10-Q

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 June 30, 2010

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 incorporation or organization)	(I.R.S. Employer Identification No.)

575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI	63166-6760
(Address of principal executive offices)	(Zip Code)

(314) 674-1000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   X      No

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

Large Accelerated Filer   X   Accelerated Filer Non-Accelerated Filer Smaller Reporting Company ­___ (Do not check if a smaller reporting company).

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by Court.  Yes  X    No___

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at June 30, 2010
Common Stock, $0.01 par value		121,981,790

PART I. FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

SOLUTIA INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Dollars in millions, except per share amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Net Sales	$	518		$	410		$	984		$	749
Cost of goods sold		396			288			716			546
Gross Profit		122			122			268			203
Selling, general and administrative expenses		67			54			133			104
Research, development and other operating expenses, net		3			2			7			6
Operating Income		52			66			128			93
Interest expense		(36	)		(22	)		(74	)		(59	)
Other income (loss), net		10			(1	)		13			(2	)
Loss on debt extinguishment		--			(8	)		(89	)		(8	)
Income (Loss) from Continuing Operations Before Income Tax Expense		26			35			(22	)		24
Income tax expense		2			10			11			3
Income (Loss) from Continuing Operations		24			25			(33	)		21
Income (Loss) from Discontinued Operations, net of tax		17			(14	)		17			(169	)
Net Income (Loss)		41			11			(16	)		(148	)
Net income attributable to noncontrolling interest		--			1			1			1
Net Income (Loss) attributable to Solutia	$	41		$	10		$	(17	)	$	(149	)
Basic and Diluted Income (Loss) per Share attributable to Solutia:
Income (Loss) from Continuing Operations attributable to Solutia	$	0.20		$	0.25		$	(0.28	)	$	0.21
Income (Loss) from Discontinued Operations, net of tax		0.14			(0.15	)		0.14			(1.79	)
Net Income (Loss) attributable to Solutia	$	0.34		$	0.10		$	(0.14	)	$	(1.58	)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Dollars in millions)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2010			2009		2010			2009
Net Income (Loss)	$	41		$	11	$	(16	)	$	(148	)
Other Comprehensive Income (Loss):
Currency translation adjustments		(54	)		56		(89	)		19
Pension settlement		--			20		1			20
Unrealized gain on derivative instruments		--			--		--			4
Realized loss on derivative instruments		2			--		2			--
Amortization of net actuarial loss		1			--		2			2
Comprehensive Income (Loss)		(10	)		87		(100	)		(103	)
Comprehensive Income attributable to noncontrolling interest		--			1		1			1
Comprehensive Income (Loss) attributable to Solutia	$	(10	)	$	86	$	(101	)	$	(104	)

See accompanying Notes to the Consolidated Financial Statements

1

  SOLUTIA INC.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Dollars in millions, except per share amounts)

(Unaudited)

	June 30, 2010			December 31, 2009
ASSETS
Current Assets:
Cash and cash equivalents	$	127		$	243
Trade receivables, net of allowances of $3 in 2010 and $2 in 2009		286			268
Miscellaneous receivables		69			82
Inventories		283			257
Prepaid expenses and other assets		21			37
Assets of discontinued operations		--			10
Total Current Assets		786			897
Net Property, Plant and Equipment		864			919
Goodwill		722			511
Net Identified Intangible Assets		928			803
Other Assets		105			136
Total Assets	$	3,405		$	3,266
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	176		$	169
Accrued liabilities		256			206
Short-term debt, including current portion of long-term debt		8			28
Liabilities of discontinued operations		3			50
Total Current Liabilities		443			453
Long-Term Debt		1,534			1,264
Postretirement Liabilities		345			411
Environmental Remediation Liabilities		252			260
Deferred Tax Liabilities		202			179
Other Liabilities		121			99
Commitments and Contingencies (Note 8)
Shareholders’ Equity:
Common stock at $0.01 par value; (500,000,000 shares authorized, 122,529,368 and 121,869,293 shares issued in 2010 and 2009, respectively)		1			1
Additional contributed capital		1,621			1,612
Treasury shares, at cost (547,578 in 2010 and 430,203 in 2009)		(3	)		(2	)
Accumulated other comprehensive loss		(321	)		(237	)
Accumulated deficit		(798	)		(781	)
Total Shareholders’ Equity attributable to Solutia		500			593
Equity attributable to noncontrolling interest		8			7
Total Shareholders’ Equity		508			600
Total Liabilities and Shareholders’ Equity	$	3,405		$	3,266

See accompanying Notes to the Consolidated Financial Statements.

2

SOLUTIA INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in millions)

(Unaudited)

	Six Months Ended June 30,
	2010			2009
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES:
Net loss	$	(16	)	$	(148	)
Adjustments to reconcile net loss to net cash provided by operations:
(Income) Loss from discontinued operations, net of tax		(17	)		169
Depreciation and amortization		55			51
Pension obligation related expense less than contributions		(57	)		(11	)
Other postretirement benefit obligation related expense less than contributions		(4	)		(5	)
Amortization of deferred debt issuance costs and debt discount		5			10
Deferred income taxes		(35	)		(9	)
Other charges:
Non-cash loss on deferred debt issuance cost and debt discount write-off		80			8
Other charges, including restructuring expenses		59			1
Changes in assets and liabilities:
Income taxes payable		10			3
Trade receivables		(6	)		(5	)
Inventories		(14	)		56
Accounts payable		(6	)		(21	)
Environmental remediation liabilities		(8	)		(8	)
Restricted cash for environmental remediation and other legacy payments		--			10
Other assets and liabilities		55			(12	)
Cash Provided by Operations – Continuing Operations		101			89
Cash Provided by (Used in) Operations – Discontinued Operations		(18	)		59
Cash Provided by Operations		83			148
INVESTING ACTIVITIES:
Property, plant and equipment purchases		(14	)		(23	)
Acquisition payments		(371	)		(1	)
Property disposals		--			1
Cash Used in Investing Activities – Continuing Operations		(385	)		(23	)
Cash Provided by (Used in) Investing Activities – Discontinued Operations		(2	)		21
Cash Used in Investing Activities		(387	)		(2	)
FINANCING ACTIVITIES:
Net change in lines of credit		--			(14	)
Proceeds from long-term debt obligations		1,144			70
Payment of long-term debt obligations		(878	)		(80	)
Net change in long-term revolving credit facilities		--			(181	)
Proceeds from stock issuance		--			119
Proceeds from short-term debt obligations		--			11
Payment of short-term debt obligations		(16	)		(13	)
Debt issuance costs		(27	)		(4	)
Purchase of treasury shares		(1	)		(1	)
Other, net		(9	)		(2	)
Cash Provided by (Used in) Financing Activities		213			(95	)
Effect of Exchange Rate Changes on Cash		(25	)		--
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(116	)		51
CASH AND CASH EQUIVALENTS:
Beginning of period		243			32
End of period	$	127		$	83
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest	$	48		$	61
Cash payments for income taxes, net of refunds	$	19		$	3
Non-Cash Investing Activities:
Capital expenditures included in accounts payable	$	4		$	1

See accompanying Notes to the Consolidated Financial Statements.

3

SOLUTIA INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Dollars in millions)

	Equity attributable to Solutia
	Common Stock		Additional Contributed Capital		Treasury Stock			Accumulated Other Comprehensive Loss			Accumulated Deficit			Equity Attributable to Noncontrolling Interest			Total Shareholders’ Equity
Beginning Balance – January 1, 2009	$	1	$	1,474	$	--		$	(286	)	$	(668	)	$	8		$	529
Comprehensive income:
Net loss		--		--		--			--			(159	)		--			(159	)
Accumulated currency adjustments		--		--		--			(37	)		--			--			(37	)
Unrealized gain on derivative instruments		--		--		--			4			--			--			4
Amortization of net actuarial loss		--		--		--			2			--			--			2
Dividends attributable to noncontrolling interest		--		--		--			--			--			(2	)		(2	)
Treasury stock purchases		--		--		(1	)		--			--			--			(1	)
Share-based compensation expense		--		6		--			--			--			--			6
Ending Balance – March 31, 2009		1		1,480		(1	)		(317	)		(827	)		6			342
Comprehensive income:
Net income		--		--		--			--			10			1			11
Accumulated currency adjustments		--		--		--			56			--			--			56
Pension settlement		--		--		--			20			--			--			20
Issuance of common stock		--		119		--			--			--			--			119
Treasury stock purchases		--		--		(1	)		--			--			--			(1	)
Share-based compensation expense		--		5		--			--			--			--			5
Ending Balance – June 30, 2009	$	1	$	1,604	$	(2	)	$	(241	)	$	(817	)	$	7		$	552
Beginning Balance – January 1, 2010	$	1	$	1,612	$	(2	)	$	(237	)	$	(781	)	$	7		$	600
Comprehensive income:
Net loss		--		--		--			--			(58	)		1			(57	)
Accumulated currency adjustments		--		--		--			(35	)		--			--			(35	)
Amortization of net actuarial loss		--		--		--			1			--			--			1
Pension settlement charge		--		--		--			1			--			--			1
Treasury stock purchases		--		--		(1	)		--			--			--			(1	)
Share-based compensation expense		--		4		--			--			--			--			4
Ending Balance – March 31, 2010		1		1,616		(3	)		(270	)		(839	)		8			513
Comprehensive income:
Net income		--		--		--			--			41			--			41
Accumulated currency adjustments		--		--		--			(54	)		--			--			(54	)
Realized loss on derivative instruments		--		--		--			2			--			--			2
Amortization of net actuarial loss		--		--		--			1			--			--			1
Share-based compensation expense		--		5		--			--			--			--			5
Ending Balance – June 30, 2010	$	1	$	1,621	$	(3	)	$	(321	)	$	(798	)	$	8		$	508

See accompanying Notes to the Consolidated Financial Statements.

4

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

1.  Basis of Presentation and Accounting Policies

Basis of Presentation

Unless the context requires otherwise, the terms “Solutia”, “Company”, “we”, and “our” in this report refer to Solutia Inc. and its subsidiaries. The accompanying consolidated financial statements have not been audited but have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  Therefore, this Report on Form 10-Q should be read in conjunction with Solutia’s Report on Form 10-K for the fiscal year ended December 31, 2009.  ; In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported.  Financial information for the first six months of fiscal year 2010 should not be annualized because of the seasonality of our business.

Reclassifications

We reclassified $8 for the three and six months ended June 30, 2009 from interest expense to loss on debt extinguishment to conform to the 2010 presentation.  The reclassification had no impact to reported net income (loss) for the respective periods.

Accounting Policies

Inventory Valuation

Inventories are stated at cost or market, whichever is less, with cost being determined using standards, which approximate actual cost.  Variances, exclusive of unusual volume and operating performance, are capitalized into inventory when material. Standard cost includes direct labor and raw materials, and manufacturing overhead based on normal capacity.  Effective January 1, 2010, the cost of all consolidated inventories is determined using the FIFO method.  For further detail, see Note 5 – Detail of Certain Balance Sheet Accounts.

2.  Acquisitions and Divestitures

Acquisitions

On April 30, 2010, Solutia purchased 100% of the shares of Novomatrix Pte. Ltd. (“Novomatrix”) for $73, subject to a working capital adjustment (“Novomatrix Acquisition”). Novomatrix is a leader in branding, marketing, and distributing performance window films catering to the premium segment in the automotive and architectural markets.  The Novomatrix Acquisition allows us to support our growth strategy for our Performance Films reporting segment by expanding our global footprint into key emerging regions through Novomatrix’s well-established presence in Southeast Asia and the Middle East.

On June 1, 2010, Solutia purchased 100% of the shares of Etimex Solar GmbH (“Vistasolar”) for $294 and $3 of incremental working capital, which is subject to a final working capital adjustment (“Vistasolar Acquisition”).  Vistasolar is a leading supplier of ethylene vinyl acetate (“EVA”) encapsulants to the photovoltaic market which enables us to expand our Advanced Interlayers product portfolio to supply each of the dominant photovoltaic encapsulant technologies.

5

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

The Novomatrix Acquisition and Vistasolar Acquisition were accounted for as business combinations, and accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair value.  The purchase price allocations for the second quarter 2010 are subject to adjustments, principally related to the working capital true-up mechanism.  Possible other adjustments to recorded fair value may include those relating to: (i) completion of valuation reports associated with fixed assets and identified intangible assets, (ii) deferred tax assets and liabilities and (iii) adjustments to the amount of recorded goodwill. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of both acquisitions.

	Novomatrix		Vistasolar
	April 30, 2010		June 1, 2010
Assets:
Trade receivables	$	2	$	10
Miscellaneous receivables		1		--
Inventories		10		3
Property, plant and equipment		--		16
Identified intangible assets		50		119
Goodwill		24		187
Total assets acquired	$	87	$	335
Liabilities:
Accounts payable	$	4	$	2
Accrued liabilities		2		1
Postretirement liabilities		--		1
Deferred tax liabilities		8		34
Total liabilities assumed	$	14	$	38

Goodwill resulting from both acquisitions is not deductible for tax purposes. See Note 4 – Goodwill and Other Intangible Assets for further information, including allocation of goodwill by segment.  Goodwill largely consists of expected growth synergies through the application of each company’s innovative technologies and expansion of distribution channels in emerging markets in addition to cost synergies resulting from manufacturing and supply chain work process improvements.

The following table presents the weighted average life in years and the gross carrying value of the identified intangible assets included in net identified intangible assets within the Consolidated Statement of Financial Position on the date of acquisition for the Novomatrix Acquisition and Vistasolar Acquisition:

6

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

	Novomatrix				Vistasolar
	April 30, 2010				June 1, 2010
	Weighted Average Life in Years		Carrying Value		Weighted Average Life in Years		Carrying Value
Technology		--	$	--		20	$	25
Customer relationships		17		29		25		81
Other		5		1		3		5
Trademarks		N/A		20		N/A		8
Total identified intangible assets		17	$	50		23	$	119
Total weighted average life in years		22

Effective May 1, 2010 and June 1, 2010, results from the operations of Novomatrix and Vistasolar, respectively, have been included in our Consolidated Statement of Operations.  We have incurred $3 and $7 of acquisition related costs, including legal and accounting fees related to both acquisitions, for the three and six months ended June 30, 2010, respectively.  These costs were recorded in selling, general and administrative expenses.  The following table shows the results of operations for both acquisitions that were included in our Consolidated Statement of Operations since the date of acquisition:

	Three and Six Months Ended June 30, 2010
	Novomatrix		Vistasolar
Net sales	$	7	$	7
Net income	$	--	$	2
Net income per basic and dilutive share	$	--	$	0.02

The following pro forma financial information presents the combined results of operations of Solutia, as if the Novomatrix Acquisition and Vistasolar Acquisition had occurred at the beginning of the periods presented.  The pro forma results below are not necessarily indicative of what actually would have occurred had the acquisitions been in effect for the periods presented and should not be taken as representation of our future consolidated results of operations.  Pro forma results were as follows:

	Three Months Ended  June 30,				Six Months Ended June 30,
	2010		2009		2010			2009
Net sales	$	539	$	430	$	1,039		$	786
Net income (loss)	$	47	$	10	$	(5	)	$	(151	)
Net income (loss) per basic and dilutive share	$	0.39	$	0.10	$	(0.04	)	$	(1.60	)
Net income (loss) attributable to Solutia	$	47	$	9	$	(6	)	$	(152	)
Net income (loss) attributable to Solutia per basic and dilutive share	$	0.39	$	0.09	$	(0.05	)	$	(1.61	)

7

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Divestitures

On June 1, 2009, we sold substantially all the assets and certain liabilities, including environmental remediation liabilities and pension liabilities of active employees, of our Integrated Nylon business to S.K. Capital Partners II, L.P. (the “Buyer”) resulting in the realization of a loss of $76, which was recorded in income (loss) from discontinued operations for the six months ended June 30, 2009.  On April 20, 2010, we entered into a settlement agreement that resolved all outstanding matters with Lyondell Chemical Company (“Lyondell”), a guest that operated at the Integrated Nylon Alvin, Texas plant, in exchange for payment by us of $17.  Separately, we entered into an agreement with the Bu yer whereby our liability for indirect residual costs at the plant is settled in exchange for a payment by us of $4.  During 2009, we accrued for our estimate of such settlements.  Each settlement became effective upon Lyondell’s emergence from bankruptcy protection on April 30, 2010.  Based on the terms of the settlements, we recognized a gain of $17 during the second quarter 2010 in income (loss) from discontinued operations.  Of the total $21 in settlements, we paid $19 in the second quarter 2010 with the remaining $2 to be paid in the second half of 2010.

