10-Q 1 sol10q.txt ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 001-13255 --------- SOLUTIA INC. ------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 43-1781797 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760 --------------------------------------------------------------- ---------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (314) 674-1000 -------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING TWELVE MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES X NO --- --- INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES NO X --- --- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. OUTSTANDING AT CLASS SEPTEMBER 30, 2005 ----- ------------------ COMMON STOCK, $0.01 PAR VALUE 104,459,578 SHARES ----------------------------- ------------------ ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SOLUTIA INC. (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2005 2004 2005 2004 ---- ---- ---- ---- NET SALES ......................................................... $ 676 $ 678 $ 2,156 $2,022 Cost of goods sold................................................. 595 587 1,864 1,816 ------ ------ -------- ------ GROSS PROFIT....................................................... 81 91 292 206 Marketing expenses................................................. 36 31 104 105 Administrative expenses............................................ 23 20 72 78 Technological expenses............................................. 11 7 33 33 Amortization expense............................................... 1 -- 1 1 ------ ------ -------- ------ OPERATING INCOME (LOSS)............................................ 10 33 82 (11) Equity earnings (loss) from affiliates............................. 13 (16) 48 (28) Interest expense (a)............................................... (20) (21) (64) (93) Other income, net.................................................. 2 1 8 1 Loss on debt modification.......................................... -- -- -- (15) Reorganization items, net.......................................... (15) (14) (35) (63) ------ ------ -------- ------ INCOME (LOSS) BEFORE INCOME TAX EXPENSE............................ (10) (17) 39 (209) Income tax expense................................................. 5 1 19 7 ------ ------ -------- ------ NET INCOME (LOSS).................................................. $ (15) $ (18) $ 20 $ (216) ====== ====== ======== ====== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE........................ $(0.14) $(0.17) $ 0.19 $(2.07) BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING.............. 104.5 104.5 104.5 104.5 ====== ====== ======== ====== (a) Interest expense excludes unrecorded contractual interest expense of $8 for the three months ended September 30, 2005 and 2004, and $24 for the nine months ended September 30, 2005 and 2004.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS) (DOLLARS IN MILLIONS) (UNAUDITED)

NINE MONTHS THREE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2005 2004 2005 2004 ---- ---- ---- ---- NET INCOME (LOSS)................................................ $ (15) $ (18) $ 20 $ (216) OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments ................................ (1) 1 (8) -- Net unrealized gain on derivative instruments, net of tax........ 4 -- 4 -- Minimum pension liability adjustments, net of tax ............... -- -- -- 18 ----- ------ ---- ------ COMPREHENSIVE INCOME (LOSS)...................................... $ (12) $ (17) $ 16 $ (198) ===== ====== ==== ====== See accompanying Notes to Condensed Consolidated Financial Statements.

1 SOLUTIA INC. (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)

AS OF AS OF SEPTEMBER 30, DECEMBER 31, 2005 2004 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents................................................. $ 82 $ 115 Trade receivables, net of allowances of $8 and $11 in 2005 and 2004....... 279 286 Miscellaneous receivables ................................................ 59 93 Inventories............................................................... 243 239 Prepaid expenses and other assets......................................... 32 45 ------ ------ TOTAL CURRENT ASSETS...................................................... 695 778 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $2,514 in 2005 and $2,511 in 2004.................................... 796 841 INVESTMENTS IN AFFILIATES................................................. 212 177 GOODWILL.................................................................. 76 76 IDENTIFIED INTANGIBLE ASSETS, NET ........................................ 36 38 OTHER ASSETS.............................................................. 127 166 ------ ------ TOTAL ASSETS.............................................................. $1,942 $2,076 ====== ====== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable ......................................................... $ 174 $ 198 Accrued liabilities ...................................................... 237 283 Short-term debt .......................................................... 300 300 ------ ------ TOTAL CURRENT LIABILITIES ................................................ 711 781 LONG-TERM DEBT ........................................................... 250 285 OTHER LIABILITIES ........................................................ 253 267 ------ ------ TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE............................... 1,214 1,333 LIABILITIES SUBJECT TO COMPROMISE ........................................ 2,156 2,187 SHAREHOLDERS' DEFICIT: Common stock (authorized, 600,000,000 shares, par value $0.01) Issued: 118,400,635 shares in 2005 and 2004........................... 1 1 Additional contributed capital........................................ 56 56 Treasury stock, at cost (13,941,057 shares in 2005 and 2004).......... (251) (251) Net deficiency of assets at spinoff....................................... (113) (113) Accumulated other comprehensive loss...................................... (79) (75) Accumulated deficit....................................................... (1,042) (1,062) ------ ------ TOTAL SHAREHOLDERS' DEFICIT............................................... (1,428) (1,444) ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............................... $1,942 $2,076 ====== ====== See accompanying Notes to Condensed Consolidated Financial Statements.

2 SOLUTIA INC. (DEBTOR-IN-POSSESSION) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN MILLIONS) (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, ----------------------------- 2005 2004 ---- ---- DECREASE IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income (loss).............................................................. $ 20 $ (216) Adjustments to reconcile to Cash From Operations: Depreciation and amortization............................................. 88 95 Restructuring expenses and other charges.................................. (1) 139 Amortization of deferred credits.......................................... (6) (30) Other, net................................................................ (3) 4 Changes in assets and liabilities: Income and deferred taxes............................................ (8) -- Trade receivables.................................................... 7 (28) Inventories.......................................................... (4) (7) Accounts payable..................................................... (22) 80 Liabilities subject to compromise.................................... (31) (47) Other assets and liabilities......................................... (42) 1 ------- ------- CASH USED IN OPERATING ACTIVITIES.............................................. (2) (9) ------- ------- INVESTING ACTIVITIES: Property, plant and equipment purchases........................................ (51) (32) Acquisition and investment payments............................................ -- (36) Other investing activities..................................................... 4 (1) ------- ------- CASH USED IN INVESTING ACTIVITIES.............................................. (47) (69) ------- ------- FINANCING ACTIVITIES: Net change in short-term debt obligations...................................... -- (361) Proceeds from long-term debt obligations....................................... -- 300 Net change in cash collateralized letters of credit............................ 17 85 Deferred debt issuance costs................................................... (1) (13) ------- ------- CASH PROVIDED BY FINANCING ACTIVITIES.......................................... 16 11 ------- ------- DECREASE IN CASH AND CASH EQUIVALENTS.......................................... (33) (67) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR.............................................................. 115 159 ------- ------- END OF PERIOD.................................................................. $ 82 $ 92 ======= ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for reorganization items, net.................................... $ (48) $ (30) ======= ======= See accompanying Notes to Condensed Consolidated Financial Statements.

3 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 1. NATURE OF OPERATIONS AND BANKRUPTCY PROCEEDINGS Nature of Operations Solutia Inc., together with its subsidiaries (referred to herein as "Solutia" or the "Company"), is a global manufacturer and marketer of a variety of high-performance chemical-based materials. Solutia is a world leader in performance films for laminated safety glass and after-market applications; specialty products such as water treatment chemicals, heat transfer fluids and aviation hydraulic fluids; and an integrated family of nylon products including high-performance polymers and fibers. Prior to September 1, 1997, Solutia was a wholly-owned subsidiary of the former Monsanto Company (now known as Pharmacia Corporation ("Pharmacia"), a wholly-owned subsidiary of Pfizer, Inc.). On September 1, 1997, Pharmacia distributed all of the outstanding shares of common stock of Solutia as a dividend to Pharmacia stockholders (the "spinoff"). As a result of the spinoff, on September 1, 1997, Solutia became an independent publicly held company and its operations ceased to be owned by Pharmacia. A net deficiency of assets of $113 resulted from the spinoff. Bankruptcy Proceedings Overview -------- On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries (collectively, "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. The cases were consolidated for the purpose of joint administration and were assigned case number 03-17949 (PCB). Solutia's subsidiaries outside the United States were not included in the Chapter 11 filing. The filing was made to restructure Solutia's balance sheet by reducing indebtedness to appropriate levels, to streamline operations and reduce costs, in order to allow Solutia to emerge from Chapter 11 as a viable going concern, and to obtain relief from the negative financial impact of liabilities for litigation, environmental remediation and certain postretirement benefits and liabilities under operating contracts, all of which were assumed by Solutia at the time of the spinoff (collectively, "legacy liabilities"). These factors, combined with the weakened state of the chemical manufacturing sector, general economic conditions and continuing high, volatile energy and crude oil costs have been an obstacle to Solutia's financial stability and success. Under Chapter 11, Solutia is operating its businesses as a debtor-in-possession ("DIP") under bankruptcy court protection from creditors and claimants. Since the Chapter 11 filing, all orders sufficient to enable Solutia to conduct normal business activities, including the approval of Solutia's DIP financing, have been entered by the bankruptcy court. While Solutia is subject to Chapter 11, all transactions not in the ordinary course of business require the prior approval of the bankruptcy court. As a consequence of the Chapter 11 filing, pending litigation against Solutia is generally stayed, and no party may take any action to collect its pre-petition claims except pursuant to an order of the bankruptcy court. November 30, 2004 was the last date by which holders of pre-petition claims against the Debtors could file proofs of claim with respect to such claims. Any holder of a claim that was required to file a proof of claim by November 30, 2004, and did not do so, may be barred from asserting such claim against the Debtors and, accordingly, may not be able to participate in any distribution with respect to such claim. Differences between claim amounts identified by the Debtors and proofs of claim filed by claimants will be investigated and resolved in connection with the Debtors' claims resolution process, and only holders of claims that are ultimately allowed for purposes of the Chapter 11 case 4 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) will be entitled to distributions. Solutia has not yet fully completed its analysis of all the proofs of claim. Because the settlement terms of allowed claims are subject to a confirmed plan of reorganization, the ultimate distribution with respect to allowed claims is not presently ascertainable. On June 7, 2005, Solutia reached an agreement-in-principle with Monsanto Company ("Monsanto") and the Official Committee of Unsecured Creditors in Solutia's Chapter 11 case (the "Unsecured Creditors' Committee") that will serve as a framework for Solutia's plan of reorganization. The agreement-in-principle is subject to the negotiation of definitive documents, approval by Solutia's board of directors and various other conditions and contingencies, some of which are not within the control of Solutia, Monsanto or the Unsecured Creditors' Committee. Until a plan of reorganization consistent with the terms of the agreement-in-principle is confirmed by the bankruptcy court, the terms of the agreement-in-principle are not binding upon any party. Under the agreement-in-principle, Solutia would emerge from bankruptcy as an independent publicly held company. The agreement-in-principle provides for $250 of new investment in a reorganized Solutia which would be used to pay retiree benefits to those who retired prior to the spinoff, certain environmental remediation obligations of Solutia and other legacy liabilities. The $250 would be raised in a rights offering to Solutia's unsecured creditors. Monsanto would be obligated to backstop the rights offering, exercising any rights not exercised by the unsecured creditors. The agreement-in-principle also provides that Monsanto would pay environmental remediation costs at sites that have not been owned or operated by Solutia, and to which waste has not been sent, since the spinoff, provides a mechanism for sharing between Monsanto and Solutia responsibility for environmental liabilities at certain sites adjacent to the Anniston, Alabama, and Sauget, Illinois, plant locations, and provides that Monsanto would contribute $107, less certain expenses incurred, and litigation settlement costs paid, by Monsanto during the course of Solutia's Chapter 11 case, to make distributions to the holders of certain unsecured claims, including current tort and other legacy litigation claims. The agreement-in-principle provides that Solutia will continue to pay its annual installment and education fund obligations relating to the August 2003 Anniston polychlorinated biphenyls ("PCBs") settlement and education fund obligations relating to the Anniston Partial Consent Decree (as described in Note 7). The agreement-in-principle provides for pay-off of Solutia's secured debt and debtor-in-possession financing from an exit financing package to be arranged by Solutia and does not require termination of Solutia's pension plans. However, the agreement-in-principle does not provide for distributions to the holders of Solutia's existing equity. Solutia's existing shares of common stock, as well as options and warrants to purchase its common stock, would be cancelled and holders of Solutia's common stock, including options and warrants to purchase Solutia's common stock, would receive no consideration for that stock or those options and warrants. Although the agreement-in-principle does not provide for any distributions to holders of Solutia's existing equity, the Official Committee of Equity Security Holders in Solutia's bankruptcy case has filed a complaint against Pharmacia and Monsanto and an objection to the proofs of claim filed by Monsanto and Pharmacia in Solutia's bankruptcy, arguing that holders of Solutia's existing equity are entitled to some form of distribution. This complaint is more fully described in Note 7. Although the agreement-in-principle provides for distributions of common stock in a reorganized Solutia to holders of allowed unsecured claims, Solutia is unable to predict what recovery its plan of reorganization will provide to these holders of unsecured claims. The ultimate ownership interests in the reorganized Solutia held by Monsanto and other holders of unsecured claims will depend on, among other factors, the amount of allowed unsecured claims in the bankruptcy case and the number of rights exercised by unsecured creditors in the rights offering. Prior to exiting from Chapter 11, the bankruptcy court must confirm a plan of reorganization that satisfies the requirements of the U.S. Bankruptcy Code. As provided by the U.S. Bankruptcy Code, Solutia had the exclusive right to propose a plan of reorganization for 120 days following the Chapter 11 filing date. The bankruptcy court has 5 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) approved several extensions of the exclusivity period, the most recent of which was set to expire on October 11, 2005. However, the bankruptcy court entered an order on October 6, 2005 extending the exclusivity period until the bankruptcy court rules on Solutia's current motion for an extension of the exclusivity period, which sought to extend the exclusivity period through January 9, 2006. Although Solutia expects to receive further extensions of the exclusivity period, no assurance can be given that any such future extension requests will be granted by the bankruptcy court. Solutia plans to file with the bankruptcy court a plan of reorganization and disclosure statement consistent with the terms of the agreement-in-principle that provide for Solutia's emergence from bankruptcy as a going concern. There can be no assurance, however, that such a plan of reorganization would be confirmed by the bankruptcy court or that such plan would be implemented successfully. Basis of Presentation --------------------- These financial statements should be read in conjunction with the audited consolidated financial statements and notes to consolidated financial statements included in Solutia's 2004 Annual Report on Form 10-K ("2004 Form 10-K"), filed with the Securities and Exchange Commission ("SEC") on March 10, 2005. The condensed consolidated financial statements have been prepared in accordance with Statement of Position 90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and on a going concern basis, which assumes the continuity of operations and reflects the realization of assets and satisfaction of liabilities in the ordinary course of business. Continuation of Solutia as a going concern is contingent upon, among other things, Solutia's ability (i) to comply with the terms and conditions of its DIP financing; (ii) to obtain confirmation of a plan of reorganization under the U.S. Bankruptcy Code; (iii) to return to profitability; (iv) to generate sufficient cash flow from operations; and (v) to obtain financing sources to meet Solutia's future obligations. These matters create substantial doubt about Solutia's ability to continue as a going concern. The condensed consolidated financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties. Additionally, a plan of reorganization could materially change amounts reported in the condensed consolidated financial statements, which do not give effect to all adjustments of the carrying value of assets and liabilities that are necessary as a consequence of reorganization under Chapter 11. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position, results of operations, comprehensive income (loss), and cash flows for the interim periods reported. Such adjustments are of a normal, recurring nature. In addition, footnote disclosures which would substantially duplicate the disclosures in the audited consolidated financial statements have been omitted in the accompanying unaudited condensed consolidated financial statements. The results of operations for the three and nine month periods ended September 30, 2005 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications of prior year's financial information have been made to conform to the 2005 presentation. Condensed Consolidating Financial Statements -------------------------------------------- Condensed consolidating financial statements for Solutia and subsidiaries in reorganization and subsidiaries not in reorganization as of September 30, 2005 and December 31, 2004, and for the three and nine months ended September 30, 2005 and September 30, 2004 are presented below. These condensed consolidating financial statements include investments in subsidiaries carried under the equity method. 6 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION AS OF SEPTEMBER 30, 2005

SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ ASSETS Current assets ................................... $ 402 $374 $ (81) $ 695 Property, plant and equipment, net................ 672 124 -- 796 Investments in subsidiaries and affiliates........ 380 218 (386) 212 Goodwill and identified intangible assets, net.... 101 11 -- 112 Other assets...................................... 82 45 -- 127 ------------------------------------------------------------------------- TOTAL ASSETS................................... $ 1,637 $772 $(467) $ 1,942 ========================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities .............................. $ 708 $169 $(166) $711 Long-term debt.................................... 0 250 -- 250 Other liabilities................................. 201 52 -- 253 ------------------------------------------------------------------------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE....... 909 471 (166) 1,214 LIABILITIES SUBJECT TO COMPROMISE................. 2,156 -- -- 2,156 TOTAL SHAREHOLDERS' EQUITY (DEFICIT).............. (1,428) 301 (301) (1,428) ------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)........................................ $ 1,637 $772 $(467) $ 1,942 =========================================================================

CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION AS OF DECEMBER 31, 2004 SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ ASSETS Current assets.................................... $ 476 $390 $ (88) $ 778 Property, plant and equipment, net................ 701 140 -- 841 Investments in subsidiaries and affiliates........ 324 232 (379) 177 Goodwill and identified intangible assets, net.... 102 12 -- 114 Other assets...................................... 110 56 -- 166 ------------------------------------------------------------------------- TOTAL ASSETS................................... $ 1,713 $830 $(467) $ 2,076 ========================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities............................... $ 758 $202 $(179) $ 781 Long-term debt.................................... -- 285 -- 285 Other liabilities................................. 212 55 -- 267 ------------------------------------------------------------------------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE....... 970 542 (179) 1,333 LIABILITIES SUBJECT TO COMPROMISE................. 2,187 -- -- 2,187 TOTAL SHAREHOLDERS' EQUITY (DEFICIT).............. (1,444) 288 (288) (1,444) ------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)........................................ $ 1,713 $830 $(467) $ 2,076 ========================================================================= 7

SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ NET SALES......................................... $538 $237 $ (99) $676 Cost of goods sold................................ 502 198 (105) 595 ------------------------------------------------------------------------- GROSS PROFIT...................................... 36 39 6 81 Marketing, administrative and technological expenses......................................... 53 18 (1) 70 Amortization Expense.............................. 1 -- -- 1 ------------------------------------------------------------------------- OPERATING INCOME (LOSS) .......................... (18) 21 7 10 Equity earnings (loss) from affiliates............ 25 (1) (11) 13 Interest expense.................................. (14) (6) -- (20) Other income, net................................. 7 3 (8) 2 Reorganization items, net......................... (15) -- -- (15) ------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE........... (15) 17 (12) (10) Income tax expense ............................... -- 5 -- 5 ------------------------------------------------------------------------- NET INCOME (LOSS)................................ $(15) $ 12 $ (12) $(15) ========================================================================= CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005

SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ NET SALES......................................... $1,733 $725 $(302) $2,156 Cost of goods sold................................ 1,578 608 (322) 1,864 ------------------------------------------------------------------------- GROSS PROFIT...................................... 155 117 20 292 Marketing, administrative and technological expenses......................................... 160 50 (1) 209 Amortization Expense.............................. 1 -- -- 1 ------------------------------------------------------------------------- OPERATING INCOME (LOSS)........................... (6) 67 21 82 Equity earnings (loss) from affiliates............ 89 (3) (38) 48 Interest expense.................................. (46) (18) -- (64) Other income, net................................. 18 10 (20) 8 Reorganization items, net......................... (33) (2) -- (35) ------------------------------------------------------------------------- INCOME BEFORE INCOME TAX EXPENSE ................. 22 54 (37) 39 Income tax expense................................ 2 17 -- 19 ------------------------------------------------------------------------- NET INCOME ....................................... $ 20 $ 37 $ (37) $ 20 ========================================================================= 8

SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ NET SALES......................................... $547 $224 $(93) $678 Cost of goods sold................................ 499 185 (97) 587 ------------------------------------------------------------------------- GROSS PROFIT...................................... 48 39 4 91 Marketing, administrative and technological expenses......................................... 42 16 -- 58 ------------------------------------------------------------------------- OPERATING INCOME ................................. 6 23 4 33 Equity earnings (loss) from affiliates............ (1) (3) (12) (16) Interest expense.................................. (16) (5) -- (21) Other income, net................................. 7 (1) (5) 1 Reorganization items, net......................... (14) -- -- (14) ------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE........... (18) 14 (13) (17) Income tax expense ............................... -- 1 -- 1 ------------------------------------------------------------------------- NET INCOME (LOSS)................................. $(18) $ 13 $(13) $(18) ========================================================================= CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004

SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ NET SALES......................................... $1,645 $656 $(279) $2,022 Cost of goods sold................................ 1,568 544 (296) 1,816 ------------------------------------------------------------------------- GROSS PROFIT...................................... 77 112 17 206 Marketing, administrative and technological expenses......................................... 170 46 -- 216 Amortization expense.............................. -- 1 -- 1 ------------------------------------------------------------------------- OPERATING INCOME (LOSS)........................... (93) 65 17 (11) Equity loss from affiliates....................... (5) (3) (20) (28) Interest expense.................................. (75) (18) -- (93) Other income (expense), net....................... 20 (3) (16) 1 Loss on debt modification......................... -- (15) -- (15) Reorganization items, net......................... (63) -- -- (63) ------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE........... (216) 26 (19) (209) Income tax expense ............................... -- 7 -- 7 ------------------------------------------------------------------------- NET INCOME (LOSS)................................. $ (216) $ 19 $ (19) $ (216) ========================================================================= 9

SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ Net Cash Provided by (Used in) Operating Activities....................................... $(42) $40 $-- $ (2) Net Cash Used in Investing Activities............. (34) (13) -- (47) Net Cash Provided by (Used in) Financing Activities....................................... 32 (16) -- 16 ------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents...................................... (44) 11 -- (33) Cash and Cash Equivalents: Beginning of year.............................. 50 65 -- 115 ------------------------------------------------------------------------- End of period.................................. $ 6 $76 $-- $ 82 =========================================================================

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ Net Cash Provided by (Used in) Operating Activities....................................... $(50) $ 41 $-- $ (9) Net Cash Used in Investing Activities............. (56) (13) -- (69) Net Cash Provided by (Used in) Financing Activities....................................... 15 (4) -- 11 ------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents...................................... (91) 24 -- (67) Cash and Cash Equivalents: Beginning of year.............................. 125 34 -- 159 ------------------------------------------------------------------------- End of period.................................. $ 34 $ 58 $-- $ 92 =========================================================================

Recently Issued Accounting Pronouncements In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"). SFAS 123R replaced Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), and superseded Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on their fair values and eliminates the alternative method of accounting for employee share-based payments previously available under APB 25. Historically Solutia has elected to follow the guidance of APB 25 which allowed Solutia to use the intrinsic value method of accounting to value its share-based payment transactions with employees. Based on this method, Solutia did not recognize compensation expense in its consolidated financial statements as the stock options granted had an exercise price equal to the fair market value of the underlying common stock on the date of the grant. SFAS 123R requires measurement of the cost of share-based payment transactions to employees at the fair value of the award on the grant date and recognition of expense over the required service or vesting period. Solutia is required to adopt SFAS 123R by January 1, 2006. The impact on Solutia's earnings will include the remaining amortization of the fair value of existing options currently disclosed as pro-forma expense in Note 3 and is contingent upon the number of future options granted, the selected transition method and the selection among acceptable valuation methodologies for valuing options. In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations - an interpretation of FASB Statement No. 143 ("FIN 47"). FIN 47 clarifies that the term "conditional asset retirement obligation" as used in Statement of Financial Accounting Standards No.143, Accounting for Asset Retirement Obligations ("SFAS 143"), refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists 10 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) about the timing and (or) method of settlement, including those that may be conditional on a future event. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing and (or) method of settlement should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when sufficient information to reasonably estimate the fair value of an asset retirement obligation is considered available. Solutia is currently in the process of evaluating the requirements of FIN 47. At this time Solutia is unable to provide a meaningful range of estimates of any conditional asset retirement obligations required to be recognized in accordance with FIN 47. To the extent any conditional asset retirement obligations are identified, Solutia will recognize the cumulative effect of the initial application of FIN 47 as a change in accounting principle. Solutia plans to continue its evaluation process and complete any appropriate change in accounting methods prior to the effective date of FIN 47, which is December 31, 2005. In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154"). SFAS 154 changes the requirements for the accounting and reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in accounting principle as well as changes required by an accounting pronouncement that do not otherwise include specific transition provisions. Previously, most changes in accounting principle were required to be recognized by including in net income of the period in which the change occurs the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior periods' financial statements of a change in accounting principle as if that principle had always been used. SFAS 154 will be effective for fiscal years beginning after December 15, 2005. The impact of the adoption of SFAS 154 will depend upon the nature of accounting changes Solutia may initiate in future periods, if any. 2. LIABILITIES SUBJECT TO COMPROMISE AND REORGANIZATION ITEMS, NET Liabilities Subject to Compromise Under Chapter 11 of the U.S. Bankruptcy Code, certain claims against Solutia in existence prior to the filing of the petitions for relief under the federal bankruptcy laws are stayed while Solutia continues business operations as a debtor-in-possession. These estimated claims are reflected in the Condensed Consolidated Statement of Financial Position as Liabilities Subject to Compromise as of September 30, 2005 and December 31, 2004 and are summarized in the table below. Such claims remain subject to future adjustments. Adjustments may result from actions of the bankruptcy court, negotiations with claimants, rejection or assumption of executory contracts, determination of value of any collateral securing claims, reconciliation of proofs of claim or other events. Solutia has received approval from the bankruptcy court to pay or otherwise honor certain of its pre-petition obligations, including (i) certain pre-petition compensation to employees and employee-equivalent independent contractors; (ii) business expenses of employees; (iii) obligations under employee benefit plans; (iv) employee payroll deductions and withholdings; (v) costs and expenses incident to the foregoing payments (including payroll-related taxes and processing costs); (vi) certain pre-petition workers' compensation claims, premiums and related expenses; (vii) certain pre-petition trust fund and franchise taxes; (viii) pre-petition claims of certain contractors, freight carriers, processors, customs brokers and related parties; (ix) customer accommodation programs; and (x) pre-petition claims of critical vendors in the ordinary course of business. Accordingly, these pre-petition items have been excluded from Liabilities Subject to Compromise as of September 30, 2005 and December 31, 2004, as applicable. 11 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) The amounts subject to compromise consisted of the following items:

SEPTEMBER 30, DECEMBER 31, 2005 2004 ---- ---- Postretirement benefits (a)............................... $1,077 $1,090 Litigation reserves (b)................................... 136 141 Accounts payable (c)...................................... 118 130 Environmental reserves (d)................................ 82 82 Other miscellaneous liabilities........................... 75 76 6.72% debentures due 2037 (e)............................. 150 150 7.375% debentures due 2027 (e)............................ 300 300 11.25% notes due 2009 (f)................................. 223 223 Other (g)................................................. 43 43 ------ ------ 716 716 Unamortized debt discount and debt issuance costs......... (48) (48) ------ ------ TOTAL DEBT SUBJECT TO COMPROMISE..................... 668 668 ------ ------ TOTAL LIABILITIES SUBJECT TO COMPROMISE................... $2,156 $2,187 ====== ====== (a) Postretirement benefits include Solutia's domestic (i) qualified pension plan liabilities of $466 and $445 as of September 30, 2005 and December 31, 2004, respectively; (ii) non-qualified pension plan liabilities of $19 and $18 as of September 30, 2005 and December 31, 2004, respectively; and (iii) other postretirement benefits liabilities of $592 and $627 as of September 30, 2005 and December 31, 2004, respectively. Pursuant to a bankruptcy court order, Solutia made payments with respect to other postretirement obligations of approximately $65 in the nine months ended September 30, 2005. (b) An automatic stay has been imposed against the commencement or continuation of legal proceedings against Solutia outside of the bankruptcy court process. Consequently, Solutia's accrued liability with respect to pre-petition legal proceedings has been classified as subject to compromise as of September 30, 2005 and December 31, 2004. Pursuant to a bankruptcy court order, Solutia made a scheduled payment of $5 in the third quarter 2005 with respect to the Anniston litigation settlement reached in 2003. (c) Pursuant to bankruptcy court orders, Solutia settled certain accounts payable liabilities subject to compromise in the nine months ended September 30, 2005. (d) Represents remediation obligations related primarily to properties that are not owned or operated by Solutia, including non-owned properties adjacent to plant sites and certain owned offsite disposal locations. See Note 7 for further disclosure with respect to ongoing legal proceedings concerning environmental liabilities subject to compromise. (e) While operating during the Chapter 11 bankruptcy proceedings, Solutia has ceased recording interest on its 6.72% debentures due 2037 and its 7.375% debentures due 2027. The amount of contractual interest expense not recorded in the nine months ended September 30, 2005 was approximately $24. (f) Pursuant to a bankruptcy court order, Solutia is required to continue payments of the contractual interest on its 11.25% notes due 2009 as a form of adequate protection under the U.S. Bankruptcy Code; provided, however, that Solutia's official committee of unsecured creditors (the "Creditors' Committee") has the right at any time, and Solutia has the right at any time after the payment of the contractual interest due in July 2005, to seek to terminate Solutia's obligation to continue making the interest payments. Solutia or the Creditors' Committee could successfully terminate all or part of Solutia's interest payment obligations only after a showing that the noteholders are not entitled to adequate protection, which would depend, among other things, on the value of the collateral securing the notes as of December 17, 2003, and whether that value is decreasing during the course of Solutia's bankruptcy case. Neither Solutia nor the Creditors' Committee has sought to terminate Solutia's obligation to continue making the interest payments. The amount of contractual interest paid with respect to these notes was approximately $25 in the nine months ended September 30, 2005, and the accrued interest related to these notes was included in Accrued Liabilities classified as not subject to compromise as of September 30, 2005 and December 31, 2004. 12 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) (g) Represents the debt obligation incurred upon the consolidation of the assets and liabilities of a synthetic lease structure consolidated as part of the adoption of FASB Interpretation No. 46, Consolidation of Variable Interest Entities. The obligation, representing the synthetic lease arrangement with respect to Solutia's headquarters building, was reclassified to liabilities subject to compromise in 2004 as Solutia believes it is unable to continue to perform on this debt obligation.

Reorganization Items, Net Reorganization items, net are presented separately in the Condensed Consolidated Statement of Operations and represent items of income, expense, gain or loss that are realized or incurred by Solutia because it is in reorganization under Chapter 11 of the U.S. Bankruptcy Code. Reorganization items, net consisted of the following items:

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2005 2004 2005 2004 ---- ---- ---- ---- Professional fees (a) ........................ $(13) $(13) $(37) $(37) Contract termination costs (b) ............... -- -- -- (20) Severance and employee retention costs (c).... (2) (1) (10) (8) Adjustments to allowed claim amounts (d) ..... 1 -- (10) -- Settlements of pre-petition claims (e) ....... -- -- 29 2 Other ........................................ (1) -- (7) -- ---- ---- ---- ---- TOTAL REORGANIZATION ITEMS, NET .............. $(15) $(14) $(35) $(63) ==== ==== ==== ==== (a) Professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings. (b) Asset write-offs associated with contract rejections and terminations resulting from the ongoing reorganization-related evaluation of the financial viability of Solutia's existing contracts. (c) Expense provisions related to (i) employee severance costs incurred directly as part of the Chapter 11 reorganization process and (ii) a retention plan for certain Solutia employees approved by the bankruptcy court. (d) Adjustments to record certain pre-petition claims at estimated amounts of the allowed claims. (e) Represents the difference between the settlement amount of certain pre-petition obligations and the corresponding amounts previously recorded.

