##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission
file number 001-13255
 SOLUTIA INC.
 (Exact name of registrant as specified in its charter)
 DELAWARE
    
    43-1781797(State or other jurisdiction of 
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. Yes þ No o
 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 o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(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 o No þ
 Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
 Outstanding atClass
    
    September 30, 2008Common Stock, $0.01 par value
    
    94,343,610 shares




---



TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. FINANCIAL STATEMENTSCONSOLIDATED STATEMENT OF OPERATIONSCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)CONSOLIDATED STATEMENT OF OPERATIONSCONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)CONSOLIDATED STATEMENT OF FINANCIAL POSITIONCONSOLIDATED STATEMENT OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSItem 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORSItem 4. CONTROLS AND PROCEDURESPART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 1A. RISK FACTORSITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 5. OTHER EVENTSITEM 6. EXHIBITSSIGNATUREEXHIBIT INDEXExhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2    Table of Contents  
 
 PART I. FINANCIAL INFORMATION
 
 
 Item 1. FINANCIAL STATEMENTS
 SOLUTIA INC.
 
 
 CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share amounts)
(Unaudited)
 Successor
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007Net Sales
    
    $
    587
    
    
    $
    454Cost of goods sold
    
    
    432
    
    
    
    342Gross Profit
    
    
    155
    
    
    
    112Selling, general and administrative expenses
    
    
    76
    
    
    
    59Research, development and other operating expenses, net
    
    
    3
    
    
    
    6Operating Income
    
    
    76
    
    
    
    47Interest expense (a)
    
    
    (39
    )
    
    
    (20
    )Other income, net
    
    
    4
    
    
    
    2Reorganization items, net
    
    
    
    
    
    
    (152
    )Income (Loss) from Continuing Operations Before Income Tax Expense
    
    
    41
    
    
    
    (123
    )Income tax expense
    
    
    17
    
    
    
    11Income (Loss) from Continuing Operations
    
    
    24
    
    
    
    (134
    )Income (Loss) from Discontinued Operations, net of tax
    
    
    (31
    )
    
    
    23Net Loss
    
    $
    (7
    )
    
    $
    (111
    )Basic and Diluted Loss per Share:Income (Loss) from Continuing Operations
    
    $
    0.32
    
    
    $
    (1.28
    )Income (Loss) from Discontinued Operations
    
    
    (0.41
    )
    
    
    0.22Net Loss
    
    $
    (0.09
    )
    
    $
    (1.06
    )
 (a)
    
    Predecessor excludes unrecorded contractual interest expense of $8 in the three months ended September 30, 2007. 
 
 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
(Unaudited)
 Successor
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007Net Loss
    
    $
    (7
    )
    
    $
    (111
    )Other Comprehensive Income (Loss):Currency translation adjustments
    
    
    (62
    )
    
    
    16Unrealized loss on derivative instruments
    
    
    (13
    )
    
    
    1Amortization of prior service gain
    
    
    
    
    
    
    (4
    )Amortization of actuarial loss
    
    
    
    
    
    
    5Comprehensive Loss
    
    $
    (82
    )
    
    $
    (93
    )
   - 1 -




---



##### Table of Contents



SOLUTIA INC.
 
 
 CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share amounts)
(Unaudited)
 Successor
    
    
    PredecessorSeven Months
    
    
    Two Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    February 29,
    
    
    September 30,2008
    
    
    2008
    
    
    2007Net Sales
    
    $
    1,346
    
    
    $
    335
    
    
    $
    1,151Cost of goods sold
    
    
    1,065
    
    
    
    242
    
    
    
    859Gross Profit
    
    
    281
    
    
    
    93
    
    
    
    292Selling, general and administrative expenses
    
    
    165
    
    
    
    42
    
    
    
    155Research, development and other operating expenses, net
    
    
    4
    
    
    
    3
    
    
    
    17Operating Income
    
    
    112
    
    
    
    48
    
    
    
    120Equity earnings from affiliates
    
    
    
    
    
    
    
    
    
    
    12Interest expense (a)
    
    
    (99
    )
    
    
    (12
    )
    
    
    (51
    )Other income, net
    
    
    9
    
    
    
    2
    
    
    
    30Loss on debt modification
    
    
    
    
    
    
    
    
    
    
    (7
    )Reorganization items, net
    
    
    
    
    
    
    1,433
    
    
    
    (185
    )Income (Loss) from Continuing Operations Before Income
Tax Expense
    
    
    22
    
    
    
    1,471
    
    
    
    (81
    )Income tax expense
    
    
    17
    
    
    
    214
    
    
    
    24Income (Loss) from Continuing Operations
    
    
    5
    
    
    
    1,257
    
    
    
    (105
    )Income (Loss) from Discontinued Operations, net of tax
    
    
    (58
    )
    
    
    197
    
    
    
    42Net Income (Loss)
    
    $
    (53
    )
    
    $
    1,454
    
    
    $
    (63
    )Basic and Diluted Income (Loss) per Share:Income (Loss) from Continuing Operations
    
    $
    0.08
    
    
    $
    12.03
    
    
    $
    (1.00
    )Income (Loss) from Discontinued Operations
    
    
    (0.87
    )
    
    
    1.88
    
    
    
    0.40Net Income (Loss)
    
    $
    (0.79
    )
    
    $
    13.91
    
    
    $
    (0.60
    )
 (a)
    
    Predecessor excludes unrecorded contractual interest expense of $5 in
the two months ended February 29, 2008 and $24 in the nine months
ended September 30, 2007. 
 
 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
(Unaudited)
 Successor
    
    
    PredecessorSeven Months
    
    
    Two Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    February 29,
    
    
    September 30,2008
    
    
    2008
    
    
    2007Net Income (Loss)
    
    $
    (53
    )
    
    $
    1,454
    
    
    $
    (63
    )Other Comprehensive Income (Loss):Currency translation adjustments
    
    
    (40
    )
    
    
    32
    
    
    
    19Unrealized loss on derivative instruments
    
    
    (9
    )
    
    
    
    
    
    
    1Amortization of prior service gain
    
    
    
    
    
    
    (3
    )
    
    
    (12
    )Amortization of actuarial loss
    
    
    
    
    
    
    2
    
    
    
    14Actuarial loss arising during the two months ended
February 29, 2008, net of tax of $2
    
    
    
    
    
    
    (64
    )
    
    
    Prior service gain arising during the two months ended
February 29, 2008
    
    
    
    
    
    
    109
    
    
    
    Fresh-start accounting adjustment
    
    
    
    
    
    
    (30
    )
    
    
    Comprehensive Income (Loss)
    
    $
    (102
    )
    
    $
    1,500
    
    
    $
    (41
    )
   - 2 -




---



##### Table of Contents



SOLUTIA INC.
 