A summary of the net sales and income (loss) from discontinued operations related to our Integrated Nylon  business is as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2010		2009			2010		2009
Integrated Nylon:
Operating results:
Net sales	$	--	$	162		$	--	$	370
Income (Loss) before income taxes	$	17	$	(13	)	$	17	$	(187	)
Income tax benefit		--		--			--		(17	)
Income (Loss) from discontinued operations, net of tax	$	17	$	(13	)	$	17	$	(170	)

The carrying amounts of all assets and liabilities associated with our Integrated Nylon business have been classified as current in the Consolidated Statement of Financial Position and consist of the following:

	June 30, 2010		December 31, 2009
Assets:
Miscellaneous receivables	$	--	$	10
Assets of discontinued operations	$	--	$	10
Liabilities:
Accounts payable	$	--	$	29
Accrued liabilities		3		21
Liabilities of discontinued operations	$	3	$	50

The 2009 operating results of our Integrated Nylon business reflect adjustments to our interest expense associated with debt which would be repaid using anticipated sales proceeds which were not previously allocated to the results of this business.  Conversely, certain corporate expenses are excluded from the operating results which had previously been allocated to Integrated Nylon.

On January 31, 2003, we sold the resins, additives and adhesives business to UCB S.A.  During the six months ended June 30, 2009, changes related to tax audits from 2000 through 2004 for our 100% owned subsidiary, Solutia Deutschland GmbH, resulted in a reduction in previously unrecognized tax benefits of $1.  Accordingly, an income tax benefit equal to this amount was recognized in income (loss) from discontinued operations.

3.  Share-Based Compensation

On April 21, 2010, at our annual meeting of stockholders, our stockholders approved amendments to our 2007 Management Long-Term Incentive Plan (the “2007 Management Plan”).  The amendments, among other things, increase the number of shares reserved for issuance under the 2007 Management Plan by 3,640,000 shares, to a total amount of 10,840,000 shares.

8

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Stock Options

We granted options to purchase a total of 987,374 shares of common stock to eligible employees under our 2007 Management Plan during the six months ended June 30, 2010.  We did not grant any options under our 2007 Non-Employee Director Stock Compensation Plan (“2007 Director Plan”) during the six months ended June 30, 2010.  The options granted (i) have an exercise price of not less than 100 percent of the fair market value of the common stock on the grant date, (ii) substantially all become exercisable in four equal installments on the first, second, third and fourth anniversary of the grant date, subject to the employee’s continued employment and (iii) expire on the tenth anniversary of the grant date.  We did not grant any options to purchase shares of common stoc k under the 2007 Management Plan or 2007 Director Plan during the six months ended June 30, 2009.

The fair value of stock options is determined at the grant date using a Black-Scholes model, which requires us to make several assumptions including risk-free interest rate, expected dividends and volatility.  The risk-free rate is based on the U.S. Treasury yield curve in effect for the expected term of the options at the time of grant.  The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to do so.  Our historical volatility data and employee stock option exercise patterns were not considered in determining the volatility data and expected life assumptions.  The volatility assumptions were based on (i) historical volatilities of the stock of comparable chemical companies whose shares are traded using daily sto ck price returns equivalent to the expected term of the options and (ii) implied volatility.  The expected life of an option was determined based on a simplified assumption that the option will be exercised evenly from the time it becomes exercisable to expiration.

The weighted average fair value of options granted during the six months ended June 30, 2010 was determined based on the following weighted average assumptions:

	June 30, 2010
Expected volatility		37.10	%
Expected term (in years)		6.3
Risk-free rate		3.19	%
Weighted average grant date fair value	$	7.13

A summary of stock option information as of June 30, 2010 is as follows:

	Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value (a)
Vested or Expected to Vest at June 30, 2010		2,661,209	$	17.13		8.4	$	--
Exercisable at June 30, 2010		1,214,682	$	17.24		7.7	$	--

(a) Intrinsic value for stock options is calculated based on the difference between the exercise price of the underlying awards and the quoted market price of our common stock as of the reporting date. If the exercise price of the underlying awards is higher than the quoted market price of our common stock as of the reporting date, the intrinsic value of the award is $0.

During the three and six months ended June 30, 2010, we recognized $1 and $2 of compensation expense related to our stock options, respectively.  For the three and six months ended June 30, 2009, we recognized $2 and $4 of compensation expense related to our stock options, respectively, of which $1 was allocated to discontinued operations.  Pre-tax unrecognized compensation expense for stock options, net of estimated forfeitures, was $8 as of June 30, 2010 which will be recognized as expense over a remaining weighted average period of 1.9 years.

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SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Restricted Stock Awards

We granted 608,940 shares of restricted stock awards with a weighted average grant date fair value of $18.91 per share to certain employees under our 2007 Management Plan during the six months ended June 30, 2010.  Half of the 2007 Management Plan shares granted during the six months ended June 30, 2010 vest upon completion of a service condition and the remaining half of the shares vest based upon the attainment of certain performance and market conditions (“Performance Shares”).  The service condition shares vest 100 percent in April 2014 and the Performance Shares vest in April 2013 if attainment of the performance and market conditions is achieved. The actual vesting of the Performance Shares could rang e from zero to 175 percent of the targeted number of shares depending upon actual performance.  We did not grant any restricted stock awards under the 2007 Management Plan during the six months ended June 30, 2009.

We granted 36,447 shares of restricted stock awards as initial or annual equity retainers with a weighted-average grant date fair value of $16.95 per share to our non-employee directors under the 2007 Director Plan during the six months ended June 30, 2010.  Included in this grant are 6,227 shares, representing an initial equity retainer, that vests in three equal installments on the anniversary of the grant.  The balance of the shares, representing annual equity retainers, vest in three equal installments, with the first installment vesting as of the date of the grant and the remaining vesting equally on the first and second anniversary of the grant date.  We did not grant any restricted stock awards under t he 2007 Director Plan during the six months ended June 30, 2009.

During the three and six months ended June 30, 2010, we recognized $4 and $7 of compensation expense, respectively, related to our restricted stock awards.  During the three and six months ended June 30, 2009, we recognized $3 and $7 of compensation expense, respectively, related to our restricted stock awards, of which $1 was allocated to discontinued operations.  Pre-tax unrecognized compensation expense for restricted stock awards, net of estimated forfeitures, was $24 as of June 30, 2010 which will be recognized as expense over a remaining weighted average period of 2.1 years.

4.  Goodwill and Other Intangible Assets

Goodwill

Goodwill by reportable segment is as follows:

	Advanced Interlayers		Performance Films		Technical Specialties		Total
Balance at December 31, 2009	$	205	$	159	$	147	$	511
Acquisitions		187		24		--		211
Balance at June 30, 2010	$	392	$	183	$	147	$	722

The goodwill recognized in the Advanced Interlayers and Performance Films reportable segments relate to the Vistasolar Acquisition and Novomatrix Acquisition, respectively.

Identified Intangible Assets

Identified intangible assets are summarized in aggregate as follows:

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SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

	June 30, 2010								December 31, 2009
	Estimated Useful Life in Years	Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Estimated Useful Life in Years	Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Amortizable intangible assets:
Customer relationships	13 to 27	$	590	$	(43	)	$	547	23 to 27	$	491	$	(34	)	$	457
Technology	5 to 26		217		(23	)		194	5 to 26		202		(19	)		183
Trade names	25		12		(1	)		11	25		13		(1	)		12
Patents	13		4		(1	)		3	13		5		(1	)		4
Other	3 to 5		6		--			6	--		--		--			--
Non amortizable intangible assets:
Trademarks			167		--			167			147		--			147
Total identified intangible assets		$	996	$	(68	)	$	928		$	858	$	(55	)	$	803

Amortization expense and its allocation to cost of goods sold and selling, general and administrative expenses in the Consolidated Statement of Operations follow:

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Cost of goods sold	$	3	$	3	$	5	$	5
Selling, general and administrative expenses		5		5		10		10
Total	$	8	$	8	$	15	$	15

We expect amortization expense for intangible assets to total approximately $34, $38, $38, $36 and $36 for the years ending December 31, 2010, 2011, 2012, 2013 and 2014, respectively.

5.  Detail of Certain Balance Sheet Accounts

Components of inventories were as follows:

Inventories	June 30, 2010		December 31, 2009
Finished goods	$	170	$	138
Goods in process		41		47
Raw materials and supplies		72		71
Inventories, at FIFO cost	$	283		256
Excess of LIFO over FIFO cost				1
Total Inventories			$	257

On January 1, 2010 we changed our method of accounting for inventories in the United States, excluding supplies, from determining cost using the LIFO method to determining cost using the FIFO method.  All of our other operations will continue to be valued at cost, determined by the FIFO method.  We believe this change is preferable as the FIFO method better reflects the current value of inventories on the Consolidated Statement of Financial Position.  Furthermore, the application of the FIFO method provides a uniform costing method across our global operations.  Prior financial statements have not been retroactively adjusted due to immateriality. The cumulative effect of the change in accounting principle of $1 was recorded as an increase to cost of goods sold as of January 1, 2010.

Components of property, plant and equipment were as follows:

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SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Property, Plant and Equipment	June 30, 2010			December 31, 2009
Land	$	33		$	33
Leasehold improvements		9			10
Buildings		201			211
Machinery and equipment		752			758
Construction in progress		25			35
Total property, plant and equipment		1,020			1,047
Less accumulated depreciation		(156	)		(128	)
Net Property, Plant and Equipment	$	864		$	919

Components of accrued liabilities were as follows:

Accrued Liabilities	June 30, 2010		December 31, 2009
Wages and benefits	$	49	$	24
Foreign currency and interest rate hedge agreements		11		7
Restructuring reserves		25		13
Environmental remediation liabilities		31		31
Accrued income taxes payable		26		19
Accrued selling expenses		15		20
Accrued interest		15		8
Other		84		84
Total Accrued Liabilities	$	256	$	206

6.  Income Taxes

Income Tax Expense

We recorded net income tax expense on continuing operations of $2 and $11 for the three and six months ended June 30, 2010, respectively, and net income tax expense on continuing operations of $10 and $3 for the three and six months ended June 30, 2009, respectively.  Our income tax expense or benefit is affected by changes in unrecognized tax benefits and the mix of income and losses in the tax jurisdictions in which we operate.  The net income tax expense for the three months ended June 30, 2010 included a $6 reduction in a valuation allowance of an ex-U.S. entity.  Included in the net income tax expense for the six months ended June 30, 2009 is a tax benefit of $10 recognized in this period due to developmen ts in relevant tax case law.  For both of the periods presented, we recorded income tax expense on ex-U.S. earnings but a full valuation allowance against the tax benefit on losses experienced in the U.S.

Unrecognized Tax Benefits

The total amount of unrecognized tax benefits, inclusive of interest and penalties, at June 30, 2010 and December 31, 2009 was $147 and $155, respectively.  Included in the balance at June 30, 2010 and December 31, 2009 were $53 and $54, respectively, of unrecognized tax benefits that, if recognized, would impact the effective tax rate.  The decrease in the amounts is mainly the result of the closure of tax audits, statute of limitation expirations and the effect of currency exchange rate fluctuations, offset by tax positions with respect to events in the current year.  

We file income tax returns in the U.S. and various states and foreign jurisdictions.  With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2002.  It is reasonably possible that within the next 12 months our unrecognized tax benefits will decrease by a range of $0 to $17 due to the resolution of federal, state and foreign examinations and appeals, and the expiration of various statutes of limitation resulting in a reduction in income tax expense.

12

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

7.  Restructuring Reserves

In an effort to maintain competitiveness across our businesses and the geographic areas in which we operate and to enhance the efficiency and cost effectiveness of our support operations, we periodically initiate certain restructuring activities which result in charges for costs associated with exit or disposal activities, severance and/or impairment of long-lived assets.  A summary of these activities for the periods presented are as follows:

Primary Accelerators Closure

On April 22, 2010, due to overcapacity within the industry, a disadvantaged cost position and increasing pressure from Far Eastern producers, we made the decision to exit our Primary Accelerators business and to cease manufacturing of SANTOCURE® primary accelerator products at the Monsanto Company (“Monsanto”) facility in Antwerp, Belgium, where we currently operate as a guest, at a date to be determined during the second half of 2010.  Our decision is consistent with our strategy of focusing on businesses that are leaders in their global markets and that have sustainable competitive advantages.  Upon cessation of manufacturing of these products, we will retrospectively report the results of this business, including exit-related charges, as discontinued operations.

We expect, based upon current information, the exit from the Primary Accelerators business will result in estimated pre-tax charges to income of approximately $40 to $50 within our Technical Specialties reportable segment throughout the closure process over the next two years.  Estimates of the total cost we expect to incur for each major type of cost associated with the exit are as follows: (i) $32 to $40 for contract termination payments in accordance with the operating agreement related to severance and retraining costs for third party employees and indirect residual costs; (ii) $6 for impairment o f long-lived assets using a Level 3 fair value measurement as defined by U.S. GAAP under the fair value hierarchy and (iii) $2 to $4 for severance of our employees and other costs.  There can be no assurance as to what the ultimate charges will be.  A summary of the charges associated with this project during the three and six months ended June 30, 2010 as recorded in cost of goods sold is as follows:

	Contract Termination Payments		Impairment of Long-Lived Assets		Total
Three and Six Months Ended June 30, 2010:
Charges taken	$	32	$	6	$	38

Cologne Facility Closure

In the fourth quarter 2009, we announced the sale of our customer list and technology related to select products in our PERKACIT® ultra accelerators product line within our Technical Specialties reportable segment (“Thiurams Sale”).  As part of the Thiurams Sale, we entered into an agreement with the buyer to produce the select products through March 31, 2010 (“Tolling Agreement”) for $4.  At the end of the Tolling Agreement, we ceased manufacturing at the Akzo Nobel facility in Cologne, Germany (“Cologne Facility”) where we operated as a guest with expectation of a complete exit of this facility by the third quarter of 2010.  A summary of the charges and changes in estimate associated with this p roject during the three and six months ended June 30, 2010 and cumulative charges through June 30, 2010 are as follows:

	Contract Termination Payments		Employment Reductions		Other Restructuring Costs		Total
Three Months Ended June 30, 2010:
Cost of goods sold (a)	$	1	$	1	$	1	$	3
Six Months Ended and Cumulative through June 30, 2010:
Cost of goods sold	$	2	$	2	$	1	$	5
Selling, general and administrative expenses		--		1		--		1
Total	$	2	$	3	$	1	$	6

(a) The $1 charge for contract termination payments represents a change in estimate due to final negotiations with Akzo Nobel during the three months ended June 30, 2010.

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SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

To complete the closure process, based on current information, we expect to incur charges of approximately $2 as an increase to cost of goods sold for other costs including demolition.  There can be no assurance as to what the ultimate charges will be.
 

General Corporate

In the fourth quarter of 2008, we initiated a general corporate restructuring targeted to increase the efficiency and cost effectiveness of our support operations.  Throughout 2009, this project expanded in scope to include a reduction in operational personnel in order to more appropriately match our organization with current production levels.  A summary of the employee reduction charges associated with this project during the three and six months ended June 30, 2010 and cumulative charges through June 30, 2010 are as follows:

	Advanced Interlayers		Performance Films		Technical Specialties		Unallocated and Other		Total
Three Months Ended June 30, 2010:
Selling, general and administrative expenses	$	--	$	--	$	--	$	1	$	1
Six Months Ended June 30, 2010:
Cost of goods sold	$	--	$	1	$	--	$	--	$	1
Selling, general and administrative expenses		--		--		1		1		2
Total	$	--	$	1	$	1	$	1	$	3
Cumulative through June 30, 2010:
Cost of goods sold	$	3	$	2	$	1	$	1	$	7
Selling, general and administrative expenses		12		3		3		14		32
Research, development and other operating expenses, net		1		--		--		--		1
Total	$	16	$	5	$	4	$	15	$	40

In addition to the cumulative employee reduction charges recorded in selling, general and administrative expenses, we incurred $1 of charges for future contractual payments related to the relocation of certain regional support operations from Singapore to Shanghai, China.  We do not expect to incur any additional restructuring charges for this project.

