UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K/A


Amendment
No. 1


(Mark
One)
 X
              ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31,
      2007o
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _______________________________ to
      ______________________Commission
      file number 001-13255
  SOLUTIA INC.
 
 (Exact
name of registrant as specified in its charter)
  Delaware
                
                (State
      or other jurisdiction of
                incorporation
      or organization)
              
              43-1781797
                (I.R.S.
      Employer
                Identification
      No.)
  575 Maryville Centre Drive, P.O. Box
      66760, St. Louis, Missouri
              63166-6760(Address
      of principal executive offices)
              (Zip
      Code)
  Registrant's
      telephone number, including area code: (314) 674-1000Securities
      registered pursuant to Section 12(b) of the
Act:
  Title of each
      class
                  None
                
                Name of each exchange
      on which registered
                  None
  Securities
registered pursuant to section 12(g) of the Act:
 Title of each
class
 $.01 par
value Common Stock


Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  [   ] Yes  
  [ X ] No





Indicate
by check mark if the registrant is required to file reports pursuant to Section
13 or 15(d) of the Act.  [   ] Yes     [ X ]
No





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  [ X ] Yes       [   ]
No





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  [ X ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer.  (See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act).





Large
accelerated filer
[  ]                                                                Accelerated
filer
[X]                                                      Non-accelerated
filer [  ]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  [   ] Yes     [X]
No





The
aggregate market value of the registrant’s common stock held by non-affiliates,
as of the last business day of the registrant’s most recently completed second
fiscal quarter, June 30, 2007, based upon the value of the last sales price of
these shares as quoted on the OTC Bulletin Board, was approximately $35.5
million.





Note.—If a determination as to
whether a particular person or entity is an affiliate cannot be made without
involving unreasonable effort and expense, the aggregate market value of the
common stock held by non-affiliates may be calculated on the basis of
assumptions reasonable under the circumstances, provided that the assumptions
are set forth in this Form.





Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date:   104,459,578 shares of
common stock, $.01 par value, outstanding as of the close of business on January
31, 2008.




Explanatory
Note





This Amendment No. 1 to Form 10-K for
the year ended December 31, 2007 (this "Amendment"), originally filed with the
Securities and Exchange Commission on February 27, 2008 (the "Original Filing")
is being filed to incorporate the consolidated financial statements of Siratsa
LLC (previously known as Astaris LLC), our 50/50 joint venture with FMC
Corporation, for the three year period ended December 31, 2007 as required by
Rule 3-09 of Regulation S-X promulgated by the U.S. Securities and Exchange
Commission (“SEC”) relating to the form and content of financial statements
filed with the SEC.


This Amendment No. 1 to Annual Report
on Form 10-K is also being filed to amend the following typographical
errors:





Item 1.
BUSINESS





Company
Overview





The
second paragraph is amended by changing the dates from “April 1977” and
“September 1977” to “April 1997” and “September 1997”,
respectively.





Item 1A.
RISK FACTORS





“The
Applicability of Numerous Environmental Laws to Our Manufacturing Facilities
Could Cause Us to Incur Material Costs and Liabilities.”





The third
paragraph is amended by changing the natural resource trustees’ estimate of the
value of the natural resource damages from “between $66 million and $604
million” to “between $366 million and $604 million”.





ITEM 3.
LEGAL PROCEEDINGS





Legal Proceedings in Our
Bankruptcy Case





JPMorgan Adversary
Proceeding





The
second paragraph is amended by changing the amount of the 2027/2037 Notes from
“$300” to “$300 million”.





Item 6.
SELECTED FINANCIAL DATA





Footnote
(5) is amended by changing the amount of the write-off of debt issuance costs in
2006 from “$6 million” to “$4 million”.





Footnote
(6) is amended by changing the amount of the increase in valuation allowances in
2007 from “$66 million” to “$70 million”.





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





Officers





The title “President, Integrated Nylon”
should be added to the first column of the listing for Jonathon P.
Wright.


1





As
required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended,
new certifications by our principal executive officer and principal financial
officer are being filed with this Amendment.





Except as expressly stated herein, no
changes have been made to the Original Filing.  Except as expressly
stated herein, this Amendment does not update any of the disclosures contained
in the Original Filing to reflect any events that occurred after the date of the
Original Filing.  The filing of this Amendment shall not be deemed an
admission that the Original Filing, when made, included any untrue statement of
a material fact or omitted to state a material fact necessary to make a
statement not misleading.





2


PART
I





ITEM
1. BUSINESS





Company
Overview





We are a global manufacturer and
marketer of a variety of high-performance chemical and engineered materials that
are used in a broad range of consumer and industrial applications.  We
maintain a global infrastructure consisting of 29 manufacturing facilities, 8
technical centers and over 30 sales offices globally, including 20 facilities in
the United States.  We employ approximately 6,000 individuals around
the world.





We were formed in April 1997 by
Pharmacia Corporation (“Pharmacia”), which was then known as Monsanto Company
(“Old Monsanto”) to hold and operate substantially all of the assets, and assume
all of the liabilities of Old Monsanto’s historical chemicals
business.  Pharmacia spun us off to Pharmacia’s shareholders and we
became an independent company in September 1997 (the “Solutia
Spinoff”).  Pharmacia subsequently formed a new company, Monsanto
Company, (“Monsanto”) to hold its agricultural and seed businesses and then spun
Monsanto off to its shareholders as well.





Chapter
11 Proceedings





On
December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries (the "Debtors")
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code (the "Chapter 11 Cases") in the U.S. Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court").  The cases
were consolidated for the purpose of joint administration and were assigned case
number 03-17949 (PCB).  Our subsidiaries outside the United States
were not included in the Chapter 11 filing.  The filing was made to
restructure our balance sheet, to streamline operations and to reduce costs, in
order to allow us to emerge from Chapter 11 as a viable going
concern.  The filing also was made to obtain relief from the negative
financial impact of liabilities for litigation, environmental remediation and
certain post-retirement benefits (the "Legacy Liabilities") and liabilities
under operating contracts, all of which were assumed at the time of the Solutia
Spinoff.  These factors, combined with the weakened state of the
chemical manufacturing sector, general economic conditions and continuing high,
volatile energy and crude oil costs were an obstacle to our financial stability
and success.





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




On
January 16, 2004, pursuant to authorization from the Bankruptcy Court, we
entered into a DIP credit facility.  This DIP credit facility has
subsequently been amended from time to time, with Bankruptcy Court
approval.  The DIP credit facility, as amended, consists of: (a) a
$975 million fully-drawn term loan; and (b) a $250 million borrowing-based
revolving credit facility, which includes a $150 million letter of credit
subfacility.  The DIP credit facility matures on March 31,
2008.





On
October 15, 2007, we filed our Fifth Amended Joint Plan of Reorganization (the
“Plan”) and the related Fifth Amended Disclosure Statement (the “Disclosure
Statement”) with the Bankruptcy Court.  The Disclosure Statement was
approved by the Bankruptcy Court on October 19, 2007.  The Plan is
based on a comprehensive settlement reached with all of the major constituents
in our bankruptcy case which includes the following parties: Monsanto,
noteholders controlling at least $300 million in principal amount of the
2027/2037 notes, the Official Committee of General Unsecured Creditors, the
Official Committee of Equity Security Holders and the Ad Hoc Trade
Committee.





The
Disclosure Statement contains a description of the events that led up to the
Debtors’ bankruptcy filing, the actions the Debtors’ have taken to improve their
financial situation while in bankruptcy, a current


3


description
of the Debtors’ businesses and a summary of the classification and treatment of
allowed claims and equity interests under the Plan.  The Disclosure
Statement was sent to our creditors and equity interest holders who approved the
Plan.  On November 29, 2007 the Bankruptcy Court entered an order
confirming the Plan.  We plan to declare the Plan effective and emerge
from Chapter 11 on February 28, 2008.





Set forth
below is a brief description of certain terms of the Plan and are qualified in
their entirety by reference to the Plan and Disclosure Statement.





Under the
Plan, we will emerge from bankruptcy as an independent publicly-held
company.  The Plan provides for a re-allocation of our Legacy
Liabilities with Monsanto, and an underlying settlement with the Official
Committee of Retirees, the terms of which are set forth in the Monsanto
Settlement Agreement and the Retiree Settlement Agreement, which have been filed
with the Bankruptcy Court.





The Plan
contemplates the completion of two rights offerings to raise new equity capital:
(1) $250 million of new common stock will be sold to the noteholders and general
unsecured creditors (“Creditor Rights Offering”) and (2) $175 million or 17
percent of new common stock will be sold pursuant to another rights offering to
holders of at least 11 shares of common stock (“Equity Rights
Offering”).  A group of our creditors has committed to backstop the
Creditor Rights Offering.  The $250 million generated as a result of
the Creditor Rights Offering will be used as follows: $175 million will be set
aside in a Voluntary Employees’ Beneficiary Association (VEBA) Retiree Trust to
fund the retiree welfare benefits for those pre-spin retirees who receive these
benefits from us; and we will use $75 million to pay for other Legacy
Liabilities being retained by the Company.  The $175 million generated
as a result of the Equity Rights Offering will be paid to Monsanto in connection
with the settlement of its claims.  Any portion of the 17 percent of
the new common stock that is not purchased by current equity holders will be
distributed to Monsanto.





Under the
Plan, current equity holders that own at least 175 shares of our common stock
will receive their pro rata share of 1 percent of the new common stock and
current equity holders that own at least 11 shares of our common stock will
receive additional rights as described above.  Additionally, current
equity security holders will have the following rights:  i) holders
who own at least 24 shares of our common stock will receive their pro rata share
of five-year warrants to purchase 7.5 percent of the new common stock; and ii)
holders who own at least 107 shares of our common stock will receive the right
to participate in a buy out for cash of general unsecured claims of less than
$100 thousand but more than $2.5 thousand for an amount equal to 52.35 percent
of the allowed amount of such claims, subject to election of each general
unsecured creditor to sell their claim.





Expected
distributions to be provided creditors and equity holders are set forth in the
Plan and Disclosure Statement which have been filed with the Securities &
Exchange Commission as exhibits to Form 8-K, dated October 22,
2007.





On
November 21, 2007, the Bankruptcy Court entered its Order approving our entry
into the Exit Financing Facility Commitment Letter dated October 25, 2007 by and
between Solutia, Citigroup Global Markets Inc., Goldman Sachs Credit Partners
L.P. and Deutsche Bank Securities Inc. (collectively, “the
Lenders”).  Under the Exit Financing Facility Commitment Letter and
subject to the conditions contained therein, the Lenders were to provide us with
$2.0 billion in financing (collectively, the “Exit Financing Facility”),
including (a) a $400 million senior secured asset-based revolving credit
facility. (b) a $1.2 billion senior secured term loan facility and (c) if we are
unable to issue $400 million senior unsecured notes by the closing of the Exit
Financing Facility, a $400 million senior unsecured bridge
facility.





On
January 22, 2008, the Lenders informed us they were refusing to provide the exit
funding, asserting that there has been an adverse change in the markets since
entering into the commitment.  We disagreed with their assertion and,
on February 6, 2008, we filed a complaint in the Bankruptcy Court seeking a
court order requiring the Lenders to meet their commitment and fund our exit
from bankruptcy.  Trial on this matter began, February 21,
2008.  On February 25, 2008 and before the trial concluded, we reached
an agreement with our Lenders on the terms of a revised exit financing package,
subject to Bankruptcy Court approval.  The Bankruptcy Court approved
the revised exit financing package on February 26, 2008 finding that the
revisions are substantially consistent with the order confirming our
Plan.  Accordingly, we are currently scheduled to


4


emerge
from Chapter 11 on February 28, 2008.  In the event the Lenders do not
fund the exit financing for any other reason, it is not certain that we can
extend our DIP credit facility and, if we can extend it, at what
cost.





General
Development of Business





In May
2007 we purchased the 50% of Flexsys that we did not own from our joint venture
partner Azko Nobel N.V. for approximately $213 million.  The purchase
was simultaneous with Flexsys’ purchase of Azko Nobel’s CRYSTEX® manufacturing
operations in Japan for $25 million.  Flexsys manufactures more than
50 different products which are classified into two main product groups:
vulcanizing agents, principally insoluble sulfur and rubber
chemicals.





Also, in May 2007 we sold DEQUEST®, our
water treatment phosphates business (“Dequest”) to Thermphos Trading
GmbH.  Thermphos purchased the assets and assumed certain of the
liabilities of Dequest for $67 million, subject to a working capital
adjustment.  As part of the sale, we and Thermphos entered into a ten
year lease and operating agreement under which we will continue to operate the
Dequest production facility for Thermphos at our plant in Newport, Wales, United
Kingdom.





In
September 2007 we announced the opening of our new plant in Suzhou, China, a
manufacturing site for our SAFLEX® business.





In
November 2007, CPFilms purchased certain assets of Acquired Technology, Inc.
which provides technology to help grow and develop CPFilms’ broad product
portfolio while immediately adding sales volume in the aftermarket window film
business.





Segments;
Principal Products





Our
reportable segments are:





·
            Performance
      Products; and





·
            Integrated
      Nylon.





The
tabular and narrative information contained in Note 24 to the accompanying
consolidated financial statements appearing on pages 104-106 is incorporated by
reference into this section.





Performance
Products





Rubber
Chemicals.We purchased the 50% of
Flexsys that we did not own in May 2007 from our joint venture partner, Akzo
Nobel.  These chemicals help cure and protect rubber, impart desirable
properties to cured rubber, increase durability, and lengthen product
life.  Flexsys products play an important role in the manufacture of
tires and other rubber products such as belts, hoses, seals and
footwear.





Flexsys
manufactures more than 50 different products which are classified into two main
product groups: vulcanizing agents, principally insoluble sulfur, and rubber
chemicals.  Insoluble sulfur is a key vulcanizing agent manufactured
predominantly for the tire industry.  Flexsys is the world's leading
supplier of insoluble sulfur and markets under the trade name of
CRYSTEX®.  Flexsys has three product groups within rubber chemicals:
antidegradants, accelerators, and other rubber chemicals.





Flexsys
products are manufactured at 15 facilities worldwide: eight in Europe, three in
North America, two in South America and two in Asia.  Flexsys has
eight offices and a sales force of approximately 20 employees plus a worldwide
network of agents and distributors.





CPFilms.
CPFilms is a films business which adds functionality to glass.  Our
CPFilms business manufactures and sells special custom coated window films under
four brands:


5


• LLUMAR®;




VISTA®;





• GILA®;
and





• FORMULA
ONE PERFORMANCE AUTOMOTIVE FILMS®.




CPFilms
also manufactures various films for use in tapes, automotive badging, optical
and colored filters, shades, packaging, computer touch screens,
electroluminescent displays, and cathode ray tube and flat-panel
monitors.





