<PAGE>

1998
MANAGEMENT REPORT

Management is responsible for the integrity, objectivity and
preparation of Solutia Inc.'s consolidated financial statements and all
of the related information appearing in this annual report. The
statements have been prepared in accordance with generally accepted
accounting principles. Where necessary, this information reflects
estimates that are based upon currently available information and
management's judgments.

     Management is also responsible for maintaining a system of
internal accounting controls designed to provide reasonable assurance
that Solutia's assets are safeguarded against material loss from
unauthorized use or disposition and that authorized transactions are
properly recorded to permit the preparation of accurate financial
information. Cost/benefit judgments are an important consideration in
this regard. The effectiveness of internal controls is maintained by
careful personnel selection and thorough training, division of
responsibilities, establishment and communication of policies, and
ongoing internal review programs and audits.

     Management believes that Solutia's system of internal 
accounting controls as of and for the period ended December 31, 1998,
was effective and adequate to accomplish the objectives described above. 


/s/ Robert G. Potter

Robert G. Potter 
Chairman and Chief Executive Officer


/s/ Robert A. Clausen

Robert A. Clausen
Senior Vice President and Chief Financial Officer


February 24, 1999



AUDIT AND FINANCE COMMITTEE REPORT

The Audit and Finance Committee, composed of non-employee directors,
met six times during 1998. The committee reviews and monitors
the company's internal controls, financial reports, and accounting
practices as well as the scope and extent of the audits performed by
both the independent and internal auditors. The committee also
recommends to the full Board the selection of Solutia's principal
independent auditors, and it approves in advance all significant audit
and nonaudit services provided by these auditors. Deloitte & Touche LLP
was appointed independent auditor to examine, and to express an opinion
as to the fair presentation of, the consolidated financial statements.
The Deloitte & Touche LLP report follows.

     The internal and principal independent auditors meet with the
committee, with and without management representatives present, to
discuss the results of their examination, the adequacy of the company's
internal accounting controls, and the quality of the company's financial
reporting. The Audit and Finance Committee also reviews and monitors the
company's financial policies, including planning and structure, so that
they conform to the company's requirements for growth and sound
operation.

     The Audit and Finance Committee has reviewed the financial section
of this annual report. Pursuant to the recommendation of the committee,
the board of directors has approved the financial section.


/s/ Frank A. Metz Jr.

Frank A. Metz Jr. 
Chairman, Audit and Finance Committee

February 24, 1999

18  SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>

1998
REPORT OF INDEPENDENT AUDITORS

To the Shareholders of Solutia Inc.: 

We have audited the accompanying 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. These financial statements
are the responsibility of the company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.

     We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.

     In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Solutia Inc.
and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.

     As discussed in Note 16 to the financial statements, in 1997, the
company changed its method of accounting for environmental obligations
under the Resource Conservation and Recovery Act.


/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
St. Louis, Missouri

February 24, 1999

                                    SOLUTIA INC. 1998 ANNUAL REPORT  19
<PAGE>
<PAGE>

1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

Solutia Inc. is an international producer and marketer of a range of
high-performance chemical-based materials that are used by its customers
to make consumer, household, automotive, and industrial products. These
products include nylon and acrylic fibers, intermediates, Saflex(R)
plastic interlayer, phosphorus derivatives, and specialty chemicals.

     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 carpet fibers, nylon industrial fibers, and
Acrilan(R) acrylic fibers business units, and;

* POLYMERS & RESINS - comprised of Saflex(R) plastic interlayer, nylon
plastics & polymers, resins, and polymer modifier business units.

     During 1998, the Chemicals, Fibers and Polymers & Resins segments
accounted for approximately 31 percent, 34 percent and 35 percent,
respectively, of the company's consolidated net sales. Solutia reported
all of these businesses as one segment prior to its adoption of
Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
effective December 31, 1997. As permitted by this standard, information
for years prior to 1997 was not restated to conform to the new
disclosure requirements because it was impractical to do so. Therefore,
the discussion of the company's results for periods prior to 1997 has
been prepared on the basis of one segment.

     Prior to September 1, 1997, the businesses that form the company
were wholly owned by Monsanto Company ("Monsanto"). On September 1,
1997, 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 the company's
common stock for every five shares of Monsanto common stock held of
record as of August 20, 1997. As a result of the Spinoff, the company
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 with respect to the
separation of the companies and to provide mechanisms for an orderly
transition following the Spinoff.

     Financial data included in the company's consolidated financial
statements for periods prior to the Spinoff were prepared on a basis
that reflected an estimate of what the historical assets, liabilities,
and operations would have been if Solutia had been organized as a
separate legal entity, owning certain net assets of Monsanto. Management
believes that the assumptions underlying these financial statements are
reasonable. These historical consolidated financial statements, however,
may not necessarily reflect the results of operations, cash flows, or
financial position of the company in the future, or what the results of
operations, cash flows, or financial position would have been had the
company been a separate stand-alone public entity.

     For periods after the Spinoff, Solutia's consolidated financial
statements have been prepared on a basis that reflects the historical
value of the assets, liabilities, and operations of the businesses that
were contributed to Solutia by Monsanto. See Note 1 of the "Notes to
Consolidated Financial Statements" for a detailed discussion of the
basis of presentation used in the preparation of Solutia's consolidated
financial statements.

     Solutia achieved impressive 1998 financial results in its first
full year as an independent company. Financial performance in 1998
reflected management's focus on earnings per share growth and cash flow
generation. The improvement over 1997 in earnings per share resulted
principally from lower average raw material costs, lower environmental
charges, and other cost reductions, partially offset by lower average
selling prices. Cash flow also benefited from improved working capital
management. During 1998, the company used its strong financial
performance to repay all of its short-term debt, to reinvest in itself
through share repurchases, and to prepare for the future through capital
projects that will lead to further cost reductions. The following
section provides a detailed discussion of Solutia's results of
operations for 1998 and 1997.

<PAGE>
RESULTS OF OPERATIONS

1998 COMPARED WITH 1997

Net sales for 1998 were $2.84 billion, down 5 percent from $2.97 billion
in 1997. The decline was principally due to lower average selling
prices. However, operating income for 1998 increased 33 percent due to
lower average raw material costs, which directly offset average selling
price declines, lower environmental charges, and other cost reductions
in all segments, primarily related to personnel costs.

CHEMICALS SEGMENT
Net sales for Solutia's Chemicals segment declined by 8 percent during
1998 as compared to 1997 due to lower average selling prices in the
segment's intermediates business and lower sales volumes in the
intermediates and phosphorus derivatives businesses. Net sales for the
industrial products business were essen-


20  SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>

tially unchanged from 1997. Average selling price declines in
intermediates were caused primarily by sales contracts that contain
formula pricing tied to the cost of the raw material components of its
products. During 1998, the costs of certain key raw material feedstocks
fell, resulting in lower average selling prices. Lower phosphorus
derivative volumes were caused by competitor price reduction actions.

     The segment's lower net sales were partially offset by lower raw
material and other costs which resulted in a net 2 percent decline in
segment profit. However, segment profit for 1998 as a percentage of net
sales was 26 percent compared with 1997's 24 percent due to other cost
reductions.

     During 1998, Solutia announced that it was reviewing options for
its phosphorus derivatives business that included sale, alliance or
joint venture. Based on discussions with interested potential buyers,
the company is primarily pursuing the sale of the business but is still
considering all alternatives. Discussions with interested parties are
continuing.

FIBERS SEGMENT
Net sales for 1998 in the Fibers segment were down slightly as compared
with 1997 results as higher sales volumes in the carpet business were
offset by lower average selling prices in all segment businesses and by
lower Acrilan(R) acrylic fiber volumes. The improvement in carpet volumes
was due to strong builder and commercial sales and new introductions of
Wear-Dated(R) brand products. Price reductions in the Fibers segment were
caused by competitive pressures on carpet staple despite a first quarter
1998 price increase, and lower pricing of Acrilan(R) acrylic fibers to
maintain competitiveness, where desirable, in the business's export and
domestic markets. For both the carpet and Acrilan(R) acrylic fiber
products, the majority of the average selling price declines occurred
during the second half of the year. Year-over-year price declines caused
by lower priced imports also affected the nylon industrial products.
Volume reductions in the Acrilan(R) acrylic fiber business occurred
primarily in the second half of 1998 as weak economic conditions in Asia
caused producers to reduce selling prices in all regions and to increase
volumes of products shipped to other world areas.

     Profit for the Fibers segment increased significantly on carpet
volume increases, reduced raw material costs, and other cost reductions,
which more than offset the decline in average selling prices. As the
result of these items, Fibers segment profit as a percentage of net
sales increased to 21 percent in 1998 from 16 percent in 1997.

POLYMERS & RESINS SEGMENT
Net sales for the Polymers & Resins segment declined 5 percent primarily
as the result of softer pricing and lower volumes. Lower average selling
prices were felt most significantly by the company's Saflex(R) plastic
interlayer unit and, to a lesser extent, by the resins business as
Solutia responded to competitor price reductions to maintain market
share. Lower volumes occurred in the nylon plastics and polymers
business and resulted from lower sales of textile polymer. This volume
decline was partially offset by increased volumes in the resins
business.

     1998 profit for the Polymers & Resins segment was flat as compared
to 1997. Reduced raw material and other cost reductions offset the
effect of the lower net sales discussed above and changeover costs at
the Saflex(R) plastic interlayer production sites as they expanded
production of the new Saflex IIIG(TM) plastic interlayer product. However,
segment profit as a percentage of net sales increased to 27 percent for
1998 from 26 percent for 1997 as the result of the other cost
reductions.

OPERATING INCOME
Solutia's operating income for 1998 increased by 33 percent over 1997
due to lower environmental charges, discussed below, and higher segment
profit. Marketing, administrative and technological expenses were
essentially unchanged in 1998 as compared to 1997. However, the
comparison of operating income between 1998 and 1997 was affected by
several unusual items related to reversals of excess restructuring
reserves, inventory charges, the adoption of new accounting standards
and environmental-related charges.

     During 1998 and 1997, Solutia reversed excess restructuring
reserves to adjust downward the recorded amounts as a result of reduced
cost estimates. A reversal of $3 million ($2 million aftertax, or $0.02
per share) was made in the second quarter of 1998 due to lower cost
estimates to complete the shutdown of certain facilities included in the
1996 plan. Reversals made in the third quarter 1998 and fourth quarter
1998 of $3 million ($2 million aftertax, or $0.02 per share) and $3
million ($2 million aftertax, or $0.02 per share), respectively, were
due to lower cost estimates to implement the company's employment
reduction plans. These lower cost estimates were due to higher than
anticipated attrition that has reduced employment levels without
additional cost to the company. The 1997 reversal of $8 million ($5
million after tax, or $0.04 per share) occurred in the second quarter
and became excess as the result of lower exit costs associated with the
sale and closure of certain nonstrategic facilities included in the 1995
restructuring actions.

<PAGE>
     Operating income for 1998 was also affected by inventory charges
of $4 million ($3 million aftertax, or $0.03 per share) in the third
quarter and $6 million ($4 million aftertax, or $0.04 per share) in the
fourth quarter. The third quarter charge was taken to reduce certain
slow-moving inventories to their net realizable values. The fourth
quarter charge was primarily caused by losses on the disposition of
certain non-salable inventories.

                                    SOLUTIA INC. 1998 ANNUAL REPORT  21

<PAGE>
<PAGE>

     Operating income for 1998 also included stand-alone expenses for
certain general and administrative services that were provided by
Monsanto during 1997. As discussed in Note 1 of the "Notes to the
Consolidated Financial Statements," Monsanto provided these services
prior to the Spinoff under a cost allocation arrangement. If Solutia had
operated as a stand-alone entity for all of 1997, management estimates
that general and administrative service expenses would have been higher
by approximately $13 million in order to reflect the cost of replacing
the services represented by these allocations.

     Operating income in 1997 was affected by the adoption of new
accounting standards and environmental-related charges taken in the
first, second and fourth quarters. The first quarter charge of $10
million ($6 million aftertax, or $0.05 per share) was associated with
the adoption of American Institute of Certified Public Accountants'
Statement of Position ("SOP") No. 96-1, "Environmental Remediation
Liabilities." The second quarter charge of $10 million ($6 million
aftertax, or $0.05 per share) was caused by environmental-related
litigation associated with the Brio Superfund site near Houston, Texas.
The fourth quarter charge of $72 million ($46 million aftertax, or $0.37
per share) was associated with environmental remediation liability
changes. These charges are discussed further in Note 16 of the "Notes to
Consolidated Financial Statements."

EQUITY EARNINGS FROM AFFILIATES
Equity Earnings from Affiliates were lower for 1998 as compared to 1997
primarily due to the lower earnings from the company's Quimica "M" S.A.
de C.V. ("Quimica") joint venture and the Flexsys, L.P. ("Flexsys")
joint venture in which Solutia has 49 percent and 50 percent ownership
interests, respectively. Quimica was adversely affected by changeover
costs for production of Saflex IIIG(TM) plastic interlayer and the
devaluation of the Mexican peso. Flexsys experienced lower earnings due
to start-up costs and operational difficulties associated with the joint
venture's new PPD2 facility. The PPD2 unit produces 4-amino-
diphenylamine, a product that extends the life of rubber products.

ECONOMIC CONDITIONS
Solutia is affected by economic conditions, particularly those in the
domestic housing industry, the domestic and international automotive
industries and the domestic and international textile industries. Each
of these industries is cyclical. Global competition and weakened general
economic conditions in certain world areas have led to declining average
selling prices. These factors are expected to result in continued
downward pressure on prices. However, these conditions also exert
downward pressure on the prices of many of the company's purchased major
raw materials. Average selling prices and sales volumes to the domestic
carpet industry are also affected by that industry's ongoing mill 
consolidation, consumer trends toward alternative flooring materials,
and competition from lower-priced polyester staple.

1997 COMPARED WITH 1996

In 1997, the company's net sales of $2.97 billion were down slightly
when compared with net sales of $2.98 billion in 1996. The decrease was
principally attributed to the effects of unfavorable currency exchange
rates, and was partially offset by approximately $12 million of higher
sales volumes. The effect of higher average selling prices was minimal.
Sales volumes increased for the nylon plastics and polymers and the
Saflex(R) plastic interlayer business units. These increases were
principally the result of higher demand. These sales increases were
offset by the combination of unfavorable currency exchange rates and
lower sales volumes of intermediates and carpet staple. The use of
alternative floor coverings and competition from lower priced polyester
staple had a negative effect on sales into the residential carpet
market. Combined net sales of the other business units decreased
slightly compared with net sales in 1996. While currency exchange rates
had a negative effect on Solutia's net sales in 1997, the effect on the
company's 1997 operating income was minimal because ex-U.S. sales are
sourced primarily from ex-U.S. operations.