Ruabon Facility Closure

Due to overcapacity within the industry, a disadvantaged cost position and increasing pressure from Far Eastern producers, we ceased the manufacturing of certain rubber chemicals at our facility in Ruabon, United Kingdom (“Ruabon Facility”) in the third and fourth quarters of 2008 with an expected final closure of the plant in 2014.  A summary of the charges associated with this project within our Technical Specialties reportable segment during the three and six months ended June 30, 2010 and cumulative charges and changes in estimates through June 30, 2010 as recorded in cost of goods sold are as follows:

	Contract Termination Payments			Employment Reductions		Other Restructuring Costs		Total
Three Months Ended June 30, 2010:
Charges taken	$	--		$	--	$	1	$	1
Six Months Ended June 30, 2010:
Charges taken	$	--		$	--	$	2	$	2
Cumulative through June 30, 2010:
Charges taken	$	10		$	9	$	6	$	25
Changes in estimates (a)		(5	)		--		--		(5	)
Total	$	5		$	9	$	6	$	20

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SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

(a) We reduced the contract termination payment reserve by $5 due to a renegotiation of the lease and operating agreement with our third party operator.  The new lease and operating agreement, which is effective from September 1, 2009 through December 31, 2013, reduced the services to be provided and increased certain fees allowing the contract to provide an economic benefit.

To complete the closure process, based on current information, we expect to incur an additional $3 in charges as an increase to cost of goods sold for other restructuring costs including demolition.

Restructuring Summary

A summary of all restructuring activity during the three and six months ended June 30, 2010 is as follows:

	Contract Termination Payments			Employment Reductions			Impairment of Long-Lived Assets			Other Restructuring Costs			Total
Balance at December 31, 2009	$	2		$	15		$	--		$	--		$	17
Charges taken		1			4			--			1			6
Amounts utilized		(1	)		(7	)		--			(1	)		(9	)
Currency fluctuations		--			(1	)		--			--			(1	)
Balance at March 31, 2010		2			11			--			--			13
Charges taken		32			2			6			2			42
Amounts utilized		--			(6	)		--			(2	)		(8	)
Non-Cash reductions		--			--			(6	)		--			(6	)
Changes in estimates		1			--			--			--			1
Currency fluctuations		(1	)		--			--			--			(1	)
Balance at June 30, 2010	$	34		$	7		$	--		$	--		$	41

We expect $25 of restructuring liabilities as of June 30, 2010 to be utilized within the next twelve months.

8.  Commitments and Contingencies

Litigation

We are a party to legal proceedings, which have arisen in the ordinary course of business and involve claims for monetary damages.  As of June 30, 2010 and December 31, 2009, we accrued approximately $3 and $2, respectively, for legal costs to defend ourselves in legal matters.

Except for the potential effect of an unfavorable outcome with respect to our Legacy Tort Claims Litigation, it is our opinion that the aggregate of all claims and lawsuits will not have a material adverse impact on our consolidated financial statements.

Legacy Tort Claims Litigation

Pursuant to the Amended and Restated Settlement Agreement effective February 28, 2008, entered into by Solutia and Monsanto in connection with our emergence from Chapter 11 (the “Monsanto Settlement Agreement”), Monsanto is responsible to defend and indemnify Solutia for any Legacy Tort Claims as that term is defined in the agreement, while Solutia retains responsibility for tort claims arising out of exposure occurring after our spinoff from Pharmacia Corporation (“Pharmacia”) (the former Monsanto Company which is now a 100% owned subsidiary of Pfizer, Inc.), which occurred on September 1, 1997 (the “Solutia Spinoff”).  Solutia or its 100% owned subsidiary, Flexsys, have been named as defendants in the following actions, and have submitted the matters to Monsanto as L egacy Tort Claims.  However, to the extent these matters relate to post Solutia Spinoff exposure or such matters are not within the meaning of “Legacy Tort Claims” within the Monsanto Settlement Agreement, we would potentially be liable.

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

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SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Beginning in February 2008, Flexsys, Monsanto, Pharmacia, Akzo Nobel and another third party were named as defendants in approximately seventy-five individual lawsuits, and Solutia was named in two individual lawsuits, filed in various state court jurisdictions by residents or former residents of Putnam County, West Virginia.  The largely identical complaints allege that the residents were exposed to potentially harmful levels of dioxin particles from the Nitro facility.  Plaintiffs did not specify the amount of their alleged damages in their complaints.  In 2009, over fifty additional nearly identical complaints were filed by individual plaintiffs in the Putnam County area, which named Solutia and Flexsys as defendants.

The claims in this matter concern alleged conduct occurring while Flexsys was a joint venture of Solutia and Akzo Nobel, and any potential damages in these cases would be evenly apportioned between Solutia and Akzo Nobel.

Escambia County, Florida Litigation: In June 2008, a group of approximately fifty property owners and business owners in the Pensacola, Florida area filed a lawsuit in the Circuit Court for Escambia County, Florida against Monsanto, Pharmacia, Solutia and the plant manager at Solutia's former Pensacola plant, which was included in the sale of our Integrated Nylon business.  The lawsuit, entitled John Allen, et al. v. Monsanto Company, et al., alleges tha t the defendants are responsible for elevated levels of PCBs in the Escambia River and Escambia Bay due to past and allegedly continuing releases of PCBs from the Pensacola plant.  The plaintiffs seek: (1) damages associated with alleged decreased property values caused by the alleged contamination and (2) remediation of the alleged contamination in the waterways.  Plaintiffs did not specify the amount of their alleged damages in their complaint.  Plaintiffs have subsequently amended their complaint to add additional plaintiffs to the litigation, such that 111 property and business owners are now named as plaintiffs.

St. Clair County, Illinois and Related Litigation: In February 2009, a purported class action lawsuit was filed in the Circuit Court of St. Clair County, Illinois against Solutia, Pharmacia, Monsanto and two other unrelated defendants alleging the contamination of the plaintiff’s property from PCBs, dioxins, furans and other alleged hazardous substances emanating from the defendants’ facilities in Sauget, Illinois (including our W.G. Krummrich site in Sauget, Illinois).  The proposed class action is comprised of residents who live within a two-mile radius of the Sauget facilities.  The plai ntiffs are seeking damages for medical monitoring and the costs associated with remediation and removal of alleged contaminants from their property.  This action is one of several lawsuits (primarily filed by the same plaintiffs’ counsel) over the past year regarding alleged historical contamination from the W.G. Krummrich site.

In addition to the purported class action lawsuit, twenty additional individual lawsuits have been filed since February 2009 against the same defendants (including Solutia) comprised of claims from over one thousand individual residents of Illinois who claim they suffered illnesses and/or injuries as well as property damages as a result of the same PCB’s, dioxins, furans and other alleged hazardous substances allegedly emanating from the defendants’ facilities in Sauget.  In June 2010, a group of approximately 1,200 plaintiffs have also filed wrongful death claims in a lawsuit in St. Clair County arising out of alleged contamination from the defendants’ facilities.  Moreover, four additional individua l lawsuits comprised of claims from twelve plaintiffs have been filed between January and April 2010 in Madison County, Illinois, alleging the plaintiffs suffered illnesses resulting from exposure to benzene, PCBs, dioxins, furans and other hazardous substances.  Lastly, in June 2010, a second purported class action lawsuit was filed in the Circuit Court of St. Louis City, Missouri against the same defendants alleging the contamination of the plaintiffs’ property from PCBs, dioxins, furans and other alleged hazardous substances emanating from the defendants’ facilities in Sauget, Illinois and from our now-closed Queeny plant in St. Louis.  The plaintiffs are seeking damages for medical monitoring and the costs associated with remediation and removal of alleged contaminants from their property.  The proposed class members include residents exclusively within the state of Missouri.

16

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Upon assessment of the terms of the Monsanto Settlement Agreement and other defenses available to us, we believe the probability of an unfavorable outcome to us on the Putnam County, West Virginia, Escambia County, Florida, and St. Clair County, Illinois and related litigation against us is remote and, accordingly, we have not recorded a loss contingency.  Nonetheless, if it were subsequently determined these matters are not within the meaning of “Legacy Tort Claims,” as defined in the Monsanto Settlement Agreement, or other defenses to us were unsuccessful, it is reasonably possible we would be liable for an amount which cannot be estimated but which could have a material adverse effect on our consolidated financial statements.

Solutia Inc. Employees’ Pension Plan Litigation

Starting in October 2005, separate purported class action lawsuits were filed by current or former participants in our U.S. pension plan (“U.S. Plan”), which were ultimately consolidated in September 2006 into a single case.  The Consolidated Class Action Complaint alleged three separate causes of action against the U.S. Plan: (1) the U.S. Plan violates ERISA by terminating interest credits on prior plan accounts at the age of 55; (2) the U.S. Plan is improperly backloaded in violation of ERISA; and (3) the U.S. Plan is discriminatory on the basis of age.  In September 2007, the court dismissed the plaintiffs’ second and third claims, and by consent of the parties, certified a class action against the U.S. Plan only with res pect to plaintiffs’ claim that the U.S. Plan violates ERISA by allegedly terminating interest credits on prior plan accounts at the age of 55.  On June 11, 2009, the United States District Court for the Southern District of Illinois entered a summary judgment in favor of the U.S. Plan on the sole remaining claim against the U.S. Plan.  The district court entered its final appealable judgment in the case on September 29, 2009, and plaintiffs have appealed the decision to the Seventh Circuit Court of Appeals.  The Seventh Circuit held oral argument on the appeal in April 2010, and a decision is pending.

Medicare Reimbursement Litigation

In December 2009, the Department of Justice (“DOJ”), on behalf of the United States government, filed suit in the United States District Court, Northern District of Alabama (in a case captioned United States of America v. Stricker, et al.), against Solutia, Monsanto, Pharmacia and the attorneys and law firms who represented the plaintiffs in Abernathy v. Solutia Inc., et al. (“Abernathy”) lawsuit arising out of PCB contamination in Anniston, Alabama.   The DOJ alleges the defendants failed to reimburse Medicare for medical expenses paid to Abernathy se ttlement recipients who were Medicare beneficiaries.  Specifically, the DOJ claims that approximately 907 claimants who received payments for medical treatment under the Abernathy settlement were Medicare beneficiaries who received “conditional” payments from Medicare for the same treatment.  The DOJ alleges that the conditional payments were subject to reimbursement if a primary payer had responsibility to cover the treatment at issue, but no reimbursement was made to the government by any of the Abernathy participants.  The DOJ is seeking recovery of these allegedly unpaid reimbursements from the defendants who paid into the Abernathy settlement fund, as well as the plaintiffs’ counsel who represented the Medicare recipients and were responsible for the distribution of the settlement funds.& #160; The DOJ did not specify the amount of damages – either generally from the defendants or specifically from Solutia – which the government seeks in this case.

Solutia denies the allegations, and asserts that liability for such reimbursements should be the responsibility of the plaintiffs’ counsel who were actually responsible for the distribution of the settlement funds to the plaintiffs.  In February 2010, defendants filed motions, which are currently pending, to dismiss the suit.

Resolution of Tax Indemnification

During the second quarter 2010, we received a favorable settlement in a tax indemnification case related to income taxes we paid on a business for periods prior to our acquisition.  The settlement resulted in an $8 gain recorded in other income (loss), net within Unallocated and Other during the three and six months ended June 30, 2010.

17

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Environmental Liabilities

In the ordinary course of business, we are subject to numerous environmental laws and regulations covering compliance matters or imposing liability for the costs of, and damages resulting from, cleaning up sites, past spills, disposals and other releases of hazardous substances.  We have incurred, and we may in the future incur, liabilities to investigate and clean up waste or contamination at our current facilities, properties adjacent to our current facilities or facilities operated by third parties at where we may have disposed of waste or other materials.  Under some circumstances, the scope of our liability may extend to damages to natural resources for which we have accrued $2, exclusive of the balances noted below.  In almost all cases, our potential liability arising from hist orical contamination is based on operations and other events occurring at our facilities or as a result of their operation prior to the Solutia Spinoff.

Further, under terms of the Monsanto Settlement Agreement, we have agreed to share responsibility with Monsanto for the environmental remediation at certain locations outside our plant boundaries in Anniston, Alabama and Sauget, Illinois which were also incurred prior to the Solutia Spinoff (the “Shared Sites”).  Under this cost-sharing arrangement, we are responsible for the funding of environmental liabilities at the Shared Sites from February 28, 2008 (the “Effective Date”) up to a total of $325.  Thereafter, if needed, we and Monsanto will share responsibility equally.  From the Effective Date through June 30, 2010, we have made cash payments of $19 toward remediation of the S hared Sites after exhaustion of the special purpose entity funds and have accrued an additional $168 to be paid over the life of the Shared Sites remediation activity.

Reserves for environmental remediation that we believe to be probable and estimable are recorded appropriately as current and long-term liabilities in the Consolidated Statement of Financial Position.  These reserves include liabilities expected to be paid out within fifteen years.  The amounts charged to pre-tax earnings for environmental remediation and related charges are included in cost of goods sold and are summarized below:

	Total
Balance at December 31, 2009	$	291
Net charges taken		3
Amounts utilized		(7	)
Currency fluctuations		(1	)
Balance at March 31, 2010	$	286
Net charges taken		3
Amounts utilized		(6	)
Balance at June 30, 2010	$	283

	June 30, 2010		December 31, 2009
Environmental Remediation Liabilities, current	$	31	$	31
Environmental Remediation Liabilities, long-term		252		260
Total	$	283	$	291

In addition to accrued environmental liabilities, there are costs which have not met the definition of probable, and accordingly, are not recorded in the Consolidated Statement of Financial Position.  These loss contingencies are monitored regularly for a change in fact or circumstance that would require an accrual adjustment.  These matters involve significant unresolved issues, including the interpretation of applicable laws and regulations, the outcome of negotiations with regulatory authorities and alternative methods of remediation. Because of these uncertainties, the potential liability for existing environmental remediation may range up to two times the amount recorded.

Except as noted below, we believe that these matters, when ultimately resolved, which may be over an extended period of time, will not have a material adverse effect on our Consolidated Statement of Financial Position, but could have a material adverse effect on our Consolidated Statement of Operations in any given period.  Our significant sites are described in more detail below:

18

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Anniston, Alabama:  On Aug. 4, 2003, the U.S. District Court for the Northern District of Alabama approved a Revised Partial Consent Decree, pursuant to which Pharmacia and Solutia are obligated to perform, among other things, residential cleanup work and a remedial investigation/feasibility study (“RI/FS”) as a result of PCB contamination from our Anniston plant, which occurred prior to the Solutia Spinoff.  The residential cleanup is proceeding and should be completed within the next year, along with the implementation of an institutional control program to address future changes to residential properties.  Some level of remediation of non-residential properties and creek floodplains and/or sediment will be required in the future and we have accrued for this liability based upon our understanding of the level and extent of contamination in these areas, the remedial effort likely to be required by various governmental organizations and estimated costs associated with similar remediation projects. We may recover some of our investigation and remediation costs from parties, against whom we filed a cost recovery action in July 2003 but because the eventual outcome of these proceedings is uncertain, our environmental liability at June 30, 2010 does not incorporate this potential reimbursement.  State and Federal Natural Resource Damage Trustees have asserted a claim for potential natural resource damage but have yet to undertake an assessment as to the nature and extent of such damages.  As of June 30, 2010, we have accrued $112 for all environmental remediation projects in the Anniston, Alabama area which repre sents our best estimate of the final cost liability. Timing of the remediation will not be established until we complete the RI/FS, a Record of Decision is issued by the United States Environmental Protection Agency (“USEPA”), and a consent decree is negotiated and entered by the court to cover the selected remediation for each of the operable units of this site, which will take several years.

Sauget, Illinois:  A number of industrial facilities, including our W.G. Krummrich plant, have operated and disposed of waste in Sauget, Illinois.  Areas of contamination from these industrial operations, which for our W.G. Krummrich plant occurred prior to the Solutia Spinoff, have been classified as part of either the Sauget Area 1 Sites or the Sauget Area 2 Sites. We conducted a RI/FS for the Sauget Area 1 Sites under an Administrative Order on Consent issued on January 21, 1999.  Although an extensive removal action for one of the Sauget Area 1 Sites was conducted under a Unilateral Administrative Order issued on May 31, 2000, the cost and timin g of any additional required remedial actions will be established only after a Record of Decision is issued by the USEPA and a consent decree is negotiated and entered by the court to cover the selected remediation, which is expected within the next two years.  We have an agreement with two other potentially responsible parties (“PRPs”) to enter into an allocation proceeding upon issuance of the Record of Decision to resolve our respective shares of the liability for the Sauget Area 1 Sites and we are pursuing a cost recovery lawsuit against one additional PRP.  We, in coordination with 19 other PRPs, were also required to conduct a RI/FS for the Sauget Area 2 Sites under an Administrative Order on Consent issued effective November 24, 2000.  We submitted the revised RI/FS report with other PRPs based on interim allocations and have agreed, upon issuance of the Record of Decision, to participate in an allocation proceeding to fully resolve each PRPs’ share of t he liability for the investigation and remediation costs.  An interim groundwater remedy has been installed pursuant to a Unilateral Administrative Order issued on October 3, 2002.  We anticipate that the USEPA will issue a Record of Decision sometime in 2011.  Our ultimate exposure at these sites will depend on the final remedial actions to be taken and on the level of contribution from other PRPs.  In addition, several PRPs, including Solutia and Pharmacia, received in June 2009 from the U.S. Department of Interior, on behalf of various federal and state natural resource trustees, a notice of intent to perform and an invitation to cooperate in a natural resource damage assessment from the Sauget Industrial Corridor.  Our best estimate of the ultimate cost of all remedial measures that will be required at the Sauget, Illinois area sites is $69 which we have accrued as of June 30, 2010.

