earnings each period.

REVENUE RECOGNITION -- Revenue is recognized upon shipment of product to customers. Sales discounts, returns and allowances are included in net sales, and the provision for doubtful accounts is included in selling, general and administrative expenses in the Consolidated Statement of Earnings.

ADVERTISING AND PROMOTION COSTS -- The Company advertises and promotes its products through national and regional media. Products are also advertised and promoted through cooperative programs with retailers. The Company expenses advertising and promotion costs as incurred, although costs incurred during interim periods are generally expensed ratably in relation to revenues.

RESEARCH AND DEVELOPMENT costs are expensed as incurred and were $86.7, $79.9 and $70.2 in 1999, 1998 and 1997, respectively.

INCOME TAXES -- Deferred income taxes are recognized for the effect of temporary differences between financial and tax reporting. No additional U.S. taxes have been provided on earnings of foreign subsidiaries expected to be reinvested indefinitely. Additional income taxes are provided, however, on planned repatriations of foreign earnings after taking into account tax-exempt earnings and applicable foreign tax credits.

EARNINGS PER SHARE -- Basic earnings per share is based on the average number of shares outstanding during the period. Diluted earnings per share is based on the average number of shares used for the basic earnings per share calculation, adjusted for the dilutive effect of convertible preferred stock, stock options, convertible debentures and compensation awards. For purposes of calculating diluted earnings per share, net earnings have been adjusted for the additional contribution to the ESOP portion of the Company's Savings Investment Plan and its related trust that would have been required had the Redeemable Preferred Stock been converted as of the beginning of the period.

ACCOUNTING FOR STOCK-BASED COMPENSATION -- The Company accounts for stock options using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25 (APB 25). Pro forma disclosures required under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as if the Company had adopted the fair value based method of accounting for stock options, are presented in the "Stock-Based Compensation" Note.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 133 provides standards on accounting and disclosure for derivative instruments, and requires that all derivatives be measured at fair value and reported as either assets or liabilities in the Company's Consolidated Balance Sheet. In accordance with the issuance of SFAS No. 137, the Company will be required to adopt the provisions of SFAS No. 133 no later than the beginning of fiscal year 2001. The Company has not completed its evaluation to determine the impact of SFAS No. 133 on its Consolidated Financial Statements.

RECLASSIFICATIONS -- Certain reclassifications have been made to the 1998 and 1997 Consolidated Financial Statements to conform with the 1999 presentation.

NOTES TO FINANCIAL STATEMENTS (continued)
(Dollars in millions except per share data)

STOCK SPLIT

On May 28, 1998, the Company's Board of Directors declared a three-for-one stock split, which was accomplished by means of a stock dividend of two additional shares of RAL stock for each outstanding share of RAL stock. The dividend was paid to shareholders of record at the close of business on June 22, 1998, and the additional shares were distributed on July 15, 1998. Previously unissued shares were used for the split; therefore, treasury shares were not affected. All references to number of shares and per share amounts in the Consolidated Financial Statements and Notes to Financial Statements reflect this split, except on the Consolidated Statement of Shareholders Equity.

SEGMENT INFORMATION

The Operating Segment Information discussion appearing on pages 18 and 19 and the Segment Information appearing on pages 21 and 22 herein are an integral part of these financial statements.

SUBSEQUENT EVENTS

On November 1, 1999, the Company completed the sale of its Energizer Power Systems Original Equipment Manufacturers' (OEM) rechargeable battery business to Moltech Corporation for approximately $20.

Also on November 1, 1999, the Company purchased the assets of Canbrands International, Ltd., a manufacturer of pet litter products in Canada and the United States.

DISCONTINUED OPERATIONS

On December 3, 1997, the Company completed the sale of its Soy Protein Products business to E.I. du Pont de Nemours and Company (DuPont) for $1,554.2, comprised of 22.5 million shares of DuPont common stock (which stock was valued at $1,399.2 at the date of the transaction) and the assumption of certain liabilities. A pre-tax gain of $1.1 billion, or $705.1 after tax, was recorded on the sale during the first quarter of fiscal year 1998.

On April 1, 1998, the Company completed the tax-free spin-off to shareholders of its Agricultural Products business. The spin-off resulted in a reduction in equity of $333.1, recorded as a reduction of the Company's retained earnings of $419.4 and a reduction of the Company's cumulative translation adjustment of $86.3.

The Soy Protein Products and Agricultural Products businesses are accounted for as discontinued operations in the accompanying consolidated financial statements. Also included in discontinued operations in 1998 is a gain of $5.3, after taxes, on the settlement of a claim related to a previously disposed business, partially offset by transaction costs associated with the spin-off of the Company's Agricultural Products business. Operating results for the Soy Protein Products and Agricultural Products businesses are included in the Consolidated Statement of Earnings through December 3, 1997 and April 1, 1998, respectively. Results for discontinued operations are as follows:

                                                                                        1998          1997
                                                                                        ----          ----
Net sales.......................................................................      $  923.7      $1,983.8
                                                                                      ========      ========
Earnings before income taxes....................................................      $   32.1      $  116.3
Income taxes....................................................................          22.1          41.5
                                                                                      --------      --------
Net earnings from discontinued operations.......................................      $   10.0      $   74.8
                                                                                      ========      ========

ACQUISITIONS

In December 1997, the Company acquired Edward Baker Petfoods, a United Kingdom manufacturer of dry pet foods and a supplier of branded and private label products to the European market, for $182.5. This acquisition was accounted for using the purchase method of accounting, and accordingly, the results of operations are included in the Consolidated Statement of Earnings from the date of acquisition.

MARKETABLE EQUITY SECURITIES

Marketable equity securities at September 30, 1999 consist primarily of shares of DuPont common stock and Conoco, Inc. (Conoco) B common stock. Shares of Conoco were obtained in the current year in conjunction with DuPont's spin-off of Conoco, whereby the Company chose to tender some of its shares of DuPont common stock in a non-taxable exchange for Conoco B common stock. This exchange resulted in an after-tax gain of $32.2, or $.11 and $.10 per basic and diluted share, respectively, during 1999. On a pre-tax basis, this gain was $50.3, calculated as the difference between the average cost of the DuPont common shares tendered and the market value of the Conoco B common shares received.

NOTES TO FINANCIAL STATEMENTS (continued)
(Dollars in millions except per share data)

During 1999, the Company sold DuPont common stock shares for $284.4 and recorded an after-tax gain on this sale of $22.8, or $.07 per basic and diluted share. On a pre-tax basis, this gain was $35.7. The cost basis of these shares was determined using the average cost method.

The table below shows the aggregate fair value, gross unrealized holding loss, tax benefit, and net unrealized holding loss for these securities as of September 30, 1999 and 1998. The change in net unrealized holding loss of $64.4 and $88.9 for the years ended September 30, 1999 and 1998, respectively, are included in Other Comprehensive Income, as shown in the Consolidated Statement of Shareholders Equity.

                                                      GROSS                         NET
                                                    UNREALIZED                   UNREALIZED
                                    AGGREGATE        HOLDING          TAX         HOLDING
                                    FAIR VALUE         LOSS         BENEFIT         LOSS
                                    ----------      ----------      -------      ----------
September 30, 1999............       $1,185.5        $  (38.3)      $ 13.8         $(24.5)
September 30, 1998............       $1,281.2        $ (138.9)      $ 50.0         $(88.9)

INVESTMENT IN INTERSTATE BAKERIES CORPORATION

The Company's equity investments in affiliated companies includes a 43.3% interest in IBC at September 30, 1999. The Company accounts for its investment in IBC by the equity method of accounting. The carrying value of this investment was $357.6 and $314.1 at September 30, 1999 and 1998, respectively. The market value of the Company's investment in IBC was $698.0 and $940.7 at September 30, 1999 and 1998, respectively. As of the July 1995 sale of Continental Baking Company (CBC), the market value of the IBC shares received exceeded the underlying net assets of IBC by $95.2. This excess is included in the carrying value of the Company's investment in IBC, and is amortized over 30 years and adjusted for changes in the Company's equity ownership. Cash dividends received from IBC were $8.5 and $8.8 in fiscal years 1999 and 1998, respectively.