CPFilms
operates facilities in Martinsville, Virginia; Canoga Park, California; and
Runcorn, U.K.





Other Performance
Products. SAFLEX® is the world's largest producer of PVB (Polyvinyl
Butyral) sheet, a plastic interlayer used in the manufacture of laminated glass
for automotive and architectural applications.  In addition to PVB
sheet, which is mostly marketed under the SAFLEX® brand, we manufacture
specialty intermediate PVB resin products sold under the BUTVAR® brand, optical
grade PVB resin and plasticizer.




PVB is a
specialty resin used in the production of laminated safety glass sheet, an
adhesive interlayer with high tensile strength, impact resistance, transparency
and elasticity that make it particularly useful in the production of safety
glass.  Laminated safety glass is predominately produced with PVB
sheet and is legislated in all industrialized countries for automobile
windshields.  Developing countries also use laminated safety glass in
automotive windshields though it is not formally
legislated.  Approximately 45% of sales to the automotive sector are
for aftermarket replacement windows.  Architectural laminated safety
glass is widely used in the construction of modern office buildings, airports,
and residential homes.  Other applications for PVB resin include
non-sheet applications such as wash primers and other surface coatings,
specialty adhesive formulations, and inks.





The
SAFLEX® business operates facilities in Antwerp, Belgium; Ghent, Belgium;
Newport, Wales (U.K.); Santo Toribio, Mexico; Sao Jose dos Campos, Brazil;
Singapore; Springfield, Massachusetts; and Trenton, Michigan.





The
Specialty Products business represents a unique set of niche businesses serving
a diverse set of markets and end users in the aerospace, manufacturing and
industrial end markets.





The
principal product lines of the Specialty Products business are as
follows:





HEAT
TRANSFER FLUIDS –THERMINOL® heat transfer fluids used for indirect heating or
cooling of chemical processes in various types of industrial equipment and in
solar energy power systems.  The fluids provide enhanced pumping
characteristics because they remain thermally stable at high and low
temperatures.





AVIATION
FLUIDS – SKYDROL® brand aviation hydraulic fluids and SKYKLEEN® brand of
aviation solvents supplied across the aviation industry.  The
SKYRDROL® line includes fire-resistant hydraulic fluids, which are used in more
than half of the world's commercial aircraft.





PLASTIC
PRODUCTS - a variety of products including entrance matting and automotive spray
suppression flaps sold under the brands ASTROTURF®, CLEAN MACHINE® and CLEAR
PASSTM.





Heat
transfer fluids are manufactured in Anniston, Alabama; Alvin, Texas (Chocolate
Bayou); Newport, Wales (U.K.); and Sao Jose dos Campos,
Brazil.  Aviation Fluids are manufactured in Anniston,
Alabama.  Plastic products are manufactured in Ghent, Belgium and
St. Louis, Missouri.


6


Principal
Products




Major
      ProductsMajor
      End-Use Markets
            Brand
            Description
            
            Major
      Competitors
            Major
      Raw Materials
            Major
      Plants(1)
            
            Major
      End-Use ApplicationsCONSTRUCTION
      AND HOME FURNISHINGS
            SAFLEX®
              LLUMAR®
              VISTA®
              GILA®
            Laminated
      window glass
              Professional
      window films
              Retail
      window films
            
            DuPont
              Kuraray
              Sekisui
              3M
              Madico
            Butyraldehyde
              Ethanol
              Polyvinyl
      alcohol
              Vinyl
      acetate
              monomer
              Polyester
      film
            Ghent,
      Belgium
              Martinsville,
      VA
              Springfield,
      MA
              Santo
      Toribio, Mexico
              Runcorn,
      U.K.
            
            Products
      to increase the safety, security, sound attenuation, energy efficiency and
      ultraviolet protection of architectural glass for residential and
      commercial structures; after-market films for solar control, security and
      safetyASTROTURF®
              CLEAN
              MACHINE®
            Artificial
      turf for non-athletic use
              Door
      mats
            
            Sanddud
              Baltplast
              Time
      Packaging
            Polyethylene
            Ghent,
      Belgium
              St.
      Louis, MO
            
            Entrance,
      mattingRUBBER
      CHEMICALS
            CRYSTEX®
              SANTOFLEX®
            Insoluble
      Sulfur
              Antidegradant
            
            Lanxess
              Chemtura
              Shikoku
              Oriental
      Carbon
              Chemicals
              Limited
      (India)
            Benzene
      derivatives
              Ketones
              Sulfur
              CS2
              Napthenic
      processing oil
            Antwerp,
      Belgium
              Itupeva,
      Brazil
              Kashima,
      Japan
              Monogahela,
      PA
              Lemoyne,
      AL
              Nienburg,
      Germany
              Kuantan,
      Malaysia
              Sauget,
      IL
              Sete,
      FR
              Termoli,
      Italy
              Wrexham,
      U.K.
            
            Products
      critical to the manufacture of finished rubber as they increase the
      productivity of the manufacturing process and the quality of the end
      product with improved resilience, strength and resistance to wear and
      tear.  Primary application is in the production of
      tires.VEHICLES
            SAFLEX®
              LLUMAR®
              VISTA®
              GILA®
            Laminated
      window glass
              Professional
      window films
              Retail
      window films
            
            DuPont
              Sekisui
              Bekaert
              Johnson
      Laminating
              Garware
            Butyraldehyde
              Ethanol
              Polyvinyl
      alcohol
              Vinyl
      acetate monomer
              Polyester
      film
            Ghent,
      Belgium
              Martinsville,
      VA
              Santo
      Toribio, Mexico
              Springfield,
      MA
              Trenton,
      MI Runcorn, U.K.
            
            Products
      to increase the safety, security, sound attenuation and ultraviolet
      protection of automotive glass and give vehicles a custom
      appearance






7






CLEAR
      PASSTM
            Spray
      suppression
            
            Fichet
              Wegu
              Austi
              Ex-Spray
            Polyethylene
            Ghent,
      Belgium
            
            Spray
      suppression systems for trucksINDUSTRIAL
      APPLICATIONS & ELECTRONICS
            Metalized
      films
              Sputtered
      films
              Deep-dyed
      films
            Release
      liners
            
            3M
              ATI
              Intellicoat
              Mitsubishi
            Polyester
      film
            Martinsville,
      VA
              Runcorn,
      U.K.
            
            Window
      films, tapes, automotive badging, optical and colored filters, shades,
      reprographics, and packaging usesPerformance
      films
              Conductive
      and anti-
              reflective
      coated
              films
            
            Bekaert
              OCLI
              Southwall
            Polyester
      film
              Induim
      tin
              Precious
      metals
            Canoga
      Park, CA
              Martinsville,
      VA
              Runcorn,
      U.K.
            
            Computer
      touch-screens, electroluminescent displays for hand-held electronics and
      watches, and cathode ray tube and LCD monitorsCAPITAL
      EQUIPMENT
            THERMINOL®
            Heat
      transfer fluids
            
            Dow
            Benzene
              Phenol
            Alvin,
      TX
              Anniston,
      AL
              Newport,
      U.K.
            
            Heat
      transfer fluids for a wide variety of manufacturing and refining
      usesAVIATION
      & TRANSPORTATION
            SKYDROL®
              SKYKLEEN®
            Aviation
      hydraulic fluids
              Aviation
      solvents
            
            ExxonMobil
            Phosphate
      esters
            Anniston,
      AL
            
            Hydraulic
      fluids for commercial aircraft, and environmentally friendly solvents for
      aviation maintenance







(1)
            Major
      plants are comprised of those facilities at which each of the identified
      major products conclude their respective manufacturing
      processes.  The major products may pass through other of our
      plants prior to the final sale to
customers.





Integrated
Nylon




Integrated
Nylon consists of nylon plastics, fiber and intermediate chemical products used
in construction, automotive, consumer and industrial applications.





Integrated
Nylon comprises an integrated family of nylon products, as follows:





·
            Our
      VYDYNE®
      nylon molding resins, ASCEND®
      nylon polymers and nylon industrial fibers, which are sold into the
      automotive, engineered thermoplastic, apparel, textile, commercial and
      industrial markets in products such as knit clothing, dental floss, tires,
      airbags, molded automotive parts, conveyor belts, cooking bags, food
      packaging and camping gear.




·
            Our
      nylon carpet staple and nylon bulk continuous filament which are sold
      under the WEAR-DATED®
      brand for residential carpet and the ULTRON®
      brand for commercial carpet, as well as under private labels for the
      residential, commercial and industrial
markets.




·
            Our
      chemical intermediates, including adipic acid, hexamethylenediamine and
      acrylonitrile are used internally as feedstock for fiber and resins
      production and are also sold on the merchant market for use in nylon and
      acrylic fiber, nylon and ABS plastic, synthetic resins, synthetic
      lubricants, paper chemicals, herbicides and
  plasticizers.




The
Integrated Nylon segment operates facilities in Alvin, Texas (Chocolate Bayou);
Decatur, Alabama; Foley, Alabama; Greenwood, South Carolina; and Pensacola,
Florida.


8





Principal Products


Major
      ProductsMajor
      End-Use Markets
            Brand
            Description
            Major
      Competitors
            Major
      Raw Materials
            Major
      Plants(1)
            Major
      End-Use ApplicationsCONSTRUCTION
      AND HOME FURNISHINGS
            WEAR-DATED®
              ULTRON®
              ASCEND®
            Nylon
      carpet staple
              Nylon
      bulk continuous filament
              Nylon
      polymer
            Invista
              Shaw
      Industries
              Rhodia
            Adipic
      acid
              Hexamethylene-diamine
            Foley,
      AL
              Greenwood,
      SC
              Cantonment,
      FL
            Residential
      and commercial carpeting and non-woven reinforcement and
      liningsPERSONAL
      PRODUCTS
            ASCEND®
            Nylon
      polymer
            Invista
              Rhodia
              Radici
            Adipic
      acid
              Hexamethylene-diamine
            Greenwood,
      SC
              Cantonment,
      FL
            Knit
      apparel, half-hose, active wear, apparel, dental floss, and intimate
      apparelVEHICLES
            VYDYNE®
              ASCEND®
            Nylon
      filaments and molding agents
              Nylon
      polymer
            Acordis
              BASF
              DuPont
              Invista
              Rhodia
            Adipic
      acid
              Hexamethylene-diamine
            
            Tires,
      airbags, automotive interior and exterior, and under-the-hood molded
      partsINDUSTRIAL
      APPLICATIONS
            ASCEND®
              Industrial
      nylon fiber
            Nylon
      polymer
            Kordsa
              Invista
              Shenma
            Propylene
              Natural
      gas
              Cyclohexane
              Ammonia
            Decatur,
      AL
              Greenwood,
      SC
              Cantonment,
      FL
            Conveyer
      belts, nylon film cooking bags, specialized food packaging, sewing thread,
      backpacks, cots, tentsINTERMEDIATE
      CHEMICALS
            Adipic
      acid
              Hexamethylene-diamine
              Acrylonitrile
            
            Asahi
      Chemical
              Invista
              Rhodia
              BASF
              Ineos
            Propylene
              Natural
      gas
              Cyclohexane
              Ammonia
            Alvin,
      TX
              Decatur,
      AL
              Cantonment,
      FL
            Nylon
      and acrylic fiber, nylon and SBA plastics, synthetic resins, synthetic
      lubricants, paper chemicals,
plasticizers





(1)
            Major
      plants are comprised of those facilities at which each of the identified
      major products conclude their respective manufacturing
      processes.  The major products may pass through other of our
      plants prior to the final sale to
customers.




Sale
of Products




We sell
our products directly to end users in various industries, principally by using
our own sales force, and, to a lesser extent, by using
distributors.





Our
marketing and distribution practices do not result in unusual working capital
requirements on a consolidated basis.  We maintain inventories of
finished goods, goods in process and raw materials to meet customer requirements
and our scheduled production. In general, we do not manufacture our products
against a backlog of firm orders; we schedule production to meet the level of
incoming orders and the projections of future demand.  However, in the
Performance Products segment, a large portion of sales for 2007 were pursuant to
volume commitments.  We do not have material contracts with the
government of the United States or any state, local or foreign
government.  In 2007, no single customer or customer group accounted
for 10 percent or more of our net sales.





Our
second and third quarters are typically stronger than our first and fourth
quarters because sales of carpet and window films are stronger in the spring and
fall.




Competition




The
global markets in which our businesses operate are highly
competitive.  We expect competition from other manufacturers of the
same products and from manufacturers of different products designed for the same
uses as our products to continue in both U.S. and international
markets.  Depending on the product involved, we encounter various
types of competition, including price, delivery, service, performance, product
innovation, product recognition and quality.  Overall, we regard our
principal product groups as competitive with many other products of other
producers and believe that we are an important producer of many of these product
groups.  For additional information regarding competition in specific
markets, see the charts under "Segments: Principal Products" above.







9


Raw
Materials and Energy Resources




We buy
large amounts of commodity raw materials and energy resources, including
propylene, cyclohexane, benzene, vinyl acetate, polyvinyl alcohol, 2-ethyl
hexanol and natural gas.  We typically buy major requirements for key
raw materials pursuant to contracts with average contractual periods of one to
four years.  We obtain certain important raw materials from a few
major suppliers. In general, in those cases where we have limited sources of raw
materials, we have developed contingency plans to the extent practicable to
minimize the effect of any interruption or reduction in supply. However, we also
purchase raw materials from some single source suppliers in the industry and in
the event of an interruption or reduction in supply, might not be able to
mitigate any negative effects.





While
temporary shortages of raw materials and energy resources may occasionally
occur, these items are generally sufficiently available to cover our current and
projected requirements.  However, their continuing availability and
price may be affected by unscheduled plant interruptions and domestic and world
market conditions, political conditions and governmental regulatory
actions.  Due to the significant quantity of some of these raw
materials and energy resources that we use, a minor shift in the underlying
prices for these items can result in a significant impact on our consolidated
financial position and results of operations.





Intellectual
Property




We own a
large number of patents that relate to a wide variety of products and processes
and have pending a substantial number of patent applications.  We also
own and utilize across our business segments a significant amount of valuable
technical and commercial information that is highly proprietary and maintained
as trade secrets.  In addition, we are licensed under a small number
of patents owned by others.  We own a considerable number of
established trademarks in many countries as well as related internet domain
names under which we market our products.  This intellectual property
in the aggregate is of material importance to our operations and to our various
business segments.





Research
and Development




Research
and development constitute an important part of our activities.  Our
expenses for research and development amounted to $37 million in both 2007 and
2006 and $40 million in 2005, or about 1.3 percent of sales on
average.  We focus our expenditures for research and development on
process improvements and selected product development.





Our
research and development programs in the Performance Products segment include
new products and processes for the window glazing and specialty chemicals
markets.  A new acoustic safety interlayer and a new heat transfer
fluid have been commercialized.  A new aviation fluid is in flight
service evaluation.  Several process technologies developed to support
the construction of SAFLEX® plants have been started up.  Significant
progress was achieved in developing a solar safety interlayer and a new
interlayer for thin film photovoltaic cell lamination.  Window films
that mitigate or enhance the reception of electronic signals through windows
continue to be developed.  New products using advances in exterior
coatings, adhesive formulations, and nanoparticle technologies are being
commercialized.




Our
research and development programs in our Flexsys business emphasize the balance
between manufacturing cost reduction and capacity expansion.  We have
made significant progress in process optimization, capacity expansion and energy
reduction across most of our Flexsys product lines.





Our
Integrated Nylon segment continues to focus on internal process improvements to
mitigate increasing raw material prices and to commercialize new products to
address customer needs and improve product mix.





Environmental
Matters





The
narrative appearing under “Environmental Matters” beginning on page 45 below is
incorporated by reference.





Employee
Relations




On
December 31, 2007, we had approximately 6,000 employees worldwide: with
U.S. employees constituting 69 percent of the total number of
employees.  Approximately 450 of the European employees are
represented by the union delegation.  Approximately 15 percent of our
U.S. workforce is currently represented by various labor unions with local
agreements that expire between July 2009 and February 2013, at our following
sites: Anniston, Alabama; Sauget, Illinois; Springfield, Massachusetts; and
Trenton, Michigan.  In the U.S., local agreements cover wages and
working conditions.  Each of our U.S. labor unions ratified new
five-year collective bargaining agreements in 2005 which set pension and health
and welfare benefits for our employees who are


10


represented
by the labor unions at the above sites.





International
Operations




We are
engaged in manufacturing, sales and research and development in areas outside
the United States. Approximately 55 percent of our consolidated sales from
continuing operations for the year ended December 31, 2007 were made into
markets outside the United States, including Europe, Canada, Latin America and
Asia.





Operations
outside the United States are potentially subject to a number of risks and
limitations that are not present in domestic operations, including trade
restrictions, investment regulations, governmental instability and other
potentially detrimental governmental practices or policies affecting companies
doing business abroad.  Operations outside the United States are also
subject to fluctuations in currency values.  The functional currency
of each of our non- U.S. operations is generally the local
currency.  Exchange rates between these currencies and U.S. dollars
have fluctuated significantly in recent years and may continue to do
so.  In addition, we generate revenue from export sales and operations
conducted outside the United States that may be denominated in currencies other
than the relevant functional currency.





Internet
Access to Information





Our
Internet address is www.solutia.com.  We
make available free of charge through our Internet website our annual report on
Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and
any amendments to these reports as soon as reasonably practicable after they are
electronically filed with, or furnished to, the Securities and Exchange
Commission (“SEC”).  All of these materials may be accessed from the
"Investors" section of our website, www.solutia.com.  These
materials may also be accessed through the SEC’s website (www.sec.gov) or in
the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C.
20549.  Information on the operation of the Public Reference Room may
be obtained by calling 1-800-SEC-0330.


11


ITEM
1A. RISK FACTORS





IN EVALUATING US, CAREFUL
CONSIDERATION SHOULD BE GIVEN TO THE RISK FACTORS SET FORTH BELOW, AS WELL AS
THE OTHER INFORMATION SET FORTH IN THIS ANNUAL REPORT ON FORM
10-K.  ALTHOUGH THESE RISK FACTORS ARE MANY, THESE FACTORS SHOULD NOT
BE REGARDED AS CONSTITUTING THE ONLY RISKS ASSOCIATED WITH OUR
BUSINESSES.  EACH OF THESE RISK FACTORS COULD ADVERSELY AFFECT OUR
BUSINESS, OPERATING RESULTS AND/OR FINANCIAL CONDITION.  IN ADDITION
TO THE FOLLOWING DISCLOSURES, PLEASE REFER TO THE OTHER INFORMATION CONTAINED IN
THIS REPORT INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED
NOTES.





CERTAIN
BANKRUPTCY CONSIDERATIONS





We
May Not Be Able to Consummate Our Exit Financing and Successfully Implement the
Plan





Our
emergence from Chapter 11 bankruptcy protection is contingent on the closing of
our exit financing.  Additionally, if we remain in Chapter 11 beyond
the anticipated closing date of February 28, 2008 we may be faced with needing
to extend our DIP financing which expires on March 31, 2008.  It is
not certain that we can extend our DIP financing and, if we can extend it, at
what cost.  It may also become necessary to amend our Solutia Europe
S.A./N.V. (“SESA”) €200 million facility agreement and our Flexsys $225 million
multicurrency term and revolving financing facility.  It is not
certain that we can amend these facilities and, if we can amend them, at what
cost.





If we are
unable to successfully implement our Plan, it would then be unclear as to
whether we would be able to reorganize our businesses and what, if any,
distributions holders of claims against or equity interests in us ultimately
would receive with respect to their claims or equity interests.  If our
confirmed Plan does not become effective, there also can be no assurance that we
will be able to successfully develop, prosecute, confirm, and consummate an
alternative plan of reorganization with respect to the Chapter 11 Cases that
would be acceptable to the Bankruptcy Court and our creditors, equity holders
and other parties in interest.  There can be no assurance that such an
alternative plan of reorganization would preserve the reallocation of the Legacy
Liabilities that is achieved in the Plan, which eliminates legacy tort liability
exposure, reduces environmental obligations, and significantly reduces our
exposure with regard to retiree obligations.  Additionally, it is possible
that third parties may seek and obtain approval to terminate or shorten the
exclusivity period during which only we may propose and confirm a plan of
reorganization.  Finally, our emergence from bankruptcy is not assured.





Prolonged
Continuation of the Chapter 11 Cases May Harm Our Businesses





Any
prolonged continuation of the Chapter 11 Cases beyond the anticipated closing
date of February 28, 2008 could adversely affect our businesses and
operations.  As long as the Chapter 11 Cases continue, our senior
management will be required to spend a significant amount of time and effort
dealing with our reorganization instead of focusing exclusively on business
operations.  Prolonged continuation of the Chapter 11 Cases may also
make it more difficult to attract and retain management and other key personnel
necessary to the success and growth of our businesses.  In addition,
the longer the Chapter 11 Cases continue, the more likely it is that our
customers, suppliers, distributors and agents will lose confidence in our
ability to successfully reorganize our businesses and seek to establish
alternative commercial relationships.  Furthermore, as long as the
Chapter 11 Cases continue, we will be required to incur substantial costs for
professional fees and other expenses associated with the
proceedings.  Additionally, if we remain in Chapter 11 beyond the
anticipated closing date of February 28, 2008 we may be faced with needing to
extend our DIP financing which expires on March 31, 2008.  It is not
certain that we can extend our DIP financing and, if we can extend it, at what
cost.


12





The
Change of Control Produced by Our Restructuring May Result in a Limitation On or
Loss of Net Operating Losses for Federal Income Tax Purposes





Our
issuance of new common stock in a reorganized Solutia, along with the
cancellation of existing equity interests maycause us to undergo an
ownership change upon emergence from Chapter 11.  As a result, Section
382 of the Internal Revenue Code (“IRC”) may apply to limit our use of
consolidated net operating losses upon emergence.  Additionally, our
ability to use any remaining capital loss carryforwards and tax credits may be
limited.  The annual limitation imposed by the particular provision of
Section 382 of the IRC that we expect to apply to our ownership change generally
equals the product of (i) the fair market value of the net equity value of
our stock at the time of the ownership change, taking into account the increase
in value of the corporation as a result of the surrender or cancellation of
creditor’s claims in the transaction (rather than the value without taking into
account such increases, as is the case under the general rule for non-bankruptcy
ownership changes) multiplied by (ii) the long-term tax-exempt rate in
effect for the month in which the ownership change occurs.  The
long-term tax-exempt rate is published monthly by the IRS and is intended to
reflect current interest rates on long-term tax-exempt debt
obligations.  Accordingly, under this rule the Section 382 limitation
would generally reflect the increase in the value of our new stock resulting
from the conversion of debt to equity in the proceeding.  Section 383
of the IRC applies a similar limitation to a capital loss carryforward and tax
credits.  Although it is impossible to predict with absolute certainty
the net equity value of reorganized Solutia immediately upon emergence from
Chapter 11, our use of our net operating losses is expected to be substantially
limited after an ownership change.





RISKS
RELATED TO OUR BUSINESS AND INDUSTRY





The
Prices of Raw Materials and Energy We Require to Produce Our Products Are
Volatile and Cannot Always Be Passed On to Our Customers





We
purchase large amounts of commodity raw materials, including natural gas,
propylene, cyclohexane and benzene.  Occasionally, temporary shortages
of these raw materials and energy sources may occur.  In addition, we
often purchase major requirements for key raw materials under medium-term
contracts.  Pricing under these contracts may fluctuate as a result of
unscheduled plant interruptions, United States and worldwide market conditions
and government regulation.  Given our competitive markets, it is not
always possible to pass all of these increased costs on to our
customers.  In addition, natural gas prices and other raw material and
energy costs are currently more than double the average ten-year
levels.  Elevated raw material and energy costs could significantly
reduce our operating margins in the future.  See also Business – Raw
Materials and Energy Resources.





Problems
Encountered in Operating Our Production Facilities Could Adversely Impact Our
Business





Our
production facilities are subject to hazards associated with the manufacture,
handling, storage and transportation of chemical materials and products,
including leaks and ruptures, explosions, fires, inclement weather and natural
disasters, unscheduled down time and environmental hazards.  From time
to time in the past, we have had incidents that have temporarily shut down or
otherwise disrupted our manufacturing, causing production delays and resulting
in liability for workplace injuries and fatalities.  We are dependent
upon the continued safe operation of our production facilities.





In
addition, some of our products involve the manufacture or handling of a variety
of reactive, explosive and flammable materials.  Use of these products
by our employees, customers and contractors could result in liability to usif an explosion, fire,
spill or other accident were to occur.


13


We
Have and Will Continue to Have Significant Indebtedness




We have
and will continue to have a significant amount of indebtedness.  Our
significant indebtedness could have important consequences, including the
following:




·
            We
      will have to dedicate a significant portion of our cash flow to making
      interest and principal payments on our indebtedness, thereby reducing the
      availability of our cash flow to fund working capital, capital
      expenditures, acquisitions or other general corporate
      purposes.




·
            Levels
      of indebtedness may make us less attractive to potential acquirors or
      acquisition targets.




·
            Levels
      of indebtedness may limit our flexibility to adjust to changing business
      and market conditions, and make us more vulnerable to downturns in general
      economic conditions as compared to competitors that may be less
      leveraged.




·
            As
      described in more detail above, the documents providing for our
      indebtedness contain restrictive covenants that may limit our financing
      and operational flexibility.




Furthermore,
our ability to satisfy our debt service obligations will depend, among other
things, upon our future operating performance and ability to refinance
indebtedness when necessary.  These factors depend partly on economic,
financial, competitive and other factors beyond our control.  We may
not be able to generate sufficient cash from operations to meet our debt service
obligations as well as fund necessary capital expenditures, pension funding
obligations and investments in research and development.  In addition,
if we need to refinance our debt, obtain additional financing or sell assets or
equity, we may not be able to do so on commercially reasonable terms, if at
all.





Turnover
in the Senior Management Team and Losses of Other Key Personnel Could Have a
Significant Adverse Effect on Our Results of Operations





The
services of our senior management team, as well as other key personnel, have
been integral in our improving results during the Chapter 11 Cases and will be
critical to the implementation of our business strategies going forward and our
success.  If our emergence from the Chapter 11 Cases is delayed, our
financial results diminish, the terms of incentive compensation programs are not
adequate or any other adverse events occur in the Chapter 11 Cases, we may have
difficulty retaining current senior management and other key personnel and be
unable to hire qualified personnel to fill any resulting vacancies, which could
have a significant adverse effect on our results of operations and ability to
emerge from Chapter 11.





We
Operate in a Highly Competitive Industry That Includes Competitors with Greater
Resources Than Ours





The
markets in which we compete are highly competitive.  Competition in
these markets is based on a number of factors, such as price, product quality
and service.  Some of our competitors may have greater financial,
technological and other resources and may be better able to withstand changes in
market conditions.  In addition, some of our competitors may be able
to respond more quickly to new or emerging technologies and changes in customer
requirements.  Consolidation of our competitors or customers may also
adversely affect our businesses.  Furthermore, global competition and
customer demands for efficiency will continue to make price increases
difficult.





We
Operate in Cyclical Business Segments and Our Financial Results Are Likely to
Fluctuate Accordingly





We
operate in cyclical business segments.  Specifically, a substantial
portion of our sales are to customers involved, directly or indirectly, in the
housing and automotive industries, both of which are, by their nature, cyclical
industries.  A downturn in either or both of these industries would
result in lower demand for our products among customers involved in those
industries and a reduced ability to pass on cost increases to these
customers.





If
We Are Unable to Protect Our Intellectual Property Rights, Our Sales and
Financial Performance Could Be Adversely Affected





We own a
large number of patents that relate to a wide variety of products and processes
and have a substantial number of patent applications pending.  We own
a considerable number of established trademarks in many countries under which we
market our products.  These patents and trademarks in the aggregate
are of material importance to the operations of our businesses.  Our
performance may depend in part on our ability to establish, protect and enforce
such intellectual property and to defend against any claims of infringement,
which could involve complex legal, scientific and factual questions and
uncertainties.





14


In the
future, we may have to rely on litigation to enforce our intellectual property
rights and contractual rights.  In addition, we may face claims of
infringement that could interfere with our ability to use technology or other
intellectual property





Legal
Proceedings Could Impose Substantial Costs on Us





As a
manufacturer of chemical-based materials, we are subject to various lawsuits
involving environmental, hazardous waste, personal injury and product liability
claims.  We are named in a number of legal proceedings primarily
relating to former operations, including claims for personal injury and property
damage arising out of releases of or alleged exposure to materials that are
classified as hazardous substances under federal environmental law or alleged to
be hazardous by plaintiffs.  Adverse judgments in these legal
proceedings, or the filing of additional environmental or other damage claims
against us, may have a negative impact on our future results of
operations.  Additionally, administrative and legal costs associated
with defending or settling large claims, or large numbers of claims, could have
a negative impact on our future results of operations.  It is possible
that the Bankruptcy Court could disagree with our treatment of these
claims.  It is also possible that third parties, including the U.S.
federal government, state regulatory agencies, or others, may challenge the
dischargeability of these claims.  If these litigation matters or
claims are not treated as contemplated in our Plan, as filed, or if the actual
costs are materially greater than estimates associated with these claims, they
could have a material adverse effect on our financial condition and future
operating performance.





The
Applicability of Numerous Environmental Laws to Our Manufacturing Facilities
Could Cause Us to Incur Material Costs and Liabilities





We are
subject to extensive federal, state, local and foreign environmental, safety and
health laws and regulations concerning, among other things, emissions to the
air, discharges to land and water and the generation, handling, treatment and
disposal of hazardous waste and other materials.  We are also required
to maintain various environmental permits and licenses, many of which require
periodic modification and renewal.  Our operations entail the risk of
violations of these laws and regulations, many of which provide for substantial
fines and criminal sanctions for violations.





In
addition, these requirements and their enforcement may become more stringent in
the future.  Non-compliance with such future requirements could
subject us to material liabilities, such as government fines, third-party
lawsuits or the suspension of non-compliant operations.  We may also
be required to make significant site or operational modifications at substantial
cost.  Future regulatory and enforcement developments could also
restrict or eliminate our ability to continue to manufacture certain products or
could require us to make modifications to our products.





At any
given time, we are involved in litigation, administrative proceedings and
investigations of various types in a number of jurisdictions involving potential
environmental liabilities, including clean-up costs associated with contaminated
hazardous waste disposal sites, natural resource damages, property damages and
personal injury.  For example, natural resource trustees have asserted
certain natural resource damage claims against us principally relating to our
Anniston and Sauget facilities, the liability for which we expect to share with
Monsanto pursuant to our Plan.  The natural resource trustees have
estimated the value of the natural resource damages at between $366 million and
$604 million; we dispute these estimates and have received estimates from third
party experts of $14 million to $51 million for such asserted
damages.  These damage estimates are preliminary and subject to change
and do not take into account reductions to damages possible through projects to
restore natural resources.  We may be required to spend substantial
sums to defend or settle these and other actions, to pay any fines levied
against us or satisfy any judgments or other rulings rendered against us and
such sums may be material.




Under
certain environmental laws, we can be held strictly liable for hazardous
substance contamination at real property we have owned, operated or used as a
disposal site or for natural resource damages associated with such
contamination.  Liability under environmental laws relating to
contaminated sites can be imposed retroactively and on a joint and several
basis.  One liable party could be held responsible for all costs at a
site, regardless of fault, percentage of contribution to the site or the
legality of the original disposal.  We may also face liability for
violations under environmental laws occurring prior to the date of our
acquisition of properties subject thereto.  As described in more
detail above and in the following paragraph, we could incur significant costs,
 
 15


including
cleanup costs, natural resources damages, civil or criminal fines and sanctions
and third-party claims as a result of hazardous substance
contamination.


We have
made and will continue to make substantial expenditures for environmental and
regulatory compliance and remediation projects.  During 2007, we spent
approximately $11 million on environmental compliance-related capital projects
for various environmental matters and $68 million for the management of
environmental programs.  Included in environmental program management
is the operation and maintenance of current operating facilities for
environmental control which is expensed in the period incurred, and $12 million
for remediation activities.





The
substantial amounts that we may be required to spend on environmental capital
projects and programs could cause substantial cash outlays and, accordingly,
could have a material effect on our consolidated financial position, liquidity
and profitability or may limit our financial and operating
flexibility.  In addition, although we believe that we have correctly
budgeted and, to the extent appropriate under applicable accounting principles,
reserved for these amounts, factors beyond our control may render these budgeted
and reserved amounts inadequate.  These factors include changing
governmental policies and regulations, the commencement of new governmental
proceedings or third party litigation regarding environmental remediation, new
releases of hazardous substances that result in personal injury, property damage
or harm to the environment, the discovery of unknown conditions of contamination
or unforeseen problems encountered in the environmental remediation
programs.





Our
commencement of Chapter 11 proceedings was caused, in significant part, by an
accumulation of Legacy Liabilities, including, among others, “legacy
environmental liability” arising from historical operations of Pharmacia prior
to the Solutia spin-off.  In the course of the Chapter 11 proceedings,
we have achieved a substantial reallocation of the risk from these Legacy
Liabilities.  In particular, Monsanto has agreed to be financially
responsible for remediation costs and other environmental liabilities for sites
owned, operated or used by Pharmacia but never owned, operated or used by us
after the Solutia Spin-off, to share liabilities with respect to offsite areas
at the Sauget and Anniston plant sites, and to be financially responsible for
personal injury and property damage claims associated with exposures to
hazardous substances arising from legacy Pharmacia operations (so-called “Legacy
Toxic Tort Claims”).  If Monsanto and Pharmacia fail to honor their
obligation with respect to such remediation costs or Legacy Toxic Tort Claims,
we could become responsible for some or all of such liabilities (except for the
remediation costs and other environmental liabilities for sites owned, operated
or used by Pharmacia but never owned, operated or used by us for which we expect
to receive a discharge under the Plan) which liabilities could be
material.  See also Management’s Discussion and Analysis –
Environmental Matters.





We
Face Currency and Other Risks Associated with International Sales





We
generate revenue from export sales, as well as from operations conducted outside
the United States.  For example, approximately 55 percent of our
consolidated sales in 2007 were made into markets outside the United States,
including Europe, Canada, Latin America and Asia.  Approximately 74
percent of the sales of the Performance Products segment were made into markets
outside the United States.  Operations outside the United States
expose us to risks which would adversely affect our results of operations and
financial conditions including fluctuations in currency values, trade
restrictions, tariff and trade regulations, U.S. export controls, foreign tax
laws, shipping delays, and economic and political instability.  For
example, violations of U.S. export controls could result in fines and the
suspension or loss of export privileges.





The
functional currency of each of our non-U.S. operations is generally the local
currency.  Exchange rates between some of these currencies and U.S.
dollars have fluctuated significantly in recent years and may do so in the
future.  It is possible that fluctuations in foreign exchange rates
will have a negative effect on our results of operations.





Many
of Our Products and Manufacturing Processes Are Subject to Technological Change
and Our Business Will Suffer if We Fail to Keep Pace





We sell
many of our products (and their corresponding manufacturing processes) in
markets that are subject to technological change and new product introductions
and enhancements.  We must continue to enhance our existing products
and to develop and manufacture new products with improved capabilities to
continue to be a market leader.  We must also continue to make
improvements in our manufacturing processes and productivity to maintain our
competitive position.  When we invest in new technologies, processes
or production facilities, we will face risks related to construction delays,
cost over-runs and unanticipated technical difficulties related to start-up. Our
inability to anticipate, respond to, capitalize on or utilize changing
technologies could have an adverse effect on our consolidated results of
operations, financial condition and cash flows in any given period.





16




Significant
Payments May Be Required to Maintain the Funding of Our Domestic Qualified
Pension Plan


We
maintain a qualified pension plan under which certain of our employees and
retirees are entitled to receive benefits.  Although we have frozen
future benefit accruals under our U.S. pension plan, significant liabilities
still remain.  In order to fund the pension plan, we made significant
contributions to the pension plan in 2007 amounting to approximately $105
million and will have to fund more going forward.  We may be unable to
obtain financing to make these pension plan contributions.  In
addition, even if financing for these contributions is obtained, the funding
obligations and the carrying costs of debt incurred to fund the obligations
could have a significant adverse effect on our results of
operations.





In
addition, we are party to certain litigation with respect to our domestic
pension plan as more fully described in Part I, Item 3 – Legal
Proceedings.  It is not known what funding liabilities may be required
of us under the Employee Retirement Income Security Act and any other applicable
law if a judgment is entered against our pension plan in this litigation, given
that we are the sponsor of the Solutia Pension Plan.  If a final
judgment is entered against the Solutia pension plan, the liability resulting
from such judgment could have a material adverse effect on our financial results
and continuing operations.





Our
Operations Are Restricted by the Terms of Our Credit Facilities





Our
current credit facilities include a number of significant restrictive covenants
and our exit facility will as well.  These covenants could impair our
financing and operational flexibility and make it difficult for us to react to
market conditions and satisfy our ongoing capital needs and unanticipated cash
requirements.  Specifically, such covenants restrict our ability and,
if applicable, the ability of our subsidiaries to, among other
things:





·
            incur
      additional debt;





·
            make
      certain investments;





·
            enter
      into certain types of transactions with
  affiliates;





·
            limit
      dividends or other payments by us and certain of our
      subsidiaries;





·
            use
      assets as security in other
transactions;





·
            pay
      dividends on our common stock or repurchase our equity
      interests;





·
            sell
      certain assets or merge with or into other
  companies;





·
            guarantee
      the debts of others;





·
            enter
      into new lines of business;





·
            make
      capital expenditures;





·
            prepay,
      redeem or exchange our debt;





·
            form
      any joint ventures or subsidiary
investments.





In
addition, our current credit facilities and our exit facility require us to
satisfy certain financial covenants.  These financial covenants and
tests could limit our ability to react to market conditions or satisfy
extraordinary capital needs and could otherwise restrict our financing and
operations.





Our
ability to comply with the covenants and other terms of our debt obligations
will depend on our future operating performance.  If we fail to comply
with such covenants and terms, we would be required to obtain waivers from our
lenders to maintain compliance with our debt obligations.  If we are
unable to obtain any necessary waivers and the debt is accelerated, a material
adverse effect on our financial condition and future operating performance would
result.


17




Labor
Disruptions With the Unionized Portion Of Our Workforce Could Have a Negative
Effect




As of
December 31, 2007, approximately 15 percent of our United States employees
were unionized.  They are represented by various labor unions with
local agreements set to expire between July 2009 and February
2013.  While we believe that our relations with our employees are
good, we may not be able to negotiate these or other collective bargaining
agreements on the same or more favorable terms as the current agreements, or at
all, and without production interruptions, including labor
stoppages.  A prolonged labor dispute, which could include a work
stoppage, could impact our ability to satisfy our customers’ requirements and
negatively affect our financial condition.







18





ITEM
3. LEGAL PROCEEDINGS





Because
of the size and nature of our business, we are a party to numerous legal
proceedings.  Most of these proceedings have arisen in the ordinary
course of business and involve claims for money damages.  In addition,
at the time of its spinoff from Pharmacia, we assumed the defense of specified
legal proceedings and agreed to indemnify Pharmacia for obligations arising in
connection with those proceedings.  We ceased performing these defense
and indemnification obligations to Pharmacia shortly after filing for Chapter 11
protection because such obligations constitute pre-petition obligations under
the U.S. Bankruptcy Code that we are prohibited from performing, except pursuant
to a confirmed plan of reorganization.  Pharmacia has asserted a claim
in our Chapter 11 case pertaining to these and other matters which will be
resolved via the Plan as discussed in Note 1 to the accompanying consolidated
financial statements.





Monsanto
also indemnified Pharmacia with respect to a number of legal proceedings
described in our 2003 Form 10-K/A in which we were a named defendant or were
defending solely due to the Pharmacia related indemnification obligations
referred to above.  We are prohibited from performing with respect to
these obligations, and developments, if any, in these matters are currently
managed by Monsanto or other named defendants.  Accordingly, we have
ceased reporting on the status of these legal proceedings.  The legal
proceedings in this category relate to property damage, personal injury,
products liability, premises liability or other damages relating to exposure to
PCB, asbestos and other chemicals manufactured before the Solutia
Spinoff.  Defense and settlement costs as well as judgments, if any,
are currently being funded by Monsanto for these matters.  Monsanto’s
funding of these legal activities, and the resulting claim against us which
Monsanto has asserted in the Chapter 11 case, inclusive of the non-quantified
unliquidated and contingent components of their claim, will be resolved via the
Plan as discussed in Note 1 to the accompanying consolidated financial
statements.  The estimated unsecured claim amount, classified as a
liability subject to compromise, was $106 and $111, as of December 31, 2007 and
December 31, 2006 respectively.





Following
is a summary of legal proceedings that we continue to manage that, if resolved
unfavorably, could have a material adverse effect on our results of operation
and financial position.  See also Management’s Discussion and
Analysis.





Legal Proceedings in Our
Bankruptcy Case





Citigroup Global Markets, et al.
Adversary Proceeding





On February 6, 2008, we filed an
adversary proceeding in our bankruptcy case against Citigroup Global Markets
Inc., Goldman Sachs Credit Partners, L.P. and Deutsche Bank Securities Inc.
(collectively, “the Lenders”) seeking a court order requiring the Lenders to
meet their commitment under the Exit Financing Facility Commitment Letter that
has been approved by the Court on November 21, 2007.  Under the Exit
Financing Facility Commitment Letter and subject to the conditions contained
therein, the Lenders were to provide us with $2.0 billion in financing
(collectively, the “Exit Financing Facility”), including (a) a $400 million
senior secured asset-based revolving credit facility, (b) a $1.2 billion senior
secured term loan facility and (c) if we are unable to issue $400 million senior
unsecured notes by the closing of the Exit Financing Facility, a $400 million
senior unsecured bridge facility.





On January 22, 2008, the Lenders
informed us they were refusing to provide the exit funding, asserting that there
has been an adverse change in the markets since entering into the
commitment.  We disagreed with their assertion and, on February 6,
2008, we filed a complaint in the Bankruptcy Court seeking a court order
requiring the Lenders to meet their commitment and fund our exit from
bankruptcy.  Trial on this matter began February 21,
2008.  On February 25, 2008 and before the trial concluded, we reached
an agreement with our Lenders on the terms of a revised exit financing package,
subject to Bankruptcy Court approval.  The Bankruptcy Court approved
the revised exit financing package on February 26, 2008 finding that the
revisions are substantially consistent with the order confirming our
Plan.  Accordingly, we are currently scheduled to emerge from Chapter
11 on February 28, 2008.





JPMorgan Adversary
Proceeding





On May
27, 2005, JPMorgan, as indenture trustee for our debentures due 2027 and 2037
(the “Prepetition Indenture”), filed an adversary proceeding against us in our
bankruptcy case.  In the proceeding, JPMorgan asserted causes of
action principally seeking declaratory judgments to establish the validity and
priority of the purported security interest of the holders of the 2027 and 2037
Debentures.  The matter was tried before the Bankruptcy Court in 2006
and in May 2007, the Court ruled in our favor holding that the 2027 and 2037
Debentures were properly de-securitized under the express terms of the
Prepetition Indenture and its related agreements, that the holders of the 2027
and 2037 Debentures do not have, and are not entitled to any security interests
or
liens on any of our assets and that the Noteholders are not entitled to any
equitable relief.  The ruling was appealed separately by the
Prepetition Indenture Trustee and the Ad Hoc Committee of Solutia
Noteholders.


19




The
Prepetition Indenture Trustee, the Ad Hoc Committee of Solutia Noteholders and
individual Noteholders controlling at least $300 million in principal amount of
the 2027/2037 Notes have agreed to stay their appeals in this Adversary
Proceeding in consideration for the Noteholders’ treatment under the
Plan.  The Plan provides that this Adversary Proceeding will be deemed
dismissed and withdrawn with prejudice on the effective date of the Plan (the
“Effective Date”).





Equity Committee Adversary Proceeding
Against Monsanto and Pharmacia





On March
7, 2005, the Equity Committee in our bankruptcy case filed a complaint against,
and objections to the proofs of claim filed by Pharmacia and Monsanto in our
bankruptcy case.  The complaint alleged, among other things, that the
Solutia Spinoff was a fraudulent transfer under the Bankruptcy Code because
Pharmacia forced us to assume excessive liabilities and insufficient assets such
that we were destined to fail from our inception.





Pharmacia
and Monsanto filed a motion to dismiss the complaint or, in the alternative, to
stay the adversary proceeding.  During a hearing held in April 2006,
the Bankruptcy Court denied Pharmacia and Monsanto’s motion to dismiss the
complaint and in September 2006, the Court ruled that while the Equity Committee
did not have standing to pursue these claims on behalf of the Debtors, it had
standing to pursue its own objections to the claims of Monsanto and
Pharmacia.  The Equity Committee has agreed to stay the Equity
Committee Adversary Proceeding in consideration for the treatment given to
Equity Holders under the Plan.  The Plan provides that this Adversary
Proceeding will be deemed dismissed and withdrawn with prejudice on the
Effective Date.





Dispute
Regarding Proof of Claim of Bank of New York





On June 22, 2007, we filed an objection
to the proof of claim filed by the Bank of New York, as indenture trustee for
the 2009 Notes, seeking disallowance of the portion of the claim that
represented original issue discount that would remain unearned as of the
Effective Date.  The indenture trustee opposed the disallowance, and
further asserted that the allowed amount of the claim should include damages
arising from, among other things, our proposed payment of the claim prior to the
stated maturity of the 2009 Notes.





On November 9, 2007, after briefing by
the parties and a hearing held before the Bankruptcy Court on October 31, 2007,
the Bankruptcy Court issued a memorandum decision sustaining our objection to
the claim filed by the indenture trustee for the 2009 Notes and disallowing the
portions of the 2009 Notes’ claim that represent (i) post-effective date
unearned original discount and (ii) damages comprised of interest from the
Effective Date to the stated maturity date of the 2009 Notes.  A
subsequent order entered by the Bankruptcy Court on November 26, 2007 fixed the
allowed amount of the claim at $181.7 million, plus accrued pre-petition and
pendency interest, for a total allowed claim of approximately $209 million as of
September 30, 2007.  The indenture trustee for the 2009 Notes filed
appeals of the Bankruptcy Court’s memorandum decision and related rulings on
November 28, 2007.





To prevent any delay to confirmation of
the Plan as a result of this pending appeal, we, the Official Committee of
Unsecured Creditors (the “Creditors’ Committee”) and the indenture trustee
agreed that we would set up a reserve on the Effective Date in the amount of
$37.5 million for the benefit of the indenture trustee and the 2009 noteholders,
in the event that the indenture trustee should prevail on
appeal.  Pursuant to the terms agreed upon by the parties, the reserve
will be funded with cash or an irrevocable letter of credit.   If
funded with a letter of credit, the letter of credit must be in the amount of
$37.5 million, issued by a nationally recognized financial institution and made
payable to the indenture trustee to fund any unpaid amount of the claim as
allowed on appeal.





On November 27, 2007, the Creditors’
Committee filed a motion seeking to recharacterize certain interest payments
made to the indenture trustee during our bankruptcy cases as payments of
principal.  On December 10, 2007, the Bankruptcy Court denied the
Creditors’ Committee’s motion and entered an order to that effect on December
17, 2007.  On December 10, 2007, we and the Creditors’ Committee filed
cross appeals of the Bankruptcy Court’s November 9, 2007 memorandum decision and
related rulings.





On
January 16, 2008, we announced that we had reached a settlement with the
indenture trustee and the 2009 noteholders, whereby the 2009 noteholders will
receive $220.5 million in cash plus all accrued but unpaid interest through the
Effective Date.  On February 26, 2008 the Bankruptcy Court entered an
order approving the settlement.





Legal Proceedings Outside
Our Bankruptcy Case





Flexsys
Antitrust Litigation




Antitrust
authorities in the United States, Europe and Canada have been investigating past
commercial practices in the rubber chemicals industry including the practices of
Flexsys.  The practices being investigated occurred during the period
that


20





Flexsys
was a 50/50 joint venture between us and Akzo Nobel.  The European
Commission issued its findings from its investigation in 2005, in which the
Commission granted Flexsys full immunity from any potential
fines.  Investigations regarding the industry may still be on-going in
the United States and Canada, but to date, no findings have been made against
Flexsys in either country.





In
addition, a number of purported civil class actions have been filed against
Flexsys and other producers of rubber chemicals on behalf of indirect
purchasers of rubber chemical products.  A series of such purported
class actions have been filed against Flexsys in various state courts in the
United States and in four courts in Canada.  However, all of
these cases have been dismissed, or are currently subject to confirmed or
tentative settlements.




Flexsys
Patent Litigation




Flexsys
holds various patents covering inventions in the manufacture of rubber
chemicals, including patents describing and claiming a manufacturing process for
4-aminodiphenylamine ("4-ADPA"), a key building block for the manufacture of
6PPD and IPPD, as well as a manufacturing process for 6PPD and IPPD, which
function as anti-degradants and are used primarily in the manufacture of rubber
tires.  Flexsys has been engaged in litigation in several
jurisdictions to protect and enforce its patents.




Legal
Proceedings in the United States




The ITC proceeding. In
February 2005, Flexsys filed a complaint with the U.S. International Trade
Commission ("ITC"), requesting that the ITC initiate an investigation against
Sinorgchem Co. Shangdong, a Chinese entity ("Sinorgchem"), Korea Kumho
Petrochemical Company, a Korean company ("KKPC"), and third party distributors
of Sinorgchem. Flexsys claims that the process Sinorgchem used to make 4-ADPA
and 6PPD, its sale of 6PPD for importation into the United States, and
Sinorgchem's sale of 4-ADPA to KKPC and KKPC's importation of 6PPD into the
United States were covered by Flexsys’ patents. Accordingly, Flexsys requested
that the ITC issue a limited exclusion order prohibiting the importation into
the United States of 4-ADPA and 6PPD originating from these entities. In
February 2006, an Administrative Law Judge ("ALJ") of the ITC determined that
Flexsys’ patents were valid, that the process used by Sinorgchem to make 4-ADPA
and 6PPD was covered by Flexsys’ patents, and that Sinorgchem and its
distributor, but not KKPC, had violated section 1337 of the U.S. Tariff Act. In
July 2006, the ITC substantially upheld the ALJ's decision on the basis of
literal infringement, and subsequently issued a limited exclusion order against
Sinorgchem and its distributor prohibiting them from importing 4-ADPA and 6PPD
manufactured by Sinorgchem into the United States.




Sinorgchem
appealed the ITC decision to the United States Court of Appeals for the Federal
Circuit. On December 21, 2007, a three-judge panel of the Federal Circuit
overruled the ITC’s finding that Sinorgchem had literally infringed Flexsys’
patent and remanded the matter to the ITC to determine whether Sinorgchem’s
processes infringe Flexsys’ patent on other grounds set forth by
Flexsys.  On February 25, 2008, Flexsys filed a petition for a
rehearing of the decision by the full panel of judges on the Federal
Circuit.  The limited exclusion order issued by the ITC remains in
effect.




Flexsys America L.P. v. Kumho Tire
U.S.A., Inc. et al. In January 2005, Flexsys filed suit in United States
District Court for the Northern District of Ohio for patent infringement against
Sinorgchem, KKPC, Kumho Tire Korea and Kumho Tire US, affiliates of KKPC, and
certain other tire distributors seeking monetary damages as well as injunctive
relief. This action is currently stayed pending resolution of the ITC matter
described above.




In re Rubber Chemicals Antitrust
Litigation. In April 2006, KKPC filed suit against Flexsys in the United
States District Court for the Central District of California for alleged
violations of the Sherman Act, breach of contract, breach of the implied
covenant of good faith and fair dealing, declaratory relief, intentional
interference with prospective economic advantage, disparagement and violations
of the California Business & Professions Code. This matter was subsequently
transferred to the United States District Court, Northern District of
California.  Flexsys filed a motion to dismiss KKPC’s complaint, which
was granted by the court in August 2007.  The court granted KKPC the
right to refile an amended complaint, which KKPC filed in September
2007.  We filed a motion to dismiss the amended
complaint.  Argument of this motion was heard on February 13,
2008.  A decision on the motion is pending.




Legal
Proceedings in Korea


In April
2004, Sinorgchem filed an action with the Korean Intellectual Property Tribunal
("IPT") seeking to invalidate Flexsys’ Korean patent. The IPT issued a decision
invalidating significant claims of Flexsys’ Korean patent. The IPT decision was
reversed on appeal by the Patent Court of Korea. Sinorgchem appealed the
decision of the Patent Court of Korea to the Supreme Court of
Korea.  On October 25, 2007 the Supreme Court of Korea reversed the
decision of the Patent Court on one of the claims


21




and
remanded the case back to the Patent Court for further review of the validity of
the other claims in accordance with the Supreme Court decision.  We
expect the Patent Court of Korea to render a decision in the first half of
2008.




Also, in
April 2004, Flexsys filed a patent infringement action in Korean Civil Court
against KKPC seeking to enjoin it from manufacturing 6PPD in violation of
Flexsys’ Korean patent. Flexsys alleges that Sinorgchem manufactures 4-ADPA
using Flexsys’ patented process, that KKPC imports Sinorgchem's 4-ADPA into
Korea and uses it to manufacture 6PPD for the production of rubber tires for
sale in Korea. In late 2004, the Korean District Court dismissed the action and
found Flexsys’ Korean patent invalid. The District Court's decision was upheld
on appeal by the Korean High Court. We have appealed the decision to the Supreme
Court of Korea.  We expect the Supreme Court of Korea to render a
decision in this case in the near future.




Legal
Proceedings in Europe and China




Various
parties, including Sinorgchem and other competitors of Flexsys, have filed
other, separate actions in patent courts in Europe and China seeking to
invalidate certain of Flexsys’ patents issued in those
jurisdictions.




Flexsys
Tort Litigation





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





Flexsys
has asserted a claim against Pharmacia for indemnification and defense in this
litigation.  Pursuant to a settlement agreement between Flexsys and
Pharmacia, Pharmacia has agreed to defend Flexsys in this litigation and to bear
the full cost of such defense.  Pharmacia retained its right to assert
that it is not obligated to indemnify Flexsys for potential damages with respect
to this matter.





Other Legal
Proceedings





Davis v. Solutia Inc. Employees’
Pension Plan; Hammond, et al. v. Solutia Inc. Employees’ Pension
Plan.Since October 2005, current or former participants in
the Solutia Inc. Employees’ Pension Plan (the “Pension Plan”) have filed three
class actions alleging that the Pension Plan is discriminatory based upon age
and that the lump sum values of individual account balances in the Pension Plan
have been, and continue to be, miscalculated.  None of the Debtors,
and no individual or entity other than the Pension Plan, has been named as a
defendant in any of these cases.  Two of these cases, captioned Davis, et al. v. Solutia, Inc.
Employees’ Pension Plan and Hammond, et al. v. Solutia, Inc.
Employees’ Pension Plan, are still pending in the Southern District of
Illinois, and have been consolidated with similar cases against Monsanto Company
and Monsanto Company Pension Plan (Walker et al. v. The Monsanto
Pension Plan, et al.) and Pharmacia Cash Balance Pension Plan, Pharmacia
Corporation, Pharmacia and Upjohn, Inc., and Pfizer Inc. (Donaldson v. Pharmacia Cash Balance
Pension Plan, et al.).  The plaintiffs in the Pension Plan
cases seek to obtain injunctive and other equitable relief (including money
damages awarded by the creation of a common fund) on behalf of themselves and
the nationwide putative class of similarly situated current and former
participants in the Pension Plan.





A
Consolidated Class Action Complaint (the “Complaint”) was filed by all of the
plaintiffs in the consolidated case on September 4, 2006.  The
Complaint alleged three separate causes of action against the Pension Plan: (1)
the Pension Plan violates the Employee Retirement Income Security Act (“ERISA”)
by terminating interest credits on prior plan accounts at the age of 55; (2) the
Pension Plan is improperly backloaded in violation of ERISA; and (3) the Pension
Plan is discriminatory on the basis of age.  In September 2007, the
second and third of these claims were dismissed by the court.





By
consent of the parties, the court certified a class in September 2007 with
respect to the Pension Plan on plaintiffs’ claim that the Pension Plan
discriminated against employees on the basis of their age by only providing
interest credits on prior plan accounts through age 55.




Dickerson v. Feldman; Reiff v.
Metz. Two companion purported class actions were filed – the former in
October 2004, the latter in June, 2007 - in the United States District Court for
the Southern District of New York against a number of defendants, including our
former officers and employees  and Solutia’s Employee Benefits Plans
Committee and Pension and Savings Funds Committee.  We were not named
as a defendant.  The actions alleged breach of fiduciary duty under
ERISA and sought to recover alleged losses to the Solutia Inc. Savings and
Investment Plan (“SIP Plan”) during the period December 16, 1998 to the date
the


22


action
was filed.  The plaintiffs in both cases alleged the investment of SIP
Plan assets in our common stock was imprudent, and the actions sought monetary
payment to the SIP Plan to recover the losses resulting from the alleged breach
of fiduciary duties, as well as injunctive and other appropriate equitable
relief, reasonable attorney’s fees and expenses, costs and
interest.  In addition, the plaintiffs in these actions filed a proof
of claim for $269 million against us in the Bankruptcy Court.





In
December 2007, we, the named defendants, and the plaintiffs reached a global
settlement in principle which would resolve both the pending bankruptcy claims
and the Dickerson and
Reiff lawsuits on a
class wide basis.  The settlement remains subject to the parties
entering into a formal settlement agreement, and the settlement must be approved
by both the Bankruptcy Court and the District Court.





Ferro Antitrust
Investigation.  Competition authorities in Belgium are
investigating past commercial practices of certain companies engaged in the
production and sale of butyl benzyl phthalates (“BBP”).  One of the
BBP producers under investigation by the Belgian Competition Authority (“BCA”)
is Ferro Belgium sprl, a European subsidiary of Ferro Corporation
(“Ferro”).  Ferro’s BBP business in Europe was purchased from us in
2000.  We received an indemnification notice from Ferro and have
exercised our right, pursuant to the purchase agreement relating to Ferro’s
acquisition of the BBP business from us, to assume and control the defense of
Ferro in proceedings relating to these investigations.  On July 7,
2005, the BCA Examiner issued a Statement of Objections regarding its BBP
investigation in which SESA, our European non-Debtor subsidiary, along with
Ferro Belgium sprl and two other producers of BBP, is identified as a party
under investigation with respect to its ownership of the BBP business from 1997
until the business was sold to Ferro in 2000.  SESA’s written comments
on the Reasoned Report were submitted on November 12, and December 17, 2007 and
presented at oral hearings before the BCA on December 20, 2007 and January 18,
2008.  No decision has been issued to date.