W. G. Krummrich Site:  We entered into a Consent Order under the U.S. Resource Conservation and Recovery Act of 1976, as amended, effective May 3, 2000, to investigate and remediate soil and groundwater contamination from our manufacturing operations at the W.G. Krummrich plant, which occurred prior to the Solutia Spinoff.  We conducted an extensive corrective measures study and a Final Decision was issued by the USEPA in February 2008 setting out the required corrective measures to be completed.  Due to the complexity of the contamination issues at this site, certain of the corrective measures will be performed in phases with the final remediation appro ach and timing for some of the corrective measures being determined only after investigation and pilot testing phases are completed.  Our best estimate of the ultimate cost of all corrective measures that will be required at the W.G. Krummrich Site is $27 which we have accrued as of June 30, 2010.

We also have accruals for remedial obligations at several of our current or former manufacturing sites which we have owned or operated since the Solutia Spinoff.  Our best estimate of the ultimate cost of all corrective measures that will be required at these sites is $75 which we have accrued as of June 30, 2010.

19

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Environmental Agency Enforcement Actions

On March 3, 2009, the USEPA issued a Notice of Violation (“NOV”), Administrative Order (“AO”) and Reporting Requirement (“RR”) to Solutia concerning alleged violations of the Clean Air Act arising out of an inspection conducted at our manufacturing facility in Springfield, Massachusetts.  The NOV describes the USEPA’s findings alleging violations of the plant’s Title V and state operating permits related to emissions of volatile organic compounds.  The AO orders Solutia to comply with its Title V permit and the National Emission Standards for Hazardous Air Pollutants, Subpart OOO (Amino/Phenolic Resins), Subpart UU (Equipment Leaks) and General Provisions.  The RR requires Solutia to submit additional information regarding certain storage vessels and associated equipment.  On March 23, 2009, Solutia met with the USEPA to confer on this NOV, AO and RR.  Submittals of the requested information under the RR were made as required.  The USEPA informed Solutia at the meeting that it had not yet made any decisions as to whether it will take enforcement action or what type of action it will take with respect to this matter and we have entered into a tolling agreement with the United States that provides the USEPA time to evaluate its case.  The amount of a potential loss, if any, is not currently estimable.

9.  Derivatives and Risk Management

Our business operations give rise to market risk exposures that result from changes in foreign currency exchange rates, interest rates and certain commodity prices.  To manage the volatility relating to these exposures, we periodically enter into various derivative transactions that enable us to alleviate the adverse effects of financial market risk.  The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged.  Our approved policies and procedures do not permit the purchase or holding of any derivative financial instruments for trading purposes.  Management of counterparty credit risk is through diversification and credit rating reviews of the firms wi th whom we transact.

Foreign Currency Exchange Rate Risk

We manufacture and sell our products in a number of countries throughout the world and, as a result, are exposed to movements in foreign currency exchange rates.  We are exposed to this risk both on an intercompany and a third-party basis.  We use foreign currency derivative instruments to manage the volatility associated with foreign currency purchases of materials and other assets and liabilities created in the normal course of business and to protect against exposure related to intercompany financing transactions.  These risks are hedged primarily through the use of forward exchange contracts and purchased options with maturities of less than 18 months.

We have chosen not to designate these instruments as hedges to allow the changes in the fair value of these instruments to largely offset the re-measurement of the underlying assets and liabilities in the Consolidated Statement of Operations. We had currency forward contracts to purchase and sell $115 of currencies as of June 30, 2010 comprised principally of the Euro, British Pound-Sterling, U.S. Dollar, Mexican Peso and Malaysian Ringgit.

Interest Rate Risk

Interest rate risk is primarily related to changes in interest expense from floating rate debt.  To limit our exposure to this risk, in 2008 we entered into interest rate swap agreements. The interest rate swap agreements have declining total notional amounts of $800 to $150 which are effective from April 2010 through February 2014.  The terms of the interest rate swap agreements require us to pay interest utilizing fixed interest rates ranging from 4.65 percent to 4.85 percent and receive interest utilizing 1-Month LIBOR, with a floor of 3.50 percent.  Through February 2009, we designated the interest rate swap agreements as cash flow hedges.  Subsequently, we discontinued hedge accounting in February 2009 and all prospective mark-to-market gains or losses are recogniz ed in interest expense in the Consolidated Statement of Operations.

20

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Commodity Price Risk

Certain raw materials and energy resources we use are subject to price volatility caused by weather, crude oil prices, supply conditions, political and economic variables and other unpredictable factors.  At the current time, we are not using derivative instruments because the volatility of these costs has been within an acceptable range.  We will deploy appropriate derivative instruments if we project or experience volatility related to the price fluctuations that are deemed unacceptable.

At June 30, 2010 and December 31, 2009, we did not have any derivatives designated as hedging instruments.  Our derivatives not designated as hedging instruments, recorded at their respective fair values at June 30, 2010 and December 31, 2009 are summarized as follows:

	June 30, 2010
	Asset Derivatives			Liability Derivatives
	Consolidated Statement of Financial Position Presentation	Fair Value		Consolidated Statement of Financial Position Presentation	Fair Value
Derivative not designated as hedging instruments:
Interest rate contracts	Miscellaneous Receivables	$	--	Accrued Liabilities	$	10
	Other Assets		--	Other Liabilities		22
Total Interest rate contracts			--			32
Foreign exchange contracts	Miscellaneous Receivables		2	Accrued Liabilities		1
Total		$	2		$	33

	December 31, 2009
	Asset Derivatives			Liability Derivatives
	Consolidated Statement of Financial Position Presentation	Fair Value		Consolidated Statement of Financial Position Presentation	Fair Value
Derivative not designated as hedging instruments:
Interest rate contracts	Miscellaneous Receivables	$	--	Accrued Liabilities	$	6
	Other Assets		--	Other Liabilities		14
Total Interest rate contracts			--			20
Foreign exchange contracts	Miscellaneous Receivables		2	Accrued Liabilities		1
Total		$	2		$	21

During the twelve months following June 30, 2010, we expect a reclassification of $8 into earnings of the $19 accumulated losses on the interest rate swaps.  For the six months ended June 30, 2009, we recognized a gain of $4 in Other Comprehensive Income for the period in which our interest rate contracts were designated as cash flow hedging instruments.

A summary of the effect of our derivative instruments on the Consolidated Statement of Operations is as follows:

		Amount of Gain (Loss) Recognized in Consolidated Statement of Operations
		Three Months Ended June 30,					Six Months Ended June 30,
Derivatives not designated as hedging instruments:	Presentation of Gain (Loss) Recognized in Consolidated Statement of Operations	2010			2009		2010			2009
Interest rate contracts	Interest expense	$	(10	)	$	9	$	(16	)	$	4
Foreign exchange contracts	Other income (loss), net		2			14		4			16
Commodity contracts	Income (Loss) from Discontinued Operations, net of tax		--			--		--			(1	)
Total		$	(8	)	$	23	$	(12	)	$	19

21

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

10.  Fair Value of Financial Instruments

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

			Fair Value Measurements at June 30, 2010
	Total		Quoted Prices in Active Markets for Identical Assets  (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Derivatives – Foreign Exchange (a)	$	2	$	--	$	2	$	--
Total	$	2	$	--	$	2	$	--
Liabilities:
Derivatives – Foreign Exchange (a)	$	1	$	--	$	1	$	--
Derivatives – Interest Rates (b)		32		--		32		--
Total	$	33	$	--	$	33	$	--

			Fair Value Measurements at December 31, 2009
	Total		Quoted Prices in Active Markets for Identical Assets  (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Derivatives – Foreign Exchange (a)	$	2	$	--	$	2	$	--
Total	$	2	$	--	$	2	$	--
Liabilities:
Derivatives – Foreign Exchange (a)	$	1	$	--	$	1	$	--
Derivatives – Interest Rates (b)		20		--		20		--
Total	$	21	$	--	$	21	$	--

(a)	Includes foreign currency forward and options contracts which are valued using an income approach based on the present value of the forward rate less the contract rate multiplied by the notional amount.
(b)	Includes interest rate swaps which are valued using counterparty quotes, which use discounted cash flows and the then-applicable forward interest rates.

The recorded amounts of cash, trade receivables, accounts payable and short-term debt approximate their fair values at both June 30, 2010 and December 31, 2009, due to the short maturity of these instruments.  The estimated fair value of our long-term debt at June 30, 2010 is $1,559 compared to the recorded amount of $1,542 (including current portion of long-term debt).  The estimated fair value of our long-term debt at December 31, 2009 was $1,309 compared to the recorded amount of $1,276 (including current portion of long-term debt).  The fair values are estimated by various banks based upon trading levels on the date of measurement.

11.  Pension Plans and Other Postretirement Benefits

Components of Net Periodic Benefit Cost

For the three and six months ended June 30, 2010 and 2009, our principal pension and healthcare and other benefit costs for continuing operations were as follows:

22

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

	Pension Benefits
	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Service costs for benefits earned	$	--		$	--		$	1		$	1
Interest costs on benefit obligation		11			15			23			30
Assumed return on plan assets		(12	)		(15	)		(25	)		(29	)
Amortization of net actuarial loss		3			1			5			1
Settlement Charges		--			--			1			--
Total	$	2		$	1		$	5		$	3

	Healthcare and Other Benefits
	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Service costs for benefits earned	$	1		$	1		$	2		$	2
Interest costs on benefit obligation		3			3			5			7
Assumed return on plan assets		(2	)		(1	)		(3	)		(2	)
Amortization of net actuarial gain		(2	)		(1	)		(3	)		(3	)
Total	$	--		$	2		$	1		$	4

Settlements

For the six months ended June 30, 2010 we recorded a settlement charge of $1 resulting from the significant amount of lump sum distributions in Belgium associated with a reduction of personnel prior to June 30, 2010.  This reduction was driven by restructuring activities as more fully discussed in Note 7 – Restructuring Reserves.

Employer Contributions

According to current IRS funding rules, we are required to contribute $37 to our U.S. pension plans, collectively, in 2010.  In the six months ended June 30, 2010, we satisfied this requirement via a $50 contribution which included a $13 voluntary contribution.  We also expect to be required to fund approximately $12 in pension contributions to our foreign pension plans in 2010, of which $6 has been contributed in the six months ended June 30, 2010.

12.  Debt Obligations

In the first quarter of 2010, we issued $300 of 7.875 percent notes  due 2020 (“2020 Notes”) which resulted in net proceeds to us of $292, after deducting underwriting discount and fees.  In addition, we extinguished our existing $1.2 billion senior secured term loan facility (“2014 Term Loan”) and $350 senior secured asset-based revolving credit facility (“2013 Revolver”), replacing them with a $1,150 senior secured credit facility (“Credit Facility”).  The Credit Facility consists of an $850 term loan maturing in 2017 (“2017 T erm Loan”) and a $300 revolving credit facility maturing in 2015 (“2015 Revolver”).  As a result of the early extinguishment of our 2014 Term Loan and 2013 Revolver, we incurred an $80 non-cash charge related to the write-off of deferred debt issuance costs on our 2014 Term Loan and 2013 Revolver and a $9 prepayment penalty for the early extinguishment of the 2014 Term Loan.  These amounts were recorded in loss on debt extinguishment for the six months ended June 30, 2010.

We had no short-term borrowings at June 30, 2010 and $16 at December 31, 2009, comprised of other lines of credit.

23

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Our long-term debt consisted of the following as of June 30, 2010 and December 31, 2009:

	June 30, 2010			December 31, 2009
2017 Term Loan	$	848		$	--
2014 Term Loan		--			876
8.75% 2017 Notes		400			400
7.875% 2020 Notes		300			--
Total principal amount		1,548			1,276
Less: Unamortized debt discount		(6	)		--
Less: Current portion of long-term debt		(8	)		(12	)
Total	$	1,534		$	1,264

The weighted average interest rate on our total debt outstanding was 6.4 percent and 7.7 percent at June 30, 2010 and December 31, 2009, respectively.  Our weighted average interest rate on short-term debt outstanding was 2.1 percent at December 31, 2009.

The $400 of 8.75 percent notes due in 2017 (“2017 Notes”) were issued at par and require semi-annual interest payments.  The 2020 Notes were issued at 99.5 percent of par and require semi-annual interest payments.  Our current subsidiaries CPFilms Inc., Flexsys America L.P., Flexsys America Co., Monchem International, Inc., Solutia Inter-America, Inc., Solutia Overseas, Inc., S E Investment LLC and future subsidiaries as defined by the 2017 Notes and 2020 Notes (“The Notes”), subject to certain exceptions are guarantors (“Note Guarantors”) of The Notes as of June 30, 2010.  Solutia Business Enterprises Inc., a previous guarantor of the 2017 Notes, 2020 Notes and 2017 Term L oan, was merged into Solutia Inc. during the second quarter of 2010.

The 2017 Term loan was issued at 99.5 percent of the principal amount bearing interest at LIBOR plus 3.25 percent with a 1.50 percent LIBOR floor.  We are required to pay 1 percent of the principal of the 2017 Term Loan annually via quarterly payments. The 2015 Revolver bears interest at our option, at LIBOR plus 3.50 percent with no LIBOR floor or at the prime rate plus 2.50 percent with no prime rate floor.  LIBOR based interest for the 2017 Term Loan and 2015 Revolver is payable on the last day of each relevant interest period (defined as one, two, three or six months or other periods available to all lenders under each facility) and, in the case of any interest period longer than three months, on each successive date three months after the first day of such interest period.  Prime based interest for the 2015 Revolver is payable quarterly in arrears. CPFilms Inc., Flexsys America L.P., Flexsys America Co., Monchem International, Inc., Solutia Inter-America, Inc., Solutia Overseas, Inc. and future subsidiaries, as defined by the Credit Facility, subject to certain exceptions (the “Credit Facility Guarantors”), are guarantors of our obligations under the Credit Facility.  The Credit Facility and the related guarantees are secured by liens on substantially all of our and the Credit Facility Guarantors’ present and future assets.

The Credit Facility and The Notes include a number of customary covenants and events of default, including the maintenance of certain financial covenants that restrict our ability to, among other things, incur additional debt; make certain investments; pay dividends, repurchase stock, sell certain assets or merge with or into other companies; enter into new lines of business; and prepay, redeem or exchange our debt.  The Credit Facility also includes the maintenance of the following financial covenants: (i) total leverage ratio and (ii) fixed charge coverage ratio as defined by the Credit Facility.  We were in compliance with all applicable covenants as of June 30, 2010.

13.  Segment Data

We are a global manufacturer and marketer of a variety of high-performance chemical-based materials, which are used in a broad range of consumer and industrial applications.   Our operations are managed and reported in three reportable segments, consisting of Advanced Interlayers (formerly Saflex), Performance Films (formerly CPFilms) and Technical Specialties.  The reportable segment name changes in the first quarter of 2010 did not affect the organizational structure, financial results or the composition of the products within each reportable segment.

24

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

The Advanced Interlayers reportable segment is a global manufacturer of interlayers for laminated glass and encapsulants for the photovoltaic market.  The Performance Films reportable segment is a manufacturer of performance films for after-market applications which add functionality to glass.  The Technical Specialties reportable segment is a global manufacturer of specialties such as chemicals for the rubber, solar energy, process manufacturing and aviation industries.  The major products by reportable segment are as follows:

Reportable Segment	Products
Advanced Interlayers	·    SAFLEX® plastic interlayer ·    VISTASOLAR® ethyl vinyl acetate encapsulants ·    Specialty intermediate Polyvinyl Butyral resin and plasticizer
Performance Films	·    LLUMAR®, VISTA®, GILA®, V-KOOL®, HUPER OPTIK®, and FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS® professional and retail window films ·    Other enhanced polymer films for industrial customers
Technical Specialties	·    CRYSTEX® insoluble sulphur ·    SANTOFLEX® antidegradants ·    SANTOCURE® and PERKACIT® primary and ultra accelerators ·    THERMINOL® heat transfer fluids ·    SKYDROL® aviation hydraulic fluids ·    SKYKLEEN® brand of aviation solvents

The performance of our operating segments is evaluated based on segment profit, defined as earnings before interest expense, loss on debt extinguishment, income taxes, depreciation and amortization less net income attributable to noncontrolling interests.  Segment profit includes selling, general and administrative, research, development and other operating expenses, gains and losses from asset dispositions and restructuring charges, net income attributable to noncontrolling interests and other income and expense items that can be directly attributable to the segment.  Certain operations, expenses and other items that are managed outside the reportable segments are reported as Unallocated and Other.  Unallocated and Other is comprised of corporate expenses, adjustments to our LIFO valuatio n reserve, adjustments to our environmental remediation liabilities, equity earnings from affiliates, other income and expense items including currency gains/losses, gains and losses from asset dispositions and restructuring charges that are not directly attributable to the reportable segments in addition to operating segments that do not meet the quantitative threshold for determining reportable segments.  There were no inter-segment sales in the periods presented below.

