<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                    FORM 10-Q

(MARK ONE)

      [X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
            EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

                                       OR

      | |   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
            EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 001-13255
                       ---------

                                  SOLUTIA INC.
                                  ------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

             DELAWARE                                   43-1781797
             --------                                   ----------
  (STATE OR OTHER JURISDICTION OF           (I.R.S. EMPLOYER IDENTIFICATION NO.)
   INCORPORATION OR ORGANIZATION)

   575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
   --------------------------------------------------------------- ----------
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)            (ZIP CODE)

                                 (314) 674-1000
                                 --------------
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

      INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS TO
BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES  X   NO
                                      -----   ----

      INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED
FILER, AN ACCELERATED FILER OR A NON-ACCELERATED FILER. SEE DEFINITION OF
"ACCELERATED FILER" AND "LARGE ACCELERATED FILER" IN RULE 12b-2 OF THE EXCHANGE
ACT (CHECK ONE):

  LARGE ACCELERATED FILER      ACCELERATED FILER  X   NON-ACCELERATED FILER    .
                          ---                    ---                        ---

      INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT. YES     NO  X
                                               ---    ---

      INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

                                                       OUTSTANDING AT
                    CLASS                              JUNE 30, 2006
                    -----                              -------------

       COMMON STOCK, $0.01 PAR VALUE                104,459,578 SHARES
       -----------------------------                ------------------

<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

                      CONSOLIDATED STATEMENT OF OPERATIONS
           (DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                THREE MONTHS                 SIX MONTHS
                                                                               ENDED JUNE 30,              ENDED JUNE 30,
                                                                               --------------              --------------
                                                                              2006        2005            2006          2005
                                                                              ----        ----            ----          ----
<S>                                                                          <C>            <C>         <C>           <C>
NET SALES ..........................................................         $ 765          $ 730       $ 1,443       $ 1,444
Cost of goods sold .................................................           635            629         1,239         1,241
                                                                             -----          -----       -------       -------
GROSS PROFIT .......................................................           130            101           204           203
Marketing expenses .................................................            35             34            68            66
Administrative expenses ............................................            23             24            44            46
Technological expenses .............................................            12             11            24            22
Amortization expense ...............................................             1             --             1            --
                                                                             -----          -----       -------       -------
OPERATING INCOME ...................................................            59             32            67            69
Equity earnings from affiliates ....................................            11             21            21            35
Interest expense (a) ...............................................           (27)           (22)          (50)          (44)
Other income, net ..................................................             4              4             7             5
Loss on debt modification ..........................................            --             --            (8)           --
Reorganization items, net ..........................................           (18)           (15)          (32)          (20)
                                                                             -----          -----       -------       -------
INCOME BEFORE INCOME TAX EXPENSE ...................................            29             20             5            45
Income tax expense .................................................             5              7             7            13
                                                                             -----          -----       -------       -------
INCOME (LOSS) FROM CONTINUING OPERATIONS ...........................            24             13            (2)           32
Income from Discontinued Operations, net of tax ....................             4              1             8             3
                                                                             -----          -----       -------       -------
NET INCOME .........................................................         $  28          $  14       $     6       $    35
                                                                             =====          =====       =======       =======

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Income (Loss) from Continuing Operations ...........................         $0.23          $0.12       ($ 0.02)      $  0.30
Income from Discontinued Operations ................................          0.04           0.01          0.08          0.03
                                                                             -----          -----       -------       -------
Net Income .........................................................         $0.27          $0.13        $ 0.06       $  0.33
                                                                             =====          =====       =======       =======

BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING ..............         104.5          104.5         104.5         104.5
                                                                             =====          =====       =======       =======
</TABLE>

(a)   Interest expense excludes unrecorded contractual interest expense of $8
      for the three months ended June 30, 2006 and 2005, and $16 for the six
      months ended June 30, 2006 and 2005.

See accompanying Notes to Consolidated Financial Statements.


                                       1
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

                  CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                        THREE MONTHS                SIX MONTHS
                                                                       ENDED JUNE 30,             ENDED JUNE 30,
                                                                       --------------             --------------
                                                                     2006         2005          2006          2005
                                                                     ----         ----          ----          ----
<S>                                                                 <C>          <C>           <C>           <C>
NET INCOME .................................................        $  28        $  14         $   6         $  35
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized loss on derivative instruments ..............           --           --            (1)           --
Currency translation adjustments ...........................           10           (2)           12            (7)
                                                                    -----        -----         -----         -----
COMPREHENSIVE INCOME .......................................        $  38        $  12         $  17         $  28
                                                                    =====        =====         =====         =====
</TABLE>

See accompanying Notes to Consolidated Financial Statements.


                                       2
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

                  CONSOLIDATED STATEMENT OF FINANCIAL POSITION
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                     JUNE 30,            DECEMBER 31,
                                                                                       2006                 2005
                                                                                       ----                 ----
<S>                                                                                   <C>                  <C>
                                     ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...............................................             $   265              $   107
Trade receivables, net of allowances of $8 and $7 in 2006 and 2005 ......                 347                  246
Miscellaneous receivables ...............................................                  90                   95
Inventories .............................................................                 263                  254
Prepaid expenses and other assets .......................................                  29                   34
Assets of discontinued operations .......................................                  84                   69
                                                                                      -------              -------
TOTAL CURRENT ASSETS ....................................................               1,078                  805
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of
     $2,545 in 2006 and $2,482 in 2005 ..................................                 772                  770
INVESTMENTS IN AFFILIATES ...............................................                 213                  205
GOODWILL ................................................................                  89                   76
IDENTIFIED INTANGIBLE ASSETS, net .......................................                  32                   28
OTHER ASSETS ............................................................                 105                  100
                                                                                      -------              -------
TOTAL ASSETS ............................................................             $ 2,289              $ 1,984
                                                                                      =======              =======

                     LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ........................................................             $   197              $   218
Accrued liabilities .....................................................                 245                  223
Short-term debt .........................................................                 700                  300
Liabilities of discontinued operations ..................................                  30                   26
                                                                                      -------              -------
TOTAL CURRENT LIABILITIES ...............................................               1,172                  767
LONG-TERM DEBT ..........................................................                 210                  247
OTHER LIABILITIES .......................................................                 260                  248
                                                                                      -------              -------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE .............................               1,642                1,262

LIABILITIES SUBJECT TO COMPROMISE .......................................               2,084                2,176

SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value $0.01)
    Issued: 118,400,635 shares in 2006 and 2005 .........................                   1                    1
    Additional contributed capital ......................................                  56                   56
    Treasury stock, at cost (13,941,057 shares in 2006 and 2005) ........                (251)                (251)
Net deficiency of assets at spinoff .....................................                (113)                (113)
Accumulated other comprehensive loss ....................................                 (82)                 (93)
Accumulated deficit .....................................................              (1,048)              (1,054)
                                                                                      -------              -------
TOTAL SHAREHOLDERS' DEFICIT .............................................              (1,437)              (1,454)
                                                                                      -------              -------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT .............................             $ 2,289              $ 1,984
                                                                                      =======              =======
</TABLE>

See accompanying Notes to Consolidated Financial Statements.


                                       3
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                          SIX MONTHS ENDED
                                                                                               JUNE 30,
                                                                                       -----------------------
                                                                                       2006               2005
                                                                                       ----               ----
<S>                                                                                   <C>                 <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income ...............................................................                6               $  35
Adjustments to reconcile net income to Cash From Operations:
     Income from discontinued operations, net of tax .....................               (8)                 (3)
     Depreciation and amortization .......................................               57                  56
     Restructuring expenses and other charges (gains).....................               (1)                 --
     Amortization of deferred credits ....................................               (4)                 (4)
     Other, net ..........................................................               --                  (1)
     Deferred Income Taxes ...............................................                1                   6
     Equity earnings from affiliates .....................................              (21)                (35)
     Changes in assets and liabilities:
          Income taxes payable ...........................................               (1)                (16)
          Trade receivables ..............................................             (102)                (10)
          Inventories ....................................................               (3)                (10)
          Accounts payable ...............................................              (14)                (18)
          Liabilities subject to compromise ..............................              (72)                (23)
          Other assets and liabilities ...................................               36                  (7)
                                                                                      -----               -----
CASH USED IN OPERATING ACTIVITIES - CONTINUING OPERATIONS ................             (126)                (30)
CASH PROVIDED BY OPERATING ACTIVITIES - DISCONTINUED OPERATIONS ..........                2                   4
                                                                                      -----               -----
CASH USED IN OPERATING ACTIVITIES ........................................             (124)                (26)
                                                                                      -----               -----

INVESTING ACTIVITIES:
Property, plant and equipment purchases ..................................              (41)                (27)
Acquisition and investment payments ......................................              (16)                 --
Investment and property disposals ........................................               --                   2
                                                                                      -----               -----
CASH USED IN INVESTING ACTIVITIES - CONTINUING OPERATIONS ................              (57)                (25)
CASH USED IN INVESTING ACTIVITIES - DISCONTINUED OPERATIONS ..............               (2)                 (2)
                                                                                      -----               -----
CASH USED IN INVESTING ACTIVITIES ........................................              (59)                (27)
                                                                                      -----               -----

FINANCING ACTIVITIES:
Net change in short-term debt obligations ................................              350                  --
Net change in cash collateralized letters of credit ......................               --                  17
Deferred debt issuance costs .............................................               (9)                 --
                                                                                      -----               -----
CASH PROVIDED BY FINANCING ACTIVITIES - CONTINUING OPERATIONS ............              341                  17
                                                                                      -----               -----

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .........................              158                 (36)

CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR ........................................................              107                 115
                                                                                      -----               -----
END OF PERIOD ............................................................            $ 265               $  79
                                                                                      =====               =====

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for reorganization items ...................................            $ (31)              $ (30)
                                                                                      =====               =====
</TABLE>

See accompanying Notes to Consolidated Financial Statements.


                                       4
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

1. NATURE OF OPERATIONS AND BANKRUPTCY PROCEEDINGS

Nature of Operations

      Solutia  Inc.,  together  with its  subsidiaries  (referred  to  herein as
"Solutia" or the "Company"),  is a global manufacturer and marketer of a variety
of  high-performance  chemical-based  materials.  Solutia  is a world  leader in
performance  films for  laminated  safety glass and  after-market  applications;
specialties such as water treatment chemicals, heat transfer fluids and aviation
hydraulic  fluids;   and  an  integrated  family  of  nylon  products  including
high-performance polymers and fibers.

      Prior to September 1, 1997,  Solutia was a wholly-owned  subsidiary of the
former  Monsanto  Company (now known as Pharmacia  Corporation,  a  wholly-owned
subsidiary  of Pfizer,  Inc.  ("Pharmacia")).  On September  1, 1997,  Pharmacia
distributed  all of the  outstanding  shares of  common  stock of  Solutia  as a
dividend to Pharmacia  stockholders (the "Solutia Spinoff").  As a result of the
Solutia Spinoff,  on September 1, 1997,  Solutia became an independent  publicly
held  company  and  its  operations  ceased  to be  owned  by  Pharmacia.  A net
deficiency of assets of $113 resulted from the Solutia Spinoff.

Bankruptcy Proceedings

Overview

      On December 17,  2003,  Solutia  Inc.  and its 14 U.S.  subsidiaries  (the
"Debtors") filed voluntary petitions for reorganization  under Chapter 11 of the
U.S.  Bankruptcy Code (the "Chapter 11 Cases") in the U.S.  Bankruptcy Court for
the  Southern  District  of New York (the  "Bankruptcy  Court").  The cases were
consolidated  for the purpose of joint  administration  and were  assigned  case
number 03-17949 (PCB). Solutia's subsidiaries outside the United States were not
included in the Chapter 11 filing.

      The filing was made to  restructure  Solutia's  balance  sheet by reducing
indebtedness  to  appropriate  levels,  to streamline  operations  and to reduce
costs,  in order to allow  Solutia to emerge from  Chapter 11 as a viable  going
concern,  and to obtain relief from the negative financial impact of liabilities
for litigation,  environmental  remediation and certain post-retirement benefits
(the "Legacy  Liabilities")  and liabilities under operating  contracts,  all of
which were assumed at the time of the Solutia Spinoff.  These factors,  combined
with the weakened state of the chemical  manufacturing sector,  general economic
conditions and continuing high, volatile energy and crude oil costs have been an
obstacle to Solutia's financial stability and success.

      Under   Chapter   11,   Solutia  is   operating   its   businesses   as  a
debtor-in-possession   ("DIP")  under  court   protection   from  creditors  and
claimants.  Since the Chapter 11 filing,  orders sufficient to enable Solutia to
conduct  normal  business  activities,  including  the approval of Solutia's DIP
financing,  have been entered by the Bankruptcy Court.  While Solutia is subject
to Chapter 11, all  transactions  not in the ordinary course of business require
the prior approval of the Bankruptcy Court.

      On January 16, 2004,  pursuant to authorization from the Bankruptcy Court,
Solutia entered into a $525 DIP credit facility.  This DIP facility consisted of
(i) a $50 multiple draw term loan; (ii) a $300 single draw term loan,  which was
drawn  in  full  on  the  effective  date  of the  facility;  and  (iii)  a $175
borrowing-based  revolving  credit  facility,  which  includes a $150  letter of
credit subfacility. The DIP credit facility was subsequently amended on March 1,
2004,  July 20, 2004 and June 1, 2005.  A fourth  amendment  was entered into on
March 17, 2006, all with Bankruptcy Court approval. The fourth amendment,  among
other things,  (i)  increased the DIP facility from $525 to $825;  (ii) extended
the term of the DIP  facility  from  June  19,  2006 to March  31,  2007;  (iii)
decreased the interest rate on the term loan  component of the DIP facility from
LIBOR  plus 425 basis  points to LIBOR  plus 350 basis  points;  (iv)  increased
certain  thresholds  allowing  the Debtors to retain more of the  proceeds  from
certain  dispositions


                                       5
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

and other extraordinary receipts; (v) approved the disposition of certain assets
of the Debtors;  (vi) allowed refinancing of, and certain amendments to, Solutia
Europe S.A./N.V.'s  outstanding  Euronotes;  and (vii) amended certain financial
and other  covenants.  The  fourth  amendment  also  contains  a number of other
modifications  required  to  make  the  remaining  terms  of  the  DIP  facility
consistent with the amendments set forth above.

      As a  consequence  of the Chapter 11 filing,  pending  litigation  against
Solutia is  generally  stayed,  and no party may take any action to collect  its
pre-petition  claims except pursuant to order of the Bankruptcy Court.  November
30, 2004 was the last date by which  holders of pre-filing  date claims  against
the Debtors  could file such claims.  Any holder of a claim that was required to
file such  claim by  November  30,  2004,  and did not do so may be barred  from
asserting  such claim against the Debtors and,  accordingly,  may not be able to
participate in any  distribution on account of such claim.  Differences  between
claim amounts  identified  by the Debtors and claims filed by claimants  will be
investigated  and resolved in  connection  with the Debtors'  claims  resolution
process,  and only holders of claims that are ultimately allowed for purposes of
the Chapter 11 case will be entitled to distributions. Solutia has not yet fully
completed its analysis of all the proofs of claim. Since the settlement terms of
allowed claims are subject to a confirmed plan of  reorganization,  the ultimate
distribution with respect to allowed claims is not presently ascertainable.

      On February 14, 2006,  the Debtors filed with the  Bankruptcy  Court their
Joint  Plan  of  Reorganization  (the  "Plan")  and  Disclosure  Statement  (the
"Disclosure  Statement").  The  Plan and  Disclosure  Statement  along  with the
Relationship  Agreement (as defined below) and the Retiree Settlement Agreement,
entered into among Solutia,  the Official Committee of Unsecured  Creditors (the
"Unsecured  Creditors'  Committee") and Official Committee of Retirees appointed
in the Debtors' Chapter 11 Cases (the "Retirees'  Committee"),  Monsanto Company
("Monsanto"),  certain  retirees and the other  parties  thereto  (the  "Retiree
Settlement"),   set  forth  the  terms  of  a  global  settlement  (the  "Global
Settlement") between Solutia, the Unsecured Creditors' Committee,  the Retirees'
Committee,  Monsanto and Pharmacia.  The Global  Settlement  provides for, among
other things,  the  reallocation  of certain Legacy  Liabilities  among Solutia,
Monsanto and Pharmacia and the treatment  various  constituencies in the Chapter
11 Cases  will  receive  under the Plan.  The  Disclosure  Statement  contains a
description of the events that led up to the Debtors'  bankruptcy  filings,  the
actions the Debtors have taken to improve  their  financial  situation  while in
bankruptcy  and  a  current   description  of  the  Debtors'   businesses.   The
reallocation  of  liabilities  between  Solutia  and  Monsanto is set forth in a
Relationship Agreement (the "Relationship Agreement") to be entered into between
Solutia and Monsanto upon  confirmation of the Plan. The Relationship  Agreement
was filed with the  Bankruptcy  Court on February  14, 2006 as an exhibit to the
Plan.

      Solutia also issued a press  release on February 14, 2006  announcing  the
filing of the Plan and Disclosure Statement with the Bankruptcy Court. The press
release was furnished to the  Securities  and Exchange  Commission in a Form 8-K
filed on February 14, 2006. The Plan,  including the Relationship  Agreement and
Retiree  Settlement  Agreement,  and the Disclosure  Statement were furnished as
exhibits to a Form 8-K filed on February 21, 2006.

      The Plan,  which  incorporates  the  Relationship  Agreement  and  Retiree
Settlement,  is subject to approval by the Bankruptcy  Court in accordance  with
the Bankruptcy Code as well as various other conditions and contingencies,  some
of which are not within the control of  Solutia,  and  therefore  are subject to
change and are not binding  upon any party.  The  Disclosure  Statement  remains
subject to change  pending a hearing in the  Bankruptcy  Court to  consider  the
legal adequacy of the  Disclosure  Statement.  Once the Disclosure  Statement is
approved by the Bankruptcy  Court, it will be distributed to all  constituencies
entitled to vote on the Plan. Solutia cannot provide any assurance that any plan
of  reorganization   ultimately  confirmed  by  the  Bankruptcy  Court,  or  any
disclosure  statement  ultimately  approved  by the  Bankruptcy  Court,  will be
consistent with the terms of the Plan and Disclosure  Statement.  The previously
scheduled Disclosure Statement hearing has been cancelled and, based on comments
from the Bankruptcy Court,  Solutia anticipates that a hearing on the Disclosure
Statement will not take place until after the Bankruptcy Court makes a ruling in
the JPM Proceeding (as described in Note 9).

      If confirmed,  the Plan will provide Solutia with significant  relief from
the Legacy  Liabilities  Solutia was required to assume in the Solutia  Spinoff.
These Legacy Liabilities included:  (1) retiree medical,  retiree life


                                       6
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

insurance and retiree disability benefits ("Retiree Welfare Benefits") for those
individuals  who  retired  or  became  disabled  prior  to the  Solutia  Spinoff
("Pre-Spin Retirees"); (2) environmental remediation costs related to activities
of the  chemicals  business  of  Pharmacia  that  occurred  prior to the Solutia
Spinoff;  and (3) toxic tort  litigation  costs  relating to  chemical  exposure
associated  with the  activities of Pharmacia that occurred prior to the Solutia
Spinoff.

      Under the Plan,  Solutia would emerge from  bankruptcy  as an  independent
publicly held company ("reorganized Solutia"). The Plan provides for $250 of new
investment in reorganized Solutia.  This new investment will be in the form of a
rights  offering  to  certain  unsecured  creditors,   who  will  be  given  the
opportunity to purchase 22.7 percent of the common stock in reorganized Solutia.
Monsanto will backstop the rights  offering,  meaning it will commit to purchase
up to the entire  $250 of stock,  to the extent  the stock is not  purchased  by
eligible unsecured creditors in the rights offering.

      Of this  $250  new  investment,  $175  would be set  aside in a  Voluntary
Employees'  Beneficiary  Association  ("VEBA") Retiree Trust to fund the Retiree
Welfare  Benefits for those  Pre-Spin  Retirees who receive these  benefits from
Solutia,  and $50  would  be used to fund  reorganized  Solutia's  environmental
remediation commitments in Anniston,  Alabama and Sauget, Illinois, as described
below.  The remaining $25 would be available for reorganized  Solutia to pay any
of the Legacy Liabilities that it is retaining.

      Under  the  Plan and  Relationship  Agreement,  as  between  Monsanto  and
Solutia, Monsanto would be responsible, with certain exceptions, for all current
and future  tort  litigation  costs  arising  from the  conduct  of  Pharmacia's
chemical  business prior to the Solutia Spinoff,  including  litigation  arising
from exposure to  polychlorinated  biphenyls  ("PCBs") and other  chemicals.  In
addition,  Monsanto  would accept  financial  responsibility  for  environmental
remediation  obligations  at all sites for which  Solutia was required to assume
responsibility  as part of the  Solutia  Spinoff  but which were never  owned or
operated by Solutia.  These  include more than 50 sites with active  remediation
projects and  approximately  200  additional  known sites and off-site  disposal
facilities,  as well as  sites  that  have  not yet  been  identified.  Finally,
Monsanto  would  share  financial   responsibility  with  Solutia  for  off-site
remediation  costs  in  Anniston,  Alabama  and  Sauget,  Illinois.  Under  this
cost-sharing  mechanism,  the first $50 would be paid from the  proceeds  of the
rights  offering (as  described  above),  Monsanto  would pay the next $50 (less
amounts it has paid for  remediation at these sites during the Chapter 11 Cases,
which totaled over $30 as of January 31, 2006), Solutia would be responsible for
the next $325 in costs,  and any further costs would be shared  equally  between
Solutia and  Monsanto.  Under  certain  circumstances,  Solutia would be able to
defer paying a portion of its shared responsibility with respect to the Anniston
and  Sauget  sites  in  excess  of $30 in any  calendar  year,  up to $25 in the
aggregate.  Any  deferred  amounts  would be paid by  Monsanto,  but  subject to
repayment  by  Solutia  at a later  date.  The Plan and  Relationship  Agreement
provide that Solutia will continue to pay its annual  installment  and education
fund  obligations  relating  to the August 2003  Anniston  PCBs  settlement  and
education fund  obligations  relating to the Anniston Partial Consent Decree (as
described in Note 9).

      The Plan incorporates the terms of the Retiree Settlement Agreement, which
was negotiated with the Retirees'  Committee,  which represents more than 23,000
former  employees of Pharmacia  and Solutia and their  dependents.  Although the
Retiree Settlement Agreement includes benefit  modifications,  the Plan, through
the $175 from the rights  offering  that will be  allocated  to the VEBA  Trust,
provides  significant  current  funding  which will  greatly  improve  Solutia's
ability to meet these  benefit  obligations  going  forward.  Under the  Retiree
Settlement  Agreement,  retirees will retain  certain  company-provided  medical
benefits,  although the cost to retirees for such benefits will  increase.  Many
retirees will retain their  company-provided  life insurance benefits,  although
some will experience a reduction in the benefit provided. The Retiree Settlement
Agreement  also  maintains   Solutia's  rights  according  to  a  separate  2001
settlement  and a  post-settlement  retiree  medical  plan,  under which Solutia
intends  to make  certain  changes on or after the  effective  date of the Plan,
including  the  elimination  of  company-provided  medical  benefits for certain
groups of retirees that also are eligible for Medicare coverage.

      In consideration of the benefit  modifications  being accepted by retirees
pursuant to the Retiree  Settlement  Agreement,  the Plan  contemplates that the
retirees would receive an allowed unsecured claim in the aggregate amount of $35
in Solutia's  bankruptcy case. The common stock in reorganized  Solutia received
on account of this


                                       7
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

claim  would be  deposited  in the VEBA  Trust and used to pay  Retiree  Welfare
Benefits.  This  deposit  would  be in  addition  to  the  $175  that  would  be
contributed to the VEBA Trust from the proceeds of the rights offering. The VEBA
Trust would be a bankruptcy-remote entity and would be managed by an independent
trustee.

      The Plan  also  provides  for the  assumption  and  extension  of  certain
commercial and operating agreements between Solutia and Monsanto. The Plan seeks
a  release  for  Monsanto  and  Pharmacia  from  certain   pre-Solutia   Spinoff
liabilities, including those related to Retiree Welfare Benefits.

      In the Disclosure Statement,  Solutia estimated that the amount of allowed
general  unsecured claims in its Chapter 11 case will be  approximately  $800 to
$1,000, the enterprise value of reorganized Solutia will be approximately $2,000
to $2,300 and the  reorganization  equity value of  reorganized  Solutia will be
approximately  $700 to $1,100.  However,  these  amounts are estimates and it is
possible that the actual general  unsecured  claims pool,  enterprise  value and
equity value of reorganized Solutia will be outside of these estimated ranges.

      The Plan  contains  details  regarding  how the  claims  of each  class of
creditors and interest holders will be treated.  The Plan provides for repayment
of  Solutia's  secured  debt  and  debtor-in-possession  financing  from an exit
financing package to be arranged by Solutia and does not require  termination of
Solutia's pension plans. In consideration for its contributions  under the Plan,
resolution  of its claim in the Chapter 11 Cases and the  settlement  of ongoing
and potential  litigation,  among other things,  Monsanto  would receive  common
stock in reorganized Solutia. If Monsanto is required to make the full new money
investment under the rights offering,  Monsanto's equity interest in reorganized
Solutia is  expected  to range  from  approximately  45  percent to 49  percent,
depending on the actual amount of allowed general unsecured claims.  The holders
of allowed  general  unsecured  claims would receive the remainder of the common
stock in reorganized Solutia, as described below.