Department of Justice
Investigations.We have received two grand jury subpoenas from
the Antitrust Division of the United States Department of Justice (the
“DOJ”).  The first subpoena, which we received in April 2006, relates
to the DOJ’s investigation of potential antitrust violations in the adipic acid
industry.  The second subpoena, which we received in September 2007,
pertains to the DOJ’s investigation of potential antitrust violations in the
sodium tripoloyphosphate (“STPP”) industry.  During the relevant time
period of the subpoena, we were an owner of Astaris LLC, a 50/50 joint venture
with FMC Corporation, which manufactured and marketed phosphorus-based products,
including STPP.  We and our joint venture partner sold substantially
all of the assets of Astaris in November 2005 to Israel Chemicals
Limited.  We have not engaged in the STPP business since the sale of
our interest in the Astaris assets.  We are fully cooperating with the
DOJ in both investigations, which are ongoing.





Department of Labor Investigation of
Solutia Inc. Savings and Investment Plan.In 2005 the
Department of Labor (“DOL”) contacted us through the Employee Benefits Security
Administration, informing us that it wanted to conduct an investigation of
Solutia’s SIP Plan.  We fully cooperated with the DOL throughout the
investigation.





On
December 6, 2006, the DOL issued a letter stating that, based on facts gathered;
it appeared that we, through our fiduciaries, breached our fiduciary obligations
and violated provisions of ERISA with respect to the SIP
Plan.  Specifically, the DOL stated that it found no evidence that:
(1) the Pension and Savings Funds Committee (“PSFC”) sufficiently monitored
the Solutia Stock Fund option within the SIP Plan to determine if the Solutia
Stock Fund continued to be a prudent investment for the SIP Plan prior to
December 15, 2003 and (2) our Board of Directors, CEO, and PSFC, prior to
December 15, 2003, adequately monitored the SIP Plan fiduciaries, including the
PSFC, the Employee Benefits Plan Committee, and the Northern Trust Company of
Connecticut.  The DOL did not assert in its letter that the SIP Plan
or its participants had been harmed by these alleged
breaches.  Further, the DOL did not find that the offering of the
Solutia Stock Fund as an investment option in the SIP Plan was itself a
violation of ERISA, or that it caused any participant to suffer investment
losses.  Further, the DOL did not assert any monetary fines against us
based on its findings to date.  The DOL stated in the letter that its
findings were subject to the possibility that additional information could lead
the DOL to revise its views.





The DOL
did not choose to file suit against our fiduciaries, instead offering us the
opportunity to voluntarily discuss how the alleged violations may be
corrected.  We have submitted additional information to the DOL to
support our request for reconsideration of the DOL’s findings.  We
believe the DOL is likely to close its investigation in connection with the
settlement of the Dickerson and Reiff cases mentioned
above.





Solutia Canada Inc. v. INEOS
Americas LLC.Solutia Canada Inc. (“Solutia Canada”) filed
suit in Quebec Court in December 2006, alleging breach of contract by INEOS
Americas LLC (“INEOS”).  In late 2002, we negotiated a Stock and Asset
Purchase Agreement for the sale of its Resimenes & Additives business to UCB
S.A. (“UCB”).  As part of this agreement, we agreed to exclude the
LaSalle assets from the agreement and entered into the LaSalle Toll Agreement
(“LTA”) with UCB.  The LTA passed through all the benefits and risks
of ownership of the LaSalle operations to UCB, other than pre-closing
environmental liabilities.  In the LTA, Solutia Canada agreed to
operate its LaSalle Plant for the benefit of UCB and to provide all the
necessary services to convert UCB’s raw materials on a cost-neutral
basis.  Thus, UCB would pay Solutia Canada for all of its


23


actual,
direct and indirect costs incurred in connection with the performance or supply
of services under the LTA or in holding itself ready to perform or supply those
services.  In the years after its execution, the LTA was assigned by
UCB to Cytec Industries, Inc., then to INEOS.





On
January 31, 2006, INEOS notified Solutia Canada of its intention to terminate
the LTA effective January 31, 2008, in compliance with the terms of the
LTA.  INEOS’ decision to terminate the LTA will likely trigger the
shutdown of all activities at the LaSalle Plant, resulting in termination costs
recoverable by Solutia Canada against INEOS.  Solutia Canada estimates
that the overall termination costs associated with the termination of the LTA
and the shutdown of the LaSalle Plant will total approximately $31
million.  INEOS disputes the overall amount of Solutia Canada’s
termination costs.





We filed
this litigation against INEOS for breach of the LTA with respect to such
termination costs.  On March 26, 2007, INEOS filed a cross-demand
against Solutia Canada for $1 million, alleging that Solutia Canada improperly
charged INEOS on its October and November 2006 invoices for items which INEOS
claims are not actual direct or indirect costs under the LTA.  INEOS
reserved the right to amend its demand for additional alleged overpayments on
any future invoices through the remaining term of the LTA.  Solutia
Canada denies INEOS’ allegation.





Texas Commission on Environmental
Quality Administrative Enforcement Proceeding.On August 11,
2006, the Executive Director of the Texas Commission on Environmental Quality
(the “Commission”) commenced an administrative enforcement proceeding against us
by filing a petition with the Texas Commission on Environmental
Quality.  The petition alleged certain violations of the State of
Texas air quality program.  The Executive Director requested that an
administrative penalty, the amount of which was de minimis, be assessed and that
we undertake corrective actions to ensure compliance with the Texas Health and
Safety Code and the rules of the Commission in connection with alleged
self-reported unauthorized emission events and deviations of air
permits.  We answered the petition on September 1, 2006, asserted
affirmative defenses and requested a contested enforcement case
hearing.  We have reached a settlement in principle with the
Commission that includes payment of a de minimis penalty and contribution to an
environmentally beneficial project in exchange for mitigation of a portion of
the penalty.  All required corrective action has been completed.  The
final settlement orders are subject to approval by the Commission at an upcoming
Commission agenda meeting.





Risk
Management





We have
evaluated risk retention and insurance levels for product liability, workplace
health and safety, property damage and other potential areas of
risk.  Our management determines the amount of insurance coverage to
acquire from unaffiliated companies and the appropriate amount of risk to retain
and/or co-insure based on the cost and availability of insurance and the
likelihood of a loss.  Management believes that the level of risk that
we have retained is consistent with those of other companies in the chemical
industry.  We share certain of these policies with
Pharmacia.  There can be no assurance that we will not incur losses
beyond the limits, or outside the coverage, of our insurance.  For
additional information, see "Self-Insurance" on page 46.





We will
continue to devote significant effort to maintaining and improving safety and
internal control programs, which reduce our exposure to certain
risks.  We actively participate in several programs which provide
third party review and verification of our programs and practices.  In
the U.S. we are engaged in the Occupational Safety and Health Administration’s
Voluntary Protection Program with eight locations currently approved at STAR
status, the highest level possible.  In addition, our operations
participate in applicable management system certification processes world
wide.





24


ITEM
6.  SELECTED FINANCIAL DATA





Financial
Summary





(Dollars
      and shares in millions, except per share amounts)
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Operating
      Results:Net
      Sales
            
            $
            3,535
            
            
            $
            2,795
            
            
            $
            2,645
            
            
            $
            2,529
            
            
            $
            2,268Gross
      Profit
            
            
            489
            
            
            
            360
            
            
            
            304
            
            
            
            193
            
            
            
            77As percent of net
      sales
            
            
            14
            %
            
            
            13
            %
            
            
            11
            %
            
            
            8
            %
            
            
            3
            %Marketing,
      Administrative, and Technological Expenses
            
            
            297
            
            
            
            272
            
            
            
            266
            
            
            
            273
            
            
            
            332As percent of net
      sales
            
            
            8
            %
            
            
            10
            %
            
            
            10
            %
            
            
            11
            %
            
            
            15
            %Operating Income
      (Loss)(1)
            
            
            190
            
            
            
            87
            
            
            
            37
            
            
            
            (81
            )
            
            
            (259
            )As percent of net
      sales
            
            
            5
            %
            
            
            3
            %
            
            
            1
            %
            
            
            (3
            )%
            
            
            (11
            )%Income
      (Loss) from Continuing Operations Before Taxes
            
            
            (203
            )
            
            
            (38
            )
            
            
            13
            
            
            
            (303
            )
            
            
            (497
            )Income
      (Loss) from ContinuingOperations(2)
            
            
            (222
            )
            
            
            (56
            )
            
            
            3
            
            
            
            (296
            )
            
            
            (893
            )Income
      (Loss) from Discontinued Operations, net of tax
            
            
            14
            
            
            
            58
            
            
            
            8
            
            
            
            (24
            )
            
            
            (77
            )Cumulative
      Effect of Change in Accounting Principle, net of tax
            
            
            --
            
            
            
            --
            
            
            
            (3
            )
            
            
            --
            
            
            
            (5
            )Net
      Income (Loss)
            
            
            (208
            )
            
            
            2
            
            
            
            8
            
            
            
            (320
            )
            
            
            (975
            )Per Share
      Data:Basic and Diluted Earnings
      (Loss) per Sharefrom Continuing
      Operations(2)
            
            $
            (2.12
            )
            
            $
            (0.54
            )
            
            $
            0.03
            
            
            $
            (2.83
            )
            
            $
            (8.54
            )Weighted
      Average Shares Outstanding - Basic and Diluted
            
            
            104.5
            
            
            
            104.5
            
            
            
            104.5
            
            
            
            104.5
            
            
            
            104.6Dividends
      per Share
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Common
      Stock Price:High
            
            
            0.79
            
            
            
            0.75
            
            
            
            1.69
            
            
            
            1.39
            
            
            
            4.89Low
            
            
            0.18
            
            
            
            0.28
            
            
            
            0.33
            
            
            
            0.15
            
            
            
            0.23Close
            
            
            0.22
            
            
            
            0.75
            
            
            
            0.45
            
            
            
            1.17
            
            
            
            0.37Financial Position –
      Continuing Operations:Total
      Assets
            
            $
            2,633
            
            
            $
            2,017
            
            
            $
            1,884
            
            
            $
            1,958
            
            
            $
            2,313Liabilities
      not Subject to Compromise
            
            
            2,307
            
            
            
            1,600
            
            
            
            1,209
            
            
            
            1,294
            
            
            
            1,303Liabilities
      Subject to Compromise
            
            
            1,922
            
            
            
            1,849
            
            
            
            2,176
            
            
            
            2,187
            
            
            
            2,220Long-Term Debt(3)
            
            
            359
            
            
            
            210
            
            
            
            247
            
            
            
            285
            
            
            
            294Shareholders’
      Deficit
            
            
            (1,595
            )
            
            
            (1,405
            )
            
            
            (1,433
            )
            
            
            (1,423
            )
            
            
            (1,100
            )Other Data from
      Continuing Operations:Working Capital(4)
            
            $
            (397
            )
            
            $
            (280
            )
            
            $
            (2
            )
            
            $
            (20
            )
            
            $
            42Interest Expense(5)
            
            
            134
            
            
            
            100
            
            
            
            79
            
            
            
            108
            
            
            
            115Income Tax Expense (Benefit)(6)
            
            
            19
            
            
            
            18
            
            
            
            10
            
            
            
            (7
            )
            
            
            396Depreciation
      and Amortization
            
            
            116
            
            
            
            109
            
            
            
            109
            
            
            
            118
            
            
            
            125Capital
      Expenditures
            
            
            150
            
            
            
            105
            
            
            
            75
            
            
            
            49
            
            
            
            70Employees
      (Year-End)
            
            
            6,000
            
            
            
            5,100
            
            
            
            5,400
            
            
            
            5,700
            
            
            
            6,300





(1)
Operating income (loss) includes net restructuring (gains)/charges and other
items of $9 million in 2007, ($7 million) in 2006, $14 million in 2005, $62
million in 2004 and $228 million in 2003





(2)Income
(loss) from continuing operations includes net restructuring charges and other
(gains)/charges of ($5) million, or ($0.05) per share in 2007, $3 million,
or $0.03 per share in 2006, ($37) million, or ($0.35) per share in 2005, $146
million, or $1.40 per share in 2004, and $15 million, or $0.14 per share in
2003.





(3)Long-term
debt excludes $659 million as of December 31, 2007, $668 million as of December
31, 2006, 2005 and 2004, and $625 million as of December 31, 2003 of debt
classified as subject to compromise in accordance with Statement of Position
90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, as a result of
Solutia’s Chapter 11 bankruptcy filing in 2003.





(4)Working capital is defined as total current assets less total current
liabilities.





(5)
Interest expense includes the recognition of interest on allowed secured claims
as approved by the Bankruptcy Court of $8 million in 2007 and the write-off of
debt issuance costs of $4 million in 2006, $25 million in 2004 and $14 million
in 2003 due to the early refinancing of the underlying debt
facilities.





(6) Income
tax expense (benefit) includes an increase in valuation allowances of $70
million in 2007, $27 million in 2006, $12 million in 2005, $109 million in 2004,
and $542 million in 2003.





See
Management’s Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 for more information.