Operating results for each segment for the three and six months ended June 30, 2010 and 2009 are as follows:

25

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

	Three Months Ended June 30,										Six Months Ended June 30,
	2010					2009					2010					2009
	Net Sales		Profit (Loss)			Net Sales		Profit (Loss)			Net Sales		Profit (Loss)			Net Sales		Profit (Loss)
Reportable Segments:
Advanced Interlayers	$	208	$	44		$	160	$	35		$	394	$	92		$	293	$	54
Performance Films		73		18			54		12			125		27			88		13
Technical Specialties		233		42			190		62			457		116			357		118
Reportable Segment Totals		514		104			404		109			976		235			738		185
Unallocated and Other		4		(14	)		6		(19	)		8		(40	)		11		(44	)
Total		518		90			410		90			984		195			749		141
Reconciliation to Consolidated Totals:
Depreciation and amortization				(28	)				(26	)				(55	)				(51	)
Interest expense				(36	)				(22	)				(74	)				(59	)
Loss on debt extinguishment				--					(8	)				(89	)				(8	)
Net income attributable to noncontrolling interest				--					1					1					1
Consolidated Totals:	____					____					____					____
Net Sales	$	518				$	410				$	984				$	749
Income (Loss) from Continuing Operations Before Income Taxes			$	26				$	35				$	(22	)			$	24

Assets as of June 30, 2010 and December 31, 2009 for each segment are as follows:

	June 30, 2010		December 31, 2009
Assets by Segment:
Advanced Interlayers	$	1,536	$	1,305
Performance Films		696		598
Technical Specialties		895		903
Reportable Segment totals		3,127		2,806
Reconciliation to consolidated totals:
Discontinued Operations		--		10
Unallocated and Other		278		450
Consolidated totals	$	3,405	$	3,266

14.  Earnings (Loss) Per Share

 

The following table presents the net income (loss) used in the basic and diluted earnings (loss) per share and reconciles weighted average number of shares used in the basic earnings (loss) per share calculation to the weighted average number of shares used to compute diluted earnings (loss) per share.

26

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
(Shares in millions)	2010		2009			2010			2009
Consolidated Statement of Operations:
Income (Loss) from continuing operations	$	24	$	25		$	(33	)	$	21
Less: Net Income attributable to noncontrolling interest		--		1			1			1
Income (Loss) from continuing operations attributable to Solutia		24		24			(34	)		20
Income (Loss) from discontinued operations, net of tax		17		(14	)		17			(169	)
Net Income (Loss) attributable to Solutia	$	41	$	10		$	(17	)	$	(149	)
Weighted average number of shares outstanding used for basic earnings (loss) per share		118.7		95.5			118.6			94.3
Non-vested restricted shares		1.2		0.1			N/A	(a)		0.1
Stock options		--		--			N/A	(a)		--
Warrants		--		--			N/A	(a)		--
Weighted average number of shares outstanding and common equivalent shares used for diluted earnings (loss) per share		119.9		95.6			118.6			94.4

(a) For the six months ended June 30, 2009, continuing operations resulted in a loss.  As a result of the loss, the weighted average shares for basic and dilutive are the same.  If we had income from continuing operations for the period, the dilutive shares would have included 1.1 million shares of non-vested restricted stock, and no shares for stock options and warrants.

 

During the three and six months ended June 30, 2010 and 2009, the following shares were not included in the computation of earnings (loss) per share since the result would have been anti-dilutive.

	Three Months Ended June 30,		Six Months Ended June 30,
(Shares in millions)	2010	2009	2010	2009
Non-vested restricted shares	0.5	0.6	0.2	0.6
Stock options	2.6	2.5	2.2	2.5
Warrants	4.5	4.5	4.5	4.5

15.Condensed Consolidating Financial Statements

In accordance with SEC regulation S-X Rule 3-10 “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered,” we are providing condensed consolidating financial statements as The Notes are fully and unconditionally guaranteed on a joint and several basis.

The following consolidating financial statements present, in separate columns, financial information for:  Solutia on a parent only basis carrying its investment in subsidiaries under the equity method; Note Guarantors on a combined basis (“Guarantors”), carrying investments in subsidiaries which do not guarantee the debt (the “Non-Guarantors”) under the equity method; Non-Guarantors on a combined basis; eliminating entries; and consolidated totals as of June 30, 2010 and December 31, 2009 and for the three and six months ended June 30, 2010 and 2009.  The eliminating entries 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.

27

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Condensed Consolidating Statement of Operations

Three Months Ended June 30, 2010

	Parent-Only Solutia			Guarantors		Non- Guarantors			Eliminations			Consolidated Solutia
Net Sales	$	123		$	120	$	469		$	(194	)	$	518
Cost of goods sold		108			74		409			(195	)		396
Gross Profit		15			46		60			1			122
Selling, general, and administrative expenses		28			14		25			--			67
Research, development and other operating expenses, net		3			1		(1	)		--			3
Operating Income (Loss)		(16	)		31		36			1			52
Equity earnings from affiliates		66			27		--			(93	)		--
Interest expense		(36	)		--		(37	)		37			(36	)
Other income, net		10			10		34			(44	)		10
Income from Continuing Operations Before Income Tax Expense		24			68		33			(99	)		26
Income tax expense		--			--		4			(2	)		2
Income from Continuing Operations		24			68		29			(97	)		24
Income from discontinued operations, net of tax		17			--		--			--			17
Net Income		41			68		29			(97	)		41
Net Income attributable to noncontrolling interest		--			--		--			--			--
Net Income attributable to Solutia	$	41		$	68	$	29		$	(97	)	$	41

Condensed Consolidating Statement of Operations

Three Months Ended June 30, 2009

	Parent-Only Solutia			Guarantors			Non- Guarantors			Eliminations			Consolidated Solutia
Net Sales	$	102		$	93		$	370		$	(155	)	$	410
Cost of goods sold		94			57			299			(162	)		288
Gross Profit		8			36			71			7			122
Selling, general, and administrative expenses		33			8			13			--			54
Research, development and other operating expenses, net		1			--			1			--			2
Operating Income (Loss)		(26	)		28			57			7			66
Equity earnings from affiliates		39			9			--			(48	)		--
Interest expense		(22	)		(1	)		(39	)		40			(22	)
Other income (loss), net		9			16			21			(47	)		(1	)
Loss on debt extinguishment		--			--			(8	)		--			(8	)
Income from Continuing Operations Before Income Tax Expense		--			52			31			(48	)		35
Income tax expense		--			--			10			--			10
Income from Continuing Operations		--			52			21			(48	)		25
Income (Loss) from discontinued operations, net of tax		10			(11	)		(13	)		--			(14	)
Net Income		10			41			8			(48	)		11
Net Income attributable to noncontrolling interest		--			--			1			--			1
Net Income attributable to Solutia	$	10		$	41		$	7		$	(48	)	$	10

28

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Condensed Consolidating Statement of Operations

Six Months Ended June 30, 2010

	Parent-Only Solutia			Guarantors		Non- Guarantors			Eliminations			Consolidated Solutia
Net Sales	$	235		$	221	$	893		$	(365	)	$	984
Cost of goods sold		203			142		742			(371	)		716
Gross Profit		32			79		151			6			268
Selling, general, and administrative expenses		56			28		49			--			133
Research, development and other operating expenses, net		5			2		--			--			7
Operating Income (Loss)		(29	)		49		102			6			128
Equity earnings from affiliates		136			67		--			(203	)		--
Interest expense		(74	)		--		(71	)		71			(74	)
Other income, net		21			23		55			(86	)		13
Loss on debt extinguishment		(88	)		--		(1	)		--			(89	)
Income (Loss) from Continuing Operations Before Income Tax Expense		(34	)		139		85			(212	)		(22	)
Income tax expense		--			--		15			(4	)		11
Income (Loss) from Continuing Operations		(34	)		139		70			(208	)		(33	)
Income from discontinued operations, net of tax		17			--		--			--			17
Net Income (Loss)		(17	)		139		70			(208	)		(16	)
Net Income attributable to noncontrolling interest		--			--		1			--			1
Net Income (Loss) attributable to Solutia	$	(17	)	$	139	$	69		$	(208	)	$	(17	)

Condensed Consolidating Statement of Operations

Six Months Ended June 30, 2009

	Parent-Only Solutia			Guarantors			Non- Guarantors			Eliminations			Consolidated Solutia
Net Sales	$	184		$	170		$	663		$	(268	)	$	749
Cost of goods sold		165			107			548			(274	)		546
Gross Profit		19			63			115			6			203
Selling, general, and administrative expenses		49			19			36			--			104
Research, development and other operating expenses, net		3			1			2			--			6
Operating Income (Loss)		(33	)		43			77			6			93
Equity earnings from affiliates		68			6			--			(74	)		--
Interest expense		(58	)		(1	)		(81	)		81			(59	)
Other income (loss), net		17			32			36			(87	)		(2	)
Loss on debt extinguishment		--			--			(8	)		--			(8	)
Income (Loss) from Continuing Operations Before Income Tax Expense		(6	)		80			24			(74	)		24
Income tax expense		--			--			3			--			3
Income (Loss) from Continuing Operations		(6	)		80			21			(74	)		21
Loss from discontinued operations, net of tax		(143	)		(11	)		(15	)		--			(169	)
Net Income (Loss)		(149	)		69			6			(74	)		(148	)
Net Income attributable to noncontrolling interest		--			--			1			--			1
Net Income (Loss) attributable to Solutia	$	(149	)	$	69		$	5		$	(74	)	$	(149	)

29

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Condensed Consolidating Balance Sheet

June 30, 2010

	Parent-Only Solutia			Guarantors		Non- Guarantors		Eliminations			Consolidated Solutia
ASSETS
Current Assets:
Cash and cash equivalents	$	67		$	--	$	60	$	--		$	127
Trade receivables, net		33			53		200		--			286
Intercompany receivables		135			423		319		(877	)		--
Miscellaneous receivables		10			2		57		--			69
Inventories		66			54		204		(41	)		283
Prepaid expenses and other assets		2			2		7		10			21
Total Current Assets		313			534		847		(908	)		786
Net Property, Plant and Equipment		176			138		550		--			864
Investments in Affiliates		2,184			602		904		(3,690	)		--
Goodwill		150			191		381		--			722
Net Identified Intangible Assets		191			315		422		--			928
Intercompany Advances		296			475		1,498		(2,269	)		--
Other Assets		54			4		47		--			105
Total Assets	$	3,364		$	2,259	$	4,649	$	(6,867	)	$	3,405
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	45		$	22	$	109	$	--		$	176
Intercompany payables		595			8		274		(877	)		--
Accrued liabilities		110			16		131		(1	)		256
Short-term debt, including current portion of long-term debt		8			--		--		--			8
Intercompany short-term debt		--			--		323		(323	)		--
Liabilities of discontinued operations		3			--		--		--			3
Total Current Liabilities		761			46		837		(1,201	)		443
Long-Term Debt		1,534			--		--		--			1,534
Intercompany Long-Term Debt		10			23		1,913		(1,946	)		--
Postretirement Liabilities		248			3		94		--			345
Environmental Remediation Liabilities		235			2		15		--			252
Deferred Tax Liabilities		20			10		172		--			202
Other Liabilities		56			6		59		--			121
Shareholders’ Equity:
Common stock		1			--		--		--			1
Additional contributed capital		1,621			2,169		1,551		(3,720	)		1,621
Treasury stock		(3	)		--		--		--			(3	)
Accumulated other comprehensive loss		(321	)		--		--		--			(321	)
Accumulated deficit		(798	)		--		--		--			(798	)
Total Shareholders’ Equity attributable to Solutia		500			2,169		1,551		(3,720	)		500
Equity attributable to noncontrolling interest		--			--		8		--			8
Total Shareholders’ Equity		500			2,169		1,559		(3,720	)		508
Total Liabilities and Shareholders’ Equity	$	3,364		$	2,259	$	4,649	$	(6,867	)	$	3,405

30

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Condensed Consolidating Balance Sheet

December 31, 2009

	Parent-Only Solutia			Guarantors		Non- Guarantors		Eliminations			Consolidated Solutia
ASSETS
Current Assets:
Cash and cash equivalents	$	104		$	1	$	138	$	--		$	243
Trade receivables, net		27			44		197		--			268
Intercompany receivables		188			357		326		(871	)		--
Miscellaneous receivables		7			2		73		--			82
Inventories		65			39		184		(31	)		257
Prepaid expenses and other current assets		24			1		7		5			37
Assets of discontinued operations		10			--		--		--			10
Total Current Assets		425			444		925		(897	)		897
Net Property, Plant and Equipment		182			142		595		--			919
Investments in Affiliates		2,064			421		52		(2,537	)		--
Goodwill		150			191		170		--			511
Net Identified Intangible Assets		194			320		289		--			803
Intercompany Advances		153			552		1,259		(1,964	)		--
Other Assets		92			4		40		--			136
Total Assets	$	3,260		$	2,074	$	3,330	$	(5,398	)	$	3,266
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	48		$	13	$	108	$	--		$	169
Intercompany payables		578			18		275		(871	)		--
Accrued liabilities		85			9		121		(9	)		206
Short-term debt, including current portion of long-term debt		12			--		16		--			28
Intercompany short-term debt		--			--		778		(778	)		--
Liabilities of discontinued operations		50			--		--		--			50
Total Current Liabilities		773			40		1,298		(1,658	)		453
Long-Term Debt		1,264			--		--		--			1,264
Intercompany Long-Term Debt		19			23		1,144		(1,186	)		--
Postretirement Liabilities		304			3		104		--			411
Environmental Remediation Liabilities		242			1		17		--			260
Deferred Tax Liabilities		20			10		149		--			179
Other Liabilities		45			7		47		--			99
Shareholders’ Equity:
Common stock		1			--		--		--			1
Additional contributed capital		1,612			1,990		564		(2,554	)		1,612
Treasury stock		(2	)		--		--		--			(2	)
Accumulated other comprehensive loss		(237	)		--		--		--			(237	)
Accumulated deficit		(781	)		--		--		--			(781	)
Total Shareholders’ Equity attributable to Solutia		593			1,990		564		(2,554	)		593
Equity attributable to noncontrolling interest		--			--		7		--			7
Total Shareholders’ Equity		593			1,990		571		(2,554	)		600
Total Liabilities and Shareholders’ Equity	$	3,260		$	2,074	$	3,330	$	(5,398	)	$	3,266

31

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Dollars in millions, except per share amounts or otherwise noted)

(Unaudited)

Condensed Consolidating Statement of Cash Flows

Six Months ended June 30, 2010

	Parent-Only Solutia			Guarantors			Non- Guarantors			Eliminations		Consolidated Solutia
Cash Provided by (Used in) Operations	$	(104	)	$	88		$	99		$	--	$	83
INVESTING ACTIVITIES:
Property, plant and equipment purchases		(3	)		(2	)		(9	)		--		(14	)
Acquisition payments		--			(1	)		(370	)		--		(371	)
Property disposals		(2	)		--			--			--		(2	)
Cash Used in Investing Activities		(5	)		(3	)		(379	)		--		(387	)
FINANCING ACTIVITIES:
Proceeds from long-term debt obligations		1,144			--			--			--		1,144
Payments of long-term debt obligations		(878	)		--			--			--		(878	)
Payment of short-term debt obligations		--			--			(16	)		--		(16	)
Debt issuance costs		(27	)		--			--			--		(27	)
Purchase of treasury shares		(1	)		--			--			--		(1	)
Other, net		(9	)		--			--			--		(9	)
Changes in investments and advances from (to) affiliates		(157	)		(86	)		243			--		--
Cash Provided by (Used in) Financing Activities		72			(86	)		227			--		213
Effect of Exchange Rate Changes on Cash		--			--			(25	)		--		(25	)
Decrease in Cash and Cash Equivalents		(37	)		(1	)		(78	)		--		(116	)
CASH AND CASH EQUIVALENTS:
Beginning of year		104			1			138			--		243
End of year	$	67		$	--		$	60		$	--	$	127

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2009

	Parent-Only Solutia			Guarantors			Non- Guarantors			Eliminations		Consolidated Solutia
Cash Provided by (Used in) Operations	$	(166	)	$	135		$	179		$	--	$	148
INVESTING ACTIVITIES:
Property, plant and equipment purchases		(13	)		(1	)		(14	)		--		(28	)
Acquisition payments		--			(1	)		--			--		(1	)
Property disposals		26			--			1			--		27
Cash Provided by (Used in) Investing Activities		13			(2	)		(13	)		--		(2	)
FINANCING ACTIVITIES:
Net change in lines of credit		(3	)		--			(11	)		--		(14	)
Proceeds from short-term debt obligations		--			--			11			--		11
Payments of short-term debt obligations		--			--			(13	)		--		(13	)
Proceeds from long-term debt obligations		--			--			70			--		70
Payments of long-term debt obligations		(6	)		--			(74	)		--		(80	)
Net change in long-term revolving credit facility		(175	)		--			(6	)		--		(181	)
Debt issuance costs		--			--			(4	)		--		(4	)
Proceeds from stock issuance		119			--			--			--		119
Purchase of treasury shares		(1	)		--			--			--		(1	)
Other, net		--			--			(2	)		--		(2	)
Changes in investments and advances from (to) affiliates		264			(132	)		(132	)		--		--
Cash Provided by (Used in) Financing Activities		198			(132	)		(161	)		--		(95	)
Increase in Cash and Cash Equivalents		45			1			5			--		51
CASH AND CASH EQUIVALENTS:
Beginning of period		--			1			31			--		32
End of period	$	45		$	2		$	36		$	--	$	83

32

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, our ability to comply with the terms of our financing agreements; our ability to reduce our overall leveraged position; 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. (“U.S. GAAP”); ability to implement cost reduction initiatives in a timely manner; geopolitical instability; and changes in pension and other postretirement assumptions.