     Solutia's operating income in 1997 increased significantly from
operating income in 1996. However, operating income was affected by
unusual items in both years. In 1997, operating income included a first
quarter charge of $10 million ($6 million aftertax, or $0.05 per share)
associated with the adoption of SOP 96-1, "Environmental Remediation
Liabilities,"  which is further discussed in Note 16 of the "Notes to
Consolidated Financial Statements." Operating income in the second
quarter of 1997 included a charge of $10 million ($6 million aftertax,
or $0.05 per share) for environmental-related litigation associated with
the Brio Superfund site near Houston, Texas. In addition, operating
income in the second quarter of 1997 included $8 million ($5 million
aftertax, or $0.04 per share) of reversals of excess restructuring
reserves from prior years. The excess was primarily the result of lower
exit costs associated with the sale and closure of nonstrategic
facilities included in 1995 restructuring actions. Operating income in
the fourth quarter of 1997 included charges of $72 million ($46 million
aftertax, or $0.37 per share) associated with environmental remediation
liability changes. These charges are discussed further in Note 16 of the
"Notes to Consolidated Financial Statements."

<PAGE>
     Operating income in 1996 included a net charge of $248 million
($156 million aftertax, or $1.30 per share) for restructuring and other
actions, primarily for the costs of work force reductions, asset write-
offs, and facility rationalizations.

22  SOLUTIA INC. 1998 ANNUAL REPORT

<PAGE>
<PAGE>

     The increase in operating income in 1997 can be attributed primarily
to the effect of cost reductions. The cost reductions were realized
principally through the restructuring actions that were taken during
1997. Significant progress was made on this restructuring plan. During
1997, employment was reduced by approximately 600 people. The effect of
these cost savings was the primary driver behind the reductions in the
company's marketing and administrative expenses in 1997. In addition,
Solutia's operations in 1997 received lower cost allocations from
Monsanto. As further described in Note 1 of the "Notes to Consolidated
Financial Statements," on April 1, 1997, Monsanto discontinued its
allocations of corporate expenses for general and administrative
services that it had been providing previously. Solutia's 1997
administrative expenses consisted of three months of Monsanto
allocations and nine months of stand-alone staff expenses. If Solutia
had operated as a stand-alone entity in 1996 and 1997, management
estimates that general and administrative services would have been lower
by approximately $39 million in 1996 and higher by $13 million in 1997
in order to reflect the cost of replacing the services represented by
these allocations.

     The increase in Earnings from Equity Affiliates was driven by the
Flexsys and Advanced Elastomer Systems, L.P. joint ventures. Solutia's
share of the combined 1997 earnings for these ventures increased
approximately 40 percent over the combined earnings from these ventures
in 1996. Solutia has a 50 percent ownership interest in each of these
joint ventures.

LIQUIDITY AND CAPITAL RESOURCES

Solutia has historically generated sufficient cash from operations to
more than fund its capital needs. Capital expenditures for 1998 were
$158 million. These expenditures were used to fund various cost
reduction, maintenance and capacity expansion projects. The company
expects that its capital requirements will be approximately $300 million
in 1999, and $200 million to $250 million in 2000, principally as a
result of capacity expansion and cost reduction projects. Approximately
$216 million of these estimated capital requirements were committed at
December 31, 1998. A portion of these capital expenditures will be
funded from advance payments received from third parties participating
in these projects. Third party payments received during 1998 totaled $76
million.

     Solutia's working capital as of December 31, 1998, increased to
$259 million from $106 million at December 31, 1997, primarily because
strong cash flow from operations facilitated the repayment of short-term
debt.

     In the third quarter of 1998, Solutia completed the pay-down of
the approximately $429 million of short-term debt that had been
refinanced shortly after the Spinoff. Short-term debt balances were
reduced by $190 million during 1998. At December 31, 1998, Solutia had a
five-year revolving credit facility of $800 million with a syndicate of
banks to support its commercial paper.
 
     The credit facility is also available for working capital and
other general corporate purposes. No borrowings were outstanding under
this credit facility as of December 31, 1998. This credit facility gives
Solutia the financing flexibility to take advantage of investment
opportunities that may arise and to satisfy future funding requirements.

     As of December 31, 1998, Solutia had a shareholders' deficit of $7
million. Shareholders' deficit was reduced significantly during 1998 by
the company's net income, but was partially offset by share repurchases.
The company's shareholders' deficit at December 31, 1997 of $131 million
resulted primarily from the assumption of $1.029 billion of debt and
$1.018 billion of postretirement liabilities from Monsanto in
conjunction with the 1997 Spinoff.

     During the third quarter of 1998, the company completed the 5
million common share repurchase program that was authorized in September
1997. On October 1, 1998, Solutia announced that the board of directors
had authorized a second 5 million share repurchase program. The company
expects to complete this second program by the end of 1999. Shares
repurchased under both programs during 1998 totaled 5.5 million, at a
cost of $140 million. In addition, shares repurchased during 1998 for
Solutia's compensation and benefits programs were approximately 0.7
million shares at a cost of approximately $21 million.

     The company believes that its cash flow from operations,
supplemented by periodic additional borrowings from its existing credit
facility, provide sufficient resources to finance its operations and
planned capital needs for the next 12 months.

<PAGE>
ENVIRONMENTAL MATTERS

Solutia continues its strong commitment to comply with various laws and
government regulations concerning environmental matters and employee
safety and health in the United States and other countries. U.S. federal
environmental legislation that has a particular impact on the company
includes the Toxic Substances Control Act; the Resource Conservation and
Recovery Act ("RCRA"); the Clean Air Act; the Clean Water Act; the Safe
Drinking Water Act; and the Comprehensive Environmental Response,
Compensation and Liability Act (commonly known as "Superfund"). The
company is also subject to the Occupational Safety and Health Act and
regulations of the Occupational Safety and Health Administration
("OSHA") concerning employee safety and health matters. The U.S.
Environmental Protection Agency ("EPA"), OSHA, and other federal
agencies have the authority to promulgate regulations that have an
impact on the company's operations. In addition to these federal
activities, various states have been delegated certain authority under
several of the aforementioned federal statutes. Many state and local
governments have adopted environmental and employee safety and health
laws and regulations, some of which are similar to federal requirements.
State and federal authorities may seek fines and penalties for violation
of these laws and regulations.

                                    SOLUTIA INC. 1998 ANNUAL REPORT  23

<PAGE>
<PAGE>

     Solutia is dedicated to long-term environmental protection and
compliance programs that reduce and monitor emissions of hazardous
materials into the environment as well as to the remediation of
identified existing environmental concerns. The company is among the
leaders in the chemical industry's Responsible Care performance
enhancement program.

     Expenditures in 1998 were approximately $17 million for
environmental capital projects and approximately $66 million for the
management of environmental programs, including the operation and
maintenance of facilities for environmental control, of which $22
million was charged against recorded environmental liabilities. The
company estimates that a total of approximately $25 million will be
spent during 1999 and 2000 on additional capital projects for
environmental protection and that expenses for the management of
environmental programs in 1999 and 2000 will continue at levels
comparable to 1998.

     With respect to environmental remediation obligations, the
company's policy is to accrue costs for remediation of contaminated
sites in the accounting period in which the obligation is probable and
the cost is reasonably estimable.

     At the time of the Spinoff, the company assumed from Monsanto,
pursuant to a distribution agreement, liabilities related to specified
Superfund proceedings. As a result, while Monsanto remains the named
potentially responsible party ("PRP") or defendant for actions that
occurred prior to September 1, 1997, the company will manage proceedings
and litigation against Monsanto and indemnify Monsanto for costs,
expenses, and judgments, if any are incurred by Monsanto, arising from
these liabilities. During 1998, Solutia received one notice from the EPA
alleging it as a PRP with respect to Superfund for product sold by
Monsanto in 1986.

     The company's estimates of its liabilities for Superfund sites are
based on evaluations of currently available facts with respect to each
individual site and take into consideration factors such as existing
technology, laws and agency policy, and prior experience in remediation
of contaminated sites. As assessments and remediation activities
progress at individual sites, these liabilities are reviewed
periodically and adjusted to reflect additional technical, engineering
and legal information that becomes available. The company has an accrued
liability of $36 million as of December 31, 1998 for Superfund sites.
Major Superfund sites in this category include the noncompany-owned
sites at Brio and MOTCO in Texas, and Fike/Artel in West Virginia, which
account for $26 million of the accrued amount. The company spent
approximately $8 million in 1998 for remediation of Superfund sites.
Similar amounts can be expected in future years.

     The company had an accrued liability of $93 million as of December
31, 1998, for shutdown plants and third-party sites for which the
company assumed responsibility pursuant to a distribution agreement
entered into with Monsanto. The company's estimate of its liability
related to these sites is based on evaluations of currently available
facts with respect to each individual site. The estimate takes into
consideration factors such as existing technology, laws and agency
policy, and prior experience in remediation of contaminated sites. The
company spent $6 million in 1998 for remediation of these sites. Similar
amounts can be expected in the future.

     The company had an accrued liability of $69 million as of December
31, 1998, for solid and hazardous waste remediation, and for post-
closure costs at the company's operating locations. The company
recognizes certain post-closure costs over the estimated remaining
useful life of the related facilities. The company spent $8 million in
1998 for remediation of these facilities.

     Uncertainties related to all of the company's environmental
liabilities are evolving government regulations, the method and extent
of remediation, and future changes in technology. Because of these
uncertainties, the company estimates that potential future expenses
associated with these liabilities could be an additional $20 million to
$30 million. Although the ultimate costs and results of remediation of
contaminated sites cannot be predicted with certainty, they are not
expected to result in a material adverse effect on Solutia's
consolidated financial position, liquidity, or profitability in any one
year.

THE YEAR 2000 ISSUE

OVERVIEW
The year 2000 ("Y2K") issue refers to the inability of a date-
sensitive computer program to recognize a two-digit date field
designated "00" as the year 2000. Mistaking "00" for 1900 could result
in a system failure or miscalculations causing disruptions to
operations, including manufacturing, a temporary inability to process
transactions, send invoices, or engage in other normal business
activities. This is a significant issue for most, if not all companies,
with far reaching implications, some of which cannot be anticipated or
predicted with any degree of certainty.

<PAGE>
     Solutia began addressing its Y2K issues in 1996. The planning
phase of the process was completed during 1997. Effective December 31,
1998, Solutia adopted the Y2K Readiness Disclosure format of the
Chemical Manufacturers Association ("CMA"), of which the company is a
member. The CMA disclosure format uses four process categories and five
functional areas. Solutia has conformed its Y2K reporting to the CMA 
disclosure format. The following sections contain a summary 
of Solutia's Y2K readiness and detailed discussions of Solutia's Y2K
issues.

24  SOLUTIA INC. 1998 ANNUAL REPORT


<PAGE>
<PAGE>

SUMMARY OF Y2K READINESS
The following table summarizes Solutia's Y2K readiness. The percentage
in each column indicates the completion of each process step listed.

<TABLE>
<CAPTION>
                                                                                           Contingency          Planned
                             Inventory/                                                       Plans          Implementation
                             Assessment      Remediation      Testing   Implementation      Developed             Date
                            ------------------------------------------------------------------------------------------------
<S>                             <C>              <C>            <C>           <C>            <C>              <C>
Business Applications           100%             70%            70%           70%              See              Mid-1999
Manufacturing and 
  Warehousing Equipment         100%             50%            50%           50%            Comments         2nd Qtr. 1999
Information Technology 
  Technical Infrastructure       75%              0%             0%            0%             Below             Mid-1999
Environmental Operations
  Systems                       100%             50%            50%           50%                             2nd Qtr. 1999
Business Partners               100%              -              -             -                              2nd Qtr. 1999
                            ------------------------------------------------------------------------------------------------
</TABLE>

BUSINESS APPLICATIONS
Solutia inventoried and assessed its business applications during 1997.
At that time, the company determined that significant portions of its
software required modification or repair to function properly beyond
December 31, 1999. Solutia is addressing the majority of these Y2K
issues through the previously planned installation of software licensed
from SAP AG which is Y2K compliant. The implementation of SAP involves a
series of transitions, the first of which occurred in January 1997.
Through December 31, 1998, implementations were completed in accordance
with the transition schedule resulting in approximately 70 percent of
the company being on SAP. After December 31, the company decided to
delay the transitions to SAP scheduled for January 31, 1999, and March
31, 1999, by 30 days each to perform additional testing, to complete
personnel training, and to minimize problems with the transition. The
final transition to SAP is now scheduled to occur on April 30, 1999.
Critical issues that are not addressed by SAP are in the process of
being remediated. The company expects to complete remediation of all
critical business applications by the end of April 1999. Y2K integrated
testing of SAP and non-SAP systems will occur during mid-1999.

MANUFACTURING AND WAREHOUSING EQUIPMENT AND 
ENVIRONMENTAL OPERATIONS SYSTEMS
The manufacturing and warehousing equipment and the environmental
operations systems areas include primary process control systems and
devices with embedded chips. Primary process control systems were
inventoried and assessed during late 1997. Remediation and testing of
these systems is continuing. The inventory and assessment of the
company's devices with embedded chip systems was completed during
December 1998. Remediation of the Y2K issues found has begun. Some
slippage from planned schedules occurred during 1998 as resources were
temporarily redirected to other Y2K areas. However, substantial
resources are being directed towards the remediation of Y2K issues
detected and the testing and implementation of repaired systems. Solutia
expects that work on the critical issues in these areas will be
completed on schedule by the end of the second quarter of 1999, with the
exception of a small portion of systems that will be repaired and tested
during planned plant shutdowns in the second half of 1999.

INFORMATION TECHNOLOGY TECHNICAL INFRASTRUCTURE
The information technology ("IT") technical infrastructure area is
primarily comprised of host server systems, computer networking
infrastructure, voice systems, and desktop computer workstations and
software. The inventory and assessment of known long lead-time items is
complete. Major projects were identified during 1998 and are scheduled
for completion during 1999. An exhaustive and comprehensive follow-up
investigation of this area to assure that no critical components were
overlooked is under way. The inventory phase of this investigation for
the manufacturing sites was completed during January 1999, while the
inventory of the office and warehouse sites is expected to be completed
during March 1999. The assessment, remediation and testing of any new
items found will be addressed by mid-1999.

BUSINESS PARTNERS
Solutia's business partners include its suppliers and service providers
(supply chain), and its customers. Solutia has identified those business
partners in the supply chain that provide materials, products or
services critical to the company's operations. During 1998, critical
suppliers' Y2K issues were assessed using questionnaires and other
inquiries. Approximately two-thirds of Solutia's critical suppliers
report that they have either completed their remediation efforts or have
plans to complete their remediation by mid-1999. Investigation of the
remaining Y2K issues with critical suppliers is continuing on schedule.
Audits of selected suppliers to verify the status and/or completion of
their remediation are planned for the first half of 1999.

<PAGE>
   Solutia has been working with customers to address their Y2K
concerns regarding Solutia's ability to operate. Plans to address the
ability of our significant customers to accept our products after
December 31, 1999, will be determined as contingency plans are
developed.

                                    SOLUTIA INC. 1998 ANNUAL REPORT  25
<PAGE>
<PAGE>

INTEGRATED TESTING
The company intends to perform integrated Y2K testing of critical
systems in all functional areas throughout 1999, with the majority of
such testing occurring during the second and third quarters of 1999.
Given the nature of Solutia's manufacturing and other operations, full-
scale integrated testing may not be practical in some areas and,
therefore, may be limited in scope to avoid significant disruption of
the company's operations. Statements of compliance from vendors and
other compliance evidence are expected to mitigate the risk of not
performing integrated testing in those areas.

CONTINGENCY PLANNING
After the end of 1998, Solutia completed the development of a
contingency planning process for Y2K issues. The process engages the
manufacturing sites in the evaluation of their existing contingency
plans in light of possible Y2K effects, such as the loss of electrical
and telephone utilities. Solutia expects that the Y2K contingency plans
for all manufacturing sites will be in place by the beginning of the
third quarter 1999. The contingency planning process is being modified
for use in non-manufacturing areas. Contingency plans for those areas
will be completed by the end of third quarter 1999. For both
manufacturing and non-manufacturing areas, the plans will include
procedures that attempt to minimize the impact of any unremediated and
unresolved Y2K issues on Solutia's operations and financial position. 

COSTS
To date, the company has incurred approximately $7 million in costs
related to Y2K work, excluding the cost of SAP implementation.
Management currently estimates that additional costs to evaluate and
remediate the remaining issues will be $5 million to $10 million. These
costs will be expensed as incurred during 1999.

RISKS
Based on the status of the company's work to address its Y2K issues,
including the implementation of SAP, management does not expect the Y2K
issue to pose significant operational problems for the company. However,
if the SAP implementation is delayed beyond the second quarter of 1999
or the remediation of other issues is not completed in a timely manner,
Y2K could have a material adverse effect on the company, depending on
the nature and extent of any remaining unremediated or unresolved
issues. Furthermore, if the company's customers, suppliers, and service
providers fail to rectify their Y2K issues in their own systems the
resultant effect on the company may be material. Management anticipates
the most reasonably likely worst-case scenario would involve a temporary
shutdown of certain units if, in management's judgment, the company
cannot run certain processes safely from an environmental, safety and
health standpoint because of the failure of the company or a supplier to
resolve Y2K issues. Through the development of contingency plans, the
company expects to mitigate the effect that any such temporary shutdowns
would have on the company or third parties.

   The estimated costs and date of completion of Y2K remediation are
based on management's best estimates, which were derived from numerous
assumptions about future events. These assumptions include the
availability of certain resources, third-party modification plans and
other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially. Specific factors
that might cause material differences include, but are not limited to,
the availability and cost of personnel trained in this area, the ability
to identify and correct all relevant computer codes, and the cost and
availability of replacements for devices with embedded chips.

DERIVATIVE FINANCIAL INSTRUMENTS

The company is exposed to market risk, including changes in interest
rates, currency exchange rates, and certain commodity prices. To manage
the volatility relating to these exposures, the company enters into
various derivative transactions pursuant to the company's policies. The
company does not purchase or hold any derivative financial instruments
for trading purposes.

   The tests discussed below for exposure to interest rate and
currency rate exposures are based on a variance/covariance value at risk
model using a one-year horizon and a 95 percent confidence level. The
model assumes that financial returns are normally distributed. The value
at risk model takes into account correlations and diversification across
market factors, including currencies and interest rates. Estimates of
volatility and correlations or market factors are drawn from the JP
Morgan RiskMetrics(TM) dataset as of December 31, 1998. In cases where
data is unavailable, a reasonable approximation is included. The effect
of these estimates did not significantly change the total value at risk.
This methodology is consistent with that used in the prior year.

<PAGE>
FOREIGN CURRENCY EXCHANGE RATE RISK
Currency forward contracts are used to manage currency exposures for
financial instruments denominated in currencies other than the entity's
functional currency. Gains and losses on contracts that are designated
and effective as hedges are included in net income and offset the
exchange gain or loss of the transaction being hedged. Corporate policy
prescribes the range of allowable hedging activity and the instruments
permitted for use. Because the counterparties to these contracts are
major international financing institutions, credit risk arising from
these contracts is not significant and Solutia does not anticipate any
counterparty losses. This hedging activity is intended to protect the
company from adverse fluctuations in foreign currency exchange rates.

26  SOLUTIA INC. 1998 ANNUAL REPORT

<PAGE>
<PAGE>

   As of December 31, 1998, Solutia had currency forward contracts to
purchase $34 million and to sell $34 million of other currencies,
principally the Belgian franc, with average maturities of 4 months. Net
unrealized hedging losses as of December 31, 1998, were not material. 

   Based on the company's overall currency rate exposure at December 31,
1998, including derivative and other foreign currency sensitive
instruments, a near-term change in currency rates within a 95 percent
confidence level based on historical currency rate movements, would not
materially affect the consolidated financial position, results of
operations, or cash flows of the company.

INTEREST RATE RISK
Interest rate risk is primarily related to the changes in fair value on
fixed-rate, long-term debt and short-term, floating rate debt. Based on
the company's overall interest rate exposure at December 31, 1998, a
near-term change in interest rates, within a 95 percent confidence level
based on historical interest rate movements, would not materially affect
the consolidated financial position, results of operations, or cash
flows of the company. This is consistent with the overall interest rate
exposure at December 31, 1997.

COMMODITY PRICE RISK
Certain raw materials are subject to price volatility caused by weather,
petroleum prices, and other unpredictable factors. The company employs
commodity price swaps to hedge this exposure. The commodity price risk
associated with the derivative instruments is not material to the
company's consolidated financial position, results of operations, or
cash flow.

EUROPEAN MONETARY UNION

On January 1, 1999, 11 member countries of the European Union adopted
the euro as their common legal currency. Effective that date, conversion
rates between the existing sovereign currency ("legacy currency") of
each of these participating countries and the euro were irrevocably
fixed, and the euro became available for non-cash transactions. The
legacy currencies of these countries will remain legal tender during a
transition period from January 1, 1999 to January 1, 2002. During this
transition period, parties may pay for goods and services using either
the euro or the relevant legacy currency. Currency conversion will be
performed using a triangulation method whereby one legacy currency is
converted to the euro and then to the second legacy currency. The
conversion to the euro will be completed in July 2002 when the legacy
currencies of the participating member countries cease to be legal
tender.

   While the conversion to the euro is expected to increase cross-
border price transparency, and therefore to stimulate cross-border
competition within the single currency zone created by the participating
countries, the effect on the price of raw materials that Solutia
purchases is expected to generally offset the effect on the finished
products it sells. In addition, the conversion to the euro is expected
to have the positive effect of eliminating currency risk in cross-border
sales and reduce currency exchange costs.

   Solutia's information systems have been updated to allow the
triangulation method of currency conversion to the requisite number of
decimal places in a timely fashion. The cost of the technological
updates was not material. 

   For the reasons stated above, management does not expect the
introduction of the euro to have a material effect on Solutia's
business, financial condition, or results of operations. If cross-border
price transparency causes the markets from which the company purchases
raw materials or to which it sells finished products to behave
differently than management expects, the introduction of the euro could
have a material effect on the company.

RECENTLY ISSUED ACCOUNTING STANDARDS

In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 establishes the
accounting guidance for the capitalization of certain internal-use
software costs once certain criteria are met. This accounting standard
will be effective for the company beginning January 1, 1999. The
adoption of SOP 98-1 is not expected to have a material impact on the
company.

   In April 1998, the American Institute of Certified Public
Accountants issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. It requires costs of start-up
activities and organization costs to be expensed as incurred. This
statement will be effective for the company's financial statements for
the year ended December 31, 1999. The adoption of SOP 98-5 is not
expected to have a material impact on the company.

<PAGE>
   In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 provides comprehensive and consistent standards for the
recognition and measurement of derivative and hedging activities. It
requires that derivatives be recorded on the Statement of Consolidated
Financial Position at fair value and establishes criteria for hedges of
changes in the fair value of assets, liabilities or firm commitments,
hedges of variable cash flows of forecasted transactions, and hedges of
foreign currency exposures of net investments in foreign operations.
Changes in the fair value of derivatives that do not meet the criteria
for hedges would be recognized in the Statement of Consolidated Income.
This statement will be effective for the company beginning January 1,
2000. The company is evaluating SFAS No. 133 and has not determined its
effect on the consolidated financial statements.

                                    SOLUTIA INC. 1998 ANNUAL REPORT  27

<PAGE>
<PAGE>

1998
<TABLE>
STATEMENT OF CONSOLIDATED INCOME
<CAPTION>
                                                                 Year Ended December 31,
                                                         -------------------------------------
                                                          1998           1997           1996
                                                        --------       --------       --------
Dollars in millions, except per share amounts
<S>                                                     <C>            <C>            <C>
NET SALES                                                $2,835         $2,969         $2,977
Cost of goods sold                                        2,085          2,316          2,325
                                                        --------       --------       --------
GROSS PROFIT                                                750            653            652
Marketing expenses                                          145            143            172
Administrative expenses                                     136            133            167
Technological expenses                                       83             87             88
Restructuring expenses - net                                  -              -            192
                                                        --------       --------       --------
OPERATING INCOME                                            386            290             33
Equity earnings from affiliates                              25             31             21
Interest expense                                            (43)           (41)           (36)
Other income (expense) - net                                  7             10             15
                                                        --------       --------       --------
INCOME BEFORE INCOME TAXES                                  375            290             33
Income taxes                                                126             98              1
                                                        --------       --------       --------
NET INCOME                                               $  249         $  192         $   32
                                                        ========       ========       ========
BASIC EARNINGS PER SHARE                                 $ 2.16         $ 1.63         $ 0.28
                                                        ========       ========       ========
DILUTED EARNINGS PER SHARE                               $ 2.03         $ 1.55         $ 0.27
                                                        ========       ========       ========

Weighted average equivalent shares (in millions):
Basic                                                     115.5          117.7          116.2
Effect of dilutive securities:
Common share equivalents - common stock issuable
  upon exercise of oustanding stock options                 7.3            6.0            3.6
                                                        --------       --------       --------
Diluted                                                   122.8          123.7          119.8
                                                        ========       ========       ========
</TABLE>


<TABLE>
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
<CAPTION>
                                                                 Year Ended December 31,
                                                          ------------------------------------
                                                           1998           1997           1996
                                                          ------         ------         ------
Dollars in millions
<S>                                                       <C>            <C>            <C>
NET INCOME                                                 $249           $192           $ 32 
OTHER COMPREHENSIVE INCOME:
Currency translation adjustments                             10             19              -
Minimum pension liability adjustments, net of tax of 
  $2 in 1998 and $4 in 1997                                  (3)            (7)             -
                                                          ------         ------         ------
COMPREHENSIVE INCOME                                       $256           $204           $ 32
                                                          ======         ======         ======

See accompanying Notes to Consolidated Financial Statements.
</TABLE>

28  SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>

1998
<TABLE>
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
<CAPTION>                                                                              
                                                                          As of December 31,
                                                                       -----------------------
                                                                         1998           1997
                                                                       --------       --------
Dollars in millions, except per share amounts
<S>                                                                    <C>            <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents                                               $   89         $   24
Trade receivables, net of allowances of $7 in 1998 and $6 in 1997          357            425
Miscellaneous receivables and prepaid expenses                             126            136
Deferred income tax benefit                                                 88             91
Inventories                                                                331            325
                                                                       --------       --------
TOTAL CURRENT ASSETS                                                       991          1,001

PROPERTY, PLANT AND EQUIPMENT:
Land                                                                        17             17
Buildings                                                                  371            357
Machinery and equipment                                                  2,786          2,707
Construction in progress                                                   127            107
                                                                       --------       --------
Total property, plant and equipment                                      3,301          3,188
Less accumulated depreciation                                            2,357          2,265
                                                                       --------       --------
NET PROPERTY, PLANT AND EQUIPMENT                                          944            923
INVESTMENTS IN AFFILIATES                                                  394            423
LONG-TERM DEFERRED INCOME TAX BENEFIT                                      274            300
OTHER ASSETS                                                               162            121
                                                                       --------       --------
TOTAL ASSETS                                                            $2,765         $2,768
                                                                       ========       ========

LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable                                                        $  278         $  221
Wages and benefits                                                         107            106
Restructuring reserves                                                      18             40
Miscellaneous accruals                                                     329            335
Short-term debt                                                              -            193
                                                                       --------       --------
TOTAL CURRENT LIABILITIES                                                  732            895
LONG-TERM DEBT                                                             597            597
POSTRETIREMENT LIABILITIES                                                 971            958
OTHER LIABILITIES                                                          472            449

SHAREHOLDERS' DEFICIT:
Common stock (authorized, 600,000,000 shares, par value $0.01)
  Issued: 118,400,635 shares in 1998 and 1997                                1              1
  Additional contributed capital                                          (131)          (119)
  Treasury stock, at cost (5,629,677 and 992,828 shares in 1998 
    and 1997, respectively)                                               (143)           (22)
Unearned ESOP shares                                                       (25)           (31)
Accumulated other comprehensive income                                      19             12
Reinvested earnings                                                        272             28
                                                                       --------       --------
TOTAL SHAREHOLDERS' DEFICIT                                                 (7)          (131)
                                                                       --------       --------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT                             $2,765         $2,768
                                                                       ========       ========

See accompanying Notes to Consolidated Financial Statements.