      Based  on the  mid-point  of  the  equity  value  of  reorganized  Solutia
described  above,  the  Plan  provides  for  distributions  of  common  stock in
reorganized  Solutia  to  holders  of  allowed  unsecured  claims  in an  amount
estimated at between 48 percent and 56 percent of their allowed claims. However,
this is only an  estimated  range of  recoveries.  Solutia  is unable to predict
precisely  what  recovery  the Plan will  provide to these  holders of unsecured
claims  or how  any  potential  modifications  to the  Plan  will  impact  these
recoveries.  Therefore, actual recoveries may be materially different from these
estimates.  Furthermore,  the equity  interests  received  by holders of allowed
unsecured  claims will be subject to dilution as a result of the incentive stock
option plan that is expected to be adopted by Solutia  pursuant to the Plan. The
ultimate ownership  interests in reorganized  Solutia held by Monsanto and other
holders of unsecured  claims will depend on, among other factors,  the amount of
allowed  unsecured  claims  in the  bankruptcy  case and the  number  of  rights
exercised by unsecured creditors in the rights offering.

      The Plan does not provide for  distributions  to the holders of  Solutia's
existing equity.  Under the Plan,  Solutia's existing shares of common stock, as
well as options and  warrants to purchase its common  stock,  would be cancelled
and  holders of  Solutia's  common  stock,  including  options  and  warrants to
purchase  Solutia's common stock,  would receive no consideration for that stock
or those  options  and  warrants.  Although  the Plan does not  provide  for any
distributions to holders of Solutia's existing equity, the Official Committee of
Equity  Security  Holders in  Solutia's  bankruptcy  case has filed a  complaint
against Pharmacia and Monsanto, and an objection to the proofs of claim filed by
Monsanto  and  Pharmacia  in  Solutia's  bankruptcy,  arguing  that  holders  of
Solutia's  existing  equity are entitled to distribution on the basis of several
legal theories.

      In order to exit  Chapter 11,  Solutia  must propose and confirm a plan of
reorganization  that satisfies the requirements of the U.S.  Bankruptcy Code. As
provided by the U.S. Bankruptcy Code, Solutia had the exclusive right to propose
a plan of reorganization  for 120 days following the Chapter 11 filing date. The
Bankruptcy Court has subsequently approved several extensions of the exclusivity
period, the most recent of which is set to expire on October 10, 2006.  Although
Solutia expects to receive  further  extensions of the  exclusivity  period,  no
assurance can be given that any such future  extension  requests will be granted
by the Bankruptcy  Court.  Moreover,  although  Solutia has filed the Plan which
provides for Solutia's  emergence from bankruptcy as a going concern,  there can
be


                                       8
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

no  assurance  that the  Plan,  or any  other  plan of  reorganization,  will be
confirmed  by the  Bankruptcy  Court or that any such plan  will be  implemented
successfully.

Basis of Presentation

      These financial  statements should be read in conjunction with the audited
consolidated financial statements and notes to consolidated financial statements
included in Solutia's 2005 Annual Report on Form 10-K ("2005 Form 10-K"),  filed
with the Securities and Exchange Commission ("SEC") on March 15, 2006.

      The  consolidated  financial  statements  have been prepared in accordance
with Statement of Position 90-7 ("SOP 90-7"), Financial Reporting by Entities in
Reorganization  Under the Bankruptcy  Code, and on a going concern basis,  which
assumes the continuity of operations and reflects the  realization of assets and
satisfaction of liabilities in the ordinary course of business.  Continuation of
the Company as a going concern is contingent upon, among other things, Solutia's
ability (i) to comply with the terms and conditions of its DIP  financing;  (ii)
to obtain  confirmation of a plan of  reorganization  under the U.S.  Bankruptcy
Code; (iii) to return to  profitability;  (iv) to generate  sufficient cash flow
from  operations;  and (v) to obtain  financing  sources  to meet the  Company's
future obligations. These matters create uncertainty about the Company's ability
to continue as a going concern.  The  consolidated  financial  statements do not
reflect any adjustments  relating to the  recoverability  and  classification of
recorded asset amounts or the amounts and  classification  of  liabilities  that
might result from the outcome of these uncertainties.  Additionally, a confirmed
plan  of  reorganization   could  materially  change  amounts  reported  in  the
consolidated  financial statements,  which do not give effect to all adjustments
of the  carrying  value  of  assets  and  liabilities  that are  necessary  as a
consequence of reorganization under Chapter 11.

      The accompanying  unaudited  consolidated financial statements reflect all
adjustments that, in the opinion of management,  are necessary to present fairly
the financial position, results of operations,  comprehensive income (loss), and
cash flows for the interim periods  reported.  Such adjustments are of a normal,
recurring nature. In addition,  footnote  disclosures which would  substantially
duplicate the disclosures in the audited consolidated  financial statements have
been omitted in the accompanying  unaudited  consolidated  financial statements.
The results of  operations  for the three and six months ended June 30, 2006 are
not necessarily indicative of the results to be expected for the full year.

      Certain  reclassifications of prior year's financial information have been
made to conform to the 2006 presentation.

Condensed Consolidating Financial Statements

      Condensed  consolidating financial statements for Solutia and subsidiaries
in reorganization and subsidiaries not in reorganization as of June 30, 2006 and
December 31, 2005, and for the three and six months ended June 30, 2006 and June
30, 2005 are presented below. These condensed consolidating financial statements
include investments in subsidiaries carried under the equity method.


                                       9
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

                CONDENSED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2006

<TABLE>
<CAPTION>
                                                                SOLUTIA AND       SUBSIDIARIES                        SOLUTIA AND
                                                              SUBSIDIARIES IN        NOT IN                          SUBSIDIARIES
                                                               REORGANIZATION    REORGANIZATION     ELIMINATIONS     CONSOLIDATED
                                                               --------------    --------------     ------------     ------------
<S>                                                                 <C>               <C>              <C>               <C>
ASSETS
Current assets ...............................................      $   656           $   512          $   (90)          $ 1,078
Property, plant and equipment, net ...........................          658               114               --               772
Investment in subsidiaries and affiliates ....................          465               216             (468)              213
Goodwill and identified intangible assets, net ...............          100                21               --               121
Other assets .................................................           59                46               --               105
                                                                    ------------------------------------------------------------
   TOTAL ASSETS ..............................................      $ 1,938           $   909          $  (558)          $ 2,289
                                                                    ============================================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities ..........................................      $ 1,098           $   253          $  (179)          $ 1,172
Long-term debt ...............................................           --               210               --               210
Other liabilities ............................................          193                67               --               260
                                                                    ------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ..................        1,291               530             (179)            1,642

LIABILITIES SUBJECT TO COMPROMISE ............................        2,084                --               --             2,084

TOTAL SHAREHOLDERS' EQUITY (DEFICIT) .........................       (1,437)              379             (379)           (1,437)
                                                                    ------------------------------------------------------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) .........      $ 1,938           $   909          $  (558)          $ 2,289
                                                                    ============================================================
</TABLE>

     CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2005

<TABLE>
<CAPTION>
                                                                SOLUTIA AND       SUBSIDIARIES                        SOLUTIA AND
                                                              SUBSIDIARIES IN        NOT IN                          SUBSIDIARIES
                                                               REORGANIZATION    REORGANIZATION     ELIMINATIONS     CONSOLIDATED
                                                               --------------    --------------     ------------     ------------
<S>                                                                 <C>               <C>              <C>               <C>
ASSETS
Current assets ...............................................      $   447           $   430          $   (72)          $   805
Property, plant and equipment, net ...........................          674                96               --               770
Investment in subsidiaries and affiliates ....................          388               213             (396)              205
Goodwill and identified intangible assets, net ...............          100                 4               --               104
Other assets .................................................           62                38               --               100
                                                                    ------------------------------------------------------------
   TOTAL ASSETS ..............................................      $ 1,671           $   781          $  (468)          $ 1,984
                                                                    ============================================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities ..........................................      $   748           $   176          $  (157)          $   767
Long-term debt ...............................................           --               247               --               247
Other liabilities ............................................          201                47               --               248
                                                                    ------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ..................          949               470             (157)            1,262

LIABILITIES SUBJECT TO COMPROMISE ............................        2,176                --               --             2,176

TOTAL SHAREHOLDERS' EQUITY (DEFICIT) .........................       (1,454)              311             (311)           (1,454)
                                                                    ------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
     (DEFICIT) ...............................................      $ 1,671           $   781          $  (468)          $ 1,984
                                                                    ============================================================
</TABLE>


                                       10
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

             CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE
                        THREE MONTHS ENDED JUNE 30, 2006

<TABLE>
<CAPTION>
                                                         SOLUTIA AND       SUBSIDIARIES                      SOLUTIA AND
                                                      SUBSIDIARIES IN         NOT IN                         SUBSIDIARIES
                                                       REORGANIZATION     REORGANIZATION    ELIMINATIONS     CONSOLIDATED
                                                       --------------     --------------    ------------     ------------
<S>                                                         <C>               <C>               <C>               <C>
NET SALES ........................................          $ 633             $ 248             $(116)            $ 765
Cost of goods sold ...............................            546               212              (123)              635
                                                            -----------------------------------------------------------
GROSS PROFIT .....................................             87                36                 7               130

Marketing, administrative and technological
expenses .........................................             56                14                --                70
Amortization expense .............................              1                --                --                 1
                                                            -----------------------------------------------------------
OPERATING INCOME .................................             30                22                 7                59

Equity earnings (loss) from affiliates ...........             27                (1)              (15)               11
Interest expense .................................            (21)               (6)               --               (27)
Other income, net ................................             10                 1                (7)                4
Reorganization items, net ........................            (18)               --                --               (18)
                                                            -----------------------------------------------------------
INCOME BEFORE INCOME TAXES .......................             28                16               (15)               29
Income tax expense (benefit) .....................             (1)                5                 1                 5
                                                            -----------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS ................             29                11               (16)               24
Income (loss) from discontinued
operations, net of tax ...........................             (1)                5                --                 4
                                                            -----------------------------------------------------------
NET INCOME .......................................          $  28             $  16             $ (16)            $  28
                                                            ===========================================================
</TABLE>


                                       11
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

             CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE
                         SIX MONTHS ENDED JUNE 30, 2006

<TABLE>
<CAPTION>
                                                        SOLUTIA AND        SUBSIDIARIES                      SOLUTIA AND
                                                      SUBSIDIARIES IN         NOT IN                         SUBSIDIARIES
                                                       REORGANIZATION     REORGANIZATION   ELIMINATIONS      CONSOLIDATED
                                                       --------------     --------------   ------------      ------------
<S>                                                        <C>                <C>              <C>              <C>
NET SALES ......................................           $ 1,190            $ 475            $(222)           $ 1,443
Cost of goods sold .............................             1,063              411             (235)             1,239
                                                           ------------------------------------------------------------
GROSS PROFIT ...................................               127               64               13                204

Marketing, administrative and technological
expenses .......................................               108               28               --                136
Amortization expense ...........................                 1               --               --                  1
                                                           ------------------------------------------------------------
OPERATING INCOME ...............................                18               36               13                 67

Equity earnings (loss) from affiliates .........                52               (2)             (29)                21
Interest expense ...............................               (39)             (11)              --                (50)
Other income, net ..............................                17                3              (13)                 7
Loss on debt modification ......................                (8)              --               --                 (8)
Reorganization items, net ......................               (32)              --               --                (32)
                                                           ------------------------------------------------------------
INCOME BEFORE INCOME TAXES .....................                 8               26              (29)                 5
Income tax expense .............................                 1                6               --                  7
                                                           ------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS .......                 7               20              (29)                (2)
Income (loss) from discontinued
operations, net of tax .........................                (1)               9               --                  8
                                                           ------------------------------------------------------------
NET INCOME .....................................           $     6            $  29            $ (29)            $    6
                                                           ============================================================
</TABLE>


                                       12
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

             CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE
                        THREE MONTHS ENDED JUNE 30, 2005

<TABLE>
<CAPTION>
                                                                 SOLUTIA AND       SUBSIDIARIES                       SOLUTIA AND
                                                               SUBSIDIARIES IN        NOT IN                          SUBSIDIARIES
                                                                REORGANIZATION    REORGANIZATION    ELIMINATIONS      CONSOLIDATED
                                                                --------------    --------------    ------------      ------------
<S>                                                                 <C>                <C>              <C>              <C>
NET SALES ...............................................           $   603            $ 227            $(100)           $   730
Cost of goods sold ......................................               541              193             (105)               629
                                                                    ------------------------------------------------------------
GROSS PROFIT ............................................                62               34                5                101

Marketing, administrative and technological
expenses ................................................                54               15               --                 69
                                                                    ------------------------------------------------------------
OPERATING INCOME ........................................                 8               19                5                 32

Equity earnings (loss) from affiliates ..................                32               (1)             (10)                21
Interest expense ........................................               (16)              (6)              --                (22)
Other income, net .......................................                 5                5               (6)                 4
Reorganization items, net ...............................               (12)              (3)              --                (15)
                                                                    ------------------------------------------------------------
INCOME BEFORE INCOME TAXES ..............................                17               14              (11)                20
Income tax expense ......................................                 2                5               --                  7
                                                                    ------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS .......................                15                9              (11)                13
Income (loss) from discontinued
operations, net of tax ..................................                (1)               2               --                  1
                                                                    ------------------------------------------------------------
NET INCOME ..............................................                14               11              (11)                14
                                                                    ============================================================
</TABLE>

             CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE
                         SIX MONTHS ENDED JUNE 30, 2005

<TABLE>
<CAPTION>
                                                                 SOLUTIA AND       SUBSIDIARIES                       SOLUTIA AND
                                                               SUBSIDIARIES IN        NOT IN                          SUBSIDIARIES
                                                                REORGANIZATION    REORGANIZATION    ELIMINATIONS      CONSOLIDATED
                                                                --------------    --------------    ------------      ------------
<S>                                                                 <C>                <C>              <C>              <C>
NET SALES ...............................................           $ 1,195            $ 452            $(203)           $ 1,444
Cost of goods sold ......................................             1,077              381             (217)             1,241
                                                                    ------------------------------------------------------------
GROSS PROFIT ............................................               118               71               14                203

Marketing, administrative and technological
expenses ................................................               105               29               --                134
                                                                    ------------------------------------------------------------
OPERATING INCOME ........................................                13               42               14                 69

Equity earnings (loss) from affiliates ..................                64               (2)             (27)                35
Interest expense ........................................               (32)             (12)              --                (44)
Other income, net .......................................                10                7              (12)                 5
Reorganization items, net ...............................               (17)              (3)              --                (20)
                                                                    ------------------------------------------------------------
INCOME BEFORE INCOME TAXES ..............................                38               32              (25)                45
Income tax expense ......................................                 2               11               --                 13
                                                                    ------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS .......................                36               21              (25)                32
Income (loss) from discontinued
operations, net of tax ..................................                (1)               4               --                  3
                                                                    ------------------------------------------------------------
NET INCOME ..............................................                35               25              (25)                35
                                                                    ============================================================
</TABLE>


                                       13
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

             CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE
                         SIX MONTHS ENDED JUNE 30, 2006

<TABLE>
<CAPTION>
                                                                     SOLUTIA AND       SUBSIDIARIES                     SOLUTIA AND
                                                                   SUBSIDIARIES IN        NOT IN                        SUBSIDIARIES
                                                                    REORGANIZATION    REORGANIZATION    ELIMINATIONS    CONSOLIDATED
                                                                    --------------    --------------    ------------    ------------
<S>                                                                     <C>               <C>              <C>            <C>
Net Cash Provided by (Used in) Operating
Activities ......................................................       $  (143)          $    19          $    --        $  (124)
Net Cash Used in Investing Activities ...........................           (52)               (7)              --            (59)
Net Cash Provided by Financing Activities .......................           333                 8               --            341
                                                                        ---------------------------------------------------------
Net Increase in Cash and Cash Equivalents .......................           138                20               --            158

Cash and Cash Equivalents:
   Beginning of year ............................................            18                89               --            107
                                                                        ---------------------------------------------------------
   End of period ................................................       $   156           $   109          $    --        $   265
                                                                        =========================================================
</TABLE>

             CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE
                         SIX MONTHS ENDED JUNE 30, 2005

<TABLE>
<CAPTION>
                                                                     SOLUTIA AND       SUBSIDIARIES                     SOLUTIA AND
                                                                   SUBSIDIARIES IN        NOT IN                        SUBSIDIARIES
                                                                    REORGANIZATION    REORGANIZATION    ELIMINATIONS    CONSOLIDATED
                                                                    --------------    --------------    ------------    ------------
<S>                                                                     <C>               <C>              <C>           <C>
Net Cash Provided by (Used in) Operating
Activities ......................................................       $   (41)          $    15          $    --       $   (26)
Net Cash Used in Investing Activities ...........................           (21)               (6)              --           (27)
Net Cash Provided by (Used in) Financing
Activities ......................................................            24                (7)              --            17
                                                                        ---------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents .....................................................           (38)                2               --           (36)

Cash and Cash Equivalents:
   Beginning of year ............................................            50                65               --           115
                                                                        ---------------------------------------------------------
   End of period ................................................       $    12           $    67          $    --       $    79
                                                                        =========================================================
</TABLE>

Recently Issued Accounting Pronouncements

      In July 2006, the Financial  Accounting  Standards  Board ("FASB")  issued
FASB  Interpretation  No. 48, Accounting for Uncertainty in Income Taxes,  ("FIN
48"). FIN 48 creates a single model to address  uncertainty in tax positions and
clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax  position is required  to meet before  being  recognized  in the
financial   statements.   FIN  48  also  provides   guidance  on  derecognition,
measurement,  classification,  interest  and  penalties,  accounting  in interim
periods,  disclosure and transition. In addition, FIN 48 eliminates income taxes
from the scope of Statement of Financial  Accounting  Standards  ("SFAS") No. 5,
Accounting for Contingencies.

      FIN 48 is effective  for fiscal years  beginning  after  December 15, 2006
(i.e.,  effective January 1, 2007 for Solutia).  Differences between the amounts
recognized in the statements of financial  position prior to the adoption of FIN
48 and the amounts reported after adoption will be accounted for as a cumulative
effect adjustment  recorded to the beginning balance of retained  earnings.  The
cumulative  effect adjustment would not apply to those items that would not have
been  recognized  in  earnings,  such as the  effect of  adopting  FIN 48 on tax
positions related to business combinations.  Solutia is currently evaluating the
impact of FIN 48 on the consolidated financial statements.


                                       14
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

2. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET

Liabilities Subject to Compromise

      Under  Chapter 11 of the U.S.  Bankruptcy  Code,  certain  claims  against
Solutia in existence  prior to the filing of the  petitions for relief under the
federal bankruptcy laws are stayed while Solutia continues  business  operations
as  a  debtor-in-possession.   These  estimated  claims  are  reflected  in  the
Consolidated   Statement  of  Financial  Position  as  Liabilities   Subject  to
Compromise  as of June 30, 2006 and December 31, 2005 and are  summarized in the
table below. Such claims remain subject to future  adjustments.  Adjustments may
result  from  actions of the  bankruptcy  court,  negotiations  with  claimants,
rejection or assumption of executory  contracts,  determination  of value of any
collateral securing claims, reconciliation of proofs of claim or other events.

      Solutia  has  received  approval  from  the  Bankruptcy  Court  to  pay or
otherwise honor certain of its pre-petition  obligations,  including (i) certain
pre-petition  compensation  to  employees  and  employee-equivalent  independent
contractors;  (ii)  business  expenses of  employees;  (iii)  obligations  under
employee benefit plans; (iv) employee payroll  deductions and withholdings;  (v)
costs and expenses incident to the foregoing payments (including payroll-related
taxes and processing costs);  (vi) certain  pre-petition  workers'  compensation
claims, premiums and related expenses; (vii) certain pre-petition trust fund and
franchise taxes;  (viii)  pre-petition  claims of certain  contractors,  freight
carriers,  processors,  customs  brokers  and  related  parties;  (ix)  customer
accommodation  programs;  and (x) pre-petition claims of critical vendors in the
ordinary course of business.  Accordingly,  these  pre-petition  items have been
excluded from Liabilities Subject to Compromise as of June 30, 2006 and December
31, 2005, as applicable.

      The amounts subject to compromise consisted of the following items:

<TABLE>
<CAPTION>
                                                                        JUNE 30,   DECEMBER 31,
                                                                          2006         2005
                                                                          ----         ----
<S>                                                                      <C>         <C>
      Postretirement benefits (a) .................................      $ 1,028     $ 1,098
      Litigation reserves (b) .....................................          116         136
      Accounts payable (c) ........................................          116         118
      Environmental reserves (d) ..................................           81          82
      Other miscellaneous liabilities .............................           75          74

      6.72% debentures due 2037(e) ................................          150         150
      7.375% debentures due 2027(e) ...............................          300         300
      11.25% notes due 2009 (f) ...................................          223         223
      Other (g) ...................................................           43          43
                                                                         -------     -------
                                                                             716         716
      Unamortized debt discount and debt issuance costs ...........          (48)        (48)
                                                                         -------     -------
           TOTAL DEBT SUBJECT TO COMPROMISE .......................          668         668
                                                                         -------     -------
      TOTAL LIABILITIES SUBJECT TO COMPROMISE .....................      $ 2,084     $ 2,176
                                                                         =======     =======
</TABLE>

      (a)   Postretirement  benefits  include  Solutia's  domestic (i) qualified
            pension  plan  liabilities  of $462 and $501 as of June 30, 2006 and
            December 31, 2005,  respectively;  (ii)  non-qualified  pension plan
            liabilities  of $19 as of both June 30, 2006 and  December 31, 2005;
            and (iii) other postretirement benefits liabilities of $547 and $578
            as of June 30, 2006 and December 31, 2005, respectively. Pursuant to
            a bankruptcy  court order,  Solutia  made  payments  with respect to
            other  postretirement  obligations of  approximately  $47 in the six
            months ended June 30, 2006.  Solutia also made $43 of  contributions
            to its qualified  pension plan pursuant to IRS funding  requirements
            in the six months ended June 30, 2006.

      (b)   An  automatic  stay has been  imposed  against the  commencement  or
            continuation  of legal  proceedings  against  Solutia outside of the
            bankruptcy court process. Consequently,  Solutia's accrued liability
            with respect to pre-petition  legal  proceedings has been classified
            as subject to  compromise as of June 30, 2006 and December 31, 2005.
            During  the  second   quarter  2006  Solutia   transferred   out  of
            liabilities subject to compromise $20 of litigation reserves related
            to  the  PENNDOT  litigation  matter  that  were  no  longer  deemed
            uncertain  as a result  of a  favorable  court  ruling  (as  further
            described in Note 9).


                                       15
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

      (c)   Pursuant  to  bankruptcy  court  orders,   Solutia  settled  certain
            accounts payable liabilities subject to compromise in the six months
            ended June 30, 2006.

      (d)   Represents  remediation  obligations related primarily to properties
            that are not  owned or  operated  by  Solutia,  including  non-owned
            properties  adjacent  to  plant  sites  and  certain  owned  offsite
            disposal  locations.  See Note 9 for further disclosure with respect
            to ongoing legal proceedings  concerning  environmental  liabilities
            subject to compromise.

      (e)   While  operating  during  the  Chapter  11  bankruptcy  proceedings,
            Solutia has ceased  recording  interest on its 6.72%  debentures due
            2037 and its 7.375%  debentures  due 2027. The amount of contractual
            interest  expense not recorded in the six months ended June 30, 2006
            was approximately $16.

      (f)   Pursuant  to a  bankruptcy  court  order,  Solutia  is  required  to
            continue  payments of the  contractual  interest on its 11.25% notes
            due 2009 as a form of adequate  protection under the U.S. Bankruptcy
            Code;  provided,  however,  that  Solutia's  official  committee  of
            unsecured  creditors (the  "Creditors'  Committee") has the right at
            any time, and Solutia has the right at any time after the payment of
            the  contractual  interest  made in July 2005,  to seek to terminate
            Solutia's  obligation  to  continue  making the  interest  payments.
            Solutia or the Creditors' Committee could successfully terminate all
            or part of  Solutia's  interest  payment  obligations  only  after a
            showing   that  the   noteholders   are  not  entitled  to  adequate
            protection,  which would depend, among other things, on the value of
            the  collateral  securing  the notes as of December  17,  2003,  and
            whether  that value is  decreasing  during  the course of  Solutia's
            bankruptcy  case.  The  amount  of  contractual  interest  paid with
            respect to these notes was approximately $13 in the six months ended
            June 30, 2006, and the accrued  interest  related to these notes was
            included  in  Accrued  Liabilities  classified  as  not  subject  to
            compromise as of June 30, 2006 and December 31, 2005.

      (g)   Represents the debt obligation  incurred upon the  consolidation  of
            the  assets  and   liabilities  of  a  synthetic   lease   structure
            consolidated as part of the adoption of FASB  Interpretation No. 46,
            Consolidation  of  Variable   Interest   Entities.   The  obligation
            represents the synthetic lease arrangement with respect to Solutia's
            headquarters building.

Reorganization Items, Net

      Reorganization  items,  net  are  presented  separately  in the  Condensed
Consolidated  Statement of Operations  and represent  items of income,  expense,
gain or  loss  that  are  realized  or  incurred  by  Solutia  because  it is in
reorganization under Chapter 11 of the U.S. Bankruptcy Code.