13 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 3. STOCK OPTION PLANS Solutia applies APB No. 25 for measurement and recognition of stock-based transactions with employees. Accordingly, no compensation cost has been recognized for Solutia's option plans in the Condensed Consolidated Statement of Operations, as all options granted under the plans had an exercise price equal to the market value of Solutia's stock on the date of the grant. However, see Note 1 for a summary of expected future changes in accounting practices with respect to Solutia's stock option plans based upon Solutia's required adoption of SFAS No. 123R no later than January 1, 2006. The following table illustrates the effect on net income (loss) and income (loss) per share if the fair value based method had been applied to all outstanding and unvested awards:

THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2005 2004 2005 2004 ---- ---- ---- ---- NET INCOME (LOSS): As reported.................................... $ (15) $ (18) $ 20 $ (216) Deduct: Total stock-based employee compensation expense determined using the Black-Scholes option-pricing model for all awards, net of tax......................... -- (1) -- (3) ------- ------ ----- ------ Pro forma...................................... $ (15) $ (19) $ 20 $ (219) ======= ====== ===== ====== INCOME (LOSS) PER SHARE: Basic and diluted - as reported................ $( 0.14) $(0.17) $0.19 $(2.07) Basic and diluted - pro forma.................. $( 0.14) $(0.18) $0.19 $(2.10)

Compensation expense resulting from the fair value method may not be representative of compensation expense to be incurred on a pro forma basis in future years. The fair value of each option grant is estimated on the date of grant by use of the Black-Scholes option-pricing model. In addition, Solutia believes that its plan of reorganization will provide for cancellation of its existing shares of common stock, as well as options and warrants to purchase its common stock, and that it is unlikely that holders of options to purchase Solutia's common stock will receive any consideration for those options in such a plan of reorganization. 4. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Goodwill of $76 at both September 30, 2005 and December 31, 2004 was allocated to the CPFilms reporting unit within the Performance Products and Services segment. There were no changes to the net carrying amount of goodwill during the nine months ended September 30, 2005. 14 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Identified Intangible Assets Identified intangible assets generally are comprised of i) amortizable contract-based intangible assets with finite useful lives, and ii) indefinite-lived trademarks not subject to amortization. These intangible assets are summarized in aggregate as follows:

SEPTEMBER 30, 2005 DECEMBER 31, 2004 --------------------------------- ----------------------------------- GROSS NET GROSS NET CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING VALUE AMORTIZATION VALUE VALUE AMORTIZATION VALUE --------------------------------- ----------------------------------- Amortizable intangible assets.... $29 $(20) $ 9 $31 $(20) $11 Trademarks....................... 27 -- 27 27 -- 27 --------------------------------- ----------------------------------- TOTAL IDENTIFIED INTANGIBLE ASSETS.......................... $56 $(20) $36 $58 $(20) $38 =====================-=========== ===================================

There were no material acquisitions of intangible assets and there have been no changes to amortizable lives or methods during the nine months ended September 30, 2005. In addition, amortization expense for the net carrying amount of finite-lived intangible assets is estimated to be $1 annually from 2005 through 2009. 5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS

SEPTEMBER 30, December 31, 2005 2004 ---- ---- INVENTORIES Finished goods................................................ $ 190 $ 223 Goods in process.............................................. 127 99 Raw materials and supplies.................................... 98 92 ----- ----- Inventories, at FIFO cost..................................... 415 414 Excess of FIFO over LIFO cost................................. (172) (175) ----- ----- TOTAL INVENTORIES............................................. $ 243 $ 239 ===== =====

Inventories at FIFO approximate current cost.

SEPTEMBER 30, December 31, 2005 2004 ---- ---- ACCRUED LIABILITIES Wages and benefits............................................ $ 53 $ 55 Accrued rebates and sales returns/allowances.................. 24 31 Accrued interest.............................................. 11 25 Other......................................................... 149 172 ---- ---- TOTAL ACCRUED LIABILITIES..................................... $237 $283 ==== ====

6. RESTRUCTURING RESERVES Solutia recorded $3 of charges in Reorganization Items, net during the third quarter 2005, including $2 of decontamination costs incurred as part of the shut-down of the acrylic fibers business in the Integrated Nylon segment and $1 of severance and retraining costs involving headcount reductions primarily in its Performance Products and Services segment and corporate function. During the nine months ended September 30, 2005, Solutia recorded restructuring charges of $10 in Reorganization Items, net involving the exit of its acrylic fibers operations and shut-down of its nylon industrial fiber manufacturing unit at its plant in Pensacola, Florida. This $10 of net charges from the closure of these businesses 15 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) included $11 of asset write-downs, $4 of severance and retraining costs and $4 of decontamination costs, partially offset by a $7 gain from the reversal of the LIFO reserve associated with the inventory liquidated as part of the business shut-down and a $2 million gain from the sale of certain assets. In addition, Solutia recorded $3 of severance and retraining costs in the nine months ended September 30, 2005 with $2 recorded in Reorganization Items, net and $1 in Cost of Goods Sold involving headcount reductions within both the Integrated Nylon and Performance Products and Services segments, as well as the corporate function. Solutia cannot forecast the level of future restructuring charges due to the inherent uncertainty involved in operating as a debtor-in-possession under Chapter 11 bankruptcy protection. A summary of restructuring activity during the three and nine months ended September 30, 2005 is presented as follows:

DECOMMISSIONING/ FUTURE LEASE EMPLOYMENT ASSET DISMANTLING PAYMENTS REDUCTIONS WRITE-DOWNS TOTAL ------------------------------------------------------------------------------- Balance at December 31, 2004......... $ 5 $ 12 $-- $-- $ 17 Charges taken...................... -- -- 5 6 11 Amounts utilized................... -- (12) (1) (6) (19) ------------------------------------------------------------------------------- BALANCE AT MARCH 31, 2005............ $ 5 $ -- $ 4 $-- $ 9 Charges taken...................... 2 -- 1 5 8 Amounts utilized................... (3) -- (4) (5) (12) ------------------------------------------------------------------------------- BALANCE AT JUNE 30, 2005............. $ 4 $ -- $ 1 $-- $ 5 Charges taken...................... 2 -- 1 -- 3 Amounts utilized................... (3) -- (1) -- (4) ------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 2005........ $ 3 $ -- $ 1 $-- $ 4 ===============================================================================

7. CONTINGENCIES Legacy Liabilities One of the objectives of Solutia's Chapter 11 filing is to obtain relief from the negative financial impact of legacy liabilities. The agreement-in-principle, as further described in Note 1, sets forth the proposed terms for addressing the funding responsibility for these legacy liabilities, including contingent litigation and environmental obligations, through Solutia's Chapter 11 proceedings. Litigation Because of the size and nature of its business, Solutia is 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, Solutia assumed the defense of specified legal proceedings and agreed to indemnify Pharmacia for obligations arising in connection with those proceedings. Solutia has determined that these defense and indemnification obligations to Pharmacia are pre-petition obligations under the U.S. Bankruptcy Code that Solutia is prohibited from performing, except pursuant to a confirmed plan of reorganization. As a result, Solutia has ceased performance of these obligations. Solutia had a liability of $136 and $141 as of September 30, 2005 and December 31, 2004, respectively, associated with these obligations classified as a liability subject to compromise. See Note 1 for further description as to how these legacy litigation claims would be addressed under the agreement-in-principle. 16 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Solutia's 2003 Form 10-K/A described a number of legal proceedings in which Solutia was a named defendant or was defending solely due to its indemnification obligations referred to above. Solutia is prohibited from performing with respect to these obligations, and developments, if any, in these matters are currently managed by other named defendants. Accordingly, Solutia has ceased reporting on the status of those legal proceedings. The legal proceedings which are in this category are (i) Owens v. Monsanto; (ii) Payton v. Monsanto; (iii) other Anniston cases not described in this report; (iv) the PENNDOT case; and (v) premises based asbestos litigation. Following is a summary of legal proceedings that Solutia or certain of its equity affiliates continue to manage that could result in an outcome that is material to the consolidated financial statements. Legal Proceedings in Solutia's Bankruptcy Case ---------------------------------------------- A complaint was filed on May 27, 2005 against Solutia in its bankruptcy case by JP Morgan Chase Bank, National Association ("JP Morgan"), as indenture trustee for Solutia's debentures due in 2027 and 2037 asserting six causes of action, as follows: (a) five causes of action seeking declaratory judgments to establish the validity and priority of JP Morgan's security interests; and (b) one cause of action pursuant to section 363 of the Bankruptcy Code asserting that JP Morgan's security interests lacked adequate protection. Solutia filed its response to the JP Morgan complaint on July 5, 2005, denying the allegations of JP Morgan based on the express terms of the indentures governing the 2027 and 2037 debentures, and has responded to JP Morgan's requests for production of documents. On March 7, 2005, the Official Committee of Equity Security Holders (the "Equity Committee") in Solutia's bankruptcy case filed a complaint against Pharmacia and Monsanto and an objection to the proofs of claim filed by Monsanto and Pharmacia in Solutia's bankruptcy case. The complaint seeks to avoid certain obligations assumed by Solutia in its spinoff from Pharmacia. The complaint alleges that the spinoff was a fraudulent transfer under the Bankruptcy Code because Pharmacia forced Solutia to assume excessive liabilities and insufficient assets, such that Solutia was destined to fail from its inception. On May 24, 2005 Pharmacia and Monsanto filed a motion to dismiss the complaint, or in the alternative, to stay the adversary proceeding, which was not adjudicated by the bankruptcy court but rather taken under advisement to be addressed in the future. Neither a discovery schedule nor a trial date has been set. The Equity Committee has also filed a Motion for Leave to conduct an examination of the Debtors pursuant to Bankruptcy Rule 2004. On August 4, 2005, Solutia filed with the bankruptcy court a Statement of Reservation of Rights in response to the Equity Committee's complaint, expressing Solutia's view that the issues and disputes raised by the Equity Committee would be resolved through the process of confirmation of Solutia's Plan of Reorganization. Anniston Partial Consent Decree ------------------------------- On August 4, 2003, the U.S. District Court for the Northern District of Alabama approved a Partial Consent Decree in an action captioned United States of America v. Pharmacia Corporation (p/k/a Monsanto Company) and Solutia. This Partial Consent Decree provides for Pharmacia and Solutia to sample certain residential properties and remove soils found on those properties if PCBs are at a level of 1 part per million ("ppm") or above, to conduct a Remedial Investigation and Feasibility Study to provide information for the selection by the EPA of a cleanup remedy for the Anniston PCB site, and pay EPA's past response costs and future oversight costs related to this work. The decree also provided for the creation of an educational trust fund of approximately $3 to be funded over a 12-year period to provide supplemental educational services for school children in west Anniston. In the fall of 2004, EPA, Solutia and Pharmacia, and other potentially responsible parties ("PRPs") with respect to the Anniston lead site began negotiations regarding cleanup on the Anniston lead and PCB sites. Subsequently, Solutia learned that EPA intended to enter into an Administrative Order on Consent with the lead site PRPs which would deny Pharmacia and Solutia contribution rights against the lead site PRPs with respect to PCB cleanup. An order was issued by the district court on June 2, 2005 requiring the parties to proceed through formal dispute resolution and preserving the status quo for thirty days. On June 30, 2005, the district court found that by granting contribution 17 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) protection to the lead site PRPs, the EPA would have repudiated the Partial Consent Decree and indicated that, if such contribution protection were granted, the court would suspend Solutia's and Pharmacia's obligations under the Partial Consent Decree upon their motion. Solutia and Pharmacia continue attempts to negotiate a global settlement with EPA and the Anniston lead site PRPs and have not made a motion to the district court to suspend their obligations under the Partial Consent Decree. Flexsys Related Litigation -------------------------- Antitrust authorities in the United States, Europe and Canada are investigating past commercial practices in the rubber chemicals industry. Flexsys, Solutia's 50/50 joint venture with Akzo Nobel N.V., is a subject of such an investigation and has been fully cooperating with the authorities and will continue to do so in the ongoing investigation. In addition, a number of class actions have been filed against Flexsys and other producers of rubber chemicals. State court actions. Solutia is aware of 23 class actions filed in various state courts against Flexsys and other producers of rubber chemicals. Solutia is only named as a defendant in one of these cases, David Pearman and Pearman Agri Services, Inc. v Akzo Nobel Chemicals, Inc., et. al., pending in the Circuit Court for Claiborne County, Tennessee, which was automatically stayed as against Solutia. In 20 of these cases, plaintiffs seek actual and treble damages under state law on behalf of all retail purchasers of tires in that state since as early as 1994. In the other three cases, plaintiffs make similar allegations and seek similar relief on behalf of all consumers of products containing rubber, including tires. Eleven of these cases remain pending at the trial level in procedural stages or are pending on appeal following dismissal as to Flexsys by the trial court on procedural grounds. The remaining cases have been dismissed voluntarily by plaintiffs or by the court on procedural grounds and are not on appeal. Canadian actions. Two class actions were filed in the Province of Quebec, Canada, in May 2004 and one case was filed in Ontario, Canada, in May 2005 against Flexsys and other rubber chemical producers, each alleging that collusive sales and marketing activities of the defendants damaged all persons in Quebec during the period July 1995 through September 2001. In August 2005, Solutia became aware of a case filed in British Columbia, Canada against Flexsys and other rubber chemical producers alleging the same claims as the Quebec and Ontario cases and seeking unspecified damages under a variety of theories on behalf of all purchasers of products containing rubber chemicals in British Columbia. No responses are yet due nor have any been filed by defendants in any of these cases. Solutia is not a defendant in any of these cases. Federal court actions alleging violations of federal securities laws. Six shareholder class actions have been filed in the U.S. District Court for the Northern District of California against Solutia, its then and former chief executive officers and its then chief financial officer. The complaints were consolidated into a single action called In Re Solutia Securities Litigation, and a consolidated complaint which named two additional defendants, Solutia's then current and past controllers, was filed. The consolidated complaint alleges that, from December 16, 1998 to October 10, 2002, Solutia's accounting practices regarding incorporation of Flexsys' results into Solutia's financial reports violated federal securities laws by misleading investors as to Solutia's actual results and causing inflated prices to be paid by purchasers of Solutia's publicly traded securities during the period. The plaintiffs seek damages and any equitable relief that the court deems proper. The consolidated action is automatically stayed with respect to Solutia by virtue of Section 362(a) of the U.S. Bankruptcy Code and the action was dismissed without prejudice pending resolution of Solutia's bankruptcy case. The complaint against the individual defendants was dismissed with prejudice and no appeal was filed within the applicable appeals period. Shareholder Derivative Suits. Two shareholder derivative suits have been filed in the Missouri Circuit Court for the Twenty-First Judicial Circuit of St. Louis County against certain of Solutia's current and past directors, chief executive officers, chief financial officer and former vice chairman. Solutia is included as a nominal defendant. The plaintiffs seek damages on behalf of Solutia for the individual defendants' alleged breaches of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment, arising out of Flexsys' alleged participation in the price-fixing of rubber chemicals and Solutia's incorporation of Flexsys' 18 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) purportedly inflated financial results arising from the alleged price-fixing into Solutia's financial statements. These two shareholder derivative suits were consolidated into a single action, In re Solutia Inc. Derivative Litigation. On December 29, 2003, the court entered an order in the consolidated action staying the litigation with respect to all defendants, including Solutia. In August 2004, the court involuntarily dismissed the cases for lack of prosecution. Plaintiffs' motion to reinstate the actions is pending. Other Legal Proceedings ----------------------- On October 7, 2004, a class action captioned Dickerson v. Feldman, et al. was filed in the United States District Court for the Southern District of New York against a number of defendants, including former officers and employees of Solutia and Solutia's Employee Benefits Plans Committee and Pension and Savings Funds Committee. Solutia was not named as a defendant. The action alleges breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 ("ERISA") and seeks to recover alleged losses in the Solutia Inc. Savings and Investment Plan ("SIP Plan") arising from the alleged imprudent investment of SIP Plan assets in Solutia's common stock during the period from December 16, 1998 through the date the action was filed. The investment is alleged to have been imprudent because of Solutia's legacy environmental and litigation liabilities and because of Flexsys' alleged involvement in the matters described above under "Flexsys Related Litigation". The action seeks monetary payment to the SIP Plan to compensate for 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 plaintiff in this action filed a proof of claim for $269 against Solutia in the U.S. Bankruptcy Court for the Southern District of New York. The plaintiff then sought to withdraw the reference of his ERISA claim from the bankruptcy court to the district court so that the proof of claim and the class action could be considered together by the district court. On March 11, 2005 the district court denied without prejudice plaintiff's motion to withdraw the reference. In May of 2005, the plaintiff filed an amended and then a second amended complaint. Although the ERISA violations alleged are very similar to those asserted in the original complaint, the second amended complaint added new allegations largely similar to those made in In Re Solutia Securities Litigation described above. This second amended complaint also adds twelve new defendants, including former and current directors and officers of Solutia. The directors are alleged to have breached their fiduciary duties under ERISA by failing to monitor the plan's fiduciaries, and by failing to recognize that the fiduciaries were not themselves properly managing the plan. On September 1, 2005, the plaintiff filed an amended proof of claim against Solutia solely to raise the purported amount of the claim to $290. On September 7, 2005 the plaintiff filed a motion in the U.S. Bankruptcy Court for the Southern District of New York seeking leave to file a single proof of claim against Solutia on behalf of all members of the class. On October 14, 2003, Solutia filed an action captioned Solutia Inc. v. FMC Corporation in Circuit Court in St. Louis County, Missouri, against FMC over the failure of purified phosphoric acid technology contributed by FMC to Astaris, a 50/50 joint venture between Solutia and FMC. On February 20, 2004, Solutia voluntarily dismissed the state court action and filed an adversary proceeding against FMC in the U.S. Bankruptcy Court for the Southern District of New York. FMC filed a motion with the bankruptcy court to withdraw the reference. The motion was granted, and, as a result, the matter is now pending in the U.S. District Court for the Southern District of New York. FMC filed a motion to dismiss Solutia's action based upon an alleged lack of standing. On March 29, 2005 the court granted in part and denied in part FMC's motion to dismiss. Specifically, the court dismissed with prejudice two of Solutia's claims for breach of contract. The court denied FMC's motion to dismiss Solutia's other claim for breach of contract and its claims for breach of fiduciary duty, negligent misrepresentation and fraud and fraud in the inducement. Solutia is vigorously pursuing this action. Competition authorities in Belgium and several other European countries 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, the European subsidiary of Ferro Corporation. Ferro's BBP business in Europe was purchased from Solutia Inc. in 2000. Solutia received an indemnification notice from Ferro and has exercised its right, pursuant to the purchase agreement 19 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) relating to Ferro's acquisition of the BBP business from Solutia, to assume and control the defense of Ferro in proceedings relating to these investigations. On July 7, 2005, the BCA issued a Statement of Objections regarding its BBP investigation in which Solutia Europe S.A/N.V., a European subsidiary of Solutia, along with Ferro 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. Solutia Inc. is not named as a party under investigation in the Statement of Objections. Solutia's written comments to the Statement of Objections were submitted on August 31, 2005 and presented at an oral hearing before the BCA on September 6, 2005. A Reasoned Report to be submitted by the investigator to the BCA has not yet been received. Solutia is fully cooperating with the BCA in this investigation. Solutia currently believes that any liability that may result from the Belgian investigation will not be significant to its results of operations or financial position. However, Solutia cannot provide any assurance that the liability assessed against it as a result of this matter would not have a material adverse effect on Solutia's results of operations or financial position. On October 12, 2005 an action, captioned Davis, et. al. v. Solutia, Inc. Employees' Pension Plan, was filed in the U.S. District Court for the Southern District of Illinois against the Solutia Employees' Pension Plan (the "Plan") by a class of participants in the Plan who allege that the method of calculating their benefits under the Plan was unlawful. Specifically, the Davis plaintiffs allege that the Plan violated ERISA by reducing their accrued benefit as a result of the attainment of a certain age, reducing their rate of benefit accrual because of the attainment of a certain age, computing benefits in an unlawful method and, finally, by "backloading" benefits resulting in accruals occurring slowly over time so that very little of the accrued benefit is vested prior to the attainment of age 65. None of the Debtors has been named as a defendant in this case. Environmental Liabilities Environmental compliance and remediation costs and other environmental liabilities incurred by Solutia generally fall into two broad categories: (a) those related to properties currently owned or operated by Solutia and (b) those related to properties that are not owned by Solutia, including non-owned properties adjacent to plant sites and certain owned offsite disposal locations. For the owned and operated sites, Solutia had an accrued liability of $75 and $78 as of September 30, 2005 and December 31, 2004, respectively, for solid and hazardous waste remediation, which represents Solutia's best estimate of the underlying obligation. In addition, this balance also includes post-closure costs at certain of Solutia's operating locations. This liability is not classified as subject to compromise in the Condensed Consolidated Statement of Financial Position because, irrespective of the bankruptcy proceedings, Solutia will be required to comply with environmental requirements in the conduct of its business, regardless of when the underlying environmental contamination occurred. However, Solutia ultimately expects to seek recovery against other potentially responsible parties at certain of these locations. Solutia had an accrued liability of $82 as of September 30, 2005 and December 31, 2004 for properties not owned or operated by Solutia. This liability is classified as subject to compromise in the Condensed Consolidated Statement of Financial Position as of both September 30, 2005 and December 31, 2004. The agreement-in-principle provides that Monsanto will pay environmental remediation costs at sites that have not been owned or operated by Solutia, and to which waste has not been sent, since the spinoff, and provides a mechanism for sharing between Monsanto and Solutia responsibility for environmental liabilities at certain sites adjacent to the Anniston, Alabama, and Sauget, Illinois, plant locations. See Note 1 for further description as to how these legacy environmental claims would be addressed under the agreement-in-principle. Remediation activities are currently being funded by Monsanto for certain of these properties not owned or operated by Solutia. In addition, Solutia has not adjusted its recorded environmental liabilities classified as subject to compromise for ongoing remediation activities at these sites since the inception of Solutia's bankruptcy case. In addition to the bankruptcy proceedings, Solutia's environmental liabilities are also subject to changing governmental policy and regulations, discovery of unknown conditions, judicial proceedings, changes in method and extent of remediation, existence of other potentially responsible parties and changes in technology. Solutia believes that the known and unknown environmental matters, including matters classified as subject to compromise for which Solutia may ultimately assume responsibility, when ultimately resolved, which may be over an extended period of time, could have a material effect on the consolidated financial position, liquidity and profitability of Solutia. 20 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Impact of Chapter 11 Proceedings -------------------------------- During the reorganization process, substantially all pending litigation against Solutia and its subsidiaries that filed for reorganization under Chapter 11 ("Debtors") is stayed, as well as the majority of all other pre-petition claims. Exceptions would generally include pre-petition claims addressed by the bankruptcy court, as well as fully secured claims. Such claims may be subject to future adjustments. Adjustments may result from actions of the bankruptcy court, negotiations with claimants, assumption or rejection of executory contracts, determination as to the value of any collateral securing claims, reconciliation of proofs of claim or other events. Additional pre-filing claims not currently reflected in the consolidated financial statements may be identified through the proof of claim reconciliation process. The amount of pre-filing claims ultimately allowed by the bankruptcy court with respect to contingent claims may be materially different from the amounts reflected in the condensed consolidated financial statements. Generally, claims against Debtors arising from actions or omissions prior to their filing date may be subject to compromise in connection with the plan of reorganization. The ultimate resolution of all of these claims may be settled through negotiation as opposed to court proceedings, with the result being that Solutia may retain certain obligations currently classified as subject to compromise in the Condensed Consolidated Statement of Financial Position. See Note 1 for further description of the agreement-in-principle that outlines Solutia's current proposal for resolution of certain claims. 8. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS Components of Net Periodic Benefit Cost For the three and nine months ended September 30, 2005 and 2004, Solutia's pension and healthcare and other benefit costs were as follows:

PENSION BENEFITS ---------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2005 2004 2005 2004 ---- ---- ---- ---- Service costs for benefits earned........ $ 2 $ -- $ 5 $ 13 Interest costs on benefit obligation..... 18 18 53 59 Assumed return on plan assets............ (17) (18) (50) (57) Prior service costs ..................... -- -- 1 5 Recognized net loss...................... 4 1 10 6 Curtailment and settlement net charges .. 7 7 7 69 ---- ---- ---- ---- TOTAL.................................... $ 14 $ 8 $ 26 $ 95 ==== ==== ==== ====

HEALTHCARE AND OTHER BENEFITS ----------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- 2005 2004 2005 2004 ---- ---- ---- ---- Service costs for benefits earned........ $ 1 $ 1 $ 4 $ 6 Interest costs on benefit obligation..... 9 8 26 32 Prior service costs ..................... (3) (2) (8) (10) Recognized net loss...................... 4 1 11 6 Curtailment gain......................... (4) (38) (4) (38) --- ---- ---- ---- TOTAL.................................... $ 7 $(30) $ 29 $ (4) === ==== ==== ====

21 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Changes in Solutia's Pension and Other Postretirement Benefit Plans Solutia amended its U.S. qualified pension plan in the third quarter 2005 to cease benefit accruals for domestic union participants to be effective January 1, 2006. This action resulted in a curtailment of the U.S. qualified pension plan, as defined by SFAS No. 88, Employees Accounting for Settlements and Curtailments of Defined Pension Plans and for Termination Benefits, due to the reduction in anticipated future service of union participants in Solutia's U.S. qualified pension plan. The net result of this action in the third quarter 2005 was a $7 loss due primarily to the required recognition of unrecognized losses that were expected to be amortized into earnings over the estimated future service period of the plan participants. Solutia also amended in the third quarter 2005 its U.S. postretirement plan for union, active employees to be effective January 1, 2006. These changes included discontinuation of all postretirement benefits after attaining age 65, changes to certain eligibility requirements for pre-65 postretirement benefits with the eventual elimination of these benefits by 2016, and significant reduction of retiree life insurance benefits for future retirees. This action resulted in a curtailment of the U.S. postretirement plan, as defined by SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, due to the reduction in anticipated future service of union participants in Solutia's U.S. postretirement plan. The net result of this action in the third quarter 2005 was a $4 gain due primarily to the required recognition of unrecognized gains that were expected to be amortized into earnings over the estimated future service period of the plan participants. In 2004, Solutia amended its U.S. qualified and non-qualified pension plans to cease future benefit accruals effective July 1, 2004 for non-union participants in these plans. Solutia also amended its U.S. postretirement plan for non-union, active employees effective September 1, 2004. These changes included discontinuation of all postretirement benefits after attaining age 65, changes to certain eligibility requirements for pre-65 postretirement benefits and the eventual elimination of these benefits by 2016, and elimination of retiree life insurance benefits for future retirees. See Note 16 in Solutia's 2004 Form 10-K for further information with respect to these actions. Employer Contributions According to current IRS funding rules, Solutia does not expect to be required to make pension contributions to its U.S. qualified pension plan in 2005. However, Solutia may elect to make voluntary contributions to the pension plan in 2005 in order to minimize future required contributions. No contributions were made to the U.S. qualified pension plan in the nine months ended September 30, 2005. 22 9. SEGMENT DATA Solutia's management is organized around two strategic business platforms: Performance Products and Services and Integrated Nylon. Solutia's reportable segments and their major products are as follows:

PERFORMANCE PRODUCTS AND SERVICES INTEGRATED NYLON --------------------------------- ---------------- SAFLEX(R) and VANCEVA(R) plastic interlayer Nylon intermediate "building block" chemicals Polyvinyl butyral for KEEPSAFE(R) and KEEPSAFE MAXIMUM(R) Merchant polymer and nylon extrusion polymers, laminated window glass including VYDYNE(R) and ASCEND(R) LLUMAR(R), VISTA(R) and GILA(R) professional and retail window Carpet fibers, including the WEAR-DATED(R) and films ULTRON(R) brands THERMINOL(R) heat transfer fluids Industrial nylon fibers DEQUEST(R) water treatment chemicals SKYDROL(R) aviation hydraulic fluids Services for process research and development, scale-up manufacturing and small volume licensed production for the pharmaceutical industry

Solutia evaluates the performance of its operating segments based on segment earnings before interest expense and income taxes ("EBIT"), which includes marketing, administrative, technological and amortization expenses, gains and losses from asset dispositions and restructuring charges, and other income and expense items that can be directly attributable to the segment. Certain expenses and other items that are managed outside the segments are excluded. These unallocated items consist primarily of corporate expenses, certain equity earnings from affiliates, other income and expense items, reorganization items, gains and losses from asset dispositions and restructuring charges that are not directly attributable to the operating segment. There were no inter-segment sales in the periods presented below. 23 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Segment data for the three and nine months ended September 30, 2005 and 2004 are as follows:

THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 2005 2004 ---------------------- --------------------- NET PROFIT NET PROFIT SALES (LOSS) SALES (LOSS) ----- ------ ----- ------ SEGMENT: Performance Products and Services.......... $292 $ 37 $275 $ 27 Integrated Nylon........................... 384 (10) 403 (15) ---- ----- ---- ---- SEGMENT TOTALS............................. 676 27 678 12 RECONCILIATION TO CONSOLIDATED TOTALS: Corporate gain (expenses).............. (16) 22 Equity earnings (loss) from affiliates. 13 (16) Interest expense....................... (20) (21) Other expense, net...................... -- (1) Reorganization items, net.............. (14) (13) CONSOLIDATED TOTALS: ---- ---- NET SALES.............................. $676 $678 ==== ---- ==== ---- LOSS BEFORE INCOME TAXES............... $(10) $(17) ==== ==== NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 2005 2004 ---------------------- --------------------- NET PROFIT NET PROFIT SALES (LOSS) SALES (LOSS) ----- ------ ----- ------ SEGMENT: Performance Products and Services.......... $ 894 $109 $ 833 $ 79 Integrated Nylon........................... 1,262 3 1,189 (22) ------ ---- ------ ---- SEGMENT TOTALS............................. 2,156 112 2,022 57 RECONCILIATION TO CONSOLIDATED TOTALS: Corporate expenses..................... (41) (67) Equity earnings (loss) from affiliates. 46 (28) Interest expense....................... (64) (93) Other income (expense), net............ 2 (1) Loss on debt modification.............. -- (15) Reorganization items, net.............. (16) (62) CONSOLIDATED TOTALS: ------ ------ NET SALES.............................. $2,156 $2,022 ====== ---- ====== ----- INCOME (LOSS) BEFORE INCOME TAXES...... $ 39 $(209) ==== =====

24 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 10. SUBSEQUENT EVENTS Solutia announced in September 2005 that it and FMC Corporation ("FMC") had reached a definitive agreement to sell Astaris, their 50/50 joint venture. The transaction received bankruptcy court approval and closed in the fourth quarter 2005. Under the terms of the agreement, Israel Chemicals Limited ("ICL") purchased substantially all of the operating assets of Astaris for $255, subject to certain purchase price adjustments. Solutia expects to receive net proceeds of up to $100, approximately $20 of which will be distributed in 2006 subject to certain terms and conditions of the asset purchase agreement. In connection with this sale, Solutia expects to record a gain in the fourth quarter of 2005. In addition, certain of the assets and liabilities of Astaris that were not included in the sale to ICL were transferred to Solutia and FMC. Generally, these assets and liabilities consisted of property originally contributed to the joint venture by Solutia and FMC, as well as associated liabilities. 11. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS CPFilms Inc., Monchem International, Inc., Monchem, Inc., Solutia Systems, Inc., Solutia Investments, LLC and Solutia Business Enterprises, Inc., wholly-owned subsidiaries of Solutia (the "Guarantors"), are guarantors of Solutia's 11.25% Senior Secured Notes due 2009 (the "Notes"). In connection with the completion of the October 2003 credit facility, Solutia Investments, LLC and Solutia Business Enterprises, Inc. became guarantors of the Notes through cross-guarantor provisions. Solutia's obligations under the October 2003 facility were paid in full with the proceeds of a final DIP facility dated January 16, 2004, which payment did not affect the Guarantors' obligations in respect of the Notes. Certain other wholly-owned subsidiaries of Solutia (the "DIP Guarantors") guaranteed the final DIP facility (as well as a smaller, interim DIP facility put in place as of December 19, 2003), but the DIP Guarantors were not required by the cross-guarantor provisions to guarantee the Notes. The Guarantors fully and unconditionally guarantee the Notes on a joint and several basis. The following consolidating condensed financial statements present, in separate columns, financial information for: Solutia Inc. on a parent only basis carrying its investment in subsidiaries under the equity method; Guarantors on a combined, or where appropriate, consolidated basis, carrying investments in subsidiaries which do not guarantee the debt (the "Non-Guarantors") under the equity method; Non-Guarantors on a combined, or where appropriate, consolidated basis; eliminating adjustments; and consolidated totals as of September 30, 2005 and December 31, 2004, and for the three and nine months ended September 30, 2005 and 2004. The eliminating adjustments primarily reflect intercompany transactions, such as interest income and expense, accounts receivable and payable, advances, short and long-term debt, royalties and profit in inventory eliminations. Solutia has not presented separate financial statements and other disclosures concerning the Guarantors as such information is not material and would substantially duplicate disclosures included elsewhere in this report. 25 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2005

PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------- NET SALES................................ $488 $48 $239 $ (99) $676 Cost of goods sold....................... 477 23 200 (105) 595 -------------------------------------------------------------------------- GROSS PROFIT............................. 1 25 39 6 81 Marketing expenses....................... 21 6 9 -- 36 Administrative expenses.................. 14 2 7 -- 23 Technological expenses................... 10 1 -- -- 11 Amortization expenses.................... -- -- 1 -- 1 -------------------------------------------------------------------------- OPERATING INCOME (LOSS).................. (34) 16 22 6 10 Equity earnings (loss) from affiliates... 47 11 (1) (44) 13 Interest expense......................... (15) -- (12) 7 (20) Other income, net........................ 2 7 8 (15) 2 Reorganization items, net................ (15) -- -- -- (15) -------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES ....... (15) 34 17 (46) (10) Income tax expense ...................... -- -- 5 -- 5 -------------------------------------------------------------------------- NET INCOME (LOSS)........................ $(15) $34 $ 12 $ (46) $(15) ==========================================================================

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) THREE MONTHS ENDED SEPTEMBER 30, 2005 PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------- NET INCOME(LOSS)......................... $(15) $34 $12 $(46) $(15) OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments......... (1) (1) (2) 3 (1) Net unrealized gain on derivative instruments, net of tax................. 4 -- 1 (1) 4 -------------------------------------------------------------------------- COMPREHENSIVE INCOME (LOSS).............. $(12) $33 $11 $(44) $(12) ==========================================================================

26 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2004

PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------- NET SALES................................ $506 $40 $225 $(93) $678 Cost of goods sold....................... 477 22 185 (97) 587 -------------------------------------------------------------------------- GROSS PROFIT............................. 29 18 40 4 91 Marketing expenses....................... 18 5 8 -- 31 Administrative expenses.................. 11 1 8 -- 20 Technological expenses................... 6 1 -- -- 7 -------------------------------------------------------------------------- OPERATING INCOME (LOSS).................. (6) 11 24 4 33 Equity earnings (loss) from affiliates... 26 8 (2) (48) (16) Interest expense......................... (29) (1) (14) 23 (21) Other income, net........................ 5 18 8 (30) 1 Reorganization items, net................ (14) -- -- -- (14) -------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES ....... (18) 36 16 (51) (17) Income tax expense ...................... -- -- 1 -- 1 -------------------------------------------------------------------------- NET INCOME (LOSS)........................ $(18) $36 $ 15 $(51) $(18) ==========================================================================

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) THREE MONTHS ENDED SEPTEMBER 30, 2004 PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------- NET INCOME (LOSS)........................ $(18) $36 $15 $(51) $(18) OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments......... 1 1 -- (1) 1 -------------------------------------------------------------------------- COMPREHENSIVE INCOME (LOSS).............. $(17) $37 $15 $(52) $(17) ==========================================================================

27 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2005

PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------- NET SALES.................................. $1,589 $140 $729 $(302) $2,156 Cost of goods sold......................... 1,511 64 611 (322) 1,864 -------------------------------------------------------------------------- GROSS PROFIT............................... 78 76 118 20 292 Marketing expenses......................... 60 18 26 -- 104 Administrative expenses.................... 44 6 22 -- 72 Technological expenses..................... 30 2 1 -- 33 Amortization expenses...................... -- -- 1 -- 1 -------------------------------------------------------------------------- OPERATING INCOME (LOSS).................... (55) 50 68 20 82 Equity earnings (loss) from affiliates..... 157 35 (3) (141) 48 Interest expense........................... (47) -- (38) 21 (64) Other income (expense), net................ 1 18 30 (41) 8 Reorganization items, net.................. (33) -- (2) -- (35) -------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES ................ 2 103 55 (141) 39 Income tax expense ........................ 2 -- 17 -- 19 -------------------------------------------------------------------------- NET INCOME................................. $ 20 $103 $ 38 $(141) $ 20 ==========================================================================

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME NINE MONTHS ENDED SEPTEMBER 30, 2005 PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------- NET INCOME................................. $20 $103 $ 38 $(141) $20 OTHER COMPREHENSIVE INCOME: Currency translation adjustments........... (8) (11) (17) 28 (8) Net unrealized gain on derivative instruments, net of tax................... 4 -- -- -- 4 -------------------------------------------------------------------------- COMPREHENSIVE INCOME....................... $16 $ 92 $ 21 $(113) $16 ==========================================================================

28 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2004

PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------- NET SALES.................................. $1,508 $131 $662 $(279) $2,022 Cost of goods sold......................... 1,501 63 548 (296) 1,816 ------------------ -------------- ---------- ---------------- --------------------- GROSS PROFIT............................... 7 68 114 17 206 Marketing expenses......................... 65 16 24 -- 105 Administrative expenses.................... 50 5 23 -- 78 Technological expenses..................... 30 2 1 -- 33 Amortization expense....................... -- -- 1 -- 1 -------------------------------------------------------------------------- OPERATING INCOME (LOSS).................... (138) 45 65 17 (11) Equity earnings (loss) from affiliates..... 94 19 (2) (139) (28) Interest expense........................... (120) (2) (42) 71 (93) Other income, net.......................... 11 56 22 (88) 1 Loss on debt modification.................. -- -- (15) -- (15) Reorganization items, net.................. (63) -- -- -- (63) -------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES ......... (216) 118 28 (139) (209) Income tax expense ........................ -- -- 7 -- 7 -------------------------------------------------------------------------- NET INCOME (LOSS).......................... $ (216) $118 $ 21 $(139) $(216) ==========================================================================

CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS) NINE MONTHS ENDED SEPTEMBER 30, 2004 PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ NET INCOME (LOSS).......................... $(216) $118 $21 $(139) $(216) OTHER COMPREHENSIVE INCOME (LOSS): Currency translation adjustments........... -- -- 8 (8) -- Minimum pension liability adjustments, net of tax................................... 18 -- -- -- 18 -------------------------------------------------------------------------- COMPREHENSIVE INCOME (LOSS)................ $(198) $118 $29 $(147) $(198) ==========================================================================

29 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION AS OF SEPTEMBER 30, 2005

PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents....................... $ 1 $ 4 $ 77 $ -- $ 82 Trade receivables, net.......................... 4 141 134 -- 279 Intercompany receivables........................ 99 761 93 (953) -- Miscellaneous receivables....................... 39 -- 20 -- 59 Inventories..................................... 118 30 110 (15) 243 Prepaid expenses and other current assets....... 18 -- 11 3 32 -------------------------------------------------------------------------- TOTAL CURRENT ASSETS............................ 279 936 445 (965) 695 PROPERTY, PLANT AND EQUIPMENT, NET.............. 591 81 124 -- 796 INVESTMENTS IN AFFILIATES....................... 2,308 203 17 (2,316) 212 GOODWILL........................................ -- 72 4 -- 76 IDENTIFIED INTANGIBLE ASSETS, NET............... 3 26 7 -- 36 INTERCOMPANY ADVANCES........................... 128 1,238 719 (2,085) -- OTHER ASSETS.................................... 82 -- 45 -- 127 -------------------------------------------------------------------------- TOTAL ASSETS.................................... $3,391 $2,556 $1,361 $(5,366) $1,942 ========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable................................ $ 129 $ 8 $ 38 $ (1) $ 174 Intercompany payables........................... 108 3 115 (226) -- Accrued liabilities............................. 140 12 85 -- 237 Short-term debt................................. 300 -- -- -- 300 Intercompany short-term debt.................... -- -- 190 (190) -- -------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES....................... 677 23 428 (417) 711 LONG-TERM DEBT.................................. -- -- 250 -- 250 INTERCOMPANY LONG-TERM DEBT..................... -- -- 408 (408) -- OTHER LIABILITIES............................... 201 -- 52 -- 253 -------------------------------------------------------------------------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE..... 878 23 1,138 (825) 1,214 LIABILITIES SUBJECT TO COMPROMISE............... 3,941 408 21 (2,214) 2,156 SHAREHOLDERS' EQUITY (DEFICIT): Common stock.................................... 1 -- -- -- 1 Additional contributed capital ................. 56 -- -- -- 56 Treasury stock.................................. (251) -- -- -- (251) Net (deficiency) excess of assets at spinoff and subsidiary capital........................ (113) 2,125 202 (2,327) (113) Accumulated other comprehensive loss............ (79) -- -- -- (79) Accumulated deficit............................. (1,042) -- -- -- (1,042) -------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT)............ (1,428) 2,125 202 (2,327) (1,428) -------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT).............................. $3,391 $2,556 $1,361 $(5,366) $1,942 ==========================================================================

30 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL POSITION AS OF DECEMBER 30, 2004

PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................. $ 43 $ 7 $ 65 $ -- $ 115 Trade receivables, net.................... 7 131 148 -- 286 Intercompany receivables.................. 130 759 77 (966) -- Miscellaneous receivables................. 65 1 27 -- 93 Inventories............................... 112 28 116 (17) 239 Prepaid expenses and other assets......... 27 -- 15 3 45 -------------------------------------------------------------------------- TOTAL CURRENT ASSETS...................... 384 926 448 (980) 778 PROPERTY, PLANT AND EQUIPMENT, NET........ 623 78 140 -- 841 INVESTMENTS IN AFFILIATES................. 2,220 189 22 (2,254) 177 GOODWILL.................................. -- 71 5 -- 76 IDENTIFIED INTANGIBLE ASSETS, net......... 2 27 9 -- 38 INTERCOMPANY ADVANCES..................... 128 1,238 806 (2,172) -- OTHER ASSETS.............................. 111 -- 55 -- 166 -------------------------------------------------------------------------- TOTAL ASSETS.............................. $ 3,468 $2,529 $1,485 $(5,406) $ 2,076 ========================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Accounts payable.......................... $ 138 $ 8 $ 53 $ (1) $ 198 Intercompany payables..................... 113 17 109 (239) -- Accrued liabilities....................... 176 11 96 -- 283 Short-term debt........................... 300 -- -- -- 300 Intercompany short-term debt.............. -- -- 214 (214) -- -------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES................. 727 36 472 (454) 781 LONG-TERM DEBT............................ -- -- 285 -- 285 INTERCOMPANY LONG-TERM DEBT............... -- -- 463 (463) -- OTHER LIABILITIES......................... 212 -- 56 (1) 267 -------------------------------------------------------------------------- TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE.............................. 939 36 1,276 (918) 1,333 LIABILITIES SUBJECT TO COMPROMISE......... 3,973 415 22 (2,223) 2,187 SHAREHOLDERS' EQUITY (DEFICIT): Common stock.............................. 1 -- -- -- 1 Additional contributed capital ........... 56 -- -- -- 56 Treasury stock............................ (251) -- -- -- (251) Net (deficiency) excess of assets at spinoff and subsidiary capital.......... (113) 2,078 187 (2,265) (113) Accumulated other comprehensive loss...... (75) -- -- -- (75) Accumulated deficit....................... (1,062) -- -- -- (1,062) -------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT)...... (1,444) 2,078 187 (2,265) (1,444) -------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)........................ $ 3,468 $2,529 $1,485 $(5,406) $ 2,076 ==========================================================================

31 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2005

PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ CASH PROVIDED BY (USED IN) OPERATIONS....... $(103) $ 59 $ 42 $ -- $(24) -------------------------------------------------------------------------- INVESTING ACTIVITIES: Property, plant and equipment purchases..... (30) (7) (14) -- (51) Other investing activities.................. 3 -- 1 -- 4 -------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES........... (27) (7) (13) -- (47) -------------------------------------------------------------------------- FINANCING ACTIVITIES: Net change in cash collateralized letters of credit................................. 17 -- -- -- 17 Changes in investments and advances from (to) affiliates...................... 72 (55) (17) -- -- Deferred debt issuance costs................ (1) -- -- -- (1) -------------------------------------------------------------------------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................ 88 (55) (17) -- 16 -------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... (42) (3) 12 -- (33) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR........................... 43 7 65 -- 115 -------------------------------------------------------------------------- END OF PERIOD............................... $ 1 $ 4 $ 77 $ -- $ 82 ==========================================================================

32 SOLUTIA INC. (DEBTOR-IN-POSSESSION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2004

PARENT ONLY NON- CONSOLIDATED SOLUTIA INC. GUARANTORS GUARANTORS ELIMINATIONS SOLUTIA INC. ------------ ---------- ---------- ------------ ------------ CASH PROVIDED BY (USED IN) OPERATIONS....... $ (67) $ 72 $(14) $ -- $ (9) -------------------------------------------------------------------------- INVESTING ACTIVITIES: Property, plant and equipment purchases..... (16) (3) (13) -- (32) Acquisition and investment payments......... (35) -- (1) -- (36) Other investing activities.................. (1) -- -- -- (1) -------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES........... (52) (3) (14) -- (69) -------------------------------------------------------------------------- FINANCING ACTIVITIES: Net change in short-term debt obligations (361) -- -- -- (361) Proceeds from long-term debt obligations 300 -- -- -- 300 Net change in cash collateralized letters of credit................................. 85 -- -- -- 85 Changes in investments and advances from (to) affiliates........................... (19) (75) 56 -- -- Deferred debt issuance costs................ (9) -- (4) -- (13) -------------------------------------------------------------------------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES................................ 34 (75) 52 -- 11 -------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................... (85) (6) 24 -- (67) CASH AND CASH EQUIVALENTS: BEGINNING OF YEAR........................... 105 20 34 -- 159 -------------------------------------------------------------------------- END OF PERIOD............................... $ 20 $ 14 $ 58 $ -- $ 92 ==========================================================================

33 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include all statements regarding expected future financial position, results of operations, profitability, cash flows and liquidity. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements herein include, among others, Solutia's ability to develop, confirm and consummate a Chapter 11 plan of reorganization; Solutia's ability to reduce its overall leveraged position; the potential adverse impact of Solutia's Chapter 11 filing on its operations, management and employees; the risks associated with operating businesses under Chapter 11 protection; Solutia's ability to comply with the terms of its debtor-in-possession ("DIP") financing facility; customer response to Solutia's Chapter 11 filing; general economic, business and market conditions; customer acceptance of new products; raw material and energy costs or shortages; limited access to capital resources; currency and interest rate fluctuations; increased competitive and/or customer pressure; gain or loss of significant customers; compression of credit terms with suppliers; exposure to product liability and other litigation; changes in cost of environmental remediation obligations and other environmental liabilities; changes in accounting principles generally accepted in the U.S.; ability to implement cost reduction initiatives in a timely manner; geopolitical instability; and changes in pension and other postretirement assumptions. OVERVIEW Summary of Significant Third Quarter 2005 Events U.S. Hurricanes --------------- Hurricanes Katrina and Rita, which affected the gulf coast region of the U.S. during the third quarter 2005, had a significant impact on Solutia's manufacturing operations. Although Solutia's manufacturing facilities did not suffer significant physical damage, the manufacturing facility in Alvin, Texas was forced to completely shut-down its operations ahead of Hurricane Rita as a precaution. Further, reduced availability of key raw material and energy sources affected the ability of certain plants in the Integrated Nylon segment to operate at normal production rates. As a result, Solutia has experienced significant costs involved in shutting down and restarting these operations, significant unabsorbed fixed costs and lost sales volumes. Furthermore, Solutia declared force majeure in late September 2005 for certain products within its Integrated Nylon segment as a result of the aforementioned raw material and utility supply limitations, some of which are a result of force majeure declarations by certain of Solutia's suppliers. Solutia has contacted customers and is actively managing the situation to mitigate the effects of this interruption in supply on its operations and customer deliveries. However, the duration of the force majeure period and the potential financial impact of this situation on Solutia are unknown at this time. Reorganization Strategy ----------------------- Solutia continued to take positive actions in the third quarter 2005 to achieve its reorganization strategy, which involves the principal objectives of (i) managing the businesses to enhance Solutia's performance; (ii) making changes to Solutia's asset portfolio to maximize the value of the estate; (iii) achieving reallocation of "legacy liabilities"; and (iv) negotiating an appropriate capital structure. Recent actions regarding achievement of these principle objectives are explained further below. In addition, Solutia continues to pursue a consensual agreement on the plan of reorganization through negotiations with the other constituents in the bankruptcy case. However, as a result of the numerous uncertainties and complexities inherent in Solutia's bankruptcy proceedings, its ability to emerge and timing of emergence from bankruptcy are subject to significant uncertainty. PERFORMANCE ENHANCEMENT Solutia benefited in the third quarter 2005 from several actions implemented during 2004 designed to enhance its performance. These included implementing significant general and administrative expense reductions; 34 using more performance-based compensation and benefits programs; enacting key senior management changes; initiating a cost reduction program at Solutia's operating sites focused on actions such as lean manufacturing techniques, yield improvement, maintenance savings and utilities optimization; and implementing an enterprise-wide procurement effort. In addition, Solutia continued to use the tools of bankruptcy to renegotiate various contracts in the third quarter 2005 which are expected to provide future benefits to Solutia. In September 2005, each of Solutia's U.S. labor unions ratified new five-year collective bargaining agreements which set pension and health and welfare benefits for Solutia's employees who are represented by labor unions. The agreements, which take effect January 1, 2006, provide for changes to pension and welfare benefits consistent with those Solutia had previously implemented for U.S. non-union employees. Specifically, the union employees have agreed to freeze their pension plan, phase-out company-provided retiree medical benefits by October 31, 2016, and participate in a more cost-effective medical insurance program, effective January 1, 2006. These changes are consistent with previous steps Solutia has taken to achieve its objective of emerging with a cost-structure that allows it to compete more effectively in the global environment. Solutia announced in September 2005 that it is beginning the construction of a new SAFLEX(R) plastic interlayer plant in China with production anticipated to commence in mid-2007. The plant will focus on meeting the growing demands of the Chinese automotive market and the broader Asia Pacific region for Solutia's plastic interlayer products, as well as enhance Solutia's overall global cost position. This project demonstrates Solutia's commitment to a market that is expected to be very important to Solutia's future growth and Solutia's focus on being a competitive supplier on a global basis. PORTFOLIO EVALUATION Solutia's stated strategy is to build a portfolio of high-potential businesses that can consistently deliver returns in excess of Solutia's cost of capital. In employing this strategy, Solutia announced in September 2005 that it and FMC Corporation ("FMC") had reached a definitive agreement to sell Astaris, their 50/50 joint venture. The transaction received bankruptcy court approval and closed in the fourth quarter 2005. Under the terms of the agreement, Israel Chemicals Limited ("ICL") purchased substantially all of the operating assets of Astaris for $255 million, subject to certain purchase price adjustments. Solutia expects to receive net proceeds of up to $100 million, approximately $20 million of which will be deposited into escrow accounts. Distributions, if any, from the escrow accounts are expected to be received in 2006, subject to certain terms and conditions of the asset purchase agreement. In connection with this sale, Solutia expects to record a gain in the fourth quarter of 2005. In addition, certain of the assets and liabilities of Astaris that were not included in the sale to ICL were transferred to Solutia and FMC. Generally, these assets and liabilities consisted of property originally contributed to the joint venture by Solutia and FMC, as well as associated liabilities. REALLOCATION OF LEGACY LIABILITIES On June 7, 2005, Solutia reached an agreement-in-principle with Monsanto Company ("Monsanto") and the Official Committee of Unsecured Creditors in Solutia's Chapter 11 case (the "Unsecured Creditors' Committee") that will serve as a framework for Solutia's plan of reorganization. The agreement-in-principle is subject to the negotiation of definitive documents, approval by Solutia's board of directors and various other conditions and contingencies, some of which are not within the control of Solutia, Monsanto or the Unsecured Creditors' Committee. Until a plan of reorganization consistent with the terms of the agreement-in-principle is confirmed by the bankruptcy court, the terms of the agreement-in-principle are not binding upon any party. See Note 1 to the accompanying condensed consolidated financial statements for further description of the agreement-in-principle. 35 Bankruptcy Developments ----------------------- See Note 1 to the accompanying condensed consolidated financial statements for a summary of developments in Solutia's Chapter 11 bankruptcy case. SUMMARY RESULTS OF OPERATIONS The discussions below and the accompanying consolidated financial statements have been prepared in accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7"), and on a going concern basis, which assumes the continuity of operations and reflects the realization of assets and satisfaction of liabilities in the ordinary course of business. However, as a result of the Chapter 11 bankruptcy proceedings, such realization of assets and liquidation of liabilities are subject to a significant number of uncertainties. Results of Operations - Third Quarter 2005 Compared with Third Quarter 2004 Net sales and operating income of Solutia for the three months ended September 30, 2005 and 2004 are as follows:

(dollars in millions) 2005 2004 ---- ---- Net Sales............................................................... $676 $678 ==== ==== Operating Income: Performance Products and Services Segment Profit.................... $ 37 $ 27 Integrated Nylon Segment Loss ...................................... (10) (15) Less: Corporate Gain (Expenses)................................ (16) 22 Less: Equity (Earnings) Loss from Affiliates, Other (Income) Expense and Reorganization Items included in Segment Profit.... (1) (1) ---- ---- Operating Income........................................................ $ 10 $ 33 ==== ==== Net Gains (Charges) included in Operating Income........................ $ (3) $ 25 ==== ====

The $2 million, or less than 1 percent, decrease in net sales as compared to the third quarter 2004 was primarily a result of lower sales volumes of approximately 8 percent nearly entirely offset by higher average selling prices of approximately 8 percent. The $23 million, or 70 percent, decline in operating income as compared to the third quarter 2004 resulted primarily from the absence of one-time gains incurred in 2004, which are described in greater detail in the Results of Operations section below, higher raw material and energy costs, costs incurred as a result of Hurricanes Katrina and Rita and moderately lower net sales. 36 Results of Operations - Nine Months Ended September 30, 2005 Compared with Nine Months Ended September 30, 2004 Net sales and operating income (loss) of Solutia for the nine months ended September 30, 2005 and 2004 are as follows:

(dollars in millions) 2005 2004 ---- ---- Net Sales............................................................... $2,156 $2,022 ====== ====== Operating Income (Loss): Performance Products and Services Segment Profit.................... $ 109 $ 79 Integrated Nylon Segment Profit (Loss).............................. 3 (22) Less: Corporate Expenses....................................... (41) (67) Less: Equity (Earnings) Loss from Affiliates, Other (Income) Expense and Reorganization Items included in Segment Profit (Loss).................................................. 1 (1) ------ ------ Operating Income (Loss)................................................. $ 82 $ (11) ====== ====== Charges included in Operating Income (Loss)............................. $ (4) $ (54) ====== ======

The $134 million, or 7 percent, increase in net sales as compared to the nine months ended September 30, 2004 was primarily a result of higher average selling prices of approximately 11 percent and favorable currency exchange rate fluctuations of approximately 1 percent, partially offset by lower sales volumes of approximately 5 percent. The $93 million improvement in operating income as compared to the nine months ended September 30, 2004 resulted primarily from higher net sales and lower charges in 2005, which are described in greater detail in the Results of Operations section below, partially offset by higher raw material and energy costs, as well as costs incurred as a result of Hurricanes Katrina and Rita. 37 Financial Information Summarized financial information concerning Solutia and subsidiaries in reorganization and subsidiaries not in reorganization as of and for the three and nine months ended September 30, 2005 is presented as follows:

SOLUTIA AND SUBSIDIARIES SOLUTIA AND SUBSIDIARIES IN NOT IN SUBSIDIARIES (dollars in millions) REORGANIZATION REORGANIZATION ELIMINATIONS CONSOLIDATED -------------- -------------- ------------ ------------ Three Months Ended September 30, 2005: -------------------------------------- Net Sales................................. $ 538 $237 $ (99) $ 676 Operating Income (Loss)................... (18) 21 7 10 Net Income (Loss)......................... (15) 12 (12) (15) Nine Months Ended September 30, 2005: ------------------------------------- Net Sales................................. $ 1,733 $725 $(302) $ 2,156 Operating Income (Loss)................... (6) 67 21 82 Net Income (Loss)......................... 20 37 (37) 20 As of September 30, 2005: ------------------------- Total Assets.............................. $ 1,637 $772 $(467) $ 1,942 Liabilities not Subject to Compromise..... 909 471 (166) 1,214 Liabilities Subject to Compromise......... 2,156 -- -- 2,156 Total Shareholders' Equity (Deficit)...... (1,428) 301 (301) (1,428)

CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no changes in the nine months ended September 30, 2005 with respect to Solutia's critical accounting policies, as presented on pages 17 through 20 of Solutia's 2004 Form 10-K. RESULTS OF OPERATIONS--THIRD QUARTER 2005 COMPARED WITH THIRD QUARTER 2004 PERFORMANCE PRODUCTS AND SERVICES

THREE MONTHS ENDED SEPTEMBER 30, ------------------ (dollars in millions) 2005 2004 ---- ---- Net Sales.............................................................. $292 $275 ==== ==== Segment Profit ........................................................ $ 37 $ 27 ==== ==== Charges and Reorganization Items included in Segment Profit............ $ (1) $ (1) ==== ====

The $17 million, or 6 percent, increase in net sales as compared to the third quarter 2004 resulted primarily from an increase in average selling prices of approximately 4 percent and higher sales volumes of approximately 2 percent. Higher average selling prices were experienced across several product lines, including SAFLEX(R) and VANCEVA(R) plastic interlayer products, LLUMAR(R) and VISTA(R) professional film products, THERMINOL(R) heat transfer fluids and DEQUEST(R) water treatment chemicals, generally as a result of favorable market conditions and in response to the escalating cost of raw materials. Higher volumes were experienced in SAFLEX(R) and VANCEVA(R) plastic interlayer products and LLUMAR(R) and VISTA(R) professional film products, partially offset by lower volumes due to the shut-down of Solutia's chlorobenzenes operations in 2004. The $10 million, or 37 percent, increase in segment profit in comparison to the third quarter 2004 resulted primarily from higher net sales, partially offset by higher raw material and energy costs of approximately $5 million. 38 In addition, segment profit in the third quarter 2005 was affected by $1 million of restructuring charges included within reorganization items, net while segment profit in the third quarter 2004 was affected by $1 million of net charges including $2 million of asset write-offs and repairs and maintenance charges resulting from the impact of Hurricane Ivan at the Martinsville, Virginia plant, partially offset by $1 million of gain from the favorable settlement of reserves established in 2003 related to the closure of non-strategic facilities in Solutia's Pharmaceutical Services division. INTEGRATED NYLON

THREE MONTHS ENDED SEPTEMBER 30, ------------------ (dollars in millions) 2005 2004 ---- ---- Net Sales.............................................................. $384 $403 ==== ==== Segment Loss .......................................................... $(10) $(15) ==== ==== Charges and Reorganization Items included in Segment Loss.............. $ -- $ (5) ==== ====

The $19 million, or 5 percent, decrease in net sales as compared to the third quarter 2004 resulted primarily from lower sales volumes of approximately 16 percent, partially offset by higher average selling prices of approximately 11 percent. Sales volumes were negatively affected by Hurricanes Katrina and Rita, which forced certain manufacturing facilities to reduce production rates due to the shortages of certain raw materials and in particular Hurricane Rita forced the manufacturing facility in Alvin, Texas to completely shut-down its operations. This production slowdown did not allow Solutia to fully meet customer demand during the third quarter 2005. Additionally, certain customers were unable to take product due to their own operational issues resulting from the hurricanes. Sales volumes were also adversely affected as a result of Solutia's exit from the acrylic fibers operations in the second quarter 2005 but were partially offset because certain Solutia produced intermediate chemicals previously supplied to the acrylic fibers operations were sold into the intermediates merchant market. Average selling prices increased in all businesses primarily in response to the escalating cost of raw materials. The $5 million, or 33 percent, improvement in segment loss in comparison to the third quarter 2004 resulted principally from lower charges, partially offset by lower net sales and higher raw material and energy costs of approximately $16 million. In addition, segment loss was affected by the aforementioned hurricanes experienced in the third quarter 2005. Although Solutia's manufacturing facilities did not suffer significant physical damage, the manufacturing facility in Alvin, Texas was forced to completely shut-down its operations ahead of Hurricane Rita as a precaution. Further, reduced availability of key raw material and energy resources affected the ability of certain plants to operate at normal production levels. As a result, Solutia has experienced significant costs involved in shutting down and restarting these operations, significant unabsorbed fixed costs and lost sales volumes. Furthermore, Solutia declared force majeure in late September 2005 for certain products within its Integrated Nylon segment as a result of the aforementioned raw material and utility supply limitations some of which are a result of force majeure declarations by certain of Solutia's suppliers. The duration of the force majeure period and the potential financial impact of this situation on Solutia are unknown at this time. Segment loss in the third quarter 2005 included $2 million of decontamination costs incurred as part of the shut-down of the acrylic fibers business, offset by a $2 million gain on the sale of acrylic fibers assets. Segment loss in the third quarter 2004 was also affected by a hurricane experienced in the gulf region of the U.S. in the third quarter 2004. In particular, segment loss in the third quarter 2004 included $5 million of charges resulting from the impact of Hurricane Ivan at the Pensacola, Florida and Foley, Alabama plants involving primarily repairs and maintenance costs, as well as asset write-offs. In addition to these charges, segment loss in the third quarter 2004 was affected by unabsorbed fixed costs and lost sales volumes as a result of temporarily shutting down certain manufacturing operations at the Pensacola and Foley plants due to Hurricane Ivan. 39 CORPORATE EXPENSES THREE MONTHS ENDED SEPTEMBER 30, ------------------ (dollars in millions) 2005 2004 ---- ---- Corporate Expenses (Gain)............................. $16 $(22) === ==== Gains (Charges) included in Corporate Expenses........ $(3) $ 31 === ==== The $38 million change in corporate expenses (gain) in comparison to the third quarter 2004 was primarily a result of the net gain included in 2004. Charges of $3 million and the net gain of $31 million included in the third quarter 2005 and 2004 results, respectively, both resulted from various curtailment and settlement activity due to amendments to Solutia's various postretirement plans (as more fully described in Note 8 to the accompanying condensed consolidated financial statements). In addition, the third quarter 2005 included modest increases in legal costs, partially offset by the full quarter benefit of cost reduction measures taken in the second half of 2004. EQUITY EARNINGS (LOSS) FROM AFFILIATES THREE MONTHS ENDED SEPTEMBER 30, ------------------ (dollars in millions) 2005 2004 ---- ---- Equity Earnings (Loss) from Affiliates not included in Reportable Segment Profit........................ $13 $(16) --- ---- Equity Earnings from Affiliates included in Reportable Segment Profit........................... $-- $ -- --- ---- Equity Earnings (Loss) from Affiliates................ $13 $(16) === ==== Charges included in Equity Earnings (Loss) from Affiliates......................... $-- $(27) === ==== Equity earnings (loss) from affiliates improved by $29 million in the third quarter 2005 as compared to the third quarter 2004. This improvement was primarily a result of higher average selling prices and improved manufacturing performance at both the Astaris and Flexsys joint ventures. In addition, the third quarter 2004 results included $24 million in litigation related charges and $2 million in asset impairment and severance charges at the Flexsys joint venture and $1 million of severance and contract cancellation charges at the Astaris joint venture. REORGANIZATION ITEMS, NET THREE MONTHS ENDED SEPTEMBER 30, ------------------ (dollars in millions) 2005 2004 ---- ---- Reorganization Items, net............................. $(15) $(14) ==== ==== Reorganization items, net are presented separately in the Condensed Consolidated Statement of Operations and represent items of income, expense, gain, or loss that are realized or incurred by Solutia because it is in reorganization under Chapter 11 of the U.S. Bankruptcy Code. Reorganization items incurred in the third quarter 2005 included $13 million of professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings; $2 million of expense provisions for (i) employee severance costs incurred directly as part of the Chapter 11 reorganization process and (ii) a retention plan for certain Solutia employees approved by the bankruptcy court; $1 million net gain for adjustments to record certain pre-petition claims at estimated amounts of the allowed claims; and $1 million of other reorganization charges primarily involving costs incurred with exiting the acrylic fibers operations. Reorganization items incurred in the third quarter 2004 included $13 million of professional fees for services provided by debtor and creditor professionals directly 40 related to Solutia's reorganization proceedings and $1 million of expense provisions for (i) employee severance costs incurred directly as part of the Chapter 11 reorganization process and (ii) a retention plan for certain Solutia employees approved by the bankruptcy court. INCOME TAX EXPENSE THREE MONTHS ENDED SEPTEMBER 30, ------------------ (dollars in millions) 2005 2004 ---- ---- Income Tax Expense................................... $ 5 $ 1 === ==== Solutia's income tax expense in the third quarter 2005 and 2004 was primarily a result of foreign income taxes. As a result of Solutia's Chapter 11 filing, Solutia did not record any U.S. income tax expense or benefit for domestic operations (including temporary differences) during the quarters ended September 30, 2005 and 2004. Consequently, the changes in federal and state deferred tax assets were offset by corresponding changes in valuation allowances. See Note 13 of Solutia's 2004 Form 10-K for additional information concerning Solutia's deferred tax assets and changes in valuation allowances due to Solutia's Chapter 11 filing. RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2004 PERFORMANCE PRODUCTS AND SERVICES NINE MONTHS ENDED SEPTEMBER 30, ----------------- (dollars in millions) 2005 2004 ---- ---- Net Sales........................................... $894 $833 ==== ==== Segment Profit ..................................... $109 $ 79 ==== ==== Charges and Reorganization Items included in Segment Profit................................... $ (9) $(18) ==== ==== The $61 million, or 7 percent, increase in net sales as compared to the nine months ended September 30, 2004 resulted primarily from higher sales volumes of approximately 3 percent, an increase in average selling prices of approximately 3 percent and favorable currency exchange rate fluctuations of approximately 1 percent. Higher volumes were experienced in SAFLEX(R) and VANCEVA(R) plastic interlayer products, pharmaceutical services and THERMINOL(R) heat transfer fluids, partially offset by lower volumes due to the shut-down of Solutia's chlorobenzenes operations in 2004. Higher average selling prices were experienced across several product lines including SAFLEX(R) and VANCEVA(R) plastic interlayer products, LLUMAR(R) and VISTA(R) professional film products, THERMINOL(R) heat transfer fluids and DEQUEST(R) water treatment chemicals generally in response to the escalating cost of raw materials. The favorable exchange rate fluctuations occurred primarily as a result of the stronger euro in relation to the U.S. dollar in comparison to the nine months ended September 30, 2004. The $30 million, or 38 percent, increase in segment profit in comparison to the nine months ended September 30, 2004 resulted principally from higher net sales, partially offset by higher raw material and energy costs of approximately $15 million. In addition, segment profit in the nine months ended September 30, 2005 was affected by $8 million of reorganization items which consisted primarily of adjustments to record certain pre-petition claims at estimated amounts of the allowed claims, as well as $1 million of restructuring charges not included within reorganization items. Segment profit in 2004 was affected by $17 million of charges involving plant closure costs for Solutia's chlorobenzenes operations, including costs for decommissioning and dismantling activities, asset write-offs, future costs for non-cancelable operating leases, and severance and retraining costs; $2 million of asset write-offs and repairs and maintenance charges resulting from the impact of Hurricane Ivan at the Martinsville, Virginia plant, partially offset by $1 million of gain from the favorable settlement of reserves established in 2003 related to the closure of non-strategic facilities in Solutia's Pharmaceutical Services division. 41 INTEGRATED NYLON NINE MONTHS ENDED SEPTEMBER 30, ------------------- (dollars in millions) 2005 2004 ---- ---- Net Sales........................................... $1,262 $1,189 ====== ====== Segment Profit (Loss)............................... $ 3 $ (22) ====== ====== Charges and Reorganization Items included in Segment Profit (Loss)............................ $ (11) $ (5) ====== ====== The $73 million, or 6 percent, increase in net sales as compared to the nine months ended September 30, 2004 resulted primarily from higher average selling prices of approximately 17 percent, partially offset by lower sales volumes of approximately 11 percent. Average selling prices increased in all businesses primarily in response to the escalating cost of raw materials. Sales volumes were negatively affected by Hurricanes Katrina and Rita, which forced certain manufacturing facilities to reduce production rates due to the shortages of certain raw materials and in particular Hurricane Rita forced the manufacturing facility in Alvin, Texas to completely shut-down its operations. This production slowdown did not allow Solutia to fully meet customer demand. Additionally, certain customers were unable to take product due to their own operational issues resulting from the hurricanes. Sales volumes were also adversely affected as a result of Solutia's exit from the acrylic fibers operations in the second quarter 2005 but were partially offset because certain Solutia produced intermediate chemicals previously supplied to the acrylic fibers operations were sold into the intermediates merchant market. In addition, sales volumes were negatively impacted in 2005 as a result of contract terminations in the intermediate chemicals business in 2004. The $25 million improvement in segment profit in comparison to the nine months ended September 30, 2004 resulted primarily from higher net sales, partially offset by higher raw material and energy costs of approximately $137 million. In addition, segment loss was affected by the aforementioned hurricanes experienced in the third quarter 2005. Although Solutia's manufacturing facilities did not suffer significant physical damage, the manufacturing facility in Alvin, Texas was forced to completely shut-down its operations ahead of Hurricane Rita as a precaution. Further, reduced availability of key raw material and energy sources affected the ability of certain plants to operate at normal production levels. As a result, Solutia has experienced significant costs involved in shutting down and restarting these operations, significant unabsorbed fixed costs and lost sales volumes. Furthermore, Solutia declared force majeure in late September 2005 for certain products within its Integrated Nylon segment as a result of the aforementioned raw material and utility supply limitations some of which are a result of force majeure declarations by certain of Solutia's suppliers. The duration of the force majeure period and the potential financial impact of this situation on Solutia are unknown at this time. Segment profit in the nine months ended September 30, 2005 also included reorganization items of $11 million comprised of $10 million principally due to the shut-down of the acrylic fibers operations and $1 million of other restructuring charges. The shut-down costs included $11 million of asset write-downs, $4 million of severance and retraining costs and $4 million of decontamination costs, partially offset by a $7 million gain from the reversal of the LIFO reserve associated with the inventory sold and/or written off as part of the business shut-down and a $2 million gain from the sale of certain acrylic fibers assets. Segment loss in the nine months ended September 30, 2004 was also affected by a hurricane experienced in the gulf region of the U.S. in 2004. In particular, segment loss in the nine months ended September 30, 2004 included $5 million of charges resulting from the impact of Hurricane Ivan at the Pensacola, Florida and Foley, Alabama plants involving primarily repairs and maintenance costs, as well as asset write-offs. In addition to these charges, segment loss in the nine months ended September 30, 2004 was affected by unabsorbed fixed costs and lost sales volumes as a result of temporarily shutting down certain manufacturing operations at the Pensacola and Foley plants due to Hurricane Ivan. 42 CORPORATE EXPENSES NINE MONTHS ENDED SEPTEMBER 30, ----------------- (dollars in millions) 2005 2004 ---- ---- Corporate Expenses.................................... $41 $ 67 === ==== Charges included in Corporate Expenses................ $(3) $(31) === ==== The $26 million, or 39 percent, decrease in corporate expenses in comparison to the nine months ended September 30, 2004 was primarily a result of higher charges in 2004. Charges of $3 million and $31 million included in the nine months ended September 30, 2005 and 2004 results, respectively, resulted from various curtailment and settlement activities due to amendments to Solutia's various postretirement plans (as more fully described in Note 8 to the accompanying condensed consolidated financial statements). In addition, the nine months ended September 30, 2005 included a modest increase in legal costs, partially offset by the benefit of cost reduction measures taken in the second half of 2004. EQUITY EARNINGS (LOSS) FROM AFFILIATES NINE MONTHS ENDED SEPTEMBER 30, ----------------- (dollars in millions) 2005 2004 ---- ---- Equity Earnings (Loss) from Affiliates not included in Reportable Segment Profit (Loss)................. $46 $(28) --- ---- Equity Earnings from Affiliates included in Reportable Segment Profit (Loss).................... $ 2 $ -- --- ---- Equity Earnings (Loss) from Affiliates................ $48 $(28) === ==== Gains (charges) included in Equity Earnings (Loss) from Affiliates......................... $ 5 $(45) === ==== Equity earnings (loss) from affiliates improved by $74 million in comparison to the nine months ended September 30, 2004. This improvement was primarily a result of lower charges in 2005, as well as higher average selling prices, favorable product mix and improved manufacturing performance at both the Astaris and Flexsys joint ventures. In addition, the results for the nine months ended September 30, 2005 included a one-time, non-operational gain of $5 million incurred by the Flexsys joint venture. Included in the results for the nine months ended September 30, 2004 were $45 million of charges including $24 million in litigation related charges and $9 million of asset impairment and severance charges at the Flexsys joint venture, as well as $6 million in contract termination costs, $3 million in dismantling charges, $2 million of severance costs, and $1 million of asset impairments at the Astaris joint venture. INTEREST EXPENSE NINE MONTHS ENDED SEPTEMBER 30, ----------------- (dollars in millions) 2005 2004 ---- ---- Interest Expense...................................... $64 $ 93 === ==== Charges included in Interest Expense.................. $-- $(25) === ==== The $29 million, or 31 percent, decrease in interest expense in 2005 in comparison to the nine months ended September 30, 2004 resulted principally from the write-off of unamortized debt issuance costs of $25 million in 2004. 43 REORGANIZATION ITEMS, NET NINE MONTHS ENDED SEPTEMBER 30, ----------------- (dollars in millions) 2005 2004 ---- ---- Reorganization Items, net............................. $(35) $(63) ==== ==== Reorganization items, net are presented separately in the Condensed Consolidated Statement of Operations and represent items of income, expense, gain, or loss that are realized or incurred by Solutia because it is in reorganization under Chapter 11 of the U.S. Bankruptcy Code. Reorganization items incurred in the nine months ended September 30, 2005 included $37 million of professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings; a $29 million net gain representing the difference between the settlement amount of certain pre-petition obligations and the corresponding amounts previously recorded; $10 million of net charges for adjustments to record certain pre-petition claims at estimated amounts of the allowed claims; $10 million of expense provisions related to (i) employee severance costs incurred directly as part of the Chapter 11 reorganization process and (ii) a retention plan for certain Solutia employees approved by the bankruptcy court; and $7 million of other reorganization charges primarily involving costs incurred with exiting the acrylic fibers operations. Reorganization items incurred in the nine months ended September 30, 2004 included $37 million of professional fees for services provided by debtor and creditor professionals directly related to Solutia's reorganization proceedings; $20 million of asset write-offs associated with contract rejections and terminations; $8 million of expense provisions for (i) employee severance costs incurred directly as part of the Chapter 11 reorganization process and (ii) a retention plan for certain Solutia employees approved by the bankruptcy court; and a $2 million gain representing the difference between the settlement amount of certain pre-petition obligations and the corresponding amounts previously recorded. INCOME TAX EXPENSE NINE MONTHS ENDED SEPTEMBER 30, ----------------- (dollars in millions) 2005 2004 ---- ---- Income Tax Expense ................................... $19 $ 7 === ==== Solutia's income tax expense in the nine months ended September 30, 2005 and 2004 was primarily a result of foreign income taxes. As a result of Solutia's Chapter 11 filing, Solutia did not record any U.S. income tax expense or benefit for domestic operations (including temporary differences) during the nine months ended September 30, 2005 and 2004. Consequently, the changes in federal and state deferred tax assets were offset by corresponding changes in valuation allowances. See Note 13 of Solutia's 2004 Form 10-K for additional information concerning Solutia's deferred tax assets and changes in valuation allowances due to Solutia's Chapter 11 filing. 44 SUMMARY OF EVENTS AFFECTING COMPARABILITY In the nine months ended September 30, 2005 and 2004, certain events affecting comparability were recorded in Reorganization Items, net in the Condensed Consolidated Statement of Operations. A comparison of reorganization items for the three and nine months ended September 30, 2005 and 2004, respectively, is provided in the above Results of Operations section, as well as Note 2 to the accompanying condensed consolidated financial statements. Charges and gains recorded in the nine months ended September 30, 2005 and 2004 and other events affecting comparability recorded outside of reorganization items have been summarized in the table below (dollars in millions):

2005 -------------------------------------------------------------------- PERFORMANCE PRODUCTS AND INTEGRATED CORPORATE/ INCREASE/(DECREASE) SERVICES NYLON OTHER CONSOLIDATED ---------------------------------------- ------------ ---------- ---------- ------------ IMPACT ON: Cost of Goods Sold...................... $ 1 $-- $-- $ 1 (a) -- -- 3 3 (b) ---------------------------------------------------------------- OPERATING INCOME IMPACT................. (1) -- (3) (4) Equity earnings from affiliates......... -- -- 5 5 (c) ---------------------------------------------------------------- PRE-TAX INCOME STATEMENT IMPACT......... $(1) $-- $ 2 1 ================================================ Income tax impact....................... -- (d) ----------- AFTER-TAX INCOME STATEMENT IMPACT....... $ 1 =========== 2005 CHARGES AND OTHER EVENTS a) Restructuring costs related principally to severance and retraining costs ($1 million pre-tax and after-tax--see note (d) below). b) Net pension and other postretirement benefit plan curtailments and settlements, as more fully described in Note 8 to the accompanying consolidated financial statements ($3 million pre-tax and after-tax--see note (d) below). c) One-time, non-operational gain incurred by the Flexsys joint venture ($5 million pre-tax and after-tax--see note (d) below). d) The above items are considered to have like pre-tax and after-tax impact, as the tax benefit realized from the charges is offset by the increase in valuation allowance for U.S. deferred tax assets resulting from uncertainty as to their recovery as a result of the Chapter 11 filing. 45

2004 -------------------------------------------------------------------- PERFORMANCE PRODUCTS AND INTEGRATED CORPORATE/ INCREASE/(DECREASE) SERVICES NYLON OTHER CONSOLIDATED ---------------------------------------- ------------ ---------- ---------- ------------ IMPACT ON: Cost of Goods Sold...................... $ 16 $-- $ -- $ 16 (e) -- -- 24 24 (f) 2 5 -- 7 (g) ----------------------------------------------------------------- Total Cost of Goods Sold................ 18 5 24 47 Marketing............................... -- -- 2 2 (f) Administrative.......................... -- -- 3 3 (f) Technological........................... -- -- 2 2 (f) ----------------------------------------------------------------- OPERATING LOSS IMPACT................... (18) (5) (31) (54) Equity loss from affiliates............. -- -- (45) (45) (h) Interest Expense........................ -- -- (25) (25) (i) Loss on debt modification............... -- -- (15) (15) (j) ----------------------------------------------------------------- PRE-TAX INCOME STATEMENT IMPACT......... $(18) $(5) $(116) (139) ================================================ Income tax benefit impact............... (6) (k) ----------- AFTER-TAX INCOME STATEMENT IMPACT....... $(133) =========== 2004 CHARGES AND OTHER EVENTS e) Restructuring costs related principally to the closure of Solutia's chlorobenzenes operations as well as certain other non-strategic operations, including costs for decommissioning and dismantling activities, asset write-offs, future costs for non-cancelable operating leases, and severance and retraining costs ($16 million pre-tax and after-tax - see note (k) below). f) Net pension and other postretirement benefit plan curtailments and settlements, as more fully described in Note 8 to the accompanying consolidated financial statements ($31 million pre-tax and after-tax--see note (k) below). g) Losses incurred directly related to the hurricanes experienced in the U.S. in the third quarter 2004 resulting in the disruption of operations and property damage at Solutia's operations in the Integrated Nylon chain located principally in the Southeastern part of the U.S. and the CPFilms location in Martinsville, Virginia. These costs included primarily asset write-offs and repairs and maintenance costs ($7 million pre-tax and after-tax--see note (k) below). h) The Flexsys and Astaris joint ventures, in each of which Solutia's has a fifty percent interest, incurred charges related to litigation matters and restructuring charges related to contract terminations, dismantling costs, asset impairments and severance charges ($45 million pre-tax and after-tax - see note (k) below). i) Write-off of unamortized debt issuance costs related to the October 2003 and interim DIP credit facilities, both retired in January 2004 with proceeds from the final DIP facility ($25 million pre-tax and after-tax - see note (k) below). j) Loss due to the modification of Solutia's Euronotes in January 2004 ($15 million pre-tax and $9 million after-tax). k) With the exception of item (j) above, which relates to ex-U.S. operations, the above items are considered to have like pre-tax and after-tax impact, as the tax benefit realized from the charges is offset by the increase in valuation allowance for U.S. deferred tax assets resulting from uncertainty as to their recovery as a result of the Chapter 11 filing.