Overview

We are a leading global manufacturer and marketer of high-performance chemical-based materials that are used across automotive, construction, industrial and consumer applications.  We report our operations in three segments: Advanced Interlayers (formerly Saflex), Performance Films (formerly CPFilms) and Technical Specialties.  The reportable segment name changes in the first quarter of 2010 did not affect the organizational structure, financial results or the composition of the products within each reportable segment. Through our Advanced Interlayers segment, we produce Polyvinyl Butyral (“PVB”) and Ethyl Vinyl Acetate (“EVA”) used in the manufacture of laminated glass for automotive, architectural and solar applications in addition to the manufacture of specialized tec hnical films for use in a wide variety of industrial applications. Our Performance Films segment manufactures, markets and distributes custom-coated window films for aftermarket automotive and architectural applications.  Technical Specialties is our specialty chemicals segment, which includes the manufacture and sale of chemicals for the rubber, solar energy, process manufacturing and aviation industries.  The major products by reportable segment are as follows:

Reportable Segment	Products
Advanced Interlayers	·SAFLEX® plastic interlayer ·VISTASOLAR® ethyl vinyl acetate encapsulants ·Specialty intermediate Polyvinyl Butyral resin and plasticizer
Performance Films	·LLUMAR®, VISTA®, GILA®, V-KOOL®, HUPER OPTIK®, and FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS® professional and retail window films ·Other enhanced polymer films for industrial customers
Technical Specialties	·CRYSTEX® insoluble sulphur ·SANTOFLEX® antidegradants ·SANTOCURE® and PERKACIT® primary and ultra accelerators ·THERMINOL® heat transfer fluids ·SKYDROL® aviation hydraulic fluids ·SKYKLEEN® brand of aviation solvents

See Note 13 to the accompanying consolidated financial statements for further information regarding our reportable segments.

Significant 2010 Events

On April 22, 2010, we announced the planned exit of our Primary Accelerators business and the cessation of the manufacturing of these products at the Monsanto Company facility in Antwerp, Belgium, where we currently operate as a guest, in the second half of 2010.  Our decision to exit this business is consistent with our strategy of focusing on businesses that are leaders in their respective markets with sustainable competitive advantage.  This step further refines our product portfolio to remain the global leader in the manufacture and supply of high-quality rubber chemicals that have a compet itive advantage in the market. 

33

On April 30, 2010 we acquired Novomatrix, a leader in branding, marketing and the distribution of performance window films catering to the premium segment of the automotive aftermarket and architectural applications for residential, commercial and industrial properties.  The acquisition expands our reach in key emerging regions through Novomatrix’s well-established presence in Southeast Asia and the Middle East, which will complement our presence in Northern Asia.  Furthermore, we expect our manufacturing capabilities, processing expertise, technology resources and strong dealer and distrib ution networks to significantly benefit from the acquired brands including V-KOOL® and HUPER OPTIK®.

On June 1, 2010 we acquired Vistasolar, a leading supplier of EVA encapsulants to the photovoltaic market.  Acquisition of Vistasolar complements our existing PVB encapsulant product capabilities resulting in the world’s only single source supplier for solar encapsulant solutions.  Integration of Vistasolar into our Advanced Interlayer segment’s existing processing expertise, global commercial capabilities, and technology resources is expected to enable rapid expansion in the photovoltaic market.

Throughout 2010, we continued to vigorously enforce our intellectual property rights covering our proprietary PPD2 technology utilized in the manufacture of products sold under the SANTOFLEX antidegradents brand name.  On July 6, 2010, the U.S. District Court of the Northern District of Ohio granted summary judgment dismissing our infringement claims against a competitor.  We are evaluating options for promptly appealing this decision to the Federal Circuit Court of Appeals.  Conversely, in the first quarter 2010, the Korean Supreme Court dismissed the appeal of a lower court decision which found key claims of our Korean patent to be valid, defeating attempts by a Chinese competitor to invalidate those claims .  This decision follows similar rulings in the first quarter 2010 by the Beijing No. 1 Intermediate People’s Court in China and the Federal Patent Court in Germany, dismissing attempts by the same competitor to invalidate our PPD patents in those countries.  Our Base Patent is valid in the United States through June 2011 and in the other world areas through 2012.  Our Process Patents on our PPD2 technology remain valid through 2019.

Second quarter foreign currency fluctuation impact:  As a global manufacturer and marketer, our operations outside the United States are subject to fluctuations in currency values.  For most of our ex-U.S. operations, the local currency has been used as the functional currency, which requires a translation into U.S. dollars at current or average exchange rates.  In the second quarter 2010, due primarily to a nine percent strengthening of the U.S. dollar spot rate versus the Euro spot rate, the translation of our balance sheet accounts from the respective functional currencies into U.S. dollars resulted in an unrealized loss of $54 million in Other Comprehensive Income (Loss).  The effects of translat ion of the balance sheet accounts as of a reporting date are not reflected in the Consolidated Statement of Operations.  In contrast, in the second quarter of 2009, the translation of our balance sheet accounts generated an unrealized gain of $56 million in Other Comprehensive Income (Loss) due to the weakening of the U.S. dollar spot rates versus the Euro and other currencies’ spot rates as of June 30, 2009.

With respect to the Consolidated Statement of Operations, movements in the average exchange rates of the Euro to U.S. dollar impact our financial results, which are discussed elsewhere in the Management's Discussion and Analysis.  Our full year Net Sales generally change in the range of $4 million to $5 million for every 0.01 change in value of the Euro to the U.S. dollar. Our full year earnings before interest, taxes, depreciation and amortization (EBITDA) generally change in the range of $0.4 million to $0.5 million for every 0.01 change in value of the Euro to the U.S. dollar.  A decline in the value of the Euro to the U.S. dollar has a negative impact on sales and EBITDA.  Our full year 2010 outlook utilizes the June 30th Euro to USD spot rate of 1.23 for the remainder of 2010.

Below are the spot and average Euro to U.S. dollar currency translation rates for the periods noted:

	June 30,	March 31,	June 30,	March 31,
	2010	2010	2009	2009
Spot rate	1.23	1.35	1.41	1.33
	Three Months Ended June 30,		Six Months Ended June 30,
	2010	2009	2010	2009
Average rate	1.30	1.34	1.35	1.34

Summary Results of Operations:  In the second quarter 2010, we reported net sales of $518 million, a 26 percent increase as compared to $410 million reported in the second quarter 2009.  The increase was driven by higher sales volumes, partially offset by unfavorable currency exchange rate fluctuations and lower selling prices.  Our second quarter 2010 gross profit of $122 million was unchanged versus the same period in 2009 as higher net sales, as described above, were offset by higher restructuring charges of $43 million, higher incentive costs and, to a lesser extent, highe r raw material prices.  The increase in restructuring charges was predominantly driven by a $38 million charge associated with the closure of our Primary Accelerators business.  Our gross profit margin decreased to 23.6 percent in the second quarter of 2010 as compared to 29.8 percent for the same period in 2009 due to the negative impact of the aforementioned Primary Accelerators restructuring charges as partially offset by net margin improvement on higher sales volumes and, to a lesser extent, the positive impact from the operations of the Novomatrix and Vistasolar acquisitions.  Selling, general and administrative expenses were $67 million in the second quarter 2010 as compared to $54 million in the same period in 2009.  This increase is predominantly due to the higher incentive expenses, higher stock compensation expense and the inclusion of expenses associated with our Novomatrix Acquisition and Vistasolar Acquisition, partially offset by decreased restructuring c harges.  As a percentage of sales, selling, general and administrative expenses decreased slightly to 12.9 percent for the second quarter 2010 as compared to 13.2 percent versus the same period in 2009.

Cash provided by operations – continuing operations for the first six months of 2010 was $101 million as compared to $89 million for the same period in 2009.  The increase is primarily attributable to higher operating income and lower interest payments, partially offset by higher pension contributions, higher working capital requirements and the absence of reimbursement for environmental remediation.  Working capital requirements on continuing operations were higher for the first six months of 2010 as compared to the same period in 2009 on significantly higher sales.  Conversely, the second quarter 2009 working capital requirements reflected the decline in demand across the global construction, automoti ve and industrial markets experienced throughout the global economy along with an uncertainty on the timing of a recovery.

Outlook

 In the second quarter 2010, we experienced continued improvement in sales volumes as compared to the first quarter 2010 across predominately all of our product offerings.  We expect sales volumes to remain steady in the second half of the year with a normal seasonal slowdown in the fourth quarter.  Coupled with this volume assumption, we are premising average selling prices generally consistent with the levels experienced in the second quarter 2010 and utilizing the June 30th Euro to U.S. dollar spot rate of 1.23 for the second half of 2010.  Inclusi ve of our recent acquisitions, and in anticipation of the reclassification of our Primary Accelerators business to discontinued operations, we expect full year revenue growth in the range of 10 percent – 15 percent versus the same period 2009.

With respect to profitability, we are premising increased raw material costs through the remainder of 2010.  Although we expect to recover these raw material increases from our customers over time, pricing on many of our Advanced Interlayers customer contracts are negotiated on an annual basis.  Further, in anticipation of sales volumes declining in the fourth quarter 2010, management will continue to focus on minimization of working capital requirements and expects lower inventory balances as compared to current levels.  This initiative will result in reduced utilization in our manufacturing facilities and lower fixed cost absorption.  Finally, to support our growth capital spending increase in the second half of 2010, we will incur non-capitalized project engineering expen se.  In order to offset the impact of these items on profitability, we will continue to adhere to our new low cost operating structure.  Overall, we expect operating margins from continuing operations for the remainder of 2010 to be modestly lower as compared to the results delivered in the first half of 2010 but, on a full year basis, higher than 2009.

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Our incremental earnings premised in 2010, along with lower interest payments resulting from our successful term loan refinancing, will generate additional operating cash, which will be partially offset by higher spending for new product and growth-related capital spending, higher tax payments due to the enhanced earnings profile and higher environmental remediation outflows due to the exhaustion of a restricted fund dedicated for this purpose.  We are currently anticipating generating cash from operations less capital spending for the full year 2010 in the range of $175 million – $200 million from continuing operations.

Critical Accounting Policies and Estimates

There were no changes in the six months ended June 30, 2010 with respect to our critical accounting policies, as presented in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2009 Form 10-K filed on February 17, 2010.

Results of Operations—Second Quarter 2010 Compared with Second Quarter 2009

Consolidated Results

(dollars in millions)	Three Months Ended June 30, 2010			Three Months Ended June 30, 2009			Increase (Decrease)			% Increase (Decrease)
Net Sales	$	518		$	410		$	108			26	%
Operating Income:
Reportable Segment Profit	$	104		$	109		$	(5	)		(5	)%
Unallocated and Other		(14	)		(19	)		5			26	%
Less:   Depreciation and Amortization		(28	)		(26	)
Less:   Other (Income) Loss and Net Income attributable to Noncontrolling interest included in Segment Profit and Unallocated and Other		(10	)		2
Operating Income	$	52		$	66		$	(14	)		(21	)%
Net Charges included in Operating Income	$	(47	)	$	(2	)

The increase in net sales in the second quarter 2010 resulted from higher sales volumes of $116 million or 28 percent, partially offset by the effect of unfavorable exchange rate fluctuations of $4 million or 1 percent and lower selling prices of $4 million or 1 percent.  Higher sales volumes were realized by all of our reporting segments due to increased demand across the global construction, automotive and industrial sectors most significantly in Europe and the Asia Pacific region.  The impact from the recent acquisitions of businesses included in the Advanced Interlayers and Performance Films reporting segments were modest as the results of these operations were consolidated for only a partial period in the second quarter 2010. The unfavorable currency impact was driven m ost notably by the increased strength of the U.S. dollar versus the Euro, in comparison to the same period in 2009, due to our strong market positions in Europe by the Advanced Interlayers and Technical Specialties reporting segments.  Selling prices were slightly lower in the Advanced Interlayers and Technical Specialties reporting segments on increased pricing pressure as driven by relatively low industry utilization experienced throughout 2009.

The decrease in operating income in the second quarter 2010 resulted from increased charges as further described below in the Summary of Events Affecting Comparability section, most significantly restructuring charges associated with the closure of our Primary Accelerators business, the return of certain employee incentives suspended during 2009 and higher raw material and energy costs, predominately in our Advanced Interlayers reporting segment, partially offset by higher net sales, as described above, and improved utilization.

Advanced Interlayers

(dollars in millions)	Three Months Ended June 30, 2010		Three Months Ended June 30, 2009			Increase (Decrease)		% Increase (Decrease)
Net Sales	$	208	$	160		$	48		30	%
Segment Profit	$	44	$	35		$	9		26	%
Net Charges included in Segment Profit	$	--	$	(4	)

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The increase in net sales in the second quarter 2010 resulted from higher sales volumes of $52 million or 33 percent, partially offset by unfavorable currency exchange rate fluctuations of $3 million or 2 percent and lower average selling prices of $1 million or 1 percent.  Higher sales volumes were due to increased demand, primarily in the global automotive market most significantly in Europe and North America.  The impact from the recent Vistasolar Acquisition was modest as the results of this operation were consolidated for only a partial period in this quarter. The unfavorable currency impact was driven most notably by the increased strength of the U.S. dollar versus the Euro, in comparison to the same period in 2009, due to our strong market positions in Europe. The decrease in selling prices is in response to increased pricing pressure in the automotive and construction sectors resulting from relatively low industry utilization experienced throughout 2009.

The increase in segment profit in the second quarter 2010 resulted from higher net sales, as described above, and lower charges as compared to the same period in 2009 described in detail in the Summary of Events Affecting Comparability section, partially offset by increased raw material and energy costs and higher incentive expense.

Performance Films

(dollars in millions)	Three Months Ended June 30, 2010			Three Months Ended June 30, 2009			Increase (Decrease)		% Increase (Decrease)
Net Sales	$	73		$	54		$	19		35	%
Segment Profit	$	18		$	12		$	6		50	%
Charges included in Segment Profit	$	(1	)	$	(2	)

The increase in net sales in the second quarter 2010 resulted from higher sales volumes of $19 million or 35 percent.  Higher sales volumes were experienced across all global markets due to improved demand in the global automotive, construction and home furnishings, industrial applications and electronic sectors, but were most significant in the automotive sector in the Asia Pacific region as impacted significantly by our recent Novomatrix Acquisition.

The increase in segment profit in the second quarter 2010 resulted primarily from higher net sales, as described above, and lower charges as compared to the same period in 2009 described in detail in the Summary of Events Affecting Comparability section, partially offset by higher incentive expense and selling costs on products associated with our Novomatrix Acquisition.

Technical Specialties

(dollars in millions)	Three Months Ended June 30, 2010			Three Months Ended June 30, 2009		Increase (Decrease)			% Increase (Decrease)
Net Sales	$	233		$	190	$	43			23	%
Segment Profit	$	42		$	62	$	(20	)		(32	)%
Net Gains (Charges) included in Segment Profit	$	(42	)	$	4

The increase in net sales in the second quarter 2010 resulted from higher sales volumes of $48 million or 25 percent, partially offset by unfavorable currency exchange rate fluctuations of $2 million or 1 percent and lower average selling prices of $3 million or 1 percent.  The higher sales volumes were experienced by nearly all products within Technical Specialties due to strengthening demand in the global automotive and industrial markets, most significantly in Europe and the Asia Pacific region.  The unfavorable exchange rate fluctuations occurred primarily as a result of the strengthening U.S. dollar in relation to the Euro in comparison to the second quarter 2009, due to our strong market positions in Europe.  Lower average selling prices were experienced primarily within our SANTOCURE® primary accelerators, SANTOFLEX® antidegradants and our THERMINOL® heat transfer fluids due to higher market capacities.

The decrease in segment profit in comparison to the second quarter 2009 resulted primarily from higher charges as compared to the same period in 2009 described in the Summary of Events Affecting Comparability section, higher raw material and energy costs and higher incentive expense, partially offset by higher net sales, as discussed above, and improved utilization.

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Unallocated and Other

(dollars in millions)	Three Months Ended June 30, 2010			Three Months Ended June 30, 2009			Increase (Decrease)		% Increase (Decrease)
Components of Unallocated and Other
Other Operations Segment Profit	$	--		$	--
Corporate Expenses		(15	)		(10	)
Share-Based Compensation Expense		(5	)		(4	)
Other Unallocated (Expense) Gain, net		6			(5	)
Unallocated and Other results	$	(14	)	$	(19	)	$	5		26	%
Net Gains Included in Unallocated and Other Results
Other Operations Segment Profit	$	--		$	--
Corporate Expenses		(1	)		--
Share-Based Compensation Expense		--			--
Other Unallocated (Expense) Gain, net		5			--
Total Net Gains included in Unallocated and Other results	$	4		$	--		$	4	N.M.

Net losses on Unallocated and Other results decreased $5 million in the second quarter 2010 as compared to the same period in 2009 primarily due to gains recognized in Other Unallocated (Expense) Gain, net as partially offset by higher Corporate Expenses.  Other Unallocated (Expense) Gain, net includes $3 million in gains on foreign currency exposure in 2010, as compared to $2 million of losses for the same period in 2009, and $5 million of other net gains in 2010, which are described in the Summary of Events Affecting Comparability.  Corporate Expenses increased in 2010 primarily due to higher employee incentives of $4 million temporarily suspended during 2009.< /font>

Interest Expense

(dollars in millions)	Three Months Ended June 30, 2010		Three Months Ended June 30, 2009		Increase (Decrease)		% Increase (Decrease)
Interest Expense	$	36	$	22	$	14		64	%

The increase in interest expense in the second quarter 2010 was predominately a result of higher mark-to-market losses on our interest rate swap agreements partially offset by lower amortization of deferred debt issue costs. In February 2009, we discontinued hedge accounting on our interest rate swap agreements resulting in mark-to-market gains or losses on these agreements recognized as interest expense when interest rates fluctuate.  In the second quarter 2010, we recognized $10 million of losses on our interest rate swap agreements as compared to $9 million of gains for the same period in 2009.  In the second quarter 2010, we amortized $1 million of deferred debt issuance costs and debt discount compared to $5 million for the same period in 2009; the decrease is due to the restructuring of our credit facility in the first quarter 2010.

Loss on Debt Extinguishment

(dollars in millions)	Three Months Ended June 30, 2010		Three Months Ended June 30, 2009		Increase (Decrease)			% Increase (Decrease)
Loss on Debt Extinguishment	$	--	$	8	$	(8	)	N.M.

The decrease in the loss on debt extinguishment in the second quarter 2010 compared to the same period in 2009 relates to lower charges as described in detail in the Summary of Events Affecting Comparability Section.

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Income Tax Expense

(dollars in millions)	Three Months Ended June 30, 2010		Three Months Ended June 30, 2009		Increase (Decrease)			% Increase (Decrease)
Income Tax Expense	$	2	$	10	$	(8	)		(80	)%

The decrease in income tax expense in the second quarter 2010 predominately resulted from the recognition of a $6 million tax benefit due to a reduction of a valuation allowance in an ex-U.S. entity as well as lower pre-tax income outside the U.S.  Our U.S. operations experienced pre-tax losses in both the second quarters 2010 and 2009 but no income tax benefit was recognized as a full valuation allowance has been provided against the U.S. deferred tax assets.

Discontinued Operations

(dollars in millions)	Three Months Ended June 30, 2010		Three Months Ended June 30, 2009			Increase (Decrease)		% Increase (Decrease)
Integrated Nylon business	$	17	$	(13	)
Other		--		(1	)
Income (Loss) from Discontinued Operations, net of tax	$	17	$	(14	)	$	31	N.M.

Income (Loss) from discontinued operations consists of the results of our Integrated Nylon and other previously divested businesses.  The increase is due to a $17 million gain recognized in the second quarter 2010 on settlement of contingent liabilities associated with the Alvin, Texas plant included in the sale of our Integrated Nylon business on June 1, 2009 compared to losses incurred in the second quarter 2009 prior to and as a result of the sale.

Summary of Events Affecting Comparability

Charges and gains recorded in the three months ended June 30, 2010 and 2009 and other events affecting comparability have been summarized and described in the table and accompanying footnotes below (dollars in millions):

2010 Events

Increase/(Decrease)	Advanced Interlayers		Performance Films			Technical Specialties			Unallocated /Other			Consolidated
Impact on:
Cost of goods sold	$	--	$	--		$	38		$	--		$	38		(a)
		--		--			1			--			1		(b)
		--		--			3			--			3		(c)
		--		1			--			--			1		(d)
Selling, general and administrative expenses		--		--			--			1			1		(e)
		--		--			--			3			3		(f)
Operating Income Impact		--		(1	)		(42	)		(4	)		(47	)
Other income (loss), net		--		--			--			8			8		(g)
Pre-tax Income Statement Impact	$	--	$	(1	)	$	(42	)	$	4			(39	)
Income tax impact													(10	)	(h)
After-tax Income Statement Impact												$	(29	)

(a)	Restructuring costs relates to the closure of our Primary Accelerators business ($38 million pre-tax and $30 million after-tax).
(b)	Restructuring costs related to the closure of our Ruabon facility ($1 million pre-tax and after-tax).
(c)	Restructuring costs related to the closure of our Cologne facility ($3 million pre-tax and $2 million after-tax).
(d)	Inventory step-up related to the Novomatrix Acquisition ($1 million pre-tax and after-tax).
(e)	Severance and retraining costs related to the general corporate restructuring ($1 million pre-tax and after-tax).
(f)	Acquisition costs related to the Vistasolar Acquisition and Novomatrix Acquisition ($3 million pre-tax and $2 million after-tax).
(g)	Gain on settlement of tax indemnification case ($8 million pre-tax and after-tax).
(h)	Income tax expense (benefit) has been provided on gains and charges at the tax rate in the jurisdiction in which they have been or will be realized.

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2009 Events

Increase/(Decrease)	Advanced Interlayers			Performance Films			Technical Specialties			Unallocated /Other			Consolidated
Impact on:
Cost of goods sold	$	1		$	--		$	--		$	--		$	1		(a)
		1			--			--			--			1		(b)
		--			--			(4	)		--			(4	)	(c)
Selling, general and administrative expenses		2			2			--			--			4		(a)
Operating Income Impact		(4	)		(2	)		4			--			(2	)
Loss on debt extinguishment		--			--			--			(8	)		(8	)	(d)
Pre-tax Income Statement Impact	$	(4	)	$	(2	)	$	4		$	(8	)		(10	)
Income tax impact														(2	)	(e)
After-tax Income Statement Impact													$	(8	)

(a)	Severance and retraining costs related to the general corporate restructuring ($5 million pre-tax and $4 million after-tax).
(b)	Charges related to the announced closure of the SAFLEX® plastic interlayer production line at our Trenton facility ($1 million pre-tax and after-tax).
(c)	Gains related to the announced closure of our Ruabon facility ($4 million pre-tax and $3 million after-tax).
(d)	Charges related to the repayment of the German term loan to write-off unamortized debt issuance costs and debt discount ($8 million pre-tax and $6 million after-tax).
(e)	Income tax expense (benefit) has been provided on gains and charges at the tax rate in the jurisdiction in which they have been or will be realized.

Results of Operations—Six Months Ended June 30, 2010 Compared with Six Months Ended June 30, 2009

Consolidated Results

(dollars in millions)	Six Months Ended June 30, 2010			Six Months Ended June 30, 2009			Increase (Decrease)		% Increase (Decrease)
Net Sales	$	984		$	749		$	235		31	%
Operating Income:
Reportable Segment Profit	$	235		$	185		$	50		27	%
Unallocated and Other		(40	)		(44	)		4		9	%
Less:   Depreciation and Amortization		(55	)		(51	)
Less:   Other (Income) Loss and Net Income attributable to Noncontrolling interest included in Segment Profit and Unallocated and Other		(12	)		3
Operating Income	$	128		$	93		$	35		38	%
Net Charges included in Operating Income	$	(58	)	$	(1	)

The increase in net sales for the six months ended June 30, 2010 resulted from higher sales volumes of $252 million or 33 percent and the effect of favorable exchange rate fluctuations of $4 million or 1 percent, partially offset by lower selling prices of $21 million or 3 percent. Higher sales volumes were realized by all of our reporting segments due to the strengthening demand across the global construction, automotive and industrial sectors, most significantly in Europe and the Asia Pacific region.  The impact from the recent acquisitions of businesses included in the Advanced Interlayers and Performance Films reporting segments were modest as the results of these operations were consolidated for only a partial period in the second quarter 2010.  The favorable currency impact was driven most notably by the increased strength of the Euro versus the U.S. dollar, in comparison to the same period in 2009, due to our strong market positions in Europe by the Advanced Interlayers and Technical Specialties reporting segments. Selling prices were lower in the Advanced Interlayers and Technical Specialties reporting segments on increased pricing pressure as driven by relatively low industry utilization experienced throughout 2009.

The increase in operating income for the six months ended June 30, 2010 resulted from higher net sales, as described above, improved utilization and higher gains on foreign currency offset partially by increased charges as further described below in the Summary of Events Affecting Comparability section, higher raw material and energy costs, predominately in our Advanced Interlayers reporting segment, and the return of certain employee incentives suspended during 2009.

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Advanced Interlayers

(dollars in millions)	Six Months Ended June 30, 2010		Six Months Ended June 30, 2009			Increase (Decrease)		% Increase (Decrease)
Net Sales	$	394	$	293		$	101		34	%
Segment Profit	$	92	$	54		$	38		70	%
Net Charges included in Segment Profit	$	--	$	(9	)

The increase in net sales for the six months ended June 30, 2010 resulted from higher sales volumes of $105 million or 36 percent and favorable currency exchange rate fluctuations of $1 million or 1 percent, partially offset by lower average selling prices of $5 million or 3 percent.  Higher sales volumes were due to increased demand, primarily in the global automotive market most significantly in Europe and the Asia Pacific region.  The impact from the recent Vistasolar Acquisition was modest as the results of this operation were consolidated for only a partial period in the second quarter 2010. The favorable currency impact was driven most notably by the increased strength of the Euro versus the U.S. d ollar, in comparison to the same period in 2009, due to our strong market positions in Europe.  The decrease in selling prices is in response to increased pricing pressure in the automotive and construction sectors as driven by relatively low industry utilization experienced throughout 2009.

The increase in segment profit for the six months ended June 30, 2010 resulted from higher net sales, as described above, and lower charges as compared to the same period in 2009 described in detail in the Summary of Events Affecting Comparability section, partially offset by increased raw material and energy costs and higher incentive expense.

Performance Films

(dollars in millions)	Six Months Ended June 30, 2010			Six Months Ended June 30, 2009			Increase (Decrease)		% Increase (Decrease)
Net Sales	$	125		$	88		$	37		42	%
Segment Profit	$	27		$	13		$	14		108	%
Charges included in Segment Profit	$	(2	)	$	(3	)

The increase in net sales for the six months ended June 30, 2010 resulted from higher sales volumes of $37 million or 42 percent. Higher sales volumes were experienced across all global markets due to improved demand in the global automotive, construction and home furnishings, industrial applications and electronic sectors, but were most significant in the automotive sector in Europe and the Asia Pacific region, the latter of which was impacted modestly by our recent Novomatrix Acquisition.

The increase in segment results in the six months ended June 30, 2010 resulted primarily from increased net sales, as described above, and decreased charges as further described below in the Summary of Events Affecting Comparability section, partially offset by selling costs on products associated with our Novomatrix Acquisition and higher incentive expense.

Technical Specialties

(dollars in millions)	Six Months Ended June 30, 2010			Six Months Ended June 30, 2009		Increase (Decrease)			% Increase (Decrease)
Net Sales	$	457		$	357	$	100			28	%
Segment Profit	$	116		$	118	$	(2	)		(2	)%
Net Gains (Charges) included in Segment Profit	$	(47	)	$	14

The increase in net sales for the six months ended June 30, 2010 resulted from higher sales volumes of $114 million or 32 percent and favorable currency exchange rate fluctuations of $2 million or 1 percent, partially offset by lower average selling prices of $16 million or 5 percent. The higher sales volumes were experienced by all products within Technical Specialties due to strengthening demand in the global automotive and industrial markets most significantly in Europe and the Asia Pacific region. The favorable exchange rate fluctu ations occurred primarily as a result of the strengthening Euro in relation to the U.S. dollar in comparison to the same period in 2009. Lower average selling prices were experienced primarily within our SANTOCURE® primary accelerators, SANTOFLEX® antidegradants and our THERMINOL® heat transfer fluids due to higher market capacities.

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The decrease in segment profit for the six months ended June 30, 2010 resulted primarily from higher charges as compared to the same period in 2009 described in the Summary of Events Affecting Comparability section and higher incentive expense, offset partially by higher net sales, as discussed above, improved utilization, and lower raw material and energy prices.

Unallocated and Other

(dollars in millions)	Six Months Ended June 30, 2010			Six Months Ended June 30, 2009			Increase (Decrease)		% Increase (Decrease)
Components of Unallocated and Other
Other Operations Segment Profit (Loss)	$	1		$	(4	)
Corporate Expenses		(30	)		(23	)
Share-Based Compensation Expense		(9	)		(9	)
Other Unallocated Expense, net		(2	)		(8	)
Unallocated and Other results	$	(40	)	$	(44	)	$	4		9	%
Net Charges Included in Unallocated and Other
Other Operations Segment Profit (Loss)	$	--		$	(2	)
Corporate Expenses		(1	)		(1	)
Share-Based Compensation Expense		--			--
Other Unallocated (Expense) Gain, net		--			--
Net Charges included in Unallocated and Other results	$	(1	)	$	(3	)	$	2		67	%

Net losses on Unallocated and Other results decreased $4 million for the six months ended June 30, 2010 as compared to the same period in 2009 due to a return to profitability of our Other Operations segment and lower net charges recorded in Other Unallocated Expense, net, partially offset by higher Corporate Expenses.  Our return to profitability for our Other Operations Segment was driven by improved demand coupled with lower operational expenses and restructuring charges resulting from the relocation of our plastics products manufacturing facility from Ghent, Belgium to Oradea, Romania. Lower net charges recorded in Other Unallocated Expense, net are primarily due to $4 million in gains on foreign currency exposure recognized in 2010 compared to $5 million of losses for the same period in 2009.  Higher Corporate Expenses are due to higher employee incentives of $7 million temporarily suspended during 2009.

Interest Expense

(dollars in millions)	Six Months Ended June 30, 2010		Six Months Ended June 30, 2009		Increase (Decrease)		% Increase (Decrease)
Interest Expense	$	74	$	59	$	15		25	%

The increase in interest expense for the six months ended June 30, 2010 resulted principally from higher mark-to-market losses on our interest rate swap agreements partially offset by lower amortization of deferred debt issue costs. For the six months ended June 30, 2010, we recognized $16 million of losses on these agreements as compared to $4 million of gains for the same period in 2009.  For the six months ended June 30, 2010, we amortized $5 of deferred debt issuance costs compared to $10 million for the same period in 2009 as a result of the restructuring of our credit facility in the first quarter 2010.