      Reorganization items, net consisted of the following items:

<TABLE>
<CAPTION>
                                                                       THREE MONTHS               SIX MONTHS
                                                                      ENDED JUNE 30,            ENDED JUNE 30,
                                                                      --------------            --------------

                                                                   2006          2005         2006          2005
                                                                   ----          ----         ----          ----
<S>                                                                <C>           <C>          <C>          <C>
Professional fees (a) ......................................       $(15)         $(13)        $(27)        $(24)
Severance and employee retention costs (b) .................         (1)           (2)          (3)          (8)
Adjustments to allowed claim amounts (c) ...................         --            --            2          (11)
Settlements of pre-petition claims (d) .....................         --            --           --           29
Other ......................................................         (2)           --           (4)          (6)
                                                                   ----          ----         ----         ----
TOTAL REORGANIZATION ITEMS, NET ............................       $(18)         $(15)        $(32)        $(20)
                                                                   ====          ====         ====         ====
</TABLE>

(a)   Professional   fees  for   services   provided  by  debtor  and   creditor
      professionals directly related to Solutia's reorganization proceedings.

(b)   Expense  provisions  related  to (i)  employee  severance  costs  incurred
      directly  as part of the  Chapter  11  reorganization  process  and (ii) a
      retention plan for certain  Solutia  employees  approved by the bankruptcy
      court.

(c)   Adjustments to record certain  pre-petition claims at estimated amounts of
      the allowed claims.

(d)   Represents  the  difference  between  the  settlement  amount  of  certain
      pre-petition   obligations  and  the  corresponding   amounts   previously
      recorded.


                                       16
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

3.  STOCK OPTION PLANS

      Solutia  has two  stock-based  incentive  plans  under  which  awards  are
available  for  grants  to  officers  and  employees;   the  Solutia  Inc.  2000
Stock-Based  Incentive Plan ("2000 Plan") and the Solutia Inc. 1997  Stock-Based
Incentive Plan ("1997 Plan").  The 2000 Plan  authorizes up to 5,400,000  shares
and the 1997 Plan up to 7,800,000  shares of Solutia  common stock for grants of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock awards and bonus stock awards. The shares used may be newly issued shares,
treasury  shares or a  combination.  Under both plans,  the exercise  price of a
stock  option must be no less than the fair  market  value of  Solutia's  common
stock on the option grant date. Additionally, the plans provide that the term of
any  stock  option  granted  may  not  exceed  10  years.   At  June  30,  2006,
approximately  2,108,795 shares from the 2000 Plan and 1,954,164 shares from the
1997 Plan remained available for grants.

      During the six months  ended June 30,  2006,  no options  were  granted to
current  executive  officers and other senior executives as a group, or to other
employees.  Total shares  covered by options  granted under the plans to current
executive officers and other senior executives as a group totaled 3,011,000, and
those to other employees totaled 10,016,592,  through June 30, 2006. The options
granted  to  Solutia's  executive  officers  and  other  senior  executives  are
primarily  performance  options  that  become  exercisable  upon the  earlier of
achievement  of specified  share price targets or the ninth  anniversary  of the
option  grant.  The  options  granted  to the  other  management  employees  are
time-based.  They generally become  exercisable in thirds,  one-third on each of
the first three anniversaries of the option grant date.

      The  Solutia  Inc.   Non-Employee   Director  Compensation  Plan  provides
incentives to non-employee  members of Solutia's  board of directors.  This plan
authorizes up to 400,000  shares for grants of  non-qualified  stock options and
for  grants of  deferred  shares in  payment  of all or a portion  of the annual
retainer for the non-employee directors. Only treasury shares may be used. Under
this plan,  the  exercise  price of a stock option must be no less than the fair
market  value of  Solutia's  common  stock on the grant date and the term of any
stock option  granted under the plan may not exceed 10 years.  At June 30, 2006,
25,174 shares of Solutia's common stock remained  available for grants under the
plan.  There were no options or deferred  shares granted in the six months ended
June 30, 2006 as all non-employee director compensation is now paid in cash.

      As of January 1,  2006,  Solutia  adopted  SFAS No.  123  (revised  2004),
Share-Based Payment ("SFAS No. 123(R)"),  using the modified prospective method,
which requires  measurement of compensation  cost for all stock-based  awards at
fair value on the date of grant and recognition of compensation over the service
period  for  awards  expected  to vest.  The fair  value  of  stock  options  is
determined using the  Black-Scholes  valuation  model,  which is consistent with
valuation  techniques  previously  utilized for options in footnote  disclosures
required under SFAS No. 123, Accounting for Stock Based Compensation, as amended
by  SFAS  No.  148,  Accounting  for  Stock-Based  Compensation--Transition  and
Disclosure.  Such value is recognized as expense over the service period, net of
estimated forfeitures, using the straight-line method under SFAS No. 123(R). The
estimation of stock awards that will ultimately vest requires  judgment,  and to
the  extent  actual  results  or  updated  estimates  differ  from  our  current
estimates,  such  amounts  will be recorded as a  cumulative  adjustment  in the
period  estimates are revised.  Additionally,  Solutia believes that its plan of
reorganization  will provide for  cancellation  of its existing shares of common
stock, as well as options and warrants to purchase its common stock, and that it
is unlikely  that  holders of options to purchase  Solutia's  common  stock will
receive any consideration for those options in such a plan of reorganization.

      There were no options  granted or  exercised  during the six months  ended
June 30, 2006. Accordingly, no compensation cost with respect to such activities
was  recognized  in the Statement of  Consolidated  Operations in the six months
ended June 30, 2006.  However,  to the extent that the remaining service periods
of unvested  options  granted  prior to January 1, 2006 extend past the adoption
date  of SFAS  No.  123(R),  the  residual  unamortized  fair  value  originally
calculated  for  footnote  disclosures  required  under  SFAS  No.  123,  net of
estimated  forfeitures,  is now  recognized on a  straight-line  basis over such
remaining  periods.  Compensation  cost  and  all  related  effects  within  the
Statement of Consolidated  Operations and Statement of  Consolidated  Cash Flows
associated  with these  unvested


                                       17
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

options  was  less  than  $1  during  the  six  months   ended  June  30,  2006.
Additionally,  there was less than $1 of total  unrecognized  compensation  cost
related to these  unvested  options as of June 30, 2006 to be recognized  over a
weighted-average recognition period of less than one year.

      Prior to January 1, 2006,  Solutia applied SFAS No. 123 as amended by SFAS
No. 148, which allowed Solutia to continue  following the guidance of Accounting
Principles  Board  ("APB")  Opinion  No.  25,  Accounting  for  Stock  Issued to
Employees,  for  measurement and  recognition of stock-based  transactions  with
employees. Accordingly, no compensation cost was recognized for Solutia's option
plans in the Statement of Consolidated  Operations  during such periods,  as all
options  granted under the plans had an exercise price equal to the market value
of  Solutia's  stock on the date of the grant.  The effect  would have been less
than $1 on net income and no change on income per share had the determination of
compensation  cost for these  plans  been  based on the fair  value at the grant
dates for awards  under these plans,  consistent  with SFAS No. 123, for the six
months ended June 30, 2005.

      A summary of  Solutia's  stock  option plans for the six months ended June
30, 2006 is as follows:

<TABLE>
<CAPTION>
                                                                                          WEIGHTED-
                                                                         WEIGHTED-         AVERAGE       AGGREGATE
                                                                         AVERAGE          REMAINING      INTRINSIC
                                                       OPTIONS       EXERCISE PRICE   CONTRACTUAL LIFE    VALUE (A)
                                                     ---------------------------------------------------------------
<S>                                                   <C>              <C>                      <C>      <C>
Outstanding at January 1, 2006 ................       17,323,551       $     15.80               --               --
   Granted ....................................               --              0.00               --               --
   Exercised ..................................               --              0.00               --               --
   Expired ....................................         (947,076)            15.33               --               --
                                                     ---------------------------------------------------------------
Outstanding at March 31, 2006  ................       16,376,475       $     15.82              1.7      $      (253)
   Granted ....................................               --              0.00               --               --
   Exercised ..................................               --              0.00               --               --
   Expired ....................................       (2,667,774)            16.49               --               --
                                                     ---------------------------------------------------------------
Outstanding at June 30, 2006 ..................       13,708,701       $     15.68              1.8      $      (209)
                                                     ===============================================================

Exercisable at June 30, 2006 ..................       13,415,802       $     15.96              1.7      $      (208)
</TABLE>

      (a)   Intrinsic  value  for  stock  options  is  calculated  based  on the
            difference  between the exercise price of the underlying  awards and
            the  quoted  market  price  of  Solutia's  common  stock  as of  the
            reporting date.

4. ACQUISITION AND DIVESTITURE

Discontinued Operations

      On  May  23,  2006,  Solutia's  wholly-owned  subsidiary,  Solutia  Europe
S.A./N.V.  ("SESA"),  agreed to sell its  pharmaceutical  services  business  to
Dishman  Pharmaceuticals  & Chemicals Ltd.  ("Dishman")  pursuant to a Stock and
Asset  Purchase  Agreement  dated as of May 23, 2006  between  SESA and Dishman.
Under the terms of the agreement,  Dishman has agreed to purchase 100 percent of
the stock of the  pharmaceutical  services  business,  as well as certain  other
assets used in the  pharmaceutical  services  business,  for approximately  $75,
subject to certain purchase price adjustments. Dishman has also agreed to assume
substantially  all of the liabilities  relating to the  pharmaceutical  services
business,  other than certain liabilities that arise prior to the closing of the
transaction  and  liabilities  under  certain  employment  agreements.  SESA has
agreed,  subject to certain  exceptions,  that for a period of three years after
the closing of the  transaction  neither it nor its affiliates will compete with
the business of the  pharmaceutical  services business or solicit for employment
certain  employees of the  pharmaceutical  services  business and their  current
affiliates. The transaction is anticipated to close in the third quarter 2006.


                                       18
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

      The  pharmaceutical  services  business is a component of the  Performance
Products segment.  Based upon the current transaction terms,  Solutia expects to
record a gain on the sale of the  pharmaceutical  services business in the range
of  approximately  $45 to $55.  Further,  approximately  (euro) 40  million,  or
approximately  $50, of the  proceeds  from the sale are required to pay down the
(euro) 200 million  facility  entered into on July 26, 2006 and closed on August
1, 2006 (as described in Note 13).

      As the  transaction  is expected to close in the third quarter  2006,  the
assets and  liabilities of the  discontinued  operations have been classified as
current in the Consolidated Statement of Financial Position at June 30, 2006 and
December  31,  2005.  The  carrying  amounts  of  assets  and  liabilities  from
discontinued operations consisted of the following:

<TABLE>
<CAPTION>
                                                                          JUNE 30,      DECEMBER 31,
                                                                            2006           2005
                                                                            ----           ----
<S>                                                                         <C>            <C>
ASSETS:
Trade receivables ....................................................      $   8          $   7
Miscellaneous receivables ............................................          2              1
Inventories ..........................................................         20             13
Prepaid expenses and other assets ....................................          2              1
Property, plant and equipment, net ...................................         35             34
Identified intangible assets, net ....................................          7              7
Other assets .........................................................         10              6
                                                                            -----          -----
         Assets of discontinued operations ...........................      $  84          $  69
                                                                            =====          =====

LIABILITIES:
Accounts payable .....................................................      $   3          $   4
Accrued liabilities ..................................................         21             17
Other liabilities ....................................................          6              5
                                                                            -----          -----
         Liabilities of discontinued operations ......................      $  30          $  26
                                                                            =====          =====
</TABLE>

      The operating  results of the  pharmaceutical  services business have been
reported separately as discontinued operations,  net of tax, in the Consolidated
Statement of  Operations  for each period  presented.  Net sales and income from
discontinued operations are as follows:

<TABLE>
<CAPTION>
                                                                        THREE MONTHS           SIX MONTHS
                                                                        ENDED JUNE 30,       ENDED JUNE 30,
                                                                        --------------       --------------

                                                                       2006        2005      2006       2005
                                                                       ----        ----      ----       ----
<S>                                                                    <C>          <C>      <C>        <C>
      Net sales ..............................................         $ 15         $17      $ 37       $36
      Income (loss) before income taxes ......................           (1)          1         3         4
      Income tax expense (benefit) ...........................           (5)         --        (5)        1
                                                                       ----         ---      ----       ---
      INCOME FROM DISCONTINUED OPERATIONS ....................         $  4         $ 1      $  8       $ 3
                                                                       ====         ===      ====       ===
</TABLE>

Acquisition

      On March 1, 2006,  pursuant to a stock purchase  agreement  among Solutia,
Vitro S.A. de C.V.  ("Vitro")  and Vitro Plan S.A.  de C.V.  ("Vitro  Plan"),  a
wholly-owned subsidiary of Vitro, Solutia acquired Vitro Plan's 51 percent stake
in Quimica M, S.A.  de C.V.  ("Quimica")  (originally  formed in 1996 as a joint
venture between Vitro,  Vitro Plan, and Monsanto) for approximately $20 in cash.
As a result of this  acquisition,  Solutia  became the sole owner of Quimica and
its plastic interlayer plant located in Puebla, Mexico. Pursuant to the purchase
agreement,  Solutia also entered into supply  agreements with Vitro Flex S.A. de
C.V. and Vitro  Automotriz S.A. de C.V. to provide their


                                       19
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

requirements  for most  SAFLEX(R)  plastic  interlayer  products  for up to five
years. This acquisition reflects Solutia's commitment to meet the growing global
demand for its SAFLEX(R) and VANCEVA(R) plastic interlayer products.

      The allocation of purchase price to the assets and liabilities acquired or
assumed resulted in Solutia's  acquisition or assumption of total current assets
of $18,  non-current assets of $32, goodwill of $5,  amortizable  contract-based
intangible assets of $4, current liabilities of $11 and non-current  liabilities
of $7.  The  contract-based  intangible  assets are being  amortized  over their
estimated  useful  lives of 5 years.  Results of  operations  for  Quimica  were
included in Solutia's  results of operations  from the  acquisition  date in the
Performance  Products  segment.  The  results  of  operations  for the  acquired
business were not material to Solutia's consolidated results of operations.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

      Goodwill  of $89  and  $76  at  June  30,  2006  and  December  31,  2005,
respectively,  was  allocated  to the  Performance  Products  segment.  This $13
increase in goodwill as of June 30, 2006 was a result of the Quimica acquisition
(as further described in Note 4), of which $5 resulted from the 2006 acquisition
and $8  resulted  from the  original  acquisition  in 1996  that was  previously
accounted for under the equity method of accounting.

Identified Intangible Assets

      Identified  intangible  assets  generally are comprised of (i) amortizable
contract-based   intangible   assets  with  finite   useful   lives,   and  (ii)
indefinite-lived trademarks not subject to amortization. These intangible assets
are summarized in aggregate as follows:

<TABLE>
<CAPTION>
                                                              JUNE 30, 2006                      DECEMBER 31, 2005
                                                   ----------------------------------   --------------------------------
                                                     GROSS                     NET        GROSS                    NET
                                                   CARRYING    ACCUMULATED   CARRYING   CARRYING   ACCUMULATED  CARRYING
                                                     VALUE    AMORTIZATION     VALUE      VALUE   AMORTIZATION    VALUE
                                                   ----------------------------------   --------------------------------
<S>                                                  <C>         <C>          <C>         <C>         <C>          <C>
Amortized intangible assets ..................       $  12       $  (6)       $   6       $   8       $  (6)       $   2
Trademarks ...................................          26          --           26          26          --           26
                                                   ----------------------------------   --------------------------------
TOTAL IDENTIFIED INTANGIBLE
ASSETS .......................................       $  38       $  (6)       $  32       $  34       $  (6)       $  28
                                                   ==================================   ================================
</TABLE>

      There  were no  changes to  amortizable  lives or  methods  during the six
months  ended June 30,  2006.  In  addition,  amortization  expense  for the net
carrying amount of finite-lived intangible assets is estimated to be $2 annually
from 2006 through 2010.

6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

<TABLE>
<CAPTION>
                                                                 JUNE 30,   DECEMBER 31,
    INVENTORIES                                                    2006         2005
                                                                   ----         ----
<S>                                                               <C>          <C>
    Finished goods ......................................         $ 219        $ 236
    Goods in process ....................................           149          131
    Raw materials and supplies ..........................           100           93
                                                                  -----        -----
    Inventories, at FIFO cost ...........................           468          460
    Excess of FIFO over LIFO cost .......................          (205)        (206)
                                                                  -----        -----
    TOTAL INVENTORIES ...................................         $ 263        $ 254
                                                                  =====        =====
</TABLE>

      Inventories at FIFO approximate current cost.


                                       20
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     JUNE 30,       DECEMBER 31,
      ACCRUED LIABILITIES                                              2006            2005
                                                                       ----            ----
<S>                                                                   <C>             <C>
      Wages and benefits ......................................       $   43          $   54
      Accrued rebates and sales returns/allowances ............           18              22
      Accrued interest ........................................           26              23
      Other ...................................................          158             124
                                                                      ------          ------
      TOTAL ACCRUED LIABILITIES ...............................       $  245          $  223
                                                                      ======          ======
</TABLE>

7. INVESTMENT IN AFFILIATE

      At June 30,  2006,  Solutia  participated  in one  principal  50/50  joint
venture,  Flexsys Group, comprised of interests in Flexsys Holding B.V., Flexsys
America L.P. and Flexsys Rubber  Chemicals Ltd.  (collectively  "Flexsys"),  for
which Solutia  applies the equity  method of  accounting.  Summarized  financial
information for 100 percent of the Flexsys joint venture is as follows:

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED             SIX MONTHS ENDED
                                                            JUNE 30,                       JUNE 30,
                                                      ---------------------------------------------------
                                                       2006           2005           2006           2005
                                                       ----           ----           ----           ----
<S>                                                   <C>            <C>            <C>            <C>
      Net sales .............................         $  161         $  174         $  316         $  334
      Gross profit ..........................             47             60             93            112
      Operating income ......................             32             30             60             61
      Net income ............................             21             22             40             46
</TABLE>

8. RESTRUCTURING RESERVES

      Solutia  recorded  approximately $1 of asset  write-downs  recorded within
Reorganization  Items, net in the Performance  Products segment during the three
months ended June 30, 2006. In addition,  Solutia  recorded  approximately $1 of
severance  and  retraining  costs  in the  three  months  ended  June  30,  2006
principally  in  Marketing  and  Administrative   expenses  involving  headcount
reductions recorded primarily in the Performance Products segment.

      Solutia recorded approximately $2 of decommissioning and dismantling costs
in the six  months  ended  June 30,  2006 as a result  of the  shut-down  of its
acrylic fibers  business in 2005,  and  approximately  $2 of asset  write-downs.
These  costs  were  all  recorded   within   Reorganization   Items,   net  with
approximately  $3 in the Integrated  Nylon segment and  approximately  $1 in the
Performance Products segment. In addition,  Solutia recorded approximately $3 of
severance  and  retraining  costs in the six  months  ended  June 30,  2006 with
approximately $2 in Reorganization Items, net, and approximately $1 in Marketing
and Administrative  expenses involving headcount  reductions recorded throughout
the organization.


                                       21
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

      A summary of restructuring  activity during the three and six months ended
June 30, 2006 is as follows:

<TABLE>
<CAPTION>
                                                    DECOMMISSIONING/    EMPLOYMENT       ASSET WRITE-
                                                      DISMANTLING       REDUCTIONS           DOWNS             TOTAL
                                                    -----------------------------------------------------------------
<S>                                                      <C>               <C>               <C>               <C>
      Balance at December 31, 2005 ..............        $   2             $   2             $  --             $   4
        Charges taken ...........................            2                 2                 1                 5
        Amounts utilized ........................           (2)               (3)               (1)               (6)
                                                    -----------------------------------------------------------------
      Balance at March 31, 2006 .................        $   2             $   1             $  --             $   3
        Charges taken ...........................           --                 1                 1                 2
        Amounts utilized ........................           (1)               (1)               (1)               (3)
                                                    -----------------------------------------------------------------
      BALANCE AT JUNE 30, 2006 ..................        $   1             $   1             $  --             $   2
                                                    =================================================================
</TABLE>

      Solutia cannot forecast the level of future  restructuring  charges due to
the inherent uncertainty involved in operating as a  debtor-in-possession  under
Chapter 11 bankruptcy protection.

9. CONTINGENCIES

Litigation

      Because  of the size and  nature of its  business,  Solutia  is a party to
numerous  legal  proceedings.  Most of  these  proceedings  have  arisen  in the
ordinary  course of business and involve claims for money damages.  In addition,
at the time of its  spinoff  from  Pharmacia,  Solutia  assumed  the  defense of
specified legal  proceedings  and agreed to indemnify  Pharmacia for obligations
arising in connection with those proceedings.  Solutia has determined that these
defense  and   indemnification   obligations   to  Pharmacia  are   pre-petition
obligations  under the U.S.  Bankruptcy  Code that  Solutia is  prohibited  from
performing, except pursuant to a confirmed plan of reorganization.  As a result,
Solutia has ceased  performance  of these  obligations.  Solutia's  cessation of
performance  may give rise to a  pre-petition  unsecured  claim against  Solutia
which  Pharmacia  may assert in  Solutia's  Chapter  11  bankruptcy  case.  This
estimated  unsecured  claim  amount was  classified  as a  liability  subject to
compromise  as of June 30, 2006 and  December 31, 2005 in the amount of $116 and
$136, respectively.

      Solutia's  2003 Form  10-K/A  described a number of legal  proceedings  in
which  Solutia  was a  named  defendant  or  was  defending  solely  due  to its
indemnification  obligations  referred  to above.  Solutia  is  prohibited  from
performing with respect to these obligations, and developments, if any, in these
matters are currently  managed by other named defendants.  Accordingly,  Solutia
has  ceased  reporting  on the  status  of those  legal  proceedings.  The legal
proceedings which are in this category are (i) Owens v. Monsanto; (ii) Payton v.
Monsanto;   (iii)  other  Anniston  cases;  and  (iv)  premises  based  asbestos
litigation.

      Following is a summary of legal proceedings that Solutia or certain of its
equity  affiliates  continue to manage that could  result in an outcome  that is
material to the consolidated financial statements:

LEGAL PROCEEDINGS IN SOLUTIA'S BANKRUPTCY CASE

JPMORGAN ADVERSARY PROCEEDING

      On May 27, 2005,  JPMorgan,  as indenture trustee for Solutia's debentures
due 2027 and 2037 (the "Prepetition  Indenture"),  filed an adversary proceeding
(the "JPM  Proceeding")  against  Solutia in Solutia's  bankruptcy  case. In its
adversary   proceeding,   JPMorgan   asserted  five  causes  of  action  seeking
declaratory  judgments to establish  the validity and priority of the  purported
security interest of the holders of the 2027 and 2037 debentures,  and one cause
of action  pursuant to section 363 of the  Bankruptcy  Code  asserting  that the
alleged


                                       22
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

security  interests lacked adequate  protection.  The JPM Proceeding  relates to
Solutia's  2002 and 2003  refinancings  of its credit  facilities.  When Solutia
refinanced its credit facilities in 2002, the 2027 and 2037 debentures  obtained
a pro rata secured  interest in certain of  Solutia's  assets as a result of the
application of the "equal and ratable" provisions of the Prepetition  Indenture.
On October 8, 2003,  Solutia  restructured  its credit  facilities,  reduced its
outstanding  secured  indebtedness  below the  threshold  level  that  initially
triggered the "equal and ratable"  provisions of the Prepetition  Indenture and,
as a result,  the 2027 and 2037 debentures  returned to their original unsecured
status.  JPMorgan  alleges that the October 8, 2003 refinancing had no effect on
the security  interests and liens that were created in 2002,  and argues further
that,  even if it did,  those liens should be  reinstated as a matter of equity.
The Unsecured Creditors' Committee and the Ad Hoc Solutia Trade Claims Committee
have  intervened  in the JPM  Proceeding  in support  of Solutia  and the Ad Hoc
Committee of Solutia Noteholders has intervened in the JPM Proceeding in support
of JPMorgan.  Trial of the JPM Proceeding concluded on July 10, 2006. Post-trial
briefs are  expected  to be  submitted  by the  parties  by August 9, 2006.  The
Bankruptcy  Court has  indicated  that it will  take at least  six  weeks  after
submission of the post-trial briefs to make a ruling in the JPM Proceeding.

EQUITY COMMITTEE ADVERSARY PROCEEDING AGAINST MONSANTO AND PHARMACIA

      On March 7,  2005,  the  Official  Committee  of Equity  Security  Holders
("Equity  Committee")  in Solutia's  bankruptcy  case filed a complaint  against
Pharmacia and Monsanto and  objections to the proofs of claim filed by Pharmacia
and Monsanto in Solutia's bankruptcy case (the "Equity Committee Complaint"). In
the Equity  Committee  Complaint,  the Equity  Committee  seeks to avoid certain
obligations  assumed by Solutia at the time of its spinoff from  Pharmacia.  The
Equity Committee Complaint alleges, among other things, that the Solutia Spinoff
was a fraudulent  transfer under the Bankruptcy  Code because  Pharmacia  forced
Solutia  to assume  excessive  liabilities  and  insufficient  assets  such that
Solutia was destined to fail from its inception.  Pharmacia and Monsanto filed a
motion to dismiss the Equity Committee  Complaint for, among other things,  lack
of standing or, in the alternative,  to stay the adversary proceeding. On August
4, 2005,  the  Debtors  filed with the  Bankruptcy  Court  their  Statement  and
Reservation of Rights in Response to Equity Committee's  Complaint and Objection
to  Claims,  in which the  Debtors  expressed  their  view that the  issues  and
disputes raised in the Equity Committee  Complaint would be resolved through the
Plan  confirmation  process.  During  a  hearing  held on  April  11,  2006  the
Bankruptcy Court issued a bench ruling denying  Pharmacia and Monsanto's  motion
to dismiss  the Equity  Committee  Complaint.  The Ad Hoc  Committee  of Solutia
Noteholders  and the Ad Hoc Solutia Trade Claims  Committee  have  intervened in
this  adversary  proceeding  in support of the Equity  Committee.  The Unsecured
Creditors' Committee has intervened,  and Solutia intends to intervene,  in this
adversary proceeding as neutral parties due to the importance of this proceeding
with  respect to  Solutia's  bankruptcy  case.  The case is  proceeding  and the
Bankruptcy  Court has set this  matter for trial to commence  on  September  11,
2006.