 
 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in millions, except per share amounts)
(Unaudited)
 Successor
    
    
    PredecessorSeptember 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    38
    
    
    $
    173Trade receivables, net of allowances of $0 in 2008 and $2 in 2007
    
    
    303
    
    
    
    293Miscellaneous receivables
    
    
    117
    
    
    
    114Inventories
    
    
    354
    
    
    
    268Prepaid expenses and other assets
    
    
    96
    
    
    
    43Assets of discontinued operations
    
    
    1,167
    
    
    
    808Total Current Assets
    
    
    2,075
    
    
    
    1,699Property, Plant and Equipment, net of accumulated depreciation of $40
in 2008 and $1,102 in 2007
    
    
    978
    
    
    
    619Goodwill
    
    
    511
    
    
    
    149Identified Intangible Assets, net
    
    
    851
    
    
    
    57Other Assets
    
    
    181
    
    
    
    116Total Assets
    
    $
    4,596
    
    
    $
    2,640LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current Liabilities:Accounts payable
    
    $
    224
    
    
    $
    180Accrued liabilities
    
    
    276
    
    
    
    239Short-term debt, including current portion of long-term debt
    
    
    39
    
    
    
    982Liabilities of discontinued operations
    
    
    289
    
    
    
    294Total Current Liabilities
    
    
    828
    
    
    
    1,695Long-Term Debt
    
    
    1,365
    
    
    
    359Postretirement Liabilities
    
    
    415
    
    
    
    80Environmental Remediation Liabilities
    
    
    286
    
    
    
    56Deferred Tax Liabilities
    
    
    216
    
    
    
    45Other Liabilities
    
    
    118
    
    
    
    78Liabilities Subject to Compromise
    
    
    
    
    
    
    1,922Commitments and Contingencies (Note 10)Shareholders Equity (Deficit):Successor common stock at $0.01 par value; (500,000,000 shares
authorized, 94,391,972 shares issued in 2008)
    
    
    1
    
    
    
    Predecessor common stock at $0.01 par value; (600,000,000 shares
authorized, 118,400,635 shares issued in 2007)
    
    
    
    
    
    
    1Additional contributed capital
    
    
    1,469
    
    
    
    56Predecessor stock held in treasury, at cost, 13,941,057 shares in 2007
    
    
    
    
    
    
    (251
    )Predecessor net deficiency of assets at spin-off
    
    
    
    
    
    
    (113
    )Accumulated other comprehensive loss
    
    
    (49
    )
    
    
    (46
    )Accumulated deficit
    
    
    (53
    )
    
    
    (1,242
    )Total Shareholders Equity (Deficit)
    
    
    1,368
    
    
    
    (1,595
    )Total Liabilities and Shareholders Equity (Deficit)
    
    $
    4,596
    
    
    $
    2,640
   - 3 -




---



##### Table of Contents



SOLUTIA INC.
 
 
 CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
 Successor
    
    
    PredecessorSeven Months
    
    
    Two Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    EndedSeptember 30,
 2008
    
    
    February 29,
 2008
    
    
    September 30,
 2007INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:Net income (loss)
    
    $
    (53
    )
    
    $
    1,454
    
    
    $
    (63
    )Adjustments to reconcile net income (loss) to net cash used in operations:(Income) Loss from discontinued operations, net of tax
    
    
    58
    
    
    
    (197
    )
    
    
    (42
    )Depreciation and amortization
    
    
    64
    
    
    
    11
    
    
    
    41Revaluation of assets and liabilities, net of tax
    
    
    
    
    
    
    (1,383
    )
    
    
    Discharge of claims and liabilities, net of tax
    
    
    
    
    
    
    100
    
    
    
    Other reorganization items, net
    
    
    
    
    
    
    52
    
    
    
    185Pension expense less than contributions
    
    
    (40
    )
    
    
    (18
    )
    
    
    (67
    )Other postretirement benefits expense less than contributions
    
    
    
    
    
    
    (6
    )
    
    
    (25
    )Amortization of deferred debt issuance costs
    
    
    10
    
    
    
    
    
    
    
    2Deferred income taxes
    
    
    (22
    )
    
    
    5
    
    
    
    Equity earnings from affiliates
    
    
    
    
    
    
    
    
    
    
    (12
    )Other (gains) charges including restructuring expenses
    
    
    67
    
    
    
    (2
    )
    
    
    (3
    )Gain on sale of assets
    
    
    (8
    )
    
    
    
    
    
    
    Changes in assets and liabilities:Income taxes payable
    
    
    14
    
    
    
    5
    
    
    
    13Trade receivables
    
    
    14
    
    
    
    (24
    )
    
    
    (31
    )Inventories
    
    
    (20
    )
    
    
    (34
    )
    
    
    (17
    )Accounts payable
    
    
    21
    
    
    
    31
    
    
    
    15Restricted cash to fund payment of legacy liabilities
    
    
    12
    
    
    
    
    
    
    
    Environmental remediation liabilities
    
    
    (7
    )
    
    
    (1
    )
    
    
    Other assets and liabilities
    
    
    17
    
    
    
    (4
    )
    
    
    (8
    )Cash Provided by (Used in) Continuing Operations before Reorganization Activities
    
    
    127
    
    
    
    (11
    )
    
    
    (12
    )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
    
    
    (29
    )
    
    
    (31
    )
    
    
    (53
    )Other reorganization and emergence related payments
    
    
    (1
    )
    
    
    (17
    )
    
    
    (5
    )Cash Used in Reorganization Activities
    
    
    (30
    )
    
    
    (348
    )
    
    
    (58
    )Cash Provided by (Used in) Operations  Continuing Operations
    
    
    97
    
    
    
    (359
    )
    
    
    (70
    )Cash Provided by (Used in) Operations  Discontinued Operations
    
    
    (124
    )
    
    
    (53
    )
    
    
    4Cash Used in Operations
    
    
    (27
    )
    
    
    (412
    )
    
    
    (66
    )INVESTING ACTIVITIES:Property, plant and equipment purchases
    
    
    (52
    )
    
    
    (15
    )
    
    
    (61
    )Acquisition and investment payments
    
    
    (2
    )
    
    
    
    
    
    
    (120
    )Restricted cash
    
    
    
    
    
    
    
    
    
    
    4Investment proceeds and property disposals
    
    
    53
    
    
    
    
    
    
    
    7Cash Used in Investing Activities-Continuing Operations
    
    
    (1
    )
    
    
    (15
    )
    
    
    (170
    )Cash Provided by (Used in) Investing Activities-Discontinued Operations
    
    
    (27
    )
    
    
    (14
    )
    
    
    23Cash Used in Investing Activities
    
    
    (28
    )
    
    
    (29
    )
    
    
    (147
    )FINANCING ACTIVITIES:Net change in lines of credit
    
    
    28
    
    
    
    
    
    
    
    25Proceeds from long-term debt obligations
    
    
    
    
    
    
    1,600
    
    
    
    75Net change in long-term revolving credit facilities
    
    
    (3
    )
    
    
    190
    
    
    
    (78
    )Proceeds from stock issuance
    
    
    422
    
    
    
    250
    
    
    
    Proceeds from short-term debt obligations
    
    
    
    
    
    
    
    
    
    
    325Payment of short-term debt obligations
    
    
    
    
    
    
    (966
    )
    
    
    (53
    )Payment of long-term debt obligations
    
    
    (434
    )
    
    
    (366
    )
    
    
    Payment of debt obligations subject to compromise
    
    
    
    
    
    
    (221
    )
    
    
    Debt issuance costs
    
    
    (1
    )
    
    
    (136
    )
    
    
    (11
    )Other financing activities
    
    
    (2
    )
    
    
    
    
    
    
    Cash Provided by Financing Activities
    
    
    10
    
    
    
    351
    
    
    
    283INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (45
    )
    
    
    (90
    )
    
    
    70CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    83
    
    
    
    173
    
    
    
    150End of period
    
    $
    38
    
    
    $
    83
    
    
    $
    220SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash payments for interest
    
    $
    85
    
    
    $
    43
    
    
    $
    102Cash payments for income taxes
    
    $
    15
    
    
    $
    4
    
    
    $
    18
   - 4 -




---



##### Table of Contents



SOLUTIA INC.
 
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 1. Background
 Nature of Operations
    Emergence from Chapter 11 Proceedings
    - 5 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
   2. Fresh Start Consolidated Statement of Financial Position
 Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code An Amendment of AICPA Statement
of Position 90-7
 Business Combinations Accounting for Income Taxes
     - 6 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
  Predecessor
    
    
    
    
    
    
    Revaluation of
    
    
    SuccessorFebruary 29,
    
    
    Effect of
    
    
    Assets and
    
    
    February 29,2008
    
    
    Plan
    
    
    Liabilities
    
    
    2008ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    180
    
    
    $
    (97
    )(a)
    
    $
    
    
    
    $
    83Trade receivables, net
    
    
    317
    
    
    
    
    
    
    
    
    
    
    
    317Miscellaneous receivables
    
    
    128
    
    
    
    (3
    )(a)
    
    
    (1
    )(d)
    
    
    124Inventories
    
    
    302
    
    
    
    
    
    
    
    98
    (d)
    
    
    400Prepaid expenses and other assets
    
    
    56
    
    
    
    30
    (a)(b)
    
    
    (5
    )(d)
    
    
    81Assets of discontinued operations
    
    
    863
    
    
    
    
    
    
    
    218
    (d)
    
    
    1,081Total Current Assets
    
    
    1,846
    
    
    
    (70
    )
    
    
    310
    
    
    
    2,086Property, Plant and Equipment
    
    
    629
    
    
    
    
    
    
    
    406
    (d)
    
    
    1,035Goodwill
    
    
    150
    
    
    
    
    
    
    
    370
    (e)
    
    
    520Identified Intangible Assets, net
    
    
    56
    
    
    
    
    
    
    
    825
    (d)
    
    
    881Other Assets
    
    
    113
    
    
    
    112
    (a)(b)
    
    
    (3
    )(d)
    
    
    222Total Assets
    
    $
    2,794
    
    
    $
    42
    
    
    $
    1,908
    
    
    $
    4,744LIABILITIES AND SHAREHOLDERS DEFICITCurrent Liabilities:Accounts payable
    
    $
    234
    
    
    $
    
    
    
    $
    
    
    
    $
    234Accrued liabilities
    
    
    234
    
    
    
    17
    (a)
    
    
    15
    (d)
    
    
    266Short-term debt, including current portion of long-term debt
    
    
    1,098
    
    
    
    (1,085
    )(b)
    
    
    
    
    
    
    13Liabilities of discontinued operations
    
    
    297
    
    
    
    
    
    
    
    2
    (d)
    
    
    299Total Current Liabilities
    
    
    1,863
    
    
    
    (1,068
    )
    
    
    17
    
    
    
    812Long-Term Debt
    
    
    386
    
    
    
    1,410
    (b)
    
    
    
    
    
    
    1,796Postretirement Liabilities
    
    
    86
    
    
    
    369
    (a)
    
    
    
    
    
    
    455Environmental Remediation Liabilities
    
    
    55
    
    
    
    207
    (a)
    
    
    29
    (d)
    
    
    291Deferred Tax Liabilities
    
    
    47
    
    
    
    (12
    )(a)
    
    
    194
    (d)
    
    
    229Other Liabilities
    
    
    83
    
    
    
    34
    (a)
    
    
    7
    (d)
    
    
    124Total Liabilities not Subject to Compromise
    
    
    2,520
    
    
    
    940
    
    
    
    247
    
    
    
    3,707Liabilities Subject to Compromise
    
    
    1,962
    
    
    
    (1,962
    )(a)
    
    
    
    
    
    
    Shareholders Equity (Deficit):Successor common stock at $0.01 par value
    
    
    
    
    
    
    1
    (c)
    
    
    
    
    
    
    1Predecessor common stock at $0.01 par value
    
    
    1
    
    
    
    
    
    
    
    (1
    )(c)
    
    
    Additional contributed capital
    
    
    56
    
    
    
    1,036
    (c)
    
    
    (56
    )(c)
    
    
    1,036Predecessor stock held in treasury, at cost
    
    
    (251
    )
    
    
    
    
    
    
    251
    (c)
    
    
    Predecessor net deficiency of assets at spin-off
    
    
    (113
    )
    
    
    
    
    
    
    113
    (c)
    
    
    Accumulated other comprehensive income (loss)
    
    
    (97
    )
    
    
    127
    (a)
    
    
    (30
    )(c)
    
    
    Accumulated deficit
    
    
    (1,284
    )
    
    
    (100
    )(c)
    
    
    1,384
    (c)
    
    
    Total Shareholders Equity (Deficit)
    
    
    (1,688
    )
    
    
    1,064
    
    
    
    1,661
    
    
    
    1,037Total Liabilities and Shareholders Equity (Deficit)
    
    $
    2,794
    
    
    $
    42
    
    
    $
    1,908
    
    
    $
    4,744
 (a)
    
    To record the discharge and payment of liabilities subject to
compromise, payment of accrued post-petition interest, the
re-establishment of liabilities to be retained by Successor, the
defeasance of a substantial amount of our postretirement liabilities
and the establishment of SFC LLC, a fund restricted to the payment of
certain Legacy Liabilities.(b)
    
    To record the extinguishment of Predecessor debt and the write-off of
any related unamortized debt financing costs and the establishment of
Successor debt financing and related financing costs pursuant to our
Financing Agreements.(c)
    
    To record the net effect of discharge of claims and liabilities
subject to compromise, gain on the revaluation of assets and
liabilities, cancellation of Predecessor common stock, close out of
remaining equity balances of Predecessor in accordance with
fresh-start accounting, and the issuance of Successor common stock and
warrants to purchase common stock.(d)
    
    To adjust assets and liabilities to fair value.(e)
    
    The goodwill of Predecessor has been eliminated and the reorganization
value in excess of amounts allocable to identified tangible and
intangible assets has been classified as goodwill.  - 7 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 Liabilities Subject to Compromise
  PredecessorDecember 31,2007Postretirement benefits
    
    $
    664Litigation reserves
    
    
    106Accounts payable
    
    
    102Environmental reserves
    
    
    80Other miscellaneous liabilities
    
    
    311Subtotal
    
    
    1,263Debt Subject to Compromise:6.72% debentures due 2037
    
    
    1507.375% debentures due 2027
    
    
    30011.25% notes due 2009
    
    
    223673Unamortized debt discount and debt issuance costs
    
    
    (14
    )Subtotal
    
    
    659Total Liabilities Subject to Compromise
    
    $
    1,922
 Reorganization Items, net
   PredecessorTwo Months
    
    
    Three Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    EndedFebruary 29,
    
    
    September 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2007Discharge of claims and liabilities (a)
    
    $
    (104
    )
    
    $
    
    
    
    $
    Revaluation of assets and liabilities (b)
    
    
    1,589
    
    
    
    
    
    
    
    Professional fees (c)
    
    
    (52
    )
    
    
    (18
    )
    
    
    (50
    )Severance and employee retention costs (d)
    
    
    
    
    
    
    (1
    )
    
    
    (4
    )Settlements of pre-petition claims (e)
    
    
    
    
    
    
    1
    
    
    
    3Adjustments to allowed claim amounts (f)
    
    
    
    
    
    
    (134
    )
    
    
    (134
    )Total Reorganization Items, net
    
    $
    1,433
    
    
    $
    (152
    )
    
    $
    (185
    )
 (a)
    
    The discharge of claims and liabilities primarily relates to allowed general, unsecured claims in our Chapter 11 proceedings,
such as (1) claims due to the rejection or modification of certain executory contracts, (2) claims relating to changes in
postretirement healthcare benefits and the rejection of our non-qualified retirement plans, and (3) claims relating to the
restructuring of financing arrangements.(b)
    
    We revalued our assets and liabilities at estimated fair value as a result of fresh-start accounting. This resulted in a
$1,801 pre-tax gain, of which $212 is recognized in Income (Loss) from Discontinued Operations on the Consolidated Statement of
Operations, primarily reflecting the fair value of newly recognized intangible assets, the elimination of our LIFO reserve and
the increase in the fair value of tangible property and equipment.(c)
    
    Professional fees for services provided by debtor and creditor professionals directly related to our reorganization proceedings.(d)
    
    Expense provisions related to (i) employee severance costs incurred directly as part of the Chapter 11 reorganization process
and (ii) a retention plan for certain of our employees approved by the Bankruptcy Court.(e)
    
    Represents the difference between the settlement amount of certain pre-petition obligations and the corresponding amounts
previously recorded.(f)
    
    Adjustments to record certain pre-petition claims at estimated amounts of the allowed claims.  - 8 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
  3. Significant Accounting Policies
 Basis of Presentation
    Reclassifications
  Marketing expenses:
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2007
    
    
    2007Selling, general and administrative expenses
    
    $
    27
    
    
    $
    71Income (Loss) from Discontinued Operations
    
    $
    11
    
    
    $
    34
  - 9 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 Administrative expenses:
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2007
    
    
    2007Selling, general and administrative expenses
    
    $
    29
    
    
    $
    78Research, development and other operating expenses, net
    
    $
    (1
    )
    
    $
    (2
    )Income (Loss) from Discontinued Operations
    
    $
    (1
    )
    
    $
    (2
    )
 Technological expenses:
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2007
    
    
    2007Selling, general and administrative expenses
    
    $
    2
    
    
    $
    5Research, development and other operating expenses, net
    
    $
    7
    
    
    $
    19Income (Loss) from Discontinued Operations
    
    $
    3
    
    
    $
    9
 Amortization expense:
 Use of Estimates
  Inventory Valuation
   - 10 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 Property, Plant and Equipment
  Estimated Useful LivesAsset Classification
    
    Successor
    
    PredecessorBuildings and Improvements
    
    5 to 35 years
    
    5 to 35 yearsMachinery and Equipment
    
    5 to 20 years
    
    3 to 15 years
  Goodwill and Intangible Assets
    Estimated Useful LivesSuccessor
    
    PredecessorFinite-Lived Intangible Assets
    
    5 to 27 years
    
    5 to 25 years
  Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging Activities
  - 11 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
    Recently Issued Accounting Standards
 Disclosures about Derivative Instruments and
Hedging Activities
 4. Discontinued Operations
 Integrated Nylon Business  Held for Sale
 Accounting for the Impairment or Disposal
of Long-Lived Assets
  Successor
    
    
    PredecessorSeptember 30,
    
    
    December 31,2008
    
    
    2007Assets:Trade receivables, net
    
    $
    185
    
    
    $
    155Miscellaneous receivables
    
    
    11
    
    
    
    19Inventories
    
    
    450
    
    
    
    149Prepaid expenses and other assets
    
    
    14
    
    
    
    9Property,
plant and equipment, net
    
    
    457
    
    
    
    433Identified
intangible assets, net
    
    
    
    
    
    
    1Other assets
    
    
    50
    
    
    
    35Assets of discontinued operations
    
    $
    1,167
    
    
    $
    801Liabilities:Accounts payable
    
    $
    143
    
    
    $
    162Accrued liabilities
    
    
    80
    
    
    
    58Environmental
remediation liabilities
    
    
    9
    
    
    
    5Other liabilities
    
    
    57
    
    
    
    63Liabilities of discontinued operations
    
    $
    289
    
    
    $
    288
  - 12 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
  Successor
    
    
    Predecessor
    
    
    Successor
    
    
    PredecessorThree Months
    
    
    Three Months
    
    
    Seven Months
    
    
    Two Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    February 29,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2008
    
    
    2007Operating results:Net sales
    
    $
    506
    
    
    $
    507
    
    
    $
    1,174
    
    
    $
    318
    
    
    $
    1,423Income before income taxes
    
    $
    (30
    )
    
    $
    23
    
    
    $
    (57
    )
    
    $
    197
    
    
    $
    14Income tax expense
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Income (Loss) from discontinued operations
    
    $
    (31
    )
    
    $
    23
    
    
    $
    (58
    )
    
    $
    197
    
    
    $
    13
 Water Treatment Phosphonates Business  Divestiture
 ®
   Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2007
    
    
    2007Net sales
    
    $
    
    
    
    $
    43Income before income taxes
    
    $
    
    
    
    $
    34Income tax expense
    
    
    
    
    
    
    5Income from discontinued operations
    
    $
    
    
    
    $
    29
  - 13 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 5. Share-Based Compensation
 Predecessor
  Successor
   Stock Options
    SuccessorSeptember 30,2008Expected volatility
    
    
    26.1
    %Expected term (in years)
    
    
    6Risk-free rate
    
    
    4.24
    %Weighted-average grant date fair value
    
    $
    5.91
  - 14 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
  Weighted-Average
    
    
    AggregateWeighted-Average
    
    
    Remaining
    
    
    IntrinsicOptions
    
    
    Exercise Price
    
    
    Contractual Life
    
    
    Value (a)Vested or Expected to Vest at
September 30, 2008
    
    
    2,724,351
    
    
    $
    17.30
    
    
    
    9.4
    
    
    $
    (9
    )Exercisable at September 30, 2008
    
    
    66,667
    
    

    $
    17.33
    
    


    9.4
    
    
    $
    
 (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.  Restricted Stock Awards
   6. Goodwill and Other Intangible Assets
 Goodwill
  SuccessorSeptember 30,2008SAFLEX®
    
    $
    205CPFilms
    
    
    159Technical Specialties
    
    
    147Total
    
    $
    511
  - 15 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 Identified Intangible Assets
  Successor
    
    
    PredecessorSeptember 30, 2008
    
    
    December 31, 2007Estimated
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    EstimatedUseful
    
    
    Gross
    
    
    
    
    
    
    Net
    
    
    Useful
    
    
    Gross
    
    
    
    
    
    
    NetLife in
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Life in
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingYears
    
    
    Value
    
    
    Amortization
    
    
    Value
    
    
    Years
    
    
    Value
    
    
    Amortization
    
    
    ValueAmortizable intangible assets:Customer relationships
    
    
    23 to 27
    
    
    $
    495
    
    
    $
    (11
    )
    
    $
    484
    
    
    
    12
    
    
    $
    1
    
    
    $
    (
    )
    
    $
    1Technology
    
    
    5 to 26
    
    
    
    203
    
    
    
    (6
    )
    
    
    197
    
    
    
    15 to 25
    
    
    
    18
    
    
    
    (1
    )
    
    
    17Trade names
    
    
    25
    
    
    
    13
    
    
    
    (
    )
    
    
    13
    
    
    
    16 to 25
    
    
    
    2
    
    
    
    (
    )
    
    
    2Patents
    
    
    13
    
    
    
    5
    
    
    
    (
    )
    
    
    5
    
    
    
    5 to 10
    
    
    
    2
    
    
    
    (
    )
    
    
    2Contract-based
    
    
    
    
    
    
    
    
    
    
    (
    )
    
    
    
    
    
    
    5 to 20
    
    
    
    18
    
    
    
    (8
    )
    
    
    10Non amortizable intangible assets:Trademarks
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    26Total Identified Intangible Assets
    
    
    
    
    
    $
    868
    
    
    $
    (17
    )
    
    $
    851
    
    
    
    
    
    
    $
    67
    
    
    $
    (9
    )
    
    $
    58
  Three Months
    
    
    Seven MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2008
    
    
    2008Cost of goods sold
    
    $
    3
    
    
    $
    6Selling, general and administrative expenses
    
    $
    5
    
    
    $
    12
  7. Detail of Certain Balance Sheet Accounts
 Successor
    
    
    PredecessorSeptember 30,
    
    
    December 31,Inventories
    
    2008
    
    
    2007Finished goods
    
    $
    221
    
    
    $
    188Goods in process
    
    
    48
    
    
    
    39Raw materials and supplies
    
    
    85
    
    
    
    76Inventories, at FIFO cost
    
    
    354
    
    
    
    303Excess of FIFO over LIFO cost
    
    
    
    
    
    
    (35
    )Total Inventories
    
    $
    354
    
    
    $
    268
  - 16 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
  Successor
    
    
    PredecessorSeptember 30,
    
    
    December 31,Property, Plant and Equipment
    
    2008
    
    
    2007Land
    
    $
    34
    
    
    $
    33Leasehold improvements
    
    
    7
    
    
    
    23Buildings
    
    
    211
    
    
    
    338Machinery and equipment
    
    
    717
    
    
    
    1,279Construction in progress
    
    
    49
    
    
    
    48Total property, plant and equipment
    
    
    1,018
    
    
    
    1,721Less accumulated depreciation
    
    
    (40
    )
    
    
    (1,102
    )Total
    
    $
    978
    
    
    $
    619
 Successor
    
    
    PredecessorSeptember 30,
    
    
    December 31,Accrued Liabilities
    
    2008
    
    
    2007Wages and benefits
    
    $
    59
    
    
    $
    84Environmental remediation liabilities
    
    
    34
    
    
    
    15Accrued income and other taxes payable
    
    
    41
    
    
    
    20Accrued selling expenses
    
    
    23
    
    
    
    19Accrued interest
    
    
    10
    
    
    
    24Other
    
    
    109
    
    
    
    77Total Accrued Liabilities
    
    $
    276
    
    
    $
    239
 8. Income Taxes
 Income Tax Expense
    Unrecognized Tax Benefits
   - 17 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
  Net Operating Loss and Valuation Allowance
  9. Restructuring Costs
   Future
    
    
    
    
    
    
    OtherContractual
    
    
    Employment
    
    
    RestructuringPayments
    
    
    Reductions
    
    
    Costs
    
    
    TotalPredecessorBalance at December 31, 2007
    
    $
    3
    
    
    $
    5
    
    
    $
    
    
    
    $
    8Amounts utilized
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Currency fluctuations
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Balance at February 29, 2008
    
    
    3
    
    
    
    5
    
    
    
    
    
    
    
    8SuccessorCharges taken
    
    
    3
    
    
    
    5
    
    
    
    2
    
    
    
    10Amounts utilized
    
    
    (1
    )
    
    
    (3
    )
    
    
    (2
    )
    
    
    (6
    )Change in estimates
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    Balance at September 30, 2008
    
    $
    7
    
    
    $
    5
    
    
    $
    
    
    
    $
    12
  - 18 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 10. Commitments and Contingencies
 Litigation
   Legal Proceedings Resolved in Our Chapter 11 Process
 Savings and Investment Plan Litigation ,
 Legal Proceedings Ongoing Post-Chapter 11
 Flexsys Patent and Related Litigation
  Legal Proceedings in the United States
 The ITC-1 proceeding
  - 19 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
  The ITC-2 proceeding.
 United States Civil Patent Infringement Litigation ITC-1
 In re Rubber Chemicals Antitrust Litigation
 Legal Proceedings in Europe, Korea, and China.
 Legacy Tort Litigation
    - 20 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 Putnam County, West Virginia litigation.
  Escambia County, Florida Litigation. John Allen, et al. v. Monsanto Company, et al.
 Cash Balance Plan Litigation
 Davis, et al. v. Solutia, Inc.
Employees Pension Plan Hammond, et al. v. Solutia, Inc. Employees Pension Plan Walker et al. v. The Monsanto Pension Plan,
et al. Donaldson v. Pharmacia Cash Balance Pension Plan, et al.
    - 21 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 Department of Justice Investigations
  LaSalle Termination Litigation
    Concluded matters
 Ferro Antitrust Investigation Texas Commission on Environmental Quality
Administrative Enforcement Proceeding Savings and Investment Plan Litigation
 Environmental Liabilities
   - 22 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
   TotalPredecessorBalance at December 31, 2007
    
    $
    71Charges taken
    
    
    257Amounts utilized
    
    
    (1
    )Currency fluctuations
    
    
    Balance at February 29, 2008
    
    
    327SuccessorCharges taken
    
    
    6Amounts utilized (a)
    
    
    (12
    )Currency fluctuations
    
    
    (1
    )Balance at September 30, 2008
    
    $
    320Environmental Remediation Liabilities, current
    
    $
    34Environmental Remediation Liabilities, long-term
    
    
    286Balance at September 30, 2008
    
    $
    320
 (a)
    
    For the seven months ended September 30, 2008, allowable expenditures of $12
were reimbursed to us by a special purpose entity established with proceeds of stock
issued by us on the Effective Date.   - 23 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
  Anniston, Alabama:
 Sauget, Illinois:
 W. G. Krummrich Site:
  - 24 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
  11. Fair Value of Financial Instruments
 Fair Value Measurements Effective
Date of Statement 157
   Fair Value Measurements at September 30, 2008Quoted Prices inActive Markets
    
    
    
    
    
    
    Significantfor Identical
    
    
    Significant Other
    
    
    UnobservableAssets
    
    
    Observable Inputs
    
    
    InputsTotal
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Assets:Derivatives  Commodities (a)
    
    $
    2
    
    
    $
    
    
    
    $
    2
    
    
    $
    Derivatives  Interest Rates (b)
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    Derivatives  Foreign Exchange (c)
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    Total
    
    $
    5
    
    
    $
    
    
    
    $
    5
    
    
    $
    Liabilities:Derivatives  Commodities (a)
    
    $
    6
    
    
    $
    
    
    
    $
    6
    
    
    $
    Derivatives  Interest Rates (b)
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    Derivatives  Foreign Exchange (c)
    
    
    7
    
    
    
    
    
    
    
    7
    
    
    
    Total
    
    $
    17
    
    
    $
    
    
    
    $
    17
    
    
    $
    
 (a)
    
    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.(b)
    
    Includes interest rate caps and swaps which are valued using
counterparty quotes, which use discounted cash flows and the
then-applicable forward interest rates.(c)
    
    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.  - 25 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 12. Pension Plans and Other Postretirement Benefits
 Employers Accounting for Postretirement Benefits
Other Than Pensions
 Components of Net Periodic Benefit Cost
  Pension BenefitsSuccessor
    
    
    Predecessor
    
    
    Successor
    
    
    PredecessorThree Months
    
    
    Three Months
    
    
    Seven Months
    
    
    Two Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    February 29,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2008
    
    
    2007Service costs for benefits earned
    
    $
    2
    
    
    $
    2
    
    
    $
    3
    
    
    $
    1
    
    
    $
    4Interest costs on benefit obligation
    
    
    17
    
    
    
    17
    
    
    
    40
    
    
    
    12
    
    
    
    51Assumed return on plan assets
    
    
    (16
    )
    
    
    (19
    )
    
    
    (41
    )
    
    
    (13
    )
    
    
    (54
    )Actuarial net loss
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    2
    
    
    
    9Settlement charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Total
    
    $
    3
    
    
    $
    4
    
    
    $
    2
    
    
    $
    3
    
    
    $
    10
 Healthcare and Other BenefitsSuccessor
    
    
    Predecessor
    
    
    Successor
    
    
    PredecessorThree Months
    
    
    Three Months
    
    
    Seven Months
    
    
    Two Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    February 29,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2008
    
    
    2007Service costs for benefits earned
    
    $
    1
    
    
    $
    1
    
    
    $
    3
    
    
    $
    1
    
    
    $
    3Interest costs on benefit obligation
    
    
    4
    
    
    
    7
    
    
    
    9
    
    
    
    4
    
    
    
    19Assumed return on plan assets
    
    
    (2
    )
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    Prior service credits
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (3
    )
    
    
    (12
    )Actuarial (gain) loss
    
    
    (1
    )
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    5Total
    
    $
    2
    
    
    $
    5
    
    
    $
    7
    
    
    $
    2
    
    
    $
    15
 Settlements
   - 26 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 Employer Contributions
  13. Debt Obligations
  Successor
    
    
    PredecessorSeptember 30,
    
    
    December 31,2008
    
    
    2007Senior secured term loan facility due 2014
    
    $
    1,191
    
    
    $
    Senior secured asset-based revolving credit facility due 2013
    
    
    186
    
    
    
    Facility Agreement due 2011
    
    
    
    
    
    
    231Flexsys term loan due 2012
    
    
    
    
    
    
    76Flexsys revolving credit facility due 2012
    
    
    
    
    
    
    476.72% debentures due 2037
    
    
    
    
    
    
    1507.375% debentures due 2027
    
    
    
    
    
    
    30011.25% notes due 2009
    
    
    
    
    
    
    223Maryville notes due 2022
    
    
    
    
    
    
    20Total principal amount
    
    
    1,377
    
    
    
    1,047Unamortized net discount (a)
    
    
    
    
    
    
    1,377
    
    
    
    1,047Less current portion of long-term debt
    
    
    (12
    )
    
    
    (15
    )Less debt subject to compromise (Note 2)
    
    
    
    
    
    
    (673
    )Total
    
    $
    1,365
    
    
    $
    359
 (a)
    
    Unamortized net discount of $14 as of December 31, 2007 is included in
liabilities subject to compromise, as further described in Note 2. Financing Agreements
     - 27 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
  st
  Maryville Notes
  14. Segment Data
 Disclosures about Segments of an Enterprise and Related Information, ® ®
  - 28 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 ®
 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 accelerators
    
    THERMINOL® heat transfer fluids
    
    SKYDROL® aviation hydraulic fluids
    
    SKYKLEEN® brand of aviation solvents
   Successor
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007Net
    
    
    Profit
    
    
    Net
    
    
    ProfitSales
    
    
    (Loss)
    
    
    Sales
    
    
    (Loss)Reportable Segments:SAFLEX®
    
    $
    221
    
    
    $
    35
    
    
    $
    173
    
    
    $
    27CPFilms
    
    
    63
    
    
    
    15
    
    
    
    59
    
    
    
    14Technical Specialties
    
    
    294
    
    
    
    74
    
    
    
    214
    
    
    
    44Reportable Segment Totals
    
    
    578
    
    
    
    124
    
    
    
    446
    
    
    
    85Unallocated and Other
    
    
    9
    
    
    
    (16
    )
    
    
    8
    
    
    
    (20
    )Total
    
    
    587
    
    
    
    108
    
    
    
    454
    
    
    
    65Reconciliation to Consolidated
Totals:Depreciation and amortization
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (16
    )Interest expense
    
    
    
    
    
    
    (39
    )
    
    
    
    
    
    
    (20
    )Reorganization items, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (152
    )Consolidated Totals:Net Sales
    
    $
    587
    
    
    
    
    
    
    $
    454Income (Loss) from Continuing
Operations Before Income
Taxes
    
    
    
    
    
    $
    41
    
    
    
    
    
    
    $
    (123
    )
  - 29 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 Successor
    
    
    PredecessorSeven Months
    
    
    Two Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    February 29,
    
    
    September 30,2008
    
    
    2008
    
    
    2007Net
    
    
    Profit
    
    
    Net
    
    
    Profit
    
    
    Net
    
    
    ProfitSales
    
    
    (Loss)
    
    
    Sales
    
    
    (Loss)
    
    
    Sales
    
    
    (Loss)Reportable Segments:SAFLEX®
    
    $
    509
    
    
    $
    57
    
    
    $
    125
    
    
    $
    17
    
    
    $
    531
    
    
    $
    86CPFilms
    
    
    157
    
    
    
    34
    
    
    
    39
    
    
    
    9
    
    
    
    184
    
    
    
    50Technical Specialties
    
    
    657
    
    
    
    125
    
    
    
    164
    
    
    
    40
    
    
    
    409
    
    
    
    72Reportable Segment Totals
    
    
    1,323
    
    
    
    216
    
    
    
    328
    
    
    
    66
    
    
    
    1,124
    
    
    
    208Unallocated and Other
    
    
    23
    
    
    
    (31
    )
    
    
    7
    
    
    
    (5
    )
    
    
    27
    
    
    
    (12
    )Total
    
    
    1,346
    
    
    
    185
    
    
    
    335
    
    
    
    61
    
    
    
    1,151
    
    
    
    196Reconciliation to Consolidated
Totals:Depreciation and amortization
    
    
    
    
    
    
    (64
    )
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (41
    )Interest expense
    
    
    
    
    
    
    (99
    )
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    (51
    )Reorganization items, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,433
    
    
    
    
    
    
    
    (185
    )Consolidated Totals:Net Sales
    
    $
    1,346
    
    
    
    
    
    
    $
    335
    
    
    
    
    
    
    $
    1,151Income (Loss) from Continuing
Operations Before Income Taxes
    
    
    
    
    
    $
    22
    
    
    
    
    
    
    $
    1,471
    
    
    
    
    
    
    $
    (81
    )
  Successor
    
    
    PredecessorSeptember 30,
    
    
    December 31,2008
    
    
    2007Assets
    
    
    AssetsReportable Segments:SAFLEX®
    
    $
    1,372
    
    
    $
    525CPFilms
    
    
    632
    
    
    
    255Technical Specialties
    
    
    1,018
    
    
    
    635Reportable Segment Totals
    
    
    3,022
    
    
    
    1,415Reconciliation to consolidated totals:Discontinued Operations
    
    
    1,167
    
    
    
    808Unallocated and Other
    
    
    407
    
    
    
    417Consolidated Totals
    
    $
    4,596
    
    
    $
    2,640
  - 30 -




---



##### Table of Contents



SOLUTIA INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Dollars in millions, except per share amounts or otherwise noted)
(Unaudited)
 15. Earnings (Loss) Per Share
  Successor
    
    
    Predecessor
    
    
    Successor
    
    
    PredecessorThree Months
    
    
    Three Months
    
    
    Seven Months
    
    
    Two Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    February 29,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2008
    
    
    2007Consolidated Statement of Operations Results:Income (Loss) from continuing operations
    
    $
    24
    
    
    $
    (134
    )
    
    $
    5
    
    
    $
    1,257
    
    
    $
    (105
    )Income (Loss) from discontinued operations
    
    
    (31
    )
    
    
    23
    
    
    
    (58
    )
    
    
    197
    
    
    
    42Net income (loss)
    
    $
    (7
    )
    
    $
    (111
    )
    
    $
    (53
    )
    
    $
    1,454
    
    
    $
    (63
    )Weighted-average number of shares outstanding used for basic earnings (loss) per share
    
    
    76.0
    
    
    
    104.5
    
    
    
    66.8
    
    
    
    104.5
    
    
    
    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
    
    
    76.0
    
    
    
    104.5
    
    
    
    66.8
    
    
    
    104.5
    
    
    
    104.5
 non-vested
  - 31 -




---



##### Table of Contents



Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Overview
  ®
 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 accelerators
    
    THERMINOL® heat transfer fluids
    
    SKYDROL® aviation hydraulic fluids
    
    SKYKLEEN® brand of aviation solvents
  Significant Developments and Strategic Actions  Third Quarter 2008
    - 32 -




---



##### Table of Contents



Combined Quarterly Financial Results of the Predecessor and Successor
    Summary Results of Operations
 ®
   Outlook
   - 33 -




---



##### Table of Contents



Critical Accounting Policies and Estimates
  Results of OperationsThird Quarter 2008 Compared with Third Quarter 2007
 Consolidated Results
 Successor
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Net Sales
    
    $
    587
    
    
    $
    454
    
    
    $
    133
    
    
    
    29
    %Operating Income:Reportable Segment Profit
    
    $
    124
    
    
    $
    85
    
    
    $
    39
    
    
    
    46
    %Unallocated and Other
    
    
    (16
    )
    
    
    (20
    )
    
    
    4
    
    
    
    20
    %Less: Depreciation and Amortization
    
    
    (28
    )
    
    
    (16
    )Less: Other Income included in
Segment Profit and
Unallocated and Other
    
    
    (4
    )
    
    
    (2
    )Operating Income
    
    $
    76
    
    
    $
    47
    
    
    $
    29
    
    
    
    62
    %Net Gains (Charges) included in Operating Income
    
    $
    1
    
    
    $
    (7
    )
 ® ®
 ®
  - 34 -




---



##### Table of Contents



SAFLEX®
 Successor
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Net Sales
    
    $
    221
    
    
    $
    173
    
    
    $
    48
    
    
    
    28
    %Segment Profit
    
    $
    35
    
    
    $
    27
    
    
    $
    8
    
    
    
    30
    %
 ® ®
  CPFilms
 Successor
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Net Sales
    
    $
    63
    
    
    $
    59
    
    
    $
    4
    
    
    
    7
    %Segment Profit
    
    $
    15
    
    
    $
    14
    
    
    $
    1
    
    
    
    7
    %
   Technical Specialties
 Successor
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Net Sales
    
    $
    294
    
    
    $
    214
    
    
    $
    80
    
    
    
    37
    %Segment Profit
    
    $
    74
    
    
    $
    44
    
    
    $
    30
    
    
    
    68
    %Net charges included in Segment Profit
    
    $
    (1
    )
    
    $
    (3
    )
 ® ® ® ® ® ® ® ®
  - 35 -




---



##### Table of Contents



Unallocated and Other
 Successor
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Unallocated and Other results
    
    $
    (16
    )
    
    $
    (20
    )
    
    $
    4
    
    
    
    20
    %Net gains (charges) included in Unallocated and Other
    
    $
    2
    
    
    $
    (4
    )
  Interest Expense
 Successor
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Interest Expense
    
    $
    39
    
    
    $
    20
    
    
    $
    19
    
    
    
    95
    %Charges included in Interest Expense
    
    $
    (1
    )
    
    $
    (2
    )
    - 36 -




---



##### Table of Contents



Reorganization Items, net
 Successor
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Reorganization Items, net
    
    $
    
    
    
    $
    (152
    )
    
    $
    152
    
    
    
    N.M.
  Income Tax Expense
 Successor
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Income Tax Expense
    
    $
    17
    
    
    $
    11
    
    
    $
    6
    
    
    
    55%
    Discontinued Operations
 Successor
    
    
    PredecessorThree Months
    
    
    Three MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Income (Loss) from Discontinued Operations, net of tax
    
    $
    (31
    )
    
    $
    23
    
    
    $
    (54
    )
    
    
    N.M.
   - 37 -




---



##### Table of Contents



Combined Results of OperationsNine Months Ended September 30, 2008 Compared with Nine Months Ended
September 30, 2007
 Consolidated Results
 Combined
    
    
    PredecessorNine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Net Sales
    
    $
    1,681
    
    
    $
    1,151
    
    
    $
    530
    
    
    
    46
    %Operating Income:Reportable Segment Profit
    
    $
    282
    
    
    $
    208
    
    
    $
    74
    
    
    
    36
    %Unallocated and Other
    
    
    (36
    )
    
    
    (12
    )
    
    
    (24
    )
    
    
    (200
    %)Less: Depreciation and Amortization
    
    
    (75
    )
    
    
    (41
    )Less: Equity Earnings from
Affiliates, Other Income and Loss on
Debt Modification included in
Segment Profit and
Unallocated and Other
    
    
    (11
    )
    
    
    (35
    )Operating Income
    
    $
    160
    
    
    $
    120
    
    
    $
    40
    
    
    
    33
    %Charges included in Operating Income
    
    $
    (67
    )
    
    $
    (10
    )
 ® ®
  - 38 -




---



##### Table of Contents



® ®
 SAFLEX®
 Combined
    
    
    PredecessorNine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Net Sales
    
    $
    634
    
    
    $
    531
    
    
    $
    103
    
    
    
    19
    %Segment Profit
    
    $
    74
    
    
    $
    86
    
    
    $
    (12
    )
    
    
    (14
    %)Charges included in Segment Profit
    
    $
    (37
    )
    
    $
    
 ® ®
  CPFilms
 Combined
    
    
    PredecessorNine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Net Sales
    
    $
    196
    
    
    $
    184
    
    
    $
    12
    
    
    
    7
    %Segment Profit
    
    $
    43
    
    
    $
    50
    
    
    $
    (7
    )
    
    
    (14
    %)Charges included in Segment Profit
    
    $
    (10
    )
    
    $
    
   - 39 -




---



##### Table of Contents



Technical Specialties
 Combined
    
    
    PredecessorNine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Net Sales
    
    $
    821
    
    
    $
    409
    
    
    $
    412
    
    
    
    101
    %Segment Profit
    
    $
    165
    
    
    $
    72
    
    
    $
    93
    
    
    
    129
    %Charges included in Segment Profit
    
    $
    (27
    )
    
    $
    (5
    )
 ® ® ®
  Unallocated and Other
 Combined
    
    
    PredecessorNine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Unallocated and Other results
    
    $
    (36
    )
    
    $
    (12
    )
    
    $
    (24
    )
    
    
    (200
    %)Net gains included in Unallocated and Other
    
    $
    11
    
    
    $
    10
  - 40 -




---



##### Table of Contents



Interest Expense
 Combined
    
    
    PredecessorNine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Interest Expense
    
    $
    111
    
    
    $
    51
    
    
    $
    60
    
    
    
    118
    %Charges included in Interest Expense
    
    $
    (1
    )
    
    $
    (2
    )
  Reorganization Items, net
 Combined
    
    
    PredecessorNine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Reorganization Items, net
    
    $
    1,433
    
    
    $
    (185
    )
    
    $
    1,618
    
    
    
    N.M.
   - 41 -




---



##### Table of Contents



Income Tax Expense
 Combined
    
    
    PredecessorNine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Income Tax Expense
    
    $
    231
    
    
    $
    24
    
    
    $
    207
    
    
    
    N.M.
     Discontinued Operations
 Combined
    
    
    PredecessorNine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    
    
    
    
    %September 30,
    
    
    September 30,
    
    
    Increase
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    (Decrease)Income from Discontinued Operations, net of tax
    
    $
    139
    
    
    $
    42
    
    
    $
    97
    
    
    
    231
    %Reorganization items included in income
from discontinued operations
    
    $
    212
    
    
    $
    
    - 42 -




---



##### Table of Contents



Summary of Events Affecting Comparability
  2008 Events
 Technical
    
    
    UnallocatedIncrease/(Decrease)
    
    SAFLEX®
    
    
    CPFilms
    
    
    Specialties
    
    
    /Other
    
    
    ConsolidatedImpact on:Cost of goods sold
    
    $
    36
    
    
    $
    10
    
    
    $
    20
    
    
    $
    1
    
    
    $
    67
    (a)
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    13
    (b)
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )(c)
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )(d)1
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    2
    (e)Research, development and other operating expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )(f)Operating Income Impact
    
    
    (37
    )
    
    
    (10
    )
    
    
    (27
    )
    
    
    7
    
    
    
    (67
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )(g)Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4
    (h)Reorganization Items, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,433
    
    
    
    1,433
    (i)Pre-tax Income Statement Impact
    
    $
    (37
    )
    
    $
    (10
    )
    
    $
    (27
    )
    
    $
    1,443
    
    
    
    1,369Income tax impact
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187
    (j)After-tax Income Statement Impact
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,182
 (a)
    
    Charges resulting from the step-up in basis of our inventory in accordance with fresh-start accounting ($67 million pre-tax and
$52 million after-tax).(b)
    
    Charges related to the announced closure of the Ruabon Facility ($13 million pre-tax and after-tax).(c)
    
    Gain related to the termination of a natural gas purchase contract related to the announced closure of the Ruabon Facility ($6
million pre-tax and after-tax).(d)
    
    Gain resulting from settlements of legacy insurance policies with insolvent insurance carriers ($3 million pre-tax and after-tax).(e)
    
    Restructuring costs related principally to severance and retraining costs ($2 million pre-tax and after-tax).(f)
    
    Gain resulting from surplus land sales ($6 million pre-tax and after-tax).(g)
    
    Unamortized debt issuance costs associated with the repayment of the Bridge ($1 million pre-tax and after-tax).(h)
    
    Gain resulting from the settlement of emergence related incentive accruals ($4 million pre-tax and after-tax).(i)
    
    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).(j)
    
    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.  - 43 -




---



##### Table of Contents



2007 Events
 Technical
    
    
    UnallocatedIncrease/(Decrease)
    
    SAFLEX®
    
    
    CPFilms
    
    
    Specialties
    
    
    /Other
    
    
    ConsolidatedImpact on:Cost of goods sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    4
    (a)
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3
    (b)
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2
    (c)Operating Income Impact
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    (4
    )
    
    
    (9
    )Interest Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (2
    )(d)Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    21
    (e)Loss on debt modification
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )(f)Reorganization Items, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (185
    )
    
    
    (185
    )(g)Pre-tax Income Statement Impact
    
    $
    
    
    
    $
    
    
    
    $
    (5
    )
    
    $
    (177
    )
    
    
    (182
    )Income tax impact
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )(h)After-tax Income Statement Impact
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (179
    )
 (a)
    
    Restructuring charge resulting from the termination of a third-party agreement in the third quarter at one of our facilities ($4 million pre-tax and $3 million after-tax  see note (h) below).(b)
    
    Charge resulting from the step-up in basis of Flexsys inventory in accordance with purchase accounting ($3 million
pre-tax and $2 million after-tax  see note (h) below).(c)
    
    Restructuring costs related principally to severance and retraining costs ($2 million pre-tax and $1 million
after-tax  see note (h) below).(d)
    
    Charge resulting from recognition of interest expense on claims recognized as allowed secured claims through
settlements approved by the Bankruptcy Court in the third quarter ($2 million pre-tax and after-tax  see note (h)
below)(e)
    
    Settlement gain, net of legal expenses in the second quarter ($21 million pre-tax and after-tax  see note (h) below).(f)
    
    We recorded a charge of approximately $7 million (pre-tax and after-tax  see note (h) below) in the first quarter to
record the write-off of debt issuance costs and to record the DIP facility modification.(g)
    
    Reorganization items, net consist of the following: $134 million net charge from adjustments to record certain
pre-petition claims at estimated amounts of the allowed claims, $50 million of professional fees for services
provided by debtor and creditor professionals directly related to our reorganization proceedings; $4 million of
expense provisions related to (i) employee severance costs incurred directly as part of the Chapter 11 reorganization
process and (ii) a retention plan for certain of our employees approved by the Bankruptcy Court; offset by a $3
million gain realized from a claim settlement ($185 million pre-tax and after-tax  see note (h) below).(h)
    
    With the exception of item (a), (b), and (c) above, which related to operations not in reorganization, the above
items were considered to have like pre-tax and after-tax impact as the tax benefit or expense realized from these
events is offset by the change in valuation allowance for U.S. deferred tax assets resulting from uncertainty as to
their recovery due to our Chapter 11 bankruptcy filing. Financial Condition and Liquidity
   Cash Flow
 Combined
    
    
    PredecessorNine Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)Continuing OperationsCash used in operating activities
    
    $
    (262
    )
    
    $
    (70
    )
    
    $
    (192
    )Cash used in investing activities
    
    $
    (16
    )
    
    $
    (170
    )
    
    $
    154Cash provided by financing activities
    
    $
    361
    
    
    $
    283
    
    
    $
    78
  - 44 -




---



##### Table of Contents



Working Capital
 Successor
    
    
    PredecessorSeptember 30,
    
    
    December 31,
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)Continuing OperationsCurrent assets
    
    $
    908
    
    
    $
    891Current liabilities
    
    
    539
    
    
    
    1,401Working Capital
    
    $
    369
    
    
    $
    (510
    )
    
    $
    879
  Discontinued Operations
 Combined
    
    
    PredecessorNine Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    Increase(dollars in millions)
    
    2008
    
    
    2007
    
    
    (Decrease)Discontinued OperationsCash provided by (used in) operating activities
    
    $
    (177
    )
    
    $
    4
    
    
    $
    (181
    )Cash provided by (used in) investing activities
    
    $
    (41
    )
    
    $
    23
    
    
    $
    (64
    )
   - 45 -




---



##### Table of Contents



Debt and Liquidity
     Pension Funding
  Contingencies
   - 46 -




---



##### Table of Contents



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS
   
 
 Item 4. CONTROLS AND PROCEDURES
   - 47 -




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 
 ITEM 1. LEGAL PROCEEDINGS
 Legal Proceedings Resolved in Our Chapter 11 Process
 Savings and Investment Plan Litigation ,
 Legal Proceedings Ongoing Post-Chapter 11
  Flexsys Patent and Related Litigation
  Legal Proceedings in the United States
 The ITC-2 proceeding. 4-ADPA
  - 48 -




---



##### Table of Contents



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, 2007 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.
 Our actual financial results may vary significantly from the projections filed with the
Bankruptcy Court.
 Financial
Reporting by Entities in Reorganization under the Bankruptcy Code
 Because our consolidated financial statements reflect fresh-start accounting adjustments
made upon emergence from bankruptcy, and because of the effects of the transactions that
became effective pursuant to the Plan of Reorganization, financial information in our future
financial statements will not be comparable to our financial information from prior periods.
 Business Combinations
  -49-




---



##### Table of Contents



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.
  We Have and Will Continue to Have Significant Indebtedness.
  
    
    We will have to dedicate a significant portion of our cash flow to
making interest and principal payments on our indebtedness,
thereby reducing the availability of our cash flow to fund working
capital, capital expenditures, acquisitions or other general
corporate purposes.
 
    
    Levels of indebtedness may make us less attractive to potential acquirors or acquisition targets.
 
    
    Levels of indebtedness may limit our flexibility to adjust to
changing business and market conditions, and make us more
vulnerable to downturns in general economic conditions as compared
to competitors that may be less leveraged.
 
    
    As described in more detail
below, the credit facilities contain
restrictive covenants that may limit our financing and operational
flexibility.
  Our Operations Are Restricted by Our Credit Facilities and Could be Impacted by the Failure
of Our Lenders to Perform.
  
    
    incur additional debt;
 
    
    make certain investments and acquisitions;
  -50-




---



##### Table of Contents




    
    enter into certain types of transactions with affiliates;
 
    
    limit dividends or other payments by us and certain of our subsidiaries;
 
    
    use assets as security in other transactions;
 
    
    pay dividends on our common stock or repurchase our equity interests;
 
    
    sell certain assets or merge with or into other companies;
 
    
    guarantee the debts of others;
 
    
    enter into new lines of business;
 
    
    make capital expenditures;
 
    
    prepay, redeem or exchange our debt;
 
    
    form any joint ventures or subsidiary investments.
     -51-




---



##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Total Number of
    
    
    Approximate DollarShares Purchased as
    
    
    Value (in millions)Total Number
    
    
    
    
    
    
    Part of Publicly
    
    
    that May Yet Beof Shares
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    Purchased Under thePeriod
    
    Purchased (1)
    
    
    Per Share (2)
    
    
    Programs
    
    
    Plans or ProgramsJuly 1-31, 2008
    
    
    0
    
    
    $
    0.00
    
    
    
    0
    
    
    $
    0August 1-31, 2008
    
    
    31,429
    
    
    $
    15.50
    
    
    
    0
    
    
    $
    0September 1-30, 2008
    
    
    0
    
    
    $
    0.00
    
    
    
    0
    
    
    $
    0Total
    
    
    31,429
    
    
    $
    15.50
    
    
    
    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 EVENTS
  
 
 ITEM 6. EXHIBITS
   -52-




---



##### Table of Contents



SIGNATURE
  SOLUTIA INC.
(Registrant)/s/ TIMOTHY J. SPIHLMAN(Vice President and Controller)(On behalf of the Registrant and as
Principal Accounting Officer)   - 53 -




---



##### Table of Contents



EXHIBIT INDEX
  EXHIBITNUMBER
    
    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)31.1
    
    
    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
  - 54 -