Terms of a shareholder agreement provide that, with certain limited exceptions, the Company will not acquire any additional shares of IBC stock for a period of six years from the July 1995 closing of the sale of CBC. The agreement also provides that within five years of closing, the Company's ownership of IBC stock will be reduced to no more than 14.9% of the total outstanding shares. The Company has registration rights with respect to the IBC stock, but the shareholder agreement provides that, with certain limited exceptions, the Company may not sell any of the IBC stock without first offering the securities to IBC. IBC also has the right, during the sixth year following closing, to acquire any of the IBC stock then held by the Company at a price equal to 110% of its then current market price. The shareholder agreement provides that the Company will vote the shares of IBC stock in accordance with the recommendation of IBC's Board of Directors with respect to shareholder proposals and nominations to that Board, and with respect to other proposals, in proportion to the votes of all other shareholders; provided, however, that the Company may vote as it deems appropriate with respect to proposals for the merger of IBC, the sale of all IBC assets, or the issuance of any other class of voting stock of IBC.

In July 1997, the Company issued $480 million of SAILS consisting of 7% exchangeable notes due August 1, 2000. At maturity, the SAILS are mandatorily exchangeable into a number of shares of IBC common stock owned by the Company, or cash, at the Company's option. The number of shares or the amount of cash will be based on the average market price of IBC stock on the 20 trading days prior to maturity on August 1, 2000 (the "IBC Maturity Price"). If the IBC Maturity Price is greater than or equal to $37.7819, the SAILS will be exchangeable at maturity into 12.70 million shares of IBC stock. If the IBC Maturity Price is $30.96875 or less, the SAILS will be exchangeable into 15.50 million shares of IBC stock. If the IBC Maturity Price is between $30.96875 and $37.7819, the SAILS will be exchangeable into a number of shares of IBC stock between 15.50 million and 12.70 million, respectively, based on an exchange ratio. If the SAILS are redeemed for cash, the amount of cash will be equal to the number of IBC shares exchangeable under the terms of the SAILS times the IBC Maturity Price. This transaction effectively limits the amount of appreciation on part of the Company's investment in IBC and locks in a minimum gain at the issuance price of $30.96875. (See the "Long-Term Debt" Note for additional information on the SAILS debt for the current year.)

                                                                        AUGUST 21,       AUGUST 22,
                                                                           1999             1998
                                                                        ----------       ----------
Current assets........................................................   $  333.7         $  343.2
Noncurrent assets.....................................................    1,321.1          1,304.2
                                                                         --------         --------
    Total assets......................................................   $1,654.8         $1,647.4
                                                                         ========         ========
Current liabilities...................................................   $  365.5         $  361.0
Noncurrent liabilities................................................      660.7            710.5
Stockholders equity...................................................      628.6            575.9
                                                                         --------         --------
    Total liabilities and stockholders equity.........................   $1,654.8         $1,647.4
                                                                         ========         ========

                                                                         52 WEEKS        52 WEEKS        52 WEEKS
                                                                          ENDED           ENDED           ENDED
                                                                        AUGUST 21,      AUGUST 22,      AUGUST 23,
                                                                           1999            1998            1997
                                                                        ----------      ----------      ----------
Net sales.............................................................   $3,480.4        $3,290.5        $3,222.5
Cost of products sold.................................................    1,644.3         1,551.6         1,554.3
                                                                         --------        --------        --------
Gross profit..........................................................   $1,836.1        $1,738.9        $1,668.2
                                                                         ========        ========        ========
Net income............................................................   $  124.9        $  132.5        $  108.4
                                                                         ========        ========        ========
Company equity earnings, net of taxes.................................   $   35.9        $   38.7        $   34.0
                                                                         ========        ========        ========

RESTRUCTURING ACTIVITIES

During 1999, the Company recorded after-tax provisions for restructuring of $61.4, or $.20 and $.19 per basic and diluted share, respectively. On a pre-tax basis, before reversals of prior years' charges, these charges were $103.9 and consisted of termination benefits of $3.3 and non-cash charges of $100.6. The total pre-tax charge and non-cash component were reduced to net amounts of $95.2 and $91.9, respectively, due to reversals of prior period restructuring charges of $8.7.

Included in the total pre-tax charge are impairment write-downs totaling $56.7 related to fixed assets of the Company's OEM rechargeable battery business and a loss of $38.9 on the sale of this business on November 1, 1999. The fair value of the impaired assets was primarily determined based upon estimates of recovery value for unique manufacturing equipment. The remaining 1999 pre-tax charges are related to additional rationalization of Battery Products' production capacity, which provide for the termination of approximately 210 production and administrative employees and the closure of one plant. As of September 30, 1999, approximately 160 employees have been severed and the plant was closed in connection with these charges.

During 1998, the Company recorded after-tax provisions for restructuring of $61.3, or $.20 and $.19 per basic and diluted share, respectively. On a pre-tax basis, before reversals of prior years' charges, these charges were $108.3 and consisted of termination benefits of $31.4, other cash costs of $6.3 and non-cash charges of $70.6. The total pre-tax charge and non-cash component were reduced to net amounts of $96.4 and $58.7, respectively, due to reversals of prior period restructuring charges of $11.9.

Included in the 1998 pre-tax charge were impairment write-downs of $66.4, primarily representing a write-down of lithium ion rechargeable battery assets of the OEM rechargeable battery business. The pre-tax charge also included $21.8 related to a voluntary early retirement option offered to most U.S. Battery Products' employees and additional charges related to the Company's European battery and international pet food operations. These provisions provided for the termination or early retirement of approximately 700 employees in production, sales and administrative capacities. As of September 30, 1999, approximately 650 employees have been terminated or retired in connection with these charges.

During 1997, the Company recorded provisions for restructuring which reduced pre-tax and after-tax earnings from continuing operations and earnings from continuing operations per basic and diluted share by $111.4, $98.0, $.32 and $.30, respectively. These charges are primarily associated with the continued rationalization of Battery Products' production capacity and business structure and provided for the termination of approximately 1,340 employees in production, sales and administrative capacities and the closing of three plants. The total pre-tax charge consisted of termination benefits of $50.5, other cash costs of $11.0 and non-cash charges of $49.9, primarily related to impairment losses on land, buildings, machinery and equipment. A portion of Battery Products' 1997 restructuring plan was subsequently revised due to a change in business operations. As a result, 200 of the 1,340 employees are being retained, and termination costs associated with these employees are being used to provide for other cash costs associated with the 1997 restructuring provisions. As of September 30, 1999, approximately 990 employees have been terminated and all plants were closed in connection with these charges.

                                                                                  1999          1998
                                                                                  ----          ----
Reserve balance at beginning of year.......................................      $  57.3       $ 66.3
Gross provision recorded before reversals..................................        103.9        108.3
Portion of current period provision classified as asset impairments and
    loss on sale of business...............................................       (100.6)       (70.6)
Termination benefits paid..................................................        (38.8)       (28.5)
Other cash exit costs incurred.............................................         (6.5)       (16.5)
Decrease due to translation................................................         (1.7)        (1.7)
                                                                                 -------       ------
Reserve balance at September 30............................................      $  13.6       $ 57.3
                                                                                 =======       ======

Restructuring actions represented by the September 30, 1999 reserve balance are expected to be substantially completed in 2000.

                                     CONTINUING OPERATIONS BEFORE
                                            EQUITY EARNINGS                        CONSOLIDATED
                                    -------------------------------      ---------------------------------
                                     1999        1998        1997         1999         1998         1997
                                     ----        ----        ----         ----         ----         ----
Currently payable
    United States.............      $156.2      $120.0      $ 136.8      $156.7      $  140.9      $ 151.1
    State.....................        19.1        14.9         12.2        19.2          15.4         14.5
    Foreign...................        39.3        29.6         36.5        39.3          41.0         61.0
                                    ------      ------      -------      ------      --------      -------
        Total current.........       214.6       164.5        185.5       215.2         197.3        226.6
                                    ------      ------      -------      ------      --------      -------
Deferred
    United States.............        37.8       (57.1)      (114.4)       52.7         345.1       (100.7)
    State.....................        (6.0)       (1.3)        (1.2)       (5.4)          9.6         (1.2)
    Foreign...................         0.2        11.4          0.1         0.2          11.5          1.1
                                    ------      ------      -------      ------      --------      -------
        Total deferred........        32.0       (47.0)      (115.5)       47.5         366.2       (100.8)
                                    ------      ------      -------      ------      --------      -------
Income taxes..................      $246.6      $117.5      $  70.0      $262.7      $  563.5      $ 125.8
                                    ======      ======      =======      ======      ========      =======

Components of consolidated income taxes:

                                                                          1999         1998         1997
                                                                          ----         ----         ----
Continuing operations before equity earnings.......................      $246.6      $  117.5      $  70.0
Equity earnings....................................................        16.1          17.6         14.3
Discontinued operations............................................          --         428.4         41.5
                                                                         ------      --------      -------
                                                                         $262.7      $  563.5      $ 125.8
                                                                         ======      ========      =======

The source of pre-tax earnings follows:

                                      CONTINUING OPERATIONS BEFORE
                                    INCOME TAXES AND EQUITY EARNINGS                CONSOLIDATED
                                    --------------------------------      ---------------------------------
                                     1999        1998         1997        1999         1998         1997
                                     ----        ----         ----        ----         ----         ----
United States.................      $623.5      $385.3      $ 352.4      $675.5      $1,561.4      $ 464.3
Foreign.......................        92.3        84.1         32.5        92.3         107.8         85.2
                                    ------      ------      -------      ------      --------      -------
Pre-tax earnings..............      $715.8      $469.4      $ 384.9      $767.8      $1,669.2      $ 549.5
                                    ======      ======      =======      ======      ========      =======

                                                       1999                   1998                    1997
                                                 -----------------      -----------------      ------------------
Computed tax at federal statutory rate.......    $250.5       35.0%     $164.3       35.0%     $134.7        35.0%
State income taxes, net of federal tax
  benefit....................................      10.6        1.5         8.8        1.9         7.1         1.8
Foreign tax in excess of domestic rate.......       7.2        1.0        11.6        2.4        25.2         6.5
Taxes on repatriation of foreign earnings....       9.6        1.4         9.0        1.9        13.1         3.4
Foreign tax credit refunds...................        --         --          --         --       (34.7)       (9.0)
Recognition of capital losses related to
  prior years' restructuring actions.........     (10.0)      (1.4)      (44.8)      (9.5)      (61.7)      (16.0)
Investment income............................     (11.5)      (1.6)      (16.6)      (3.5)      (10.6)       (2.7)
Other, net...................................      (9.8)      (1.4)      (14.8)      (3.2)       (3.1)        (.8)
                                                 ------       ----      ------       ----      ------       -----
                                                 $246.6       34.5%     $117.5       25.0%     $ 70.0        18.2%
                                                 ======       ====      ======       ====      ======       =====

The Company recognized capital loss benefits of $10.0 in 1999, $44.8 in 1998 and $61.7 in 1997 primarily related to past restructuring actions. In 1997, the Company changed its method of computing foreign tax credits and recognized tax benefits of $34.7 related to foreign tax credit refund claims for 1993 through 1996.

The effective rate for discontinued operations is higher than the federal statutory rate in 1998 and 1997 due to foreign taxes in excess of the domestic rate, taxes on repatriation of foreign earnings and non-deductible costs related to the Agricultural Products business spin-off.

The deferred tax assets and liabilities recorded on the balance sheet, which include current and noncurrent elements, as of September 30, 1999 and 1998 are as follows:

                                                                   1999                   1998
                                                                   ----                   ----
Deferred Tax Liabilities:
    Investment in available-for-sale securities.............      $(359.4)               $(380.3)
    Depreciation and property differences...................        (75.9)                (100.8)
    Pension plans...........................................       (117.3)                (106.0)
    Equity investments in affiliated companies..............        (36.7)                 (21.3)
    SAILS debt..............................................        (44.5)                    --
    Other...................................................        (55.9)                 (58.9)
                                                                  -------                -------
        Gross deferred tax liabilities......................       (689.7)                (667.3)
                                                                  -------                -------
Deferred Tax Assets:
    Postretirement benefits other than pensions.............        216.5                  207.4
    Accrued liabilities.....................................         77.2                   65.7
    Tax loss carryforwards and tax credits..................         55.0                   54.4
    Recognized capital losses...............................          0.5                   91.7
    Intangible assets.......................................         20.6                   30.5
    Other...................................................         69.9                   43.3
                                                                  -------                -------
        Gross deferred tax assets...........................        439.7                  493.0
                                                                  -------                -------
    Valuation allowance.....................................        (78.3)                 (74.6)
                                                                  -------                -------
    Net deferred tax liability..............................      $(328.3)               $(248.9)
                                                                  =======                =======

Tax loss carryforwards and tax credits totaling $2.0 expired in 1999. Future expiration of tax loss carryforwards and credits, if not utilized, are as follows: 2000, $3.0; 2001, $3.0; 2002, $4.4; 2003, $3.0; 2004, $2.9; thereafter or no expiration, $38.7. The valuation allowance is primarily attributed to certain accrued liabilities, tax loss carryforwards and tax credits outside the U.S. The valuation allowance increased in 1999 by $3.7, primarily due to losses in certain foreign subsidiaries for which no tax benefit is expected to be realized.

At September 30, 1999, $148 of foreign subsidiary net earnings were considered permanently invested in those businesses. Accordingly, U.S. income taxes have not been provided for such earnings. It is not practicable to determine the amount of unrecognized deferred tax liabilities associated with such earnings.

NOTES TO FINANCIAL STATEMENTS (continued)
(Dollars in millions except per share data)

EARNINGS PER SHARE

Basic earnings per share is based on the average number of shares outstanding during the period. Diluted earnings per share is based on the average number of shares used for the basic earnings per share calculation, adjusted for the dilutive effect of convertible preferred stock, stock options, convertible debentures and compensation awards.

The following table sets forth the computation of basic and diluted earnings per share.

                                                                        YEAR ENDED SEPTEMBER 30,
                                                                  ------------------------------------
                                                                   1999           1998           1997
                                                                   ----           ----           ----
Numerator:
    Earnings from continuing operations.....................      $505.1         $390.6         $348.9
    Preferred stock dividend, net of taxes..................        (2.6)         (11.5)         (13.1)
                                                                  ------         ------         ------
    Numerator for basic earnings per share -
      Earnings from continuing operations
        available to common shareholders....................       502.5          379.1          335.8
    Effect of dilutive securities:
      ESOP stock............................................         2.5            9.8           10.0
                                                                  ------         ------         ------
    Numerator for diluted earnings per share -
      Earnings from continuing operations
        available to common shareholders....................      $505.0         $388.9         $345.8
                                                                  ------         ------         ------
      Net earnings from discontinued operations.............      $   --         $ 10.0         $ 74.8
                                                                  ------         ------         ------
      Gain on sale of discontinued operations...............      $   --         $705.1         $   --
                                                                  ------         ------         ------
Denominator (shares in millions):
    Denominator for basic earnings per share -
      weighted average shares<F*>...........................       307.8          304.9          306.2
    Effect of dilutive securities:
      ESOP stock............................................         4.1           17.7           19.4
      Stock options.........................................         3.0            4.2            4.5
      Deferred compensation.................................          --             --            0.6
                                                                  ------         ------         ------
    Dilutive potential common shares........................         7.1           21.9           24.5
                                                                  ------         ------         ------
    Denominator for diluted earnings per
      share - adjusted weighted average
      shares and assumed conversions........................       314.9          326.8          330.7
                                                                  ======         ======         ======
Basic earnings per share:
    Earnings from continuing operations.....................      $ 1.63         $ 1.24         $ 1.10
    Net earnings from discontinued operations...............          --           0.03           0.24
    Gain on sale of discontinued operations.................          --           2.32             --
                                                                  ------         ------         ------
    Net Earnings............................................      $ 1.63         $ 3.59         $ 1.34
                                                                  ======         ======         ======
Diluted earnings per share:
    Earnings from continuing operations.....................      $ 1.60         $ 1.19         $ 1.05
    Net earnings from discontinued operations...............          --           0.03           0.22
    Gain on sale of discontinued operations.................          --           2.16             --
                                                                  ------         ------         ------
    Net Earnings............................................      $ 1.60         $ 3.38         $ 1.27
                                                                  ======         ======         ======

<F*>Weighted average shares excludes 13.7, 13.5 and 12.9 shares of common stock
held by the Company's Grantor Trust at September 30, 1999, 1998 and 1997,
respectively.

NOTES TO FINANCIAL STATEMENTS (continued)
(Dollars in millions except per share data)

STOCK-BASED COMPENSATION

The Company's 1999 Incentive Stock Plan (1999 Plan) was adopted in February 1999, and replaced the 1996 Incentive Stock Plan (1996 Plan). Under these plans, awards to purchase shares of the Company's common stock may be granted to directors, officers and key employees. No additional awards may be granted under the 1996 Plan, which will continue in existence until granted shares are exercised or terminated. A maximum of 19.0 million shares of RAL Stock was approved to be issued under the 1999 Plan. At September 30, 1999, 1998 and 1997, respectively, there were 17.1 million, 3.0 million and 8.7 million shares available for future awards.

Options under the 1999 and 1996 Plans generally consist of two types of grants, all of which are granted at the market price on the grant date. The first type of option grant generally vests ratably over four or five years. The second type has accelerated vesting provisions that are based on stock price or peer group performance hurdles. If these hurdles are met, options vest at various times between years three through eight. If the hurdles are not achieved, options vest in year nine. Awards have a maximum term of 10 years.

In fiscal 1999, a restoration option feature was added to substantially all outstanding option grants for employees. A restoration option may be received equal to the number of shares surrendered upon a stock-for-stock exercise. The shares tendered must have been held for a minimum of six months. Restoration option grants are non-dilutive, as they do not increase the combined number of shares of RAL Stock and options held by an employee before exercise. The new options have an exercise price equal to the market price of RAL Stock on the grant date, a maximum term equal to the remainder of the original option's term, and are subject to a one-year vesting period.

In fiscal 1998, some options were modified for certain employees of discontinued operations to extend the option exercise period. The modification resulted in a new measurement date and a one-time charge to earnings from discontinued operations in fiscal 1998. The effect of this modification is also included in the pro forma disclosures below.

Phantom options may also be granted to certain executives currently located outside of the United States. Each unit, upon exercise, allows the holder to receive cash equal to the excess of the market price of RAL Stock over the grant price. The grant price of each phantom option is equal to the market price of RAL Stock on the grant date. During 1998, 32,750 units were granted. The weighted-average fair value for phantom options granted in 1998 was $30.875. No units were granted in 1999 or 1997.

Restricted stock awards may also be issued under the 1999 Plan. Restrictions on shares of restricted stock issued to eligible employees lapse over various periods, provided continued employment and, in certain cases, minimum stock price requirements are met. Restricted stock shares granted in 1999, 1998 and 1997 were 2,000, 64,000 and 12,000, respectively. The weighted-average fair value for restricted stock granted in 1999, 1998 and 1997 was $28.00, $30.88 and $28.01, respectively.

The Company continues to apply APB 25 and related Interpretations in accounting for its stock-based compensation. Accordingly, charges to earnings for stock-based compensation were $3.6, $20.5 and $13.8 in 1999, 1998 and 1997, respectively. Had compensation cost for stock-based compensation been determined based on the fair value method set forth under SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated in the table below. Pro forma amounts are for disclosure purposes only and do not include options granted prior to fiscal year 1996; therefore, these amounts may not be representative of future calculations.

Under the terms of the 1999 and 1996 Plans, option shares and prices are adjusted in conjunction with stock splits and spin-offs so that the option holder is in the same economic position before and after these equity transactions. Fiscal 1998 and 1997 shares and prices reflect the three-for-one stock split distributed on July 15, 1998. Fiscal 1998 information also reflects the effect of the spin-off of the Agricultural Products business effective April 1, 1998. The stock split and spin-off did not result in additional compensation expense.

                                                                            1999          1998          1997
                                                                            ----          ----          ----
Net Earnings:
    As reported........................................................    $505.1       $1,105.7       $423.7
    Pro forma..........................................................    $492.9       $1,104.9       $417.9
Basic Earnings Per Share:
    As reported........................................................    $ 1.63       $   3.59       $ 1.34
    Pro forma..........................................................    $ 1.59       $   3.59       $ 1.32
Diluted Earnings Per Share:
    As reported........................................................    $ 1.60       $   3.38       $ 1.27
    Pro forma..........................................................    $ 1.56       $   3.38       $ 1.25

                                                                                  1999               1998           1997
                                                                                  ----               ----           ----
Risk-free interest rate....................................................       5.7%               5.6%           6.3%
Expected life of option.................................................... 1.1 to 4.5 years        6 years        8 years
Expected volatility of RAL Stock...........................................  24.9% to 38.9%     19.9% to 23.0%     20.0%
Expected dividend yield on RAL Stock.......................................       1.4%               1.3%           1.3%

A summary of nonqualified RAL Stock options outstanding is as follows (shares in millions):

                                                            1999                      1998                      1997
                                                    --------------------      --------------------      --------------------
                                                                WEIGHTED                  WEIGHTED                  WEIGHTED
                                                                AVERAGE                   AVERAGE                   AVERAGE
                                                                EXERCISE                  EXERCISE                  EXERCISE
                                                    SHARES       PRICE        SHARES       PRICE        SHARES       PRICE
                                                    ------      --------      ------      --------      ------      --------
Outstanding on October 1,.........................  19.38        $21.33       16.95        $18.15       20.16        $17.16
Granted...........................................   1.92         28.58        2.68         30.73         .06         27.63
Exercised.........................................  (1.98)        18.29        (.87)        14.18       (3.09)        11.68
Cancelled.........................................   (.08)        24.30        (.08)        22.63        (.18)        21.36
                                                    -----                     -----                     -----
Outstanding prior to spin-off
  on April 1,.....................................     --            --       18.68         20.12          --            --
                                                                              =====
Adjusted options at April 1,
  based on spin-off ratio of
  average trading prices..........................     --            --       19.27         19.50          --            --
Granted...........................................     --            --        2.21         30.88          --            --
Exercised.........................................     --            --       (2.03)        14.14          --            --
Cancelled.........................................     --            --        (.07)        27.65          --            --
                                                                              -----
Outstanding on September 30,......................  19.24         22.36       19.38         21.33       16.95         18.15
                                                    =====                     =====                     =====
Exercisable on September 30,......................   7.34         17.41        5.92         17.70        2.46         15.49
                                                    =====                     =====                     =====

Information about RAL Stock options at September 30, 1999 is summarized below (shares in millions):

                                                      OUTSTANDING STOCK OPTIONS                    EXERCISABLE STOCK OPTIONS
                                          --------------------------------------------------      ----------------------------
                                                      WEIGHTED AVERAGE
                                                         REMAINING
   RANGE OF                                           CONTRACTUAL LIFE      WEIGHTED AVERAGE                  WEIGHTED AVERAGE
EXERCISE PRICES                           SHARES          (YEARS)            EXERCISE PRICE       SHARES       EXERCISE PRICE
---------------                           ------      ----------------      ----------------      ------      ----------------
$11.00-15.63............................   4.43             2.6                  $13.18            3.69            $13.04
$18.74-28.13............................   7.86             6.6                   20.79            3.28             20.57
$28.50-42.84............................   6.95             8.7                   29.98             .37             32.77
                                          -----                                                    ----
$11.00-42.84............................  19.24             6.4                   22.36            7.34             17.41
                                          =====                                                    ====

NOTES TO FINANCIAL STATEMENTS (continued)
(Dollars in millions except per share data)

PENSIONS AND OTHER POSTRETIREMENT BENEFITS

In the current year, the Company adopted SFAS No. 132, " Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement standarizes the disclosure requirements for pensions and other postretirement benefits into a combined format, requires additional information on changes in benefit obligations and fair value of plan assets and eliminates certain requirements from other accounting standards no longer deemed useful. The Statement does not change the measurement or recognition of these benefits in the financial statements. The following pension and other postretirement benefit information is presented in accordance with SFAS No. 132. Prior year amounts have been restated to conform to the current year's presentation.

The Company has several defined benefit pension plans covering substantially all of its employees in the U.S. and certain employees in other countries. The aggregate benefit obligation of these foreign pension plans is not significant to the total benefit obligation.

The Company currently provides other postretirement benefits, consisting of health care and life insurance benefits for certain groups of retired employees and plans whereby certain management employees may defer compensation in exchange for cash benefits after retirement. Retiree contributions for health care benefits are adjusted periodically, and it is expected that such adjustments will continue into the future.

In fiscal 1999, the Company amended the qualified U.S. Pension Plan to allow employees to make an irrevocable election effective January 1, 1999 between two pension benefit formulas. Prior to this time, one benefit formula was used. Also effective January 1, 1999, assets of the Plan provide employee benefits in addition to normal retirement benefits. The additional benefit is equal to a 300 percent match on participants' after-tax contributions of 1 or 1.75 percent to the Savings Investment Plan.

The following tables present the benefit obligation and funded status of the plan:

                                                                                   SEPTEMBER 30,
                                                                  ------------------------------------------------
                                                                         PENSION                 POSTRETIREMENT
                                                                  ----------------------      --------------------
                                                                    1999          1998         1999         1998
                                                                    ----          ----         ----         ----
CHANGE IN BENEFIT OBLIGATION:
    Benefit obligation at beginning of year.................      $1,088.8      $  974.7      $ 422.6      $ 366.4
    Service cost............................................          36.7          21.1          2.2          2.3
    Interest cost...........................................          72.9          72.3         28.9         28.1
    Plan participants' contributions........................           0.8           1.0          3.7          3.7
    Actuarial (gain) loss...................................          (8.0)        102.8         16.4         46.0
    Benefits paid...........................................         (82.6)        (60.5)       (26.0)       (23.1)
    Foreign currency exchange rate changes..................          (1.6)         (1.7)          --           --
    Disposal of businesses..................................            --         (34.8)          --         (0.8)
    Amendments..............................................          (8.1)          0.6           --           --
    Special termination benefits............................            --           8.9           --           --
    Curtailment.............................................           1.8           4.4           --           --
                                                                  --------      --------      -------      -------
    Benefit obligation at end of year.......................      $1,100.7      $1,088.8      $ 447.8      $ 422.6
                                                                  ========      ========      =======      =======
CHANGE IN PLAN ASSETS:
    Fair value of plan assets at beginning of year..........      $1,729.2      $1,682.2      $   4.6      $   5.1
    Actual return on plan assets............................         150.6         137.8          0.2         (0.5)
    Company contributions...................................           3.5           3.3         22.3         21.0
    Plan participants' contributions........................           0.8           1.0          3.7          3.7
    Benefits paid...........................................         (82.6)        (60.5)       (26.0)       (23.1)
    Foreign currency exchange rate changes..................          (2.5)         (0.9)          --           --
    Disposal of businesses..................................          (3.6)        (33.7)          --         (1.6)
                                                                  --------      --------      -------      -------
    Fair value of plan assets at end of year................      $1,795.4      $1,729.2      $   4.8      $   4.6
                                                                  ========      ========      =======      =======

                                                                                   SEPTEMBER 30,
                                                                  ------------------------------------------------
                                                                         PENSION                 POSTRETIREMENT
                                                                  ----------------------      --------------------
                                                                    1999          1998         1999         1998
                                                                    ----          ----         ----         ----
FUNDED STATUS:
    Funded status of the plan...............................      $  694.7      $  640.4      $(443.0)     $(418.0)
    Unrecognized net loss (gain)............................        (396.1)       (380.1)        50.6         35.4
    Unrecognized prior service cost.........................          (4.2)          4.3         (7.4)        (8.0)
    Unrecognized net transition asset.......................          (0.2)         (4.5)          --           --
                                                                  --------      --------      -------      -------
    Prepaid (accrued) benefit cost..........................      $  294.2      $  260.1      $(399.8)     $(390.6)
                                                                  ========      ========      =======      =======
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET:
    Prepaid benefit cost....................................      $  314.8      $  279.3      $    --      $    --
    Accrued benefit liability...............................         (23.7)        (19.2)      (399.8)      (390.6)
    Intangible asset........................................           1.1            --           --           --
    Accumulated other comprehensive income..................           2.0            --           --           --
                                                                  --------      --------      -------      -------
    Net amount recognized...................................      $  294.2      $  260.1      $(399.8)     $(390.6)
                                                                  ========      ========      =======      =======

For pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation was $29.0 and $29.7 at September 30, 1999 and 1998, respectively, and the accumulated benefit obligation was $23.7 and $19.2. There are no plan assets for these non-qualified plans as of September 30, 1999 and 1998.

Pension assets consist primarily of listed common stocks and bonds. The U.S. plan held approximately 5.2 million shares of RAL Stock at September 30, 1999 and 1998, with market values of $146.1 and $151.9, respectively. The plan received dividends on RAL Stock during 1999 and 1998 of $2.1 per year.

Of the postretirement liabilities, $22.7 and $20.1 are classified as current liabilities at September 30, 1999 and 1998, respectively, and the remainder is classified as long-term liabilities.

The following table presents pension and postretirement expense:

                                                                                    YEAR ENDED SEPTEMBER 30,
                                                                 ---------------------------------------------------------------
                                                                            PENSION                        POSTRETIREMENT
                                                                 ------------------------------      ---------------------------
                                                                  1999        1998        1997       1999       1998       1997
                                                                  ----        ----        ----       ----       ----       ----
    Service cost...........................................      $ 36.7      $ 21.1      $ 23.9      $ 2.2      $ 2.3      $ 3.0
    Interest cost..........................................        72.9        72.3        68.5       28.9       28.1       27.0
    Expected return on plan assets.........................      (133.5)     (121.9)     (110.1)        --         --         --
    Amortization of unrecognized prior service cost........         0.4         0.9         1.0       (0.6)      (0.6)      (0.6)
    Amortization of unrecognized transition asset..........        (4.6)       (4.6)       (4.6)        --         --         --
    Recognized net actuarial (gain) loss...................        (3.1)       (6.8)       (2.7)       1.1       (1.5)      (1.0)
    Early retirement enhancement...........................          --         9.7         1.6         --         --         --
    Curtailment loss.......................................          --         7.2          --         --        0.1         --
                                                                 ------      ------      ------      -----      -----      -----
    Net periodic benefit cost/(income).....................      $(31.2)     $(22.1)     $(22.4)     $31.6      $28.4      $28.4
                                                                 ======      ======      ======      =====      =====      =====
DISTRIBUTION OF NET PERIODIC BENEFIT COST:
    Continuing operations..................................      $(31.2)     $(31.7)     $(24.2)     $31.6      $27.6      $25.9
    Discontinued operations................................          --         9.6         1.8         --        0.8        2.5
                                                                 ------      ------      ------      -----      -----      -----
    Net periodic benefit cost/(income).....................      $(31.2)     $(22.1)     $(22.4)     $31.6      $28.4      $28.4
                                                                 ======      ======      ======      =====      =====      =====

The following table presents assumptions, which reflect weighted averages for the component plans, used in determining the above information.

                                                                    PENSION     POSTRETIREMENT
                                                                  -----------   ---------------
                                                                  1999   1998    1999     1998
                                                                  ----   ----    ----     ----
Discount rate...............................................      6.9%   6.9%    7.0%     7.0%
Expected return on plan assets..............................      8.9%   8.9%     --       --
Compensation increase rate..................................      5.4%   5.4%     --       --

NOTES TO FINANCIAL STATEMENTS (continued)
(Dollars in millions except per share data)

Assumed health care cost trend rates have been used in the valuation of postretirement health insurance benefits. The trend rate is 7 percent in 1999 declining to 6 percent in 2000 and thereafter for retirees under age 65. For retirees age 65 and older, the trend rate is 6 percent in 1999 and thereafter. A one percentage point increase in health care cost trend rates in each year would increase the accumulated postretirement benefit obligation as of September 30, 1999 by $13.5 and the net periodic postretirement benefit cost by $1.0. A one percentage point decrease in the health care cost trend rates in each year would decrease the accumulated postretirement benefit obligation as of September 30, 1999 by $12.0 and the net periodic postretirement benefit cost for 1999 by $0.9.

DEFINED CONTRIBUTION PLAN

The Company sponsors employee savings plans which cover substantially all U.S. employees. In fiscal 1999, the Company amended the contribution structure of the plans. Prior to January 1, 1999, the Company generally matched 100% of participants' before-tax contributions up to 6 percent of compensation for employees hired prior to July 1, 1993. For employees hired on or after July 1, 1993, the Company matched before-tax participant contributions in increasing 20 percent increments for each year of service. On January 1, 1999 and thereafter, the Company matches 25 percent of participants' before-tax contributions up to 4 percent of compensation. In addition, participants can make after-tax contributions of 1 percent or 1.75 percent of compensation into the savings plan. This participant after-tax contribution is matched within the pension plan at 300 percent. Amounts charged to expense during 1999, 1998, and 1997 were $8.8, $21.3 and $20.3, respectively. The 1999 decrease in defined contribution expense, and related increase in defined benefit service cost, reflects the aforementioned plan change.

NOTES PAYABLE

Notes payable at September 30, 1999 consisted of notes payable to financial institutions of $640.7 and commercial paper borrowings of $49.8 and had a weighted average interest rate of 6.1%. Notes payable at September 30, 1998 consisted of notes payable to financial institutions of $657.3 and commercial paper borrowings of $115.1 and had a weighted average interest rate of 7.2%.

At September 30, 1999, total unused lines of credit were $372.9.

                                                                    1999                1998
                                                                    ----                ----
Debentures
    9 1/4% due 2009.........................................      $  181.0            $  181.0
    7 3/4% due 2015.........................................         175.0               175.0
    9.30% due 2021..........................................         200.0               200.0
    8 5/8% due 2022.........................................         250.0               250.0
    8 1/8% due 2023.........................................         175.0               175.0
    7 7/8% due 2025.........................................         225.0               225.0
Other Debt
    SAILS, 7%, net of unrealized gain.......................         356.5               480.0
    ESOP loan guarantee (through 12-31-98)..................            --                13.2
    Medium-term Notes, 9.74% to 10.18%, maturing
      2000-2010.............................................          24.0                31.0
    LIBOR + 15 basis points, or 5.8375% at September 30,
      1998..................................................            --                50.0
Industrial revenue bonds, 4.25% to 8.0%, maturing
  2000-2015.................................................          26.9                29.1
Other.......................................................           9.7                22.6
                                                                  --------            --------
                                                                   1,623.1             1,831.9
    Less current portion....................................        (371.3)              (37.1)
                                                                  --------            --------
                                                                  $1,251.8            $1,794.8
                                                                  ========            ========

Aggregate maturities on all long-term debt, exclusive of debentures held in treasury, are $6.2, $2.9, $3.2 and $0.2 for the years ending September 30, 2001 through 2004, respectively.

In July 1997, the Company issued $480 of SAILS consisting of 7% exchangeable notes due August 1, 2000. At maturity, the SAILS are mandatorily exchangeable into a number of shares of IBC common stock owned by the Company, or cash, at the Company's option. Approximately 7.7 million notes were issued. Net proceeds of $466 from the transaction were primarily used to reduce short-term debt.

NOTES TO FINANCIAL STATEMENTS (continued)
(Dollars in millions except per share data)

The SAILS debt was initially recorded on the balance sheet at the principal amount at issuance. For accounting purposes, terms of the SAILS require them to be marked to the cash value of the underlying IBC common shares into which they may be exchanged. A market value adjustment is required for the SAILS debt when the IBC stock price is outside the range of $30.96875 and $37.7819. If the IBC stock price is greater than $37.7819, the Company records a cumulative unrealized loss on the SAILS debt, and if the IBC stock price is less than $30.96875, the Company records a cumulative unrealized gain. At September 30, 1999, the IBC stock price was $23.00. Accordingly, the Company recorded a cumulative, unrealized pre-tax gain of $123.5 during fiscal year 1999. This gain was calculated as the difference between the carrying value of the SAILS at September 30, 1998, or $480.0, and the carrying value of the SAILS at September 30, 1999, based on 15.5 million shares of IBC common stock into which the SAILS may be exchanged. On an after-tax basis, this gain was $79.0, or $.26 and $.25 per basic and diluted share, respectively. (See the Investment in Interstate Bakeries Corporation Note for more information on SAILS.)

To fund its purchase of the Company's Redeemable Preferred Stock, the trust for the Company-sponsored ESOP borrowed $500.0 principal amount in ten-year 8.25% notes (ESOP loan). During 1999, 1998 and 1997, the ESOP incurred $0.5, $4.2 and $8.2, respectively, of interest expense on the ESOP loan.

REDEEMABLE PREFERRED STOCK

The Company's Articles of Incorporation authorize the Company to issue up to 10,600,000 shares of $1 par value preferred stock. As of September 30, 1999, there were no shares of preferred stock outstanding.

At the end of December, 1998, the Company converted all of the outstanding shares of Series A 6.75% Preferred Stock (Redeemable Preferred Stock) into RAL Stock in accordance with the terms of the Redeemable Preferred Stock. To effect this conversion, the Company issued 13,505,609 shares held in Treasury and 2,209,192 authorized but previously unissued shares of RAL Stock. The shares of RAL Stock issued in the conversion were issued to the ESOP, where they were held in the ESOP Common Stock Fund of the Company's Savings Investment Plan. Since the conversion, participants in the ESOP have been able to diversify their account balances in that Fund into other investment options in the Savings Investment Plan.

SHAREHOLDERS EQUITY

On March 28, 1996, the Board of Directors declared a dividend of one share purchase right ("Right") for each outstanding share of RAL Stock. Each Right entitles a shareholder of RAL Stock to purchase an additional share of RAL Stock at an exercise price of $64.27, which price is subject to antidilution adjustments. Rights, however, may only be exercised if a person or group has acquired, or commenced a public tender for, 20% or more of the outstanding RAL Stock, unless the acquisition is pursuant to a tender or exchange offer for all outstanding shares of RAL Stock and a majority of the Board of Directors determines that the price and terms of the offer are adequate and in the best interests of shareholders (a "Permitted Offer"). At the time that 20% or more of the outstanding RAL Stock is actually acquired (other than in connection with a Permitted Offer), the exercise price of each Right will be adjusted so that the holder (other than the person or member of the group that made the acquisition) may then purchase a share of RAL Stock at one-third of its then-current market price. If the Company merges with any other person or group after the Rights become exercisable, a holder of a Right may purchase, at the exercise price, common stock of the surviving entity having a value equal to twice the exercise price. If the Company transfers 50% or more of its assets or earnings power to any other person or group after the Rights become exercisable, a holder of a Right may purchase, at the exercise price, common stock of the acquiring entity having a value equal to twice the exercise price.

The Company can redeem the Rights at a price of $.01 per Right at any time prior to the time a person or group actually acquires 20% or more of the outstanding RAL Stock (other than in connection with a Permitted Offer). In addition, following the acquisition by a person or group of at least 20%, but not more than 50%, of the outstanding RAL Stock (other than in connection with a Permitted Offer), the Company may exchange each Right for one share of RAL Stock. The Company's Board of Directors may amend the terms of the Rights at any time prior to the time a person or group acquires 20% or more of the outstanding RAL Stock (other than in connection with a Permitted Offer), and may amend the terms to lower the threshold for exercise of the Rights. If the threshold is reduced it cannot be lowered to a percentage which is less than 10%, or, if any shareholder holds 10% or more of the outstanding RAL Stock at that time, the reduced threshold must be greater than the percentage held by that shareholder. On May 28, 1998, the Board amended the terms of the Rights to eliminate the obligation of the Company to reserve shares of RAL Stock which would be issued upon exercise of the Rights. The Rights will expire on March 28, 2006.

At September 30, 1999, there were 600,000,000 shares of RAL Stock authorized, of which 32,286 shares were reserved for conversion of the 5 3/4% subordinated debentures and 43,376,578 shares were reserved under various employee incentive compensation and benefit plans.

GRANTOR TRUST

On September 15, 1994, the Company established the Ralston Purina Company Grantor Trust (the Trust) to provide a source of funds to assist the Company in meeting its obligations under various employee benefit plans and programs. The Trust supports certain employee benefit plans and does not change those plans or the amounts of stock expected to be issued for those plans. However, payment of certain benefits would be accelerated if minimum funding requirements of the Trust are not met.

For financial reporting purposes, the Trust is consolidated with the Company. In 1998, the Trust was adjusted through additional paid in capital from fair market value to original cost basis based upon guidance issued by the Emerging Issues Task Force of the FASB. The cost basis of the shares held by the Trust is shown as a reduction of

NOTES TO FINANCIAL STATEMENTS (continued)
(Dollars in millions except per share data)

shareholders equity. Any dividend transactions between the Company and the Trust are eliminated. RAL Stock held in the Trust is not considered outstanding in the computation of earnings per share.

The Trustee, a party not related to the Company, is responsible for voting the shares of RAL Stock held in the Trust.

COMMITMENTS AND CONTINGENCIES

LEGAL AND ENVIRONMENTAL MATTERS -- The Company is a party to a number of legal proceedings in various state, federal and foreign jurisdictions. These proceedings are in varying stages and many may proceed for protracted periods of time. Some proceedings involve highly complex questions of fact and law.

The operations of the Company, like those of other companies engaged in similar businesses, are subject to various federal, state, and local laws and regulations intended to protect the public health and the environment. These regulations primarily relate to worker safety, air and water quality, underground fuel storage tanks and waste handling and disposal.

The Company has received notices from the U.S. Environmental Protection Agency, state agencies, and/or private parties seeking contribution, that it has been identified as a "potentially responsible party" (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act, and may be required to share in the cost of cleanup with respect to 12 federal "Superfund" sites. It may also be required to share in the cost of cleanup with respect to a state-designated site. Of these 13 sites, the Company has reached negotiated agreement as to its liability with respect to 4 of the sites. Negotiations with the U.S. Environmental Protection Agency, the state agency that is involved on the state-designated site, and other PRP's are at various stages with respect to the remaining sites. Negotiations involve determinations of the actual responsibility of the Company and the other PRP's at the site, appropriate investigatory and/or remedial actions, and allocation of the costs of such activities among the PRP's and other site users. The Company's ultimate liability in connection with those sites may depend on many factors, including the volume of material contributed to the site, the number of other PRP's and their financial viability, and the remediation methods and technology to be used.

In addition, the Company has undertaken certain programs to reduce or eliminate the environmental contamination at the rechargeable battery facility in Gainesville, Florida. This business was sold on November 1, 1999. In the event that the buyer would become unable to continue such programs, the Company would be required to bear financial responsibility for such programs as well as for other known and unknown environmental conditions at the site.

It is difficult to quantify with certainty the potential financial impact of actions regarding expenditures for environmental matters, particularly remediation, and future capital expenditures for environmental control equipment. Nevertheless, based upon the information currently available, the Company believes that its ultimate liability arising from such environmental matters, together with the liability for all other pending legal proceedings, asserted legal claims and known potential legal claims which are likely to be asserted, taking into account established accruals of $9.6 for estimated liabilities, should not be material to its financial position. Such liability could, however, be material to results of operations or cash flows for a particular quarter or annual period. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.

OTHER COMMITMENTS -- At September 30, 1999 and 1998, the Company had third party guarantees outstanding in the aggregate amount of approximately $56.6 and $65.5, respectively. These guarantees relate primarily to revenue bonds for various facilities and to workers compensation claims associated with the disposition of CBC prior to the sale. While IBC is primarily liable for the payment of these claims, the Company remains secondarily liable for payment.

Future minimum rental commitments under noncancellable operating leases in effect as of September 30, 1999 are: 2000--$7.5, 2001--$6.6, 2002--$4.8, 2003--$4.0, 2004--$2.6 and thereafter--$9.5.

Total rental expense for all operating leases was $35.6 in 1999, $37.0 in 1998 and $36.7 in 1997.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

FOREIGN CURRENCY CONTRACTS -- The Company enters into foreign exchange forward contracts and options to mitigate the Company's economic exposure to changes in exchange rates. The Company views these exposures as arising from three major areas: (a) non-U.S. dollar cash flows to the U.S. from foreign subsidiaries expected within a year or less, (b) cash flows to a foreign country in a currency other than the subsidiary's functional currency, and (c) future cash flows at the operating margin level, including anticipated intercompany transactions. The level of such actions is dependent on seasonality of the Company's activities and on specific market conditions involving various currencies.

                                                                  1999             1998
INSTRUMENT                                                        ----             ----
    Forwards...............................................      $133.4           $248.7
    Options................................................        17.7              6.7

CURRENCY
    Canadian dollar........................................        17.7             19.5
    French franc...........................................          --             74.7
    Swiss franc............................................       124.2            144.0
    Other currencies.......................................         9.2             17.2

CONCENTRATION OF CREDIT RISK -- The counterparties to foreign currency contracts and repurchase agreements consist of a number of major international financial institutions and are generally institutions with which the Company maintains lines of credit. The Company does not enter into foreign exchange contracts through brokers nor does it trade foreign exchange contracts on any other exchange or over the counter markets. Risk of currency positions and mark-to-market valuation of positions are strictly monitored at all times. The Company continually monitors the credit ratings of its counterparties both internally and by using outside rating agencies. The Company has implemented policies which limit the amount of agreements it enters into with any one party. While nonperformance by these counterparties exposes the Company to potential credit losses, such losses are not anticipated due to the control features mentioned.

Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers, generally short payment terms and their dispersion across geographic areas.

FAIR VALUE OF FINANCIAL INSTRUMENTS -- The Company's financial instruments include cash and cash equivalents, marketable equity securities, short-term and long-term debt, foreign currency contracts and, in 1998, Redeemable Preferred Stock.

At September 30, 1999 and 1998, the fair value of the Company's available-for-sale marketable equity securities was $1,185.5 and $1,281.2, respectively. See the "Marketable Equity Securities" Note for additional information about the Company's available-for-sale securities at September 30, 1999 and 1998.

At September 30, 1999 and 1998, the fair value of debt was $2,374.6 and $2,925.1, respectively, compared to its carrying value of $2,313.6 and $2,604.3, respectively. The fair value of the Company's long-term debt has been estimated using quoted market prices and yields obtained through independent pricing sources for the same or similar types of borrowing arrangements, taking into consideration the underlying terms of the debt, such as the coupon rate, term to maturity, tax impact to investors and imbedded call options.

Due to the nature of cash equivalents and short-term borrowings, including notes payable, carrying amounts on the balance sheet approximate fair value.

The fair value of foreign currency contracts is the amount that the Company would receive or pay to terminate the contracts, considering first, quoted market prices of comparable agreements, or in the absence of quoted market prices, such factors as interest rates, currency exchange rates and remaining maturities. Based on these considerations, the calculated fair values of foreign currency contracts outstanding at September 30, 1999 and 1998 were not material.

During fiscal year 1999, all shares of Redeemable Preferred Stock were converted into RAL Stock. See the "Redeemable Preferred Stock" Note for additional information. At September 30, 1998, Redeemable Preferred Stock had a fair value and carrying value of $481.2 and $256.1, respectively. The fair value was based upon the greater of the fair market value of the RAL Stock into which the Redeemable Preferred Stock may have been converted or the guaranteed redemption value.

                                                                          YEAR ENDED SEPTEMBER 30,
                                                                  ----------------------------------------
                                                                   1999             1998             1997
                                                                  ------            ----             ----
Translation and exchange losses.............................      $ 10.5           $ 16.9           $  6.0
Dividend income.............................................       (30.3)           (22.9)              --
Investment income...........................................        (5.5)            (5.7)            (4.3)
Return on other investments.................................         0.1             (9.1)            (8.3)
Miscellaneous (income)/expense..............................         2.9               .4             (1.1)
                                                                  ------           ------           ------
                                                                  $(22.3)          $(20.4)          $ (7.7)
                                                                  ======           ======           ======

                    SUPPLEMENTAL BALANCE SHEET INFORMATION
                                                                        SEPTEMBER 30,
                                                                  -------------------------
                                                                    1999             1998
                                                                    ----             ----
Receivables (current)--
    Trade...................................................      $  674.8         $  672.1
    Notes and other.........................................          65.5             69.6
    Allowance for doubtful accounts.........................         (24.5)           (24.5)
                                                                  --------         --------
                                                                  $  715.8         $  717.2
                                                                  ========         ========
Inventories--
    Raw materials and supplies..............................      $  128.5         $  134.7
    Work in process.........................................         111.1            124.1
    Finished products.......................................         309.4            341.6
                                                                  --------         --------
                                                                  $  549.0         $  600.4
                                                                  ========         ========
Other Current Assets--
    Prepaid expenses........................................      $   53.9         $   59.7
    Deferred income tax benefits............................          69.1             60.4
                                                                  --------         --------
                                                                  $  123.0         $  120.1
                                                                  ========         ========
Investments and Other Assets--
    Goodwill (net of accumulated amortization: 1999--$164.6
      and 1998--$133.5).....................................      $  499.9         $  545.9
    Other intangible assets (net of accumulated
      amortization: 1999--$363.3 and 1998--$345.7)..........         215.3            231.2
    Equity investments in affiliated companies..............         363.7            319.3
    Available-for-sale securities...........................       1,185.5          1,281.2
    Deferred charges and other assets.......................         560.2            530.6
                                                                  --------         --------
                                                                  $2,824.6         $2,908.2
                                                                  ========         ========
Accounts Payable and Accrued Liabilities--
    Trade accounts payable..................................      $  316.0         $  286.2
    Accrued advertising, promotion and allowances...........         125.6            101.4
    Incentive compensation, salaries and vacations..........          83.5             76.2
    Accrued interest........................................          41.3             43.1
    Restructuring reserves..................................          13.6             57.3
    Other...................................................         209.4            150.6
                                                                  --------         --------
                                                                  $  789.4         $  714.8
                                                                  ========         ========
Other Liabilities--
    Postretirement medical benefits.........................      $  144.6         $  141.9
    Other postretirement benefits...........................         232.5            228.6
    Minority interests......................................           2.7              3.0
    Other...................................................         161.7            160.1
                                                                  --------         --------
                                                                  $  541.5         $  533.6
                                                                  ========         ========

                              SUPPLEMENTAL CASH FLOW STATEMENT INFORMATION
                                                                          YEAR ENDED SEPTEMBER 30,
                                                                  ----------------------------------------
                                                                   1999             1998             1997
                                                                   ----             ----             ----
Interest paid...............................................      $179.1           $175.7           $154.2
Income taxes paid...........................................       201.4            146.4            166.7

                                        ALLOWANCE FOR DOUBTFUL ACCOUNTS
                                                                   1999             1998             1997
                                                                   ----             ----             ----
Balance, beginning of year..................................       $24.5            $24.8           $ 26.7
Provision charged to expense................................         8.3              3.9              3.1
Writeoffs, less recoveries..................................        (8.3)            (4.2)            (5.0)
                                                                   -----            -----           ------
Balance, end of year........................................       $24.5            $24.5           $ 24.8
                                                                   =====            =====           ======

                                                  (UNAUDITED)
                                  (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)

FISCAL 1999                                                 FIRST            SECOND           THIRD            FOURTH
-----------                                                 -----            ------           -----            ------
Net sales..............................................    $1,291.8         $1,130.2         $1,088.5         $1,210.0
Gross profit<Fa>.......................................       663.4            579.9            565.3            642.1
Net earnings<Fb>.......................................       176.8            107.2             57.2            163.9
Earnings per share of RAL Stock
    Basic
        Net earnings...................................         .58              .34              .18              .54
    Diluted
        Net earnings...................................         .55              .34              .18              .53
Dividends paid per share...............................         .10              .10              .10              .10
Market price range of RAL Stock........................    37 3/16-          32 1/2-              33-          30 7/8-
                                                             28 1/4         25 13/16           25 5/8           27 1/4

<Fa>  Amounts published in previous quarters have been restated
      due to certain reclassifications made between cost of
      products sold and selling, general and administrative
      expenses, to conform to year-end presentation.

<Fb>  Earnings from continuing operations were (reduced)/increased
      for the following unusual items:

                                                   EARNINGS FROM
                                                    CONTINUING         BASIC       DILUTED
                                                    OPERATIONS          EPS          EPS
                                                   -------------       -----       -------
First Quarter
    Unrealized gain on SAILS debt............         $ 44.9           $ .15        $ .14
Second Quarter
    Restructuring provisions.................         $(35.0)          $(.11)       $(.11)
    Unrealized gain on SAILS debt............           48.4             .15          .15
                                                      ------           -----        -----
                                                      $ 13.4           $ .04        $ .04
                                                      ------           -----        -----
Third Quarter
    Restructuring provisions.................         $(26.8)          $(.09)       $(.09)
    Unrealized loss on SAILS debt............           (8.7)           (.03)        (.03)
    Gain on sale of DuPont stock.............            8.4             .03          .03
                                                      ------           -----        -----
                                                      $(27.1)          $(.09)       $(.09)
                                                      ------           -----        -----
Fourth Quarter
    Restructuring reversals..................         $  0.4           $  --        $  --
    Unrealized loss on SAILS debt............           (5.6)           (.02)        (.02)
    Gain on sale of DuPont stock.............           14.4             .05          .05
    Gain on conversion of DuPont stock.......           32.2             .11          .11
    Capital loss tax benefits................           10.0             .03          .03
                                                      ------           -----        -----
                                                      $ 51.4           $ .17        $ .17
                                                      ------           -----        -----

                                                  (UNAUDITED)
                                  (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)

FISCAL 1998                                                 FIRST            SECOND           THIRD            FOURTH
-----------                                                 -----            ------           -----            ------
Net sales..............................................    $1,317.1         $1,110.8         $1,072.9         $1,152.5
Gross profit<Fa>.......................................       670.1            563.1            545.1            579.9
Earnings from continuing operations<Fb>................       139.7             86.5             59.6            104.8
Net earnings/(loss) from discontinued operations.......        15.7             (6.6)             0.9               --
Gain on sale of discontinued operations................       705.1               --               --               --
Net earnings...........................................       860.5             79.9             60.5            104.8
Earnings per share of RAL Stock
    Basic
        Earnings from continuing operations............         .44              .27              .19              .34
        Net earnings/(loss) from discontinued
          operations...................................         .05             (.02)              --               --
        Gain on sale of discontinued operations........        2.30               --               --               --
        Net earnings...................................        2.79              .25              .19              .34
    Diluted
        Earnings from continuing operations............         .42              .26              .18              .33
        Net earnings/(loss) from discontinued
          operations...................................         .05             (.02)              --               --
        Gain on sale of discontinued operations........        2.14               --               --               --
        Net earnings...................................        2.61              .24              .18              .33
Dividends paid per share...............................         .10              .10              .10              .10
Market price range of RAL Stock........................   32 19/64-          35 5/8-         39 5/64-          38 7/8-
                                                           27 51/64           28 1/2          33 9/16               26

<Fa>  Amounts have been restated due to certain reclassifications
      made between cost of products sold and selling, general and
      administrative expenses, to conform to the current year's
      presentation.

<Fb>  Earnings from continuing operations were (reduced)/increased
      for the following unusual items:

                                                   EARNINGS FROM
                                                    CONTINUING         BASIC       DILUTED
                                                    OPERATIONS          EPS          EPS
                                                   -------------       -----       -------
Second Quarter
    Restructuring provisions.................         $(43.7)          $(.14)       $(.13)
    Capital loss tax benefits................           41.5             .13          .12
    Gain on sale of IBC stock................            9.5             .03          .03
                                                      ------           -----        -----
                                                      $  7.3           $ .02        $ .02
                                                      ------           -----        -----
Third Quarter
    Restructuring provisions.................         $(17.6)          $(.05)       $(.05)

Fourth Quarter
    Capital loss tax benefits................         $  3.3           $ .01        $ .01
    Gain on sale of IBC stock................            3.5             .01          .01
                                                      ------           -----        -----
                                                      $  6.8           $ .02        $ .02
                                                      ------           -----        -----