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Loss on Debt Extinguishment

(dollars in millions)	Six Months Ended June 30, 2010		Six Months Ended June 30, 2009		Increase (Decrease)		% Increase (Decrease)
Loss on Debt Extinguishment	$	89	$	8	$	81	N.M.

The increase in the loss on debt extinguishment for the six months ended June 30, 2010 is the result of the early extinguishment of our 2014 Term Loan and 2013 Revolver as compared to the loss in the comparable period in 2009 discussed in the Results of Operations—Second Quarter 2010 Compared with Second Quarter 2009 section above.  As a result of the early retirement of our 2014 Term Loan and 2013 Revolver, we incurred a $9 million prepayment penalty and an $80 million non-cash charge related to the write-off of deferred debt issuance costs related to the facilities.

Income Tax Expense

(dollars in millions)	Six Months Ended June 30, 2010		Six Months Ended June 30, 2009		Increase (Decrease)		% Increase (Decrease)
Income Tax Expense	$	11	$	3	$	8	N.M.

The increase in income tax expense for the six months ended June 30, 2010 compared to the same period in 2009 resulted from higher income in ex-U.S. operations combined with a reduction in the amount of tax benefits, partially offset by a reduced ex-U.S. effective tax rate.  For the six months ended June 30, 2010, we recognized a tax benefit of $6 million due to the reduction of a valuation allowance in an ex-U.S. entity.  For the six months ended June 30, 2009, we recognized a tax benefit of $10 million due to developments in relevant tax case law.  Our ex-U.S. effective tax declined due to a change in the mix of income and losses in the tax jurisdictions in which we operate.  Our U.S. operations experienced pre-tax losses in both the six months ended June 30, 2010 and 2009 but no income tax benefit was recognized as a full valuation allowance has been provided against the U.S. deferred tax assets.

Discontinued Operations

(dollars in millions)	Six Months Ended June 30, 2010		Six Months Ended June 30, 2009			Increase (Decrease)		% Increase (Decrease)
Integrated Nylon business	$	17	$	(170	)
Other		--		1
Income (Loss) from Discontinued Operations, net of tax	$	17	$	(169	)	$	186	N.M.

Income (loss) from discontinued operations consists of the results of our Integrated Nylon and other previously divested businesses.  The increase is due to a gain of  $17 million recognized in the six months ended June 30, 2010 on settlement of contingent liabilities associated with the Alvin, Texas plant included in the sale of our Integrated Nylon business on June 1, 2009 as compared to losses incurred prior to and as a result of the sale.

Summary of Events Affecting Comparability

Charges and gains recorded in the six months ended June 30, 2010 and 2009 and other events affecting comparability have been summarized and described in the table and accompanying footnotes below (dollars in millions):

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2010 Events

Increase/(Decrease)	Advanced Interlayers		Performance Films			Technical Specialties			Unallocated /Other			Consolidated
Impact on:
Cost of goods sold	$	--	$	--		$	38		$	--		$	38		(a)
		--		1			--			--			1		(b)
		--		--			2			--			2		(c)
		--		--			5			--			5		(d)
		--		1			--			--			1		(e)
Selling, general and administrative expenses		--		--			1			2			3		(b)
		--		--			1			--			1		(d)
		--		--			--			7			7		(f)
Operating Income Impact		--		(2	)		(47	)		(9	)		(58	)
Other income (loss), net		--		--			--			8			8		(g)
Loss on debt extinguishment		--		--			--			(89	)		(89	)	(h)
Pre-tax Income Statement Impact	$	--	$	(2	)	$	(47	)	$	(90	)		(139	)
Income tax impact													(12	)	(i)
After-tax Income Statement Impact												$	(127	)

(a)	Restructuring costs related to the closure of our Primary Accelerators business ($38 million pre-tax and $30 million after-tax).
(b)	Severance, pension settlement and retraining costs related to the general corporate restructuring ($4 million pre-tax and after-tax).
(c)	Restructuring costs related to the closure of our Ruabon facility ($2 million pre-tax and after-tax).
(d)	Restructuring costs related to the closure of our Cologne facility ($6 million pre-tax and $4 million after-tax).
(e)	Inventory step-up related to the Novomatrix Acquisition ($1 million pre-tax and after-tax).
(f)	Acquisition costs related to our agreement to purchase Vistasolar and Novomatrix ($7 million pre-tax and $6 million after-tax).
(g)	Gain on settlement of tax indemnification case ($8 million pre-tax and after-tax).
(h)	Charges related to the early extinguishment of our 2014 Term Loan and 2013 Revolver ($89 million pre-tax and $88 million after-tax).
(i)	Income tax expense (benefit) has been provided on gains and charges at the tax rate in the jurisdiction in which they have been or will be realized.

2009 Events

Increase/(Decrease)	Advanced Interlayers			Performance Films			Technical Specialties			Unallocated /Other			Consolidated
Impact on:
Cost of goods sold	$	(2	)	$	--		$	(3	)	$	(1	)	$	(6	)	(a)
		2			1			--			1			4		(b)
		5			--			--			--			5		(c)
		--			--			(3	)		--			(3	)	(d)
Selling, general and administrative expenses		(4	)		--			(9	)		(3	)		(16	)	(a)
		8			2			1			6			17		(b)
Research, development and other operating expenses, net		(1	)		--			--			--			(1	)	(a)
		1			--			--			--			1		(b)
Operating Income Impact		(9	)		(3	)		14			(3	)		(1	)
Loss on debt extinguishment		--			--			--			(8	)		(8	)	(e)
Pre-tax Income Statement Impact	$	(9	)	$	(3	)	$	14		$	(11	)		(9	)
Income tax impact														(2	)	(f)
After-tax Income Statement Impact													$	(7	)

(a)	Gain related to the reduction in the 2008 annual incentive plan ($23 million pre-tax and $20 million after-tax).
(b)	Severance and retraining costs related to the general corporate restructuring ($22 million pre-tax and $18 million after-tax).
(c)	Charges related to the announced closure of the SAFLEX® plastic interlayer production line at our Trenton facility ($5 million pre-tax and after-tax).
(d)	Gain related to the announced closure of our Ruabon facility ($3 million pre-tax and $2 million after-tax).
(e)	Charges related to the repayment of the German term loan to write-off unamortized debt issuance costs and debt discount ($8 million pre-tax and $6 million after-tax).
(f)	Income tax expense (benefit) has been provided on gains and charges at the tax rate in the jurisdiction in which they have been or will be realized.

43

Financial Condition and Liquidity

As of June 30, 2010, our total liquidity was $390 million which was comprised of $263 million in availability under our 2015 Revolver and $127 million in cash.

In the first quarter 2010, we refinanced our 2013 Revolver, which previously was limited to the amount of the borrowing base, which was calculated as a percentage of allowable inventory and trade receivables, with a new $300 million revolving credit facility that does not depend upon our borrowing base.  The impact of this refinancing was an increase in revolver availability of approximately $130 million.  Also in the first quarter 2010, we completed the sale of the 2020 Notes, resulting in an increase to liquidity of $292 million.  Proceeds from this offering, along with cash on hand, were used to fund our acquisitions of Vistasolar and Novomatrix for $297 million and $73 million, respectively, in the second quarter. As of June 30, 2010, we had no draws against our 2015 Revolver but availability was reduced by letters of credit of $37 million.

For the remainder of 2010, our anticipated use of cash includes fulfillment of our interest, foreign pension, environmental, restructuring as more fully described in Note 7 to the accompanying consolidated financial statements and tax obligations, in addition to certain capital expenditures for new products, capacity expansion and productivity enhancement and for maintenance and safety requirements.  Management has instituted significant monitoring procedures related to working capital and, as a result, we expect the use of cash for this purpose to be closely managed.  However, to the extent we are required to fund certain seasonal demands of our operations, an additional use of cash may be needed to fund working capit al.  New sources of liquidity may include additional lines of credit, financing other assets, customer receivables and/or asset sales, all of which are allowable, with certain limitations, under our existing credit agreements.

In summary, we expect that our cash on hand, coupled with future cash flows from operations and other sources of liquidity, including our 2015 Revolver, will provide sufficient liquidity to allow us to meet our projected cash requirements.

Debt Covenants

Our Credit Facility includes a number of customary covenants and events of default, including the maintenance of certain financial covenants that restrict our ability to, among other things, incur additional debt; make certain investments; pay dividends, repurchase stock, sell certain assets or merge with or into other companies; and enter into new lines of business.  The financial covenants for all measurement periods for the year ended December 31, 2010 are a Leverage Ratio and a Fixed Charge Ratio.  Below is a summary of our actual performance under these financial covenants as of June 30, 2010 along with a summary of the contractually agreed to financial covenants for each of th e two remaining measurement periods in 2010.

	June 30, 2010		September 30, 2010	December 31, 2010
	Actual	Covenant	Covenant	Covenant
Max Leverage Ratio	2.88	4.50	4.50	4.50
Min Fixed Charge Ratio	3.30	1.35	1.35	1.35

We were in compliance with all applicable covenants as of June 30, 2010.  See Note 12 to the accompanying consolidated financial statements for additional information on our debt covenants.

Cash Flows - Continuing Operations

Our cash flows from continuing operations attributable to operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows, are summarized in the following table:

Cash Flow Summary – Continuing Operations (dollars in millions)	Six Months Ended June 30, 2010			Six Months Ended June 30, 2009			Increase (Decrease)
Cash provided by operating activities	$	101		$	89		$	12
Cash used in investing activities		(385	)		(23	)		(362	)
Cash provided by (used in) financing activities		213			(95	)		308
Effect of exchange rate changes on cash		(25	)		--			(25	)
Net change in cash for period attributable to continuing operations	$	(96	)	$	(29	)	$	(67	)

44

Operating activities:  The increase in cash provided by operating activities is primarily attributable to higher operating income and lower interest payments as partially offset by higher payments on our ex-US income taxes, higher payments on our postretirement obligations, higher working capital requirements and the absence of reimbursements for environmental remediation.  In the first six months of 2010, the positive effects from restructuring events enacted in 2009 along with a continued recovery of the global macroeconomic environment significantly improved operating income as p artially offset by higher income tax payments in ex-US regions where we do not have net operating loss carryforwards.  Furthermore, in the first quarter 2010, we contributed $50 million to our U.S. pension plans, which satisfies our minimum funding requirement for 2010 and a portion of the 2011 minimum funding requirements, as compared to a contribution of $10 million in the first six months of 2009.  Working capital requirements were higher in the first six months of 2010 as compared to the same period in 2009 on significantly higher sales.  Conversely, the first six months of 2009 working capital requirements differed from our historical pattern of a seasonal increase, as it reflected the decline in demand across the global construction, automotive and industrial sectors experienced throughout the global economy along with an uncertainty on the timing of a recovery.   Finally, in the first six months of 2009, payments on our environmental remediation liabilities were reimbursed to us through a restricted cash fund established upon our emergence from bankruptcy.  With the exhaustion of this fund in 2009, cash on hand was used to satisfy these requirements in the first six months of 2010.

Investing activities:  Cash used in investing activities increased for the first six months in 2010 compared to the same period in 2009 due to cash requirements on our acquisitions of Novomatrix and Vistasolar for $73 million and $297 million, respectively, as partially offset by lower capital expenditures due to the status and timing of payments on certain growth related projects.  In the fourth quarter 2008 and the first quarter 2009, the majority of growth related capital projects were closed out in reaction to the global economic slowdown which resulted in the payment of final c ash payments on these projects in the first quarter 2009.  Conversely, new growth capital projects were only initiated in the first six months of 2010, as a more stable economic environment evolved.  Capital investment is expected to increase in subsequent quarters in 2010.

Financing activities:  During the first quarter 2010 we completed the refinancing of our 2014 Term Loan and 2013 Revolver, along with the issuance of the 2020 Notes, which resulted in an extension of our debt maturities, greater strategic and operational flexibility and net proceeds of $234 million, after a principal reduction in our term debt of $30 million and deducting $34 million in debt issuance costs and prepayment penalty.  These net proceeds were used to partially fund our acquisition of Novomatrix and Vistasolar in the second quarter 2010.  Also in the second quarter 2010, we used $16 million of cash provided by operations to fully repay all of our short-term borrowings.   During the first six months of 2009, we used $119 million in cash provided by the sale of common stock, along with proceeds received on the sale of our Integrated Nylon business and cash provided by operations, to fully repay our 2013 Revolver along with $6 million on our 2014 Term Loan.

Working Capital – Continuing Operations

Working capital used for continuing operations is summarized as follows:

Working Capital – Continuing Operations (dollars in millions)	June 30, 2010		December 31, 2009		Increase (Decrease)
Cash and cash equivalents	$	127	$	243
Trade receivables, net		286		268
Inventories		283		257
Other current assets		90		119
Total current assets	$	786	$	887
Accounts payable	$	176	$	169
Accrued liabilities		256		206
Short-term debt, including current maturities of long-term debt		8		28
Total current liabilities	$	440	$	403
Working Capital	$	346	$	484	$(138)

Our working capital used for continuing operations decreased in the first six months of 2010 primarily due to the net decrease in cash and cash equivalents, as previously discussed, in addition to $25 million in devaluation of cash held by certain of our European subsidiaries in anticipation of the Vistasolar acquisition.  Increases in working capital driven by our acquisitions of Novomatrix and Vistasolar along with the seasonal impact of higher trade receivables, inventories and accounts payable were more than offset by higher accrued liabilities associated with our annual incentive plan, restructuring activities, income taxes and interest in addition to the effects of a stronger U.S. dollar versus relevant currencies.< /font>

45

Beginning subsequent to our emergence from bankruptcy, from time to time we sell trade receivables without recourse to third parties.  These trade receivables were removed from our Consolidated Statement of Financial Position and reflected as cash provided by operating activities in the Consolidated Statement of Cash Flows at the time of sale to the third party.  Uncollected trade receivables sold under these arrangements and removed from the Consolidated Statement of Financial Position were $9 million and $8 million at June 30, 2010 and December 31, 2009, respectively.  The average monthly amounts of trade receivables sold were $10 million for the six months ended June 30, 2010.

Cash Flows - Discontinued Operations

Cash Flow Summary – Discontinued Operations (dollars in millions)	Six Months Ended June 30, 2010			Six Months Ended June 30, 2009		Increase (Decrease)
Cash provided by (used in) operating activities	$	(18	)	$	59	$	(77	)
Cash provided by (used in) investing activities		(2	)		21		(23	)
Net change in cash for period attributable to discontinued operations	$	(20	)	$	80	$	(100	)

Cash used in operating activities for the six months ended June 30, 2010 is comprised of settlement payments to Lyondell related to contingent liabilities as more fully discussed in Note 2 to the accompanying consolidated financial statements.  Throughout 2009 and up to the date of sale of our Integrated Nylon business on June 1, 2009, we aggressively worked to monetize the working capital balances historically required by this business which accounts for the significant provision of cash.  Cash used in investing activities in the six months ended June 30, 2010 is comprised of settlement payments to the buyer related to this sale, as more fully discussed in Note 2 to the accompanying consolidated financial statements.& #160; Cash provided by investing activities in the six months ended June 30, 2009 is predominantly comprised of funds received on the sale of this business as partially offset by minimum required capital expenditures.

Pension Funding

According to current IRS funding rules, we are required to contribute $37 million to our U.S. pension plans, collectively, in 2010.  In the first quarter 2010, we satisfied this requirement via a $50 million contribution, inclusive of a $13 million voluntary contribution which will reduce our 2011 minimum funding requirement by a similar amount.   We also expect to fund approximately $12 million in pension contributions to our foreign pension plans in 2010, of which $6 million was contributed in the six months ended June 30, 2010.  Actual contributions to the plans for the full year may differ as a result of a variety of factors, including future changes in actuarial assumptions, legislative changes to pension funding laws, market conditions and whether we choose to make addition al voluntary contributions or to contribute our common stock rather than cash to the plans.

Contingencies

See Note 8 to the accompanying consolidated financial statements for a summary of our contingencies as of June 30, 2010.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS

There have been no material changes in market risk exposures during the six months ended June 30, 2010 that affect the disclosures presented in the information appearing under “Derivative Financial Instruments” as presented in our 2009 Form 10-K.

Item 4.  CONTROLS AND PROCEDURES

During the period covered by this Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the our 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, our disclosure controls and procedures are effective.  Further, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15( f) under the Exchange Act) that occurred during the quarterly period ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

46

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Information required by this item is incorporated herein by reference to Note 8 included in Part I, Item 1 Financial Statements (unaudited) – Notes to Consolidated Financial Statements and the Significant 2010 Events section of Part I, Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.  Also please refer to Note 17 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

47

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c ) