UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON, D. C.
20549





FORM
10-Q





(Mark
One)


[X]
QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934


For
the quarterly period ended March 31, 2009




OR




[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





Commission
file number001-13255





SOLUTIA INC.


(Exact
name of registrant as specified in its charter)





DELAWARE
              43-1781797(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)





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.  YesX
No




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes
___    No _X_




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




Large
Accelerated Filer XAccelerated
Filer
 Non-Accelerated
Filer   Smaller
reporting company___
 (Do
not check if a smaller reporting company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes
NoX
  Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
Court.  [ X] Yes     [  ] No
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
 Class
              Outstanding
      at
                March 31, 2009Common Stock, $0.01 par
    value
              94,291,771







PART
I. FINANCIAL INFORMATION





Item
1.  FINANCIAL STATEMENTS





SOLUTIA
INC.


CONSOLIDATED
STATEMENT OF OPERATIONS


(Dollars
in millions, except per share amounts)


(Unaudited)


Successor
                                                      
                                                      
                                                      PredecessorThree
      MonthsEnded
                                                        March
      31,2009
                                                      
                                                      
                                                      One
      MonthEnded
                                                        March
      31,2008
                                                      
                                                      
                                                      Two
      MonthsEnded
                                                        February
      29,2008Net
      Sales
                                                      
                                                      $
                                                      339
                                                      
                                                      
                                                      $
                                                      182
                                                      
                                                      
                                                      $
                                                      335Cost
      of goods sold
                                                      
                                                      
                                                      258
                                                      
                                                      
                                                      
                                                      156
                                                      
                                                      
                                                      
                                                      241Gross
      Profit
                                                      
                                                      
                                                      81
                                                      
                                                      
                                                      
                                                      26
                                                      
                                                      
                                                      
                                                      94Selling,
      general and administrative expenses
                                                      
                                                      
                                                      50
                                                      
                                                      
                                                      
                                                      22
                                                      
                                                      
                                                      
                                                      42Research,
      development and other operating expenses, net
                                                      
                                                      
                                                      4
                                                      
                                                      
                                                      
                                                      2
                                                      
                                                      
                                                      
                                                      3Operating
      Income
                                                      
                                                      
                                                      27
                                                      
                                                      
                                                      
                                                      2
                                                      
                                                      
                                                      
                                                      49Interest
      expense (a)
                                                      
                                                      
                                                      (37
                                                      )
                                                      
                                                      
                                                      (17
                                                      )
                                                      
                                                      
                                                      (21
                                                      )Other
      income (loss), net
                                                      
                                                      
                                                      (1
                                                      )
                                                      
                                                      
                                                      (1
                                                      )
                                                      
                                                      
                                                      3Reorganization
      items, net
                                                      
                                                      
                                                      --
                                                      
                                                      
                                                      
                                                      --
                                                      
                                                      
                                                      
                                                      1,433Income
      (Loss) from Continuing Operations Before Income Tax
Expense
                                                      
                                                      
                                                      (11
                                                      )
                                                      
                                                      
                                                      (16
                                                      )
                                                      
                                                      
                                                      1,464Income
      tax expense (benefit)
                                                      
                                                      
                                                      (7
                                                      )
                                                      
                                                      
                                                      --
                                                      
                                                      
                                                      
                                                      214Income
      (Loss) from Continuing Operations
                                                      
                                                      
                                                      (4
                                                      )
                                                      
                                                      
                                                      (16
                                                      )
                                                      
                                                      
                                                      1,250Income
      (Loss) from Discontinued Operations, net of tax
                                                      
                                                      
                                                      (155
                                                      )
                                                      
                                                      
                                                      (14
                                                      )
                                                      
                                                      
                                                      204Net
      Income (Loss) attributable to Solutia
                                                      
                                                      $
                                                      (159
                                                      )
                                                      
                                                      $
                                                      (30
                                                      )
                                                      
                                                      $
                                                      1,454Basic
      and Diluted Loss per Share:Income
      (Loss) from Continuing Operations
                                                      
                                                      $
                                                      (0.04
                                                      )
                                                      
                                                      $
                                                      (0.27
                                                      )
                                                      
                                                      $
                                                      11.96Income
      (Loss) from Discontinued Operations, net of tax
                                                      
                                                      $
                                                      (1.66
                                                      )
                                                      
                                                      $
                                                      (0.23
                                                      )
                                                      
                                                      $
                                                      1.95Net
      Income (Loss) attributable to Solutia
                                                      
                                                      $
                                                      (1.70
                                                      )
                                                      
                                                      $
                                                      (0.50
                                                      )
                                                      
                                                      $
                                                      (13.91
                                                      )





(a)
                        Predecessor
      excludes unrecorded contractual interest expense of $5 in the two months
      ended February 29,
2008.




See accompanying Notes to
Consolidated Financial Statements.


SOLUTIA
INC.


CONSOLIDATED
STATEMENT OF COMPREHENSIVE INCOME (LOSS)


(Dollars
in millions)


(Unaudited)


Successor
                                                      
                                                      
                                                      PredecessorThree
      MonthsEnded
                                                        March 31,2009
                                                      
                                                      
                                                      One
      MonthEnded
                                                        March 31,2008
                                                      
                                                      
                                                      Two
      MonthsEnded
                                                        February 29,2008Net
      Income (Loss) attributable to Solutia
                                                      
                                                      $
                                                      (159
                                                      )
                                                      
                                                      $
                                                      (30
                                                      )
                                                      
                                                      $
                                                      1,454Other
      Comprehensive Income (Loss):Currency
      translation adjustments
                                                      
                                                      
                                                      (37
                                                      )
                                                      
                                                      
                                                      23
                                                      
                                                      
                                                      
                                                      32Unrealized
      gain (loss) on derivative instruments
                                                      
                                                      
                                                      4
                                                      
                                                      
                                                      
                                                      (1
                                                      )
                                                      
                                                      
                                                      --Amortization
      of prior service gain
                                                      
                                                      
                                                      --
                                                      
                                                      
                                                      
                                                      --
                                                      
                                                      
                                                      
                                                      (3
                                                      )Amortization
      of actuarial loss
                                                      
                                                      
                                                      2
                                                      
                                                      
                                                      
                                                      --
                                                      
                                                      
                                                      
                                                      2Actuarial
      loss arising during the period
                                                      
                                                      
                                                      --
                                                      
                                                      
                                                      
                                                      --
                                                      
                                                      
                                                      
                                                      (64
                                                      )Prior
      service gain arising during the period
                                                      
                                                      
                                                      --
                                                      
                                                      
                                                      
                                                      --
                                                      
                                                      
                                                      
                                                      109Fresh-Start
      accounting adjustment
                                                      
                                                      
                                                      --
                                                      
                                                      
                                                      
                                                      --
                                                      
                                                      
                                                      
                                                      (30
                                                      )Comprehensive
      Income (Loss) attributable to Solutia
                                                      
                                                      $
                                                      (190
                                                      )
                                                      
                                                      $
                                                      (8
                                                      )
                                                      
                                                      $
                                                      1,500





See
      accompanying Notes to the Consolidated Financial
  Statements


- 1
-





SOLUTIA INC.


CONSOLIDATED
STATEMENT OF FINANCIAL POSITION


(Dollars
in millions, except per share amounts)


(Unaudited)


SuccessorMarch
      31,
                                  2009
                                
                                
                                December
      31,
                                  2008ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                
                                $
                                35
                                
                                
                                $
                                32Trade
      receivables, net of allowances of $0 in 2009 and 2008
                                
                                
                                194
                                
                                
                                
                                227Miscellaneous
      receivables
                                
                                
                                91
                                
                                
                                
                                110Inventories
                                
                                
                                310
                                
                                
                                
                                341Prepaid
      expenses and other assets
                                
                                
                                75
                                
                                
                                
                                85Assets
      of discontinued operations
                                
                                
                                342
                                
                                
                                
                                490Total
      Current Assets
                                
                                
                                1,047
                                
                                
                                
                                1,285Property, Plant and Equipment,net of accumulated depreciation of $72 in 2009 and $56 in
      2008
                                
                                
                                917
                                
                                
                                
                                952Goodwill
                                
                                
                                511
                                
                                
                                
                                511Identified
      Intangible Assets, net
                                
                                
                                805
                                
                                
                                
                                823Other
      Assets
                                
                                
                                158
                                
                                
                                
                                163Total
      Assets
                                
                                $
                                3,438
                                
                                
                                $
                                3,734LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
                                
                                $
                                119
                                
                                
                                $
                                170Accrued
      liabilities
                                
                                
                                243
                                
                                
                                
                                259Short-term
      debt, including current portion of long-term debt
                                
                                
                                39
                                
                                
                                
                                37Liabilities
      of discontinued operations
                                
                                
                                364
                                
                                
                                
                                302Total
      Current Liabilities
                                
                                
                                765
                                
                                
                                
                                768Long-Term
      Debt
                                
                                
                                1,310
                                
                                
                                
                                1,359Postretirement
      Liabilities
                                
                                
                                455
                                
                                
                                
                                465Environmental
      Remediation Liabilities
                                
                                
                                274
                                
                                
                                
                                279Deferred
      Tax Liabilities
                                
                                
                                173
                                
                                
                                
                                202Other
      Liabilities
                                
                                
                                119
                                
                                
                                
                                132Commitments
      and Contingencies (Note 9)Shareholders’
      Equity:Common
      stock at $0.01 par value; (500,000,000 shares authorized, 94,518,392 and
      94,392,772 shares issued in 2009 and 2008, respectively)
                                
                                
                                1
                                
                                
                                
                                1Additional
      contributed capital
                                
                                
                                1,480
                                
                                
                                
                                1,474Treasury
      shares, at cost (226,621 in 2009 and 77,132 in 2008)
                                
                                
                                (1
                                )
                                
                                
                                --Accumulated
      other comprehensive loss
                                
                                
                                (317
                                )
                                
                                
                                (286
                                )Accumulated
      deficit
                                
                                
                                (827
                                )
                                
                                
                                (668
                                )Total
      Shareholders’ Equity attributable to Solutia
                                
                                
                                336
                                
                                
                                
                                521Equity
      attributable to noncontrolling interest
                                
                                
                                6
                                
                                
                                
                                8Total
      Shareholders’ Equity
                                
                                
                                342
                                
                                
                                
                                529Total
      Liabilities and Shareholders’ Equity
                                
                                $
                                3,438
                                
                                
                                $
                                3,734




See
accompanying Notes to Consolidated Financial Statements.


- 2 -


SOLUTIA
INC.


CONSOLIDATED
STATEMENT OF CASH FLOWS


(Dollars
in millions)


(Unaudited)


Successor
                            
                            
                            PredecessorThree
      Months Ended
                              March 31,2009
                            
                            
                            One
      Month Ended
                              March 31,2008
                            
                            
                            Two
      Months Ended
                              February 29,2008INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                              OPERATING
      ACTIVITIES:Net
      income (loss) attributable to Solutia
                            
                            $
                            (159
                            )
                            
                            $
                            (30
                            )
                            
                            $
                            1,454Adjustments
      to reconcile net income (loss) to net cash used in
    operations:(Income)
      Loss from discontinued operations, net of tax
                            
                            
                            155
                            
                            
                            
                            14
                            
                            
                            
                            (204
                            )Depreciation
      and amortization
                            
                            
                            25
                            
                            
                            
                            9
                            
                            
                            
                            11Revaluation
      of assets and liabilities, net of tax
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            (1,383
                            )Discharge
      of claims and liabilities, net of tax
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            100Other
      reorganization items, net
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            52Pension
      obligation related expense greater than (less than)
      contributions
                            
                            
                            (5
                            )
                            
                            
                            1
                            
                            
                            
                            (18
                            )Other
      postretirement benefit obligation related expense less than
      contributions
                            
                            
                            (2
                            )
                            
                            
                            (1
                            )
                            
                            
                            (6
                            )Amortization
      of deferred debt issuance costs
                            
                            
                            5
                            
                            
                            
                            1
                            
                            
                            
                            1Deferred
      income taxes
                            
                            
                            (14
                            )
                            
                            
                            (1
                            )
                            
                            
                            5Other
      charges (gains) including restructuring expenses
                            
                            
                            (1)
                            
                            
                            
                            23
                            
                            
                            
                            (2
                            )Changes
      in assets and liabilities:Income
      taxes payable
                            
                            
                            (9
                            )
                            
                            
                            4
                            
                            
                            
                            5Trade
      receivables
                            
                            
                            33
                            
                            
                            
                            (17
                            )
                            
                            
                            (24
                            )Inventories
                            
                            
                            31
                            
                            
                            
                            (15
                            )
                            
                            
                            (34
                            )Accounts
      payable
                            
                            
                            (42
                            )
                            
                            
                            (8
                            )
                            
                            
                            31Environmental
      remediation liabilities
                            
                            
                            (5
                            )
                            
                            
                            (1
                            )
                            
                            
                            (1
                            )Restricted
      cash for environmental remediation and other legacy
    payments
                            
                            
                            5
                            
                            
                            
                            --
                            
                            
                            
                            --Other
      assets and liabilities
                            
                            
                            13
                            
                            
                            
                            1
                            
                            
                            
                            (3
                            )Cash
      Provided by (Used in) Continuing Operations before Reorganization
      Activities
                            
                            
                            30
                            
                            
                            
                            (20
                            )
                            
                            
                            (16
                            )Reorganization
      Activities:Establishment
      of VEBA retiree trust
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            (175
                            )Establishment
      of restricted cash for environmental remediation and other legacy
      payments
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            (46
                            )Payment
      for allowed secured and administrative claims
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            (79
                            )Professional
      service fees
                            
                            
                            --
                            
                            
                            
                            (7
                            )
                            
                            
                            (31
                            )Other
      reorganization and emergence related payments
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            (17
                            )Cash
      Used in Reorganization Activities
                            
                            
                            --
                            
                            
                            
                            (7
                            )
                            
                            
                            (348
                            )Cash
      Provided by (Used in) Operations – Continuing Operations
                            
                            
                            30
                            
                            
                            
                            (27
                            )
                            
                            
                            (364
                            )Cash
      Provided by (Used in) Operations – Discontinued Operations
                            
                            
                            40
                            
                            
                            
                            (30
                            )
                            
                            
                            (48
                            )Cash
      Provided by (Used in) Operations
                            
                            
                            70
                            
                            
                            
                            (57
                            )
                            
                            
                            (412
                            )INVESTING
      ACTIVITIES:Property,
      plant and equipment purchases
                            
                            
                            (15
                            )
                            
                            
                            (3
                            )
                            
                            
                            (15
                            )Acquisition
      and investment payments
                            
                            
                            (1
                            )
                            
                            
                            --
                            
                            
                            
                            --Investment
      proceeds and property disposals
                            
                            
                            1
                            
                            
                            
                            --
                            
                            
                            
                            --Cash
      Used in Investing Activities – Continuing Operations
                            
                            
                            (15
                            )
                            
                            
                            (3
                            )
                            
                            
                            (15
                            )Cash
      Used in Investing Activities – Discontinued Operations
                            
                            
                            (5
                            )
                            
                            
                            (2
                            )
                            
                            
                            (14
                            )Cash
      Used in Investing Activities
                            
                            
                            (20
                            )
                            
                            
                            (5
                            )
                            
                            
                            (29
                            )FINANCING
      ACTIVITIES:Net
      change in lines of credit
                            
                            
                            2
                            
                            
                            
                            --
                            
                            
                            
                            --Proceeds
      from long-term debt obligations
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            1,600Net
      change in long-term revolving credit facilities
                            
                            
                            (43
                            )
                            
                            
                            53
                            
                            
                            
                            190Proceeds
      from stock issuance
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            250Payment
      of short-term debt obligations
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            (966
                            )Payment
      of long-term debt obligations
                            
                            
                            (3
                            )
                            
                            
                            (3
                            )
                            
                            
                            (366
                            )Payment
      of debt obligations subject to compromise
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            (221
                            )Debt
      issuance costs
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            (136
                            )Purchase
      of treasury shares
                            
                            
                            (1
                            )
                            
                            
                            --
                            
                            
                            
                            --Other,
      net
                            
                            
                            (2
                            )
                            
                            
                            --
                            
                            
                            
                            --Cash
      Provided by (Used in) Financing Activities – Continuing
      Operations
                            
                            
                            (47
                            )
                            
                            
                            50
                            
                            
                            
                            351INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                            
                            
                            3
                            
                            
                            
                            (12
                            )
                            
                            
                            (90
                            )CASH
      AND CASH EQUIVALENTS:Beginning
      of period
                            
                            
                            32
                            
                            
                            
                            83
                            
                            
                            
                            173End
      of period
                            
                            $
                            35
                            
                            
                            $
                            71
                            
                            
                            $
                            83SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      payments for interest
                            
                            $
                            19
                            
                            
                            $
                            6
                            
                            
                            $
                            43Cash
      payments for income taxes, net of refunds
                            
                            $
                            2
                            
                            
                            $
                            1
                            
                            
                            $
                            4


See
      accompanying Notes to Consolidated Financial
  Statements.