</TABLE>


                                    SOLUTIA INC. 1998 ANNUAL REPORT  29
<PAGE>
<PAGE>

1998
<TABLE>
STATEMENT OF CONSOLIDATED CASH FLOW
<CAPTION>
                                                                Year Ended December 31,
                                                         ------------------------------------
                                                           1998          1997          1996
                                                         -------        -------       -------
Dollars in millions
<S>                                                      <C>            <C>           <C>
INCREASE IN CASH AND CASH EQUIVALENTS

OPERATING ACTIVITIES:
Net income                                                $ 249          $ 192         $  32 
Adjustments to reconcile to Cash From Operations:
  Items that did not use (provide) cash:
    Deferred income taxes                                    31             32           (45)
    Depreciation and amortization                           141            142           166 
    Restructuring expenses - net                              -              -           192 
    Other                                                    18            (39)           43 
  Working capital changes that provided (used) cash:
    Trade receivables                                        68             (9)          (43)
    Inventories                                              (6)           (32)           20
    Accounts payable and accrued liabilities                  3           (115)          (33)
    Other                                                    15            (45)           24
  Other items                                                18             33           (20)
                                                         -------        -------       -------
TOTAL CASH FROM OPERATIONS                                  537            159           336
                                                         -------        -------       -------

INVESTING ACTIVITIES:
Property, plant and equipment purchases                    (158)          (165)         (192)
Acquisition and investment payments                          (8)            (2)          (17)
Investment and property disposal proceeds                    22              9             4 
                                                         -------        -------       -------
CASH FROM INVESTING ACTIVITIES                             (144)          (158)         (205)
                                                         -------        -------       -------

FINANCING ACTIVITIES:
Net transactions with Monsanto Company                        -            292          (131) 
Long-term debt proceeds                                       -            600             - 
Net repayment of debt obligations                          (190)          (840)            - 
Treasury stock purchases                                   (161)           (35)            - 
Dividend payments                                            (5)            (1)            - 
Common stock issued under employee stock plans               28              7             - 
                                                         -------        -------       -------
CASH FROM FINANCING ACTIVITIES                             (328)            23          (131)
                                                         -------        -------       -------
INCREASE IN CASH AND CASH EQUIVALENTS                        65             24             -

CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR                                            24              -             - 
                                                         -------        -------       -------
END OF YEAR                                               $  89          $  24        $    -
                                                         =======        =======       =======

See accompanying Notes to Consolidated Financial Statements.
</TABLE>

The effect of exchange rate changes on cash and cash equivalents was not
material. 
Cash payments for interest (net of amounts capitalized) were $44 million
in 1998, $3 million in 1997 and $0 in 1996.
Cash payments for income taxes were $94 million in 1998, $30 million in
1997 and $0 in 1996.

30  SOLUTIA INC. 1998 ANNUAL REPORT

<PAGE>
<PAGE>

1998
<TABLE>
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT)
<CAPTION>
                                                                 Year Ended December 31,
                                                         -------------------------------------
                                                           1998          1997           1996
                                                         -------      ---------        -------
Dollars in millions
<S>                                                      <C>           <C>             <C>
COMMON STOCK:
BALANCE, JANUARY 1                                        $   1        $     -          $   -
  Issuance of 118,371,280 shares at Spinoff                   -              1
  Issuance of 29,355 shares in 1997 for stock option
    exercises                                                 -              -
                                                         -------      ---------        -------
BALANCE, DECEMBER 31                                      $   1        $     1          $   -
                                                         -------      ---------        -------

ADDITIONAL CONTRIBUTED CAPITAL:
BALANCE, JANUARY 1                                        $(119)       $     -          $   - 
  Net liability transfer to Solutia at Spinoff                -           (101)
  Post-Spinoff adjustments                                    -            (12)
  Employee stock plans and ESOP                             (12)            (6)
                                                         -------      ---------        -------
BALANCE, DECEMBER 31                                      $(131)       $  (119)         $   -
                                                         -------      ---------        -------

TREASURY STOCK:
BALANCE, JANUARY 1                                        $ (22)       $     -          $   -
  Shares purchased (6,246,300 shares and 1,569,800
    shares in 1998 and 1997, respectively)                 (161)           (35)
  Net shares issued under employee stock option plans
    (1,609,451 shares and 576,972 shares in 1998 and
    1997, respectively)                                      40             13
                                                         -------      ---------        -------
BALANCE, DECEMBER 31                                      $(143)       $   (22)         $   -
                                                         -------      ---------        -------

UNEARNED ESOP SHARES:
BALANCE, JANUARY 1                                        $ (31)       $     -          $   -
  Transfer of ESOP reserve balance to Solutia at 
    Spinoff                                                   -            (31)
  Amortization of ESOP balance                                6              -
                                                         -------      ---------        -------
BALANCE, DECEMBER 31                                      $ (25)       $   (31)         $   -
                                                         -------      ---------        -------

ACCUMULATED OTHER COMPREHENSIVE INCOME:
BALANCE, JANUARY 1                                        $  12        $     -          $   -
  Accumulated currency adjustments                           10             19
  Minimum pension liability adjustments                      (3)            (7)
                                                         -------      ---------        -------
BALANCE, DECEMBER 31                                      $  19        $    12          $   -
                                                         -------      ---------        -------

REINVESTED EARNINGS:
BALANCE, JANUARY 1                                        $  28        $     -          $   -
  Net income                                                249             29
  Dividends                                                  (5)            (1)
                                                         -------      ---------        -------
BALANCE, DECEMBER 31                                      $ 272        $    28          $   -
                                                         -------      ---------        -------
 
MONSANTO COMPANY EQUITY:
BALANCE, JANUARY 1                                        $   -        $   656          $ 755
  Net income                                                                               32
  Translation adjustments                                                                   -
  Net transactions with Monsanto Company prior to                                       
    Spinoff                                                                              (131)
  1997 activity to date of Spinoff: 
    Net income                                                             163
    Translation adjustments                                                 13
    Net transactions with Monsanto Company                                 292
  Elimination of Monsanto Company Equity at Spinoff                     (1,124)
                                                         -------      ---------        -------
BALANCE, DECEMBER 31                                      $   -        $     -          $ 656
                                                         -------      ---------        -------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)                      $  (7)       $  (131)         $ 656
                                                         =======      =========        =======

See accompanying Notes to Consolidated Financial Statements.
</TABLE>

                                    SOLUTIA INC. 1998 ANNUAL REPORT  31
<PAGE>
<PAGE>

1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

Dollars in millions, except per share amounts


1> BASIS OF PRESENTATION

Solutia Inc. is an international producer and marketer of a range of
high-performance chemical-based materials that are used by its customers
to make consumer, household, automotive and industrial products. Prior
to September 1, 1997, the businesses that form the company were wholly
owned by Monsanto Company ("Monsanto"). On September 1, 1997, 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 the company's 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, the company
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 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 the remaining transitions will be completed in accordance
with the transition timeline.

PRE-SPINOFF FINANCIAL INFORMATION
Financial data included in the accompanying consolidated financial
statements, for periods prior to the Spinoff, were prepared on a
combined basis. They reflect an estimate of what the historical assets,
liabilities and operations would have been if Solutia had been organized
as a separate legal entity, owning certain net assets of Monsanto.
Generally, only those assets and liabilities of the ongoing chemicals
businesses that were expected to be transferred to Solutia prior to the
Spinoff were included in the Statement of Consolidated Financial
Position.

     The Spinoff was accomplished through a distribution agreement
which defined the assets that were contributed to Solutia and the
liabilities that were assumed by Solutia. Certain of those assets and
liabilities were not included in the Statement of Consolidated Financial
Position as of December 31, 1996. Those omitted assets and liabilities
were principally comprised of a joint venture interest in Monsanto's
elemental phosphorus business and a subsequently defined amount of cash
and debt.

     Monsanto and Solutia also entered into an employee benefits and
compensation allocation agreement that set forth the manner in which
assets and liabilities under employee benefit plans and other
employment-related liabilities were divided between them. Certain assets
and liabilities related to the plans were not included in the Statement
of Consolidated Financial Position as of December 31, 1996. Items
excluded were comprised principally of assets and liabilities for U.S.
and ex-U.S. defined benefit pension plans as well as workers'
compensation and additional obligations for health care and other
postretirement benefits that Solutia retained for substantially all
retired U.S. employees.

     Unaudited Pro Forma Condensed Statements of Consolidated Income
for the years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                        1997              1996
                                       -------------------------
<S>                                     <C>               <C>
Income Before Income Taxes              $ 235             $   9
Net Income                                157                17
Basic Earnings per Share                $1.33             $0.15
Diluted Earnings per Share              $1.27             $0.14
</TABLE>

     The pro forma information is presented for illustrative purposes
only and may not be indicative of the results that would have been
obtained had the transactions actually occurred on the dates assumed,
nor is it necessarily indicative of the future consolidated results of
operations.

     The final determination of the assets contributed to Solutia and
the liabilities assumed by Solutia was made pursuant to the agreements
entered into between Monsanto and Solutia in connection with the
Spinoff. As of the date of the Spinoff, a net liability transfer to
Solutia was affected directly through the "Monsanto Company Equity"
account in the Statement of Consolidated Financial Position.

<PAGE>
     Monsanto provided certain general and administrative services to
Solutia, including finance, legal, treasury, information systems and
human resources. The cost allocated to Solutia for these services was
based upon the percentage relationship between the net assets utilized
in Solutia's operations and Monsanto's total net assets, as well as
other methods which management believes to be reasonable. These
allocations were $12 million and $85 million in 1997 and 1996,
respectively. In preparation for the Spinoff, Monsanto began a
transition plan for the separation. As part of this plan, Monsanto
discontinued its allocation of corporate expenses for these general and
administrative services on April 1, 1997, as these expenses were
specifically identified and segregated as part of Solutia's ongoing cost
infrastructure. As a result of the Spinoff, Solutia is now required to
perform these general and administrative functions using its own
resources or purchased services and is responsible for the costs and
expenses associated with the management of a public company. If Solutia
had operated as a stand-alone entity in 1996 and 1997, management
estimates that general and administrative services would have been lower
by approximately $39 million in 1996 and higher by $13 million in 1997
in order to reflect the cost of replacing the services represented by
these allocations.

     As described in Notes 10, 11 and 12, Solutia employees and
retirees participated in various Monsanto pension, health care, savings
and other benefit plans. The costs and certain obligations related to
these plans were included in Solutia's consolidated financial statements
generally based on the percentage of Solutia payroll costs to total
Monsanto payroll costs.


32  SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>

     Certain assets and liabilities related to Solutia's operation had
been managed and controlled by Monsanto on a centralized basis. Such
assets and liabilities have been allocated to Solutia in the manner
described in the preceding paragraphs for allocated general and
administrative expenses and benefit plans. A portion of the following
pre-Spinoff assets and liabilities have been determined in this manner:
other assets, accounts payable, postretirement liabilities,
miscellaneous accruals and other liabilities.

     Monsanto used a centralized approach to cash management and the
financing of its operations. As a result, cash and cash equivalents and
debt were not allocated to Solutia in the pre-Spinoff historical
financial statements. Solutia generally did not have borrowings except
amounts due to Monsanto. Interest expense was allocated to Solutia in
the consolidated financial statements to reflect Solutia's pro rata
share of the financing structure of Monsanto. This allocation in the
consolidated financial statements is based on the percentage
relationship between the net assets utilized in Solutia's operations and
Monsanto's total net assets.

     The allocation methodology followed in preparing the pre-Spinoff
consolidated financial statements may not necessarily reflect the
results of operations, cash flows, or financial position of Solutia in
the future, or what the results of operations, cash flows, or financial
position would have been had Solutia been a separate stand-alone entity.

POST-SPINOFF FINANCIAL INFORMATION
Financial data included in the accompanying consolidated financial
statements, for periods subsequent to the Spinoff, have been prepared on
a basis that reflects the historical value of the assets, liabilities,
and operations of the businesses that were contributed to Solutia by
Monsanto in accordance with the distribution and employee benefits and
compensation allocation agreements described in the preceding
paragraphs.

     Effective with the Spinoff on September 1, 1997, the assets
contributed to Solutia and the liabilities assumed by Solutia included a
joint venture interest in Monsanto's elemental phosphorus business, cash
of $75 million, debt of $1.029 billion, accrued net pension liability
for the U.S. and ex-U.S. defined benefit pension plans, and additional
obligations for health care and other postretirement benefits. At the
date of the Spinoff, the amount of postretirement liabilities assumed by
Solutia totaled approximately $1.018 billion.

2> SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION
Subsequent to the Spinoff, the consolidated financial statements include
the accounts of Solutia and its majority owned subsidiaries. Other
companies in which Solutia has a significant interest (20 to 50 percent)
are included in "Investments in Affiliates" in the Statement of
Consolidated Financial Position. Solutia's share of these companies' net
earnings or losses is reflected in "Equity Earnings from Affiliates" in
the Statement of Consolidated Income. Prior to the Spinoff, the
consolidated financial statements included the accounts of Solutia as
described in Note 1.

USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and that affect revenues and expenses during the
period reported. Estimates are adjusted when necessary to reflect actual
experience. Significant estimates are used to account for the allocation
between Monsanto and Solutia of financial statement amounts,
restructuring reserves, environmental reserves, self-insurance reserves,
employee benefit plans, asset impairments, and contingencies.

CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and temporary investments with
maturities of three months or less when purchased.

INVENTORY VALUATION
Inventories are stated at cost or market, whichever is less. Actual cost
is used to value raw materials and supplies. Standard cost, which
approximates actual cost, is used to value finished goods and goods in
process. Standard cost includes direct labor and raw materials, and
manufacturing overhead based on practical capacity. The cost of certain
inventories (78 percent as of December 31, 1998) is determined by the
last-in, first-out ("LIFO") method, which generally reflects the effects
of inflation or deflation on cost of goods sold sooner than other
inventory cost methods. The cost of other inventories generally is
determined by the first-in, first-out ("FIFO") method.

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost. The cost of plant and
equipment is depreciated over weighted average periods of 18 years for
buildings and 10 years for machinery and equipment, by the straight-line
method.

<PAGE>
IMPAIRMENT OF LONG-LIVED ASSETS
Impairment tests of long-lived assets are made when conditions indicate
a possible loss. Such impairment tests are based on a comparison of
undiscounted cash flows to the recorded value of the asset. If an
impairment is indicated, the asset value is written down to its fair
value based upon discounted cash value, using an appropriate discount
rate.

ENVIRONMENTAL REMEDIATION
Costs for remediation of waste disposal sites are accrued in the
accounting period in which the obligation is probable and when the cost
is reasonably estimable. Postclosure costs for hazardous

                                    SOLUTIA INC. 1998 ANNUAL REPORT  33

<PAGE>
<PAGE>

1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

and other waste facilities at operating locations are accrued over the
estimated life of the facility as part of its anticipated closure cost.
Environmental liabilities are not discounted, and they have not been
reduced for any claims for recoveries from insurance or third parties.
In those cases where insurance carriers of third-party indemnitors have
agreed to pay any amounts and management believes that collectability of
such amounts is probable, the amounts are reflected as receivables in
the consolidated financial statements.

     Effective January 1, 1997, Solutia adopted the American Institute
of Certified Public Accountants' Statement of Position ("SOP") 96-1,
"Environmental Remediation Liabilities." SOP 96-1 establishes
authoritative guidance regarding the recognition, measurement and
disclosure of environmental remediation liabilities. The primary change
in Solutia's accounting principles associated with the adoption of this
SOP was an acceleration of the recognition of certain environmental
remediation liabilities at operating facilities. This change and the
amounts associated with it are more fully described in Note 16.

REVENUE RECOGNITION
Revenues are recorded when products are shipped.

DERIVATIVE FINANCIAL INSTRUMENTS
Currency forward contracts are used to manage currency exposures for
financial instruments denominated in currencies other than the entity's
functional currency. Gains and losses on contracts that are designated
and effective as hedges are included in net income and offset the
exchange gain or loss of the transaction being hedged.

     Major currencies effecting the company's business are the U.S.
dollar, the British pound sterling, the Belgian franc, the German
deutsche mark and the Brazilian real. Currency restrictions are not
expected to have a significant effect on Solutia's cash flow, liquidity
or capital resources.

INCOME TAXES
Subsequent to the Spinoff, Solutia became responsible for paying its own
income taxes and filing its own income tax returns. Prior to the
Spinoff, the company did not file separate tax returns because its
results were included in the income tax returns filed by Monsanto and
its subsidiaries in various U.S. and ex-U.S. jurisdictions. The tax
provisions reflected in the Statement of Consolidated Income for periods
prior to the Spinoff have been computed as if Solutia were a separate
company.

     The company accounts for income taxes using the asset and
liability method. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences of temporary differences
between the carrying amounts and tax bases of assets and liabilities
using enacted rates.

CURRENCY TRANSLATION
The financial statements for most of Solutia's ex-U.S. operations are
translated into U.S. dollars at current exchange rates. Unrealized
currency adjustments in the Statement of Consolidated Financial Position
are accumulated in equity. The financial statements of ex-U.S. entities
that operate in hyperinflationary economies are translated at either
current or historical exchange rates, as appropriate. These currency
adjustments are included in net income.

EARNINGS PER SHARE
Effective December 31, 1997, Solutia adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." Under this
standard, the presentation of primary and fully diluted earnings per
share required by previous standards was replaced by basic and diluted
earnings per share. Basic earnings per share measures operating
performance assuming no dilution from securities or contracts to issue
common stock. Diluted earnings per share measures operating performance
by giving effect to the dilution that would occur when securities or
contracts to issue common stock are exercised or converted.

     For periods ended prior to the Spinoff, the number of weighted
average shares outstanding and common share equivalents used in the
earnings per share calculation was based upon the weighted average
number of Monsanto shares outstanding and Monsanto common share
equivalents for the applicable period, adjusted for the distribution
ratio in the Spinoff of one share of the company's common stock for
every five shares of Monsanto common stock.

COMPREHENSIVE INCOME
Effective January 1, 1998, Solutia adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes the standards for
reporting and displaying comprehensive income and its components in a
full set of general-purpose financial statements. Comprehensive income
includes net income and several other items that were recognized
directly in equity under previous accounting standards.

<PAGE>
3> INTERCOMPANY TRANSACTIONS

Transactions with Monsanto prior to the Spinoff, included in the
Statement of Consolidated Income, are summarized as follows:

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                               ------------------------
                                                1997              1996
                                               ------------------------
<S>                                             <C>               <C>
Intercompany sales                              $42               $63
General and administrative services              12                85
Interest expense                                 26                36
</TABLE>

     Intercompany sales were made at Monsanto's established transfer prices.
In addition, the costs for certain general and administrative services
were allocated to Solutia. As further discussed in

34  SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>

Note 1, Monsanto discontinued its allocation of the cost of general and
administrative expenses to Solutia, effective April 1, 1997, as part of
its transition plan of separation. Such expenses were specifically
identified and segregated as part of Solutia's ongoing cost
infrastructure. Interest expense charged to Solutia represents an
allocation from Monsanto of its total interest expense.

4> RESTRUCTURING

In December 1996, Solutia recorded pretax restructuring charges of $256
million ($164 million aftertax) to cover costs associated with the
closure or sale of certain facilities, asset write-offs, and work force
reductions of approximately 900 people across all regions and areas of
the company. These actions were necessary primarily because of excess
production capacity, coupled with insufficient demand for certain
products. Such charges included pretax amounts for asset impairments
totaling $56 million that was charged against cost of goods sold. Asset
values were written down to their discounted cash values, using
appropriate discount rates.

     1998 actions taken under the 1996 restructuring plan included
continuing the shutdowns of certain facilities and headcount reductions
of approximately 50 people. The 50 people severed were in almost all
areas of the company and had left the company by the end of 1998.
Solutia also terminated approximately 100 individuals during December
1998 who will not leave the company until various dates in the first
half of 1999. Evaluations of the costs to complete the company's
restructuring plans yielded lower cost estimates for certain of the
restructuring actions. The second quarter 1998 review yielded lower cost
estimates to complete the shutdown of certain facilities and resulted in
the reversal of $3 million ($2 million aftertax) in that quarter. The
third and fourth quarter 1998 reviews yielded downward revisions of the
costs to implement the employment reduction plans due to higher than
anticipated attrition that has reduced employment levels without
additional cost to the company. As a result, the company reversed
restructuring reserves of $3 million ($2 million aftertax) in the third
quarter 1998 and $3 million ($2 million aftertax) in the fourth quarter.
Significant progress was made on the 1996 restructuring during 1997,
with employment being reduced by approximately 600 people. Employees
terminated were from all regions and areas of the company.

     In December 1995, the board of directors of Monsanto approved a
plan of restructuring resulting in a pretax charge of $66 million ($57
million aftertax). The charge covered the costs of work force
reductions, business consolidations, facility closures, and the exit
from nonstrategic businesses and facilities. Significant progress was
made toward the completion of the 1995 restructuring during 1996. The
actions resulted in reduced employment of approximately 100 people and
the closure of certain facilities. Reviews of the 1995 restructuring
reserves during 1997 resulted in a second quarter reversal of $8 million
($5 million aftertax) due to lower exit costs associated with the sale
and closure of nonstrategic facilities. As of December 31, 1998, the
restructuring reserves established in 1995 had been utilized.

     The table below summarizes the company's 1995 and 1996
restructuring charges and the costs to implement the restructuring
actions:

<TABLE>
<CAPTION>
                                       Employee          Shutdown          Asset 
                                      Reductions      of Facilities     Impairments    Total
                                     --------------------------------------------------------
<S>                                      <C>               <C>            <C>          <C>
Balance at January 1, 1996               $ 22              $ 60           $  -         $  82
Charges                                   157                43             56           256
Amounts utilized                          (32)              (49)             -           (81)
                                     -------------------------------------------------------- 
Balance at December 31, 1996             $147              $ 54           $ 56         $ 257
                                     --------------------------------------------------------
Amounts utilized                          (80)               (9)           (56)         (145)
Adjustments                                 -                (8)             -            (8)
                                     --------------------------------------------------------
Balance at December 31, 1997             $ 67              $ 37           $  -         $ 104
                                     --------------------------------------------------------
Amounts utilized                          (24)              (16)             -           (40)
Adjustments                                (6)               (3)             -            (9)
                                     --------------------------------------------------------
BALANCE AT DECEMBER 31, 1998             $ 37              $ 18           $  -         $  55
                                     ========================================================
</TABLE>

     Restructuring expenses were recorded based on estimates prepared
at the time the restructuring actions were approved by the board of
directors. The 1997 and 1998 adjustments to these estimates, shown in
the table above, were credited to costs of goods sold in the respective
year. The timetable for completing all  employee-related actions planned
in the 1996 restructuring has extended beyond management's original
estimates due to the efforts required to complete the separation from
Monsanto and to complete the transition to new business systems and
methodologies. Management believes that the balance of these reserves as
of December 31, 1998 is adequate for completion of those activities
during 1999.

<PAGE>
5> INVESTMENTS IN AFFILIATES

At December 31, 1998, Solutia's investments in affiliates consisted
principally of its 50 percent interests in the Flexsys, L.P. ("Flexsys")
rubber chemicals joint venture and the Advanced Elastomers Systems, L.P.
("AES") joint venture for which Solutia uses the equity method of
accounting. Summarized combined financial information for 100 percent of
the Flexsys and AES joint ventures follows:

<TABLE>
<CAPTION>
                                       1998           1997           1996
                                      ------------------------------------
<S>                                    <C>            <C>            <C>
RESULTS OF OPERATIONS:
Net sales                              $838           $865           $779
Net income                               94             78             64

FINANCIAL POSITION:
Total assets                           $976           $899           $853
Total liabilities                       336            254            237
</TABLE>

                                      SOLUTIA INC. 1998 ANNUAL REPORT  35

<PAGE>
<PAGE>

1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6> INVENTORY VALUATION

The components of inventories were:

<TABLE>
<CAPTION>
                                        1998              1997
                                       -------------------------
<S>                                     <C>               <C>
Finished goods                          $ 252             $ 259
Goods in process                           87                60
Raw materials and supplies                116               148
                                       -------------------------
Inventories, at FIFO cost                 455               467
Excess of FIFO over LIFO cost            (124)             (142)
                                       -------------------------
TOTAL                                   $ 331             $ 325
                                       =========================
</TABLE>

     Inventories at FIFO approximate current cost. The effects 
of LIFO inventory liquidations were not significant in 1998 
and 1997; liquidations increased pretax income by $5 million 
in 1996.

7> INCOME TAXES

The components of income before income taxes were:

<TABLE>
<CAPTION>
                                         1998           1997           1996
                                        ------------------------------------
<S>                                      <C>            <C>             <C>
United States                            $285           $187            $11
Outside United States                      90            103             22
                                        ------------------------------------
TOTAL                                    $375           $290            $33
                                        ====================================
</TABLE>

     The components of income tax expense charged to operations were: 

<TABLE>
<CAPTION>
                                         1998           1997           1996
                                        ------------------------------------
<S>                                      <C>             <C>           <C>
Current:
U.S. federal                             $ 66            $36           $ 13
U.S. state                                  3              7              2
Outside United States                      25             23             31
                                        ------------------------------------
                                           94             66             46
                                        ------------------------------------
Deferred:
U.S. federal                               21             19            (21)
U.S. state                                  6              2             (1)
Outside United States                       5             11            (23)
                                        ------------------------------------
                                           32             32            (45)
                                        ------------------------------------
TOTAL                                    $126            $98           $  1
                                        ====================================
</TABLE>


     Factors causing Solutia's effective tax rate to differ from the
U.S. federal statutory rate were:

<TABLE>
<CAPTION>
                                                   1998           1997           1996
                                                  ------------------------------------

<S>                                                 <C>            <C>           <C>
U.S. federal statutory rate                         35%            35%            35%
U.S. state income taxes                              2              2              1
Tax benefit of foreign sales corporation            (2)            (2)           (23)
Taxes related to foreign income, 
net of credits                                       -              -              3
Income from equity affiliates 
recorded net of tax                                 (2)            (3)           (13)
Other                                                1              2              -
                                                  ------------------------------------
EFFECTIVE INCOME TAX RATE                           34%            34%             3%
                                                  ====================================
</TABLE>


<PAGE>
     Deferred income tax balances were related to:

<TABLE>
<CAPTION>
                                         1998              1997
                                       -------------------------
<S>                                     <C>               <C>
Property                                $(174)            $(177)
Postretirement benefits                   393               394
Restructuring reserves                     31                51
Environmental liabilities                  72                80
Inventory                                   5                (2)
Other                                      31                41
                                       -------------------------
NET ASSET                               $ 358             $ 387
                                       =========================
</TABLE>

     Income taxes and remittance taxes have not been recorded on $60
million in undistributed earnings of subsidiaries, either because any
taxes on dividends would be offset substantially by foreign tax credits
or because Solutia intends to reinvest those earnings indefinitely. It
is not practicable to estimate the tax effect of remitting these
earnings to the U.S.

8> DEBT OBLIGATIONS

DEBT MATURING IN ONE YEAR
Debt maturing in one year consisted principally of commercial paper
balances, which totaled $0 as of December 31, 1998 and $190 million as
of December 31, 1997. The weighted average interest rate on total debt
outstanding at December 31, 1997, was 6.99 percent. Interest expense on
commercial paper balances charged to income during 1998 and 1997, for
the period following the Spinoff, were at weighted average rates of 5.65
percent and 5.78 percent, respectively.

     As of December 31, 1998, Solutia had a five-year revolving credit
facility of $800 million with a syndicate of banks to support its
commercial paper. The credit facility is also available for working
capital and other general corporate purposes. Interest on amounts
borrowed under this credit facility is expected to approximate money
market rates.

     The credit agreement contains various covenants that, among other
things, restrict Solutia's ability to merge with another entity and that
require Solutia to meet certain leverage and interest coverage ratios.
The company does not anticipate that future borrowings will be limited
by the terms of this agreement. No borrowings were outstanding under
this credit facility as of December 31, 1998, and December 31, 1997.

LONG-TERM DEBT
Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                         1998              1997
                                        ------------------------
<S>                                      <C>               <C>
6.5% notes due 2002                      $150              $150
7.375% debentures due 2027                300               300
6.72% debentures due 2037                 150               150
Unamortized debt discount                  (3)               (3)
                                        ------------------------
TOTAL                                    $597              $597
                                        ========================
</TABLE>

     The notes and debentures are unsecured obligations. Interest is
payable semiannually, on April 15 and October 15 of each year. The


36  SOLUTIA INC. 1998 ANNUAL REPORT
<PAGE>
<PAGE>

holders of the 2037 debentures have the right to require repayment on
October 15, 2004. The notes and debentures contain provisions that,
among other things, restrict Solutia's ability to create liens against
assets and its ability to enter into sale and leaseback transactions.

9> FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair value of Solutia's long-term debt as of December 31,
1998, and December 31, 1997, was $587 million and $605 million,
respectively. These estimates compare with the recorded amount of $597
million in both years.

     The recorded amounts of cash, trade receivables, third-party
guarantees, and accounts payable approximate their fair values at both
December 31, 1998, and December 31, 1997. The estimated fair value of
the company's foreign currency forward contracts approximates their
notional amounts. Notional amounts at December 31, 1998, and December
31, 1997, for purchase contracts were $34 million and $22 million,
respectively, and for sell contracts were $34 million and $22 million,
respectively.

     Fair values are estimated by the use of quoted market prices,
estimates obtained from brokers, and other appropriate valuation
techniques based upon information available as of December 31, 1998, and
December 31, 1997. The fair-value estimates do not necessarily reflect
the values Solutia could realize in the current market.

10> POSTRETIREMENT BENEFITS - PENSIONS

Effective December 31, 1998, the company adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits," which standardizes, to the extent practicable, the disclosure
requirements for pensions and other postretirement benefits and which
requires disclosure of the components of the changes in the benefit
obligation and fair values of plan assets. Information for 1997 has been
restated to conform to the new presentation.

     Pension benefits are based on the employee's age, years of
service, and compensation level. The pension plans are funded in
accordance with Solutia's long-range projections of the plans' financial
conditions. These projections take into account benefits earned and
expected to be earned, anticipated returns on pension plan assets, and
income tax and other regulations. Prior to the Spinoff, the majority of
Solutia's employees participated in Monsanto's noncontributory pension
plans. In conjunction with the Spinoff, Solutia assumed pension
liabilities and received related assets from those plans for its
applicable active employees and for certain former employees who left
Monsanto in earlier years. 

     The company's net pension cost was $22 million in 1998 and $28
million in 1997. Net pension cost for 1997 consisted of $9 million of
net pension costs incurred subsequent to the Spinoff and $19 million of
cost allocations from Monsanto. Solutia's net pension cost allocations
from Monsanto were $18 million in 1996. Separate calculations of the
components of Solutia's net pension cost and the funded status of the
plans prior to the Spinoff are not available. For 1998 and the four
months of 1997 subsequent to the Spinoff, the company's net pension
costs were as follows:

<TABLE>
<CAPTION>
                                         1998              1997
                                       -------------------------
<S>                                     <C>                <C>
Service costs for benefits earned       $  33              $ 11
Interest cost on benefit obligation       130                52
Assumed return on plan assets            (147)              (53)
Prior service costs                        19                 4
Transition asset                          (10)               (4)
Unrecognized loss                          (3)               (1)
                                       -------------------------
TOTAL                                   $  22              $  9
                                       =========================
</TABLE>

     Components of the changes in the projected benefit obligation are
as follows: 

<TABLE>
<CAPTION>
                                                    1998           1997
                                                  -----------------------
<S>                                                <C>            <C>
Projected benefit obligation at Spinoff                           $1,768
Projected benefit obligation at January 1          $1,824              -
Service costs                                          33             11
Interest cost                                         130             52
Actuarial gains and losses                            214             58
Benefits paid                                        (229)           (75)
Plan amendments                                        11             10
                                                  -----------------------
PROJECTED BENEFIT OBLIGATION AT DECEMBER 31        $1,983         $1,824
                                                  =======================
</TABLE>


<PAGE>
     Changes in the fair value of plan assets are as follows:
<TABLE>
<CAPTION>
                                                    1998           1997
                                                  -----------------------
<S>                                                <C>            <C>
Fair value of plan assets at Spinoff                              $1,838
Fair value of plan assets at January 1             $1,834              -
Actual return on plan assets                          288             68
Benefits paid                                        (212)           (72)
                                                  -----------------------
FAIR VALUE OF PLAN ASSETS AT DECEMBER 31           $1,910         $1,834
                                                  =======================
</TABLE>

     Plan assets consist principally of common stocks and U.S.
government and corporate obligations. Contributions to these plans were
neither required nor made in 1998 and 1997 because Solutia's principal
pension plan is adequately funded, using assumed returns.

     The funded status of Solutia's pension plans at the 1998 and 1997
year-ends were as follows:

<TABLE>
<CAPTION>
                                         1998              1997
                                       -------------------------
<S>                                     <C>               <C>
Funded status                           $ (73)            $  10
Less:
  Unrecognized initial net gain           228               269
  Unrecognized prior service costs       (184)             (178)
  Additional liability                     19                14
  Unrecognized subsequent net gain         23                33
                                       -------------------------
ACCRUED NET PENSION LIABILITY           $ 159             $ 128
                                       =========================
</TABLE>

     The accrued net pension liability was included in:

<TABLE>
<S>                                      <C>               <C>
Postretirement liabilities               $168              $136
Less: Other assets                          9                 8
                                       -------------------------
ACCRUED NET PENSION LIABILITY            $159              $128
                                       =========================
</TABLE>

                                    SOLUTIA INC. 1998 ANNUAL REPORT  37

<PAGE>
<PAGE>

1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Information regarding plans with accumulated benefit obligations
in excess of plan assets is as follows:

<TABLE>
<CAPTION>
                                          1998              1997
                                         ------------------------
<S>                                       <C>               <C>
Projected benefit obligation              $27               $27
Accumulated benefit obligation             23                22
Fair value of plan assets                   -                 -
</TABLE>

     The significant actuarial assumptions used to estimate the
projected benefit obligation for the company's principal pension plan
were as follows:

<TABLE>
<CAPTION>
                                                          1998           1997
                                                         --------------------- 
<S>                                                       <C>            <C>
Discount rate                                             7.00%          7.25%
Assumed long-term rate of return on plan assets           9.50%          9.50%
Annual rates of salary increase (for plans that 
  base benefits on final compensation level)              4.00%          4.00%
</TABLE>

11> POSTRETIREMENT BENEFITS - HEALTH CARE AND OTHER

As discussed in Note 10 above, Solutia adopted SFAS No. 132 effective
December 31, 1998. Disclosures for periods prior to 1998 have been
restated.

     The majority of Solutia's employees participate in benefit
programs that provide certain health care and life insurance benefits
for retired employees. Substantially all regular, full-time U.S.
employees and certain employees in other countries may become eligible
for these benefits if they reach retirement age while employed by
Solutia. These postretirement benefits are unfunded and are generally
based on the employee's years of service and/or compensation level. The
costs of postretirement benefits are accrued by the date the employees
become eligible for the benefits. In connection with the Spinoff,
Solutia assumed retiree medical liabilities for its applicable active
employees and for approximately two-thirds of the retired U.S. employees
of Monsanto.

     During the second quarter of 1998, Solutia amended certain of its
postretirement health care plans, primarily to adjust cost-sharing
provisions. The amendment resulted in a $161 million reduction in the
company's accumulated postretirement benefit obligation, which is being
amortized over the average remaining service life of plan participants
of approximately 12 years.

     Solutia's postretirement benefit costs were $54 million in both
1998 and 1997. The 1997 postretirement benefit cost consisted of $23
million of postretirement benefit costs incurred subsequent to the
Spinoff and $31 million of cost allocations from Monsanto. Solutia's
postretirement benefit cost allocations from Monsanto were $50 million
in 1996. Separate calculations of the components of Solutia's total cost
for postretirement benefits and the status of the plans prior to the
Spinoff are not available. For the year ended December 31, 1998 and the
four months of 1997 subsequent to the Spinoff, the company's
postretirement benefit costs were as follows:

<TABLE>
<CAPTION>
                                         1998              1997
                                        ------------------------ 
<S>                                      <C>                <C>
Service costs for benefits earned        $ 11               $ 4
Interest cost on benefit obligation        54                20
Prior service costs                       (12)                -
Unrecognized net gain/(loss)                1                (1)
                                        ------------------------ 
TOTAL                                    $ 54               $23
                                        ========================
</TABLE>

<PAGE>
    Information regarding the changes in the accumulated benefit
obligation and the status of Solutia's postretirement health care plans,
life insurance plans, and employee disability plans follows:

<TABLE>
<CAPTION>
                                                          1998            1997
                                                         ----------------------
<S>                                                       <C>             <C>
Accumulated benefit obligation at Spinoff                                 $901
Accumulated benefit obligation at January 1               $ 918              -
Service costs                                                11              4
Interest cost                                                54             20
Participant contributions                                     1              -
Actuarial gains and losses                                  (19)            17
Benefits paid                                               (78)           (24)
Plan amendments                                            (161)             -
                                                         ----------------------
ACCUMULATED BENEFIT OBLIGATION AT DECEMBER 31               726            918
Unrecognized benefits from prior service                    176             27
Unrecognized subsequent net loss                            (11)           (32)
                                                         ----------------------
ACCRUED LIABILITY                                         $ 891           $913
                                                         ======================
</TABLE>

     The accrued liability was included in:

<TABLE>
<S>                                                       <C>             <C>
Miscellaneous accruals                                    $  88           $ 91
Postretirement liabilities                                  803            822
                                                         ----------------------
ACCRUED LIABILITY                                         $ 891           $913
                                                         ======================
</TABLE>

     Postretirement benefit costs were determined using the following
rate assumptions:

<TABLE>
<CAPTION>
                                                          1998           1997
                                                         ---------------------
<S>                                                       <C>            <C>
Discount rate                                             7.00%          7.25%
Assumed trend rate for health care costs                  5.00%          5.00%
Ultimate trend rate for health care costs                 5.00%          5.00%
</TABLE>


     A 1 percent change in the assumed health care cost trend rates
would have the following effect as of December 31, 1998:

<TABLE>
<CAPTION>
                                      1-PERCENTAGE-           1-PERCENTAGE-
                                     POINT INCREASE          POINT DECREASE
                                    ----------------------------------------
<S>                                        <C>                    <C>
Effect on total service and 
  interest cost components                 $1                     $ 1
Effect on postretirement 
  benefit obligation                        7                      10
</TABLE>

12> EMPLOYEE SAVINGS PLANS

For some employee savings plans, employee contributions are matched in
part by Solutia. The value of these contributions for Solutia was $16
million in 1998, $10 million in 1997, and $11 million in 1996.

38  SOLUTIA INC. 1998 ANNUAL REPORT

<PAGE>
<PAGE>

     In connection with the Spinoff, Monsanto common stock held by the
Monsanto Employee Stock Ownership Plan ("ESOP") and related Monsanto
ESOP borrowings were allocated between Solutia and Monsanto. As a result
of this allocation, Solutia received 2.4 million shares of Monsanto
common stock and assumed $29 million of ESOP debt to third parties.
Simultaneously, Solutia created its own ESOP, established a trust to
hold the Monsanto shares, and issued a $29 million loan to the trust.
Proceeds of the loan were used by the trust to repay the assumed third-
party debt. Subsequent to the Spinoff, the ESOP trust was required by
government regulations to divest its holdings of Monsanto common stock
and use the proceeds to acquire Solutia common stock. The divestiture of
Monsanto common stock and the purchase of Solutia common stock were
completed in early 1998. The trust held approximately 10.7 million
shares of Solutia common stock at December 31, 1998.

     A portion of the ESOP shares are allocated each year to employee
savings accounts as matching contributions. During 1998 and 1997,
622,598 shares and 232,674 shares, respectively, were allocated to
participants' accounts under the plan, leaving 3,887,519 unallocated
shares as of December 31, 1998. Unallocated shares held by the ESOP are
considered outstanding for earnings per share calculations. Compensation
expense is equal to the cost of the shares allocated to participants,
less dividends paid on the shares held by the ESOP. Information
regarding the ESOP follows:

<TABLE>
<CAPTION>
                                                      1998           1997           1996
                                                     ------------------------------------
<S>                                                    <C>            <C>            <C>
Total ESOP expense                                     $6             $5             $3
Interest portion of total ESOP expense                  2              3              2
Cash contributions                                      7              -              -
Dividends paid on ESOP shares held                      -              -              -
</TABLE>

     For periods prior to the Spinoff, the total Monsanto ESOP expense
and the related interest were allocated to Solutia from Monsanto. Cash
contributions and dividends paid on ESOP shares for periods prior to the
Spinoff were not applicable to the Solutia ESOP.

13> STOCK OPTION PLANS

The Solutia Inc. 1997 Stock-Based Incentive Plan (the "1997 Plan")
provides incentives to officers and employees of the company and its
subsidiaries directly linked to the price of Solutia's stock. The 1997
Plan is the company's current stock-based incentive plan for management.

     The 1997 Plan authorizes up to 7,800,000 shares of company common
stock for grants of non-qualified and incentive stock options, stock
appreciation rights, restricted stock awards, and bonus stock awards to
the company's officers and employees. Shares used may be either newly
issued shares and/or treasury shares. Under the 1997 Plan, the exercise
price of a stock option must be no less than the fair market value of
the company's common stock on the grant date. Additionally, the 1997
Plan provides that the term of any stock option granted under the plan
may not exceed 10 years. As of December 31, 1998, approximately
3,064,732 shares of company's common stock remained available for grants
under the Plan.

     During 1998, non-qualified stock options to purchase 26,000 shares
of the company's common stock were granted under the 1997 Plan to
current executive officers and other senior executives as a group, and
non-qualified stock options to purchase 231,567 shares were granted to
other employees at an average exercise price of $26.98 per share. Total
shares covered by options granted under the 1997 Plan to current
executive officers and other senior executives as a group and other
employees were 1,072,000 and 3,751,067, respectively, as of December 31,
1998. The options granted to the company's executive officers and other
senior executives are performance options that vest upon achievement of
specified share price targets. The options granted to the other
management employees are time-based. They become exercisable in thirds,
one-third on each of the first three anniversaries of the option grant
date.

     Certain options granted under Monsanto's stock option plans
("Monsanto Options") to company employees in 1997 prior to the Spinoff
were converted into Solutia options with adjustments to preserve their
value. In addition, unexercised Monsanto Options granted to Solutia and
Monsanto employees prior to 1997 were converted into two awards, one
based on Monsanto common stock and one based on Solutia common stock,
with the same overall value at the time of the Spinoff as the old award. 

<PAGE>
     Effective January 1, 1996, Solutia adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by the standard,
Solutia has elected to continue following the guidance of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," for measurement and recognition of stock-based transactions
with employees. Accordingly, no compensation cost has been recognized
for Solutia's option plans. Had the determination of compensation cost
for these plans been based on the fair value at the grant dates for
awards under these plans, consistent with the method of SFAS No. 123,
Solutia's net income would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
                                  1998              1997           1996
                                 ----------------------------------------
<S>                               <C>               <C>            <C>
NET INCOME:
As reported                       $ 249             $ 192          $  32
Pro forma                           224               159             18

DILUTED EARNINGS PER SHARE:
As reported                       $2.03             $1.55          $0.27
Pro forma                          1.82              1.29           0.15
</TABLE>

     Compensation expense resulting from the fair value method of SFAS
No. 123 may not be representative of compensation expense to be incurred
on a pro forma basis in future years.

     The fair value of each option grant is estimated on the date of
grant by use of the Black-Scholes option-pricing model.

                                     SOLUTIA INC. 1998 ANNUAL REPORT  39

<PAGE>
<PAGE>

1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The following weighted-average assumptions were used to calculate
the expense attributable to the company for Monsanto Options granted to
company employees in 1997 and 1996:
     
<TABLE>
<CAPTION>
                                        1997              1996
                                       ------------------------
<S>                                     <C>               <C>
Expected dividend yield                  0.3%              1.5%
Expected volatility                     27.0%             25.0%
Risk-free interest rates                 6.3%              6.0%
Expected option lives (years)             4.0               4.0
</TABLE>

     The following weighted-average assumptions were used for grants of
Solutia options in 1998 and 1997:

<TABLE>
<CAPTION>
                                        1998              1997
                                       ------------------------
<S>                                     <C>               <C>
Expected dividend yield                  0.2%              0.2%
Expected volatility                     28.0%             25.0%
Risk-free interest rates                 5.1%              5.9%
Expected option lives (years)             5.0               4.0
</TABLE>

     The weighted-average fair values of options granted during 1998,
1997 and 1996 were $9.33, $4.83, and $6.43 per share, respectively.

     A summary of the status of the company's stock option plans for
year ended December 31, 1998, and the period subsequent to the Spinoff
through December 31, 1997, follows:

<TABLE>
<CAPTION>
                                                           OUTSTANDING
                                              ------------------------------------- 
                       EXERCISABLE                                WEIGHTED-AVERAGE
                         SHARES                  SHARES            EXERCISE PRICE
                      -------------------------------------------------------------
<S>                    <C>                     <C>                     <C>
September 1, 1997      10,269,960              24,122,741              $13.48
                      -------------------------------------------------------------
Granted                                         4,565,500               19.25
Exercised                                        (752,102)               9.29
Expired                                          (118,411)              16.36
                      -------------------------------------------------------------
December 31, 1997       9,517,858              27,817,728              $14.53
                      -------------------------------------------------------------
Granted                                           257,567               26.98
Exercised                                      (1,833,225)              12.19
Expired                                          (475,637)              16.22
                      -------------------------------------------------------------
DECEMBER 31, 1998      22,946,490              25,766,433              $14.77
                      =============================================================
</TABLE>

     The following table summarizes information about stock options
outstanding as of December 31, 1998:

OPTIONS OUTSTANDING:

<TABLE>
<CAPTION>
                                                 Weighted-Average
       Range of                                     Remaining          Weighted-Average
    Exercise Prices         Shares               Contractual Life       Exercise Price
                         ---------------------------------------------------------------
      <C>                 <C>                       <C>                    <C>
      $ 3 to  7            4,964,597                4.2 years              $ 5.84
        8 to 11               49,679                6.9 years               10.09
       12 to 15            1,537,049                7.2 years               12.63
       16 to 18           14,331,393                8.0 years               16.44
       19 to 23            4,656,874                8.7 years               19.32
       24 to 29              226,841                9.4 years               27.53
                         ---------------------------------------------------------------
      $ 3 to 29           25,766,433                7.4 years              $14.77
                         ===============================================================
</TABLE>
               
<PAGE>
OPTIONS EXERCISABLE:

<TABLE>
<CAPTION>
       Range of                                   Weighted-Average
    Exercise Prices         Shares                 Exercise Price
                         ------------------------------------------
      <C>                 <C>                          <C>    
      $ 3 to  7            4,964,597                   $ 5.84
        8 to 11               46,179                    10.09
       12 to 15            1,531,849                    12.62
       16 to 18           14,330,393                    16.44
       19 to 23            2,073,472                    19.32
       24 to 29                    -                        -
                         ------------------------------------------
      $ 3 to 29           22,946,490                   $14.14
                         ==========================================
</TABLE>

14> ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 provides comprehensive and consistent standards for the
recognition and measurement of derivative and hedging activities. It
requires that derivatives be recorded on the Statement of Consolidated
Financial Position at fair value and establishes criteria for hedges of
changes in the fair value of assets, liabilities or firm commitments,
hedges of variable cash flows of forecasted transactions, and hedges of
foreign currency exposures of net investments in foreign operations.
Changes in the fair value of derivatives that do not meet the criteria
for hedges would be recognized in the Statement of Consolidated Income.
This statement will be effective for the company beginning January 1,
2000. The company is evaluating SFAS No. 133 and has not determined its
effect on the consolidated financial statements.

15> CAPITAL STOCK 

The company's board of directors declared a dividend of one preferred
stock purchase right on each share of the company's common stock issued
in the distribution of shares by Monsanto to its shareholders on the
effective date of the Spinoff. If a person or group acquires beneficial
ownership of 20 percent or more, or announces a tender offer that would
result in beneficial ownership of 20 percent or more, of the company's
outstanding common stock, the rights become exercisable and for every
right held, the owner will be entitled to purchase one one-hundredth of
a share of a series of preferred stock for $125. If Solutia is acquired
in a business combination transaction while the rights are outstanding,
for every right held, the holder will be entitled to purchase, for $125,
common shares of the acquiring company having a market value of $250. In
addition, if a person or group acquires beneficial ownership of 20
percent or more of the company's outstanding common stock, for every
right held, the holder (other than such person or members of such group)
will be entitled to purchase, for $125, a number of shares of the
company's common stock having a market value of $250. Furthermore, at
any time after a person or group acquires beneficial ownership of 
20 percent or more (but less than 50 percent) of the company's
outstanding common stock, the board of directors may, at its option,
exchange part or all of the rights (other than rights held by the

40  SOLUTIA INC. 1998 ANNUAL REPORT    

<PAGE>
<PAGE>

acquiring person or group) for shares of the company's common stock
on a one share-for-every-one-right basis. At any time prior to the
acquisition of such a 20 percent position, the company can redeem each
right for $0.01. The board of directors is also authorized to reduce the
aforementioned 20 percent thresholds to not less than 10 percent. The
rights expire in the year 2007.

     The company has 10 million shares of preferred stock, par value
$0.01 per share, authorized. As of December 31, 1998, there were no
preferred shares issued or outstanding.

16> COMMITMENTS AND CONTINGENCIES

Commitments, principally in connection with uncompleted additions to
property, were approximately $216 million as of December 31, 1998.
Solutia was contingently liable as a guarantor for bank loans totaling
approximately $14 million as of December 31, 1998. In addition, as of
December 31, 1998, the company was contingently liable under letters of
credit, primarily related to environmental remediation, of $88 million.
Solutia's future minimum payments under noncancelable operating leases
and unconditional purchase obligations are $20 million for 1999, $17
million for 2000, $14 million for 2001, $12 million for 2002, $46
million for 2003 and $57 million thereafter.

     Solutia has entered into agreements with customers to supply a
guaranteed quantity of certain products annually at prices specified in
the agreements. In return, the customers have advanced funds to Solutia
to cover the costs of expanding capacity to provide the guaranteed
supply. Solutia has recorded the advances as deferred credits and
amortizes the amounts to income as the customers purchase the products.
At December 31, 1998 and 1997, the unamortized deferred credits were
approximately $137 million and approximately $59 million, respectively.

     The more significant concentrations in Solutia's trade receivables
at year-end were:  

<TABLE>
<CAPTION>
                                          1998             1997
                                         -----------------------
<S>                                       <C>              <C>
U.S. chemical industry                    $55              $130
U.S. carpet industry                       51                73
European glass industry                    36                 -
European chemical industry                  -                41
</TABLE>

     Management does not anticipate losses on its trade receivables in
excess of established allowances.

     Solutia's Statement of Consolidated Financial Position included
accrued liabilities of $198 million and $217 million as of December 31,
1998 and 1997, respectively, for the remediation of identified waste
disposal sites. Expenditures related to remediation activities were $22
million in 1998, $39 million in 1997, and $59 million in 1996. Solutia
recorded charges against cost of goods sold of approximately $34 million
($22 million aftertax) in the fourth quarter of 1997 to increase its
environmental reserves. This action was required in order to reflect
revised estimates for changed circumstances relating to the ultimate
outcome of previously known environmental matters. These revised
estimates were based upon further discussions with environmental
authorities and the availability of new information from recently
completed environmental studies. These events and activities help to
define better and to quantify the company's ultimate liability for these
matters.

     Effective January 1, 1997, Solutia adopted the SOP 96-1,
"Environmental Remediation Liabilities." SOP 96-1 establishes
authoritative guidance regarding the recognition, measurement and
disclosure of environmental remediation liabilities. A charge to cost of
goods sold of approximately $10 million ($6 million aftertax) was
recorded in the first quarter of 1997 associated with the adoption of
SOP 96-1. The timing of this charge was predicated upon an application
of SOP 96-1 in which liabilities arising under the Resource Conservation
and Recovery Act ("RCRA") should be recorded when a RCRA corrective
measures study ("CMS") is completed. Subsequently, the company
reassessed its application of SOP 96-1 and concluded that these
liabilities would be recorded over a continuum of events leading up to
and including a CMS. As a result, the company recorded in the fourth
quarter of 1997, additional charges against cost of goods sold of
approximately $38 million ($24 million aftertax) associated with these
RCRA environmental liabilities.

     Uncertainties related to all of the company's environmental
liabilities include evolving government regulations, the method and
extent of remediation, and future changes in technology. Because of
these uncertainties, the company estimates that potential future
expenses associated with these liabilities could be an additional $20
million to $30 million. Although the ultimate costs and results of
remediation of contaminated sites cannot be predicted with certainty,
they are not expected to have a material adverse effect on Solutia's
consolidated financial position, liquidity, or profitability in any one
year.

<PAGE>
     Monsanto is a party to a number of lawsuits and claims relating to
Solutia, for which Solutia assumed responsibility in the Spinoff. In
addition, Solutia is also a named party in a number of lawsuits and
claims directly. Solutia intends to defend all suits and claims
vigorously. Such matters arise out of the normal course of business and
relate to product liability; government regulation, including
environmental issues; employee relations; and other issues. Certain of
the lawsuits and claims seek damages in very large amounts. Although the
results of litigation cannot be predicted with certainty, management's
belief is that the final outcome of such litigation will not have a
material adverse effect on Solutia's consolidated financial position,
liquidity or profitability in any one year, as applicable.

17> SUPPLEMENTAL DATA

Supplemental income statement data were: 

<TABLE>
<CAPTION>
                                       1998        1997         1996
                                      --------------------------------
<S>                                    <C>        <C>          <C>
Raw material and energy costs          $994       $1,102       $1,059
Employee compensation and benefits      757          746          715
Current income and other taxes          176          149          134
Rent expense                             26           28           29
Technological expenses:
  Research and development               60           60           81
  Engineering, commercial 
    development and patent               23           27            7
                                      --------------------------------
Total technological expenses             83           87           88

</TABLE>

                                  SOLUTIA INC. 1998 ANNUAL REPORT  41


<PAGE>
<PAGE>

1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                        1998         1997        1996
                                       -------------------------------
<S>                                     <C>          <C>          <C>
Interest expense:
  Total interest cost                   $49          $49          $41
  Less capitalized interest               6            8            5
                                       -------------------------------
Net interest expense                     43           41           36

Currency losses including equity in
affiliates' currency gains and losses     2            6            2
</TABLE>


18> SEGMENT AND GEOGRAPHIC DATA

Effective December 31, 1997, Solutia adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which
redefines how operating segments are determined and requires disclosure
of certain financial and descriptive information about a company's
operating segments. The required disclosures follow. As permitted by the
standard, information for years prior to 1997 was not restated to
conform to the new disclosure requirements because it was impracticable
to do so. Solutia reported one segment prior to the adoption of SFAS No.
131.

     Solutia has three reportable segments: Chemicals, Fibers, and
Polymers & Resins. The Chemicals segment produces intermediate chemicals
used in other finished products; phosphorus-based products used in food
and beverages and personal care products; and specialty fluids and
lubricants. The Fibers segment produces Acrilan(R) acrylic fibers used in
apparel, upholstery and brake fibers; nylon carpet fibers for
residential and contract markets; and industrial-strength nylon fibers
used in tire and other industrial applications. The Polymers & Resins
segment produces Saflex(R) plastic interlayer used in automotive and
architectural applications; specialty resins used in paints and
adhesives; polymer modifiers and plasticizers used in flooring products,
sealants, caulks, and adhesives; and Vydyne(R) for engineering
thermoplastics and nylon 6,6 polymers for fiber applications.

     Solutia's three reportable segments are groupings of the company's
10 business units, which are managed to focus on the company's key
technological strengths of polymer chemistry, fiber technology, process
engineering expertise, technical service, and customer problem solving.
Business units sharing similar economic characteristics and similarities
in the areas of products, production processes, types of customers, and
methods of distribution, were aggregated.

     During 1998, Solutia announced that it was reviewing options for
its phosphorus derivatives business that included sale, alliance or
joint venture. Solutia is primarily pursuing the sale of the business,
but is still considering all alternatives. Upon completion of this
divestiture, chemicals segment results will be restated to reflect the
company's ongoing segments.

     Accounting policies of the segments are the same as those
described in the summary of significant accounting policies in Note 2.
However, segment profit reflects only operating expenses that are
directly attributable to the segment. Unallocated service costs are
managed centrally and primarily include costs of technology, engineering
and manufacturing services that are provided to the segments. These
amounts also include corporate administration costs. The company
accounts for intersegment sales at agreed upon transfer prices.
Intersegment sales are eliminated in consolidation. Segment assets
consist primarily of customer receivables, finished goods inventories,
and fixed assets directly associated with the production processes of
the segment ("direct fixed assets"). Segment depreciation and amortization
is based upon direct fixed assets. Unallocated assets consist primarily
of deferred taxes, certain investments in equity affiliates, and indirect
fixed assets.

<PAGE>
     Solutia's 1998 and 1997 segment information follows:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,  
                                         ------------------------------------------------------------------------------------  
                                                           1998                                        1997
                                         ---------------------------------------      ---------------------------------------  
                                            NET         INTERSEGMENT                     Net         Intersegment
SEGMENT:                                   SALES           SALES         PROFIT         Sales           Sales         Profit
                                         ---------------------------------------      ---------------------------------------  
<S>                                       <C>               <C>          <C>           <C>              <C>           <C>
Chemicals                                 $  884            $ 7          $ 226         $  965           $ 18          $ 231
Fibers                                       962              -            200            979              -            161
Polymers & Resins                            994              -            270          1,041              5            272
                                         ---------------------------------------      ---------------------------------------  
SEGMENT TOTALS                             2,840              7            696          2,985             23            664

RECONCILIATION TO CONSOLIDATED TOTALS:
  Sales eliminations                          (7)            (7)                          (23)           (23)
  Other revenues                               2                                            7
  Less unallocated service costs:
    Cost of goods sold                                                     (70)                                        (148)
    Marketing, administrative and 
      technological expenses                                              (240)                                        (226)
  Equity earnings from affiliates                                           25                                           31
  Interest expense                                                         (43)                                         (41)
  Other income (expense)-net                                                 7                                           10

CONSOLIDATED TOTALS:
                                         -------------------------------              -------------------------------          
NET SALES                                 $2,835          $   -                        $2,969           $  -               
                                         ===============================--------      ===============================--------  
INCOME BEFORE INCOME TAXES                                               $ 375                                        $ 290
                                                                        ========                                     ========
</TABLE>

42  SOLUTIA INC. 1998 ANNUAL REPORT<PAGE>
<PAGE>

<TABLE>
<CAPTION>
                                                                             As of December 31,  
                                         ---------------------------------------------------------------------------------------
                                                             1998                                        1997
                                         -------------------------------------------- ------------------------------------------
                                                         CAPITAL    DEPRECIATION AND                Capital    Depreciation and
SEGMENT:                                  ASSETS       EXPENDITURES   AMORTIZATION     Assets     Expenditures   Amortization
                                         -------------------------------------------- ------------------------------------------
<S>                                       <C>              <C>            <C>          <C>            <C>            <C>
Chemicals                                 $  637           $ 87           $ 38         $  601         $ 50           $ 37
Fibers                                       377              8             25            400           33             26
Polymers & Resins                            592             30             38            571           55             41
                                         -------------------------------------------- ------------------------------------------
SEGMENT TOTALS                             1,606            125            101          1,572          138            104

RECONCILIATION TO CONSOLIDATED TOTALS:
  Unallocated amounts                      1,159             33             40          1,196           27             38
                                         -------------------------------------------- ------------------------------------------
CONSOLIDATED TOTALS                       $2,765           $158           $141         $2,768         $165           $142
                                         ============================================ ==========================================
</TABLE>

     Solutia's geographic information for 1998 and 1997 follows:

<TABLE>
<CAPTION>
                                                Net Sales                  Long-Lived Assets
                                         -----------------------         ---------------------
                                           1998           1997            1998           1997
                                         -----------------------         ---------------------
<S>                                       <C>            <C>              <C>            <C>
U.S.                                      $2,009         $2,030           $820           $803
Other countries                              826            939            124            120
                                         -----------------------         ---------------------
CONSOLIDATED TOTALS                       $2,835         $2,969           $944           $923
                                         =======================         =====================
</TABLE>


19> QUARTERLY DATA - UNAUDITED

<TABLE>
<CAPTION>
                                                           First         Second           Third         Fourth        Total 
                                                          Quarter        Quarter         Quarter        Quarter       Year
                                           ----------------------------------------------------------------------------------- 
<S>                                         <C>           <C>            <C>            <C>            <C>          <C>
Net Sales                                   1998          $ 720          $ 745          $ 703          $ 667        $2,835 
                                            1997            719            770            749            731         2,969
 
Gross Profit                                1998            187            206            188            169           750
                                            1997            176            189            173            115           653
 
Operating Income                            1998             99            115             95             77           386
                                            1997             95             97             88             10           290
 
Net Income                                  1998             64             72             58             55           249 
                                            1997             65             62             56              9           192 

Basic Earnings per Share                    1998           0.55           0.62           0.50           0.49          2.16 
                                            1997           0.56           0.53           0.47           0.08          1.63 

Diluted Earnings per Share                  1998           0.51           0.58           0.47           0.46          2.03 
                                            1997           0.54           0.51           0.46           0.06          1.55 
Common Stock Price:
1998                                        HIGH           32             30 5/16        30 15/16       28 1/2       32 
                                            LOW            24 3/16        25 9/16        21 1/2         18 11/16     18 11/16 

1997                                        High            -              -             21 1/2         27 3/4       27 3/4 
                                            Low             -              -             18 11/16       19 1/2       18 11/16 
</TABLE>

     Net income in the second, third and fourth quarters of 1998
includes aftertax reversals of excess restructuring reserves established
in 1996 of $2 million, $2 million and $2 million, respectively. In the
third quarter of 1998, net income includes an aftertax charge of $3
million to reduce the carrying value of certain slow-moving inventories
to their net realizable value. Net income for the fourth quarter of 1998
includes an aftertax charge of $4 million that was caused by losses on
the disposition of certain non-salable inventories.

     In the first quarter of 1997, net income included an aftertax
charge of $6 million associated with the adoption of SOP 96-1 for
environmental reserves at operating locations. Net income in the second
quarter of 1997 included an aftertax charge of $6 million for
environmental-related litigation at the Brio Superfund site and $5
million of aftertax reversals of excess restructuring reserves from
prior years. In the fourth quarter of 1997, net income included aftertax
charges totaling $46 million related to changes in estimates for
environmental remediation liabilities.

     Under SFAS No. 128, "Earnings per Share," the quarterly and total
year calculations of basic and diluted earnings per share are based on
weighted average shares outstanding for that quarterly or total year
period, respectively. As a result, the sum of diluted earnings per share
for the quarterly periods may not equal total year earnings per share.

     Because Solutia was not formed as an independent public company
until September 1, 1997, common stock price information for the first
and second quarters of 1997 is not available.


                                    SOLUTIA INC. 1998 ANNUAL REPORT  43
<PAGE>
<PAGE>

1998
FINANCIAL SUMMARY

Dollars in millions, except per share amounts

<TABLE>
<CAPTION>
                                                             Historical                              Unaudited Pro Forma<F1>
                                  --------------------------------------------------------------    -------------------------
OPERATING RESULTS:                    1998         1997         1996         1995         1994        1997          1996
                                  --------------------------------------------------------------    -------------------------
<S>                                <C>          <C>            <C>          <C>          <C>         <C>             <C>
NET SALES<F2>                      $   2,835    $   2,969      $2,977       $2,964       $3,097      $2,960          $2,962

GROSS PROFIT                             750          653         652          721          729         647             649
  As percent of net sales                 26%          22%         22%          24%          24%         22%             22%

MARKETING, ADMINISTRATIVE AND 
TECHNOLOGICAL EXPENSES                   364          363         427          410          439         393             420
  As percent of net sales                 13%          12%         14%          14%          14%         13%             14%

OPERATING INCOME<F3>                     386          290          33          258          256         254              37
  As percent of net sales                 14%          10%          1%           9%           8%          9%              1%

INCOME BEFORE INCOME TAXES               375          290          33          231          228         235               9

NET INCOME<F4>                           249          192          32          147          149         157              17
  As percent of net sales                  9%           6%          1%           5%           5%          5%             <1%

SHARE DATA:                               
                                  --------------------------------------------------------------    -------------------------

BASIC EARNINGS PER SHARE<F5>       $    2.16    $    1.63      $ 0.28       $ 1.30       $ 1.30      $ 1.33          $ 0.15
DILUTED EARNINGS PER SHARE<F5>          2.03         1.55        0.27         1.27         1.27        1.27            0.14
DIVIDENDS PER SHARE                     0.04         0.01           -            -            -           -               -

COMMON STOCK PRICE:
HIGH                                      32       27 3/4           -            -            -           -               -
LOW                                 18 11/16     18 11/16           -            -            -           -               -
CLOSE                                 22 3/8     26 11/16           -            -            -           -               -

PRICE/EARNINGS RATIO ON YEAR-END 
 STOCK PRICE                              11           17           -            -            -           -               -

NUMBER OF REGISTERED SHAREHOLDERS     41,864       57,894           -            -            -           -               -
YEAR-END SHARES OUTSTANDING 
 (IN THOUSANDS)                      112,771      117,408           -            -            -           -               -
SHARES REPURCHASED (IN THOUSANDS)      6,246        1,570           -            -            -           -               -
AVERAGE DAILY TRADING VOLUME 
 (IN THOUSANDS)                          401        1,053           -            -            -           -               -

OTHER DATA: 
                                  --------------------------------------------------------------    -------------------------
INTEREST EXPENSE<F6>               $      43    $      41      $   36          $36       $   29      $   60          $   64
INCOME TAXES                             126           98           1           84           79          78              (8)
DEPRECIATION AND AMORTIZATION            141          142         166          162          219         142             166 
TOTAL ASSETS                           2,765        2,768       2,483        2,462        2,435           -               -
CAPITAL EXPENDITURES                     158          165         192          179          187           -               -
INTERCOMPANY CHARGES<F7>                   -           12          85           72           69           -               -
LONG-TERM DEBT<F6>                       597          597           -            -            -           -               -
EMPLOYEES (YEAR-END)                   8,700        8,800           -            -            -           -               -
                                  --------------------------------------------------------------    -------------------------
<PAGE>
<FN>
<F1> The unaudited pro forma financial information is presented for 
     illustrative purposes only and has been included in this summary
     because it produces more meaningful comparisons than the
     historical financial information. It may not be indicative of the
     results that would have been obtained had the Spinoff and the
     company's 1997 debt offering actually occurred on the dates
     assumed, nor is it indicative of the future consolidated results
     of operations.

<F2> Net sales for the company included $140 million in 1995 and $400 
     million in 1994 for its rubber chemicals business. In May 1995,
     this business was contributed by Monsanto to the Flexsys, L.P.
     joint venture.

<F3> Operating income includes charges for restructuring and other 
     actions of $1 million in 1998, $84 million in 1997, $248 million
     in 1996, $46 million in 1995, and $34 million in 1994. 

<F4> Net income includes charges for restructuring and other actions of 
     $1 million or $0.01 per share in 1998, $53 million, or $0.43 per
     share in 1997, $164 million, or $1.37 per share in 1996, $52
     million, or $0.45 per share in 1995,  and $21 million, or $0.18
     per share in 1994.

<F5> For periods ended prior to the Spinoff, the number of Monsanto 
     weighted average shares outstanding and common share equivalents
     were adjusted for the distribution ratio in the Spinoff of one
     share of Solutia's common stock for every five shares of Monsanto
     common stock.

<F6> Monsanto used a centralized approach to cash management and the 
     financing of its operations. As a result, cash and cash
     equivalents and debt were not allocated to the company in the
     historical financial statements. Interest expense was allocated to
     the company in the company's consolidated financial statements to
     reflect the company's pro rata share of the financing structure of
     Monsanto.

<F7> Prior to the Spinoff, Monsanto provided certain general and 
     administrative services to the company, including finance, legal,
     treasury, information systems, and human resources. The cost of
     these services was allocated to the company based upon the
     percentage relationship between the net assets utilized in the
     company's operations and Monsanto's total net assets, as well as
     other methods that management believes to be reasonable.
</TABLE>

44  SOLUTIA INC. 1998 ANNUAL REPORT

<PAGE>
<PAGE>

1998
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME


The following unaudited pro forma condensed consolidated statements of
income for the years ended December 31, 1997 and 1996 give effect to the
Spinoff and Solutia's 1997 debt offering as if the Spinoff and the
offering had occurred as of the beginning of the periods presented. The
pro forma information is presented for illustrative purposes only and
may not be indicative of the results that would have been obtained had
the transactions actually occurred on the dates assumed, nor is it
necessarily indicative of future consolidated results of operations. The
unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the historical financial statements and the
related notes thereto included elsewhere in this annual report.

<TABLE>
<CAPTION>

Dollars in millions, 
except per share amounts                   For the Year Ended December 31, 1997          For the Year Ended December 31, 1996
                                       -------------------------------------------     ---------------------------------------- 
                                                              Pro Forma                                     Pro Forma
                                        Historical  ------------------------------      Historical  ---------------------------
                                         Solutia     Adjustments          Solutia        Solutia     Adjustments       Solutia
                                       -------------------------------------------     ----------------------------------------    
<S>                                       <C>        <C>                  <C>            <C>        <C>                <C> 
NET SALES                                 $2,969     $   (9)<FA>          $2,960         $2,977     $  (15)<FA>        $2,962
Cost of Goods Sold                         2,316         (1)<FB>           2,313          2,325          3 <FB>         2,313
                                                          1 <FC>                                         3 <FC>
                                                         (3)<FD>                                       (18)<FD>
                                       -------------------------------------------     ----------------------------------------    
GROSS PROFIT                                 653         (6)                 647            652         (3)               649
Marketing, Administrative, and 
Technological Expenses                       363         14 <FB>             393            427         14 <FB>           420
                                                         (9)<FD>                                       (67)<FD>
                                                         25 <FE>                                        46 <FE> 
Restructuring Expenses - net                                                                192                           192
                                       -------------------------------------------     ----------------------------------------    
OPERATING INCOME                             290        (36)                 254             33          4                 37
Interest Expense                             (41)       (19)<FF>             (60)           (36)       (28)<FF>           (64)
Other Income (Expense) - net                  41                              41             36                            36
                                       -------------------------------------------     ----------------------------------------    
INCOME BEFORE INCOME TAXES                   290        (55)                 235             33        (24)                 9
Income Taxes                                  98        (20)<FG>              78              1         (9)<FG>            (8)
                                       -------------------------------------------     ----------------------------------------    
NET INCOME                                $  192     $  (35)              $  157         $   32     $  (15)            $   17
                                       ===========================================     ========================================    
BASIC EARNINGS PER SHARE                  $ 1.63     $(0.30)              $ 1.33         $ 0.28     $(0.13)            $ 0.15
                                       ===========================================     ========================================    
DILUTED EARNINGS PER SHARE                $ 1.55     $(0.28)              $ 1.27         $ 0.27     $(0.13)            $ 0.14
                                       ===========================================     ========================================    
Basic Weighted Average Shares                                              117.7                                        116.2
                                       ===========================================     ========================================    
Diluted Weighted Average Shares                                            123.7                                        119.8
                                       ===========================================     ========================================    
<FN>
     NOTES
<FA> To record the estimated effect of new selling prices and
     arrangements on former intercompany sales from Solutia to Monsanto.

<FB> To record the assumed increase in retiree medical and pension 
     costs as a result of the Spinoff.

<FC> To record the estimated effect of transactions with the P4 joint 
     venture formed by Monsanto in conjunction with the Spinoff.

<FD> To reverse the historical Monsanto corporate expense allocation to 
     the company because the company is no longer subject to the
     allocation of corporate expenses from Monsanto following the
     Spinoff. 

<FE> Because the company is no longer subject to this corporate expense 
     allocation, a pro forma adjustment was made to record estimated
     general corporate costs that the company believes it would have
     incurred had the company been a separate public company for the
     periods presented.

<FF> To record additional interest expense as a result of the company's 
     assumption of debt from Monsanto and the borrowings of Solutia's
     1997 public debt offering.

<FG> To record the estimated provision for income tax as a result of 
     the pro forma adjustments referred to in Notes (A) through (F)
     above at an estimated combined U.S. federal income and state
     income tax rate of 36 percent.
</TABLE>

                                    SOLUTIA INC. 1998 ANNUAL REPORT  45