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                             FORM 10-K
                 SECURITIES AND EXCHANGE COMMISSION
                       WASHINGTON, D.C. 20549
 
(MARK ONE)
      [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
            FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                      -----------------
                                OR
 
    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
                  COMMISSION FILE NUMBER 001-13255
                                         ---------

                            SOLUTIA INC.
                            ------------
       (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
               DELAWARE                              43-1781797
               --------                              ----------
   (STATE OR OTHER JURISDICTION OF                (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)
 
10300 OLIVE BOULEVARD, 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
 
      SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
                                        NAME OF EACH EXCHANGE
      TITLE OF EACH CLASS                ON WHICH REGISTERED
      -------------------               ---------------------
$.01 PAR VALUE COMMON STOCK            NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS        NEW YORK STOCK EXCHANGE

 
    SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                                NONE
                                ----
                          (TITLE OF CLASS)
 
    INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR
FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE
SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS
FOR THE PAST 90 DAYS. [X] YES  [  ] NO
 
    INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS
PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN
DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE
IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K.
[X]
 
    STATE THE AGGREGATE MARKET VALUE OF THE VOTING AND NON-VOTING
COMMON EQUITY HELD BY NON-AFFILIATES OF THE REGISTRANT:
APPROXIMATELY $2.1 BILLION AS OF THE CLOSE OF BUSINESS ON MARCH 1,
1999.
 
    INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE
REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE
DATE: 111,664,547 SHARES OF COMMON STOCK, $.01 PAR VALUE,
OUTSTANDING AS OF THE CLOSE OF BUSINESS ON MARCH 1, 1999.
 
                DOCUMENTS INCORPORATED BY REFERENCE
 
(1)  PORTIONS OF SOLUTIA INC.'S ANNUAL REPORT TO SECURITY HOLDERS
     FOR THE YEAR ENDED DECEMBER 31, 1998 (PART I, PART II AND PART
     IV OF FORM 10-K).
 
(2)  PORTIONS OF SOLUTIA INC.'S NOTICE OF ANNUAL MEETING OF
     STOCKHOLDERS AND PROXY STATEMENT DATED MARCH 15, 1999 (PART III
     OF FORM 10-K).

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    This Annual Report on Form 10-K includes forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended. All statements regarding the expected future
financial position, results of operations, cash flows, dividends,
financing plans, business strategy, budgets, projected costs and
capital expenditures, competitive positions, growth opportunities
for existing products, effect of changes in accounting due to
recently issued accounting standards, benefits from new technology,
the cost of remediating the Year 2000 issue and the effect of any
unremediated or undiscovered Year 2000 issues on the operations,
plans and objectives of management for future operations, and
markets for stock of Solutia Inc. (the "Company") are
forward-looking statements. Although the Company believes its
expectations reflected in such forward-looking statements are based
on reasonable assumptions, no assurance can be given that such
expectations will prove to have been correct. Important factors that
could cause actual results to differ materially from the
expectations reflected in the forward-looking statements herein
include, among others, those set forth below or incorporated by
reference herein as well as general economic, business and market
conditions, customer acceptance of new products, efficacy of new
technology and facilities, changes in U.S. and ex-U.S. laws and
regulations, shortages of raw materials and energy and increased
competitive and/or customer pressure.
 
                          PART I
 
ITEM 1. BUSINESS.
 
    Solutia Inc. and its subsidiaries produce and market a range of
high performance chemical-based materials, including nylon and
acrylic fibers and fiber intermediates, SAFLEX(R) plastic
interlayer, phosphorus derivatives and specialty chemicals. These
materials are used by customers to make consumer, household,
automotive and industrial products. Unless otherwise indicated by
the context, "Solutia" means Solutia Inc. and consolidated
subsidiaries, and the "Company" means Solutia Inc. only.
 
    The Company was incorporated in Delaware in April 1997 as a
wholly-owned subsidiary of Monsanto Company ("Monsanto"). On or
prior to September 1, 1997, the businesses that form Solutia, which
previously were wholly owned by Monsanto, were transferred to
Solutia. On September 1, 1997 (the "Distribution Date"), Monsanto
distributed all of the outstanding shares of common stock of the
Company as a dividend to Monsanto stockholders (the "Spinoff"). The
distribution resulted in the issuance of one share of Solutia common
stock for every five shares of Monsanto common stock held of record
as of August 20, 1997. As a result of the Spinoff, on September 1,
1997, Solutia became an independent publicly-held company listed on
the New York Stock Exchange, and its operations ceased to be owned
by Monsanto. Monsanto and Solutia entered into a number of
agreements (collectively, the "Distribution Agreement") with respect
to the separation of the companies and to provide mechanisms for an
orderly transition following the Spinoff. Solutia has completed the
transition to services independent of Monsanto for many of these
contracts and anticipates that the remaining transitions will be
completed in accordance with the transition timeline.
 
    Solutia's strategic focus is built on key strengths, including
polymer chemistry, fiber technology, process engineering expertise,
technical service and customer problem solving. These strengths are
used in various combinations to create value-added products in three
operating segments:
 
    CHEMICALS--comprised of the Intermediates, Phosphorus
Derivatives and Industrial Products business units;
 
    FIBERS--comprised of the Carpet Fibers, Nylon Industrial Fibers
and ACRILAN(R) Acrylic Fibers business units; and
 
    POLYMERS & RESINS--comprised of the SAFLEX(R) Plastic
Interlayer, Nylon Plastics & Polymers, Resins and Polymer Modifiers
business units.
 
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    To compete effectively in its markets, Solutia has implemented a
strategy that emphasizes the following key elements:
 
    CORE PRODUCTS AND TECHNOLOGIES: Solutia is focusing on its core
products and technologies throughout its ten business units. Solutia
will continue to invest in manufacturing technology, product
research and technical and marketing support in order to continually
improve its cost and quality positions as well as its applications
support and technical service.
 
    AGGRESSIVE COST CONTROLS: Solutia believes that further expense
reductions can be achieved in manufacturing through capital
investment for more cost-effective production facilities and in
administrative functions through redesign and reengineering of
selected business processes.
 
    SELECTED GROWTH INITIATIVES AND FOCUS ON PROFITABILITY: Solutia
intends to develop the growth potential of its core chemistries and
technologies through targeted new product introductions, innovations
in related fields and selective expansions of its presence in
international markets. Solutia is also working to divest certain
businesses and acquire other businesses to upgrade the profitability
of its product portfolio. During 1998, the Company announced that it
was reviewing options for its Phosphorus Derivatives business unit
that included sale, alliance or joint venture. The Company is
primarily pursuing a sale of the business but is still considering
all alternatives. The business has annual sales of approximately
$300 million. The Company also announced that it is evaluating the
SCRIPSET(R) business of its Resins business unit for possible sale,
joint venture or other alliance.
 
    PERFORMANCE INCENTIVES: Solutia is providing incentives for
employees to increase cash flow, earnings per share and stockholder
value.
 
DESCRIPTION OF PRINCIPAL PRODUCTS AND COMPETITIVE SITUATION
 
    Set forth below are descriptions of the products in each of
Solutia's three segments: Chemicals, Fibers and Polymers & Resins.
 
    The tabular and narrative information contained in Note 18 of
"Notes to Consolidated Financial Statements" appearing on pages 42
through 43 of the 1998 Annual Report is incorporated herein by
reference.
 
CHEMICALS SEGMENT
 
  INDUSTRIAL PRODUCTS
 
    Solutia is a leading manufacturer of specialty industrial
fluids. Its products are widely recognized in their market segments
for high performance characteristics which result from proprietary
formulations. Substantially all of the products in this business
unit are trademarked. They include the following brands: SKYDROL(R)
hydraulic fluids for aviation; THERMINOL(R) heat transfer fluids;
SKYKLEEN(TM) aviation solvent; DEQUEST(R) water treatment chemicals;
and GLACIER METALWORKING FLUIDS(TM).
 
    The SKYDROL(R) product line includes fire-resistant hydraulic
fluids which are used in more than half of the world's commercial
aircraft. SKYDROL(R) 5, which was introduced in 1996, offers a range
of enhanced performance characteristics, such as improved thermal
stability and reduced weight. The SKYDROL(R) brand's major
competitor is manufactured by Exxon Corporation ("Exxon").
 