LEGAL PROCEEDINGS OUTSIDE SOLUTIA'S BANKRUPTCY CASE

ANNISTON PARTIAL CONSENT DECREE

      On August 4, 2003, the U.S.  District  Court for the Northern  District of
Alabama  approved a Partial Consent Decree in an action  captioned United States
of America v. Pharmacia  Corporation (p/k/a Monsanto Company) and Solutia.  This
Partial  Consent  Decree  provides for Pharmacia  and Solutia to sample  certain
residential properties and remove soils found on those properties if PCBs are at
a  level  of 1 part  per  million  ("ppm")  or  above,  to  conduct  a  Remedial
Investigation and Feasibility Study to provide  information for the selection by
the EPA of a cleanup remedy for the Anniston, Alabama PCB site, and to pay EPA's
past response costs and future  oversight costs related to this work. The decree
also provided for the creation of an educational  trust fund of approximately $3
to be funded over a 12-year period to provide supplemental  educational services
for school children in west Anniston.

      A subsequent dispute arose between the EPA and Solutia regarding the scope
and  application of the automatic stay arising as a result of Solutia's  Chapter
11 filing to the remaining  obligations  under the Partial  Consent  Decree.  On
April 19, 2004, the District Court held that the Partial Consent Decree enforces
police and regulatory  powers under the  Comprehensive  Environmental  Response,
Compensation,  and Liability Act ("CERCLA") and, as a


                                       23
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

result,  the  automatic  stay  provisions  of  the  U.S.   Bankruptcy  Code  are
inapplicable to Solutia's obligations under the Partial Consent Decree. On April
30, 2004, the United States  Bankruptcy  Court for the Southern  District of New
York  entered  a  Stipulation  and  Agreed  Order in which  the EPA and  Solutia
stipulated  that the  automatic  stay is  applicable  to certain of the  Partial
Consent Decree's requirements.  Solutia filed a motion asking the District Court
to  reconsider  its order and to bring it into accord with the  Stipulation  and
Agreed Order  consented to by the EPA and entered by the  Bankruptcy  Court.  On
September 9, 2004, the District Court denied  Solutia's motion and declared that
the automatic stay is  inapplicable to Solutia's  obligations  under the Consent
Decree to perform site work.  Solutia  appealed this ruling to the Eleventh U.S.
Circuit Court of Appeals, which dismissed the appeal for lack of jurisdiction.

      On June 30,  2005,  the  United  States  District  Court for the  Northern
District of Alabama issued an order (the "PCB Order") authorizing  co-defendants
Pharmacia  and  Solutia to  "suspend"  performance  of the PCB  clean-up  at the
Anniston site under the Anniston Consent Decree,  upon the filing of a motion by
either  defendant  requesting that relief.  The PCB Order found that Solutia and
Pharmacia entered into the Anniston Consent Decree,  and that the court approved
that Anniston Consent Decree,  based on the  understanding  that the defendants'
rights to pursue other liable parties for contribution  would not be impaired by
the EPA. The PCB Order  further found that the EPA's  planned  settlements  with
certain  Anniston  foundries  would thus  deprive the  defendants  of one of the
material considerations for entering into the Anniston Consent Decree.

      In July 2006,  Solutia and  Pharmacia  reached an agreement  with EPA that
clarifies the extent of remaining  obligations under the Anniston Consent Decree
and the coordination of that work with the Lead Site clean-up being performed by
others,  and by which  Solutia  and  Pharmacia  will forego the  opportunity  to
suspend their  obligations under the Anniston Consent Decree pursuant to the PCB
Order.  Solutia and  Pharmacia  preserved  their rights under this  agreement to
continue  to argue  that the  contribution  protection  afforded  certain  other
potentially  responsible  parties  performing  Lead Site clean-up  should not be
effective as to Solutia and Pharmacia.

PENNDOT CASE

      Solutia's  Annual  Report on Form  10-K (as  amended)  for the year  ended
December  31, 2003  described a case then pending in the  Commonwealth  Court of
Pennsylvania  by the  Commonwealth  of Pennsylvania  against  Pharmacia  seeking
damages for PCB  contamination in the  Transportation  and Safety Building ("T&S
Building")  in  Harrisburg,  Pennsylvania,  that  it  claimed  necessitated  the
demolition  of the T&S  building.  Solutia  was not a  named  defendant  in this
litigation  and  therefore  took no action to stay the  litigation in connection
with its Chapter 11 proceedings.  Solutia assumed the defense of this litigation
at the  time  of its  spin-off  from  Pharmacia.  Solutia  determined  that  its
obligation to defend and indemnify  Pharmacia with regard to this litigation was
a pre-petition  obligation that Solutia was prohibited from  performing,  except
pursuant  to a  confirmed  plan of  reorganization.  Therefore,  Solutia  ceased
defending  Pharmacia  with respect to this  litigation.  Solutia  did,  however,
provide a $20  letter of credit to secure a portion of  Pharmacia's  obligations
with respect to an appeal bond issued with respect to the case.

      On May 25, 2006 the Supreme Court of Pennsylvania issued its ruling on the
appeal in this case,  reversing  in whole and  remanding in part the decision of
the trial  court  against  Pharmacia.  With  respect to those  claims  that were
reversed and remanded,  the Supreme Court of Pennsylvania  significantly limited
the amount of damages  that could be awarded.  Based upon this  ruling,  Solutia
recognized a gain in its Consolidated  Statement of Operations during the second
quarter  2006  from  the  reversal  of a  significant  portion  of the  existing
litigation reserve with respect to this matter.

FLEXSYS RELATED LITIGATION

      Antitrust  authorities  in  the  United  States,  Europe  and  Canada  are
continuing to  investigate  past  commercial  practices in the rubber  chemicals
industry.  Flexsys,  Solutia's  joint  venture  with Akzo Nobel  N.V.  ("Akzo"),
remains a subject of such  investigation  and continues to fully  cooperate with
the authorities in the ongoing investigation. In addition, a number of purported
civil class actions on behalf of consumers  have been filed against  Flexsys and
other producers of rubber chemicals.

      State court actions  against  Flexsys.  Solutia is presently aware of nine
purported  class  actions that remain  pending in various  state courts  against
Flexsys  and other  producers  of rubber  chemicals  seeking  actual  and treble
damages  under state law.  Seven of these  cases  purport to be on behalf of all
retail  purchasers of tires in the respective  states since as early as 1994 and
two of the cases purport to be on behalf of all retail purchasers of any product
containing  rubber chemicals  during the same period.  Solutia is not named as a
defendant  in any of these cases.  All of these cases remain  pending in various
procedural  stages and no  substantive  discovery  or other  actions  have taken
place.

      Canadian actions against Flexsys. In May 2004, two purported class actions
were filed in the Province of Quebec,  Canada,  against Flexsys and other rubber
chemical producers alleging that collusive sales and marketing activities of the
defendants  damaged  all persons in Quebec  during the period July 1995  through
September  2001.  Plaintiffs  seek  statutory  damages of (CAD) $14.6 along with
exemplary damages of (CAD) $0.000025 per person. In May 2005 a case was filed in
Ontario, Canada against Flexsys and other rubber chemical producers alleging the
same claims as in the Quebec cases and seeking damages of (CAD) $95 on behalf of
all  persons  in Canada  injured  by the  alleged  collusive  activities  of the
defendants. In August 2005, a similar case was filed in British Columbia seeking
unspecified  damages under a variety of theories on behalf of all  purchasers of
rubber chemicals and products  containing  rubber chemicals in British Columbia.
No responses  are yet due nor have any been filed by  defendants in any of these
cases. Solutia is not a named defendant in any of these cases.


                                       24
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

      Federal  court  actions by indirect  purchasers  of rubber  chemicals.  On
January 14, 2006,  Solutia became aware of a newly filed case,  Pearman,  Benson
and Immerman v. Crompton Corp.,  Flexsys,  Solutia, et al., in the United States
District Court for the Eastern District of Tennessee at Greenville,  purportedly
filed on behalf of  consumers  in 37 states of  products  produced  with  rubber
chemicals  for the period 1994  through the present  under the  Tennessee  Trade
Practices  Act.  Solutia  was  initially  named in the suit but was  voluntarily
dismissed  without  prejudice on February 3, 2006.  On April 28,  2006,  Solutia
received notice that this case was voluntarily dismissed,  without prejudice, by
the plaintiffs.

      Federal court actions  alleging  violations  of federal  securities  laws.
Between  approximately July and September 2003, six purported  shareholder class
actions  were filed in the U.S.  District  Court for the  Northern  District  of
California against Solutia, its then and former chief executive officers and its
then chief financial  officer.  The complaints were  consolidated  into a single
action called In Re Solutia Securities Litigation, and a consolidated complaint,
which  named  two  additional  defendants,   Solutia's  then  current  and  past
controllers,  was filed. The consolidated  complaint  alleged that from December
16, 1998 to October 10, 2002,  Solutia's  accounting  practice of  incorporating
Flexsys's results into Solutia's  financial reports violated federal  securities
laws by misleading investors as to Solutia's actual results and causing inflated
prices to be paid by purchasers of Solutia's  publicly traded  securities during
the period.  The  plaintiffs  sought  damages and any equitable  relief that the
court deemed  proper.  The  consolidated  action was  automatically  stayed with
respect to Solutia by virtue of Section 362(a) of the U.S.  Bankruptcy  Code. In
March  2005 the  court  issued  a final  order  dismissing  with  prejudice  the
complaint  against  the  individual  defendants,  which  became  final  when the
plaintiffs  failed to file an  appeal of the  dismissal  within  the  applicable
appeals period,  and the case was dismissed without prejudice as against Solutia
pending resolution of the bankruptcy case.

      Shareholder  Derivative Suits. Two purported shareholder  derivative suits
were filed in the Missouri Circuit Court for the  Twenty-First  Judicial Circuit
of St. Louis County  against  certain of Solutia's  current and past  directors,
chief  executive  officers,  chief  financial  officer and former vice chairman.
Solutia is included  as a nominal  defendant.  The  plaintiffs  seek  damages on
behalf of Solutia for the individual  defendants'  alleged breaches of fiduciary
duty,  abuse of control,  gross  mismanagement,  waste of  corporate  assets and
unjust  enrichment,  arising  out  of  Flexsys'  alleged  participation  in  the
price-fixing  of rubber  chemicals  and  Solutia's  incorporation  of  Flexsys's
purportedly  inflated  financial  results arising from the alleged  price-fixing
into Solutia's financial statements. These two shareholder derivative suits were
consolidated into a single action, In re Solutia Inc. Derivative Litigation.  On
December 29, 2003, the court entered an Order in the consolidated action staying
the litigation  with respect to all  defendants,  including  Solutia.  In August
2004, the court  involuntarily  dismissed the case for lack of  prosecution.  In
late 2004,  plaintiffs'  filed a motion to  reinstate  the actions  which motion
remains pending with no further action yet taken by plaintiffs.

CASH BALANCE PLAN LITIGATION

      Since October  2005,  three cases have been filed by  participants  in the
Solutia  Inc.  Employees'  Pension  Plan  alleging  that the Pension  Plan:  (1)
violates  the  Employee   Retirement  Income  Security  Act  of  1974  ("ERISA")
prohibitions  on reducing rates of benefit  accrual based on age; (2) results in
the  impermissible  forfeiture  of accrued  benefits  under ERISA;  (3) violates
ERISA's present value calculation rules for determining lump sum  distributions;
and (4)  violates  the minimum  accrual  requirements  of ERISA.  The cases were
captioned   Davis,   et.  al.  v.  Solutia,   Inc.   Employees'   Pension  Plan,
Scharringhausen,  et. al. v. Solutia,  Inc.  Employees' Pension Plan, et al. and
Juanita Hammond,  et. al. v. Solutia,  Inc. Employees' Pension Plan. None of the
Debtors,  and,  except for the Solutia Inc.  Employee  Benefits Plans  Committee
which was named in the Scharringhausen  case, no individual or entity other than
the Pension  Plan,  has been named as a  defendant  in any of these  cases.  The
plaintiffs  in each of  these  cases  sought  to  obtain  injunctive  and  other
equitable  relief  (including  money damages awarded by the creation of a common
fund) on behalf of themselves  and the  nationwide  putative  class of similarly
situated  current and former  participants in the Pension Plan for whose pension
benefits the Pension Plan is  responsible.  The Pension Plan, and


                                       25
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

in the case of the Scharringhausen  case, the Employee Benefits Plans Committee,
moved  to  dismiss  all  three  actions  for  plaintiffs'   failure  to  exhaust
administrative remedies and failure to join necessary and indispensable parties.

            The Scharringhausen  plaintiffs have moved to intervene in the Davis
action and to consolidate  the Davis,  Scharringhausen  and Hammond  cases.  The
Hammond  plaintiff has moved to consolidate the three cases and the Pension Plan
has  responded  by  agreeing  that it should not be  required  to defend  itself
against three cases. The Davis plaintiffs have intervened in the Scharringhausen
and Hammond cases and moved to stay or dismiss those later-filed  cases,  rather
than  consolidating  them with the Davis case.  The  plaintiffs'  counsel in the
Davis, Scharringhausen and Hammond cases each have sought appointment as interim
lead  class  counsel.  In  response  to these  motions,  on April  24,  2006 the
Scharringhausen plaintiffs voluntarily dismissed their case.

      On June 2,  2006,  the  Hammond  plaintiffs  agreed to stay  their  action
pending exhaustion of administrative  remedies with respect to count (4), above.
Thereafter the Hammond and Davis  plaintiffs also each withdrew their respective
motions to  consolidate  and to stay or dismiss.  In  addition,  the Hammond and
Davis  plaintiffs  each withdrew their motions to appoint  interim class counsel
and have advised the court that they are  cooperating in the  representation  of
the putative  class.  The Pension  Plan's motions to dismiss in both the Hammond
and Davis cases remain pending.

      The Pension Plan intends to continue to vigorously  defend itself  against
any and all claims asserted in the Davis and Hammond litigation.

GE LITIGATION

      On January 3,  2006,  Solutia  received  notice  that an action  captioned
Michael Abbatiello et al. v. Monsanto Company, Pharmacia Corporation and Solutia
Inc.  (the  "Abbatiello  Case"),  was filed on December  26, 2005 in the Supreme
Court of the State of New York.  The action  was filed on behalf of 590  current
General  Electric  employees  who work at its  Schenectady,  New York  plant and
states eleven separate causes of action alleging that General Electric purchased
various  PCB  containing   products  from  Pharmacia  which  were  used  in  the
manufacture of a variety of products including electric motors,  generators, gas
turbines,  wire and cable,  insulating  materials and microwave tubes. PCBs were
later detected in various locations,  including  retention ponds,  ground water,
and water treatment centers on the approximately 628 acre site. On May 10, 2006,
Solutia received notice that an action, captioned Alan Abele, et al. v. Monsanto
Company, Pharmacia Corporation and Solutia Inc., (the "Abele Case" and, together
with the Abbatiello  Case, the "GE  Litigation")  was filed on March 15, 2006 in
the  Supreme  Court of the State of New York.  The action was filed on behalf of
486 former General  Electric  employees who were employed at General  Electric's
Schenectady,  NY plant and  states  eleven  separate  causes of action  based on
claims identical to those made on behalf of current General  Electric  employees
in the Abbatiello  Case.  The plaintiffs in each of the GE Litigation  cases are
seeking $1,000 in compensatory  damages and $1,000 in punitive  damages for each
cause of action for a total of $2,000. The GE Litigation is automatically stayed
as to Solutia pursuant to Section 362 of the U.S. Bankruptcy Code.

      At the time of the spinoff from Pharmacia,  Solutia assumed liability for,
among other things, litigation liabilities related to chemical products formerly
manufactured,  released or used by Pharmacia prior to the spinoff, including the
costs of toxic tort lawsuits alleging  exposure to PCBs.  Solutia also agreed to
defend  Pharmacia  against,  and indemnify  Pharmacia for, such liability.  Upon
filing for  Chapter 11  protection,  Solutia  determined  that its  defense  and
indemnification  obligations  to  Pharmacia  with  respect  to  such  litigation
liabilities were  pre-petition  obligations  under the U.S.  Bankruptcy Code and
that Solutia was therefore  prohibited  from  performing,  except  pursuant to a
confirmed  plan of  reorganization.  As a result,  after  filing for  Chapter 11
protection,  Solutia  ceased  performance of its defense  obligations  and those
defense  obligations have been managed by Monsanto during  Solutia's  Chapter 11
Case.  Because such  litigation was no longer being managed by Solutia,  Solutia
became  unable to provide  complete  status  updates  and, as a result,  Solutia
disclosed  that it would cease  reporting on those  litigation  matters.  The GE
Litigation  falls within the scope of litigation  liabilities  described  above.
Accordingly,  Monsanto is managing this litigation and Solutia will be unable to
provide  complete status updates on the GE Litigation.  Therefore,  Solutia will
cease reporting on the status of the GE Litigation.


                                       26
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

OTHER LEGAL PROCEEDINGS

      Dickerson  v.  Feldman.  On October  7, 2004,  a  purported  class  action
captioned  Dickerson v. Feldman,  et al. was filed in the United States District
Court for the  Southern  District  of New York  against a number of  defendants,
including  former  officers  and  employees  of Solutia and  Solutia's  Employee
Benefits Plans  Committee and Pension and Savings Funds  Committee.  Solutia was
not named as a defendant.  The action  alleged  breach of  fiduciary  duty under
ERISA and sought to recover  alleged  losses to the  Solutia  Inc.  Savings  and
Investment  Plan ("SIP  Plan")  during the period from  December 16, 1998 to the
date the action was filed. The investment of SIP Plan assets in Solutia's common
stock is alleged  to have been  imprudent  because of the risks and  liabilities
related to Solutia's legacy environmental and litigation liabilities and because
of Flexsys's  alleged  involvement in the matters described above under "Flexsys
Related  Litigation."  The  action  sought  monetary  payment to the SIP Plan to
recover the losses  resulting  from the alleged breach of fiduciary  duties,  as
well as injunctive and other appropriate equitable relief, reasonable attorney's
fees and expenses, costs and interest. In addition, the plaintiff in this action
filed a proof of claim for $269 against Solutia in the U.S. Bankruptcy Court for
the Southern District of New York.

      The  plaintiff  sought to withdraw the reference of their ERISA claim from
the  Bankruptcy  Court to the District  Court so that the proof of claim and the
class action could be considered together by the District Court. On February 11,
2005,  Solutia  filed an objection to the motion to withdraw the  reference.  On
March 11, 2005, the District Court denied without prejudice  Dickerson's  motion
to withdraw the reference.  The Dickerson plaintiffs  subsequently amended their
initial  complaint to add several  current  officers and directors of Solutia as
defendants. On July 5, 2005, the defendants filed motions to dismiss Dickerson's
amended complaint. In early September, 2005, Dickerson filed an amended proof of
claim against Solutia  increasing  Dickerson's claim from $269 to $290, based on
his amended complaint.  Dickerson also filed a motion for class certification of
his proof of claim.

      On March 30, 2006,  the District Court granted the  defendants'  motion to
dismiss on grounds that the Dickerson plaintiffs lacked standing to sue and that
the  complaint  failed  to state a claim on which  relief  may be  granted.  The
dismissal  of  Dickerson's  cause of action  resulted in dismissal of the entire
purported  class  action,  including  claims  asserted  on behalf of the unnamed
purported  class  members.  On April 3, 2006  Dickerson  filed an appeal of this
dismissal with the United States Court of Appeals for the Second Circuit.

      Solutia Inc. v. FMC  Corporation.  On October 14, 2003,  Solutia  filed an
action captioned Solutia Inc. v. FMC Corporation ("FMC") in Circuit Court in St.
Louis County, Missouri, against FMC over the failure of purified phosphoric acid
technology provided by FMC to Astaris, the 50/50 joint venture formed by Solutia
and FMC,  which was sold to Israeli  Chemicals  Limited in 2005. On February 20,
2004,  Solutia  voluntarily  dismissed  the  state  court  action  and  filed an
adversary  proceeding  against FMC in the Bankruptcy  Court.  FMC filed with the
Bankruptcy  Court a motion to withdraw  the  reference.  The motion was granted,
and, as a result,  the matter is now pending in the U.S.  District Court for the
Southern  District of New York. FMC filed a motion to dismiss  Solutia's  action
based upon an alleged lack of standing. On March 29, 2005, the New York District
Court granted in part and denied in part FMC's motion to dismiss.  Specifically,
the court  dismissed  with  prejudice  three of  Solutia's  causes of action for
breach of contract.  The New York District  Court denied FMC's motion to dismiss
Solutia's  other  causes of action for breach of  warranty,  breach of fiduciary
duty, negligent  misrepresentation,  fraud and fraud in the inducement.  In this
action, FMC does not have a counterclaim against Solutia or Astaris.

      On July 31, 2006,  the District  Court entered its order  regarding  FMC's
motion for summary  judgment,  ruling that  Solutia's  breach of fiduciary  duty
claim  would be  allowed  to  proceed,  but only on a limited  basis.  The Court
overruled the parties' motions for summary judgment on the remaining claims. The
Court also ruled that there will be a bench trial on the four  claims  remaining
in the case.

      The  sale  of  substantially  all of the  assets  of  Astaris  to  Israeli
Chemicals Limited,  as further described in Solutia's Annual Report on Form 10-K
for the year ended  December  31,  2005,  did not affect the claims  asserted by
Solutia  against FMC in this  proceeding.  Solutia is  vigorously  pursuing this
action.

      Ferro  Antitrust  Investigation.  Competition  authorities  in Belgium and
several other European countries are investigating past commercial  practices of
certain  companies engaged in the production and sale of butyl benzyl phthalates
("BBP"). One of the BBP producers under investigation by the Belgian Competition
Authority  ("BCA")  is  Ferro  Belgium  sprl,  a  European  subsidiary  of Ferro
Corporation ("Ferro"). Ferro's BBP business in Europe was purchased from Solutia
in 2000. Solutia received an indemnification notice from Ferro and has exercised
its right, pursuant to the purchase agreement relating to Ferro's acquisition of
the BBP  business  from  Solutia,  to assume and


                                       27
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

control the defense of Ferro in proceedings relating to these investigations. On
July 7, 2005,  the BCA Examiner  issued a Statement of Objections  regarding its
BBP  investigation  in which  Solutia  Europe  S.A/N.V.  ("Solutia  Europe"),  a
European non-Debtor subsidiary of Solutia, along with Ferro Belgium sprl and two
other  producers  of BBP,  is  identified  as a party under  investigation  with
respect to its  ownership of the BBP  business  from 1997 until the business was
sold to Ferro in 2000.  Solutia  Europe's  written  comments to the Statement of
Objections  were  submitted on August 31, 2005 and  presented at an oral hearing
before the BCA on September 6, 2005. The Examiner  submitted its Reasoned Report
to the  BCA on  December  22,  2005.  Solutia  is not  named  as a  party  under
investigation in the Reasoned Report. Solutia Europe will have an opportunity to
submit comments to the BCA on the Reasoned Report in writing and at a subsequent
oral hearing on a date that has not yet been determined by the BCA.  Solutia and
Solutia Europe are fully cooperating with the BCA in this investigation.

Environmental Liabilities

      Environmental  compliance and  remediation  costs and other  environmental
liabilities  incurred by Solutia generally fall into two broad  categories:  (a)
those related to properties currently owned or operated by Solutia and (b) those
related  to  properties  that are not  owned  by  Solutia,  including  non-owned
properties adjacent to plant sites and certain owned offsite disposal locations.
For the owned and operated  sites,  Solutia had an accrued  liability of $78 and
$71 as of June 30,  2006 and  December  31,  2005,  respectively,  for solid and
hazardous waste  remediation,  which  represents  Solutia's best estimate of the
underlying  obligation.  In addition,  this balance also  includes  post-closure
costs at  certain  of  Solutia's  operating  locations.  This  liability  is not
classified as subject to compromise in the Statement of  Consolidated  Financial
Position because,  irrespective of the bankruptcy  proceedings,  Solutia will be
required  to  comply  with  environmental  requirements  in the  conduct  of its
business,   regardless  of  when  the  underlying  environmental   contamination
occurred.  However,  Solutia  ultimately  expects to seek recovery against other
potentially responsible parties at certain of these locations.