25




PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





Directors





The following table shows information
about our directors as of February 27, 2008:





Name,
      Age, Year First
              Became
      a Solutia Director
            Other
      Directorships
            Principal
      Occupation and Other Business
              Experience
      Since At Least January 1, 2003Jeffry
      N. Quinn, 49
              2004
            Tecumsah
      Products Company
            President,
      Chief Executive Officer and Director since May 2004.  Named
      Chairman of the Board on February 22, 2006.  Mr. Quinn
      previously served as Solutia’s Senior Vice President, General Counsel and
      Chief Restructuring Officer from 2003 to 2004.  Prior to joining
      Solutia, Mr. Quinn  served from 2000 to 2002 as Executive Vice
      President, Chief Administrative Officer and General Counsel of Premcor
      Inc., an independent petroleum refiner and supplier of unbranded
      transportation fuels, heating oil, petrochemical feedstocks, petroleum
      coke and other petroleum products.  Premcor Inc. is now owned by
      Valero Energy Corp.Paul
      H. Hatfield, 72
              1997
            Bunge
      Limited; Maritz, Inc.; Penford Corporation
            Principal
      of Hatfield Capital Group, a private investment
      company.  Previously, Mr. Hatfield served as Chairman of the
      Board, President and Chief Executive Officer of Petrolite Corporation, a
      specialty chemical company offering integrated technologies with products
      and services which are used primarily in energy-related industries, from
      1995 through 1997.  Petrolite Corporation is now known as Baker
      Petrolite, a division of Baker Hughes.Robert
      H. Jenkins, 64
              1997
            AK
      Steel Holdings Corporation; CLARCOR Inc.; Jason Inc.; ACCO
      Brands
            Retired
      Chairman of the Board and Chief Executive Officer, Sundstrand
      Corporation.  Previously, Mr. Jenkins served as Chairman of the
      Board and Chief Executive Officer of Sundstrand Corporation, a
      multinational organization engaged in the design, manufacture and sale of
      a variety of proprietary, technology-based components and systems for
      diversified international markets, from 1997 through
  1999.Frank
      A. Metz, Jr., 74
              1997
            None
            Retired
      Senior Vice President, Finance and Planning and Chief Financial Officer,
      International Business Machines Corporation, an information technology
      company.  Previously served as Senior Vice President, Finance
      and Planning and Chief Financial Officer of IBM, from 1986 through 1993
      and as a Director of IBM from 1991 through 1993.J.
      Patrick Mulcahy, 64
              1999
            Energizer
      Holdings, Inc.; Hanesbrands Inc.; Ralcorp Holdings, Inc.
            Chairman,
      Energizer Holdings, Inc., a manufacturer of primary batteries, flashlights
      and men’s and women’s wet-shave products.  Mr. Mulcahy
      previously served as Chief Executive Officer of Energizer Holdings, Inc.,
      from 2000 through 2005.Sally
      G. Narodick, 62
              2000
            Cray
      Inc.; Penford Corporation;  Puget Energy, Inc., and its wholly
      owned subsidiary, Puget Sound Energy, Inc.; SumTotal Systems,
      Inc.
            Retired
      President, Narodick Consulting, an educational technology and e-learning
      consulting firm, from 2000 through 2004.  Ms. Narodick
      previously served as Chief Executive Officer of Apex Learning, Inc., an
      educational software company, from its founding in 1998 until
      2000.John
      B. Slaughter, 73
              1997
            None
            President
      and Chief Executive Officer, National Action Council for Minorities in
      Engineering, Inc. (a non-profit corporation).  Mr. Slaughter
      previously served as the Irving R. Melbo professor of leadership in
      education at the University of Southern California and President Emeritus
      of Occidental College from 1999 through 2000.





All the
directors were elected prior to our Chapter 11 filing.  We have not
held an annual shareholders’ meeting during our Chapter 11
case.


26


Officers





The following table shows information
about our executive officers as of February 27, 2008:





Name,
      Age and Position
              with
      Solutia
            Year
      First Became an
              Executive
      Officer of Solutia
            Other
      Business Experience Since At Least January 1, 2003Jeffry
      N. Quinn, 49
              President,
      Chief Executive Officer and Chairman of the Board
            2003
            President,
      Chief Executive Officer and Director since May 2004.  Named
      Chairman of the Board on February 22, 2006.  Mr. Quinn
      previously served as Solutia’s Senior Vice President, General Counsel and
      Chief Restructuring Officer from 2003 to 2004.  Prior to joining
      Solutia, Mr. Quinn served from 2000 to 2002 as Executive Vice President,
      Chief Administrative Officer and General Counsel of Premcor Inc., an
      independent petroleum refiner and supplier of unbranded transportation
      fuels, heating oil, petrochemical feedstocks, petroleum coke and other
      petroleum products.  Premcor Inc. is now owned by Valero Energy
      Corp.James
      M. Sullivan, 47
              Senior
      Vice President, Chief Financial Officer and Treasurer
            2004
            Senior
      Vice President, Chief Financial Officer and Treasurer since
      2004.  Mr. Sullivan served as Solutia’s Vice President and
      Controller from 1999 through 2004.Luc
      De Temmerman, 53
              Senior
      Vice President and President, Performance Products
            2003
            Senior
      Vice President and President, Performance Products since
      2005.  Mr. De Temmerman is a long-time Solutia employee who has
      previously served as Senior Vice President and Chief Operating Officer
      from 2004 through 2005; Vice President and General Manager, Performance
      Products, from 2003 through 2004; Worldwide Commercial Director for
      Laminated Glazing Products and Services, from 2001 through
      2002.Kent
      J. Davies, 44
              Senior
      Vice President and President, CPFilms
            2006
            Senior
      Vice President and President, CPFilms since January 2006.  Mr.
      Davies previously served as Senior Vice President, Marketing, R&D and
      Regulatory, for United Industries Corp., a global consumer products
      company, from 2002 through 2005 and Senior Vice President, Marketing of
      United Industries Corp., from 2001 through 2002.James
      R. Voss, 41
              Senior
      Vice President and President, Flexsys
            2005
            Senior
      Vice President and President, Flexsys since 2007.  Mr. Voss
      served as Senior Vice President, Business Operations from 2005 to
      2007.  Mr. Voss served as Senior Vice President and Chief
      Administrative Officer of Premcor Inc., an independent petroleum refiner
      and supplier of unbranded transportation fuels, heating oil, petrochemical
      feedstocks, petroleum coke and other petroleum products in the United
      States, from 2000 through 2005.  Premcor Inc. is now owned by
      Valero Energy Corp.Jonathon
      P. Wright, 48
              Senior
      Vice President and President, Integrated Nylon
            2005
            Senior
      Vice President and President, Integrated Nylon since 2005.  Mr.
      Wright served as a Vice President for Charles River Associates, an
      international economic and business consulting firm, from 2002 through
      2005 where he worked extensively in the petrochemical, specialty chemical
      and related process industries.  Mr. Wright was a Managing
      Director of Arthur D. Little’s North American Strategy and Organizational
      Consulting business from 1997 through 2002.Robert
      T. DeBolt, 47
              Senior
      Vice President, Business Operations
            2007
            Senior
      Vice President, Business Operations since 2007.  Mr. DeBolt
      served as Vice President of Corporate Strategy from 2005 to 2007 and as
      the Controller for Integrated Nylon from 2003 through
      2004.  Prior thereto, Mr. DeBolt was responsible for all of our
      manufacturing facilities.Rosemary
      L. Klein, 40
              Senior
      Vice President, General Counsel and Secretary
            2004
            Senior
      Vice President, General Counsel and Secretary since 2004.  Ms.
      Klein served as Solutia’s Vice President, Secretary and General Counsel,
      Corporate and External Affairs in 2004 and Assistant General Counsel in
      2003.  Ms. Klein served as Assistant General Counsel and
      Secretary of Premcor Inc., an independent petroleum refiner and supplier
      of unbranded transportation fuels, heating oil, petrochemical feedstocks,
      petroleum coke and other petroleum products in the United States, from
      2000 through 2003.  Premcor Inc. is now owned by Valero Energy
      Corp.Harold
      E. Wallach, 45
              Senior
      Vice President, Human Resources
            2007
            Senior
      Vice President, Human Resources since 2007.  Mr. Wallach served
      from 2000 until 2007 as a Market Leader for Mercer Human Resources
      Consulting, one of the world’s largest human resources consulting
      firms.  Prior to joining Mercer, Mr. Wallach held management
      positions with two other leading human resources consulting
      firms:  Buck Consultants from 1994 to 2000 and Hewitt, Inc. from
      1990 to 1994.





The above
listed individuals are elected to the offices set opposite their names to hold
office until their successors are duly elected and have qualified, or until
their earlier death, resignation or removal.




Audit
and Finance Committee; Audit Committee Financial Expert
 
 The
members of our Audit and Finance Committee, which met six times in 2007, are Mr.
Metz, chairman; Mr. Mulcahy, Mrs. Narodick and Dr. Slaughter.  Our
board of directors has concluded that each member of the committee is
independent within the meaning of Rule 10A-3 of the Exchange Act of 1934 and the
New York Stock Exchange’s listing standards.  The board has


27


also
concluded that Mr. Metz is an audit committee financial expert, as that term is
defined in the rules issued under the Sarbanes-Oxley Act of 2002.





The purpose of the committee is to
assist the board in overseeing the integrity of our financial statements, our
compliance with legal and regulatory requirements, the qualifications and
independence of the independent auditor, the performance of the independent
auditor and our internal audit function, and our systems of disclosure controls
and internal controls over financial reporting, and to prepare the report
required by the rules of the U.S. Securities and Exchange
Commission.





Among the
committee’s responsibilities is the selection of our independent
auditor.





The committee’s written charter sets
out the functions the committee is to perform, in light of the Sarbanes-Oxley
Act of 2002 and the rules of the New York Stock Exchange.





Compliance
with Section 16(a) of the Exchange Act





Section
16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers to file reports of holdings and transactions in our common
stock with the Securities and Exchange Commission.  During 2007, all
reports required by our directors and executive officers under Section 16(a) of
the Securities Exchange Act of 1934 were made in a timely manner.





Corporate
Governance





Our board
of directors has adopted a Code of Ethics for Senior Financial
Officers.  This code applies to our chief executive officer and the
other senior officers who have financial responsibilities, including our chief
financial officer, treasurer, controller and general counsel.  This
code is filed as an exhibit to this Annual Report on Form 10-K.  Also,
our Code of Ethics for Senior Financial Officers, Code of Business Conduct and
Ethics, Corporate Governance Guidelines, and the charters of the Audit and
Finance Committee, Executive Compensation and Development Committee and
Governance Committee are available at our web site www.solutia.com.  Any
person who wishes to obtain a copy of any of these documents may do so by
writing to Investor Relations, Solutia Inc., 575 Maryville Centre Drive, St.
Louis, Missouri 63141.





Legal
Proceedings





For a description of the Dickerson v. Feldmanand
Reiff v. Metzlitigation pending against certain of our former directors and officers
see the fourth paragraph under "Other Legal Proceedings" on page 24
above.





28




PART
IV





ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE





(a)  Documents filed as part
of this Form 10-K:





1.
            Financial
      Statements--See the Index to Consolidated Financial Statements and
      Financial Statement Schedule at page54 of Solutia's
      Form 10-K as filed with the Securities and Exchange Commission on February
      27, 2008.





2.
            The
      following supplemental schedule for the years ended December 31, 2007,
      2006 and 2005 has been filed with Solutia’s Form 10-K as filed with the
      Securities and Exchange Commission on February 27,
  2008.





II--Valuation and Qualifying
Accounts





3.
            Exhibits--See
      the Exhibit Index beginning at page 31 of this Form
      10-K/A.  For a listing of all management contracts and
      compensatory plans or arrangements required to be filed as exhibits to
      this report, see the exhibits listed under (Exhibit Nos.10(i), 10(l) through
      10 (s) and 10(mm) through 10(uu) on pages 32-34) of the Exhibit
      Index.  The following exhibits listed in the Exhibit Index are
      filed with this Form 10-K/A:













23(b)
            Consent
      of Independent Registered Public Accounting Firm31(a)
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231(b)
            Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232(a)
            Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232(b)
            Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  200299.4
            Consolidated
      Financial Statements of Siratsa LLC for the year ended December 31,
      2007














29














SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





SOLUTIA
INC.





By:  /s/
Timothy J. Spihlman


------------------------------


Timothy
J. Spihlman


Vice
President and Controller


(Principal
Accounting Officer)





Dated:
March 18, 2008





30


EXHIBIT
INDEX





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





Exhibit
No.                                           Description


−−−−−−−−−−−                                 
−−−−−−−−−−−


2(a)
            Distribution
      Agreement (incorporated by reference to Exhibit 2 of Solutia’s
      Registration Statement on Form S−1 (333−36355) filed September 25,
      1997)





2(b)
            Amendment
      to Distribution Agreement, dated as of July 1, 2002, by and among
      Pharmacia Corporation, Solutia Inc., and Monsanto Company (incorporated by
      reference to Exhibit 2 of Solutia’s Form 10−Q for the quarter ended June
      30, 2002)





2(c)
            Joint
      Venture Agreement between Solutia Inc. and FMC Corporation(1)
      (incorporated by reference to Exhibit 2(i) of Solutia’s Form 8−K filed on
      April 27, 2000)





2(d)
            First
      Amendment to Joint Venture Agreement between Solutia Inc. and FMC
      Corporation (incorporated by reference to Exhibit 2(ii) of Solutia’s Form
      8−K filed on April 27, 2000)





2(e)
            Second
      Amendment to Joint Venture Agreement between Solutia Inc. and FMC
      Corporation (incorporated by reference to Exhibit 2(iii) of Solutia’s Form
      8−K filed on April 27, 2000)





2(f)
            Third
      Amendment to Joint Venture Agreement between Solutia Inc. and FMC
      Corporation (incorporated by reference to Exhibit 2(iv) of Solutia’s Form
      8−K filed on April 27, 2000)





2(g)
            Debtors’
      Fifth Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the
      Bankruptcy Code (incorporated by reference to Exhibit 99.2 of Solutia's
      Form 8-K filed October 25, 2007)





3(a)
            Restated
      Certificate of Incorporation of Solutia (incorporated by reference to
      Exhibit 3(a) to Solutia’s Registration Statement on Form S-1 (333-36355)
      filed on September 25, 1997)





3(b)
            By-Laws
      of Solutia Inc., as amended February 26, 2003 (incorporated by reference
      to Exhibit 3(b) to Solutia’s Form 10-K for the year ended December 31,
      2003)





10(a)
            Indenture
      dated as of October 1, 1997, between Solutia Inc. and The Chase Manhattan
      Bank, as Trustee (incorporated by reference to Exhibit 4.1 of Solutia’s
      Form 10−Q for the quarter ended September 30,
  1997)





10(b)
            7.375%
      Debentures due 2027 in the principal amount of $200,000,000 (incorporated
      by reference to Exhibit 4.3 of Solutia’s Form 10−Q for the quarter ended
      September 30, 1997)





10(c)
            7.375%
      Debentures due 2027 in the principal amount of $100,000,000 (incorporated
      by reference to Exhibit 4.4 of Solutia’s Form 10−Q for the quarter ended
      September 30, 1997)





10(d)
            6.72%
      Debentures due 2037 in the principal amount of $150,000,000 (incorporated
      by reference to Exhibit 4.5 of Solutia’s Form 10−Q for the quarter ended
      September 30, 1997)





10(e)
            Indenture
      dated as of July 9, 2002, between SOI Funding Corp. and HSBC Bank USA, as
      Trustee (incorporated by reference to Exhibit 4.2 of Solutia’s Form S−4
      (333−99699) filed September 17,
2002)





10(f)
            First
      Supplemental Indenture, dated as of July 25, 2002, among Solutia Inc., SOI
      Funding Corp., the Subsidiary Guarantors and HSBC Bank USA, as Trustee
      (incorporated by reference to Exhibit 4.3 of Solutia’s
      Form S−4 (333−99699) filed September 17,
  2002)





10(g)
            Second
      Supplemental Indenture, dated as of October 24, 2002, among Solutia Inc.,
      the subsidiary guarantors named therein and HSBC Bank USA (incorporated by
      reference to Exhibit 4 of Solutia’s Form 10−Q for the quarter ended
      September 30, 2002)





10(h)
            Third
      Supplemental Indenture, dated as of October 8, 2003, among Solutia Inc.,
      the subsidiary guarantors named therein and HSBC Bank USA (incorporated by
      reference to Exhibit 4(c) of Solutia’s Form 10−Q for the quarter ended
      September 30, 2003)


31





10(i)
            Financial
      Planning and Tax Preparation Services Program for the Executive Leadership
      Team (incorporated by reference to Exhibit 10(a) of Solutia’s Form 10−K
      for the year ended December 31,
1997)





10(j)
            Employee
      Benefits Allocation Agreement (incorporated by reference to Exhibit 10(a)
      of Solutia’s Registration Statement on Form S−1 (333−36355) filed
      September 25, 1997)





10(k)
            Tax
      Sharing and Indemnification Agreement (incorporated by reference to
      Exhibit 10(b) of Solutia’s Registration Statement on Form S−1 (333−36355)
      filed September 25, 1997)





10(l)
            Solutia
      Inc. 1997 Stock−Based Incentive Plan as amended in 1999 and 2000
      (incorporated by reference to Exhibit 10(1) of Solutia’s Form 10−Q for the
      quarter ended June 30, 2000)





10(m)
            Solutia
      Inc. 2000 Stock−Based Incentive Plan (incorporated by reference to
      Appendix A of the Solutia Inc. Notice of Annual Meeting and Proxy
      Statement dated March 9, 2000)





10(n)
            Solutia
      Inc. Non−Employee Director Compensation Plan, as amended in 1999, 2000,
      and 2001 (incorporated by reference to Exhibit 10 of Solutia’s Form 10−Q
      for the quarter ended June 30,
2001)





10(o)
            Solutia
      Inc. 2003 Non−Employee Director Compensation Plan (incorporated by
      reference to Exhibit 10(a) of Solutia’s Form 10−Q for the quarter ended
      June 30, 2003)





10(p)
            2006
      Solutia Annual Incentive Plan (incorporated by reference to Exhibit 10.1
      of Solutia’s Form 8−K, filed September 28,
2006)





10(q)
            Letter
      Agreement between Solutia Inc. and Luc De Temmerman effective as of July
      19, 2004 (incorporated by reference to Exhibit 99.3 of Solutia’s Form 8−K
      filed January 18, 2005)





10(r)
            Retention
      Agreement, dated as of June 17, 2004, by and between Solutia Inc. and
      Rosemary L. Klein (incorporated by reference to Exhibit 10(aa) of
      Solutia’s Form 10−K for the year ended December 31,
  2004)





10(s)
            Form
      of Retention Agreement between Solutia Inc. and Key Employees
      (incorporated by reference to Exhibit 10(bb) of Solutia’s Form 10−K for
      the year ended December 31, 2004)





10(t)
            Protocol
      Agreement, dated as of July 1, 2002, by and among Pharmacia Corporation,
      Solutia Inc., and Monsanto Company (incorporated by reference to Exhibit
      10(b) of Solutia’s Form 10−Q for the quarter ended June 30,
      2002)





10(u)
            Protocol
      Agreement, dated as of November 15, 2002, by and among Pharmacia
      Corporation, Solutia Inc. and Monsanto Company (incorporated by reference
      to Exhibit 10.1 of Solutia’s Form 8−K filed November 18,
    2002)





10(v)
            Amendment
      to Protocol Agreement, dated as of March 3, 2003, by and among Pharmacia
      Corporation, Solutia Inc. and Monsanto Company (incorporated by reference
      to Exhibit 10(t) of Solutia’s Form10−K for the year ended December 31,
      2003)





10(w)
            Amendment
      to Protocol Agreement, dated August 4, 2003, by and among Pharmacia
      Corporation, Monsanto Company and Solutia Inc. (incorporated by reference
      to Exhibit 10(e) of Solutia’s Form 10−Q for the quarter ended June 30,
      2003)





10(x)
            Financing
      Agreement, dated as of January 16, 2004, by and among Solutia Inc. and
      Solutia Business Enterprises, Inc., as debtors and debtors−in−possession,
      as Borrowers, certain subsidiaries of Solutia Inc. listed as a Guarantor,
      as debtors and debtors−in−possession, as Guarantors, the lenders from time
      to time party thereto, as Lenders, Citicorp USA, Inc., as Collateral
      Agent, Administrative Agent and Documentation Agent (incorporated by
      reference to Exhibit 99.2 of Solutia’s Form 8−K filed January, 23,
      2004)





10(y)
            Amendment
      No. 1 to Financing Agreement and Waiver, dated as of March 1, 2004, by and
      among Solutia Inc. and Solutia Business Enterprises, Inc., as debtors,
      debtors−in−possession and as Borrowers; certain subsidiaries of Solutia
      Inc., as debtors, debtors−in−possession and as Guarantors; the lenders
      from time to time party thereto, as Lenders; Citicorp USA, Inc., as
      Collateral Agent, Administrative Agent and Co−Documentation Agent and
      Wells Fargo Foothill, LLC, as Co−Documentation Agent (incorporated by
      reference to Exhibit 10(y) of Solutia’s Form 10−K for the year ended
      December 31, 2004)


32




10(z)
              Amendment
      No. 2 to Financing Agreement and Waiver dated as of July 20, 2004 by and
      among Solutia Inc. and Solutia Business Enterprises, Inc., as debtors,
      debtors−in−possession and as Borrowers; certain subsidiaries of Solutia
      Inc. as debtors, debtors−in−possession and as Guarantors; the lenders from
      time to time party thereto, as Lenders; Citicorp USA, Inc., as Collateral
      Agent, Administrative agent and Co−Documentation Agent and Wells Fargo
      Foothill, LLC, as Co−Documentation Agent (incorporated by reference to
      Exhibit 10(f) of Solutia’s Form 10−Q for the quarter ended June 30,
      2004)


10(aa)
            Amendment
      No. 3 to the $525,000,000 Debtor−in−Possession Financing Agreement dated
      January 16, 2004 (as amended) between Solutia Inc., Solutia Business
      Enterprises, Inc. and the other parties thereto (incorporated by reference
      to Exhibit 10.1 of Solutia’s Form 8−K filed July 27,
  2005)





10(bb)
            Amendment
      No. 4 to Financing Agreement and Waiver dated as of March 17, 2006
      amending the Debtor−in−Possession Financing Agreement dated January 16,
      2005 (as amended) between Solutia Inc., Solutia Business Enterprises, Inc.
      and the other parties thereto (incorporated by reference to Exhibit 10.1
      of Solutia’s Form 8−K filed March 17,
2006)





10(cc)
            Amendment
      No. 5 to the Financing Agreement and Waiver dated as of January 25, 2007
      amending the Debtor−in−Possession Financing Agreement dated January 16,
      2004 (as amended) between Solutia Inc., Solutia Business Enterprises, Inc.
      and the other parties thereto. (incorporated by reference to Exhibit 10.1
      of Solutia's Form 8-K filed January 31,
2007)





10(dd)
            Waiver
      and Consent dated as of October 31, 2005 by and among Solutia, Solutia
      Business Enterprises, Inc., each subsidiary of Solutia listed on the
      signature pages thereto, the lenders party thereto, Citicorp USA, Inc. and
      Wells Fargo Foothill, LLC (incorporated by reference to Exhibit 10.1 of
      Solutia’s Form 8−K filed December 5,
2005)





10(ee)
            Toll
      Manufacturing Agreement by and between Solutia Inc. and Phosphorus
      Derivatives Inc. dated November 4, 2005 (incorporated by reference to
      Exhibit 10.2 of Solutia’s Form 10−Q for the quarter ended September 30,
      2005)





10(ff)
            Stock
      Purchase Agreement, dated as November 23, 2005 by and between Solutia
      Inc., Vitro S.A. de C.V., and Vitro Plan S.A. de C.V. (incorporated by
      reference to Exhibit 10.1 of Solutia’s Form 8−K filed on December 21,
      2005)





10(gg)
            Share
      and Asset Purchase Agreement entered into on May 23, 2006 between Solutia
      Europe S.A./N.V. and Dishman Pharmaceuticals & Chemicals Ltd.
      (incorporated by reference to Exhibit 10.2 of Solutia’s Form 10−Q for the
      quarter ended June 30, 2006)





10(hh)
            Amendment
      to Share and Asset Purchase Agreement entered into on August 22, 2006
      between Solutia Europe S.A./N.V. and Dishman Pharmaceuticals &
      Chemicals Ltd.(1) (incorporated by reference to Exhibit 10.1 of Solutia’s
      Form 10−Q for the quarter ended September 30,
  2006)





10(ii)
            €200,000,000
      Facility Agreement dated July 26, 2006 between Solutia Europe S.A./N.V.,
      Solutia Services International S.C.A./Comm. V.A., the guarantors listed
      therein, Citigroup Global Markets Limited, as mandated lead arranger, the
      financial institutions listed therein, as the original lenders, Citibank
      International plc as agent for the finance parties and Citibank N.A. as
      security agent for the secured parties (incorporated by reference to
      Exhibit 10.1 of Solutia’s Form 10−Q for the quarter ended June 30, 2006)
      and amendment and restatement thereof dated September 15, 2006 filed
      herewith (incorporated by reference to Exhibit 10.1 of Solutia’s Form 10−Q
      for the quarter ended September 30,
2006)





10(jj)
            Transaction
      agreement by and among Akzo Nobel Chemicals International B.V., Akzo Nobel
      Chemicals Inc., Akzo Nobel N.V., Flexsys Holding B.V., Flexsys America LP,
      Flexsys Rubber Chemicals  Ltd. and Solutia Inc. (incorporated by
      reference to Exhibit 10(rr) of Solutia's Form 10-K for the year ended
      December 31,2006)





10(kk)
            Works
      council side letter by and among Akzo Nobel N.V., Akzo Nobel Chemicals
      International B.V., Flexsys America LP, Flexsys Rubber Chemicals Ltd. and
      Solutia Inc., dated as of February 27, 2007 (incorporated by reference to
      Exhibit 10(ss) of Solutia's Form 10-K for the year ended December
      31,2006)





*10(ll)
            Flexsys
      USD 225,000,000 Multicurrency Term and Revolving Facilities Agreement
      2007





10(mm)
            2007
      Solutia Annual Incentive Program (incorporated by reference to Exhibit
      10.1 of Solutia's Form 8-K filed on March 17,
  2007)





10(nn)
            Amended
      and Restated Employment Agreement by and between Solutia Inc. and Jeffry
      N. Quinn (incorporated by reference to Exhibit 10.2 of Solutia's Form 8-K
      filed on March 17, 2007)


33


10(oo)
            Amended
      and Restated Employment Agreement by and between Solutia Inc. and Kent J.
      Davies (incorporated by reference to Exhibit 10.3 of Solutia's Form 8-K
      filed on March 17, 2007)





10(pp)
            Amended
      and Restated Employment Agreement by and between Solutia Inc. and Luc De
      Temmerman (incorporated by reference to Exhibit 10.4 of Solutia's Form 8-K
      filed on March 17, 2007)





10(qq)
            Amended
      and Restated Employment Agreement by and between Solutia Inc. and Rosemary
      L. Klein (incorporated by reference to Exhibit 10.5 of Solutia's Form 8-K
      filed on March 17, 2007)





10(rr)
            Amended
      and Restated Employment Agreement by and between Solutia Inc. and James M.
      Sullivan incorporated by reference to Exhibit 10.6 of Solutia's Form 8-K
      filed on March 17, 2007)





10(ss)
            Amended
      and Restated Employment Agreement by and between Solutia Inc. and James R.
      Voss (incorporated by reference to Exhibit 10.7 of Solutia's Form 8-K
      filed on March 17, 2007)





10(tt)
            Amended
      and Restated Employment Agreement by and between Solutia Inc. and Jonathon
      P. Wright (incorporated by reference to Exhibit 10.8 of Solutia's Form 8-K
      filed on March 17, 2007)





10(uu)
            Employment
      Agreement by and between Solutia Inc. and Robert T. DeBolt (incorporated
      by reference to Exhibit 10.9 of Solutia's Form 8-K filed on March 17,
      2007)





10(vv)
            Asset
      Purchase Agreement between Solutia Inc. and Thermphos Trading GmbH dated
      as of March 11, 2007 (incorporated by reference to Exhibit 10.1 of
      Solutia's Form 8-K filed on May 5,
2007)





10(ww)
            Amendment
      to Asset Purchase Agreement between Solutia Inc. and Thermphos Trading
      GmbH dated as of March 13, 2007 (incorporated by reference to Exhibit 10.2
      of Solutia's Form 8-K filed on May 5,
2007)





10(xx)
            Second
      Amendment to Asset Purchase Agreement between Solutia Inc. and Thermphos
      Trading GmbH dated as of May 31, 2007 (incorporated by reference to
      Exhibit 10.3 of Solutia's Form 8-K filed on May 5,
  2007)


11
              Omitted--Inapplicable;
      see "Consolidated Statement of Operations” on page 51.
 *12
                Computation of the Ratio of
      Earnings to Fixed Charges (see Exhibit
  12)
  *14
                  Solutia
      Inc. Code of Ethics for Senior Financial Officers as amended (incorporated
      by reference to Exhibit 14 of Solutia’s Form 10-K for the year ended
      December 31, 2006)


16          Omitted--Inapplicable





18          Omitted--Inapplicable





*21        Subsidiaries
of the Registrant





22          Omitted--Inapplicable





*23        Consent
of Independent Registered Public Accounting Firm





23(b)     Consent
of Independent Registered Public Accounting Firm





*24(a)   Powers
of Attorney





*24(b)   Certified
copy of board resolution authorizing Form 10-K filing utilizing powers of
attorney





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





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





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


34


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





*99.1    
Solutia's Categorical Independence Standards for Non-Employee
Directors





*99.2
            Press
      Release dated February 25, 2008 Solutia Reaches Agreement with Citi,
      Goldman Sachs and Deutsche Bank to Fund Exit
  Financing





*99.3
            Press
      Release dated February 26, 2008 Solutia Gains Court Approval of Exit
      Financing; Will Emerge from Chapter 11 on February
  28





99.4
            Consolidated
      Financial Statements for Siratsa LLC for the year ended December 31,
      2007














−−−−−−−−−−−−−−−−−−−−−−−−−−−−−


(1)
      Confidentiality has been requested for a portion of this
      exhibit.


*
      Previously filed with Solutia’s Form 10-K filed with the Securities and
      Exchange Commission on February 27,
2008.








(d)
            Financial
      Statements Schedules





Separate
      Financial Statements of Subsidiaries Not
  Consolidated.





The
consolidated financial statements of Siratsa LLC (previously known as Astaris
LLC), our 50/50 joint venture with FMC Corporation, for the three year period
ended December 31, 2007 required to be included in this report pursuant to Rule
3-09 of Regulation S-X are being filed as exhibit 99.4 to this Amendment No. 1
to Form 10-K.