    THERMINOL(R) heat transfer fluids are leaders in the worldwide
high temperature liquid phase market. These products, used in
various types of capital equipment, are known for remaining
thermally stable at high temperatures and for their low temperature
pumping characteristics. Competitors include The Dow Chemical
Company ("Dow") and Nippon Steel Chemical Co., Ltd.
 
    SKYKLEEN(TM) aviation solvents are used for their cleaning
performance in the assembly of aircraft, original equipment
manufacture and repair for both commercial and military markets.
SKYKLEEN(TM) helps reduce volatile organic compound emissions in
maintenance shops and parts cleaning operations where volatile
solvents like methyl ethyl ketone currently are used. Additional
characteristics of this clear liquid include biodegradability,
low odor, non-ozone depletion and improved worker safety.

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    DEQUEST(R) water treatment chemicals are used to solve problems
in a number of heavy and light industrial applications. These
products offer functional properties such as sequestration, scale
inhibition and corrosion control. Competing products are marketed by
Albright & Wilson plc ("Albright & Wilson") and Bayer AG ("Bayer").
 
    Launched in 1996, GLACIER METALWORKING FLUIDS(TM) are the
industry's first protein-based fluids designed for machining
operations such as grinding, drilling and threading. The fluids are
biodegradable and practically non-toxic.
 
    Solutia's specialty industrial fluids are sold throughout the
world, with no single customer accounting for a significant level of
sales.
 
    The Industrial Products business unit expects to develop new
opportunities in its niche markets by continuing to develop and
introduce new products such as GLACIER METALWORKING FLUIDS(TM) and
by pursuing sales in additional geographic areas such as Asia and
Latin America. A joint venture with Jiangsu Chemical Pesticide Group
in Suzhou, China, manufactures THERMINOL(R) heat transfer fluids.
 
    Industrial Products relies on a number of raw materials such as
benzene and phenol, most of which are purchased from a number of
suppliers.
 
  INTERMEDIATES
 
    The Intermediates business unit manufactures more than three
dozen "building block" chemicals which are used by Solutia and other
companies to make a wide variety of finished products. Intermediates'
product lines include nylon intermediates, used internally and
sold to a number of fibers and plastics manufacturers worldwide;
chlorobenzenes, used in applications such as rubber chemicals,
pigments, antioxidants, herbicides, solvents and resins; and other
intermediates which are used to produce fertilizers, detergents and
animal feed supplements.
 
    Intermediates relies on aggressive cost control, exceptional
product quality, world-class manufacturing scale and proprietary
manufacturing technology to drive its competitive success. Its
strategy is to support the competitiveness of other Solutia products
by achieving the low-cost position on their critical "building
block" chemicals and to pursue profitable external sales of these
products. Intermediates has achieved a leading position in nylon
intermediates through a combination of proprietary technology and
scale.
 
    Intermediates obtains its key raw materials, including natural
gas, cyclohexane, propylene, benzene and chlorine, from a number of
suppliers.
 
    To reduce the costs of sourcing acrylonitrile and address
external sales opportunities, Intermediates has undertaken a
significant expansion of its acrylonitrile manufacturing capacity.
Three customers have provided advance payments in return for
long-term supply contracts of acrylonitrile or a byproduct. Also,
Intermediates plans two projects at Solutia's Pensacola, Florida
plant, one-step-phenol and phenol-to-ketone alcohol. These projects
are phased to supply new low-cost ketone alcohol for the Company's
nylon-based businesses in 2000. See "Item 2. PROPERTIES."
 
    The majority of the production of Intermediates is used
internally, with most of the external sales made to a limited number
of customers. In some product lines, external sales are dependent on
a major customer. However, in each of these cases, sales to internal
customers account for the majority of the business unit's production
capacity.
 
    Competitors vary by product line and by world region and include
Asahi Chemical Industry Co., Ltd. ("Asahi"), E.I. du Pont de Nemours
and Company ("DuPont"), BASF AG ("BASF") and Rhodia, the chemicals
subsidiary of Rhone-Poulenc S.A. ("Rhodia").
 
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  PHOSPHORUS DERIVATIVES
 
    Solutia has developed an extensive franchise in phosphorus
chemistry and is recognized as a world leader in developing and
marketing applications for phosphorus chemistry. Solutia is a
low-cost producer of phosphorus-based chemicals, and most of its
product technologies are proprietary. It also has a joint venture in
Brazil using purified wet acid technology to produce many of these
products. Although the Phosphorus Derivatives business unit has been
profitable, the Company is pursuing its sale, or alternatively, an
alliance or joint venture, in light of the global consolidation
anticipated for this industry.
 
    The Phosphorus Derivatives business unit manufactures products
for a wide range of industries:
 
    FOOD AND BEVERAGE. Solutia's phosphates are used in many food
products to improve texture, appearance and flavor. Branded products
include LEVN-LITE(R), PAN-O-LITE(R) and LEVERAGE(R) brand leavening
agents, used in baking; NUTRIFOS(R) sodium tripolyphosphate, used in
meat and poultry processing; and KATCH(TM) phosphate, used to extend
the shelf life of fish products.
 
    PERSONAL CARE PRODUCTS. Major toothpaste manufacturers around
the world rely on Solutia's oral care phosphates to improve the
performance of their products. Solutia has been a leader in the
development of dentifrice agents that are used to control tartar and
to polish and whiten teeth.
 
    SPECIALTY CHEMICALS. Solutia manufactures a number of
phosphorus-based intermediates which serve as key ingredients in oil
additives, pesticides and mining chemicals. Solutia also offers
high-purity phosphoric acid, used as a building block in the
manufacture of high-purity phosphate salts.
 
    INDUSTRIAL CLEANERS AND FIRE RETARDANTS. Solutia provides
specialized cleaning ingredients for commercial laundries,
restaurant and hospital dishwashing systems and vehicle wash
facilities. Solutia also makes and sells PHOS-CHEK(R) fire fighting
agent, used in aerial spraying to control forest fires and
wildfires.
 
    ELEMENTAL PHOSPHORUS. Solutia also offers for sale elemental
phosphorus sourced from the Company's P4 joint venture with
Monsanto.
 
    The primary competitors for the Phosphorus Derivatives business
unit are FMC Corporation, Albright & Wilson and Rhodia. The business
unit's primary raw material is elemental phosphorus, which is mined
and processed in Soda Springs, Idaho, at facilities which are
jointly owned by the Company and Monsanto through the P4 joint
venture. See "Principal Equity Affiliates."
 
FIBERS SEGMENT
 
  ACRILAN(R) ACRYLIC FIBERS
 
    Solutia is the largest producer of acrylic fiber in North
America. It manufactures and markets a full line of commodity and
specialty grades of this fiber, which is used to make finished
products such as apparel, craft yarns, upholstery fabrics and brake
fibers.
 
    Solutia's ACRILAN(R) trademark is widely recognized in the
industry, as are the following brand names which are used to
identify products made with ACRILAN(R) acrylic fibers: WEAR-DATED(R)
upholstery; DURASPUN(R) fibers; THE SMART YARNS(R) fibers (for
socks); and BOUNCE-BACK(R) fibers (for craft yarn).
 
    Solutia's principal competitor for acrylic fiber in North
America is Sterling Chemicals, Inc. Competitors worldwide include
MonteFibre S.p.A. (Italy), AKSA Akrilik Kimya Sanayii A.S. (Turkey),
Courtaulds plc (United Kingdom) (recently acquired by Akzo Nobel
N.V. ("Akzo Nobel")) and Mitsubishi Chemicals Corporation (Japan).
Acrylic fiber also competes against other fibers such as cotton and
polyester.
 
    The primary raw material for acrylic fiber is acrylonitrile,
which is produced internally by Intermediates and supplemented with
external purchases.
 
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    There are a variety of differentiated ACRILAN(R) brand products,
including producer-colored fiber, pigmented UV resistant fibers,
bi-component BOUNCE-BACK(R) fibers, DURASPUN(R) abrasion-resistant
fibers and technical fibers used in friction applications, as well
as precursor chemicals for carbon fibers. These products--and the
opportunity to develop sales in other parts of the Western
Hemisphere--represent the Acrylic Fibers business unit's best
opportunities for growth.
 
  CARPET FIBERS
 
    Solutia is the world's largest producer of nylon staple fiber
and a major supplier of nylon bulk continuous filament ("BCF") to
the carpet industry in North America. Its products are used by
carpet mills in the residential market (new construction and
replacement), the contract market (offices, hotels, restaurants,
retail and institutions) and the rug market. Its product portfolio
includes nylon 6,6 staple, BCF and acrylic staple fibers--offering
carpet mills a wide range of performance and styling characteristics.
 
    Solutia's products are marketed under two of the industry's most
respected brand names: WEAR-DATED(R) carpets for the residential
market and ULTRON VIP(TM) nylon for the contract or commercial
market. The WEAR-DATED(R) brand is widely recognized by consumers in
North America for its guarantee of the finished carpet's outstanding
quality and exceptional performance.
 
    Competitive success is determined by different factors in
different segments of the market. Overall, Carpet Fibers benefits
from vertical integration with Intermediates. In the residential
segment, branded products compete based on technical advances and
marketing programs, such as Solutia's warranty offered on
WEAR-DATED(R) carpets, retailer sales incentives and similar
activities.
 
    In contract markets, the basis for competition is product
performance and downstream marketing programs. The ULTRON VIP(TM)
nylon brand offers carpet makers an innovative mix of fiber shapes
and sizes that are specifically engineered for features such as
soil-hiding ability and extra bulk and cover. The Carpet Fibers
business unit works closely with the building design community to
develop new products which address the contract market's needs. It
also sells ULTRON(R) SD Solution-Dyed nylon 6,6, which offers
superior colorfastness and protection against harsh chemicals,
bacterial growth and stains.
 
    In 1998, Solutia launched WEAR-DATED(R) PET-AGREE(TM) carpet,
which has a special backing that prevents spills or pet accidents
from penetrating the padding and damaging the subflooring.
 
    The principal competitors for nylon carpet fiber in the United
States are DuPont, AlliedSignal Inc. ("AlliedSignal") and BASF.
Solutia and AlliedSignal offer both nylon staple and BCF products,
while DuPont and BASF are primarily BCF suppliers. Solutia owns and
operates the world's largest integrated nylon manufacturing plant in
Pensacola, Florida.
 
    Because of recent consolidation in the carpet mill industry, two
customers generate approximately 70% of Carpet Fibers' sales.
 
    Carpet Fibers receives almost all of its major raw materials
from Intermediates.
 
  NYLON INDUSTRIAL FIBERS
 
    Solutia makes and supplies a complete line of industrial-strength
nylon 6,6 fibers to a variety of manufacturing customers. The Nylon
Industrial Fibers business unit's product line features continuous
filament nylon 6,6 yarns in thickness ranging from 60 to 2000 deniers.
Heavier yarns are used for tire cord for heavy duty applications such
as bias tires for aircraft and trucks; mining conveyor belts; ropes;
and cargo slings. Lighter weight yarns are used to make backpacks,
ribbons, sewing threads and dental floss. Cost per unit of performance,
service (including the ability to tailor the properties of yarns for
use in specific applications) and breadth of product line are the major
drivers of success in the industrial fibers market. Solutia has built a
strong presence in the bias tire and other heavy-denier segments and in
industrial sewing threads. Sales to five major tire companies account
for approximately 35% of total Nylon Industrial Fibers sales.
 
    In 1997, Solutia increased spinning capacity with enhanced
spinning technology at its Greenwood, South Carolina plant. This
project used proprietary technology (licensed from Toray Industries
Inc.
 
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("Toray")) to improve product quality, enhance yarn performance and
tenacity and enable Solutia to achieve a low-cost position in key
segments of the market, including automotive airbags and high
performance tires.
 
    Nylon Industrial Fibers receives almost all of its major raw
materials from Intermediates. Competitors in the United States
include DuPont (the market leader) and AlliedSignal.
 
POLYMERS & RESINS SEGMENT
 
  NYLON PLASTICS & POLYMERS
 
    Solutia manufactures and markets a line of nylon 6,6 extrusion
polymers and nylon 6,6 polymers for fiber applications. In 1998,
Solutia formed a global alliance with Dow Plastics, a business unit
of Dow, to increase the applications, development and sales of
VYDYNE(R) nylon 6,6 molding resins in key plastics markets.
VYDYNE(R) nylon gives plastics molders the ability to provide their
products with enhanced performance characteristics, such as heat
resistance, chemical resistance and toughness. VYDYNE(R) nylon
molding resins are used in under-the-hood automotive components,
electrical connectors for telephone systems and computers, medical
devices and similar applications.
 
    Product performance, technical service, vertical integration and
breadth of product line are the major drivers of success in this
market. The Nylon Plastics & Polymers business unit relies on nylon
6,6 salt as its primary raw material. This material is produced
internally by Intermediates. The business unit's primary competitor
is DuPont. Other competitors include Rhodia and the Hoechst Group.
 
  POLYMER MODIFIERS
 
    Solutia manufactures and markets a line of polymer modifiers and
specialty plasticizers that are used to improve the performance of
flooring products, sealants, caulks, adhesives and other goods. Unit
brands include SANTICIZER(R) polymer modifiers and plasticizers and
SANTOTAC MRS(R), a flooring additive.
 
    The Polymer Modifiers business unit is focused on specialty
applications, in which technical expertise and processing knowledge
can be used to help customers obtain valuable performance attributes
in their products (such as flexibility, mar/scratch resistance,
stain resistance, enhanced gloss and flame retardance). Competitors
vary by product line and include Bayer and Akzo Nobel.
 
    Polymer Modifiers obtains its key raw materials from the U.S.
and Europe. Continued growth of SANTOTAC MRS(R) additives and
SANTICIZER(R) phosphate esters as well as geographic expansion
(particularly into central Europe and Asia) are expected to be the
primary drivers of growth.
 
  RESINS
 
    The Resins business unit manufactures and markets a line of
specialty resins which are used in the manufacture of products such
as thermoset paints and coatings, pressure sensitive adhesives,
paper coatings and plastic products, among others. Brands include
RESIMENE(R) amino crosslinkers, GELVA(R) pressure sensitive
adhesives, SANTOSOL(R) solvents, SCRIPSET(R) resins for paper
sizing, BUTVAR(R) specialty binders, MODAFLOW(R) flow and leveling
agents, CLEAR PASS(R) spray control systems and other fabricated
products.
 
    Resins provides technical expertise to help customers obtain
value-added performance characteristics. Major competitors vary by
product line and include Cytec Industries, Inc. (coatings and
surface size); National Starch and Chemical Co. and Ashland Inc.
(solution acrylic adhesives); Rohm & Haas Company and Air Products
and Chemicals, Inc. (emulsion water-based adhesives); and DuPont
(solvents which have improved environmental characteristics).
 
    Resins relies on a number of commodity chemicals as raw
materials, all of which are readily available. New products
(such as di-methyl esters, a solvent with improved environmental
characteristics) and
 
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geographic expansion (particularly into Europe, Latin America and
Asia) are expected to be the primary drivers of growth.
 
  SAFLEX(R) PLASTIC INTERLAYER
 
    Solutia is the world's largest producer of polyvinyl butyral
("PVB"), a plastic interlayer used in the manufacture of laminated
glass for automotive and architectural applications. This business
unit's products are marketed under the SAFLEX(R) (for automotive and
architectural applications), KEEPSAFE(R) and SAFLEX INSIDE(TM) (for
residential security windows) and KEEPSAFE MAXIMUM(TM) (for
hurricane protection) trademarks. In 1998, SAFLEX(R) Plastic
Interlayer completed commercializing SAFLEX IIIG(TM), a patented,
reformulated product which is designed to provide superior
processing and application performance. Continued business
development will be driven by the introduction of the reformulated
PVB product, by increased penetration of geographic markets
(especially Asia) and by the creation of new primary demand for PVB
in laminated glass worldwide for residential home security,
hurricane resistance and side and rear laminates in automobiles. A
SAFLEX(R) interlayer finishing plant began operation in Singapore in
early 1998.
 
    Five customers account for approximately 75% of total sales of
SAFLEX(R) products worldwide. SAFLEX(R) Plastic Interlayer relies on
vinyl acetate monomer, polyvinyl alcohol and butanol as raw
materials, all of which are readily available in the U.S. and
European markets. Sales volumes are influenced by shifts in
automotive production and commercial building construction, which
are cyclical businesses. The principal competitor in the manufacture
of PVB is DuPont.
 
PRINCIPAL EQUITY AFFILIATES
 
    Solutia participates in a number of joint ventures in which it
shares management control with other companies. Solutia's equity
earnings from affiliates were $25 million, $31 million and $21
million in 1998, 1997 and 1996, respectively. Principal joint
ventures include Flexsys, L.P. ("Flexsys"), Advanced Elastomer
Systems, L.P. ("A.E.S.") and the P4 joint venture.
 
    The Flexsys joint venture, headquartered in Belgium, is the
world's leading supplier of process chemicals to the rubber
industry. Its product line includes a number of branded accelerators
(SANTOCURE(R), THIOFIDE(R), THIOTAX(R)), pre-vulcanization
inhibitors (SANTOGARD(R)), antidegradants and antioxidants
(FLECTOL(R), SANTOWHITE(R)) and insoluble sulphur (CRYSTEX(R)).
Flexsys is a 50/50 joint venture between the Company and Akzo Nobel.
 
    A.E.S., headquartered in the United States, produces and sells
thermoplastic elastomers--materials that combine the processability
of thermoplastic and the functional performance of thermoset rubber
products. The joint venture's product lines include SANTOPRENE(R)
thermoplastic rubber and VISTAFLEX(R) thermoplastic elastomer.
A.E.S. is a 50/50 joint venture between Solutia and Exxon.
 
    The P4 joint venture, principally located at Soda Springs,
Idaho, mines phosphate rock and produces elemental phosphorous. This
joint venture was formed during the Spinoff, with Solutia obtaining
a 40% interest and Monsanto retaining the remaining 60%. Solutia
operates the joint venture under an operating agreement. The
elemental phosphorus produced by the P4 joint venture is sold to
both Monsanto and Solutia generally at cost with certain adjustments
to reflect ownership. Monsanto has priority for a certain percentage
of the production volume. Monsanto uses the elemental phosphorus as
a raw material in the manufacture of herbicides (including
Monsanto's Roundup(R) brand herbicide). Solutia uses the elemental
phosphorus as a raw material in the manufacture of phosphorus
derivatives, which Solutia then sells, and it sells the elemental
phosphorus to other users. In the event of a change of control of
Solutia or the sale of the phosphorus derivative business (including
Solutia's interest in the P4 joint venture), Monsanto has an option
to acquire Solutia's interest in the P4 joint venture at the then
book value. Monsanto is paying Solutia an annual fee for this
option.
 
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SALE OF PRODUCTS
 
    Solutia's products are sold directly to end users in various
industries, and to wholesalers, principally by Solutia's own sales
force. Solutia's marketing and distribution practices do not result
in unusual working capital requirements on a consolidated basis.
Inventories of finished goods, goods in process and raw materials
are maintained to meet customer requirements and Solutia's scheduled
production. In general, Solutia does not manufacture its products
against a backlog of firm orders; production is geared to the level
of incoming orders and to projections of future demand. Solutia
generally is not dependent upon one or a group of customers, and it
has no material contracts with the government of the United States,
or any state or local, or foreign government. In general, Solutia's
sales are not subject to seasonality.
 
RAW MATERIALS AND ENERGY RESOURCES
 
    Solutia is a significant purchaser of basic, commodity raw
materials, including propylene, cyclohexane, benzene and natural
gas. Major requirements for key raw materials and energy are
typically purchased pursuant to long-term contracts. Solutia is not
dependent on any one supplier for a material amount of its raw
materials or energy requirements, but certain important raw
materials are obtained from a few major suppliers. In general, where
Solutia has limited sources of raw materials, it has developed
contingency plans to minimize the effect of any interruption or
reduction in supply. Information regarding specific raw materials is
provided under "Description of Principal Products and Competitive
Situation."
 
    While temporary shortages of raw materials and energy may
occasionally occur, these items are generally sufficiently available
to cover current and projected requirements. However, their
continuing availability and price are subject to unscheduled plant
interruptions occurring during periods of high demand, or due to
domestic and world market and political conditions, as well as to
the direct or indirect effect of U.S. and other countries'
government regulations. The impact of any future raw material and
energy shortages on Solutia's business as a whole or in specific
world areas cannot be accurately predicted.
 
PATENTS AND TRADEMARKS
 
    Solutia owns a large number of patents which relate to a wide
variety of products and processes, has pending a substantial number
of patent applications and is licensed under a small number of
patents owned by others. Solutia owns a considerable number of
established trademarks in many countries under which it markets its
products. Such patents and trademarks in the aggregate are of
material importance in the operations of Solutia and to its
Chemicals, Fibers and Polymers & Resins operating segments.
 
COMPETITION
 
    Solutia encounters substantial competition with respect to each
of its product lines. This competition, from other manufacturers of
the same products and from manufacturers of different products
designed for the same uses, is expected to continue in both U.S. and
ex-U.S. markets. Depending on the product involved, various types of
competition are encountered, including price, delivery, service,
performance, product innovation, product recognition and quality.
Overall, Solutia regards its principal product groups to be
competitive with many other products of other producers and believes
that it is an important producer of many such product groups. For
information regarding competition in specific markets, see
"Description of Principal Products and Competitive Situation."
 
RESEARCH AND DEVELOPMENT
 
    Research and development constitute an important part of
Solutia's activities. In recent years, Solutia's research and
development expenses amounted to approximately 2.3% of sales on
average, or $60 million, $60 million and $81 million in 1998, 1997
and 1996, respectively. Solutia focuses its research and development
expenditures on process improvements and select product development.
 
                                 8
 <PAGE>
<PAGE>

    Products launched recently as a result of internal development
include a new low-temperature cure crosslinker for paints
(RESIMENE(R) CE-7103), a new adhesive used in self-adhesive postage
stamps (GME 3026), a new nylon staple product for loop carpets, a
new carpet product for pet owners (WEAR-DATED(R) PET-AGREE(TM)) and
a plastic interlayer reformulated for improved edge stability and
moisture sensitivity (SAFLEX IIIG(TM)).
 
    Solutia also actively pursues technologies from around the world
that are expected to bring value to its business. Recent examples
include technology for one-step phenol production, which was
licensed from Boreskov Institute of Catalysis in Russia, and which
Solutia is actively seeking to license to third parties; and nylon
industrial spinning technology, licensed from Toray in Japan.
Solutia is actively licensing technologies to other firms, such as
acrylic fiber spinning, acrylonitrile manufacturing and others.
 
ENVIRONMENTAL MATTERS
 
    The narrative information appearing under "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Environmental Matters" on pages 23 and 24 of the 1998
Annual Report is incorporated herein by reference.
 
EMPLOYEE RELATIONS
 
    As of December 31, 1998, Solutia had approximately 8,700
employees worldwide. Satisfactory relations have prevailed between
Solutia and its employees. Solutia uses self-directed work teams,
incentive programs and other initiatives to keep employees actively
involved in the success of the business. The vast majority of
Solutia's employees have options to purchase Company common stock.
Approximately 20% of Solutia's workforce is represented by various
labor unions.
 
INTERNATIONAL OPERATIONS
 
    Solutia and its affiliated companies are engaged in manufacturing,
sales and research and development in areas outside the United States,
including Europe, Canada, Latin America and Asia. Approximately 30%
of Solutia's overall 1998 sales were made into markets outside the
United States. Operations outside the United States are potentially
subject to a number of risks and limitations which are not present in
domestic operations, including fluctuations in currency values, trade
restrictions, investment regulations, governmental instability and
other potentially detrimental governmental practices or policies
affecting companies doing business abroad. Solutia's Chemicals and
Polymers & Resins segments are particularly dependent upon their
international operations. Approximately one-third and one-half of
their 1998 sales, respectively, were made into markets outside the
United States.
 
                                 9
 <PAGE>
<PAGE>

ITEM 2. PROPERTIES.
 
    The general offices of the Company are located in St. Louis
County, Missouri in premises leased from Monsanto. The Company is
scheduled to move into a new leased facility in St. Louis County in
the third quarter of 1999. Solutia's European headquarters are
located in Louvain La Neuve, Belgium, in premises leased from the
University of Louvain. Solutia also has research laboratories,
research centers and manufacturing locations worldwide. In addition
to the general offices, Solutia has the following principal
facilities all of which are owned:
 
<TABLE>
<CAPTION>
Plant Site                                 Business Units Served
----------                                 ---------------------
<S>                                        <C>
Anniston, Alabama......................    Industrial Products
 
Augusta, Georgia.......................    Phosphorus Derivatives
 
Carondelet (St. Louis, Missouri).......    Phosphorus Derivatives
 
Chocolate Bayou (Alvin, Texas).........    Industrial Products, Intermediates
 
Decatur, Alabama.......................    ACRILAN(R) Acrylic Fiber, Intermediates, Research Center
 
Delaware River
  (Bridgeport, New Jersey).............    Industrial Products, Intermediates, Polymer Modifiers
 
Foley, Alabama.........................    Carpet Fibers, Nylon Plastics & Polymers
 
Ghent, Belgium.........................    Resins, SAFLEX(R) Plastic Interlayer
 
Greenwood, South Carolina..............    Carpet Fibers, Nylon Industrial Fibers, Intermediates,
                                           Nylon Plastics & Polymers
Indian Orchard
  (Springfield, Massachusetts).........    Research Center, Resins, SAFLEX(R) Plastic Interlayer
 
Krummrich (Sauget, Illinois)...........    Intermediates, Phosphorus Derivatives
 
LaSalle, Canada........................    Polymer Modifiers, Resins
 
Newport, Wales (U.K.)..................    Industrial Products, Polymer Modifiers, Resins
 
Pensacola, Florida.....................    Carpet Fibers, Nylon Industrial Fibers, Intermediates,
                                           Nylon Plastics & Polymers, Research Center
 
Queeny (St. Louis, Missouri)...........    Industrial Products
 
Singapore..............................    SAFLEX(R) Plastic Interlayer
 
Trenton, Michigan......................    Phosphorus Derivatives, Resins, SAFLEX(R) Plastic
                                           Interlayer
 
Westport (St. Louis, Missouri).........    Resins
</TABLE>
 
    Solutia also owns certain buildings and production equipment,
and leases the underlying real estate, used to produce products for
the indicated business units at the following Monsanto sites:
 
<TABLE>
<CAPTION>
Plant Site                                 Business Units Served
----------                                 ---------------------
<S>                                        <C>
Antwerp, Belgium.......................    Industrial Products, Polymer Modifiers, SAFLEX(R)
                                           Plastic Interlayer
 
Luling, Louisiana......................    Intermediates
 
Sao Jose dos Campos, Brazil............    Industrial Products, Phosphorus Derivatives, SAFLEX(R)
                                           Plastic Interlayer
</TABLE>
 
                                 10
 <PAGE>
<PAGE>

    Monsanto and Solutia have entered into certain operating
agreements (the "Operating Agreements") with respect to each of the
three facilities listed above and Chocolate Bayou in Alvin, Texas.
Under these Operating Agreements, Solutia is the guest (the "Guest")
and Monsanto is the operator (the "Operator") at all of the
facilities except the Chocolate Bayou facility, at which Monsanto is
the Guest and Solutia is the Operator. Pursuant to each of the
Operating Agreements, the Operator, as an independent contractor,
provides, or arranges for the provision of, such production, utility
and certain ancillary services as are reasonably necessary or
required for the Guest's production operations at the facility, and
the Operator leases to the Guest the real property at the facility
that is used in connection with the Guest's production operations.
The Guest is required to pay all direct and indirect costs incurred
by the Operator in the performance or supply of such services, plus
an agreed upon return on the net capital employed in connection with
the respective Operating Agreement. The Guest owns the production
assets related to its operations at the facility.
 
    The initial term of each of the Operating Agreements is 20
years. After the initial term, the Operating Agreements continue
indefinitely unless and until terminated by either party upon at
least 24 months' prior written notice. Each of the Operating
Agreements also provides that, under certain circumstances, either
the Operator or the Guest may terminate the Operating Agreement
prior to the expiration of its initial term.
 
    The Operating Agreements contain provisions requiring the Guest
to indemnify the Operator for all losses (other than environmental
liabilities) arising out of the operation of the facility or the
provision of services, except to the extent that such losses are
caused by the Operator's willful misconduct or fraud. The Operating
Agreements also apportion certain environmental liabilities.
 
    Solutia operates several facilities for third parties in
addition to Monsanto, principally within the Chocolate Bayou,
Krummrich and Pensacola sites, under long-term lease and operating
agreements.
 
    Solutia's principal plants are suitable and adequate for their
use. Utilization of these facilities may vary with seasonal,
economic and other business conditions, but none of the principal
plants is substantially idle. The facilities generally have
sufficient capacity for existing needs and expected near-term
growth.
 
    Solutia has commenced construction of a world-scale
acrylonitrile production facility at Chocolate Bayou which employs
Solutia's proprietary catalyst system and is expected to be capable
of producing in excess of 500 million pounds annually. Solutia has
agreements with customers who will participate in this project
including Bayer, Novus International Inc. and Asahi. In addition,
Solutia plans to undertake three other construction projects during
1999 and 2000. These include two projects at the Pensacola, Florida
site to produce intermediates in the nylon manufacturing process,
one a phenol production facility and the other a phenol processing
facility; and an expansion of the adiponitrile production facility
at the Decatur, Alabama site. These projects will require the
Company to manage more engineering and construction activity than it
has had to supervise in recent years.
 
    Solutia is an active participant in the safety and health
Voluntary Protection Program ("VPP") administered by OSHA for sites
in the U.S., and implemented by Solutia for sites outside the U.S.
Currently, 11 Company sites in the U.S. qualify for the OSHA VPP
"Star" designation, a rating designating full compliance, and one
site for the OSHA VPP "Merit" status. Three other Solutia sites, two
in Europe and one in Canada, have achieved the Solutia "Star"
designation, which is an internal equivalent to the OSHA
designation.
 
ITEM 3. LEGAL PROCEEDINGS.
 
    At the time of the Spinoff, the Company assumed from Monsanto,
pursuant to the Distribution Agreement, liabilities related to
specified legal proceedings. As a result, although Monsanto remains
the named defendant, the Company will manage the litigation and
indemnify Monsanto for costs, expenses and judgments arising from
such litigation. Most of these proceedings have arisen in the
ordinary course of business and involve claims for money damages.
While the results of litigation cannot be predicted with certainty,
Solutia does not believe these matters or their ultimate disposition
will have a material
 
                                 11
 <PAGE>
<PAGE>

adverse effect on Solutia's consolidated financial position,
profitability or liquidity in any one year, as applicable. The
following describes certain proceedings to which the Company is a
party or to which Monsanto is a party and for which the Company
assumed any liabilities as of the Distribution Date pursuant to the
Distribution Agreement.
 
    On April 12, 1985, Monsanto was named as a defendant in Alanis
et al. v. Farm & Home Savings, et al., filed in the District Court
in Harris County, Texas, the first of a number of lawsuits in which
plaintiffs claim injuries resulting from alleged exposure to
substances present at or emanating from the Brio Superfund site near
Houston, Texas. Monsanto is one of a number of companies that sold
materials to the chemical reprocessor at that site. Currently
pending are the following matters: (1) Monsanto is one of a number
of defendants in five cases brought in Harris County District Court
or the United States District Court for the Southern District of
Texas on behalf of 120 plaintiffs who owned homes or lived in
subdivisions near the Brio site, attended school near the site or
used nearby recreational baseball fields. Plaintiffs claim to have
suffered various personal injuries and fear future disease; they
assert the need for medical monitoring, and, in the case of the
homeowners, claim property damage. In addition to their claims of
personal injury, four plaintiffs in one of these cases allege
business losses. Plaintiffs seek compensatory and punitive damages
in an unspecified amount. (2) Monsanto is one of a number of
defendants in two actions brought in Harris County District Court on
behalf of 396 plaintiffs, who are former employees of the
owners/operators of the Brio site, and members of the employees'
families or persons who worked near the Brio site. Plaintiffs in one
of these actions also owned homes or lived in subdivisions near the
site, attended schools near the site or used nearby recreational
ball fields. Plaintiffs claim physical and emotional injury and seek
compensatory and punitive damages in an unspecified amount. The
Company believes that there are meritorious defenses to all of these
lawsuits including lack of proximate cause, lack of negligent or
other improper conduct on the part of Monsanto or Solutia, and
negligence of plaintiffs (or their parents) and/or of builders and
developers of the Southbend subdivision. These actions are being
vigorously defended.
 
    On November 15, 1993, Monsanto was named as a defendant in Dyer
et al. v. Monsanto Company, et al., filed in the Circuit Court in
St. Clair County, Alabama, the first of a number of lawsuits in
which plaintiffs claim to have sustained personal injuries or
property damage as a result of the discharge of hazardous
substances, including polychlorinated biphenyls ("PCBs"), from its
Anniston, Alabama plant site. The following matters are currently
pending: (1) Monsanto is a defendant in two cases pending in Circuit
Court in St. Clair County, Alabama which have been consolidated and
certified as a class action on behalf of all property owners in a
specified area along waterways near the plant. Monsanto is a
defendant in an additional action filed in Circuit Court in Shelby
County, Alabama on behalf of a purported class of property owners
farther downstream along this waterway. Plaintiffs in both actions
claim loss in the value of their property. Plaintiffs in the Shelby
County action additionally claim increased risk of illness,
emotional distress and the need for medical monitoring. Plaintiffs
seek compensatory and punitive damages in an unspecified amount. (2)
Monsanto is a defendant in 12 additional cases brought in Circuit
Court in Calhoun County, Circuit Court in St. Clair County, Circuit
Court in Taladega County or in U.S. District Court in the Northern
District of Alabama on behalf of 4,575 individual plaintiffs who own
or rent homes or own or operate businesses near the plant or along
waterways near the plant or who attend churches near the plant.
Plaintiffs claim to have suffered various personal injuries and fear
future disease; they assert the need for medical monitoring and claim
to have suffered loss in the value of their property or commercial
injury. They seek compensatory and punitive damages of $3 million or
in unspecified amounts for each plaintiff. (3) The Company received
a letter dated March 12, 1998, giving notice of intention to file a
Citizens' Suit pursuant to the Resource Conservation and Recovery
Act, 42 U.S.C. Sections 6972(a)(1)(B) and (b)(2)(A) and the Toxic
Substances Control Act, 15 U.S.C. Sections 2619(a)(1) and (b)(1)(A)
on behalf of four named individuals who are also plaintiffs in other
pending litigation relating to the Anniston plant. The notice claims
that solid or hazardous wastes have been released from the Anniston
plant and pose an imminent and substantial threat to health or the
environment. Plaintiffs seek statutory penalties of $25,000 per day
for a period of more than 5 years, for a total of $46 million, plus
attorneys' fees and expenses. The Company believes that there are
meritorious defenses to all these matters, including lack of any
physical injury or property damage to plaintiffs, lack of
 
                                 12
 <PAGE>
<PAGE>

any imminent or substantial endangerment to health or the
environment and lack of negligence or improper conduct on the part
of the Company or Monsanto. These actions are being vigorously
defended.
 
RISK MANAGEMENT
 
    Solutia has evaluated risk retention and insurance levels for
product liability, property damage and other potential areas of
risk. Solutia will continue to devote significant effort to
maintaining and improving safety and internal control programs,
which reduce its exposure to certain risks. Management decides the
amount of insurance coverage to purchase from unaffiliated companies
and the appropriate amount of risk to retain based on the cost and
availability of insurance and the likelihood of a loss. Management
believes that the levels of risk retention which it has implemented
are consistent with those of other companies in the chemical
industry. There can be no assurance that Solutia will not incur
losses beyond the limits, or outside the coverage, of its insurance.
Solutia's consolidated financial position, profitability and
liquidity are not expected to be affected materially by the levels
of risk retention that it accepts.
 
    Under the Distribution Agreement, Solutia is entitled to the
benefit of liability insurance coverage under certain Monsanto
policies, to the extent such coverage existed and coverage limits
are not exhausted, for claims for which it is assuming
responsibility. Such insurance coverage generally will be shared
with Monsanto for other liabilities existing prior to the
Distribution Date which Monsanto has retained, on an as available
basis, without allocation.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
    No matters were submitted to the security holders during the
fourth quarter of 1998.
 
                                 13
 <PAGE>
<PAGE>

                          PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS.
 
    The narrative and tabular information regarding the market for
the Company's common equity and related stockholder matters
appearing under "Financial Summary" on page 44 of the 1998 Annual
Report is incorporated herein by reference.
 
    The declaration and payment of dividends is made at the
discretion of the Company's Board of Directors. In October 1998, the
Board approved a change in dividend policy. Beginning in 1999, in
accordance with this policy, cash dividends will be paid on an
annual basis in December, rather than quarterly. The Board
anticipates that the current 4 cent annual dividend will remain
unchanged for the foreseeable future.
 
    The Company's stock is traded principally on the New York Stock
Exchange under the symbol "SOI."
 
ITEM 6. SELECTED FINANCIAL DATA.
 
    The tabular information under "Financial Summary" appearing on
page 44 of the 1998 Annual Report is incorporated herein by
reference.
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS.
 
    The information appearing under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages
20 through 27 of the 1998 Annual Report is incorporated herein by
reference.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
    The information appearing under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Derivative
Financial Instruments" on pages 26 and 27 of the 1998 Annual Report
is incorporated herein by reference.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
    The consolidated financial statements of Solutia appearing on
pages 28 through 43; the Report of Independent Auditors' Opinion
appearing on page 19; and the tabular and narrative information
appearing under "Quarterly Data" on page 43 of the 1998 Annual
Report are incorporated herein by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
        AND FINANCIAL DISCLOSURE.
 
    None.
 
                                 14
 <PAGE>
<PAGE>

                          PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
    Information regarding directors and executive officers appearing
under "Election of Directors" on pages 4 through 6 of the Solutia
Inc. Notice of Annual Meeting and Proxy Statement (the "1999 Proxy
Statement") dated March 15, 1999, is incorporated herein by
reference. The following information regarding Executive Officers of
the Company on March 1, 1999, is included pursuant to Instruction 3
of Item 401(b) of Regulation S-K:
 
<TABLE>
<CAPTION>
                                                                     Year
                                                                     First
                                                                    Became
                                                                      an
                                                                   Executive
       Name-Age                  Present Position with Registrant   Officer     Other Business Experience since January 1, 1994
-------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                               <C>          <C>
Robert G. Potter, 59             Chairman, Chief Executive           1997       Chief executive of chemical businesses of
                                 Officer and Director                           Monsanto Company, 1986-1997. Executive Vice
                                                                                President of Monsanto, 1990-1997. Advisory
                                                                                Director of Monsanto, 1986-1997.
 
Karl R. Barnickol, 57            Senior Vice President, General      1997       Associate General Counsel and Assistant
                                 Counsel and Secretary                          Secretary of Monsanto, 1985-1997.
 
Rodney L. Bishop, 58             Vice President and Treasurer        1997       General Auditor of Monsanto, 1993-1997.
 
A. Hameed Bhombal, 53            Vice President-Technology and       1999       Vice President and General Manager, Nylon
                                 Chief Technical Officer                        Industrial Fibers, 1997-1999. Director,
                                                                                Technology, Fibers Business Unit, of Monsanto,
                                                                                1993-1997.
 
Dennis L. Cavner, 44             Vice President, Operations          1997       Director, Manufacturing, SAFLEX(R) Plastic
                                 Excellence                                     Interlayer, of Monsanto, 1996-1997. Director,
                                                                                Manufacturing, Phosphorus and Derivatives, of
                                                                                Monsanto, 1995-1996. Plant Manager of
                                                                                Monsanto's Muscatine, Iowa facility, 1992-1995.
 
Robert A. Clausen, 54            Senior Vice President and Chief     1997       President, Monsanto Business Services,
                                 Financial Officer; Advisory                    1994-1997. Vice President, Asset Management, of
                                 Director                                       Monsanto, 1992-1994.
 
Sheila B. Feldman, 44            Vice President, Human Resources     1997       Director, Human Resources, Monsanto Business
                                                                                Services and Stewardship, 1995-1997. Director,
                                                                                Human Resources, The Chemical Group of
                                                                                Monsanto, 1993-1995.
 
John J. Ferguson, 46             Senior Vice President, Shared       1998       Vice President and General Manager, SAFLEX(R)
                                 Services and Supply Chain                      Plastic Interlayer, 1997-1998. President,
                                                                                SAFLEX(R) Plastic Interlayer, of Monsanto,
                                                                                1994-1997. Vice President and General Manager,
                                                                                SAFLEX(R) Plastic Interlayer and Vice President
                                                                                Europe/Africa Operations, The Chemical Group of
                                                                                Monsanto, 1993-1994.
 
                                 15
 <PAGE>
<CAPTION>
                                                                     Year
                                                                     First
                                                                    Became
                                                                      an
                                                                   Executive
       Name-Age                  Present Position with Registrant   Officer     Other Business Experience since January 1, 1994
-------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                               <C>          <C>
G. Bruce Greer, Jr., 38          Vice President, Commercial          1997       Senior Director, Strategic Change, of Monsanto,
                                 Development                                    1996-1997. Associate Manager and Principal of
                                                                                Gemini Consulting, a management consulting
                                                                                firm, 1992-1996.
 
Roger S. Hoard, 54               Vice President and Controller       1997       Senior Director, Finance, Monsanto Business
                                                                                Services, 1995-1997. Controller, Fibers
                                                                                Division, The Chemical Group of Monsanto, 1990-
                                                                                1995.
 
John C. Hunter III, 52           President, Chief Operating          1997       President, Fibers Business Unit, of Monsanto,
                                 Officer and Director                           1995-1997. Vice President and General Manager,
                                                                                Fibers Division and Asia-Pacific, The Chemical
                                                                                Group of Monsanto, 1993-1995.
 
Michael E. Miller, 57            Vice Chairman; Advisory Director    1997       President, Specialty Products Business Unit of
                                                                                Monsanto, 1995-1997. Group Vice President,
                                                                                Industrial Products of Monsanto, 1993-1995.
                                                                                Senior Vice President, Operations, The Chemical
                                                                                Group of Monsanto, 1993-1995.
 
John F. Saucier, 45              Vice President, Strategic           1998       Vice President, Strategic Planning, Mergers and
                                 Planning and Corporate                         Acquisitions, 1997-1998. Director, Marketing,
                                 Development                                    SAFLEX(R) Plastic Interlayer, of Monsanto,
                                                                                1995-1996. Manager, Worldwide Marketing, SAFLEX
                                                                                Division, The Chemical Group of Monsanto,
                                                                                1993-1995.
</TABLE>
 
    The above listed individuals are elected to the offices set
opposite their names to hold office until their successors are duly
elected and have qualified, or until their earlier death,
resignation or removal.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
    Information appearing under "Compensation of Directors" on page
8 and under "Compensation of Executive Officers" on pages 15 through
18 of the 1999 Proxy Statement is incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT.
 
    Information appearing under "Ownership of Company Common Stock"
on pages 9 and 10 of the 1999 Proxy Statement is incorporated herein
by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
    None.
 
                                 16
 <PAGE>
<PAGE>
                              PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
         FORM 8-K.
 
    (a) Documents filed as part of this Report:
 
        1. The financial statements set forth at pages 28 through 43
           and the Report of Independent Auditors on page 19 of the
           1998 Annual Report (See Exhibit 13 under Paragraph (a)3
           of this Item 14)
 
        2. Financial Statement Schedules
 
           The following supplemental schedule for the years
           ended December 31, 1998, 1997 and 1996:
 
                 V--Valuation and Qualifying Accounts
 
           All other supplemental schedules are omitted because
           of the absence of the conditions under which they are
           required.
 
        3. Exhibits--See the Exhibit Index beginning at page 22 of
           this Report. For a listing of all management contracts and
           compensatory plans or arrangements required to be filed as
           Exhibits to this Form 10-K, see the Exhibits listed under
           Exhibit Nos. 10(a), 10(b), 10(d), 10(e), 10(f), 10(h),
           10(i), 10(j), 10(k) and 10(l) on pages 22 and 23 of the
           Exhibit Index. The following Exhibits listed in the
           Exhibit Index are filed with this Report:

                 3(b)   By-Laws of the Company
 
                 13     The Company's 1998 Annual Report to Stockholders
 
                 21     Subsidiaries of the Registrant (see page 24)
 
                 23     Consent of Independent Auditors (see page 25)
 
                 24(a)  Powers of Attorney submitted by Robert G. Potter,
                        John C. Hunter III, Robert A. Clausen, Roger S.
                        Hoard, Robert T. Blakely, Joan T. Bok, Paul H.
                        Hatfield, Robert H. Jenkins, Howard M. Love,
                        Frank A. Metz, Jr., William D. Ruckelshaus
                        and John B. Slaughter
 
                 24(b)  Certified copy of Board resolution authorizing
                        Form 10-K filing utilizing powers of attorney
 
                 27     Financial Data Schedule (part of electronic
                        submission only)
 
    (b) Reports on Form 8-K during the quarter ended December 31,
        1998:
 
    The Company did not file any Reports on Form 8-K during the
quarter ended December 31, 1998.
 
                                 17
 <PAGE>
<PAGE>
                   REPORT OF INDEPENDENT AUDITORS
 
Solutia Inc.:
 
    We have audited the statements of consolidated financial
position of Solutia Inc. and Subsidiaries as of December 31, 1998
and 1997 and the related statements of consolidated income,
shareholders' equity (deficit) and cash flow for each of the three
years in the period ended December 31, 1998 and have issued our
opinion thereon dated February 24, 1999 (which includes an
explanatory paragraph as to a change in method of accounting in
1997); such financial statements and opinion are included in your
1998 Annual Report to shareholders and are incorporated herein by
reference. Our audits also comprehended the schedule of Solutia Inc.
and Subsidiaries, listed in Item 14(a)2. This schedule is the
responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.


 
/s/ DELOITTE & TOUCHE LLP

DELOITTE & TOUCHE LLP
 
Saint Louis, Missouri
February 24, 1999
 
                                 18
 <PAGE>
<PAGE>
                                                          SCHEDULE V


<TABLE>
                                                    SOLUTIA INC.
                                                    ------------
 
                                         VALUATION AND QUALIFYING ACCOUNTS
                                FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

                                                   (IN MILLIONS)

<CAPTION>
                     COLUMN A                             COLUMN B        COLUMN C        COLUMN D        COLUMN E
                     --------                             --------        --------        --------        --------

                                                                         Additions
                                                         Balance at      Charged to                      Balance at
                                                         Beginning       Costs and                         End of
                    Description                           of Year         Expenses       Deductions         Year
-------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>             <C>             <C>             <C>
 
Year Ended December 31, 1998:

    Reserves deducted from related assets in the
      Statement of Consolidated Financial Position:

    Valuation accounts, principally for doubtful
      receivables and returns and allowances                $7              $2              $1              $8
 
Year Ended December 31, 1997:

    Reserves deducted from related assets in the
      Statement of Consolidated Financial Position:

    Valuation accounts, principally for doubtful
      receivables and returns and allowances                $9              $1              $3              $7
 
Year Ended December 31, 1996:

    Reserves deducted from related assets in the
      Statement of Consolidated Financial Position:

    Valuation accounts, principally for doubtful
      receivables and returns and allowances                $7              $2              --              $9
</TABLE>
 
                                 19
 <PAGE>
<PAGE>

                          SIGNATURES
 
    Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
                                              SOLUTIA INC.
 
                                   By:     /s/ ROGER S. HOARD  
                                      -------------------------------
                                             Roger S. Hoard
                                       Vice President and Controller
                                       (Principal Accounting Officer)
 
Date: March 16, 1999

    Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
 
<TABLE>
<CAPTION>
                  SIGNATURE                                        TITLE                             DATE
                  ---------                                        -----                             ----
<C>                                            <S>                                            <C>
 
                    <F*>                       Chairman, Chief Executive Officer and            March 16, 1999
---------------------------------------------  Director (Principal Executive Officer)
              Robert G. Potter
 
                    <F*>                       President and Director                           March 16, 1999
---------------------------------------------
             John C. Hunter III
 
                    <F*>                       Senior Vice President and                        March 16, 1999
---------------------------------------------  Chief Financial Officer
              Robert A. Clausen                (Principal Financial Officer)
 
             /s/ ROGER S. HOARD                Vice President and Controller                    March 16, 1999
---------------------------------------------  (Principal Accounting Officer)
               Roger S. Hoard
 
                    <F*>                       Director                                         March 16, 1999
---------------------------------------------
              Robert T. Blakely
 
                    <F*>                       Director                                         March 16, 1999
---------------------------------------------
                 Joan T. Bok
 
                    <F*>                       Director                                         March 16, 1999
---------------------------------------------
              Paul H. Hatfield
 
                                 20
 <PAGE>



                    <F*>                       Director                                         March 16, 1999
---------------------------------------------
              Robert H. Jenkins
 
                    <F*>                       Director                                         March 16, 1999
---------------------------------------------
               Howard M. Love
 
                    <F*>                       Director                                         March 16, 1999
---------------------------------------------
             Frank A. Metz, Jr.
                                                            
                    <F*>                       Director                                         March 16, 1999
---------------------------------------------
           William D. Ruckelshaus
 
                    <F*>                       Director                                         March 16, 1999
---------------------------------------------
              John B. Slaughter

<FN>
<F*>Karl R. Barnickol, by signing his name hereto, does sign this document on
behalf of the above noted individuals, pursuant to powers of attorney duly
executed by such individuals which have been filed as an Exhibit to this Form
10-K.
</TABLE>
 
                                                   /s/ KARL R. BARNICKOL
                                           ------------------------------------
                                                     Karl R. Barnickol
                                                     Attorney-in-Fact


                                 21
 <PAGE>
<PAGE>
                           EXHIBIT INDEX
 
    These Exhibits are numbered in accordance with the Exhibit Table
of Item 601 of Regulation S-K.
 
Exhibit No.      Description
-----------      -----------
 
 2               Distribution Agreement (incorporated herein by reference to
                 Exhibit 2 of the Company's Registration Statement on Form
                 S-1 (333-36355) filed on September 25, 1997)
 
 3(a)            Restated Certificate of Incorporation of the Company
                 (incorporated herein by reference to Exhibit 3(a) of the
                 Company's Registration Statement on Form S-1 (333-36355)
                 filed on September 25, 1997)
 
 3(b)            By-Laws of the Company
 
 4(a)            Rights Agreement (incorporated herein by reference to
                 Exhibit 4 of the Company's Registration Statement on Form 10
                 filed on August 7, 1997)
 
 4(b)            Indenture dated as of October 1, 1997, between Solutia Inc.
                 and The Chase Manhattan Bank, as Trustee (incorporated
                 herein by reference to Exhibit 4.1 of the Company's Form
                 10-Q for the quarter ended September 30, 1997, filed on
                 November 12, 1997)
 
 4(c)            6.5% Notes due 2002 in the principal amount of $150,000,000
                 (incorporated herein by reference to Exhibit 4.2 of the
                 Company's Form 10-Q for the quarter ended September 30,
                 1997, filed on November 12, 1997)
 
 4(d)            7.375% Debentures due 2027 in the principal amount of
                 $200,000,000 (incorporated herein by reference to Exhibit
                 4.3 of the Company's Form 10-Q for the quarter ended
                 September 30, 1997, filed on November 12, 1997)
 
 4(e)            7.375% Debentures due 2027 in the principal amount of
                 $100,000,000 (incorporated herein by reference to Exhibit
                 4.4 of the Company's Form 10-Q for the quarter ended
                 September 30, 1997, filed on November 12, 1997)
 
 4(f)            6.72% Debentures due 2037 in the principal amount of
                 $150,000,000 (incorporated herein by reference to Exhibit
                 4.5 of the Company's Form 10-Q for the quarter ended
                 September 30, 1997, filed on November 12, 1997)
 
 9               Omitted--Inapplicable
 
10(a)            Financial Planning and Tax Preparation Services Program for
                 the Executive Leadership Team (incorporated herein by
                 reference to Exhibit 10(a) of the Company's Form 10-K for
                 the year ended December 31, 1997, filed on March 13, 1998)
 
10(b)            Employee Benefits Allocation Agreement (incorporated herein
                 by reference to Exhibit 10(a) of the Company's Registration
                 Statement on Form S-1 (333-36355) filed on September 25,
                 1997)
 
10(c)            Tax Sharing and Indemnification Agreement (incorporated
                 herein by reference to Exhibit 10(b) of the Company's
                 Registration Statement on Form S-1 (333-36355) filed on
                 September 25, 1997)
 
10(d)            Solutia Inc. Management Incentive Replacement Plan
                 (incorporated herein by reference to Exhibit 10(c) of the
                 Company's Registration Statement on Form S-1 (333-36355)
                 filed on September 25, 1997)
 
10(e)            Solutia Inc. 1997 Stock-Based Incentive Plan (incorporated
                 herein by reference to Exhibit 10(d) of the Company's
                 Registration Statement on Form S-1 (333-36355) filed on
                 September 25, 1997)

                                 22
 <PAGE>
<PAGE>

                            EXHIBIT INDEX (cont'd)

Exhibit No.      Description
-----------      -----------

10(f)            Solutia Inc. Non-Employee Director Compensation Plan
                 (incorporated herein by reference to Exhibit 10(e) of the
                 Company's Registration Statement on Form S-1 (333-36355)
                 filed on September 25, 1997)
 
10(g)            $800,000,000 Credit Agreement, dated as of August 14, 1997,
                 among Solutia Inc., the initial lenders named therein, Bank
                 of America National Trust and Savings Association and
                 Citibank, N.A. (incorporated herein by reference to Exhibit
                 10(f) of the Company's Registration Statement on Form S-1
                 (333-36355) filed on September 25, 1997)
 
10(h)            Form of Employment Agreement with Named Executive Officers
                 (incorporated herein by reference to Exhibit 10(1) of the
                 Company's Form 10-Q for the quarter ended March 31, 1998,
                 filed on May 7, 1998)
 
10(i)            Form of Employment Agreement with other executive officers
                 (incorporated herein by reference to Exhibit 10(2) of the
                 Company's Form 10-Q for the quarter ended March 31, 1998,
                 filed on May 7, 1998)
 
10(j)            Solutia Inc. Annual Incentive Plan (incorporated herein by
                 reference to Appendix A of the Solutia Inc. Notice of Annual
                 Meeting and Proxy Statement dated March 11, 1998)
 
10(k)            Solutia Inc. 1998-1999 Long-Term Incentive Plan
                 (incorporated herein by reference to Appendix B of the
                 Solutia Inc. Notice of Annual Meeting and Proxy Statement
                 dated March 11, 1998)
 
10(l)            Solutia Inc. Deferred Compensation Plan (incorporated herein
                 by reference to Exhibit 10 of the Company's Form 10-Q for
                 the quarter ended September 30, 1998, filed on October 23,
                 1998)
 
11               Omitted--Inapplicable; see "Statement of Consolidated
                 Income" on page 28 of the 1998 Annual Report
 
12               Omitted--Inapplicable
 
13               The Company's 1998 Annual Report to stockholders. (The
                 electronic submission includes only the financial report
                 section of the Annual Report, consisting of pages 18 through
                 45 of that Report.) Only those portions expressly
                 incorporated by reference into this Form 10-K are deemed
                 "filed"; other portions are furnished only for the
                 information of the Commission.
 
16               Omitted--Inapplicable
 
18               Preferability Letter from Deloitte & Touche LLP, dated
                 February 25, 1998 (incorporated by reference to Exhibit 18
                 of the Company's Form 10-K for the year ended December 31,
                 1997, filed on March 13, 1998).
 
21               Subsidiaries of the Registrant (see page 24)
 
22               Omitted--Inapplicable
 
23               Consent of Independent Auditors (see page 25)
 
24(a)            Powers of Attorney submitted by Robert G. Potter, John C.
                 Hunter III, Robert A. Clausen, Roger S. Hoard, Robert T.
                 Blakely, Joan T. Bok, Paul H. Hatfield, Robert H. Jenkins,
                 Howard M. Love, Frank A. Metz, Jr., William D. Ruckelshaus
                 and John B. Slaughter
 
24(b)            Certified copy of Board resolution authorizing Form 10-K
                 filing utilizing powers of attorney
 
27               Financial Data Schedule (part of electronic submission only)
 
[FN]
-------
Only Exhibits Nos. 21 and 23 have been included in the printed copy of this
Report.

                                 23