      Solutia had an accrued  liability of $81 as of June 30, 2006 and $82 as of
December  31,  2005 for  properties  not  owned or  operated  by  Solutia.  This
liability  is   classified   as  subject  to  compromise  in  the  Statement  of
Consolidated  Financial Position as of both June 30, 2006 and December 31, 2005,
as Solutia currently  believes it constitutes a pre-petition  claim that will be
discharged in the bankruptcy process. Under the Plan and Relationship Agreement,
as between Monsanto and Solutia,  Monsanto will accept financial  responsibility
for  environmental  remediation  obligations  at all sites for which Solutia was
required to assume  responsibility  at the Solutia  Spinoff but which were never
owned or  operated  by  Solutia.  This  includes  more than 50 sites with active
remediation  projects and  approximately 200 additional known sites and off-site
disposal  facilities,  as well as  sites  that  have  not yet  been  identified.
Finally,  Monsanto will share financial responsibility with Solutia for off-site
remediation  costs in  Anniston,  Alabama and Sauget,  Illinois.  The EPA and/or
Pharmacia are currently  contesting  the  enforceability  of the automatic  stay
provisions  with  respect  to the  Anniston,  Alabama  location  (as more  fully
described in the Anniston Partial Consent Decree disclosure above).  Remediation
activities  are  currently  being  funded  by  Monsanto  for  certain  of  these
properties  not  owned or  operated  by  Solutia.  Monsanto's  funding  of these
remediation  activities may give rise to a claim against  Solutia which Monsanto
may assert in Solutia's Chapter 11 bankruptcy case. In addition, Solutia has not
adjusted  its  recorded  environmental  liabilities  classified  as  subject  to
compromise for ongoing remediation activities at these sites since the inception
of Solutia's bankruptcy case.

      In  addition  to  the  bankruptcy  proceedings,   Solutia's  environmental
liabilities are also subject to changing  governmental  policy and  regulations,
discovery  of unknown  conditions,  judicial  proceedings,  method and extent of
remediation,  existence  of other  potentially  responsible  parties  and future
changes in technology. Solutia believes that the known and unknown environmental
matters, including matters classified as subject to compromise for which Solutia
may ultimately assume  responsibility,  when ultimately  resolved,  which may be
over  an  extended  period  of  time,  could  have  a  material  effect  on  the
consolidated financial position, liquidity and profitability of Solutia.


                                       28
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

Impact of Chapter 11 Proceedings

      During the  reorganization  process,  substantially all pending litigation
against Solutia and its subsidiaries that filed for reorganization under Chapter
11  ("Debtors")  is stayed,  as well as the  majority of all other  pre-petition
claims.  Exceptions would generally include pre-petition claims addressed by the
bankruptcy court, as well as fully secured claims. Such claims may be subject to
future adjustments. Adjustments may result from actions of the bankruptcy court,
negotiations,  assumption or rejection of executory contracts,  determination as
to the  value of any  collateral  securing  claims,  proofs  of  claims or other
events. Additional pre-filing claims not currently reflected in the consolidated
financial statements may be identified through the proof of claim reconciliation
process.  The amount of pre-filing claims  ultimately  allowed by the bankruptcy
court with respect to  contingent  claims may be materially  different  from the
amounts reflected in the consolidated  financial statements.  Generally,  claims
against Debtors arising from actions or omissions prior to their filing date may
be  subject to  compromise  in  connection  with a plan of  reorganization.  The
ultimate resolution of all of these claims may be settled through negotiation as
compared to court  proceedings,  with the result  being that  Solutia may retain
certain  obligations  currently  classified  as  subject  to  compromise  in the
Statement of Consolidated Financial Position.

10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Components of Net Periodic Benefit Cost

      For the three  and six  months  ended  June 30,  2006 and 2005,  Solutia's
pension and healthcare and other benefit costs were as follows:

<TABLE>
<CAPTION>
                                                                                          PENSION BENEFITS
                                                                                          ----------------
                                                                             THREE MONTHS                    SIX MONTHS
                                                                            ENDED JUNE 30,                  ENDED JUNE 30,
                                                                            --------------                  --------------
                                                                         2006            2005            2006            2005
                                                                         ----            ----            ----            ----
<S>                                                                      <C>             <C>             <C>             <C>
      Service costs for benefits earned ......................           $  1            $  1            $  2            $  3
      Interest costs on benefit obligation ...................             16              17              32              35
      Assumed return on plan assets ..........................            (15)            (16)            (30)            (33)
      Prior service costs ....................................             --               1              --               1
      Recognized net loss ....................................              1               3               3               6
                                                                         ----            ----            ----            ----
      TOTAL ..................................................           $  3            $  6            $  7            $ 12
                                                                         ====            ====            ====            ====

<CAPTION>
                                                                                     HEALTHCARE AND OTHER BENEFITS
                                                                                     -----------------------------
                                                                              THREE MONTHS                    SIX MONTHS
                                                                             ENDED JUNE 30,                  ENDED JUNE 30,
                                                                             --------------                  --------------
                                                                         2006            2005            2006             2005
                                                                         ----            ----            ----             ----
<S>                                                                      <C>             <C>             <C>             <C>
      Service costs for benefits earned ......................           $  1            $  2            $  2            $  3
      Interest costs on benefit obligation ...................              7               8              15              17
      Prior service costs ....................................             (2)             (2)             (5)             (5)
      Recognized net loss ....................................              1               3               2               7
                                                                         ----            ----            ----            ----
      TOTAL ..................................................           $  7            $ 11            $ 14            $ 22
                                                                         ====            ====            ====            ====
</TABLE>

Employer Contributions

      According  to  IRS  funding  rules,  Solutia  will  be  required  to  make
approximately  $179 in pension  contributions to its U.S. qualified pension plan
in 2006 assuming  Congress extends the interest rate relief provision  currently
proposed. If this relief is not granted, required contributions in 2006 would be
approximately $195.  Approximately $43 of these required 2006 contributions were
made in the six months ended June 30, 2006.  Solutia also expects to be required
to fund approximately $5 in pension  contributions for its foreign pension plans
in 2006.


                                       29
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

11. DEBT OBLIGATIONS

      Solutia  amended  its DIP  financing  facility  on  March  17,  2006  with
bankruptcy court approval. This amendment, among other things, (i) increased the
DIP facility from $525 to $825;  (ii) extended the term of the DIP facility from
June 19, 2006 to March 31, 2007;  (iii)  decreased the interest rate on the term
loan  component  of the DIP  facility  from LIBOR plus 425 basis points to LIBOR
plus 350 basis points; (iv) increased certain thresholds allowing the Debtors to
retain more of the proceeds from certain  dispositions  and other  extraordinary
receipts;  (v) approved the  disposition of certain assets of the Debtors;  (vi)
allowed  refinancing of, and certain  amendments to, Solutia Europe  S.A./N.V.'s
outstanding Euronotes;  and (vii) amended certain financial and other covenants.
The amendment  also  contains a number of other changes and other  modifications
required to make the  remaining  terms of the DIP facility  consistent  with the
amendments set forth above.

      Solutia  analyzed the  modifications  of the DIP facility in March 2006 in
accordance with the provisions of Emerging Issues Task Force ("EITF") No. 02-04,
Determining  Whether a Debtor's  Modification or Exchange of Debt Instruments is
within  the  Scope of FASB  Statement  No.  15,  and EITF  No.  96-19,  Debtor's
Accounting for a Modification  or Exchange of Debt  Instruments,  and recorded a
charge of approximately $8 to record the write-off of debt issuance costs and to
record the DIP  facility  as  modified at its fair  value.  In  addition,  $1 of
unamortized  debt issuance costs  associated  with the DIP facility were written
off at the time of modification in March 2006.

      See Note 13 for description of events related to Solutia's  Euronotes that
occurred subsequent to June 30, 2006.

12. SEGMENT DATA

      Solutia,  together with its  subsidiaries,  is a global  manufacturer  and
marketer of a variety of high-performance  chemical-based  materials,  which are
used in a broad range of consumer and industrial  applications.  Solutia manages
its business in two segments:  Performance  Products and Integrated  Nylon.  The
Performance  Products  segment  is a  world  leader  in  performance  films  for
laminated  safety glass and after-market  applications,  and specialties such as
water treatment  chemicals,  heat transfer fluids and aviation  hydraulic fluid.
The Integrated Nylon segment consists of an integrated  family of nylon products
including high-performance polymers and fibers. The major products by reportable
segment are as follows:

<TABLE>
<CAPTION>
     PERFORMANCE PRODUCTS                            INTEGRATED NYLON
<S>                                                  <C>
     SAFLEX(R) and VANCEVA(R) plastic                Nylon intermediate "building block"
     interlayer                                      chemicals

     Polyvinyl butyral for KEEPSAFE(R) and           Nylon resins and polymers, including
     KEEPSAFE MAXIMUM(R) laminated window            VYDYNE(R) and ASCEND(R)
     glass

     LLUMAR(R), VISTA(R), GILA(R) and FORMULA        Carpet fibers, including the WEAR-DATED(R)
     ONE(R) professional and retail window films     and ULTRON(R) brands

                                                     Industrial nylon fibers
     THERMINOL(R) heat transfer fluids
</TABLE>


                                       30
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<S>                                                  <C>
     DEQUEST(R) water treatment chemicals

     SKYDROL(R) aviation hydraulic fluids
     and SKYKLEEN(R) brand of aviation
     solvents

     ASTROTURF(R), CLEAN MACHINE(R) and
     CLEARPASS(R) entrance matting and
     automotive spray suppression flaps
</TABLE>


                                       31
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)


      Solutia  evaluates  the  performance  of its operating  segments  based on
segment  earnings  before  interest  expense and income  taxes  ("EBIT"),  which
includes  marketing,  administrative,  technological and amortization  expenses,
gains and losses from asset  dispositions and restructuring  charges,  and other
income and  expense  items that can be  directly  attributable  to the  segment.
Certain  expenses  and other items that are managed  outside  the  segments  are
excluded.  These  unallocated  items  consist  primarily of corporate  expenses,
certain  equity  earnings  from  affiliates,  other  income and  expense  items,
reorganization items, gains and losses from asset dispositions and restructuring
charges that are not directly attributable to the operating segment.  There were
no inter-segment sales in the periods presented below.

      Segment data from continuing operations for the three and six months ended
June 30, 2006 and 2005 are as follows:

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED JUNE 30,
                                             ------------------------------------------------
                                                      2006                        2005
                                             -------------------------     ------------------
                                               NET        PROFIT             NET       PROFIT
                                              SALES       (LOSS)            SALES      (LOSS)
                                              -----       ------            -----      ------
<S>                                             <C>      <C>                  <C>      <C>
SEGMENT:
Performance Products................            $308     $   46               $298     $   36
Integrated Nylon....................             457          4                432         14
                                                ----     ------               ----     ------
SEGMENT TOTALS......................             765         50                730         50

RECONCILIATION TO CONSOLIDATED TOTALS:
    Corporate gains (expenses)......                          7                           (14)
    Equity earnings from affiliates.                         12                            20
    Interest expense................                        (27)                          (22)
    Other income, net...............                          3                             1
    Reorganization items, net.......                        (16)                          (15)
CONSOLIDATED TOTALS:                            ----                          ----
    NET SALES.......................            $765                          $730
                                                ====     ------               ====      -----
    INCOME BEFORE INCOME TAXES......                     $   29                         $  20
                                                         ======                         =====

<CAPTION>
                                                         SIX MONTHS ENDED JUNE 30,
                                             ------------------------------------------------
                                                     2006                         2005
                                             -------------------           ------------------
                                               NET        PROFIT             NET       PROFIT
                                              SALES       (LOSS)            SALES      (LOSS)
                                              -----       ------            -----      ------
<S>                                           <C>       <C>                  <C>       <C>
SEGMENT:
Performance Products................          $  594    $    88              $ 566     $   69
Integrated Nylon....................             849        (10)               878         13
                                              ------    -------              -----     ------
SEGMENT TOTALS......................           1,443         78              1,444         82

RECONCILIATION TO CONSOLIDATED TOTALS:
    Corporate expenses..............                        (13)                          (25)
    Equity earnings from affiliates.                         21                            33
    Interest expense................                        (50)                          (44)
    Other income, net...............                          3                             1
    Loss on debt modification.......                         (8)                           --
    Reorganization items, net.......                        (26)                           (2)
CONSOLIDATED TOTALS:                          ------                        ------
    NET SALES.......................          $1,443                        $1,444
                                              ======    -------             ======     ------
    INCOME BEFORE INCOME TAXES                          $     5                        $   45
                                                        =======                        ======
</TABLE>


                                       32
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

13. SUBSEQUENT EVENTS

Euronotes Refinancing

      As  described  in a Form 8-K filed on August 1,  2006,  on July 26,  2006,
Solutia's  indirect  wholly-owned   subsidiary  Solutia  Services  International
S.C.A./Comm.  V.A., a subsidiary of Solutia's  wholly-owned  subsidiary  Solutia
Europe S.A./N.V.  ("SESA"), entered into a (euro) 200 million Facility Agreement
(the  "Facility  Agreement")  guaranteed by SESA and CPFilms  Vertriebs  GmbH, a
subsidiary of SESA. Closing of the credit facility  contemplated by the Facility
Agreement,  which at signing remained subject to the satisfaction of a number of
conditions precedent,  occurred on August 1, 2006. SESA used the proceeds of the
new credit  facility  to  refinance  all of its (euro) 200 million of 10 percent
Senior Secured Notes (the "Euronotes") on August 1, 2006 at a prepayment premium
of 3 percent,  as required  pursuant to the  Euronotes,  for a total  redemption
amount of approximately  (euro) 215 million,  including  accrued  interest.  The
Euronotes were  refinanced to reduce the interest  rate,  extend the term of the
indebtedness  and  facilitate  certain  dispositions  by Solutia,  including the
potential sale of its pharmaceutical services business described in Note 4.

      The Facility  Agreement has a five-year term,  with a termination  date of
July 31, 2011 and an adjustable  rate  structure  which is EURIBOR plus a margin
which currently yields a rate of approximately 5.75 to 6.50 percent.  The margin
is subject to adjustment upon the occurrence of certain events  specified in the
Facility Agreement or upon SESA and its subsidiaries attaining certain financial
benchmarks.  The new credit facility  consists of a (euro) 160 million term loan
B1 and a (euro) 40 million  term loan B2. The (euro) 40 million  term loan B2 is
expected to be repaid from the proceeds of the sale of Solutia's  pharmaceutical
services business (as further described in Note 4); accordingly, this amount has
been classified as current in the Consolidated  Statement of Financial  Position
as of June 30, 2006. The new loan is secured by substantially  all of the assets
of SESA and its subsidiaries  (excluding Flexsys Holding B.V. and Carbogen Amcis
AG). The Facility  Agreement also contains other customary terms and conditions,
including  certain financial  covenants  relating to the performance of SESA and
its subsidiaries.

14. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS

      CPFilms Inc., Monchem International, Inc., Monchem, Inc., Solutia Systems,
Inc.,  Solutia  Investments,   LLC  and  Solutia  Business  Enterprises,   Inc.,
wholly-owned  subsidiaries  of Solutia (the  "Guarantors"),  are  guarantors  of
Solutia's 11.25% Senior Secured Notes due 2009 (the "Notes"). In connection with
the completion of the October 2003 credit facility, Solutia Investments, LLC and
Solutia  Business  Enterprises,  Inc.  became  guarantors  of the Notes  through
cross-guarantor  provisions.   Solutia's  obligations  under  the  October  2003
facility  were paid in full with the proceeds of the DIP facility  dated January
16, 2004, which payment did not affect the Guarantors' obligations in respect of
the  Notes.  Certain  other  wholly-owned  subsidiaries  of  Solutia  (the  "DIP
Guarantors")  guaranteed  the final DIP facility (as well as a smaller,  interim
DIP facility put in place as of December 19, 2003),  but the DIP Guarantors were
not required by the cross-guarantor provisions to guarantee the Notes.

      The Guarantors  fully and  unconditionally  guarantee the Notes on a joint
and several basis. The following condensed  consolidating  financial  statements
present,  in separate  columns,  financial  information  for:  Solutia Inc. on a
parent only basis  carrying  its  investment  in  subsidiaries  under the equity
method;  Guarantors on a combined,  or where  appropriate,  consolidated  basis,
carrying  investments  in  subsidiaries  which do not  guarantee  the debt  (the
"Non-Guarantors")  under the equity  method;  Non-Guarantors  on a combined,  or
where appropriate, consolidated basis; eliminating adjustments; and consolidated
totals as of June 30,  2006 and  December  31,  2005,  and for the three and six
months  ended June 30,  2006 and 2005.  The  eliminating  adjustments  primarily
reflect intercompany transactions, such as interest income and expense, accounts
receivable and payable, advances, short and long-term debt, royalties and profit
in  inventory  eliminations.   Solutia  has  not  presented  separate  financial
statements and other  disclosures  concerning the Guarantors as such information
is not material and would substantially duplicate disclosures included elsewhere
in this report.


                                       33
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

                 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                        THREE MONTHS ENDED JUNE 30, 2006

<TABLE>
<CAPTION>
                                                            PARENT ONLY                      NON-                      CONSOLIDATED
                                                            SOLUTIA INC.    GUARANTORS    GUARANTORS    ELIMINATIONS   SOLUTIA INC.
                                                            ------------    ----------    ----------    ------------   ------------
<S>                                                             <C>            <C>           <C>            <C>            <C>
NET SALES ...............................................       $ 574          $  56         $ 250          $(115)         $ 765
Cost of goods sold ......................................         517             26           213           (121)           635
                                                                ----------------------------------------------------------------
GROSS PROFIT ............................................          57             30            37              6            130
Marketing expenses ......................................          19              8             8             --             35
Administrative expenses .................................          16              3             4             --             23
Technological expenses ..................................          11             --             1             --             12
Amortization expense ....................................          --             --             1             --              1
                                                                ----------------------------------------------------------------
OPERATING INCOME ........................................          11             19            23              6             59
Equity earnings (loss) from affiliates ..................          51             15            (2)           (53)            11
Interest expense ........................................         (22)            --           (12)             7            (27)
Other income, net .......................................           6              4             7            (13)             4
Reorganization items, net ...............................         (18)            --            --             --            (18)
                                                                ----------------------------------------------------------------
INCOME BEFORE INCOME TAXES ..............................          28             38            16            (53)            29
Income tax expense (benefit) ............................          (1)            --             5              1              5
                                                                ----------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS .......................          29             38            11            (54)            24
Income (loss) from discontinued
operations, net of tax ..................................          (1)            --             5             --              4
                                                                ----------------------------------------------------------------
NET INCOME ..............................................       $  28          $  38         $  16          $ (54)         $  28
                                                                ================================================================
</TABLE>

            CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
                        THREE MONTHS ENDED JUNE 30, 2006

<TABLE>
<CAPTION>
                                                            PARENT ONLY                      NON-                      CONSOLIDATED
                                                            SOLUTIA INC.    GUARANTORS    GUARANTORS    ELIMINATIONS   SOLUTIA INC.
                                                            ------------    ----------    ----------    ------------   ------------
<S>                                                             <C>            <C>           <C>            <C>            <C>
NET INCOME ..............................................       $  28          $  38         $  16          $ (54)         $  28
OTHER COMPREHENSIVE INCOME:
Currency translation adjustments ........................          10              7             8            (15)            10
                                                                ----------------------------------------------------------------
COMPREHENSIVE INCOME ....................................       $  38          $  45         $  24          $ (69)         $  38
                                                                ================================================================
</TABLE>


                                       34
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

                 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                        THREE MONTHS ENDED JUNE 30, 2005

<TABLE>
<CAPTION>
                                                    PARENT ONLY                           NON-                       CONSOLIDATED
                                                    SOLUTIA INC.      GUARANTORS       GUARANTORS     ELIMINATIONS   SOLUTIA INC.
                                                    ------------      ----------       ----------     ------------   ------------
<S>                                                     <C>              <C>              <C>            <C>             <C>
NET SALES ......................................        $ 549            $  52            $ 229          $(100)          $ 730
Cost of goods sold .............................          515               25              195           (106)            629
                                                        ----------------------------------------------------------------------
GROSS PROFIT ...................................           34               27               34              6             101
Marketing expenses .............................           19                6                9             --              34
Administrative expenses ........................           16                2                6             --              24
Technological expenses .........................           10                1               --             --              11
                                                        ----------------------------------------------------------------------
OPERATING INCOME (LOSS) ........................          (11)              18               19              6              32
Equity earnings (loss) from affiliates .........           42               11               (1)           (31)             21
Interest expense ...............................           --               --              (13)            (9)            (22)
Other income, net ..............................           (1)              (9)              12              2               4
Reorganization items, net ......................          (13)              --               (2)            --             (15)
                                                        ----------------------------------------------------------------------
INCOME BEFORE INCOME TAXES .....................           17               20               15            (32)             20
Income tax expense .............................            2               --                5             --               7
                                                        ----------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS ..............           15               20               10            (32)             13
Income (loss) from discontinued
operations, net of tax .........................           (1)              --                2             --               1
                                                        ----------------------------------------------------------------------
NET INCOME .....................................        $  14            $  20            $  12          $ (32)          $  14
                                                        ======================================================================
</TABLE>

            CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
                        THREE MONTHS ENDED JUNE 30, 2005

<TABLE>
<CAPTION>
                                                    PARENT ONLY                           NON-                       CONSOLIDATED
                                                    SOLUTIA INC.      GUARANTORS       GUARANTORS     ELIMINATIONS   SOLUTIA INC.
                                                    ------------      ----------       ----------     ------------   ------------
<S>                                                     <C>              <C>              <C>            <C>             <C>
NET INCOME .....................................        $  14            $  20            $  12          $ (32)          $  14
OTHER COMPREHENSIVE INCOME:
Currency translation adjustments ...............           (2)              (6)              (9)            15              (2)
                                                        ----------------------------------------------------------------------
COMPREHENSIVE INCOME ...........................        $  12            $  14            $   3          $ (17)          $  12
                                                        ======================================================================
</TABLE>


                                       35
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

                 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                         SIX MONTHS ENDED JUNE 30, 2006

<TABLE>
<CAPTION>
                                                       PARENT ONLY                      NON-                      CONSOLIDATED
                                                       SOLUTIA INC.     GUARANTORS   GUARANTORS    ELIMINATIONS   SOLUTIA INC.
                                                       ------------     ----------   ----------    ------------   ------------
<S>                                                       <C>              <C>          <C>            <C>            <C>
NET SALES .......................................         $ 1,081          $105         $ 479          $(222)         $ 1,443
Cost of goods sold ..............................           1,010            50           413           (234)           1,239
                                                          -------------------------------------------------------------------
GROSS PROFIT ....................................              71            55            66             12              204
Marketing expenses ..............................              38            14            16             --               68
Administrative expenses .........................              29             5            10             --               44
Technological expenses ..........................              22             1             1             --               24
Amortization expense ............................              --            --             1             --                1
                                                          -------------------------------------------------------------------
OPERATING INCOME (LOSS) .........................             (18)           35            38             12               67
Equity earnings (loss) from affiliates ..........              96            28            (3)          (100)              21
Interest expense ................................             (40)           --           (23)            13              (50)
Loss on debt modification .......................              (8)           --            --             --               (8)
Other income, net ...............................              10             8            15            (26)               7
Reorganization items, net .......................             (32)           --            --             --              (32)
                                                          -------------------------------------------------------------------

INCOME BEFORE INCOME TAX EXPENSE ................               8            71            27           (101)               5
Income tax expense ..............................               1            --             6             --                7
                                                          -------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS                        7            71            21           (101)              (2)

Income (loss) from discontinued operations ......              (1)           --             9             --                8
                                                          -------------------------------------------------------------------
NET INCOME ......................................         $     6          $ 71         $  30          $(101)         $     6
                                                          ===================================================================
</TABLE>

            CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
                         SIX MONTHS ENDED JUNE 30, 2006

<TABLE>
<CAPTION>
                                                       PARENT ONLY                      NON-                      CONSOLIDATED
                                                       SOLUTIA INC.     GUARANTORS   GUARANTORS    ELIMINATIONS   SOLUTIA INC.
                                                       ------------     ----------   ----------    ------------   ------------
<S>                                                       <C>              <C>          <C>            <C>            <C>
NET INCOME ......................................         $     6          $ 71         $  30          $(101)         $     6
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized loss on derivative
instruments .....................................              (1)           --            --             --               (1)
Currency translation adjustments ................              12             9            10            (19)              12
                                                          -------------------------------------------------------------------
COMPREHENSIVE INCOME ............................         $    17          $ 80         $  40          $(120)         $    17
                                                          ===================================================================
</TABLE>


                                       36
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

                 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                         SIX MONTHS ENDED JUNE 30, 2005

<TABLE>
<CAPTION>
                                                   PARENT ONLY                         NON-                        CONSOLIDATED
                                                   SOLUTIA INC.     GUARANTORS      GUARANTORS     ELIMINATIONS     SOLUTIA INC.
                                                   ------------     ----------      ----------     ------------     ------------
<S>                                                   <C>               <C>            <C>             <C>             <C>
NET SALES ..................................          $ 1,100           $ 92           $ 455           $(203)          $ 1,444
Cost of goods sold .........................            1,033             41             384            (217)            1,241
                                                      ------------------------------------------------------------------------
GROSS PROFIT ...............................               67             51              71              14               203
Marketing expenses .........................               38             12              16              --                66
Administrative expenses ....................               30              4              12              --                46
Technological expenses .....................               20              1               1              --                22
                                                      ------------------------------------------------------------------------
OPERATING INCOME (LOSS) ....................              (21)            34              42              14                69
Equity earnings (loss) from affiliates .....              110             24              (2)            (97)               35
Interest expense ...........................              (32)            --             (26)             14               (44)
Other income, net ..........................               (1)            11              21             (26)                5
Reorganization items, net ..................              (18)            --              (2)             --               (20)
                                                      ------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES .................               38             69              33             (95)               45
Income tax expense .........................                2             --              11              --                13
                                                      ------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS ..........               36             69              22             (95)               32
Income (loss) from discontinued
operations, net of tax .....................               (1)            --               4              --                 3
                                                      ------------------------------------------------------------------------
NET INCOME .................................          $    35           $ 69           $  26           $ (95)          $    35
                                                      ========================================================================
</TABLE>

            CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
                         SIX MONTHS ENDED JUNE 30, 2005

<TABLE>
<CAPTION>
                                                   PARENT ONLY                         NON-                        CONSOLIDATED
                                                   SOLUTIA INC.     GUARANTORS      GUARANTORS     ELIMINATIONS     SOLUTIA INC.
                                                   ------------     ----------      ----------     ------------     ------------
<S>                                                   <C>               <C>            <C>             <C>             <C>

NET INCOME .................................          $    35           $ 69           $  26           $ (95)          $    35
OTHER COMPREHENSIVE INCOME:
Currency translation adjustments ...........               (7)           (10)            (16)             26                (7)
                                                      ------------------------------------------------------------------------
COMPREHENSIVE INCOME .......................          $    28           $ 59           $  10           $ (69)          $    28
                                                      ========================================================================
</TABLE>


                                       37
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

                      CONDENSED CONSOLIDATING BALANCE SHEET
                                  JUNE 30, 2006

<TABLE>
<CAPTION>
                                                                PARENT ONLY                    NON-                  CONSOLIDATED
                                                                SOLUTIA INC.  GUARANTORS   GUARANTORS  ELIMINATIONS  SOLUTIA INC.
                                                                ------------  ----------   ----------  ------------  ------------
<S>                                                               <C>           <C>          <C>          <C>           <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................    $   144       $   10       $  111       $    --       $   265
Trade receivables, net .......................................         12          189          146            --           347
Intercompany receivables .....................................        113          729          108          (950)           --
Miscellaneous receivables ....................................         58            1           31            --            90
Inventories ..................................................        133           34          110           (14)          263
Prepaid expenses and other current assets ....................         17           --            9             3            29
Assets of discontinued operations ............................         --           --           84                          84
                                                                  -------------------------------------------------------------
TOTAL CURRENT ASSETS .........................................        477          963          599          (961)        1,078

PROPERTY, PLANT AND EQUIPMENT, NET ...........................        575           83          114            --           772
INVESTMENTS IN AFFILIATES ....................................      2,414          243           12        (2,456)          213
GOODWILL .....................................................         --           72           17            --            89
IDENTIFIED INTANGIBLE ASSETS, NET ............................          2           26            4            --            32
INTERCOMPANY ADVANCES ........................................        128        1,238          737        (2,103)           --
OTHER ASSETS .................................................         59           --           46            --           105
                                                                  -------------------------------------------------------------
TOTAL ASSETS .................................................    $ 3,655       $2,625       $1,529       $(5,520)      $ 2,289
                                                                  =============================================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable .............................................    $   147       $    8       $   44       $    (2)      $   197
Intercompany payables ........................................         70            8          145          (223)           --
Accrued liabilities ..........................................        160           14           71            --           245
Short-term debt ..............................................        650           --           50            --           700
Intercompany short-term debt .................................          1           --          185          (186)           --
Liabilities of discontinued operations .......................          1           --           29            --            30
                                                                  -------------------------------------------------------------
TOTAL CURRENT LIABILITIES ....................................      1,029           30          524          (411)        1,172

LONG-TERM DEBT ...............................................         --           --          210            --           210
INTERCOMPANY LONG-TERM DEBT ..................................         --           --          426          (426)           --
OTHER LIABILITIES ............................................        193            1           66            --           260
                                                                  -------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE ..................      1,222           31        1,226          (837)        1,642

LIABILITIES SUBJECT TO COMPROMISE ............................      3,870          410           22        (2,218)        2,084

SHAREHOLDERS' EQUITY (DEFICIT):
Common stock .................................................          1           --           --            --             1
Additional contributed capital ...............................         56           --           --            --            56
Treasury stock ...............................................       (251)          --           --            --          (251)
Net (deficiency) excess of assets at spinoff and subsidiary
  capital ....................................................       (113)       2,184          281        (2,465)         (113)
Accumulated other comprehensive loss .........................        (82)          --           --            --           (82)
Accumulated deficit ..........................................     (1,048)          --           --            --        (1,048)
                                                                  -------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) .........................     (1,437)       2,184          281        (2,465)       (1,437)
                                                                  -------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) .........    $ 3,655       $2,625       $1,529       $(5,520)      $ 2,289
                                                                  =============================================================
</TABLE>


                                       38
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

                      CONDENSED CONSOLIDATING BALANCE SHEET
                                DECEMBER 31, 2005

<TABLE>
<CAPTION>
                                                                 PARENT ONLY                    NON-                    CONSOLIDATED
                                                                 SOLUTIA INC.    GUARANTORS  GUARANTORS  ELIMINATIONS   SOLUTIA INC.
                                                                 ------------    ----------  ----------  ------------   ------------
<S>                                                                 <C>            <C>          <C>          <C>            <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................       $     1        $   15       $   91       $    --        $   107
Trade receivables, net ......................................             7           118          121            --            246
Intercompany receivables ....................................           115           754           89          (958)            --
Miscellaneous receivables ...................................            67            --           28            --             95
Inventories .................................................           142            31           94           (13)           254
Prepaid expenses and other assets ...........................            23            --            8             3             34
Assets of discontinued operations ...........................            --            --           69            --             69
                                                                    ---------------------------------------------------------------
TOTAL CURRENT ASSETS ........................................           355           918          500          (968)           805

PROPERTY, PLANT AND EQUIPMENT, NET ..........................           589            84           97            --            770
INVESTMENTS IN AFFILIATES ...................................         2,291           209           13        (2,308)           205
GOODWILL ....................................................            --            72            4            --             76
IDENTIFIED INTANGIBLE ASSETS, NET ...........................             2            26           --            --             28
INTERCOMPANY ADVANCES .......................................           128         1,238          703        (2,069)            --
OTHER ASSETS ................................................            62            --           38            --            100
                                                                    ---------------------------------------------------------------
TOTAL ASSETS ................................................       $ 3,427        $2,547       $1,355       $(5,345)       $ 1,984
                                                                    ===============================================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable ............................................       $   167        $    9       $   43       $    (1)       $   218
Intercompany payables .......................................           108            12          111          (231)            --
Accrued liabilities .........................................           143            13           67            --            223
Short-term debt .............................................           300            --           --            --            300
Intercompany short-term debt ................................            --            --          182          (182)            --
Liabilities of discontinued operations ......................             1            --           25            --             26
                                                                    ---------------------------------------------------------------
TOTAL CURRENT LIABILITIES ...................................           719            34          428          (414)           767

LONG-TERM DEBT ..............................................            --            --          247            --            247
INTERCOMPANY LONG-TERM DEBT .................................            --            --          401          (401)            --
OTHER LIABILITIES ...........................................           201            --           47            --            248
                                                                    ---------------------------------------------------------------
TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE .................           920            34        1,123          (815)         1,262

LIABILITIES SUBJECT TO COMPROMISE ...........................         3,961           407           21        (2,213)         2,176

SHAREHOLDERS' EQUITY (DEFICIT):
Common stock ................................................             1            --           --            --              1
Additional contributed capital ..............................            56            --           --            --             56
Treasury stock ..............................................          (251)           --           --            --           (251)
Net (deficiency) excess of assets at spinoff and
  subsidiary capital ........................................          (113)        2,106          211        (2,317)          (113)
Accumulated other comprehensive loss ........................           (93)           --           --            --            (93)
Accumulated deficit .........................................        (1,054)           --           --            --         (1,054)
                                                                    ---------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) ........................        (1,454)        2,106          211        (2,317)        (1,454)
                                                                    ---------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY DEFICIT) .........       $ 3,427        $2,547       $1,355       $(5,345)       $ 1,984
                                                                    ===============================================================
</TABLE>


                                       39
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

                 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                         SIX MONTHS ENDED JUNE 30, 2006

<TABLE>
<CAPTION>
                                                              PARENT ONLY                      NON-                     CONSOLIDATED
                                                              SOLUTIA INC.   GUARANTORS    GUARANTORS   ELIMINATIONS    SOLUTIA INC.
                                                              ------------   ----------    ----------   ------------    ------------
<S>                                                               <C>           <C>           <C>           <C>            <C>
CASH PROVIDED BY (USED IN) OPERATIONS ......................      $(121)        $ (23)        $  20         $  --          $(124)
                                                                  --------------------------------------------------------------

INVESTING ACTIVITIES:
Property, plant and equipment purchases ....................        (26)           (3)          (14)           --            (43)
Acquisition, net of cash acquired ..........................        (23)           --             7            --            (16)
                                                                  --------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES ..........................        (49)           (3)           (7)           --            (59)
                                                                  --------------------------------------------------------------

FINANCING ACTIVITIES:
Net change in short-term debt obligations ..................        350            --            --            --            350
Deferred debt issuance costs ...............................         (9)           --            --            --             (9)
Changes in investments and advances from (to) affiliates ...        (28)           21             7            --             --
                                                                  --------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES ......................        313            21             7            --            341
                                                                  --------------------------------------------------------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...........        143            (5)           20            --            158

CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR ..........................................          1            15            91            --            107
                                                                  --------------------------------------------------------------
END OF PERIOD ..............................................      $ 144         $  10         $ 111         $  --          $ 265
                                                                  ===============================================================
</TABLE>


                                       40
<PAGE>

                                  SOLUTIA INC.
                             (DEBTOR-IN-POSSESSION)

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                   (UNAUDITED)

                 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                         SIX MONTHS ENDED JUNE 30, 2005

<TABLE>
<CAPTION>
                                                        PARENT ONLY                       NON-                     CONSOLIDATED
                                                        SOLUTIA INC.    GUARANTORS     GUARANTORS   ELIMINATIONS   SOLUTIA INC.
                                                        ------------    ----------     ----------   ------------   ------------
<S>                                                        <C>            <C>            <C>            <C>            <C>
CASH PROVIDED BY (USED IN) OPERATIONS ................     $  (65)        $   24         $   15         $   --         $  (26)
                                                           ------------------------------------------------------------------

INVESTING ACTIVITIES:
Property, plant and equipment purchases ..............        (18)            (4)            (7)            --            (29)
Other investing activities ...........................          1             --              1             --              2
                                                           ------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES ....................        (17)            (4)            (6)            --            (27)
                                                           ------------------------------------------------------------------

FINANCING ACTIVITIES:
Net change in cash collateralized letters of
  credit .............................................         17             --             --             --             17
Changes in investments and advances from (to)
  affiliates .........................................         19            (13)            (6)            --             --
                                                           ------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ......         36            (13)            (6)            --             17
                                                           ------------------------------------------------------------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .....        (46)             7              3             --            (36)

CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR ....................................         43              7             65             --            115
                                                           ------------------------------------------------------------------
END OF PERIOD ........................................     $   (3)        $   14         $   68         $   --         $   79
                                                           ==================================================================
</TABLE>


                                       41
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

      This section  includes  forward-looking  statements  within the meaning of
Section 27A of the  Securities  Act of 1933 and  Section  21E of the  Securities
Exchange Act of 1934. These  forward-looking  statements  include all statements
regarding   expected   future   financial   position,   results  of  operations,
profitability,  cash flows and  liquidity.  Important  factors  that could cause
actual  results to differ  materially  from the  expectations  reflected  in the
forward-looking  statements herein include,  among others,  Solutia's ability to
develop,  confirm and consummate a Chapter 11 plan of reorganization;  Solutia's
ability to reduce its overall leveraged  position;  the potential adverse impact
of Solutia's Chapter 11 filing on its operations,  management and employees, and
the risks  associated  with  operating  businesses  under Chapter 11 protection;
Solutia's ability to comply with the terms of its  debtor-in-possession  ("DIP")
financing  facility;  customer response to Solutia's Chapter 11 filing;  general
economic,  business and market conditions;  customer acceptance of new products;
raw material and energy costs or shortages; limited access to capital resources;
currency and interest rate fluctuations;  increased  competitive and/or customer
pressure;  gain or loss of  significant  customers;  compression of credit terms
with suppliers;  exposure to product liability and other litigation;  changes in
cost  of   environmental   remediation   obligations  and  other   environmental
liabilities;  changes in accounting  principles  generally accepted in the U.S.;
ability to implement cost reduction initiatives in a timely manner; geopolitical
instability; and changes in pension and other postretirement assumptions.

OVERVIEW

Summary of Significant Second Quarter 2006 Events

Reorganization Strategy

      In the second quarter 2006,  Solutia  continued its stated  reorganization
strategy with a focus on the principal objectives of (i) managing the businesses
to  enhance  Solutia's  performance;  (ii)  making  changes to  Solutia's  asset
portfolio to maximize the value of the estate;  (iii) achieving  reallocation of
"legacy  liabilities";  and (iv) negotiating an appropriate  capital  structure.
Solutia took steps in 2006 to enhance its financial  performance including using
the tools of bankruptcy and making changes to its asset portfolio,  as explained
below.  Solutia also continues to pursue a reallocation of legacy liabilities in
the bankruptcy  proceeding  through  negotiations with the other constituents in
the bankruptcy case.  Solutia will also be working in 2006 to establish a proper
capital  structure upon emergence from bankruptcy.  However,  as a result of the
numerous   uncertainties  and  complexities  inherent  in  Solutia's  bankruptcy
proceedings,  its ability and timing of emergence from bankruptcy are subject to
significant uncertainty.

      PERFORMANCE ENHANCEMENT

      Solutia  benefited  in the  second  quarter of 2006 from  several  actions
implemented earlier in the bankruptcy reorganization process designed to enhance
its   performance.   These  included   implementing   significant   general  and
administrative expense reductions; increasing performance-based compensation and
benefits  programs;  enacting key senior management  changes;  initiating a cost
reduction  program at Solutia's  operating sites focused on actions such as lean
manufacturing techniques,  yield improvement,  maintenance savings and utilities
optimization; and implementing an enterprise-wide procurement effort.

      As  described  in  Note  13 to  the  accompanying  consolidated  financial
statements, on July 26, 2006, Solutia Europe S.A./N.V.  ("SESA"), entered into a
(euro) 200 million  facility  agreement that closed on August 1, 2006. SESA used
the  proceeds  of the new credit  facility  to  refinance  all of its (euro) 200
million of 10 percent Euronotes due 2008 (the "Euronotes") on August 1, 2006. It
is projected this new financing will result in significant  interest savings for
Solutia, as well as allow Solutia greater flexibility to divest non-core assets,
such as Solutia's pharmaceutical services business described below.


                                       42
<PAGE>

      PORTFOLIO EVALUATION

      Solutia's  stated  strategy  is to  build a  portfolio  of  high-potential
businesses that can consistently  deliver returns in excess of Solutia's cost of
capital. As part of this strategy,  Solutia made several changes to re-shape its
asset  portfolio  in 2004 and 2005 and  continued  these  efforts  in the second
quarter 2006. On May 23, 2006, SESA agreed to sell its  pharmaceutical  services
business to Dishman  Pharmaceuticals & Chemicals Ltd.  ("Dishman") pursuant to a
Stock and Asset  Purchase  Agreement  dated as of May 23, 2006  between SESA and
Dishman.  Under the terms of the  agreement,  Dishman has agreed to purchase 100
percent of the stock of the pharmaceutical services business, as well as certain
other assets used in the pharmaceutical services business, for approximately $75
million,  subject to certain  purchase  price  adjustments.  The  transaction is
anticipated  to close in the  third  quarter  2006 and  based  upon the  current
transaction  terms,  Solutia  expects  to  record  a  gain  on the  sale  of the
pharmaceutical  services  business in the range of approximately  $45 million to
$55 million.  See Note 4 to the accompanying  consolidated  financial statements
for  additional  information  regarding  sale  of  the  pharmaceutical  services
business.

      REALLOCATION OF LEGACY LIABILITIES

      On February 14, 2006,  the Debtors filed with the  Bankruptcy  Court their
Plan of  Reorganization  (the "Plan") and Disclosure  Statement (the "Disclosure
Statement")  providing  for,  among other things,  the  reallocation  of certain
Legacy  Liabilities  among  Solutia,  Monsanto and  Pharmacia  and the treatment
various  constituencies in the Chapter 11 Cases will receive under the Plan. See
Note  1 to  the  accompanying  consolidated  financial  statements  for  further
description  of the Plan  and  Disclosure  Statement,  as well as a  summary  of
developments in Solutia's ongoing Chapter 11 bankruptcy case.

Summary Results of Operations

      The  discussions  below  and  the  accompanying   consolidated   financial
statements  have been prepared in accordance  with  Statement of Position  90-7,
Financial  Reporting by Entities in  Reorganization  Under the  Bankruptcy  Code
("SOP 90-7"),  and on a going  concern  basis,  which assumes the  continuity of
operations  and  reflects  the   realization  of  assets  and   satisfaction  of
liabilities  in the  ordinary  course of business.  However,  as a result of the
Chapter 11 bankruptcy proceedings, such realization of assets and liquidation of
liabilities are subject to a significant number of uncertainties.

Results of Operations - Second Quarter 2006 Compared with Second Quarter 2005

      Net sales and operating  income of Solutia for the three months ended June
30, 2006 and 2005 are as follows:

<TABLE>
<CAPTION>
      (dollars in millions)                                                                 2006         2005
                                                                                            ----         ----
<S>                                                                                        <C>          <C>
      Net Sales ................................................................           $ 765        $ 730
                                                                                           =====        =====

      Operating Income:
          Performance Products Segment Profit ..................................           $  46        $  36
          Integrated Nylon Segment Profit ......................................               4           14
               Less: Corporate Gains (Expenses) ................................               7          (14)
               Less: Equity (Earnings) Loss from Affiliates,  Other (Income)
               Expense and Reorganization Items included in Segment Profit .....               2           (4)
                                                                                           -----        -----
      Operating Income .........................................................           $  59        $  32
                                                                                           =====        =====
      Gains (Charges) included in Operating Income .............................           $  19        $  --
                                                                                           =====        =====
</TABLE>

      The $35  million,  or 5 percent,  increase in net sales as compared to the
second quarter 2005 was primarily a result of higher  average  selling prices of
approximately   6  percent,   partially   offset  by  lower  sales   volumes  of
approximately  1  percent.  The $27  million  increase  in  operating  income as
compared to the second quarter 2005


                                       43
<PAGE>

resulted  primarily from higher net sales and higher  one-time net gains,  which
are  described in greater  detail in the Results of  Operations  section  below,
partially  offset by higher raw material  and energy  costs.

Results of  Operations - Six Months Ended June 30, 2006 Compared with Six Months
Ended June 30, 2005

      Net sales and  operating  income of Solutia for the six months  ended June
30, 2006 and 2005 are as follows:

<TABLE>
<CAPTION>
      (dollars in millions)                                                                    2006         2005
                                                                                               ----         ----
<S>                                                                                           <C>         <C>
      Net Sales .....................................................................         $ 1,443     $ 1,444
                                                                                              =======     =======

      Operating Income:
          Performance Products Segment Profit .......................................         $    88     $    69
          Integrated Nylon Segment Profit (Loss) ....................................             (10)         13
               Less: Corporate Expenses .............................................             (13)        (25)
               Less: Equity (Earnings) Loss from Affiliates,  Other (Income)
               Expense and Reorganization Items included in Segment Profit (Loss) ...               2          12
                                                                                              -------     -------

      Operating Income ..............................................................         $    67     $    69
                                                                                              =======     =======
      Gains (Charges) included in Operating Income ..................................         $    10     $    --
                                                                                              =======     =======
</TABLE>

      Net sales in the six months ended June 30, 2006 remained  consistent  with
the comparable  period in 2005  consisting of higher  average  selling prices of
approximately 6 percent offset by lower sales volumes of approximately 5 percent
and unfavorable  currency exchange rate fluctuations of approximately 1 percent.
The $2 million  decrease in operating income as compared to the six months ended
June 30,  2005  resulted  primarily  from  unfavorable  manufacturing  variances
resulting  principally from manufacturing  interruptions and higher raw material
and energy  costs,  partially  offset by one-time  net gains in 2006,  which are
described in greater detail in the Results of Operations section below.

Financial Information

      Summarized  financial  information  concerning Solutia and subsidiaries in
reorganization  and subsidiaries not in  reorganization  as of and for the three
and six months ended June 30, 2006 is presented as follows:


<TABLE>
<CAPTION>
                                                           SOLUTIA AND                                           SOLUTIA AND
                                                        SUBSIDIARIES IN      SUBSIDIARIES NOT                    SUBSIDIARIES
(dollars in millions)                                    REORGANIZATION     IN REORGANIZATION     ELIMINATIONS   CONSOLIDATED
                                                         --------------     -----------------     ------------   ------------
<S>                                                           <C>                 <C>                <C>             <C>
Three Months Ended June 30, 2006:
---------------------------------
Net Sales ............................................        $   633             $   248            $  (116)        $   765
Operating Income .....................................             30                  22                  7              59
Net Income ...........................................             28                  16                (16)             28

Six Months Ended June 30, 2006:
-------------------------------
Net Sales ............................................        $ 1,190             $   475            $  (222)        $ 1,443
Operating Income .....................................             18                  36                 13              67
Net Income ...........................................              6                  29                (29)              6

As of June 30, 2006:
--------------------
Total Assets .........................................        $ 1,938             $   909            $  (558)        $ 2,289
Liabilities not Subject to Compromise ................          1,291                 530               (179)          1,642
Liabilities Subject to Compromise ....................          2,084                  --                 --           2,084
Total Shareholders' Equity (Deficit) .................         (1,437)                379               (379)         (1,437)
</TABLE>


                                       44
<PAGE>

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      There were no changes in the six months  ended June 30, 2006 with  respect
to Solutia's critical accounting  policies,  as presented on pages 33 through 36
of Solutia's 2005 Form 10-K.

RESULTS OF OPERATIONS--SECOND QUARTER 2006 COMPARED WITH SECOND QUARTER 2005

PERFORMANCE PRODUCTS

<TABLE>
<CAPTION>
                                                                                          THREE MONTHS ENDED
                                                                                                 JUNE 30,
                                                                                          -------------------
   (dollars in millions)                                                                   2006         2005
                                                                                           ----         ----
<S>                                                                                       <C>           <C>
   Net Sales ...................................................................          $ 308         $298
                                                                                          =====         ====

   Segment Profit ..............................................................          $  46         $ 36
                                                                                          =====         ====
       Charges and Reorganization Items included in Segment Profit .............          $  (2)        $ --
                                                                                          =====         ====
</TABLE>

      The $10  million,  or 3 percent,  increase in net sales as compared to the
second   quarter  2005   resulted   primarily   from  higher  sales  volumes  of
approximately 2 percent,  an increase in average selling prices of approximately
2 percent,  partially offset by unfavorable  currency exchange rate fluctuations
of  approximately  1 percent.  Higher volumes were  experienced in SAFLEX(R) and
VANCEVA(R) plastic interlayer products and LLUMAR(R) professional film products,
partially offset by lower volumes in THERMINOL(R)  heat transfer fluids.  Higher
average  selling prices were  experienced  in SAFLEX(R) and  VANCEVA(R)  plastic
interlayer products and THERMINOL(R) heat transfer fluids.

      The $10 million,  or 28 percent,  increase in segment profit in comparison
to the  second  quarter  2005  resulted  primarily  from  higher  net  sales and
favorable  manufacturing variances resulting from improved capacity utilization,
partially  offset by higher raw material and energy costs. In addition,  segment
profit in the second  quarter 2006 was  affected by $1 million of  restructuring
charges  including  primarily  severance and retraining  costs and $1 million of
reorganizations items consisting primarily of certain asset write-downs.

INTEGRATED NYLON

<TABLE>
<CAPTION>
                                                                                          THREE MONTHS ENDED
                                                                                                JUNE 30,
                                                                                          -------------------
   (dollars in millions)                                                                    2006         2005
                                                                                            ----         ----
<S>                                                                                       <C>            <C>
   Net Sales ...................................................................          $   457        $432
                                                                                          =======        ====

   Segment Profit ..............................................................          $     4        $ 14
                                                                                          =======        ====
       Charges and Reorganization Items included in Segment Profit .............          $    --        $ --
                                                                                          =======        ====
</TABLE>

      The $25  million,  or 6 percent,  increase in net sales as compared to the
second quarter 2005 resulted  primarily  from higher  average  selling prices of
approximately   9  percent,   partially   offset  by  lower  sales   volumes  of
approximately 3 percent. Average selling prices increased in all businesses as a
result of favorable market  conditions and in response to the escalating cost of
raw  materials.  Sales volumes were  impacted by the exit from the  unprofitable
acrylic fibers  operations,  as well as a portion of the nylon industrial fibers
operations,  both in the second quarter 2005. Further,  lower sales volumes were
experienced within the carpet business, partially offset by higher sales volumes
in intermediate chemicals and nylon plastics and polymers.

      The $10 million,  or 71 percent,  decrease in segment profit in comparison
to the second quarter 2005 resulted  principally from unfavorable  manufacturing
costs and higher raw material  costs,  partially  offset by higher net sales. In
addition,  2005 segment profit included $7 million to shut-down  principally the
acrylic  fibers  operations  including  $5 million of asset  write-downs  and $2
million of decontamination  costs, offset by a $7 million gain from the reversal
of the LIFO reserve  associated  with the inventory sold and written off as part
of the business shut-down.