46 FINANCIAL CONDITION AND LIQUIDITY As discussed in Note 1 to the accompanying condensed consolidated financial statements, Solutia is operating as a debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code. As a result of the uncertainty surrounding Solutia's current circumstances, it is difficult to predict Solutia's actual liquidity needs and sources at this time. However, based upon current and anticipated levels of operations during the continuation of the bankruptcy proceedings, Solutia believes that its liquidity and capital resources will be sufficient to maintain its normal operations at current levels. Solutia's access to additional financing while under Chapter 11 protection will likely be very limited. Financial Analysis Solutia utilized its existing cash on-hand to finance operating needs and capital expenditures during the first nine months of 2005. Cash used in operations was $2 million in the first nine months of 2005, a change of $7 million from $9 million used in operations for the comparable period of 2004. This change in cash used in operations was primarily attributable to working capital changes. Capital spending increased $19 million to $51 million in the first nine months of 2005, compared to $32 million in the same period in 2004. Expenditures during the first nine months of 2005 were used primarily to fund certain growth initiatives, as well as various capital improvements and certain cost reduction projects. Under the terms of the previously mentioned Astaris transaction, Solutia expects to receive net proceeds of up to $100 million, approximately $20 million of which will be deposited into escrow accounts. Distributions, if any, from the escrow accounts are expected to be received in 2006, subject to certain terms and conditions of the asset purchase agreement. Pursuant to the terms of its DIP financing facility, Solutia is permitted to retain approximately $30 million of the net proceeds of the Astaris sale. However, the lenders under the DIP financing facility have agreed to waive certain prepayment requirements in the DIP financing facility and allow Solutia to retain the entire proceeds of the Astaris sale. The waiver and other matters related thereto are subject to bankruptcy court approval. Solutia has filed a motion for approval of the waiver and the matters related thereto seeking a hearing before the bankruptcy court on November 17, 2005. Total debt of $1,218 million as of September 30, 2005, including $668 million subject to compromise and $550 million not subject to compromise, decreased by $35 million as compared to $1,253 million at December 31, 2004, including $668 million subject to compromise and $585 million not subject to compromise. This decrease in total debt resulted primarily from a decrease in the recorded amount of Solutia's Euronotes due to foreign currency translation changes in the first nine months of 2005. As a result of the Chapter 11 filing, Solutia was in default on all its debt agreements as of September 30, 2005, with the exception of its DIP credit facility and Euronotes. Solutia's working capital decreased by $13 million to $(16) million at September 30, 2005, compared to $(3) million at December 31, 2004. The change was principally due to lower cash on-hand as of September 30, 2005, which is primarily the result of increased capital spending. Solutia had a shareholders' deficit of $1,428 million at September 30, 2005 compared to a deficit of $1,444 million at December 31, 2004. The $16 million decrease in shareholders' deficit principally resulted from the $20 million of net income for the nine months ended September 30, 2005, partially offset by the $4 million increase in accumulated other comprehensive losses due primarily to currency translation adjustments. The weighted average interest rate on Solutia's total debt outstanding was approximately 8.6 percent at September 30, 2005 as compared to 9.0 percent at December 31, 2004. This decrease is primarily a result of the change in interest rates on the term loan component of Solutia's DIP facility in the second quarter 2005. While operating as a debtor-in-possession during the Chapter 11 proceedings, Solutia has ceased paying interest on its 6.72% debentures due 2037 and its 7.375% debentures due 2027. The amount of contractual interest expense not recorded during the first nine months of 2005 and 2004, was approximately $24 million. At September 30, 2005, Solutia's total liquidity was $208 million in the form of $126 million of availability under the final DIP credit facility and approximately $82 million of cash on-hand, of which $76 million was cash of Solutia's subsidiaries that are not parties to the Chapter 11 proceedings. At December 31, 2004, Solutia's total liquidity was $246 million in the form of $131 million of availability under the final DIP credit facility and approximately $115 million of cash on-hand, of which $65 million was cash of Solutia's subsidiaries that are not parties to the Chapter 11 bankruptcy proceedings. 47 CONTINGENCIES See Note 7 to the accompanying condensed consolidated financial statements for a summary of Solutia's contingencies as of September 30, 2005. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS There have been no material changes in market risk exposures during the nine months ended September 30, 2005 that affect the disclosures presented in the information appearing under "Derivative Financial Instruments" on page 30 of Solutia's Form 10-K for the year-ended December 31, 2004. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this Form 10-Q, Solutia carried out an evaluation, under the supervision and with the participation of Solutia's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Solutia's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act")). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Form 10-Q, Solutia's disclosure controls and procedures are effective in timely alerting them to material information relating to Solutia and its consolidated subsidiaries that is required to be included in Solutia's periodic SEC filings. There were no changes in Solutia's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarterly period ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, Solutia's internal controls over financial reporting. 48 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Legal Proceedings in Solutia Bankruptcy Case -------------------------------------------- As described in Solutia's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (the "First Quarter 10-Q") and Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 (the "Second Quarter 10-Q"), on March 7, 2005, the Official Committee of Equity Security Holders (the "Equity Committee") in Solutia's bankruptcy case filed a complaint against Pharmacia and Monsanto and an objection to the proofs of claim filed by Monsanto and Pharmacia in Solutia's bankruptcy case and on May 24, 2005 Pharmacia and Monsanto filed a motion to dismiss the complaint, or in the alternative, to stay the adversary proceeding, which was not adjudicated by the bankruptcy court but rather taken under advisement to be addressed in the future. On August 4, 2005, Solutia filed with the bankruptcy court a Statement of Reservation of Rights in response to the Equity Committee's complaint, expressing Solutia's view that the issues and disputes raised by the Equity Committee would be resolved through the process of confirmation of Solutia's Plan or Reorganization. Flexsys Related Litigation -------------------------- Solutia's 2004 Form 10-K, First Quarter 10-Q and Second Quarter 10-Q described 23 class actions filed in various state courts against Flexsys, a 50/50 joint venture between Solutia and Akzo Nobel N.V, and other producers of rubber chemicals. Solutia is only named as a defendant in one of these cases, David Pearman and Pearman Agri Services, Inc. v Akzo Nobel Chemicals, Inc., et. al., pending in the Circuit Court for Claiborne County, Tennessee, which was automatically stayed as against Solutia. The plaintiffs in 20 of these cases seek damages under state law on behalf of all retail purchasers of tires in that state since as early as 1994; plaintiffs in the other three cases seek damages under state law on behalf of all purchasers of any product containing rubber chemicals, including tires. Eleven of the cases remain pending at the trial level in procedural stages or are pending on appeal following dismissal as to Flexsys by the trial court on procedural grounds. The remaining cases have been dismissed voluntarily by plaintiffs or by the trial court on procedural grounds and are not on appeal. Solutia's 2004 Form 10-K and Second Quarter 10-Q also described class actions filed in the Provinces of Quebec and Ontario, Canada, against Flexsys and a number of other companies producing rubber chemicals alleging that collusive sales and marketing activities of the defendants damaged all persons in Quebec during the period July 1995 through September 2001. In August 2005 Solutia became aware of a case filed in British Columbia, Canada against Flexsys and the other rubber chemical producers alleging the same claims as the Quebec and Ontario cases and seeking unspecified damages under a variety of theories on behalf of all purchasers of products containing rubber chemicals in British Columbia. No responses are yet due nor have any been filed by defendants in any of these cases. Solutia is not a defendant in any of these cases. Other Legal Proceedings ----------------------- Solutia's 2004 Form 10-K, First Quarter 10-Q and Second Quarter 10-Q described a class action captioned Dickerson v. Feldman, et al., which was filed in the U.S. District Court for the Southern District of New York against a number of defendants, including former officers and employees of Solutia and Solutia's Employee Benefits Plans Committee and Pension and Savings Funds Committee, alleging breach of fiduciary duty under the Employee Retirement Income Security Act of 1974 ("ERISA") and seeking to recover alleged losses in the Solutia Inc. Savings and Investment Plan ("SIP") arising from the alleged imprudent investment of SIP assets in Solutia's common stock during the period from December 16, 1998 through the date the action was filed. Solutia was not named as a defendant, but the plaintiff in Dickerson filed a proof of claim for $269 million against Solutia in the U.S. Bankruptcy Court for the Southern District of New York. On September 1, 2005, the plaintiff filed an amended proof of claim against Solutia solely to raise the purported amount of its claim to $290 million. On September 7, 2005 the plaintiff filed a motion in the U.S. Bankruptcy Court for the Southern District of New York seeking leave to file a single proof of claim against Solutia on behalf of all members of the class. Competition authorities in Belgium and several other European countries are investigating past commercial practices of certain companies engaged in the production and sale of butyl benzyl phthalates ("BBP"). 49 One of the BBP producers under investigation by the Belgian Competition Authority ("BCA") is Ferro Belgium sprl, the European subsidiary of Ferro Corporation. Ferro's BBP business in Europe was purchased from Solutia Inc. in 2000. Solutia received an indemnification notice from Ferro and has exercised its right, pursuant to the purchase agreement relating to Ferro's acquisition of the BBP business from Solutia, to assume and control the defense of Ferro in proceedings relating to these investigations. On July 7, 2005, the BCA issued a Statement of Objections regarding its BBP investigation in which Solutia Europe S.A/N.V., a European subsidiary of Solutia, along with Ferro 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. Solutia Inc. is not named as a party under investigation in the Statement of Objections. Solutia's written comments to the Statement of Objections were submitted on August 31, 2005 and presented at an oral hearing before the BCA on September 6, 2005. A Reasoned Report to be submitted by the investigator to the BCA has not yet been received. Solutia is fully cooperating with the BCA in this investigation. On October 12, 2005 an action, captioned Davis, et. al. v. Solutia, Inc. Employees' Pension Plan, was filed in the U.S. District Court for the Southern District of Illinois against the Solutia Employees' Pension Plan (the "Plan") by a class of participants in the Plan who allege that the method of calculating their benefits under the Plan was unlawful. Specifically, the Davis plaintiffs allege that the Plan violated ERISA by reducing their accrued benefit as a result of the attainment of a certain age, reducing their rate of benefit accrual because of the attainment of a certain age, computing benefits in an unlawful method and, finally, by "backloading" benefits resulting in accruals occurring slowly over time so that very little of the accrued benefit is vested prior to the attainment of age 65. None of the Debtors has been named as a defendant in this case. ITEM 5. OTHER INFORMATION On October 19, 2005, Solutia Inc. ("Solutia") received Bankruptcy Court approval of Solutia's entry into an Asset Purchase Agreement, dated as of September 1, 2005 (the "Purchase Agreement"), among Solutia, a Delaware corporation, FMC Corporation, a Delaware Corporation ("FMC"), Astaris LLC, a Delaware limited liability company ("Astaris"), Israel Chemicals Limited, an Israeli corporation ("ICL") and ICL Performance Products Holding, Inc., a Delaware corporation and wholly-owned subsidiary of ICL ("Buyer"), for the sale, assignment and transfer by Astaris to Buyer, or certain other affiliates of ICL, of substantially all of the operating assets, other than certain excluded assets, used in the business of Astaris and for the assumption by Buyer of specified liabilities of Astaris. The sale pursuant to the Purchase Agreement (the "Closing") was completed on November 4, 2005. In connection with the Closing, Solutia entered into a long-term toll manufacturing agreement, dated November 4, 2005 (the "Toll Agreement"), between Solutia and Phosphorus Derivatives Inc., an affiliate of ICL. At the time Astaris was formed in 2000, Solutia contributed to Astaris a facility at its W.G. Krummrich plant in Sauget, Illinois that manufactures P2 S5 (the "Sauget P2 S5 Facility"). Since the formation of Astaris, Astaris has owned and Solutia has operated the Sauget P2 S5 Facility. The Sauget P2 S5 Facility is excluded from the assets being sold to Buyer under the Purchase Agreement and was transferred from Astaris back to Solutia effective upon closing of the Purchase Agreement, as provided under the Owners Agreement. Under the Toll Agreement, Solutia will continue to manufacture, package and supply P2 S5 exclusively for Buyer at the Sauget P2 S5 Facility from raw materials and packaging provided by Buyer. The Toll Agreement provides for economic terms that are no less favorable to Solutia than those under the lease and operating agreement between Solutia and Astaris pursuant to which Solutia previously operated the Sauget P2 S5 Facility exclusively for Astaris. The description of the Toll Agreement contained herein sets forth a brief summary of certain terms of the Toll Agreement that may be material to Solutia. However, this description does not purport to be complete and is qualified in its entirety by reference to the specific terms of the Toll Agreement. A copy of the Toll Agreement is attached hereto as Exhibit 10.2. ITEM 6. EXHIBITS See the Exhibit Index at page 52, of this report. 50 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOLUTIA INC. -------------------------- (Registrant) /s/ TIMOTHY J. SPIHLMAN ----------------------------------- (Vice President and Controller) (On behalf of the Registrant and as Principal Accounting Officer) Date: November 9, 2005 51 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.1 Asset Purchase Agreement by and among FMC Corporation, Solutia Inc., Astaris LLC, Israeli Chemicals Limited and ICL Performance Products Holding Inc. dated as of September 1, 2005 10.2 Toll Manufacturing Agreement by and between Solutia Inc. and Phosphorus Derivatives Inc. dated November 4, 2005 10.3 Owners Agreement by and between Solutia Inc. and FMC Corporation dated as of September 1, 2005 10.4 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 to Solutia's Form 8-K filed July 27, 2005) 10.5 Agreement by and between Solutia Inc. and James R. Voss, dated as of August 1, 2005 (incorporated by reference to Exhibit 10.1 to Solutia's Form 10-Q for the quarter ended June 30, 2005) 10.6 Agreement by and between Solutia Inc. and Jonathon P. Wright, dated as of August 1, 2005 (incorporated by reference to Exhibit 10.2 to Solutia's Form 10-Q for the quarter ended June 30, 2005) 11 Omitted--Inapplicable; see "Condensed Consolidated Statement of Operations" on page 1 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 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 52