3


SOLUTIA
INC.
 CONSOLIDATED
STATEMENT OF SHAREHOLDERS’ EQUITY
 (Dollars
in millions)







Equity
      attributable to SolutiaCommon
                            Stock
                          
                          
                          Additional
      Contributed Capital
                          
                          
                          Treasury
                            Stock
                          
                          
                          Accumulated
      Other Comprehensive Loss
                          
                          
                          Accumulated
                            Deficit
                          
                          
                          Equity
      Attributable to
                            Noncontrolling
                            Interest
                          
                          
                          Total
      Shareholders’ EquityBeginning
      Balance – January 1, 2009
                          
                          $
                          1
                          
                          
                          $
                          1,474
                          
                          
                          $
                          --
                          
                          
                          $
                          (286
                          )
                          
                          $
                          (668
                          )
                          
                          $
                          8
                          
                          
                          $
                          529Comprehensive
      income:Net
      income
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (159
                          )
                          
                          
                          --
                          
                          
                          
                          (159
                          )Accumulated
      currency adjustments
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (37
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (37
                          )Unrealized
      gain on derivative instruments
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          4
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          4Amortization
      of actuarial loss
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          2
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          2Dividends
      attributable to noncontrolling interest
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (2
                          )
                          
                          
                          (2
                          )Treasury
      stock purchases
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (1
                          )
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          (1
                          )Share-based
      compensation expense
                          
                          
                          --
                          
                          
                          
                          6
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          --
                          
                          
                          
                          6Ending
      Balance – March 31, 2009
                          
                          $
                          1
                          
                          
                          $
                          1,480
                          
                          
                          $
                          (1
                          )
                          
                          $
                          (317
                          )
                          
                          $
                          (827
                          )
                          
                          $
                          6
                          
                          
                          $
                          342





See
accompanying Notes to Consolidated Financial Statements.


-4
-


SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


1.  Background
and Basis of Presentation





Unless
the context requires otherwise, the terms “Solutia”, “Company”, “we”, and “our”
in this report refer to Solutia Inc. and its subsidiaries. The accompanying
consolidated financial statements have not been audited but have been prepared
in conformity with accounting principles generally accepted in the United States
for interim financial information and with instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.  Therefore, this Report
on Form 10-Q should be read in conjunction with Solutia’s Report on Form 10-K
for the fiscal year ended December 31, 2008.  In the opinion of
management, these unaudited consolidated financial statements contain all
adjustments necessary to present fairly the financial position, results of
operations and cash flows for the interim periods reported.  Financial
information for the first three months of fiscal year 2009 should not be
annualized because of the seasonality of our business.





On December 17, 2003, we
and our 14 U.S. subsidiaries had filed voluntary petitions for Chapter 11
protection (the “Chapter 11 Case”).  Our subsidiaries outside
the U.S. were not included in the Chapter 11 filing.  The filing was
made to restructure our balance sheet, to streamline operations and to reduce
costs, in order to allow us to continue operations as a viable going
concern.  On February 28, 2008 (the “Effective Date”), we
consummated our reorganization under Chapter 11 of the U.S. Bankruptcy Code and
emerged from bankruptcy pursuant to our Fifth Amended Joint Plan of
Reorganization which was confirmed by the U.S. Bankruptcy Court for the Southern
District of New York on November 29, 2007 (the
“Plan”).
 
 The
consolidated financial statements for the period in which we were in bankruptcy
were prepared in accordance with the American Institute of Certified
Public Accountants’ Statement of Position 90-7, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code (“SOP
90-7”) as amended by Financial Accounting Standards Board (“FASB”) Staff
Position No. SOP 90-7-1, An
Amendment of AICPA Statement of Position 90-7.  The
consolidated financial statements were also prepared 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.  In accordance with SOP 90-7, we adoptedfresh-start
accounting as of the Effective Date.  However, due to the proximity of
the Effective Date to the February month end, for accounting convenience
purposes, we have reported the effects of fresh-start accounting as if they
occurred on February 29, 2008. The financial information set forth in this
report, unless otherwise expressly set forth or as the context otherwise
indicates, reflects the consolidated results of operations and financial
condition of Solutia Inc. and its subsidiaries for the periods following March
1, 2008 (“Successor”), and of Solutia Inc. and its subsidiaries for the periods
through February 29, 2008 (“Predecessor”).
 
 2.  Recently
Issued and Adopted Accounting Standards
  In April 2009, the FASB
issued FASB Staff Position (“FSP”) FAS 107-1 and
APB 28-1,Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS
107-1”).  FSP FAS 107-1 amends Statement of Financial Accounting
Standards (“SFAS”) No. 107,Disclosures about Fair Value of Financial Instruments (“SFAS No. 107”)
and Accounting Principles Board (“APB”) Opinion No. 28,Interim Financial Reporting, to require entities to disclose the fair
value of all financial instruments within the scope of SFAS No. 107 in all
interim financial statements.  FSP FAS 107-1 also requires disclosure
of the method(s) and significant assumptions used to estimate the fair value of
those financial instruments.  Previously, these disclosures were
required only in annual financial statements.  FSP FAS 107-1 is
effective for interim reporting periods ending after June 15,
2009.  As the standard only enhances disclosure requirements, the
adoption of FSP FAS 107-1 is not expected to have any impact on our financial
statements.





In March
2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities, (“SFAS No. 161”). On
January 1, 2009, we adopted SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133, which requires enhanced disclosures about a
company’s derivative instruments and hedging activities. The adoption of SFAS
No. 161 did not have any financial impact on our consolidated financial
statements and the additional disclosures can be found at Note 10 – Derivatives
and Risk Management.







- 5
-


SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)
  In
February 2008, the FASB issued FSP FAS 157-2,Effective Date
of SFAS No. 157 (“FSP FAS No. 157-2”), which delayed the effective
date of SFAS No. 157,Fair
Value Measurements  (“SFAS No. 157”) for nonfinancial assets
and liabilities to fiscal years beginning after November 15,
2008.  Accordingly, on January 1, 2009, we adopted the additional
requirements of SFAS 157 that were deferred by FSP FAS No. 157-2. These
additional disclosures can be found at Note 3 – Discontinued
Operations.


In December
2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements — an amendment of ARB No. 51,(“SFAS No. 160”).  SFAS No. 160 establishes new accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary through the use of disclosures that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. The provisions of SFAS No. 160 are effective for
fiscal years beginning on or after December 15, 2008 with early adoption
prohibited.  We
have retrospectively adopted this guidance effective January 1, 2009 and as a
result, have reclassified our noncontrolling interest in a
joint venture for prior periods on the Statement of Financial Position from
Other Liabilities to a separate line item in the equity
section.  Income attributable to the noncontrolling interest
was less than $1 for all periods presented and, accordingly, no modifications
were made to our Consolidated Statement of Operations or Consolidated Statement
of Comprehensive Income (Loss) for the periods presented.
 3.  Discontinued
Operations





On March
31, 2009, we entered into a definitive agreement to sell substantially all the
assets and certain liabilities, including environmental remediation liabilities
and pension liabilities of active employees, of our Integrated Nylon business to
an affiliate of S.K. Capital Partners II, L.P. (“Buyer”), a New York-based
private equity firm.  We expect this transaction to close in the
second quarter of 2009. 
 In accordance
with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, long-lived assets
held for sale with a carrying amount of $48 were written down to their fair
value of zero, resulting in a $31 loss, net of tax, which was included in income
(loss) from discontinued operations, net of tax for the three months ended March
31, 2009.  The fair value of these long-lived assets was developed
using the sales agreement noted above, which is a Level 2 fair value measurement
as defined by SFAS No. 157 under the fair value hierarchy.  Further,
and in addition to the impairment noted above, we accrued $70 at March 31, 2009
to reflect a valuation allowance on the collective carrying value of the
Integrated Nylon disposal group.




A summary of
the net sales and income (loss) from discontinued operations is as
follows:


Successor
                      
                      
                      PredecessorThree
      MonthsEnded
                        March
      31,2009
                      
                      
                      One
      MonthEnded
                        March
      31,2008
                      
                      
                      Two
      MonthsEnded
                        February
      29,2008Integrated
      Nylon:Operating
      results:Net
      sales
                      
                      $
                      208
                      
                      
                      $
                      150
                      
                      
                      $
                      318Income
      (Loss) before income taxes
                      
                      $
                      (174
                      )
                      
                      $
                      (14
                      )
                      
                      $
                      204Income
      tax benefit
                      
                      
                      (17
                      )
                      
                      
                      --
                      
                      
                      
                      --Income
      (Loss) from discontinued operations, net of tax
                      
                      $
                      (157
                      )
                      
                      $
                      (14
                      )
                      
                      $
                      204











-
6-
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)




The carrying amounts
of all assets and liabilities associated with our Integrated Nylon business have
been classified as current in the Consolidated Statement of Financial Position
and consisted of the following:





SuccessorMarch
      31,
                  2009
                
                
                December
      31,
                  2008Assets:Trade
      receivables, net
                
                $
                78
                
                
                $
                75Miscellaneous
      receivables
                
                
                17
                
                
                
                15Inventories
                
                
                235
                
                
                
                336Prepaid
      expenses and other assets
                
                
                12
                
                
                
                15Property,
      plant and equipment, net
                
                
                --
                
                
                
                41Other
      assets
                
                
                --
                
                
                
                8Assets
      of discontinued operations
                
                $
                342
                
                
                $
                490Liabilities:Accounts
      payable
                
                $
                86
                
                
                $
                101Accrued
      liabilities
                
                
                63
                
                
                
                54Valuation
      allowance
                
                
                70
                
                
                
                --Environmental
      remediation liabilities
                
                
                9
                
                
                
                9Deferred
      revenue
                
                
                53
                
                
                
                54Other
      liabilities
                
                
                2
                
                
                
                3Postretirement
      liabilities
                
                
                81
                
                
                
                81Liabilities
      of discontinued operations
                
                $
                364
                
                
                $
                302





The
operating results of our Integrated Nylon business reflect adjustments to our
LIFO Inventory reserve associated with this business and interest expense
associated with debt which would be repaid using anticipated sales proceeds
which were not previously allocated to the results of this
business.  Conversely, certain corporate expenses and reorganization
items, net are excluded from the operating results which had previously been
allocated to Integrated Nylon.





We sold
the resins, additives and adhesives business to UCB S.A. on January 31,
2003.  During the three months ended March 31, 2009, changes related
to tax audits from 2000 through 2004 for our 100% owned subsidiary, Solutia
Deutschland GmbH, resulted in a reduction in previously unrecognized tax
benefits of $2.  Accordingly, an income tax benefit equal to this
amount was recognized in income (loss) from discontinued operations, net of
tax.





4.  Share-Based
Compensation





Stock
Options





We did
not grant any options to purchase shares of common stock to eligible employees
under the Solutia Inc. 2007 Management Long-Term Incentive Plan (“2007
Management Plan”) or to our non-employee directors under the Solutia Inc. 2007
Non-Employee Director Stock Compensation Plan (“2007 Director Plan”) during the
three months ended March 31, 2009.





A summary
of stock option information as of March 31, 2009 is as follows:





Options
                
                
                Weighted-Average
                  Exercise Price
                
                
                Weighted-Average
                  Remaining
                  Contractual Life
                
                
                Aggregate
                  Intrinsic
                  Value (a)Vested
      or Expected to Vest at March 31, 2009
                
                
                2,491,239
                
                
                $
                17.29
                
                
                
                8.7
                
                
                $
                --Exercisable
      at March 31, 2009
                
                
                975,952
                
                
                $
                17.33
                
                
                
                8.3
                
                
                $
                --





(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 our
      common stock as of the reporting date. If the exercise price of the
      underlying awards is higher than the quoted market price of our common
      stock as of the reporting date, the intrinsic value of the award is
      $0.





-7
-
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


During
the three months ended March 31, 2009, we recognized $2 of compensation expense
related to our stock options, of which less than $1 was allocated to
discontinued operations.  For the one month ended March 31, 2008, we
recognized less than $1 of compensation expense related to our stock options for
both continuing and discontinued operations.  Pre-tax unrecognized
compensation expense for stock options, net of estimated forfeitures, was $9 as
of March 31, 2009 which will be recognized as expense over a remaining
weighted-average period of one year.





Restricted Stock
Awards





We did
not grant any restricted stock awards under the 2007 Management Plan or the 2007
Director Plan during the three months ended March 31, 2009.





During
the three months ended March 31, 2009, we recognized $4 of compensation expense
related to our restricted stock awards, of which less than $1 was allocated to
discontinued operations. For the one month ended March 31, 2008, we recognized
less than $1 of compensation expense related to our restricted stock awards for
both continuing and discontinued operations. Pre-tax unrecognized compensation
expense for restricted stock awards, net of estimated forfeitures, was $11 as of
March 31, 2009 which will be recognized as expense over a remaining
weighted-average period of one year.





5.  Goodwill
and Other Intangible Assets





In
connection with the adoption of fresh-start accounting, goodwill and certain
intangible assets including (i) amortizable customer relationships, unpatented
technology, contract-based intangible assets, trade names and patents and (ii)
indefinite-lived trademarks not subject to amortization were recorded at their
estimated fair value on February 29, 2008.





Goodwill
by reportable segment as of March 31, 2009 and December 31, 2008 is as
follows:





BalanceSaflex
                          
                          $
                          205CPFilms
                          
                          
                          159Technical
      Specialties
                          
                          
                          147Total
                          
                          $
                          511





Intangible
assets are summarized in aggregate as follows:





Successor
                            March 31, 2009
                          
                          
                          Successor
                            December 31, 2008Estimated
                            Useful
                            Life
      in
                            Years
                          
                          
                          Gross
                            Carrying
                            Value
                          
                          
                          Accumulated
                            Amortization
                          
                          
                          Net
                            Carrying
                            Value
                          
                          
                          Estimated
                            Useful
                            Life
      in
                            Years
                          
                          
                          Gross
                            Carrying
                            Value
                          
                          
                          Accumulated
                            Amortization
                          
                          
                          Net
                            Carrying
                            ValueAmortizable
      intangible assets:Customer
      relationships
                          
                          23
      to 27
                          
                          
                          $
                          482
                          
                          
                          $
                          (19
                          )
                          
                          $
                          463
                          
                          
                          23
      to 27
                          
                          
                          $
                          486
                          
                          
                          $
                          (15
                          )
                          
                          $
                          471Technology
                          
                          5
      to 26
                          
                          
                          
                          194
                          
                          
                          
                          (11
                          )
                          
                          
                          183
                          
                          
                          5
      to 26
                          
                          
                          
                          199
                          
                          
                          
                          (9
                          )
                          
                          
                          190Trade
      names
                          
                          25
                          
                          
                          
                          13
                          
                          
                          
                          (1
                          )
                          
                          
                          12
                          
                          
                          25
                          
                          
                          
                          13
                          
                          
                          
                          (--
                          )
                          
                          
                          13Patents
                          
                          13
                          
                          
                          
                          4
                          
                          
                          
                          (--
                          )
                          
                          
                          4
                          
                          
                          13
                          
                          
                          
                          4
                          
                          
                          
                          (--
                          )
                          
                          
                          4Non
      amortizable intangible assets:Trademarks
                          
                          
                          
                          
                          
                          
                          143
                          
                          
                          
                          --
                          
                          
                          
                          143
                          
                          
                          
                          
                          
                          
                          
                          145
                          
                          
                          
                          --
                          
                          
                          
                          145Total
      Identified Intangible Assets
                          
                          
                          
                          
                          
                          $
                          836
                          
                          
                          $
                          (31
                          )
                          
                          $
                          805
                          
                          
                          
                          
                          
                          
                          $
                          847
                          
                          
                          $
                          (24
                          )
                          
                          $
                          823





During
the three months ended March 31, 2009 we recognized $7 of amortization
expense of intangible assets.  Amortization expense is allocated to
cost of goods sold and selling, general and administrative expenses in the
Consolidated Statement of Operations as follows:





- 8
-
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


SuccessorThree
      MonthsEnded
                          March
      31,2009Cost
      of goods sold
                        
                        $
                        2Selling,
      general and administrative expenses
                        
                        $
                        5





We expect
amortization expense for intangible assets to total approximately $31 for each
of the years ending December 31, 2009 through 2013.





6.  Detail
of Certain Balance Sheet Accounts





Components
of inventories were as follows:


SuccessorInventories
                
                March
      31,
                  2009
                
                
                December
      31,
                  2008Finished
      goods
                
                $
                174
                
                
                $
                195Goods
      in process
                
                
                60
                
                
                
                59Raw
      materials and supplies
                
                
                76
                
                
                
                87Inventories,
      at FIFO cost
                
                
                310
                
                
                
                341Excess
      of FIFO over LIFO cost
                
                
                --
                
                
                
                --Total
      Inventories
                
                $
                310
                
                
                $
                341





Components
of property, plant, and equipment were as follows:


SuccessorProperty,
      Plant and Equipment
                
                March
      31,
                  2009
                
                
                December
      31,
                  2008Land
                
                $
                33
                
                
                $
                34Leasehold
      improvements
                
                
                9
                
                
                
                9Buildings
                
                
                198
                
                
                
                203Machinery
      and equipment
                
                
                719
                
                
                
                727Construction
      in progress
                
                
                30
                
                
                
                35Total
      property, plant and equipment
                
                
                989
                
                
                
                1,008Less
      accumulated depreciation
                
                
                (72
                )
                
                
                (56
                )Total Property,
      Plant and Equipment, Net
                
                $
                917
                
                
                $
                952





Components
of accrued liabilities were as follows:


SuccessorAccrued
      Liabilities
                
                March
      31,
                  2009
                
                
                December
      31,
                  2008Wages
      and benefits
                
                $
                33
                
                
                $
                57Foreign
      currency and commodity hedge agreements
                
                
                35
                
                
                
                36Restructuring
      reserves
                
                
                31
                
                
                
                19Environmental
      remediation liabilities
                
                
                30
                
                
                
                30Accrued
      income and other taxes payable
                
                
                13
                
                
                
                16Accrued
      selling expenses
                
                
                15
                
                
                
                16Accrued
      interest
                
                
                16
                
                
                
                9Other
                
                
                70
                
                
                
                76Total
      Accrued Liabilities
                
                $
                243
                
                
                $
                259








- 9
-
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


7.  Income
Taxes





Income
Tax Expense





We
recorded a net income tax benefit of $7 for the three months ended March
31, 2009 and income tax expense of $214 in the two months ended February 29,
2008.  There was no income tax expense or benefit recorded in the one
month ended March 31, 2008.





Our
income tax expense or benefit is affected by changes in unrecognized tax
benefits and the mix of income and losses in the tax jurisdictions in which we
operate.  This results in significant differences in our effective tax
rate versus the U.S. statutory rate.  For the three months ended March
31, 2009, we recognized a previously unrecognized tax benefit
of $10 due to developments in case law changing the technical merits of a tax
position.  Furthermore, for each of the periods presented,
we recorded a valuation allowance against the tax benefit in some
jurisdictions in which we experienced losses, predominantly the
U.S.





Unrecognized
Tax Benefits





The total
amount of unrecognized tax benefits at March 31, 2009 and December 31, 2008
was $145 and $157, respectively.  Included in the balance at March 31,
2009 and December 31, 2008 were $52 and $63, respectively, of unrecognized
tax benefits that, if recognized, would affect the effective tax rate.The decrease in the
amounts is mainly the result of developments in case law changing the technical
merits of a tax position, closure of tax audits, and the effect of currency
exchange rate fluctuations.





We file
income tax returns in the U.S. and various states and foreign
jurisdictions.  With few exceptions, we are no longer subject to U.S.
federal, state and local, or non-U.S. income tax examinations by tax authorities
for years before 2002. It is reasonably possible that within the next 12
months as a result of the resolution of federal, state and foreign examinations
and appeals, and the expiration of various statutes of limitation that the
unrecognized tax benefits that would affect the effective tax rate will decrease
by a range of $0 to $12 and the unrecognized tax benefits that would not affect
the effective tax rate will decrease by a range of $0 to $6.





8.  Restructuring
Reserves





In an
effort to maintain competitiveness across our businesses and the geographic
areas in which we operate and to enhance the efficiency and cost effectiveness
of our support operations, we periodically initiate certain restructuring
activities which result in charges for costs associated with exit or disposal
activities, severance and/or impairment of long-lived assets.  A
summary of these activities for the periods presented are as
follows:





2008 Restructuring Events





Due to overcapacity within the
industry, a disadvantaged cost position and increasing pressure from Far Eastern
producers, we ceased the manufacturing of certain rubber chemicals at our
facility in Ruabon, Wales, United Kingdom (“Ruabon Facility”) in the third and
fourth quarters of 2008 with an expected final closure of the plant in
2011.  As a result, we expect to incur charges of $43 throughout the
closure process as an increase to Cost of Goods Sold within our Technical
Specialties reportable segment, categorized as follows:  (i) $17 for
employment reductions, (ii) $11 for future contractual payments on indirect
residual costs necessary to continue providing third party operations at the
site until final closure, and (iii) $15 for other costs including clean-out and
demolition.  During the three months ended March 31, 2009, $1 of
restructuring costs was charged to Cost of Goods Sold relating to employment
reductions.  The cumulative restructuring costs charged to Cost of
Goods Sold relating to these activities are $21 which is categorized as follows:
(i) $8 for employment reductions, (ii) $10 for contract termination costs, and
(iii) $3 of other restructuring costs.




In an effort to balance our North
America production with customer demand, in the fourth quarter of 2008, we
announced plans to idle our SAFLEX® plastic interlayer manufacturing line at our
facility in Trenton, Michigan (“Trenton Facility”) in
2009.  Consequently, we expect to incur charges of $16 as an increase
to Cost of Goods Sold within our Saflex reportable segment, categorized as
follows:  (i) $7 for employment reductions, (ii) $8 for the write-down
of the related manufacturing assets, and (iii) $1 for other restructuring
costs.  During the three months ended March 31, 2009, $4 for
restructuring costs was charged to Cost of Goods Sold relating to employment
reductions.  The cumulative restructuring costs charged to Cost of
Goods Sold relating to these activities are $14 which is categorized as follows:
(i) $6 for employment reductions and (ii) $8 for the write-down of the related
manufacturing assets.





-
10 -
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


In the fourth
quarter of 2008, we initiated a general corporate restructuring targeted to
increase the efficiency and cost effectiveness of our support
operations.  In the first quarter of 2009, this project was expanded
in scope to include a reduction in operational personnel to more appropriately
match our organization with current production levels.  We expect to
incur charges of $22 to $27 during the life of this project to cover the cost of
impacted headcount reductions to be shared by all our segments.  A
summary of the employee reduction charges associated with this project during
the three months ended March 31, 2009 and cumulative charges through March 31,
2009 are as follows:





Three Months Ended March 31,
      2009:
                      
                      Saflex
                      
                      
                      CPFilms
                      
                      
                      Technical
      Specialties
                      
                      
                      Unallocated
      and Other
                      
                      
                      TotalCost
      of goods sold
                      
                      $
                      1
                      
                      
                      $
                      1
                      
                      
                      $
                      --
                      
                      
                      $
                      1
                      
                      
                      $
                      3Selling,
      general and administrative expenses
                      
                      
                      6
                      
                      
                      
                      --
                      
                      
                      
                      1
                      
                      
                      
                      6
                      
                      
                      
                      13Research,
      development and other operating expenses, net
                      
                      
                      1
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1Total
                      
                      $
                      8
                      
                      
                      $
                      1
                      
                      
                      $
                      1
                      
                      
                      $
                      7
                      
                      
                      $
                      17Through March 31, 2009:Cost
      of goods sold
                      
                      $
                      1
                      
                      
                      $
                      1
                      
                      
                      $
                      --
                      
                      
                      $
                      1
                      
                      
                      $
                      3Selling,
      general and administrative expenses
                      
                      
                      6
                      
                      
                      
                      --
                      
                      
                      
                      1
                      
                      
                      
                      9
                      
                      
                      
                      16Research,
      development and other operating expenses, net
                      
                      
                      1
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1Total
                      
                      $
                      8
                      
                      
                      $
                      1
                      
                      
                      $
                      1
                      
                      
                      $
                      10
                      
                      
                      $
                      20





A summary
of restructuring activity during the three months ended March 31, 2009 is as
follows:





Successor
                      
                      Future
                        Contractual
                        Payments
                      
                      
                      Employment
                        Reductions
                      
                      
                      Other
      Restructuring Costs
                      
                      
                      TotalBalance
      at December 31, 2008
                      
                      $
                      10
                      
                      
                      $
                      10
                      
                      
                      $
                      --
                      
                      
                      $
                      20Charges taken
                      
                      
                      --
                      
                      
                      
                      22
                      
                      
                      
                      --
                      
                      
                      
                      22Amounts utilized
                      
                      
                      (2
                      )
                      
                      
                      (8
                      )
                      
                      
                      --
                      
                      
                      
                      (10
                      )Balance
      at March 31, 2009
                      
                      $
                      8
                      
                      
                      $
                      24
                      
                      
                      $
                      --
                      
                      
                      $
                      32





9.  Commitments
and Contingencies





Litigation





We are a
party to legal proceedings, which have arisen in the ordinary course of business
and involve claims for money damages.





Except
for the potential effect of an unfavorable outcome with respect to our Legacy
Tort Claims Litigation, it is our opinion that the aggregate of all claims and
lawsuits will not have a material adverse impact on our consolidated financial
statements.





Legacy
Tort Claims Litigation





Pursuant
to the Amended and Restated Settlement Agreement effective February 28, 2008,
entered into by Solutia and Monsanto in connection with our emergence from
Chapter 11 (the “Monsanto Settlement Agreement”), Monsanto is responsible to
defend and indemnify us for any Legacy Tort Claims as that term is defined in
the agreement, while we retain responsibility for tort claims arising out of
exposure occurring after our spinoff from the former Monsanto Company (now known
as Pharmacia Corporation, a 100% owned subsidiary of Pfizer, Inc.), which
occurred on September 1, 1997 (the “Solutia Spinoff”).  Solutia or its
100% owned subsidiary, Flexsys, have been named as defendants in the following
actions, and have submitted the matters to Monsanto as Legacy Tort
Claims.  However, to the extent these matters relate to post Solutia
Spinoff exposure or such matters are not within the meaning of “Legacy Tort
Claims” within the Monsanto Settlement Agreement, we would potentially be
liable.  All claims in the Flexsys tort litigation matters described
below concern alleged conduct occurring while Flexsys was a joint venture of
Solutia and Akzo Nobel, and any potential damages in these cases would be evenly
apportioned between Solutia and Akzo Nobel.  In addition to the below
actions, Monsanto has sought indemnity from us for certain tort and workers’
compensation claims in which Monsanto has been named a defendant.  We
have rejected such demand pursuant to the Monsanto Settlement
Agreement.  There are no pending legal actions regarding these alleged
indemnification rights.





-
11 -
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Putnam County, West Virginia
Litigation.In December 2004, a purported class action lawsuit was filed
in the Circuit Court of Putnam County, West Virginia against Flexsys, Pharmacia,
Monsanto and Akzo Nobel (Solutia Inc. is not a named defendant) alleging
exposure to dioxin from Flexsys’ Nitro, West Virginia facility, which is now
closed.  The relevant production activities at the facility occurred
during Pharmacia’s ownership and operation of the facility and well prior to the
creation of the Flexsys joint venture between Pharmacia (then known as Monsanto,
whose interest was subsequently transferred to us in the Solutia Spinoff) and
Akzo Nobel.  The plaintiffs are seeking damages for loss of property
value, medical monitoring and other equitable relief.





Beginning
in February 2008, Flexsys, Monsanto, Pharmacia, Akzo Nobel and another third
party were named as defendants in approximately seventy-five individual
lawsuits, and Solutia was named in two individual lawsuits, filed in Putnam
County, West Virginia, by residents of that county.  The largely
identical complaints allege that the residents were exposed to potentially
harmful levels of dioxin particles from the Nitro
facility.  Plaintiffs did not specify the amount of their alleged
damages in their complaints.





Escambia County, Florida Litigation.On June 6, 2008, a group of approximately fifty property owners and
business owners in the Pensacola, Florida area filed a lawsuit in the Circuit
Court for Escambia County, Florida against Monsanto, Pharmacia, Solutia, and the
plant manager at Solutia's Pensacola plant.  The lawsuit, entitled
John Allen, et al. v. Monsanto
Company, et al., alleges that the defendants are responsible for elevated
levels of PCBs in the Escambia River and Escambia Bay due to past and allegedly
continuing releases of PCBs from the Pensacola plant.  The plaintiffs
seek: (1) damages associated with alleged decreased property values caused
by the alleged contamination, and (2) remediation of the alleged
contamination in the waterways.  Plaintiffs did not specify the amount
of their alleged damages in their complaint.





St. Clair County, Illinois
Litigation.In February 2009, a purported class action lawsuit
was filed in the Circuit Court of St. Clair County, Illinois against Solutia,
Pharmacia, Monsanto and two other unrelated defendants alleging the
contamination of their property from PCBs, dioxins, furans, and other alleged
hazardous substances emanating from the defendants’ facilities in Sauget,
Illinois (including our W.G. Krummrich site in Sauget).  The proposed
class is comprised of residents who live within a two-mile radius of the Sauget
facilities.  The plaintiffs are seeking damages for medical monitoring
and the costs associated with remediation and removal of alleged contaminants
for their property.  The plaintiffs have not identified a specific
amount of alleged damages in their complaint.





Upon
assessment of the terms of the Monsanto Settlement Agreement and other defenses
available to us, we believe the probability of an unfavorable outcome on the
Putnam County, West Virginia, Escambia County, Florida, and St. Clair County,
Illinois litigation is remote and, accordingly, we have not recorded a loss
contingency.  Nonetheless, if it were subsequently determined these
matters are not within the meaning of “Legacy Tort Claims,” as defined in the
Monsanto Settlement Agreement, or other defenses to us were unsuccessful, it is
reasonably possible we would be liable for an amount which cannot be estimated
but which could have a material adverse effect on our consolidated financial
statements.





-
12 -
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Solutia
Inc. Employees’ Pension Plan Litigation





Since October 2005, current or former
participants in our U.S. Pension Plan (the “U.S. Plan”) have filed three class
actions alleging our cash balance pension plan is discriminatory based upon age
and the lump sum values of individual account balances in the U.S. Plan have
been, and continue to be, miscalculated.  Neither Solutia, nor any
individual or entity other than the U.S. Plan has been named as a defendant in
any of these cases.  However, a judgment against the U.S. Plan could
result in an increase in our required contributions.  Two of these
cases, captioned Davis, et al.
v. Solutia, Inc. Employees’ Pension Plan and Hammond, et al. v. Solutia, Inc.
Employees’ Pension Plan, are still pending against the U.S. Plan, and
were consolidated in September 2006 with similar cases pending in the Southern
District of Illinois against Monsanto Company and Monsanto Company Pension Plan
(Walker et al. v. The Monsanto
Pension Plan, et al.)and Pharmacia Cash Balance Pension Plan, Pharmacia
Corporation, Pharmacia and Upjohn, Inc., and Pfizer Inc. (Donaldson v. Pharmacia Cash Balance
Pension Plan, et al.).





A Consolidated Class Action Complaint
was filed by all of the plaintiffs in the consolidated case on September 4,
2006.  The plaintiffs alleged in the complaint three separate causes
of action against the U.S. Plan: (1) the U.S. Plan violates ERISA by terminating
interest credits on prior plan accounts at the age of 55; (2) the U.S. Plan is
improperly backloaded in violation of ERISA; and (3) the U.S. Plan is
discriminatory on the basis of age.  The plaintiffs seek 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 U.S.
Plan.  The court has dismissed plaintiffs’ claims that the U.S. Plan
is improperly backloaded in violation of ERISA, and that the U.S. Plan is
discriminatory on the basis of age.





By
consent of the parties, the court certified a class in September 2007 against
the U.S. Plan only with respect to plaintiffs’ claim that the U.S. Plan violates
ERISA by terminating interest credits on prior plan accounts at the age of
55.  Discovery has been completed, and the parties filed their motions
for summary judgment with respect to liability in July 2008.  The
motions are pending, and a hearing on the motions is expected sometime in the
second quarter of 2009.  The amount of a potential loss, if any, is
not currently estimable.





Environmental
Liabilities





In the
ordinary course of business, we are subject to numerous environmental laws and
regulations covering compliance matters or imposing liability for the costs of,
and damages resulting from, cleaning up sites, past spills, disposals and other
releases of hazardous substances.  We have incurred, and we may in the
future incur, liabilities to investigate and clean up waste or contamination at
our current facilities, properties adjacent to our current facilities or
facilities operated by third parties at where we may have disposed of waste or
other materials.  Under some circumstances, the scope of our liability
may extend to damages to natural resources for which we have accrued $2,
exclusive of the balances noted below.  In almost all cases, our
potential liability arising from historical contamination is based on operations
and other events occurring at our facilities or as a result of their operation
prior to the Solutia Spinoff.





Further,
under terms of the Monsanto Settlement Agreement and our Plan, we have agreed to
share responsibility with Monsanto for the environmental remediation at certain
locations outside our plant boundaries in Anniston, Alabama, and Sauget,
Illinois which were also incurred prior to the Solutia Spinoff (the “Shared
Sites”).  Under this cost-sharing arrangement, we are responsible for
the funding of environmental liabilities at the Shared Sites from the Effective
Date up to a total of $325.  Thereafter, if needed, we and Monsanto
will share responsibility equally.





Reserves
for environmental remediation that we believe to be probable and estimable are
recorded appropriately as current and long-term liabilities in the Consolidated
Statement of Financial Position.  These reserves include liabilities
expected to be paid out within fifteen years.  The amounts charged to
pre-tax earnings for environmental remediation and related charges are included
in cost of goods sold and are summarized below:





-
13 -
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)




Successor
                            
                            TotalBalance
      at December 31, 2008
                            
                            $
                            309Net charges
taken
                            
                            
                            1Amounts utilized
    (a)
                            
                            
                            (5
                            )Currency
      fluctuations
                            
                            
                            (1
                            )Balance
      at March 31, 2009
                            
                            $
                            304Environmental
      Remediation Liabilities, current
                            
                            $
                            30Environmental
      Remediation Liabilities, long-term
                            
                            
                            274Balance
      at March 31, 2009
                            
                            $
                            304




(a)
              For
      the three months ended March 31, 2009, allowable expenditures of $5 were
      reimbursed to us by a special purpose entity established with proceeds of
      stock issued by us on the Effective
Date.




In
addition to accrued environmental liabilities, there are costs which have not
met the definition of probable, and accordingly, are not recorded in the
Consolidated Statement of Financial Position.  These loss
contingencies are monitored regularly for a change in fact or circumstance that
would require an accrual adjustment.  These matters involve
significant unresolved issues, including the interpretation of applicable laws
and regulations, the outcome of negotiations with regulatory authorities and
alternative methods of remediation. Because of these uncertainties, the
potential liability for existing environmental remediation may range up to two
times the amount recorded.





Except as
noted below, we believe that these matters, when ultimately resolved, which may
be over an extended period of time, will not have a material adverse effect on
our Consolidated Statement of Financial Position, but could have a material
adverse effect on our Consolidated Statement of Operations in any given
period.  Our significant sites are described in more detail
below:





Anniston,
Alabama:   On Aug. 4, 2003, the U.S. District Court for
the Northern District of Alabama approved a Revised Partial Consent Decree,
pursuant to which Pharmacia and Solutia are obligated to perform, among other
things, residential cleanup work and a remedial investigation/feasibility study
(“RI/FS”) as a result of PCB contamination from our Anniston plant, which
occurred prior to the Solutia Spinoff.  The residential cleanup is
proceeding and should be completed within the next two years.  Some
level of remediation of non-residential properties and creek floodplains and/or
sediment will be required in the future and we have accrued for this liability
based upon our understanding of the level and extent of contamination in these
areas, the remedial effort likely to be required by various governmental
organizations and estimated costs associated with similar remediation
projects.  We may recover some of our investigation and remediation
costs from parties, against whom we filed a cost recovery action in July 2003
but because the eventual outcome of these proceedings is uncertain, our
environmental liability at March 31, 2009 does not incorporate this potential
reimbursement.  State and Federal Natural Resource Damage Trustees
have asserted a claim for potential natural resource damage but have yet to
undertake an assessment as to the nature and extent of such
damages.  As of March 31, 2009, we have accrued $121 for all
environmental remediation projects in the Anniston, Alabama area which
represents our best estimate of the final cost liability.  Timing of
the remediation will not be established until we complete the RI/FS, a Record of
Decision is issued by the United States Environmental Protection Agency
(“USEPA”), and a consent decree is negotiated and entered by the court to cover
the selected remediation, which will take several years.





Sauget,
Illinois:  A number of industries, including our W.G. Krummrich
Plant, have operated and disposed of wastes in Sauget,
Illinois.  Areas of contamination from these industrial operations,
which for our W.G. Krummrich Plant occurred prior to the Solutia Spinoff, have
been classified as part of either the Sauget Area 1 Sites or the Sauget Area 2
Sites.  We are conducting a RI/FS for the Sauget Area 1 Sites under an
Administrative Order on Consent issued on January 21, 1999.  Although
an extensive removal action for one of the Sauget Area 1 Sites was conducted
under a Unilateral Administrative Order issued on May 31, 2000, the cost and
timing of any additional required remedial actions will be established only
after we complete the RI/FS, a Record of Decision is issued by the USEPA, and a
consent decree is negotiated and entered by the court to cover the selected
remediation, which is expected within the next two years.  We have an
agreement with two other potentially responsible parties (“PRPs”) to enter into
an allocation proceeding upon issuance of the Record of Decision to resolve our
respective shares of the liability for the Sauget Area 1 Sites.  We,
in coordination with 19 other PRPs, are also required to conduct a RI/FS for the
Sauget Area 2 Sites under an Administrative Order on Consent issued effective
November 24, 2000.  We submitted the revised RI report and are
preparing the FS report with other PRPs based on interim allocations and have
agreed, upon issuance of the Record of Decision, to participate in an allocation
proceeding to fully resolve each PRP’s share of the liability for the
investigation and remediation costs.  An interim groundwater remedy
has been installed pursuant to a Unilateral Administrative Order issued on
October 3, 2002.  We anticipate that the USEPA will issue a Record of
Decision sometime in mid-2010.  Our ultimate exposure at these sites
will depend on the final remedial actions to be taken and on the level of
contribution from other PRPs.  Our best estimate of the ultimate cost
of all remedial measures that will be required at the Sauget, Illinois area
sites is $79 which we have accrued as of March 31, 2009.





-
14 -
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


W. G.
Krummrich Site:  We entered into a Consent Order under the U.S.
Resource Conservation and Recovery Act of 1976, as amended, effective May 3,
2000, to investigate and remediate soil and groundwater contamination from our
manufacturing operations at the W.G. Krummrich Plant, which occurred prior to
the Solutia Spinoff.  We conducted an extensive corrective measures
study and a Final Decision was issued by the USEPA in February 2008 setting out
the required corrective measures to be completed.  Due to the
complexity of the contamination issues at this site, certain of the corrective
measures will be performed in phases with the final remediation approach and
timing for some of the corrective measures being determined only after
investigation and pilot testing phases are completed.  Our best
estimate of the ultimate cost of all corrective measures that will be required
at the W.G. Krummrich Site is $27 which we have accrued as of March 31,
2009.





We also
have accruals for remedial obligations at several of our current or former
manufacturing sites which we have owned or operated since the Solutia
Spinoff.  Our best estimate of the ultimate cost of all corrective
measures that will be required at these sites is $77 which we have accrued as of
March 31, 2009.




Environmental
Agency Enforcement Actions





On March 3,
2009, the USEPA issued a Notice of Violation (“NOV”), Administrative Order
(“AO”) and Reporting Requirement (“RR”) to Solutia concerning alleged violations
of the Clean Air Act arising out of an inspection conducted of the Indian
Orchard Plant.  The NOV describes the USEPA’s findings alleging
violations of the plant’s Title V and state operating permits related to
emissions of volatile organic compounds.  The AO orders Solutia to
comply with its Title V permit and the National Emission Standards for Hazardous
Air Pollutants, Subpart OOO (Amino/Phenolic Resins), Subpart UU (Equipment
Leaks), and General Provisions.  The RR requires Solutia to submit
additional information regarding certain storage vessels and associated
equipment.  On March 23, 2009, Solutia met with the USEPA to confer on
this NOV, AO, and RR.  The USEPA informed Solutia at the meeting that
it has not yet made any decisions as to whether it will take enforcement action
or what type of action it will take with respect to this matter.  The
amount of a potential loss, if any, is not currently
estimable.





10.  Derivatives
and Risk Management




Our business
operations give rise to market risk exposures that result from changes in
foreign currency exchange rates, interest rates and certain commodity
prices.  To manage the volatility relating to these exposures, we
periodically enter into various derivative transactions that enable us to
alleviate the adverse effects of financial market risk.  Designation
is performed on a specific exposure basis to support hedge
accounting.   The changes in fair value of these hedging
instruments are offset in part or in whole by corresponding changes in the fair
value or cash flows of the underlying exposures being hedged.  Our
approved policies and procedures do not permit the purchase or holding of any
derivative financial instruments for trading purposes, and management of
counterparty credit risk is through diversification and credit rating reviews of
the firms with whom we transact.




Foreign Currency Exchange Rate Risk




We
manufacture and sell our products in a number of countries throughout the world
and, as a result, are exposed to movements in foreign currency exchange
rates.  We are exposed to this risk both on an intercompany and a
third-party basis.  We use foreign currency hedging instruments to
manage the volatility associated with foreign currency purchases of materials
and other assets and liabilities created in the normal course of
business.  We also enter into certain foreign currency derivative
instruments primarily to protect against exposure related to intercompany
financing transactions.  These risks are hedged primarily through the
use of forward exchange contracts and purchased options with maturities of less
than 18 months.







-
15 -
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


We have chosen not to designate these instruments as
hedges to allow the changes in the fair value of these instruments to largely
offset the re-measurement of the underlying assets and liabilities in the
Consolidated Statement of Operations. We had currency forward and option
contracts to purchase and sell $615 of currencies as of March 31, 2009 comprised
principally of the Euro, British Pound-Sterling, U.S. Dollar, Japanese Yen,
Swiss Franc, and Malaysian Ringgit.  Included in the currency forward
contracts at March 31, 2009 are contracts to purchase and sell $324 of
currencies which were executed to in-substance defease contracts with the same
financial institution.




Interest Rate
Risk





Interest
rate risk is primarily related to changes in interest expense from floating rate
debt.  To limit our exposure to this risk, in 2008 we entered into
interest rate swap agreements related to our $1.2 billion senior secured term
loan facility (“Term Loan”).  The interest rate swap agreements
have declining total notional amounts of $800 to $150 which are effective from
April 2010 through February 2014.  The terms of the interest rate swap
agreements require us to pay interest utilizing fixed interest rates ranging
from 4.65 percent to 4.85 percent and receive interest utilizing 1-Month
LIBOR.  Through February 2009, we designated the interest rate swap
agreements as cash flow hedges.  Because of
significant declines in interest rates and the significant difference between
the prime and LIBOR rates, we could no longer assert we would always choose the
1-Month LIBOR on our Term Loan.  Subsequent effectiveness testing on a
historical and prospective basis comparing our interest rate swap agreements to
the available interest rate options on our Term Loan concluded the relationships
were not highly effective.  Therefore, we discontinued hedge
accounting in February 2009 and all prospective mark-to-market gains or losses
are recognized in interest expense on the Consolidated Statement of
Operations.





Commodity Price
Risk





Certain
raw materials and energy resources we use are subject to price volatility caused
by weather, crude oil prices, supply
conditions, political and economic variables and other unpredictable
factors.  Therefore, from time to time, we use forward and option
contracts to manage a portion of the volatility related to anticipated energy
purchases with maturities up to 12 months. At March 31, 2009, we had a contract
to purchase 1,375,000 mmbtus of natural gas through December of
2009.  These derivative instruments are not designated as hedges since
over 90 percent of our natural gas usage in the U.S is attributable to the
operations of our Integrated Nylon business and, as we expect to complete the
sale of this business in the second quarter of 2009, it is not probable that we
will accept physical delivery of these natural gas contracts.





At March
31, 2009, we did not have any derivatives designated as hedging
instruments.  Our derivatives not designated as hedging
instruments,  recorded at their respective fair values at March 31,
2009, are summarized as follows:





Asset Derivatives
                    
                    Liability DerivativesConsolidated
      Statement of Financial Position Presentation
                    
                    Fair Value
                    
                    Consolidated
      Statement of Financial Position Presentation
                    
                    Fair ValueDerivative
      not designated as hedging instruments:Interest
      rate contracts
                    Other
      Assets
                    
                    $
                    --
                    
                    Other
      Liabilities
                    
                    $
                    26Foreign
      exchange contracts
                    Miscellaneous
      Receivables
                    
                    
                    1
                    
                    Accrued
      Liabilities
                    
                    
                    34Commodity
      contracts
                    Miscellaneous
      Receivables
                    
                    
                    --
                    
                    Accrued
      Liabilities
                    
                    
                    1Total
                    
                    
                    $
                    1
                    
                    
                    
                    $
                    61




For the three months
ended March 31, 2009, we recognized a gain of $4 in Other Comprehensive Income
for the period in which our interest rate contracts were designated as cash flow
hedging instruments.  During the twelve months following March 31,
2009, we do not currently expect any reclassifications into earnings of the
accumulated losses on the interest rate swaps since they are not effective until
April 5, 2010.





-
16 -
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


A summary of
the effect of our derivative instruments on the Consolidated Statement of
Operations is as follows:


Amount
      of Gain (Loss) Recognized in Consolidated
      Statement of OperationsPresentation
      of Gain (Loss) Recognized in
                    Consolidated
      Statement of
    Operations
                  
                  Three
      Months Ended
                    March 31, 2009Derivatives
      not designated as hedging instruments:Interest
      rate contracts
                  Interest
      expense
                  
                  $
                  (5
                  )Foreign
      exchange contracts
                  Other
      income, net
                  
                  
                  2Commodity
      contracts
                  Income
      (Loss) from Discontinued Operations, net of tax
                  
                  
                  (1
                  )Total
                  
                  
                  $
                  (4
                  )





11.  Fair
Value of Financial Instruments





The
following table presents our assets and liabilities that are measured at fair
value on a recurring basis and are categorized using the fair value hierarchy.
The fair value hierarchy has three levels based on the reliability of the inputs
used to determine fair value.





Fair Value Measurements at March 31,
      2009Total
                    
                    
                    Quoted
      Prices in Active Markets for Identical Assets
                      (Level 1)
                    
                    
                    Significant
      Other Observable Inputs
                      (Level 2)
                    
                    
                    Significant
      Unobservable Inputs
                      (Level 3)Assets:Restricted
      cash (a)
                    
                    $
                    23
                    
                    
                    $
                    23
                    
                    
                    $
                    --
                    
                    
                    $
                    --Derivatives
      – Foreign Exchange (b)
                    
                    
                    1
                    
                    
                    
                    --
                    
                    
                    
                    1
                    
                    
                    
                    --Total
                    
                    $
                    24
                    
                    
                    $
                    23
                    
                    
                    $
                    1
                    
                    
                    $
                    --Liabilities:Derivatives
      – Foreign Exchange (b)
                    
                    $
                    34
                    
                    
                    $
                    --
                    
                    
                    $
                    34
                    
                    
                    $
                    --Derivatives
      – Interest Rates (c)
                    
                    
                    26
                    
                    
                    
                    --
                    
                    
                    
                    26
                    
                    
                    
                    --Derivatives
      – Commodities (d)
                    
                    
                    1
                    
                    
                    
                    --
                    
                    
                    
                    1
                    
                    
                    
                    --Total
                    
                    $
                    61
                    
                    
                    $
                    --
                    
                    
                    $
                    61
                    
                    
                    $
                    --





(a)
            Includes
      cash invested in money market funds restricted for funding of
      environmental remediation and other legacy liabilities.(b)
            Includes
      foreign currency forward and options contracts which are valued using an
      income approach based on the present value of the forward rate less the
      contract rate multiplied by the notional amount.(c)
            Includes
      interest rate swaps which are valued using counterparty quotes, which use
      discounted cash flows and the then-applicable forward interest
      rates.(d)
            Includes
      commodity forward contracts which are valued using a pricing model with
      inputs that are observable in the market, such as quoted forward prices of
      commodities, or that can be derived from or corroborated by observable
      market data.


12.  Pension
Plans and Other Postretirement Benefits
 
 In
preparation for the sale of our Integrated Nylon business, we divided our U.S.
Plan into the following three plans, effective February 28, 2009: (i) Nylon
Pension Plan; (ii) Solutia Pension Plan; and (iii) Solutia Union Pension
Plan.  The Nylon Pension Plan covers all active employees of the
Integrated Nylon business.  In accordance with the terms of the sale
agreement as further described in Note 3 – Discontinued Operations, the Nylon
Pension Plan will be assumed by the buyer at the time of a closing on the
sale.  Therefore, the Nylon Pension Plan liability of $81 for both
March 31, 2009 and December 31, 2008 has been classified as liabilities of
discontinued operations in the Consolidated Statement of Financial
Position.


-
17 -
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)
  As a result
of the division of the U.S. Plan into three plans, we were required to perform a
funding analysis in accordance with the Pension Protection Act of 2006
(“PPA”).  The result of this analysis is the Nylon Pension Plan and
the Solutia Pension Plan will be prohibited by the PPA from paying out lump sum
benefits, until such time as the plan assets of these two plans would rise above
the 60 percent funding level for up to half a lump sum or above the 80 percent
funding level for a full lump sum.  For participants in the Solutia Union
Pension Plan, the lump sum restrictions in the PPA do not apply until January 1,
2010.





Components of Net Periodic Benefit
Cost





For the three months ended March 31,
2009, the one month ended March 31, 2008 and the two months ended February 29,
2008 our pension and healthcare and other benefit costs for continuing
operations were as follows:


Pension BenefitsSuccessor
                  
                  
                  PredecessorThree
      MonthsEnded
                    March
      31,2009
                  
                  
                  One MonthEnded
                    March
      31,2008
                  
                  
                  Two
      MonthsEnded
                    February
      29,2008Service
      costs for benefits earned
                  
                  $
                  1
                  
                  
                  $
                  --
                  
                  
                  $
                  1Interest
      costs on benefit obligation
                  
                  
                  15
                  
                  
                  
                  6
                  
                  
                  
                  13Assumed
      return on plan assets
                  
                  
                  (14
                  )
                  
                  
                  (6
                  )
                  
                  
                  (13
                  )Amortization
      of actuarial net loss
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  2Settlement
      charge
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  1Total
                  
                  $
                  2
                  
                  
                  $
                  --
                  
                  
                  $
                  4




Healthcare and Other
    BenefitsSuccessor
                    
                    
                    PredecessorThree
      MonthsEnded
                      March
      31,2009
                    
                    
                    One MonthEnded
                      March
      31,2008
                    
                    
                    Two
      Months Ended
                      February
      29,2008Service
      costs for benefits earned
                    
                    $
                    1
                    
                    
                    $
                    1
                    
                    
                    $
                    1Interest
      costs on benefit obligation
                    
                    
                    4
                    
                    
                    
                    1
                    
                    
                    
                    4Assumed
      return on plan assets
                    
                    
                    (1
                    )
                    
                    
                    (1
                    )
                    
                    
                    --Amortization
      of prior service gains
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    (3
                    )Amortization
      of actuarial gains
                    
                    
                    (2
                    )
                    
                    
                    --
                    
                    
                    
                    --Total
                    
                    $
                    2
                    
                    
                    $
                    1
                    
                    
                    $
                    2




Settlements
 
 We
recorded a pension settlement charge of $1 in the two months ended February 29,
2008 resulting from the significant amount of lump sum distributions from our
Belgium retirement plan.
 
 Employer Contributions
 
 According
to IRS funding rules, we expect to make approximately $26 in pension
contributions to our Solutia and Solutia Union Pension Plans in
2009.  We made $4 of these required 2009 contributions during the
three months ended March 31, 2009.  We also expect to be required to
fund approximately $10 in pension contributions to our foreign pension plans in
2009.
  13.  Debt
Obligations
 
 On the
Effective Date, we entered into certain financing agreements to borrow up to
$2.05 billion from a syndicate of lenders (the “Financing
Agreements”).  The Financing Agreements consisted of (i) a $450 senior
secured asset-based revolving credit facility (“Revolver”), (ii) our
Term Loan and (iii) a $400 senior unsecured bridge facility which was
subsequently retired in 2008.


-
18 -
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


To
support local operations and to partially limit exposure to changes in
foreign-currency exchange rates, we had short-term borrowings of $27 and $25 at
March 31, 2009 and December 31, 2008, respectively, comprised of other lines of
credit.





Our
long-term debt consisted of the following as of March 31, 2009 and December 31,
2008:





SuccessorMarch
      31,
                    2009
                  
                  
                  December
      31,
                    2008Term
      Loan, due 2014
                  
                  $
                  1,185
                  
                  
                  $
                  1,188Revolver,
      due 2013
                  
                  
                  137
                  
                  
                  
                  183Total principal
      amount
                  
                  
                  1,322
                  
                  
                  
                  1,371Less
      current portion of long-term debt
                  
                  
                  (12
                  )
                  
                  
                  (12
                  )Total
                  
                  $
                  1,310
                  
                  
                  $
                  1,359





Maximum
availability under the Revolver is limited to the lesser of $450 or the amount
of our borrowing base, as defined, but generally calculated as a percentage of
allowable inventory and trade receivables.  In addition to outstanding
borrowings, availability is further reduced by outstanding letters of
credit. Availability under the Revolver was $128 and $193 as of
March 31, 2009 and December 31, 2008, respectively.  The weighted
average interest rate on our total debt outstanding was 7.9 percent
and 7.7 percent at March 31, 2009 and December 31, 2008,
respectively. Our weighted average interest rate on short-term debt
outstanding was 2.1 percent and 4.2 percent at March 31, 2009 and December 31,
2008, respectively.





The
Revolver bears interest, at our option, at LIBOR or the prime rate plus an
applicable margin. As of March 31, 2009, the applicable margin for the
LIBOR and prime rate loans in the Revolver were 2.00 percent and 1.00
percent, respectively. The Term Loan bears interest at our option, at LIBOR
with a floor of 3.50 percent through the fourth anniversary of the Effective
Date plus 5.00 percent, or at the prime rate plus 4.00 percent.  Of
the amount outstanding on the Term Loan at March 31, 2009, $900 is protected by
a LIBOR cap of 4.25 percent until April 2010.  Interest for the
Revolver and Term Loan is payable (i) with respect to LIBOR loans, on the last
day of each relevant interest period (defined as one, two, three or six months
or other periods available to all lenders under each facility) and, in the case
of any interest period longer than three months, on each successive date
three months after the first day of such interest period, and (ii) with
respect to prime rate loans, quarterly in arrears.





Our
current subsidiaries CPFilms Inc., Flexsys America L.P., Flexsys America Co.,
Monchem International, Inc., Solutia Business Enterprises Inc., Solutia
Inter-America, Inc., Solutia Overseas, Inc., Solutia Systems, Inc., S E
Investment LLC and future subsidiaries as defined by the Financing Agreements,
subject to certain exceptions (the “Guarantors”) are guarantors of our
obligations under the Financing Agreements.  The Financing Agreements
and the related guarantees are secured by liens on substantially all of our and
the Guarantors’ present and future assets.  We are
required to make mandatory repayments of the Financing Agreements in connection
with asset sales and certain other events subject to certain
exceptions.  We are required to pay 1 percent of the principal of the
Term Loan annually via quarterly payments.  In addition, on an annual
basis and subject to our leverage position at December 31st of each
year, we are required to repay the Term Loan with a portion of excess cash flow
generated during the year, as defined in the Financing Agreements.  If
net leverage is less than 3.0x or greater than or equal to 3.0x, then we are
required to repay 25 percent or 50 percent, respectively, of excess cash flow
generated during the year.  Excess cash flow is generally defined as
EBITDA less interest, capital expenditures, taxes, and amortization of debt,
plus or minus working capital changes and other adjustments.  Any
portion of the Term Loan that is repaid through mandatory prepayments or
voluntarily repaid may not be reborrowed.  Furthermore, voluntary
prepayments or amendments to the Term Loan are subject to a prepayment premium
or fee of 2 percent after the first anniversary and prior to the second
anniversary of the Effective Date and 1 percent after the second anniversary and
prior to the third anniversary of the Effective Date.  We are not
subject to any prepayment premiums or fees for amendments after the third
anniversary of the Effective Date.






- 19
-
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


The
Financing Agreements include a number of customary covenants and events of
default, including the maintenance of certain financial covenants that restrict
our ability to, among other things, incur additional debt; make certain
investments; pay dividends, repurchase stock, sell certain assets or merge with
or into other companies; enter into new lines of business; make capital
expenditures; and prepay, redeem or exchange our debt.  The financial
covenants are (i) total leverage ratio, (ii) fixed charge coverage ratio and
(iii) a capital expenditure cap as defined by the Financing Agreements. We
were in compliance with all applicable covenants as of March 31,
2009.





14.  Segment
Data





We are 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.   Our operations are managed and reported in three
reportable operating segments, consisting of Saflex, CPFilms and Technical
Specialties.





The
Saflex reportable segment is a global manufacturer of performance films for
laminated safety glass.  The CPFilms reportable segment is a
manufacturer of performance films for after-market applications which add
functionality to glass.  The Technical Specialties reportable segment
is a global manufacturer of specialty products such as chemicals for the rubber
industry, heat transfer fluids and aviation hydraulic fluids.  The
major products by reportable segment are as follows:





Reportable
      Segment
                                        ProductsSaflex
                                        ·SAFLEX®
      plastic interlayer
                                          ·Specialty
      intermediate Polyvinyl Butyral resin and plasticizerCPFilms
                                        ·LLUMAR®,
      VISTA®, GILA® and FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS® professional
      and retail window films
                                          ·Other
      enhanced polymer films for industrial customersTechnical
      Specialties
                                        ·CRYSTEX®
      insoluble sulphur
                                          ·SANTOFLEX®
      antidegradants
                                          ·SANTOCURE®
      and PERKACIT® primary and ultra accelerators
                                          ·THERMINOL®
      heat transfer fluids
                                          ·SKYDROL®
      aviation hydraulic fluids
                                          ·SKYKLEEN®
      brand of aviation
solvents





The
performance of our operating segments is evaluated based on segment profit,
defined as earnings before interest expense, income taxes, depreciation and
amortization less net income attributable to noncontrolling interests and
reorganization items, net (“EBITDA”). Segment profit includes selling,
general and administrative, research, development and other operating expenses,
gains and losses from asset dispositions and restructuring charges, net income
attributable to noncontrolling interests and other income and expense items that
can be directly attributable to the segment.  Certain operations,
expenses and other items that are managed outside the reportable segments are
reported as Unallocated and Other.  Unallocated and Other is comprised
of corporate expenses, adjustments to our LIFO valuation reserve, adjustments to
our environmental remediation liabilities, equity earnings from affiliates,
other income and expense items including currency gains/losses, gains and losses
from asset dispositions and restructuring charges that are not directly
attributable to the reportable segments in addition to operating segments that
do not meet the quantitative threshold for determining reportable
segments.  There were no inter-segment sales in the periods presented
below.





-
20 -
 
 SOLUTIA
INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars
in millions, except per share amounts or otherwise noted)
 (Unaudited)


Segment
data for the three months ended March 31, 2009, one month ended March 31, 2008
and the two months ended February 29, 2008, respectively are as
follows:





Successor
                                  
                                  
                                  PredecessorThree
      MonthsEnded
                                    March
      31,2009
                                  
                                  
                                  One
      MonthEnded
                                    March
      31,2008
                                  
                                  
                                  Two
      MonthsEnded
                                    February
      29,2008Net
                                    Sales
                                  
                                  
                                  Profit
                                    (Loss)
                                  
                                  
                                  Net
                                    Sales
                                  
                                  
                                  Profit
                                    (Loss)
                                  
                                  
                                  Net
                                    Sales
                                  
                                  
                                  Profit
                                    (Loss)Reportable
      Segments:Saflex
                                  
                                  $
                                  133
                                  
                                  
                                  $
                                  19
                                  
                                  
                                  $
                                  68
                                  
                                  
                                  $
                                  2
                                  
                                  
                                  $
                                  125
                                  
                                  
                                  $
                                  16CPFilms
                                  
                                  
                                  34
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  23
                                  
                                  
                                  
                                  3
                                  
                                  
                                  
                                  39
                                  
                                  
                                  
                                  9Technical
      Specialties
                                  
                                  
                                  167
                                  
                                  
                                  
                                  56
                                  
                                  
                                  
                                  88
                                  
                                  
                                  
                                  12
                                  
                                  
                                  
                                  164
                                  
                                  
                                  
                                  40Reportable
      Segment Totals
                                  
                                  
                                  334
                                  
                                  
                                  
                                  76
                                  
                                  
                                  
                                  179
                                  
                                  
                                  
                                  17
                                  
                                  
                                  
                                  328
                                  
                                  
                                  
                                  65Unallocated
      and Other
                                  
                                  
                                  5
                                  
                                  
                                  
                                  (25
                                  )
                                  
                                  
                                  3
                                  
                                  
                                  
                                  (7
                                  )
                                  
                                  
                                  7
                                  
                                  
                                  
                                  (2
                                  )Total
                                  
                                  
                                  339
                                  
                                  
                                  
                                  51
                                  
                                  
                                  
                                  182
                                  
                                  
                                  
                                  10
                                  
                                  
                                  
                                  335
                                  
                                  
                                  
                                  63Reconciliation
      to Consolidated Totals:Depreciation and
      amortization
                                  
                                  
                                  
                                  
                                  
                                  
                                  (25
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (9
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (11
                                  )Interest
expense
                                  
                                  
                                  
                                  
                                  
                                  
                                  (37
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (17
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (21
                                  )Reorganization items,
      net
                                  
                                  
                                  
                                  
                                  
                                  
                                  --
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  --
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,433Consolidated
      Totals:Net
      Sales
                                  
                                  $
                                  339
                                  
                                  
                                  
                                  
                                  
                                  $
                                  182
                                  
                                  
                                  
                                  
                                  
                                  $
                                  335Income
      (Loss) from Continuing
                                    Operations
      Before Income Taxes
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (11
                                  )
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (16
                                  )
                                  
                                  
                                  
                                  
                                  
                                  $
                                  1,464





15.  Earnings
(Loss) Per Share





The following table presents the net
income (loss) used in the basic and diluted earnings (loss) per share and
reconciles weighted-average number of shares used in the basic earnings (loss)
per share calculation to the weighted-average number of shares used to compute
diluted earnings (loss) per share.





Successor
                    
                    
                    PredecessorThree
      Months Ended
                      March
      31,2009
                    
                    
                    One Month
      Ended
                      March
      31,2008
                    
                    
                    Two
      Months Ended
                      February
      29,2008Consolidated
      Statement of Operations:Income
      (Loss) from continuing operations
                    
                    $
                    (4
                    )
                    
                    $
                    (16
                    )
                    
                    $
                    1,250Income
      (Loss) from discontinued operations, net of tax
                    
                    
                    (155
                    )
                    
                    
                    (14
                    )
                    
                    
                    204Net
      income (loss) attributable to Solutia
                    
                    $
                    (159
                    )
                    
                    $
                    (30
                    )
                    
                    $
                    1,454Weighted-average
      number of shares outstanding used for basic earnings (loss) per
      share
                    
                    
                    93.3
                    
                    
                    
                    59.7
                    
                    
                    
                    104.5Non-vested
      restricted shares
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --Stock
      options
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --Warrants
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --Weighted-average
      number of shares outstanding and common equivalent shares used for diluted
      earnings (loss) per share
                    
                    
                    93.3
                    
                    
                    
                    59.7
                    
                    
                    
                    104.5





Stock
options, warrants to purchase common stock and non-vested restricted shares
outstanding during the three months March 31, 2009 and one month ended March 31,
2008 were not included in the computation of earnings (loss) per share since the
result would have been antidilutive.




16.  Subsequent
Event





On May 5,
2009 $74 of senior unsecured term debt, due 2011, at a price of 95 percent of
its original principal amount was issued by our 100% owned German subsidiary,
Flexsys Verkauf GmbH (the “Senior Term Loan”).  Net proceeds, after
incorporating the original issue discount and debt issuance fees, of $66, were
used to pay down our Revolver.  The Senior Term Loan bears interest,
at our option, at LIBOR with a floor of 3.50 percent plus 8.50 percent or the
Alternative Base Rate, as defined, with a floor of 4.50 percent plus 7.50
percent.


-
21 -




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, our ability to comply
with the terms of our Financing Agreements, our ability to reduce our overall
leveraged position, general economic, business and market conditions; our
ability to complete the divesture of our Integrated Nylon business; 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




We are a
leading global manufacturer and marketer of a variety of high-performance
chemical-based materials that are used in a broad range of consumer and
industrial applications.




We report our
operations in three segments: Saflex, CPFilms and Technical
Specialties.  The major products by reportable segment are as
follows:





ReportableSegment
                                            ProductsSaflex
                                            ·SAFLEX®
      plastic interlayer
                                              ·Specialty
      intermediate Polyvinyl Butyral resin and plasticizerCPFilms
                                            ·LLUMAR®,
      VISTA®, GILA® and FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS® professional
      and retail window films
                                              ·Other
      enhanced polymer films for industrial customersTechnical
      Specialties
                                            ·CRYSTEX®
      insoluble sulphur
                                              ·SANTOFLEX®
      antidegradants
                                              ·SANTOCURE®
      and PERKACIT® primary and ultra accelerators
                                              ·THERMINOL®
      heat transfer fluids
                                              ·SKYDROL®
      aviation hydraulic fluids
                                              ·SKYKLEEN®
      brand of aviation
solvents




See Note
14 to the accompanying consolidated financial statements for further
information regarding our reportable segments.





Significant
Developments and Strategic Actions





On March 31,
2009, we entered into a definitive agreement to sell the Integrated Nylon
business to an affiliate of S.K. Capital Partners II, L.P. (“Buyer”), a New
York-based private equity firm.  At the closing of the sale, we will
receive $50 million in cash, subject to adjustment for changes in working
capital, and a two percent equity stake in a new company formed to hold
substantially all of the assets and certain liabilities, including environmental
remediation liabilities, and pension liabilities of active employees of our
Integrated Nylon business.  We will also receive an additional $4
million of cash in four annual installments beginning on September 1,
2011.  Proceeds from the sale will be used to pay down debt under our
$450 million senior secured asset-based revolving credit facility
(“Revolver”).
  The sale of
our Integrated Nylon business to the Buyer is subject to the satisfaction of a
number of conditions precedent to closing, including the Buyer’s receipt of $75
million of debt financing and Buyer’s receipt of the equity financing proceeds
from S.K. Capital Partners II, L.P.  The agreement may be terminated
by either party if the closing has not occurred by June 30, 2009 subject to,
under specified circumstances, a termination fee of $5 million.  Exit
from the Integrated Nylon business will complete the transformation of Solutia
into a pure-play performance materials and specialty chemicals
company.


-
22 -


Combined
Quarterly Financial Results of the Predecessor and Successor





Our emergence
from bankruptcy resulted in our adoption of fresh-start accounting on February
29, 2008.  In accordance with Generally Accepted Accounting
Principles, the accompanying Consolidated Statements of Operations and Cash
Flows presents the results of operations and the sources and uses of cash for
(i) the two months ended February 29, 2008 of the Predecessor and (ii) the one
month ended March 31, 2008 of the Successor.  However, for purposes of
management’s discussion and analysis of the results of operations and the
sources and uses of cash in this Form 10-Q, we have combined the prior year
results of operations for the Predecessor and the Successor.  The
results of operations of the Predecessor and Successor are not comparable due to
the change in basis resulting from the emergence from
bankruptcy.  This combined presentation is being made solely to
explain the changes in results of operations for the periods presented in the
financial statements.  We then compare the combined results of
operations and the sources and uses of cash for the three months ended March 31,
2008 with the corresponding period in the current year.




We believe
the combined results of operations for the three months ended March 31, 2008
provide management and investors with a more meaningful perspective on our
financial and operational performance and trends than if we did not combine the
results of operations of the Predecessor and the Successor in this
manner.





Summary
Results of Operations




In the first
quarter 2009, we reported sales of $339 million, a 34 percent decrease as
compared to $517 million reported in the first quarter 2008.  The
decrease was driven by lower sales volumes and unfavorable currency exchange
rate fluctuations, partially offset by higher selling prices.  Our
first quarter 2009 gross profit of $81 million, a 33 percent decrease
versus the same period in 2008, was impacted by lower net sales, as described
above, lower asset utilization in all of our reporting segments and higher
depreciation and amortization costs due to fresh-start accounting, partially
offset by lower raw material and energy costs and lower incentive
costs.  Our gross profit margin increased modestly to 23.9 percent in
the first quarter of 2009 as compared to 23.2 percent for the same period in
2008 due to higher selling prices, lower raw material and energy costs and lower
incentive costs.  Selling, general and administrative expenses were
$50 million, or 15 percent of sales as compared to $64 million or 12 percent of
net sales in the same period in 2008.  The increase in expense as a
percentage of sales is due to $13 million of restructuring charges incurred in
the first quarter 2009, higher share-based compensation expense, higher
amortization expense on intangible assets recorded upon the adoption of
fresh-start accounting, and lower net sales as described above, partially offset
by a $16 million reduction in the 2008 annual incentive plan recognized in the
first quarter 2009.




We generated
$70 million of cash from operations in the first quarter 2009 as compared to
usage of $469 million in the same period in 2008.  The increase is
primarily attributable to a lack of reorganization activities in 2009 which
required a cash usage of $355 million, primarily to facilitate our emergence
from bankruptcy.  The remaining increase of $184 million is due to
lower payments on interest expense and our postretirement obligations, lower
working capital requirements, lower payout of our employee annual incentive
plan and management’s focus on monetizing the working capital balances of
Integrated Nylon.





Outlook




The sharp
decline in demand across the global construction, automotive and industrial
markets realized in the fourth quarter of 2008 continued in the first quarter of
2009.  Access to capital continues to be constrained for most
businesses in all global markets which affects their ability to invest and
effectively plan for the future.  With the exception of the most
robust of markets, which includes China, most world economies expect 2009 GDP to
contract or remain flat.  Although the Chinese market is the exception
to this trend, GDP estimates for this economy have been significantly
reduced.




Approximately
70 percent of our sales are into the global automotive and construction
industries.  Our current operating premise is that the automotive and
construction industries, particularly the domestic and European markets, will
continue to experience minimal or negative growth in 2009.  We expect
lower volumes for the second and third quarters in 2009 versus comparable
quarters of 2008.  We are expecting an increase in volumes in the
fourth quarter of 2009, principally due to the low volumes we experienced in the
fourth quarter of 2008.  We are premising modest volume recovery in
the remaining quarters of 2009 versus first quarter results due to the
completion of inventory de-stocking measures.





-
23 -


We have taken
immediate actions to mitigate some of the impact of a weakened demand profile
including the freezing of all salary and wages to the extent allowable,
significantly reducing the payment of our 2008 annual incentive plan, suspension
of our 2009 annual incentive plan and suspension of the employer 401(k) match,
reduction of capital expenditures to maintenance levels, closure or idling of
certain lines and strict management of working capital.  All of these
actions have enhanced both earnings and cash flow.  Furthermore, we
have identified incremental and significant cost saving opportunities to further
mitigate current events which will be executed throughout 2009.  Based
on these actions and in spite of the lower expected volumes, we do expect to be
able to experience modest margin expansion over 2008 actual results and expect
to generate cash from continuing operations in 2009 in the range of $100 million
to $150 million.  As noted above, we have reduced capital expenditures to
maintenance levels, which results in a capital expenditure use of cash estimated
to range between $40 million and $50 million for 2009.




We believe we
will be able to mitigate some of the impact of weakened demand due to our
leading market positions, new product applications, proprietary technologies and
process know-how, end market diversity and our large-scale, low-cost global
manufacturing footprint.  Further, we are focused on ensuring we have
adequate internal sources of liquidity through active management of capital
expenditures and working capital in light of lower demand and lower feedstock
costs, and reducing discretionary program spending.  Due to this
focus, we believe we will generate positive cash from operations less capital
spending in this period of economic uncertainty.





Critical
Accounting Policies and Estimates




There were no
changes in the three months ended March 31, 2009 with respect to our critical
accounting policies, as presented in Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations of our 2008 Form 10-K
filed on February 19, 2009.





Results
of Operations—First Quarter 2009 Compared with First Quarter 2008





Consolidated
Results


Successor
                      
                      
                      Combined(dollars
      in millions)
                      
                      Three
      MonthsEnded
                        March
      31,2009
                      
                      
                      Three
      MonthsEnded
                        March
      31,2008
                      
                      
                      Increase
                        (Decrease)
                      
                      
                      %
                        Increase
                        (Decrease)Net
      Sales
                      
                      $
                      339
                      
                      
                      $
                      517
                      
                      
                      $
                      (178
                      )
                      
                      
                      (34
                      )%Operating
      Income:Reportable
      Segment Profit
                      
                      $
                      76
                      
                      
                      $
                      82
                      
                      
                      $
                      (6
                      )
                      
                      
                      (7
                      )%Unallocated
      and Other
                      
                      
                      (25
                      )
                      
                      
                      (9
                      )
                      
                      
                      (16
                      )
                      
                      
                      (178
                      )%Less:   Depreciation
      and Amortization
                      
                      
                      (25
                      )
                      
                      
                      (20
                      )Less:   Other
      (Income) Loss included in Segment Profit and Unallocated and
      Other
                      
                      
                      1
                      
                      
                      
                      (2
                      )Operating
      Income
                      
                      $
                      27
                      
                      
                      $
                      51
                      
                      
                      $
                      (24
                      )
                      
                      
                      (47
                      )%Net Gains (Charges) included in
      Operating Income
                      
                      $
                      1
                      
                      
                      $
                      (21
                      )




The decrease
in net sales as compared to the first quarter 2008 resulted from decreased sales
volumes of $195 million or 38 percent and the effect of unfavorable
exchange rate fluctuations of $14 million or 3 percent, partially offset by
higher selling prices of $31 million or 6 percent.  Lower sales
volumes were realized by all of our reporting segments due to the sharp decline
in demand across the global construction, automotive and industrial markets
related to the continued deterioration in the macro-economic environment which
began in the fourth quarter of 2008. The unfavorable currency impact was
driven most notably by the increased strength of the U.S. dollar versus the
Euro, in comparison to the prior year, due to our strong market positions in
Europe by the Saflex and Technical Specialties reporting
segments.  Higher selling prices were experienced across all reporting
segments due to price increases initiated in the second quarter 2008 in response
to an escalating raw material profile and, with respect to Technical
Specialties, in conjunction with generally favorable supply/demand structure in
certain specialty chemical markets.





-
24 -
 
 
  The decrease
in operating income as compared to the first quarter 2008 resulted from lower
net sales, as described above, and reduced plant utilization primarily in our
Technical Specialties reporting segment, partially offset by higher net gains as
further described below in the Summary of
Events Affecting Comparability section, lower raw material and energy
costs of approximately $6 million, actions to mitigate the impact of a weakened
demand profile as described further in the Outlooksection above, and
higher depreciation and amortization due to fresh-start
accounting.





Saflex


Successor
                    
                    
                    Combined(dollars
      in millions)
                    
                    Three
      MonthsEnded
                      March
      31,2009
                    
                    
                    Three
      MonthsEnded
                      March
      31,2008
                    
                    
                    Increase
                      (Decrease)
                    
                    
                    %
                      Increase
                      (Decrease)Net
      Sales
                    
                    $
                    133
                    
                    
                    $
                    193
                    
                    
                    $
                    (60
                    )
                    
                    
                    (31
                    )%Segment
      Profit
                    
                    $
                    19
                    
                    
                    $
                    18
                    
                    
                    $
                    1
                    
                    
                    
                    6
                    %Net
      Charges included in Segment Profit
                    
                    $
                    (5
                    )
                    
                    $
                    (13
                    )




The decrease
in net sales as compared to the first quarter 2008 was a result of lower sales
volumes of $55 million or 28 percent, unfavorable currency exchange rate
fluctuations of $8 million or 4 percent, partially offset by higher average
selling prices of $3 million or 1 percent. Lower sales volumes were due to
the sharp decline in demand across the global construction and automotive
markets as described above.  The unfavorable exchange rate
fluctuations occurred primarily as a result of the strengthening of the U.S.
dollar in relation to the Euro in comparison to the first quarter
2008.  The increase in selling prices is related to our global price
increase initiated in the second quarter 2008 on SAFLEX® plastic interlayer in
response to higher raw material costs.





The increase
in segment profit in comparison to the first quarter 2008 resulted from lower
net charges, lower raw material costs of $4 million, lower discretionary
expenses particularly on actions described in the Outlooksection above and
reduced spending in research and development, substantially offset by lower net
sales as described above.  Segment profit in the first quarter 2009
included (i) an $8 million charge related to the general corporate
restructuring, (ii) a $7 million gain related to the reduction in the 2008
annual incentive plan  and (iii) a $4 million charge related to the
announced cessation of production of SAFLEX® plastic interlayer at our facility
in Trenton, Michigan (“Trenton Facility”).  Segment profit in the
first quarter 2008 included charges of $12 million resulting primarily from the
step-up in basis of our inventory in accordance with fresh-start accounting and
$1 million of severance and retraining costs.




CPFilms


Successor
                    
                    
                    Combined(dollars
      in millions)
                    
                    Three
      MonthsEnded
                      March
      31,2009
                    
                    
                    Three
      MonthsEnded
                      March
      31,2008
                    
                    
                    Increase
                      (Decrease)
                    
                    
                    %
                      Increase
                      (Decrease)Net
      Sales
                    
                    $
                    34
                    
                    
                    $
                    62
                    
                    
                    $
                    (28
                    )
                    
                    
                    (45
                    )%Segment
      Profit
                    
                    $
                    1
                    
                    
                    $
                    12
                    
                    
                    $
                    (11
                    )
                    
                    
                    (92
                    )%Charges
      included in Segment Profit
                    
                    $
                    (1
                    )
                    
                    $
                    (4
                    )




The decrease
in net sales as compared to the first quarter 2008 resulted primarily from lower
sales volumes of $28 million or 45 percent, and, to a lesser extent, unfavorable
currency exchange rate fluctuations of $1 million or 2 percent, partially offset
by higher average selling prices of $1 million or 2 percent. The decrease
in sales volumes were experienced across all global markets due to the severe
global economic downturn and its effect on the automotive, residential housing,
and commercial construction markets.  Window films sales declined $16
million and sales of industrial products declined $11 million as compared to the
same period in the prior year.  The decrease in sales volumes
associated with window films was most pronounced in Russia, particularly in the
automotive sector.   Lower sales of our industrial products,
which include components sold to other window film manufacturers, declined at a
more rapid rate than did CPFilms’ finished goods business suggesting a general
weakness in category demand conditions and to a lesser extent destocking of
those customers’ internal inventories.





-
25 -
 
 
  The decrease
in segment results in comparison to the first quarter 2008 resulted primarily
from decreased net sales as described above, partially offset by lower
discretionary expenses particularly on items described further in the Outlooksection above and
lower raw material costs of $1 million.  Segment profit in the first
quarter 2009 included a charge of $1 million related to the general corporate
restructuring while segment profit in the first quarter 2008 included a charge
of $4 million resulting from the step-up in basis of our inventory in accordance
with fresh-start accounting.





Technical
Specialties


Successor
                      
                      
                      Combined(dollars
      in millions)
                      
                      Three
      MonthsEnded
                        March
      31,2009
                      
                      
                      Three
      MonthsEnded
                        March
      31,2008
                      
                      
                      Increase
                        (Decrease)
                      
                      
                      %
                        Increase
                        (Decrease)Net
      Sales
                      
                      $
                      167
                      
                      
                      $
                      252
                      
                      
                      $
                      (85
                      )
                      
                      
                      (34
                      )%Segment
      Profit
                      
                      $
                      56
                      
                      
                      $
                      52
                      
                      
                      $
                      4
                      
                      
                      
                      8
                      %Net
      Gains (Charges) included in Segment Profit
                      
                      $
                      10
                      
                      
                      $
                      (7
                      )




The decrease
in net sales as compared to the first quarter 2008 resulted from lower sales
volumes of $107 million or 43 percent and unfavorable currency exchange rate
fluctuations of $5 million or 2 percent, partially offset by higher average
selling prices of $27 million or 11 percent. The lower sales volumes have
been experienced by all products within Technical Specialties due to the severe
global economic downturn and the closure of the product lines at our Ruabon,
Wales, United Kingdom manufacturing facility (the “Ruabon Facility”) during the
third and fourth quarters of 2008. 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 first quarter 2008.  Higher
average selling prices were experienced primarily within CRYSTEX® insoluble
sulphur, SANTOFLEX® antidegradants and THERMINOL® heat transfer
fluids.  The increase in selling prices is related to our global
price increases initiated in the second quarter 2008 in response to higher raw
material costs across all products within Technical Specialties in addition to a
favorable supply/demand profile in certain specialty chemical
markets.





The increase
in segment profit in comparison to the first quarter 2008 resulted primarily
from higher selling prices, higher net gains, favorable exchange rate
fluctuations, actions to mitigate the impact of a weakened demand profile as
described further in the Outlooksection above and
lower raw material costs, partially offset by lower sales volumes and lower
asset utilization.  The favorable exchange rate fluctuation on segment
profit is due to a higher percentage of our operating costs transacted in Euros
than net sales in the same currency.  Segment profit in the first
quarter 2009 included (i) a $12 million gain related to the reduction in the
2008 annual incentive plan, (ii) a $1 million charge related to the general
corporate restructuring and (iii) a $1 million charge related to the closure of
the Ruabon Facility.  Segment profit in the first quarter 2008
included a charge of $7 million resulting from the step-up in basis of our
inventory in accordance with fresh-start accounting.


Unallocated
and Other


Successor
                        
                        
                        Combined(dollars
      in millions)
                        
                        Three
      MonthsEnded
                          March
      31,2009
                        
                        
                        Three
      MonthsEnded
                          March
      31,2008
                        
                        
                        Increase
                          (Decrease)
                        
                        
                        %
                          Increase
                          (Decrease)Components
      of Unallocated and OtherOther Operations Segment
      Loss
                        
                        $
                        (4
                        )
                        
                        $
                        (1
                        )Corporate Expenses
                        
                        
                        (13
                        )
                        
                        
                        (9
                        )Share-Based Compensation
      Expense
                        
                        
                        (5
                        )
                        
                        
                        (1
                        )Other Unallocated Income
      (Expense), net
                        
                        
                        (3
                        )
                        
                        
                        2Unallocated
      and Other results
                        
                        $
                        (25
                        )
                        
                        $
                        (9
                        )
                        
                        $
                        (16
                        )
                        
                        
                        (178
                        )%Net
      Gains (Charges) included in Unallocated and Other
                        
                        $
                        (3
                        )
                        
                        $
                        3





Unallocated
and Other results decreased as compared to the first quarter 2008 due to lower
net gains, higher losses on foreign currency, lower interest income and lower
segment profit from other operations.  Included in the results of
Unallocated and Other in the first quarter 2009 is (i) a charge of $7
million related to the general corporate restructuring with $5 million
recorded in corporate expenses and $2 million recorded in other operations
segment loss and (ii) a $4 million gain related to the reduction in the 2008
annual incentive plan.  In the first quarter 2008, a $3 million gain
was recorded in corporate expenses related to joint settlements with Monsanto of
legacy insurance policies with insolvent insurance carriers.  After
consideration of the aforementioned items in 2009 and 2008, corporate expenses
remained comparable to the first quarter 2008. Share-based compensation
expense increased $4 million due to higher share-based compensation expense on
management incentive and director stock compensation plans adopted upon our
emergence from bankruptcy.  Other unallocated income (expense), net
decreased by $5 million primarily due to higher losses on foreign currency and
lower interest income.  After consideration of the charge recorded in
2009, other operations segment loss decreased by $1 million as compared to the
first quarter 2008 due to the severe global economic
downturn.





-
26 -


Interest
Expense


Successor
                              
                              
                              Combined(dollars
      in millions)
                              
                              Three
      MonthsEnded
                                March
      31,2009
                              
                              
                              Three
      MonthsEnded
                                March
      31,2008
                              
                              
                              Increase
                                (Decrease)
                              
                              
                              %
                                Increase
                                (Decrease)Interest
      Expense
                              
                              $
                              37
                              
                              
                              $
                              38
                              
                              
                              $
                              (1
                              )
                              
                              
                              (3
                              )%





The decrease
in interest expense as compared to the first quarter 2008 resulted principally
from lower debt outstanding with lower interest rates in the first quarter 2009
than in 2008, substantially offset by mark-to-market losses related to interest
rate swap agreements in the first quarter 2009 which were realized upon the
discontinuance of hedge accounting.  Included in our debt to fund our
emergence from Chapter 11 was a $400 million senior unsecured bridge facility
(“Bridge”), which was subsequently repaid late in the third quarter
2008.  The repayment of the Bridge resulted in lower debt outstanding
in the first quarter 2009.  In addition, the interest rate on the
Bridge was 15.50 percent and the repayment allowed our weighted average interest
rate to decrease from 9.5 percent at March 31, 2008 to 7.9 percent at March 31,
2009.  In February 2009, we discontinued hedge accounting on our
interest rate swap agreements related to our $1.2 billion senior secured term
loan facility (“Term Loan”).  The mark-to-market loss on interest rate
swap agreements in the first quarter 2009 was $5 million.  As interest
rates fluctuate, mark-to-market gains or losses, which do not affect cash flow,
will be recognized in interest expense.  These gains or losses may
create volatility in our Consolidated Statement of Operations.
  Reorganization
Items, net


Successor
                                                  
                                                  
                                                  Combined(dollars
      in millions)
                                                  
                                                  Three
      MonthsEnded
                                                    March
      31,2009
                                                  
                                                  
                                                  Three
      MonthsEnded
                                                    March
      31,2008
                                                  
                                                  
                                                  Increase
                                                    (Decrease)
                                                  
                                                  
                                                  %
                                                    Increase
                                                    (Decrease)Reorganization
      Items, net
                                                  
                                                  $
                                                  --
                                                  
                                                  
                                                  $
                                                  1,433
                                                  
                                                  
                                                  $
                                                  (1,433
                                                  )
                                                  
                                                  N.M.




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 us because we were in reorganization under Chapter 11 of the U.S. Bankruptcy
Code.  We did not record any charges in reorganization items in the
first quarter 2009 due to our emergence from Chapter 11 on February 28,
2008.





Income
Tax Expense


Successor
                      
                      
                      Combined(dollars
      in millions)
                      
                      Three
      MonthsEnded
                        March
      31,2009
                      
                      
                      Three
      MonthsEnded
                        March
      31,2008
                      
                      
                      Increase
                        (Decrease)
                      
                      
                      %
                        Increase
                        (Decrease)Income
      Tax Expense (Benefit)
                      
                      $
                      (7
                      )
                      
                      $
                      214
                      
                      
                      $
                      (221
                      )
                      
                      
                      (103
                      )%





Our tax
expense or benefit is affected by changes in unrecognized tax benefits and the
mix of income and losses in the tax jurisdictions in which we
operate.  In the first quarter of 2009, we recognized a previously
unrecognized tax benefit of $10 million due to developments in case law changing
the technical merits of a tax position.  This benefit was partially
offset by income tax expense almost entirely attributable to income in
continuing operations outside the U.S.  In the first quarter 2008,
$202 million of the income tax expense was attributable to our emergence from
bankruptcy and the effect of adopting fresh-start accounting. The remaining
amount in the first quarter 2008 is almost entirely attributable to income on
continuing operations outside the U.S.





-
27 -


Discontinued
Operations


Successor
                      
                      
                      Combined(dollars
      in millions)
                      
                      Three
      MonthsEnded
                        March
      31,2009
                      
                      
                      Three
      MonthsEnded
                        March
      31,2008
                      
                      
                      Increase
                        (Decrease)
                      
                      
                      %
                        Increase
                        (Decrease)Integrated
      Nylon business
                      
                      $
                      (157
                      )
                      
                      $
                      190Other
                      
                      
                      2
                      
                      
                      
                      --Income
      (Loss) from Discontinued Operations, net of tax
                      
                      $
                      (155
                      )
                      
                      $
                      190
                      
                      
                      $
                      (345
                      )
                      
                      
                      (182
                      )%Reorganization
      items included in income (loss) from discontinued
    operations
                      
                      $
                      --
                      
                      
                      $
                      212




Income from
discontinued operations consists of the results of our Integrated Nylon and
other previously divested businesses.




The decrease
in the results of Integrated Nylon as compared to the first quarter 2008 is due
to a $31 million charge, net of tax, to write down the carrying value of
long-lived assets to zero, a $70 million charge to record a valuation allowance
equal to the excess of the carrying value over the fair value of the business,
the implementation of fresh-start accounting as a result of our emergence from
bankruptcy, lower sales volumes, lower selling prices and lower asset
utilization, partially offset by lower raw material costs.  The
reorganization items included in the results of Integrated Nylon included
primarily the elimination of the LIFO reserve of $204 million and the step-up in
basis of the inventory of $7 million.




We have been
named as a defendant in two adversary proceedings in the Chapter 11 bankruptcy
proceedings of Lyondell Chemical Company (“Lyondell”), a significant supplier of
propylene for our Integrated Nylon business and a guest at our Alvin, Texas
plant under a utilities and services agreement and a lease agreement, each of
which expires in December 2010.  First, Equistar Chemicals, LP
(“Equistar”), a subsidiary of Lyondell, filed suit alleging that we breached a
propylene sales contract and an ethanol contract between the parties by failing
to pay our invoices.  Equistar claims damages in the amount of $29
million on the propylene contract and $1 million on the ethanol
contract.  Second, Millennium Petrochemicals Inc. (“Millennium”),
another Lyondell subsidiary, filed suit against us and our subsidiary, Solutia
Europe SPRL/BVBA, alleging breach of vinyl acetate monomer sales contracts for
our alleged failure to pay our invoices.  Millennium claims damages in
the amount of $2 million.  We have denied the claims in the Equistar
case and will deny the claims in the Millennium case when we file our
answer.  Additionally, we have alleged that the Lyondell entities owe
an offset to us for damages associated with the rejection of other contracts
with us in an amount that equals or exceeds the alleged damages claimed in the
two adversary proceedings.





Summary
of Events Affecting Comparability





Charges
and gains recorded in the three months ended March 31, 2009 and 2008 and other
events affecting comparability have been summarized and described in the table
and accompanying footnotes below (dollars in millions):





2009
Events


Increase/(Decrease)
                                                          
                                                          Saflex
                                                          
                                                          
                                                          CPFilms
                                                          
                                                          
                                                          Technical
      Specialties
                                                          
                                                          
                                                          Unallocated
                                                            /Other
                                                          
                                                          
                                                          ConsolidatedImpact
      on:Cost
      of goods sold
                                                          
                                                          $
                                                          (2
                                                          )
                                                          
                                                          $
                                                          --
                                                          
                                                          
                                                          $
                                                          (3
                                                          )
                                                          
                                                          $
                                                          (1
                                                          )
                                                          
                                                          $
                                                          (6
                                                          )
                                                          (a)1
                                                          
                                                          
                                                          
                                                          1
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          1
                                                          
                                                          
                                                          
                                                          3
                                                          
                                                          (b)4
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          4
                                                          
                                                          (c)--
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          1
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          1
                                                          
                                                          (d)Selling,
      general and administrative expenses
                                                          
                                                          
                                                          (4
                                                          )
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          (9
                                                          )
                                                          
                                                          
                                                          (3
                                                          )
                                                          
                                                          
                                                          (16
                                                          )
                                                          (a)6
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          1
                                                          
                                                          
                                                          
                                                          6
                                                          
                                                          
                                                          
                                                          13
                                                          
                                                          (b)Research,
      development and other operating expenses, net
                                                          
                                                          
                                                          (1
                                                          )
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (1
                                                          )
                                                          (a)1
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          
                                                          
                                                          1
                                                          
                                                          (b)Operating
      Income Impact
                                                          
                                                          
                                                          (5
                                                          )
                                                          
                                                          
                                                          (1
                                                          )
                                                          
                                                          
                                                          10
                                                          
                                                          
                                                          
                                                          (3
                                                          )
                                                          
                                                          
                                                          1Pre-tax
      Income Statement Impact
                                                          
                                                          $
                                                          (5
                                                          )
                                                          
                                                          $
                                                          (1
                                                          )
                                                          
                                                          $
                                                          10
                                                          
                                                          
                                                          $
                                                          (3
                                                          )
                                                          
                                                          
                                                          1Income
      tax impact
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          --
                                                          
                                                          (e)After-tax
      Income Statement Impact
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          $
                                                          1




(a)
                Gain
      related to the reduction in the 2008 annual incentive plan ($23 million
      pre-tax and $20 million after-tax).(b)
                Severance
      and retraining costs related to the general corporate restructuring ($17
      million pre-tax and $14 million after-tax).(c)
                Charges
      related to the announced closure of the SAFLEX® plastic interlayer
      production line at the Trenton Facility ($4 million pre-tax and
      after-tax).(d)
                Charges
      related to the announced closure of the Ruabon Facility ($1 million
      pre-tax and after-tax).(e)
                Income
      tax expense has been provided on gains and charges at the tax rate in the
      jurisdiction in which they have been or will be
  realized.





- 28
-


2008
Events


Increase/(Decrease)
                      
                      Saflex
                      
                      
                      CPFilms
                      
                      
                      Technical
                        Specialties
                      
                      
                      Unallocated
                        /Other
                      
                      
                      ConsolidatedImpact
      on:Cost
      of goods sold
                      
                      $
                      12
                      
                      
                      $
                      4
                      
                      
                      $
                      7
                      
                      
                      $
                      --
                      
                      
                      
                      23
                      
                      (a)--
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      (3
                      )
                      
                      
                      (3
                      )
                      (b)1
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1
                      
                      (c)Operating
      Income Impact
                      
                      
                      (13
                      )
                      
                      
                      (4
                      )
                      
                      
                      (7
                      )
                      
                      
                      3
                      
                      
                      
                      (21
                      )Reorganization
      Items, net
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      --
                      
                      
                      
                      1,433
                      
                      
                      
                      1,433
                      
                      (d)Pre-tax
      Income Statement Impact
                      
                      $
                      (13
                      )
                      
                      $
                      (4
                      )
                      
                      $
                      (7
                      )
                      
                      $
                      1,436
                      
                      
                      
                      1,412Income
      tax impact
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      202
                      
                      (e)After-tax
      Income Statement Impact
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      1,210





(a)
            Charges
      resulting from the step-up in basis of our inventory in accordance with
      fresh-start accounting ($23 million pre and post-tax).(b)
            Gain
      resulting from settlements of legacy insurance policies with insolvent
      insurance carriers ($3 million pre-tax and after-tax).(c)
            Restructuring
      costs related principally to severance and retraining costs ($1 million
      pre-tax and after-tax).(d)
            Reorganization
      items, net consist of the following:  $104 million charge on the
      settlement of liabilities subject to compromise, $1,589 million gain from
      fresh-start accounting adjustments, and $52 million of professional fees
      for services provided by debtor and creditor professionals directly
      related to our reorganization proceedings ($1,433 million pre-tax and
      $1,231 million after-tax).(e)
            Income
      tax expense has been provided on gains and charges at the tax rate in the
      jurisdiction in which they have been or will be
  realized.








Financial
Condition and Liquidity




As of March
31, 2009, our total liquidity was $163 million which was comprised of $128
million in availability under our Revolver and $35 million in
cash.  Our Revolver is limited to the lesser of $450 million or the
amount of the borrowing base, as defined, but generally calculated as a
percentage of allowable inventory and trade receivables.  As of March
31, 2009, our borrowing base was $340 million.  Availability was
reduced by outstanding borrowings and letters of credit, which were $137 million
and $75 million, respectively, at March 31, 2009.  As discussed in
Note 3 – Discontinued Operations – to the accompanying consolidated
financial statements, we expect to complete our divestiture of the Integrated
Nylon business, which includes the sale of related inventory and trade
receivables, in the second quarter of 2009.  One effect of this
transaction will be a reduction to our existing borrowing base which will be
partially offset by proceeds of the divestiture and release of approximately $25
million in required letters of credit.  On May 5, 2009 $74 million of
senior unsecured term debt, due 2011, at a price of 95 percent of its
original principal amount was issued by our 100% owned German subsidiary Flexsys
Verkauf GmbH.  Net proceeds, after incorporating the original issue
discount and debt issuance fees, of $66 million were used to pay down our
Revolver.


We continue
to have a significant focus on preserving and increasing our liquidity and cash
position.  To this end, certain actions identified previously in the
Outlook section of
Management’s Discussion and Analysis are expected to maintain or enhance our
liquidity.  For the remainder of 2009, our anticipated use of cash
includes fulfillment of our financial, pension, environmental, restructuring and
tax obligations, in addition to certain capital expenditures necessary to
satisfy our maintenance and safety requirements.  We have reduced
capital expenditures to maintenance levels, which results in a capital
expenditure use of cash estimated to range between $40 million and $50 million
for 2009.  To the extent required to fund certain seasonal demands of
our operations, an additional use of cash may be to fund working capital
although management has instituted significant monitoring procedures and, as a
result, expects this use of cash to be minimal.  Other sources of
liquidity may include additional lines of credit, financing other assets,
customer receivables and/or asset sales, all of which are allowable, with
certain limitations, under our existing credit agreements.
 
 -
29 -
 In summary,
we expect that our cash on hand, coupled with future cash flows from operations
and other sources of liquidity, including our Revolver, will provide sufficient
liquidity to allow us to meet our projected cash
requirements.  However, common with other companies with similar
exposure to global economic and financial events, one or more financial
institutions may cease to be able to fulfill their funding obligations and we
may not be able to access substitute capital.  Also, we may experience
a continued decline in the demand for our products, which could further impact
our ability to generate cash from operations.




Debt
Covenants




Our Term Loan
and Revolver (“Financing Agreements”) include a number of customary covenants
and events of default, including the maintenance of certain financial
covenants that restrict our ability to, among other things, incur
additional debt; make certain investments; pay dividends, repurchase stock, sell
certain assets or merge with or into other companies; enter into new lines of
business; make capital expenditures; and prepay, redeem or exchange our
debt.  The financial covenants for all measurement periods for the
year ended December 31, 2009 are (i) Leverage
Ratio:  limitation of maximum leverage ratio comprised of gross
debt to trailing twelve-month continuing operations Adjusted EBITDA or earnings
from continuing operations before interest, income taxes, depreciation and
amortization, reorganization items, non-cash share-based compensation
expense and unusual gains and charges (as that term is defined in the Financing
Agreements); (ii) Fixed
Charge Ratio:  maintenance of a minimum fixed charge coverage
ratio comprised of trailing twelve-month (“TTM”) continuing operations Adjusted
EBITDA, as reduced by TTM continuing operations capital expenditures, to Fixed
Charges (as defined in the Financing Agreements, as the sum of cash
interest expense, net, TTM cash income taxes and annualized debt amortization
under our Term Loan) ratio; and iii) Maximum Capital
Expenditures.  Below is a summary of our actual performance under
these financial covenants as of March 31, 2009 along with a summary of the
contractually agreed to financial covenants for each of the three remaining
measurement periods in 2009.





March
      31, 2009
                                                                                              
                                                                                              
                                                                                              June
      30, 2009
                                                                                              
                                                                                              
                                                                                              September
      30, 2009
                                                                                              
                                                                                              
                                                                                              December
      31, 2009Actual
                                                                                              
                                                                                              
                                                                                              Covenant
                                                                                              
                                                                                              
                                                                                              Covenant
                                                                                              
                                                                                              
                                                                                              Covenant
                                                                                              
                                                                                              
                                                                                              CovenantMax
      Leverage Ratio
                                                                                              
                                                                                              
                                                                                              3.57
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.75
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.50
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.25
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.25Min
      Fixed Charge Ratio
                                                                                              
                                                                                              
                                                                                              1.64
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.15
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.15
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.15
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.15Max
      Capital Expenditures
                                                                                              
                                                                                              n.a
                                                                                              
                                                                                              
                                                                                              n.a.
                                                                                              
                                                                                              
                                                                                              n.a.
                                                                                              
                                                                                              
                                                                                              n.a.
                                                                                              
                                                                                              
                                                                                              $
                                                                                              252





As the above
table indicates, the Leverage
Ratio covenant reduces to 4.25 by the end of the third quarter 2009 and
the Fixed Charge Ratio
covenant remains consistent throughout 2009 at 1.15.  We are
projecting a reduction in our TTM Adjusted EBITDA (as that term is defined in
the Financing Agreements) in the second and third quarters of 2009 due primarily
to lower volumes.  This expectation in actual results, combined with
the scheduled reduction in the Leverage Ratio covenant noted
above, will result in reduced cushion in actual performance versus the required
covenants for the remaining quarters of 2009.


Cash
Flows - Continuing Operations




Our cash
flows from continuing operations attributable to operating, investing and
financing activities, as reflected in the Consolidated Statements of Cash Flows,
are summarized in the following table:




Successor
                                  
                                  
                                  CombinedCash
      Flow Summary – Continuing Operations
                                    (dollars
      in millions)
                                  
                                  Three MonthsEnded
                                    March
      31,2009
                                  
                                  
                                  Three MonthsEnded
                                    March
      31,2008
                                  
                                  
                                  Increase
      (Decrease)Cash
      provided by (used in) operating activities before reorganization
      items
                                  
                                  $
                                  30
                                  
                                  
                                  
                                  (36
                                  )
                                  
                                  
                                  66Cash
      used in reorganization activities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (355
                                  )
                                  
                                  
                                  355Cash
      provided by (used in) operating activities
                                  
                                  
                                  30
                                  
                                  
                                  
                                  (391
                                  )
                                  
                                  
                                  421Cash
      used in investing activities
                                  
                                  
                                  (15
                                  )
                                  
                                  
                                  (18
                                  )
                                  
                                  
                                  3Cash
      provided by (used in) financing activities
                                  
                                  
                                  (47
                                  )
                                  
                                  
                                  401
                                  
                                  
                                  
                                  (448
                                  )Net
      change in cash for period attributable to continuing
      operations
                                  
                                  $
                                  (32
                                  )
                                  
                                  $
                                  (8
                                  )
                                  
                                  $
                                  (24
                                  )




Operating
activities:  Cash provided by operating activities was $30
million for the first three months of 2009, a $421 million increase as compared
to the $391 million used in operations for the comparable period in
2008.  The increase is primarily attributable to a lack of
reorganization activities in 2009 which required a cash usage of $355 million in
2008, primarily to facilitate our emergence from bankruptcy.  Cash
provided by operating activities before reorganization items increased $66
million as compared to the $36 million used in operations for the comparable
period in 2008 despite lower earnings.  This increase was due to lower
payments on interest expense and our postretirement obligations, lower working
capital requirements and no payments on our employee annual incentive
plan in the first quarter of 2009.   Required contributions to
our U.S. pension plans, which can fluctuate based upon minimum funding
requirements, decreased $11 million in 2009 and payments on our U.S. other
postretirement obligations were $10 million lower in 2009.  The lower
payments on other postretirement obligations was due to reimbursement to us by a
fund established at our emergence from bankruptcy restricted to pay certain
liabilities assumed by us upon our spinoff from Pharmacia (“Legacy Liabilities”)
in addition to lower cash requirements on other postretirement obligations which
are not included within the definition of Legacy Liabilities.  The
reduction in other postretirement obligation payments is expected to continue
indefinitely as the balance remaining in this restricted fund at December 31,
2008, attributable to pre-spin other post retirement obligations, is $171
million, which effectively defeases the corresponding Legacy
Liability.  We will, however, continue to remain liable for payments
on other postretirement obligations which are not included within the definition
of Legacy Liabilities.





-
30 -


Investing
activities:  Cash used in investing activities decreased $3
million for the first three months in 2009 compared to the comparable period in
2008 due to the cessation of the majority of growth related projects in the
fourth quarter of 2008 in reaction to the global economic slowdown.





Financing
activities:  Cash used in financing activities was $47 million
for the first three months in 2009, compared with $401 million of cash provided
by financing activities in 2008.   During the first quarter 2009
we repaid $43 million of borrowings on our Revolver and paid our quarterly
installment of $3 million on our Term Loan.  On February 28, 2008, as
more fully described in Note 1 – Background and Basis of Presentation – in the
accompanying consolidated financial statements, we emerged from
bankruptcy.  This event required a complete recapitalization of our
debt and equity structure and, after repayment of all debt obligations
outstanding at that time, resulted in net proceeds of $351
million.  Of this amount, $250 million was used to establish certain
funds restricted for future payments related to Legacy Liabilities and the
remainder was used to pay certain secured and administrative claims and to
provide additional liquidity for operations.





Working
Capital – Continuing Operations





Working
capital used for continuing operations is summarized as follows:





Successor
                          
                          
                          SuccessorWorking
      Capital – Continuing Operations
                            (dollars
      in millions)
                          
                          March
      31,
                            2009
                          
                          
                          December
      31,
                            2008
                          
                          Increase
                            (Decrease)Cash
      and cash equivalents
                          
                          $
                          35
                          
                          
                          $
                          32Trade
      receivables, net
                          
                          
                          194
                          
                          
                          
                          227Inventories
                          
                          
                          310
                          
                          
                          
                          341Other
      current assets
                          
                          
                          166
                          
                          
                          
                          195Total
      current assets
                          
                          $
                          705
                          
                          
                          $
                          795Accounts
      payable
                          
                          $
                          119
                          
                          
                          $
                          170Accrued
      liabilities
                          
                          
                          243
                          
                          
                          
                          259Short-term
      debt, including current maturities of long-term debt
                          
                          
                          39
                          
                          
                          
                          37Total
      current liabilities
                          
                          $
                          401
                          
                          
                          $
                          466Working
      Capital
                          
                          $
                          304
                          
                          
                          $
                          329
                          
                          $
(25)





Our
working capital used for continuing operations decreased $25 million primarily
as a result of the reduced working capital requirements on lower net sales in
conjunction with strict management of required balances, and the effects of a
stronger U.S. dollar versus relevant currencies, partially offset by the $23
million reduction in the 2008 annual incentive plan liability.





From time to time,
beginning with the month subsequent to our emergence from bankruptcy, we sell
trade receivables without recourse to third parties.  In accordance
with SFAS No. 140,Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities as
amended by SFAS No. 156, Accounting for Servicing of
Financial Assets an Amendment of FASB Statement No. 140, trade
receivables were removed from our Consolidated Statement of Financial Position
and reflected as cash provided by operating activities in the Consolidated
Statement of Cash Flows at the time of sale to the third
party.  Uncollected trade receivables sold under these arrangements
and removed from the Consolidated Statement of Financial Position were $9
million and $20 million at March 31, 2009 and December 31, 2008,
respectively.  The average monthly amounts of trade receivables sold
were $13 million for the three months ended March 31, 2009.  Discounts
(losses) on sales of trade receivables were less than $1
million.  These losses primarily represented the costs of funds and
were included as a reduction in operating income.





-
31 -








Cash
Flows - Discontinued Operations


Successor
                                    
                                    
                                    CombinedCash
      Flow Summary – Discontinued Operations
                                      (dollars
      in millions)
                                    
                                    Three MonthsEnded
                                      March
      31,2009
                                    
                                    
                                    Three MonthsEnded
                                      March
      31,2008
                                    
                                    
                                    Increase
      (Decrease)Cash
      provided by (used in) operating activities
                                    
                                    $
                                    40
                                    
                                    
                                    $
                                    (78
                                    )
                                    
                                    $
                                    118Cash
      used in investing activities
                                    
                                    
                                    (5
                                    )
                                    
                                    
                                    (16
                                    )
                                    
                                    
                                    11Net
      change in cash for period attributable to discontinued
      operations
                                    
                                    $
                                    35
                                    
                                    
                                    $
                                    (94
                                    )
                                    
                                    $
                                    129


Cash used in
operating activities for discontinued operations increased $118 million despite
lower earnings from our Integrated Nylon business, as discussed in the “Results
of Operations – Discontinued
Operations,” due to management’s focus on monetizing the working capital
balances historically required by this business.  Cash used in
investing activities decreased $11 million due to a reduction in capital
expenditures to a level required to support maintenance and safety projects
only, consistent with management’s decision to discontinue operations associated
with this asset
group.





Pension
Funding




According to
current IRS funding rules, we will make contributions to our Solutia and Solutia
Union Pension Plans of approximately $26 million in
2009.  Approximately $4 million of these required contributions were
made in the three months ended March 31, 2009.  We also expect to fund
approximately $10 million in pension contributions to our foreign pension plans
in 2009.  Actual contributions to the plans may differ as a result of
a variety of factors, including future changes in actuarial assumptions,
legislative changes to pension funding laws, market conditions and whether we
choose to contribute our common stock rather than cash to the
plans.





Contingencies





See Note
9 to the accompanying consolidated financial statements for a summary of our
contingencies as of March 31, 2009.





Item
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FACTORS





There
have been no material changes in market risk exposures during the three months
ended March 31, 2009 that affect the disclosures presented in the information
appearing under “Financial instruments and Risk Management” as presented in our
2008 Form 10-K.





Item
4.  CONTROLS AND PROCEDURES





During
the period covered by this Form 10-Q, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our 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, our disclosure controls and procedures are effective
in timely accumulating and communicating them to material
information relating to us and our consolidated subsidiaries that is required to
be included in our periodic SEC filings.  The Chief Executive Officer
and Chief Financial Officer also concluded that, as of the end of the period
covered by this Form 10-Q, our disclosure controls and procedures are effective
to provide reasonable assurance that we record, process, summarize, and report
the required disclosure information within the specified time
periods.  Further, there were no changes in our 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 March 31, 2009
that have materially affected, or are reasonably likely to materially affect our
internal controls over financial reporting.


-
32 -


PART
II.  OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





Information
required by this item is incorporated herein by reference to Note 9 included in
Part I, Item 1. Financial Statements (unaudited) – Notes to Consolidated
Financial Statements.  Also please refer to Note 16 to the
Consolidated Financial Statements included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2008.


ITEM
1A.  RISK FACTORS




You should
consider carefully all of the information set forth in this report and, in
particular, the risk factors described below and those described in our Annual
Report on Form 10-K for the year ended December 31, 2008 and certain
of our other filings with the SEC. Those risks being described below, elsewhere
in this report on Form 10-Q and our other SEC filings are not the only ones we
face, but are considered to be the most material. There may be other unknown or
unpredictable economic, business, competitive, regulatory or other factors that
could have material adverse effects on our future results. Past financial
performance may not be a reliable indicator of future performance and historical
trends should not be used to anticipate results or trends in future
periods.





RISKS
RELATED TO OUR BUSINESS AND INDUSTRY




Continued
Extreme Disruption in Global Financial Markets and Sustained Weakening in our
Markets Could Significantly Impact our Results of Operations, Liquidity and Long
Term Anticipated Growth Rate
  The global
economy is currently in a pronounced economic downturn. As widely reported,
markets in the United States, Europe and Asia have been experiencing extreme
disruption, including, among other things, severely diminished liquidity and
credit availability, declines in consumer confidence, extreme fluctuations in
commodity prices, declines in economic growth, increases in unemployment rates,
and uncertainty about economic stability.  Although governments around the
world are enacting various economic stimulus programs, there can be no assurance
as to the timing or effectiveness of such programs.  The current tightening
of credit in financial markets adversely affects the ability of customers and
suppliers to obtain financing for significant purchases and operations and could
result in a decrease in or cancellation of orders for our products, our ability
to procure necessary raw materials from suppliers, our ability to secure credit
from our suppliers at terms granted to us historically and our ability to
collect from our customers amounts due on trade receivables at terms previously
experienced by us.  While we are not a direct Tier 1 supplier to domestic
automotive manufacturers, many of our customers are.  A bankruptcy filing
by one or more domestic automotive manufacturer could impact our ability to
collect accounts receivable from customers who are Tier 1 suppliers.  Our
global business is also adversely affected by decreases in the general level of
economic activity, such as decreases in business and consumer spending that
impact the construction, home furnishings, automotive, rubber chemicals and
aviation and transportation markets.  The weakening of these markets, if
not temporary, could significantly impact our results of operations, our
liquidity and our long-term anticipated growth rate.  Further, stemming
from our  emergence from bankruptcy in early 2008, the carrying amount
of our goodwill and intangible assets was established at fair value as of
February 28, 2008 and therefore is more susceptible to impairment if business
operation results and/or macroeconomic conditions deteriorate.  Impairment
charges, if any, could be material to our results of operations.  We are
unable to predict the likely duration and severity of the current disruption in
financial markets and adverse economic conditions in the U.S. and other
countries.  However, if macroeconomic conditions continue to worsen, it is
possible these factors could result in a decline in our future profitability and
cash from operating activities.
  We
May Not Be Able to Complete the Sale of Our Integrated Nylon
Business
  The sale of
our Integrated Nylon business to a subsidiary of SK Capital is subject to the
satisfaction of a number of conditions precedent to closing.  It is not
certain that all of these conditions will be satisfied, and the transaction may
not occur.  The transaction may also be terminated by us or the buyer if
closing has not occurred by June 30, 2009.  If we are not able to complete
the proposed transaction with SK Capital and its subsidiary, we may be unable to
find a third party willing to engage in a similar transaction on terms as
favorable as the current transaction, or at all.
  If we are
unable to sell our Integrated Nylon business, we would either restructure and
operate some or all of the existing assets, or we may close the business. 
Such alternatives to selling the Integrated Nylon business could divert
management, operational and financial resources from the conduct of our
business.  Further, these actions could require additional costs, impact
our liquidity profile and could adversely affect our ability to satisfy the
financial covenants of our credit facilities in the near term.





-
33 -





ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





(c )
Purchases of Equity Securities by the Issuer





Period
                  
                  Total
      Number of Shares Purchased (1)
                  
                  
                  Average
      Price Paid Per Share (2)
                  
                  
                  Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
                  
                  
                  Approximate
      Dollar Value (in millions) that May Yet Be Purchased Under the Plans or
      ProgramsJanuary
      1-31, 2009
                  
                  
                  5,089
                  
                  
                  $
                  4.18
                  
                  
                  
                  0
                  
                  
                  $
                  0February
      1-28, 2009
                  
                  
                  104,023
                  
                  
                  $
                  3.75
                  
                  
                  
                  0
                  
                  
                  $
                  0March
      1-31, 2009
                  
                  
                  0
                  
                  
                  $
                  0.00
                  
                  
                  
                  0
                  
                  
                  $
                  0Total
                  
                  
                  109,112
                  
                  
                  $
                  3.77
                  
                  
                  
                  0
                  
                  
                  $
                  0





(1)
            Shares
      surrendered to the Company by an employee to satisfy individual tax
      withholding obligations upon vesting of previously issued shares of
      restricted common stock.


(2)
            Average
      price paid per share reflects the closing price of Solutia common stock on
      the business date the shares were surrendered by the employee stockholder
      to satisfy individual tax withholding obligations upon vesting of
      restricted common stock.





ITEM
5.  OTHER INFORMATION
  On May 5,
2009, our 100% owned German subsidiary, Flexsys Verkauf GmbH,  as
borrower (the “Borrower”), and Flexsys Verwaltungs- und Beteiligungsgesellschaft
mbH, as guarantor (the “Guarantor”), entered into a credit agreement (the
“Senior Unsecured Loan Agreement”) with the lenders named therein and Jefferies
Finance LLC, as sole lead arranger, sole bookrunner and administrative
agent.  The Senior Unsecured Term Loan Agreement is a two-year senior
unsecured term loan facility in an aggregate principal amount equal to $74.0
million (the “Senior Unsecured Term Loan”).  The Senior Unsecured Term Loan
was issued at a price of 95% of the principal
amount.
  We used the
net proceeds from the Senior Unsecured Term Loan to reduce our outstanding
balance on our revolving credit facility.
  Borrowings
under the Senior Unsecured Term Loan Agreement bear interest at the Borrower’s
election at a rate per
annum equal to: (i) the alternate base rate (with a floor of 4.50%) plus
7.50% or (ii) adjusted LIBO rate (with a floor of 3.50%) plus
8.50%.
  Optional
prepayments of borrowings under the Senior Unsecured Term Loan Agreement will be
permitted at any time, without premium or penalty.  The Senior
Unsecured Term Loan Agreement requires pre-payments with the net proceeds of
sales of equity interests, debt incurrence and disposition of assets by the
Borrower or its subsidiaries.
  The Senior
Unsecured Term Loan Agreement requires that the Borrower be in compliance with
certain financial covenants.  The Senior Unsecured Term Loan includes
affirmative and negative covenants as are customary for facilities and
transactions of its type.  The facility also includes events of
default including upon nonpayment of principal when due, nonpayment of interest,
fees or other amounts when due, inaccuracy of representations and warranties in
any material respect, violation of covenants, cross-defaults, bankruptcy and
insolvency events, material judgments, actual or asserted invalidity or
impairment of guarantees or certain other Senior Unsecured Loan Agreement
documents; and a change of control.
  The foregoing
description of the Senior Unsecured Term Loan Agreement does not purport to be
complete and is qualified in its entirety by reference to the full text of such
document, a copy of which is attached as Exhibit 10.2 to this Form 10-Q and is
incorporated herein by reference.
  Mr. Kent
Davies, Senior Vice President and President of CPFilms left the Company
effective May 1, 2009.




ITEM
6.  EXHIBITS




See the
Exhibit Index at page 36 of this report.






- 34
-





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)





Dated:
May 7, 2009








- 35
-





EXHIBIT
INDEX





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





EXHIBIT
                NUMBER
              
              DESCRIPTION3.1
              
              Second
      Amended and Restated Certificate of Incorporation of Solutia Inc.
      (incorporated by reference to Exhibit 3.1 to Solutia's Form 8-K filed on
      March 4, 2008)3.2
              
              Amended
      and Restated Bylaws of Solutia Inc. (incorporated by reference to Exhibit
      3.2 to Solutia's Form 8-K filed on March 4, 2008)10.1
              
              Transaction
      Agreement, dated as of March 31, 2009, by and between Solutia Inc., NyCo
      LLC, SK Capital Partners II, L.P. and SK Titan Holdings LLC (incorporated
      by reference to Exhibit 10.1 to Solutia’s Form 8-K filed on April 1,
      200910.2
              
              Credit
      Agreement, dated as of May 5, 2009, among Flexsys Verkauf Gmbh, as
      Borrower, Flexsys Verwaltungs- Und Beteiligungsgesellschaft Mbh, as
      Holdings Guarantor, the lender parties thereto, and Jefferies Finance LLC,
      as Sole Lead Arranger, Sole Bookrunner and Administrative
      Agent31.1
              
              Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
              
              Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
              
              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
  200232.2
              
              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