                                       45
<PAGE>

CORPORATE EXPENSES

<TABLE>
<CAPTION>
                                                                                           THREE MONTHS ENDED
                                                                                                 JUNE 30,
                                                                                          --------------------
   (dollars in millions)                                                                   2006           2005
                                                                                           ----           ----
<S>                                                                                        <C>             <C>
   Corporate Expenses (Gains)...................................................           $ (7)           $14
                                                                                           ====            ===
       Gains (Charges) included in Corporate Expenses ..........................           $ 20            $--
                                                                                           ====            ===
</TABLE>

      With the  exception  of a $20  million  one-time  gain in 2006,  corporate
expenses  remained  consistent in comparing the three months ended June 30, 2006
and 2005,  respectively,  with benefits from cost reduction measures  offsetting
inflationary  increases in corporate  expenses.  The $20 million  one-time  gain
resulted from the reversal of a litigation  reserve with respect to a litigation
matter  that was  decided  favorably  in the  second  quarter  2006 (as  further
described in Note 9 of the accompanying consolidated financial statements).

EQUITY EARNINGS (LOSS) FROM AFFILIATES

<TABLE>
<CAPTION>
                                                                                            THREE MONTHS ENDED
                                                                                                 JUNE 30,
                                                                                           -------------------
   (dollars in millions)                                                                   2006           2005
                                                                                           ----           ----
<S>                                                                                        <C>             <C>
   Equity Earnings from Affiliates not included in Reportable Segment
           Profit ..............................................................           $ 12            $20
                                                                                           ----            ---
   Equity Earnings (loss) from Affiliates included in Reportable Segment
           Profit ..............................................................           $ (1)           $ 1
                                                                                           ----            ---
   Equity Earnings from Affiliates .............................................           $ 11            $21
                                                                                           ====            ===
   Gains (charges) included in Equity Earnings (Loss) from Affiliates ..........           $ (1)           $ 5
                                                                                           ====            ===
</TABLE>

      Equity  earnings  (loss) from  affiliates  decreased by $10 million in the
second quarter 2006 as compared to the second  quarter 2005.  This decline was a
primarily  a result  of the sale of the  Astaris  joint  venture  in the  fourth
quarter 2005 and lower  selling  prices and sales  volumes at the Flexsys  joint
venture in the second  quarter 2006 in comparison to the second quarter 2005. In
addition,  the second quarter 2006 results  included a $1 million  restructuring
charge  from the  Flexsys  joint  venture,  while the 2005  results  included  a
one-time,  non-operational  gain of $5 million  recognized  by the Flexsys joint
venture.

REORGANIZATION ITEMS, NET

<TABLE>
<CAPTION>
                                                                                            THREE MONTHS ENDED
                                                                                                 JUNE 30,
                                                                                           -------------------
   (dollars in millions)                                                                   2006           2005
                                                                                           ----           ----
<S>                                                                                        <C>             <C>
   Reorganization Items, net ............................................                  $(18)          $(15)
                                                                                           ====           ====
</TABLE>

      Reorganization  items,  net are presented  separately in the  Consolidated
Statement of Operations and represent  items of income,  expense,  gain, or loss
that are realized or incurred by Solutia because it is in  reorganization  under
Chapter 11 of the U.S.  Bankruptcy  Code.  Reorganization  items incurred in the
second  quarter  2006  included  $15 million of  professional  fees for services
provided by debtor and  creditor  professionals  directly  related to  Solutia's
reorganization  proceedings;  $1 million of expense  provisions for (i) employee
severance  costs  incurred  directly  as part of the  Chapter 11  reorganization
process and (ii) a retention plan for certain Solutia employees  approved by the
bankruptcy  court;  and $2 million  of other  reorganization  charges  primarily
involving costs incurred with the shut-down of certain non-strategic businesses.
Reorganization items incurred in the second quarter 2005 included $13 million of
professional  fees for services  provided by debtor and  creditor  professionals
directly  related  to  Solutia's  reorganization  proceedings  and $2 million of
expense provisions for (i) employee severance costs incurred directly as part of
the Chapter 11  reorganization  process  and (ii) a  retention  plan for certain
Solutia employees approved by the bankruptcy court.


                                       46
<PAGE>

INCOME TAX EXPENSE

<TABLE>
<CAPTION>
                                                                                           THREE MONTHS ENDED
                                                                                                 JUNE 30,
                                                                                        -----------------------
   (dollars in millions)                                                                2006               2005
                                                                                        ----               ----
<S>                                                                                     <C>                <C>
   Income Tax Expense .....................................................             $   5              $   7
                                                                                        =====              =====
</TABLE>

      Solutia's  income  tax  expense in the  second  quarter  2006 and 2005 was
primarily a result of foreign income taxes. As a result of Solutia's  Chapter 11
filing,  Solutia  did not record  any U.S.  income  tax  expense or benefit  for
domestic operations  (including  temporary  differences) during the three months
ended June 30,  2006 and 2005.  Consequently,  the  changes in federal and state
deferred  tax  assets  were  offset  by   corresponding   changes  in  valuation
allowances.  See Note 14 of Solutia's 2005 Form 10-K for additional  information
concerning the Company's deferred tax assets and changes in valuation allowances
due to Solutia's Chapter 11 filing.

DISCONTINUED OPERATIONS

<TABLE>
<CAPTION>
                                                                                           THREE MONTHS ENDED
                                                                                                 JUNE 30,
                                                                                        -----------------------
   (dollars in millions)                                                                 2006               2005
                                                                                         ----               ----
<S>                                                                                     <C>                <C>
   Income from Discontinued Operations, net of tax ........................             $   4              $   1
                                                                                        =====              =====
</TABLE>

      Income from discontinued  operations  consists of the results of Solutia's
pharmaceutical  services  business.  As described in Note 4 to the  accompanying
consolidated  financial  statements,  on May 23,  2006,  SESA agreed to sell its
pharmaceutical  services  business to Dishman  Pharmaceuticals  & Chemicals Ltd.
("Dishman").  The transaction is anticipated to close in the third quarter 2006.
Included in the results of  discontinued  operations  in the three  months ended
June 30,  2006 was a tax gain of $5  million  for the  reversal  of a  valuation
allowance  previously  established for the potential  inability to fully utilize
net operating losses from the CarboGen subsidiary of the pharmaceutical services
business.  However,  independent of the aforementioned  sales  transaction,  the
CarboGen and AMCIS  subsidiaries of the  pharmaceutical  services  business were
merged  into one  legal  entity in the  second  quarter  2006  with the  current
assumption  of the net  operating  losses from  CarboGen  being able to be fully
utilized in the future as part of the combined entity.

RESULTS OF  OPERATIONS--SIX  MONTHS ENDED JUNE 30, 2006 COMPARED WITH SIX MONTHS
ENDED JUNE 30, 2005

PERFORMANCE PRODUCTS

<TABLE>
<CAPTION>
                                                                                            SIX MONTHS ENDED
                                                                                                 JUNE 30,
                                                                                        -----------------------
   (dollars in millions)                                                                 2006               2005
                                                                                         ----               ----
<S>                                                                                     <C>                <C>
   Net Sales ..............................................................             $ 594              $ 566
                                                                                        =====              =====

   Segment Profit .........................................................             $  88              $  69
                                                                                        =====              =====
       Charges and Reorganization Items included in Segment Profit ........             $  (3)             $  (7)
                                                                                        =====              =====
</TABLE>

      The $28  million,  or 5 percent,  increase in net sales as compared to the
six months ended June 30, 2005 resulted  primarily  from higher sales volumes of
approximately   5  percent  and  an  increase  in  average   selling  prices  of
approximately 2 percent,  partially offset by unfavorable currency exchange rate
fluctuations  of  approximately  2 percent.  Higher volumes were  experienced in
SAFLEX(R) and VANCEVA(R) plastic interlayer  products and LLUMAR(R) and VISTA(R)
professional  film products,  partially  offset by lower volumes in THERMINOL(R)
heat  transfer  fluids.  Higher  average  selling  prices  were  experienced  in
SAFLEX(R) and  VANCEVA(R)  plastic  interlayer


                                       47
<PAGE>

products and THERMINOL(R)  heat transfer fluids.  The unfavorable  exchange rate
fluctuations  occurred primarily as a result of the strengthening U.S. dollar in
relation to the euro in comparison to the second quarter 2005.

      The $19 million,  or 28 percent,  increase in segment profit in comparison
to the six months ended June 30, 2005 resulted principally from higher net sales
and  favorable   manufacturing   variances   resulting  from  improved  capacity
utilization,  partially offset by higher raw material and energy costs.  Segment
profit in 2006  included $2 million of  severance  and  retraining  costs and $1
million for certain asset  write-downs.  In addition,  segment profit in the six
months ended June 30, 2005 was affected by $7 million of  reorganization  items,
which consisted  primarily of adjustments to record certain  pre-petition claims
at estimated amounts of the allowed claims.

INTEGRATED NYLON

<TABLE>
<CAPTION>
                                                                                               SIX MONTHS ENDED
                                                                                                    JUNE 30,
                                                                                             ----------------------
   (dollars in millions)                                                                      2006            2005
                                                                                              ----            ----
<S>                                                                                           <C>            <C>
   Net Sales ....................................................................             $ 849          $ 878
                                                                                              =====          =====

   Segment Profit (Loss) ........................................................             $ (10)         $  13
                                                                                              =====          =====

       Charges and Reorganization Items included in Segment Profit (Loss)  ......             $  (3)         $ (11)
                                                                                              =====          =====
</TABLE>

      The $29  million,  or 3 percent,  decrease in net sales as compared to the
six months ended June 30, 2005  resulted  primarily  from lower sales volumes of
approximately  12 percent,  partially offset by higher average selling prices of
approximately  9  percent.  Sales  volumes  were  impacted  by the exit from the
unprofitable  acrylic  fibers  operations,  as well as a  portion  of the  nylon
industrial fibers operations,  both in the second quarter 2005.  Further,  lower
sales volumes were experienced within the carpet and nylon industrial  business,
partially  offset by higher sales  volumes in  intermediate  chemicals and nylon
plastics and polymers.  Average selling prices  increased in all businesses as a
result of favorable market  conditions and in response to the escalating cost of
raw materials.

      The $23 million  decrease in the segment  profit in  comparison to the six
months ended June 30, 2005 resulted primarily from lower net sales,  unfavorable
manufacturing costs and higher raw material costs. The unfavorable manufacturing
costs were precipitated by a manufacturing  interruption  incurred at the Alvin,
Texas facility,  resulting in a significant  turnaround being accelerated in its
timing,  as well as extended in its  duration.  Segment  profit in 2006 included
approximately $2 million of decommissioning and dismantling costs as a result of
the  shut-down  of its acrylic  fibers  business in 2005 and $1 million of asset
write-downs.  In addition,  2005 segment profit included reorganization items of
$11 million comprised of $10 million principally to shut-down the acrylic fibers
operations and $1 million of other  restructuring  charges.  The shut-down costs
included  $11  million  of  asset  write-downs,  $4  million  of  severance  and
retraining costs and $2 million of decontamination  costs, partially offset by a
$7  million  gain from the  reversal  of the LIFO  reserve  associated  with the
inventory sold and written off as part of the business shut-down.

CORPORATE EXPENSES

<TABLE>
<CAPTION>
                                                                                               SIX MONTHS ENDED
                                                                                                    JUNE 30,
                                                                                             ----------------------
   (dollars in millions)                                                                      2006            2005
                                                                                              ----            ----
<S>                                                                                           <C>            <C>
   Corporate Expenses ..........................................................             $  13           $  25
                                                                                             =====           =====
       Gains (Charges) included in Corporate Expenses ..........................             $  11           $  --
                                                                                             =====           =====
</TABLE>

      With the exception of $11 million of net gains recorded in 2006, corporate
expenses remained  consistent in comparing the six months ended June 30, 2006 to
the  comparable  period in 2005,  with  benefits  from cost  reduction  measures
offsetting inflationary increases in corporate expenses. The net gains include a
$20 million  one-time  gain that  resulted  from the  reversal  of a  litigation
reserve with respect to a  litigation  matter that was decided  favorably in the
second  quarter  2006  (as  further  described  in  Note 9 of  the  accompanying
consolidated   financial   statements),   partially   offset  by  a  $9  million
environmental  charge that was precipitated by the notification by a third-party
of its intent to terminate a tolling  agreement  at one of Solutia's  facilities
outside the U.S.  that will likely result in the cessation of operations at that
site.


                                       48
<PAGE>

EQUITY EARNINGS FROM AFFILIATES

<TABLE>
<CAPTION>
                                                                                             SIX MONTHS ENDED
                                                                                                  JUNE 30,
                                                                                           ----------------------
   (dollars in millions)                                                                    2006            2005
                                                                                            ----            ----
<S>                                                                                        <C>              <C>
   Equity Earnings from Affiliates not included in Reportable Segment Profit ...           $  21            $  33
                                                                                           -----            -----
   Equity Earnings from Affiliates included in Reportable Segment Profit .......           $  --            $   2
                                                                                           -----            -----
   Equity Earnings from Affiliates .............................................           $  21            $  35
                                                                                           =====            =====
        Gains (charges) included in Equity Earnings (Loss) from Affiliates .....           $  (1)           $   5
                                                                                           =====            =====
</TABLE>

      Equity  earnings  (loss)  from  affiliates  decreased  by $14  million  in
comparison  to the six months ended June 30, 2005.  This decline was primarily a
result of the sale of the Astaris joint  venture in the fourth  quarter 2005 and
lower  selling  prices and sales volumes at the Flexsys joint venture in the six
months  ended  June 30,  2006 in  comparison  to the  same  period  in 2005.  In
addition,  results in the six months  ended June 30, 2006  included a $1 million
restructuring  charge from the Flexsys joint venture,  while the results for the
six months ended June 30, 2005 included a one-time,  non-operational  gain of $5
million incurred by the Flexsys joint venture.

INTEREST EXPENSE

<TABLE>
<CAPTION>
                                                                                              SIX MONTHS ENDED
                                                                                                   JUNE 30,
                                                                                           ----------------------
   (dollars in millions)                                                                    2006            2005
                                                                                            ----            ----
<S>                                                                                        <C>              <C>
   Interest Expense ............................................................           $  50            $  44
                                                                                           =====            =====
        Charges included in Interest Expense ...................................           $  (1)           $  --
                                                                                           =====            =====
</TABLE>

      The $6  million,  or 14 percent,  increase in interest  expense in 2006 in
comparison  to the six months  ended June 30,  2005  resulted  principally  from
higher  debt  outstanding  in the six  months  ended  June 30,  2006 than in the
comparable period of 2005.

REORGANIZATION ITEMS, NET

<TABLE>
<CAPTION>
                                                                                              SIX MONTHS ENDED
                                                                                                   JUNE 30,
                                                                                           ----------------------
   (dollars in millions)                                                                    2006            2005
                                                                                            ----            ----
<S>                                                                                         <C>             <C>
   Reorganization Items, net ...................................................            $ (32)          $ (20)
                                                                                            =====           =====
</TABLE>

      Reorganization  items,  net are presented  separately in the  Consolidated
Statement of Operations and represent  items of income,  expense,  gain, or loss
that are realized or incurred by Solutia because it is in  reorganization  under
Chapter 11 of the U.S. Bankruptcy Code. Reorganization items incurred in the six
months  ended June 30,  2006  included:  $27  million of  professional  fees for
services  provided  by debtor and  creditor  professionals  directly  related to
Solutia's reorganization  proceedings;  $3 million of expense provisions related
to (i)  employee  severance  costs  incurred  directly as part of the Chapter 11
reorganization  process and (ii) a retention plan for certain Solutia  employees
approved by the  bankruptcy  court;  a $2 million net gain from  adjustments  to
record certain  pre-petition  claims at estimated amounts of the allowed claims;
and $4  million  of  other  reorganization  charges  primarily  involving  costs
incurred with exiting certain  non-strategic  businesses.  Reorganization  items
incurred in the six months ended June 30, 2005 included:  a $29 million net gain
representing   the  difference   between  the   settlement   amount  of  certain
pre-petition  obligations and the corresponding amounts previously recorded; $24
million of  professional  fees for  services  provided  by debtor  and  creditor
professionals  directly  related to Solutia's  reorganization  proceedings;  $11
million of net charges for adjustments to record certain  pre-petition claims at
estimated  amounts of the  allowed  claims;  $8  million  of expense  provisions
related to (i) employee severance costs


                                       49
<PAGE>

incurred  directly as part of the Chapter 11  reorganization  process and (ii) a
retention plan for certain Solutia  employees  approved by the bankruptcy court;
and $6  million  of  other  reorganization  charges  primarily  involving  costs
incurred with the exit from the acrylic fibers business.

INCOME TAX EXPENSE

<TABLE>
<CAPTION>
                                                                                           SIX MONTHS ENDED
                                                                                                JUNE 30,
                                                                                        ------------------------
   (dollars in millions)                                                                2006               2005
                                                                                        ----               ----
<S>                                                                                     <C>                <C>
   Income Tax Expense ..........................................................        $   7              $  13
                                                                                        =====              =====
</TABLE>

      Solutia's  income tax  expense in the six months  ended June 30,  2006 and
2005 was primarily a result of foreign  income  taxes.  As a result of Solutia's
Chapter 11 filing, Solutia did not record any U.S. income tax expense or benefit
for domestic operations (including temporary  differences) during the six months
ended June 30,  2006 and 2005.  Consequently,  the  changes in federal and state
deferred  tax  assets  were  offset  by   corresponding   changes  in  valuation
allowances.  See Note 14 of Solutia's 2005 Form 10-K for additional  information
concerning Solutia's deferred tax assets and changes in valuation allowances due
to Solutia's Chapter 11 filing.

DISCONTINUED OPERATIONS

<TABLE>
<CAPTION>
                                                                                           SIX MONTHS ENDED
                                                                                                JUNE 30,
                                                                                        ------------------------
   (dollars in millions)                                                                2006               2005
                                                                                        ----               ----
<S>                                                                                     <C>                <C>
   Income from Discontinued Operations, net of tax .............................        $   8              $   3
                                                                                        =====              =====
</TABLE>

      Income from discontinued  operations  consists of the results of Solutia's
pharmaceutical  services  business.  As described in Note 4 to the  accompanying
consolidated  financial  statements,  on May 23,  2006,  SESA agreed to sell its
pharmaceutical  services  business to Dishman  Pharmaceuticals  & Chemicals Ltd.
("Dishman").  The transaction is anticipated to close in the third quarter 2006.
Included in the results of  operations in the six months ended June 30, 2006 was
a tax gain of $5 million as  described  further in the  Discontinued  Operations
portion of the Results of Operations section for the three months ended June 30,
2006 above.


                                       50
<PAGE>

SUMMARY OF EVENTS AFFECTING COMPARABILITY

      In the six months  ended June 30, 2006 and 2005 certain  events  affecting
comparability  were recorded in  Reorganization  Items,  net in the Statement of
Consolidated  Operations. A comparison of reorganization items for these periods
is provided in the above Results of Operations section, as well as Note 2 to the
accompanying  consolidated  financial  statements.  Charges  recorded in the six
months  ended June 30, 2006 and 2005 and other  events  affecting  comparability
recorded outside of reorganization items have been summarized in the table below
(dollars in millions).

<TABLE>
<CAPTION>
                                                                                 2006
                                                     ----------------------------------------------------------------

                                                    PERFORMANCE        INTEGRATED       CORPORATE/
                INCREASE/(DECREASE)                   PRODUCTS           NYLON             OTHER       CONSOLIDATED
                                                      --------           -----             -----       ------------
<S>                                                  <C>                 <C>             <C>              <C>
IMPACT ON:
Cost of goods sold..........................         $ --                $ --             $   9            $   9       (a)
                                                       --                  --               (20)             (20)      (b)
Marketing and administrative expenses.......            1                  --                --                1       (c)
                                                     ----------------------------------------------------------------
OPERATING INCOME IMPACT.....................           (1)                 --                11               10

Interest expense ...........................           --                 --                 (1)              (1)      (d)
Equity earnings from affiliates.............           --                  --                (1)              (1)      (e)
Loss on debt modification...................           --                  --                (8)              (8)      (d)
                                                     ----------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT.............         $ (1)               $ --             $   1               --
                                                     ==============================================
Income tax impact...........................                                                                   2       (f)
                                                                                                           -----
AFTER-TAX INCOME STATEMENT IMPACT...........                                                               $   2
                                                                                                           ======
</TABLE>

      2006 EVENTS

      a)    Environmental   charge   precipitated  by  the   notification  by  a
            third-party of its intent to terminate a tolling agreement at one of
            Solutia's facilities outside the U.S. that will likely result in the
            cessation  of  operations  at that site ($9  million  pre-tax and $7
            million after-tax).

      b)    One-time gain  resulting  from the reversal of a litigation  reserve
            with  respect to a litigation  matter that was decided  favorably in
            the  second  quarter  2006,  as further  described  in Note 9 of the
            accompanying  consolidated financial statements ($20 million pre-tax
            and after-tax).

      c)    Restructuring  costs related principally to severance and retraining
            costs ($1 million pre-tax and after-tax).

      d)    Solutia  recorded a charge of  approximately $8 million (pre-tax and
            after-tax)  to record the  write-off of debt  issuance  costs and to
            record the DIP facility as modified at its fair value.  In addition,
            $1 million  (pre-tax and  after-tax)  of  unamortized  debt issuance
            costs  associated with the DIP facility were written off at the time
            of  modification  in March 2006.  See the  Financial  Condition  and
            Liquidity section below for further  description of the DIP facility
            amendment.

      e)    Restructuring  charges at Flexsys,  Solutia's 50 percent owned joint
            venture ($1 million pre-tax and after-tax).

      f)    With the  exception  of items  (a) and (c)  above,  which  primarily
            relate to ex-U.S. operations, the above items are considered to have
            like  pre-tax  and  after-tax  impact as the tax  benefit or expense
            realized  from  these  events is offset by the  change in  valuation
            allowance for U.S. deferred tax assets resulting from uncertainty as
            to their recovery due to Solutia's Chapter 11 bankruptcy filing.


                                       51
<PAGE>

<TABLE>
<CAPTION>
                                                        2005
                                           -----------------------------------------------------------------

                                             PERFORMANCE      INTEGRATED       CORPORATE/
           INCREASE/(DECREASE)                PRODUCTS           NYLON            OTHER        CONSOLIDATED
----------------------------------------      --------           -----            -----        ------------
<S>                                             <C>              <C>              <C>              <C>
IMPACT ON:
Cost of Goods Sold......................        $--              $--              $--              $--
                                           -----------------------------------------------------------------
OPERATING INCOME IMPACT.................         --               --               --               --
Equity earnings from affiliates.........         --               --                5                5       (a)
                                           -----------------------------------------------------------------
PRE-TAX INCOME STATEMENT IMPACT.........        $--              $--              $ 5                5
Income tax impact.......................                                                            --
                                           ===============================================
                                                                                              --------------
AFTER-TAX INCOME STATEMENT IMPACT.......                                                           $ 5
                                                                                              ==============
</TABLE>

      2005 EVENTS

      a)    One-time,  non-operational  gain  recognized  by the  Flexsys  joint
            venture ($5 million pre-tax and after-tax).

FINANCIAL CONDITION AND LIQUIDITY

      As  discussed  in  Note  1  to  the  accompanying  consolidated  financial
statements,  Solutia is operating as a debtor-in-possession  under Chapter 11 of
the U.S. Bankruptcy Code. As a result of the uncertainty  surrounding  Solutia's
current  circumstances,  it is difficult to predict  Solutia's  actual liquidity
needs and sources at this time.  However,  based upon  current  and  anticipated
levels of operations  during the  continuation  of the  bankruptcy  proceedings,
Solutia believes that its liquidity and capital  resources will be sufficient to
maintain its normal operations at current levels. Solutia's access to additional
financing while in the Chapter 11 bankruptcy process may be limited.

Financial Analysis

      Solutia used its  existing  cash  on-hand to finance  operating  needs and
capital  expenditures  during the six months ended June 30,  2006.  Cash used in
continuing  operations was $126 million in the six months ended June 30, 2006, a
change of $96 million from $30 million  used in  continuing  operations  for the
comparable  period of 2005.  This change in cash used in operations in comparing
the six months ended June 30, 2006 and 2005 was primarily attributable to higher
pension  contributions  of  approximately  $43  million  and  changes in working
capital items,  including a significant increase in trade receivables  resulting
from a  considerable  increase  in net sales in the  latter  part of the  second
quarter 2006.

      Capital  spending  increased  $14 million to $41 million in the six months
ended June 30, 2006,  compared to $27 million in the comparable  period of 2005.
The  expenditures  in the six months ended June 30, 2006 were  primarily to fund
certain  growth  initiatives in the  Performance  Products  segment,  as well as
various capital improvements and certain cost reduction projects.

      Net cash used for the  acquisition  of Quimica (as  described in Note 4 to
the  accompanying  consolidated  financial  statements)  totaled $16 million and
consisted of approximately $20 million cash paid, less  approximately $4 million
of cash acquired.  There were no  acquisitions  in the six months ended June 30,
2005.

      Total debt of $1,578  million as of June 30, 2006,  including $668 million
subject to compromise and $910 million not subject to  compromise,  increased by
$363 million as compared to $1,215 million at December 31, 2005,  including $668
million  subject to compromise and $547 million not subject to compromise.  This
increase  in total debt  resulted  primarily  from $350  million  of  additional
borrowings from Solutia's DIP facility in the six months ended June 30, 2006, of
which $300 million  resulted  from the March 2006  amendment to the DIP facility
(as described below). In addition, as a result of the Chapter 11 filing, Solutia
was in  default  on all its  debt  agreements  as of June  30,  2006,  with  the
exception of its DIP credit facility and Euronotes.


                                       52
<PAGE>

      Solutia's  working  capital  decreased by $132 million to $(94) million at
June 30,  2006,  compared to $38 million at December  31,  2005.  The change was
primarily a result of higher  short-term  debt,  partially offset by higher cash
on-hand and an increase in trade receivables resulting from higher net sales.

      Solutia  had a  shareholders'  deficit of $1,437  million at June 30, 2006
compared to $1,454  million at December  31, 2005.  The $17 million  decrease in
shareholders'  deficit  resulted  primarily  from the $11  million  decrease  in
accumulated other  comprehensive  loss coupled with the $6 million net income in
the six months ended June 30, 2006.

      The weighted average interest rate on Solutia's total debt outstanding was
approximately 8.8 percent at June 30, 2006 and 8.7 percent at December 31, 2005.
Excluding  debt subject to  compromise,  with the exception of the 11.25 percent
notes due 2009 on which the bankruptcy court has permitted continued payments of
the contractual  interest,  the weighted average interest rate on total debt was
9.5 percent at June 30, 2006 compared to 9.8 percent at December 31, 2005. While
operating as a debtor-in-possession  during the Chapter 11 proceedings,  Solutia
has ceased paying interest on its 6.72 percent debentures due 2037 and its 7.375
percent  debentures  due 2027. The amount of  contractual  interest  expense not
recorded  in  each  of  the  six  months  ended  June  30,  2006  and  2005  was
approximately $16 million.

      At June 30, 2006,  Solutia's  total liquidity was $350 million in the form
of $85 million of availability  under the DIP credit facility and  approximately
$265  million of cash  on-hand,  of which  $109  million  was cash of  Solutia's
subsidiaries that are not parties to the Chapter 11 proceedings.  In comparison,
Solutia's  total  liquidity at December 31, 2005 was $238 million in the form of
$131 million of  availability  under the DIP credit  facility and  approximately
$107  million  of cash  on-hand,  of which  $89  million  was cash of  Solutia's
subsidiaries that are not parties to the Chapter 11 bankruptcy proceedings.  The
increase in cash  on-hand was  primarily a result of the DIP  amendment in March
2006 and will be used for  ongoing  operations  and to fund  upcoming  mandatory
pension contributions as described below.

      According  to  IRS  funding  rules,  Solutia  will  be  required  to  make
approximately  $179  million  in  pension  contributions  to its U.S.  qualified
pension  plan in  2006  assuming  Congress  extends  the  interest  rate  relief
provision  currently  proposed.   If  this  relief  is  not  granted,   required
contributions in 2006 would be  approximately  $195 million.  Approximately  $43
million of these required 2006  contributions  were made in the six months ended
June 30,  2006.  Solutia also  expects to be required to fund  approximately  $5
million in pension contributions for its foreign pension plans in 2006.

Amendment to DIP Financing Agreement

      On March  17,  2006,  Solutia  amended  its DIP  financing  facility  with
bankruptcy court approval. This amendment, among other things, (i) increased the
DIP facility  from $525 million to $825  million;  (ii) extended the term of the
DIP facility from June 19, 2006 to March 31, 2007;  (iii) decreased the interest
rate on the term loan  component of the DIP  facility  from LIBOR plus 425 basis
points  to LIBOR  plus 350  basis  points;  (iv)  increased  certain  thresholds
allowing  the Debtors to retain more of the proceeds  from certain  dispositions
and other extraordinary receipts; (v) approved the disposition of certain assets
of the Debtors;  (vi) allowed  refinancing of, and certain amendments to, SESA's
outstanding Euronotes;  and (vii) amended certain financial and other covenants.
The amendment  also  contains a number of other changes and other  modifications
required to make the  remaining  terms of the DIP facility  consistent  with the
amendments set forth above.

Euronotes Refinancing

      As  described  in a Form 8-K filed on August 1,  2006,  on July 26,  2006,
Solutia's  indirect  wholly-owned   subsidiary  Solutia  Services  International
S.C.A./Comm.  V.A.,  a  subsidiary  of SESA,  entered  into a (euro) 200 million
Facility  Agreement  (the "Facility  Agreement")  guaranteed by SESA and CPFilms
Vertriebs   GmbH,  a  subsidiary  of  SESA.   Closing  of  the  credit  facility
contemplated by the Facility Agreement, which at signing remained subject to the
satisfaction  of a number of conditions  precedent,  occurred on August 1, 2006.
SESA used the  proceeds  of the new  credit  facility  to  refinance  all of the
Euronotes on August 1, 2006, at a prepayment  premium of 3 percent,  as required
pursuant to the Euronotes, for a total redemption amount of approximately (euro)
215 million, including accrued interest. The Euronotes were refinanced to reduce
the interest rate,  extend the term of the indebtedness  and facilitate  certain
dispositions  by  Solutia,  including  the sale of its  pharmaceutical  services
business described below.



                                       53
<PAGE>

      The Facility  Agreement has a five-year term,  with a termination  date of
July 31, 2011 and an  adjustable  rate  structure of EURIBOR plus a margin which
currently  yields a rate of  approximately  5.75 to 6.50 percent.  The margin is
subject to adjustment  upon the  occurrence of certain  events  specified in the
Facility Agreement or upon SESA and its subsidiaries attaining certain financial
benchmarks.  The new credit facility  consists of a (euro) 160 million term loan
B1 and a (euro) 40 million  term loan B2. The (euro) 40 million  term loan B2 is
expected to be repaid from the proceeds of the sale of Solutia's  pharmaceutical
services   business  (as  further  described  in  Note  4  to  the  accompanying
consolidated financial statements); accordingly, this amount has been classified
as current in the  Consolidated  Statement of Financial  Position as of June 30,
2006. The new loan is secured by substantially all of the assets of SESA and its
subsidiaries  (excluding  Flexsys  Holding  B.V.  and  Carbogen  Amcis AG).  The
Facility Agreement also contains other customary terms and conditions, including
certain  financial  covenants  relating  to the  performance  of  SESA  and  its
subsidiaries.

PENNDOT Letter of Credit

      As a result of the  favorable  ruling  in the  PENNDOT  litigation  matter
described in Note 9 to the accompanying  consolidated  financial statements,  in
August 2006,  Monsanto,  which is managing the defense obligations of Pharmacia,
released  the $20  million  letter of  credit  that  Solutia  posted to secure a
portion of  Pharmacia's  obligations  with  respect to an appeal  bond issued in
relation to this case.

CONTINGENCIES

      See Note 9 to the  accompanying  consolidated  financial  statements for a
summary of Solutia's contingencies as of June 30, 2006.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS

      There have been no material  changes in market risk  exposures  during the
six months  ended June 30, 2006 that  affect the  disclosures  presented  in the
information  appearing under  "Derivative  Financial  Instruments" on page 47 of
Solutia's Form 10-K for the year-ended December 31, 2005.

ITEM 4. CONTROLS AND PROCEDURES

      During  the  period  covered by this Form  10-Q,  Solutia  carried  out an
evaluation,  under  the  supervision  and with the  participation  of  Solutia's
management,  including its Chief Executive Officer and Chief Financial  Officer,
of the  effectiveness  of the  design  and  operation  of  Solutia's  disclosure
controls and procedures (as defined in Rules  13a-15(e) and 15d-15(e)  under the
Securities  Exchange Act of 1934 ("Exchange Act")).  Based upon that evaluation,
the Chief Executive  Officer and Chief Financial  Officer  concluded that, as of
the end of the period covered by this Form 10-Q,  Solutia's  disclosure controls
and  procedures  are effective in timely  alerting them to material  information
relating to Solutia  and its  consolidated  subsidiaries  that is required to be
included in Solutia's  periodic SEC filings.  There were no changes in Solutia's
internal  control over  financial  reporting (as defined in Rules  13a-15(f) and
15d-15(f)  under the Exchange  Act) that occurred  during the  quarterly  period
ended June 30, 2006 that have materially  affected,  or are reasonably likely to
materially affect, the Company's internal controls over financial reporting.


                                       54
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

LEGAL PROCEEDINGS IN SOLUTIA'S BANKRUPTCY CASE
----------------------------------------------

      JPMorgan Adversary Proceeding.  As described in Solutia's Annual Report on
Form 10-K for the year  ended  December  31,  2005 (the  "2005  Form  10-K") and
Quarterly  Report on Form 10-Q for the quarter  ended March 31, 2006 (the "First
Quarter  10-Q"),  on May 27,  2005,  JPMorgan  as  indenture  trustee  under the
indenture  for  Solutia's   debentures  due  2027  and  2037  (the  "Prepetition
Indenture"),  filed an  adversary  proceeding  (the  "JPM  Proceeding")  against
Solutia in the Chapter 11 Cases. In its adversary proceeding,  JPMorgan asserted
five causes of action  seeking  declaratory  judgments to establish the validity
and priority of the purported  security  interest of the holders of the 2027 and
2037  debentures,  and one  cause  of  action  pursuant  to  section  363 of the
Bankruptcy Code asserting that the alleged  security  interests  lacked adequate
protection.  The  Unsecured  Creditors'  Committee  and the Ad Hoc Solutia Trade
Claims Committee have intervened in the JPM Proceeding in support of Solutia and
the Ad Hoc Committee of Solutia Noteholders has intervened in the JPM Proceeding
in support of JPMorgan.  Trial of the JPM Proceeding concluded on July 10, 2006.
Post-trial briefs are expected to be submitted by the parties by August 9, 2006.
The  Bankruptcy  Court has indicated  that it will take at least six weeks after
submission of the post-trial briefs to make a ruling in the JPM Proceeding.

      Equity Committee Adversary Proceeding.  As described in the 2005 Form 10-K
and First Quarter 10-Q, on March 7, 2005, the Equity Committee filed a complaint
against  Pharmacia  and Monsanto and  objections to the proofs of claim filed by
Pharmacia  and Monsanto in  Solutia's  bankruptcy  case (the  "Equity  Committee
Complaint").  In the Equity Committee  Complaint,  the Equity Committee seeks to
avoid  certain  obligations  assumed by Solutia at the time of its spinoff  from
Pharmacia.  The Equity Committee Complaint alleges, among other things, that the
Solutia  Spinoff was a fraudulent  transfer  under the  Bankruptcy  Code because
Pharmacia forced Solutia to assume excessive liabilities and insufficient assets
such that Solutia was destined to fail from its inception.  The Ad Hoc Committee
of Solutia  Noteholders  and the Ad Hoc  Solutia  Trade  Claims  Committee  have
intervened in this adversary proceeding in support of the Equity Committee.  The
Unsecured Creditors' Committee has intervened, and Solutia intends to intervene,
in this  adversary  proceeding as neutral  parties due to the importance of this
proceeding with respect to Solutia's bankruptcy case. The case is proceeding and
the Bankruptcy  Court has set this matter for trial to commence on September 11,
2006.

ANNISTON PARTIAL CONSENT DECREE
-------------------------------

      Solutia's 2005 Form 10-K described a Partial Consent Decree (the "Anniston
Consent Decree")  approved by the U.S.  District Court for the Northern District
of  Alabama  in the  case  captioned  United  States  of  America  v.  Pharmacia
Corporation  (p/k/a Monsanto  Company) and Solutia which requires  Pharmacia and
Solutia to sample certain residential properties and remove soils found on those
sites if polychlorinated biphenyls ("PCBs") are above a certain level, conduct a
Remedial  Investigation and Feasibility Study to help determine a cleanup remedy
for the Anniston, Alabama PCB site and pay the Environmental Protection Agency's
("EPA") past response costs and future  oversight costs related to the foregoing
work. The 2005 Form 10-K also discussed  negotiations and proceedings among EPA,
Solutia and Pharmacia,  and other potentially  responsible parties ("PRPs") with
respect  to  the  Anniston  lead  site,   EPA's   intention  to  enter  into  an
Administrative  Order on  Consent  with the lead  site  PRPs  which  would  deny
Pharmacia  and  Solutia  contribution  rights  against  the lead  site PRPs with
respect to PCB cleanup and a related order issued by the United States  District
Court for the  Northern  District of Alabama  issued an Order (the "PCB  Order")
authorizing  co-defendants Pharmacia and Solutia to "suspend" performance of the
PCB clean-up at the Anniston site under the Anniston  Consent  Decree,  upon the
filing of a motion by either defendant requesting that relief.

      In July 2006, Solutia and Pharmacia reached an agreement with the EPA that
clarifies the extent of remaining  obligations under the Anniston Consent Decree
and the coordination of that work with the Lead Site clean-up being performed by
others,  and by which  Solutia  and  Pharmacia  will forego the  opportunity  to
suspend their  obligations under the Anniston Consent Decree pursuant to the PCB
Order.  Solutia and  Pharmacia  preserved  their rights under this  agreement to
continue  to argue  that the  contribution  protection  afforded  certain  other
potentially  responsible  parties  performing  Lead Site clean-up  should not be
effective as to Solutia and Pharmacia.


                                       55
<PAGE>

CASH BALANCE PLAN LITIGATION
----------------------------

      As described in the 2005 Form 10-K and First Quarter  10-Q,  since October
2005, three cases have been filed by participants in the Solutia Inc. Employees'
Pension  Plan  alleging  that  the  Pension  Plan:  (1)  violates  the  Employee
Retirement Income Security Act of 1974 ("ERISA")  prohibitions on reducing rates
of benefit accrual based on age; (2) results in the impermissible  forfeiture of
accrued  benefits under ERISA;  (3) violates  ERISA's present value  calculation
rules for  determining  lump sum  distributions;  and (4)  violates  the minimum
accrual  requirements  of ERISA.  The cases  were  captioned  Davis,  et. al. v.
Solutia, Inc. Employees' Pension Plan, Scharringhausen, et. al. v. Solutia, Inc.
Employees'  Pension Plan, et al. and Juanita Hammond,  et. al. v. Solutia,  Inc.
Employees'  Pension Plan. None of the Debtors,  and, except for the Solutia Inc.
Employee Benefits Plans Committee which was named in the  Scharringhausen  case,
no  individual  or entity  other  than the  Pension  Plan,  has been  named as a
defendant  in any of these cases.  The  Scharringhausen  plaintiffs  voluntarily
dismissed their case on April 24, 2006.

      On June 2, 2006,  the  Hammond  plaintiffs'  agreed to stay  their  action
pending exhaustion of administrative  remedies with respect to count (4), above.
Thereafter the Hammond and Davis  plaintiffs also each withdrew their respective
motions to  consolidate  and to stay or dismiss.  In  addition,  the Hammond and
Davis  plaintiffs  each withdrew their motions to appoint  interim class counsel
and have advised the court that they are  cooperating in the  representation  of
the putative  class.  The Pension  Plan's motions to dismiss in both the Hammond
and Davis  cases  remain  pending.  The  Pension  Plan  intends to  continue  to
vigorously  defend itself  against any and all claims  asserted in the Davis and
Hammond litigation.

GE LITIGATION
-------------

      Solutia's 2005 Form 10-K and First Quarter 10-Q described a case captioned
Michael Abbatiello et al. v. Monsanto Company, Pharmacia Corporation and Solutia
Inc.  (the  "Abbatiello  Case"),  which was filed on  December  26,  2005 in the
Supreme Court of the State of New York on behalf of 590 current General Electric
employees who work at its  Schenectady,  New York plant stating eleven  separate
causes of action alleging that General Electric purchased various PCB containing
products  from  Pharmacia  which  were used in the  manufacture  of a variety of
products including electric motors,  generators,  gas turbines,  wire and cable,
insulating  materials and microwave  tubes.  PCBs were later detected in various
locations,  including retention ponds, ground water, and water treatment centers
on the  approximately  628 acre site. On May 10, 2006,  Solutia  received notice
that another action, captioned Alan Abele, et al. v. Monsanto Company, Pharmacia
Corporation and Solutia Inc. (the "Abele Case" and, together with the Abbatiello
Case, the "GE Litigation"),  was filed on March 15, 2006 in the Supreme Court of
the State of New York on behalf of 486 former  General  Electric  employees  who
were  employed at General  Electric's  Schenectady,  NY plant  asserting  eleven
separate causes of action and alleging claims  identical to those made on behalf
of  current  General  Electric  employees  in  the  Abbatiello  Case.  As in the
Abbatiello  Case,  the  plaintiffs  in the Abele Case are  seeking $1 billion in
compensatory  damages  and $1  billion  in  punitive  damages  for each cause of
action.  The GE Litigation  is  automatically  stayed as to Solutia  pursuant to
Section 362 of the U.S. Bankruptcy Code.

      At the time of the spinoff from Pharmacia,  Solutia assumed liability for,
among other things, litigation liabilities related to chemical products formerly
manufactured,  released or used by Pharmacia prior to the spinoff, including the
costs of toxic tort lawsuits alleging  exposure to PCBs.  Solutia also agreed to
defend  Pharmacia  against,  and indemnify  Pharmacia for, such liability.  Upon
filing for  Chapter 11  protection,  Solutia  determined  that its  defense  and
indemnification  obligations  to  Pharmacia  with  respect  to  such  litigation
liabilities were  pre-petition  obligations  under the U.S.  Bankruptcy Code and
that Solutia was therefore  prohibited  from  performing,  except  pursuant to a
confirmed  plan of  reorganization.  As a result,  after  filing for  Chapter 11
protection,  Solutia  ceased  performance of its defense  obligations  and those
defense  obligations have been managed by Monsanto during  Solutia's  Chapter 11
Case.  Because such  litigation was no longer being managed by Solutia,  Solutia
became  unable to provide  complete  status  updates  and, as a result,  Solutia
disclosed  that it would cease  reporting on those  litigation  matters.  The GE
Litigation  falls within the scope of litigation  liabilities  described  above.
Accordingly,  Monsanto is managing this litigation and Solutia will be unable to
provide  complete status updates on the GE Litigation.  Therefore,  Solutia will
cease reporting on the status of the GE Litigation.

PENNDOT CASE
------------

      Solutia's  Annual  Report on Form  10-K (as  amended)  for the year  ended
December  31, 2003  described a case then pending in the  Commonwealth  Court of
Pennsylvania  by the  Commonwealth  of Pennsylvania  against  Pharmacia  seeking
damages for PCB  contamination in the  Transportation  and Safety Building ("T&S
Building")  in  Harrisburg,  Pennsylvania,  that  it  claimed  necessitated  the
demolition  of the T&S  building.  Solutia  was not a  named  defendant  in this
litigation  and  therefore  took no action to stay the  litigation in connection
with its Chapter 11 proceedings.  Solutia assumed the defense of this litigation
at the  time  of its  spin-off  from  Pharmacia.  Solutia  determined  that  its
obligation to defend and indemnify  Pharmacia with regard to this litigation was
a pre-petition  obligation that Solutia was prohibited from  performing,  except
pursuant  to a  confirmed  plan of  reorganization.  Therefore,  Solutia  ceased
defending  Pharmacia  with respect to this  litigation.  Solutia  did,  however,
provide a $20  million  letter of  credit  to  secure a portion  of  Pharmacia's
obligations with respect to an appeal bond issued with respect to the case.

      On May 25, 2006 the Supreme Court of Pennsylvania issued its ruling on the
appeal in this case,  reversing  in whole and  remanding in part the decision of
the trial  court  against  Pharmacia.  With  respect to those  claims  that were
reversed and remanded,  the Supreme Court of Pennsylvania  significantly limited
the  amount of  damages  that  could be  awarded.  As a result  of this  ruling,
Monsanto has released  the $20 million  letter of credit that Solutia  posted to
secure a portion of  Pharmacia's  obligations  with  respect  to an appeal  bond
issued with respect to the case.

                                       56
<PAGE>

SOLUTIA INC. V. FMC CORPORATION
-------------------------------

      Solutia's 2005 Annual Report described an action captioned Solutia Inc. v.
FMC Corporation ("FMC") in Circuit Court in St. Louis County, Missouri,  against
FMC over the failure of purified  phosphoric acid technology  provided by FMC to
Astaris,  the 50/50 joint venture between Solutia and FMC. On July 31, 2006, the
District Court entered its order  regarding  FMC's motion for summary  judgment,
ruling  that  Solutia's  breach of  fiduciary  duty  claim  would be  allowed to
proceed,  but only on a limited basis. The Court further  overruled the parties'
motions for summary judgment on the remaining claims.  The Court also ruled that
there will be a bench trial on the four claims remaining in the case.

ITEM 5. OTHER INFORMATION

Euronotes Refinancing

      As  previously  disclosed  in a Form 8-K  filed  with the  Securities  and
Exchange Commission (the "SEC") on June 30, 2006, Solutia delivered a redemption
notice and  certificate  (the "Notice") to the holders of its (euro) 200 million
10.00 percent Senior Secured Notes due 2008 (the "Euronotes")  issued by Solutia
Europe S.A./N.V. ("SESA"), Solutia's wholly owned subsidiary, in accordance with
the terms and conditions of the Euronotes. Delivery of the Notice obligated SESA
to redeem the  Euronotes  on August 1, 2006 at a 3 percent  premium.

      As  described  in a Form 8-K filed on August 1,  2006,  on July 26,  2006,
Solutia's  indirect  wholly-owned   subsidiary  Solutia  Services  International
S.C.A./Comm.  V.A.  ("SSI"),  a  subsidiary  of SESA,  entered into a (euro) 200
million Facility Agreement (the "Facility  Agreement")  between SSI as borrower,
SESA and CPFilms  Vertriebs  GmbH,  as  original  guarantors,  Citigroup  Global
Markets Limited, as arranger,  the financial institutions listed therein, as the
original  lenders,  Citibank  International plc as agent for the finance parties
and  Citibank  N.A. as security  agent for the secured  parties.  Closing of the
credit  facility  contemplated  by the  Facility  Agreement,  which  at  signing
remained  subject  to the  satisfaction  of a number  of  conditions  precedent,
occurred on August 1, 2006. SESA used the proceeds of the new credit facility to
refinance of all of the Euronotes on August 1, 2006, at a prepayment  premium of
3 percent, as required pursuant to the Euronotes,  for a total redemption amount
of approximately (euro) 215 million,  including accrued interest.  The Euronotes
were refinanced to reduce the interest rate, extend the term of the indebtedness
and  allow  for  certain  dispositions  by  Solutia,  including  the sale of its
pharmaceutical services business.

      The Facility  Agreement has a five-year term,  with a termination  date of
July 31, 2011 and an  adjustable  rate  structure of EURIBOR plus a margin which
currently  yields a rate of approximately  5.75 to 6.50 percent.   The margin is
subject to adjustment  upon the  occurrence of certain  events  specified in the
Facility Agreement or upon SESA and its subsidiaries attaining certain financial
benchmarks.  The new credit facility  consists of a (euro) 160 million term loan
B1 and a (euro) 40 million  term loan B2. The (euro) 40 million  term loan B2 is
expected to be repaid from the proceeds of the sale of Solutia's  pharmaceutical
services business described in Note 4 to the accompanying consolidated financial
statements.  The new loan is secured by substantially  all of the assets of SESA
and its subsidiaries (excluding Flexsys Holding B.V. and Carbogen Amcis AG). The
Facility Agreement also contains other customary terms and conditions, including
certain  financial  covenants  relating  to the  performance  of  SESA  and  its
subsidiaries.

      The foregoing description of the Facility Agreement does not purport to be
complete  and is  qualified  in  its  entirety  by  reference  to  the  Facility
Agreement, a copy of which is attached hereto as Exhibit 10.1.

ITEM 6. EXHIBITS

      See the Exhibit Index at page 59, of this report.


                                       57
<PAGE>

                                    SIGNATURE

      Pursuant to the  requirements of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                          SOLUTIA INC.
                                          --------------------------
                                          (Registrant)


                                          /s/ TIMOTHY J. SPIHLMAN
                                          --------------------------------------
                                          (Vice President and Controller)
                                          (On behalf of the Registrant and as
                                          Principal Accounting Officer)

Date: August 2, 2006


                                       58
<PAGE>

                                  EXHIBIT INDEX

These Exhibits are numbered in accordance  with the Exhibit Table of Item 601 of
Regulation S-K.

EXHIBIT
NUMBER                                    DESCRIPTION
------                                    -----------

10.1          (Euro) 200,000,000 Facility Agreement dated July 26, 2006 between
              Solutia Europe S.A./N.V., Solutia Services International
              S.C.A./Comm. V.A., the guarantors listed therein, Citigroup Global
              Markets Limited, as mandated lead arranger, the financial
              institutions listed therein, as the original lenders, Citibank
              International plc as agent for the finance parties and Citibank
              N.A. as security agent for the secured parties

10.2          Share and Asset Purchase Agreement entered into on May 23, 2006
              between Solutia Europe S.A./N.V. and Dishman Pharmaceuticals &
              Chemicals Ltd.*

11            Omitted--Inapplicable; see "Consolidated Statement of Operations"
              on page 1

31(a)         Certification of Chief Executive Officer Pursuant to Section 302
              of the Sarbanes-Oxley Act of 2002

31(b)         Certification of Chief Financial Officer Pursuant to Section 302
              of the Sarbanes-Oxley Act of 2002

32(a)         Certification of Chief Executive Officer Pursuant to 18 U.S.C.
              Section 1350 as Adopted Pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002

32(b)         Certification of Chief Financial Officer Pursuant to 18 U.S.C.
              Section 1350 as Adopted Pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002

*Confidential  treatment  has been  requested  pursuant  to Rule 24b-2 under the
Securities  Exchange Act of 1934, as amended,  for portions of this exhibit that
contain confidential commercial and financial information.


                                       59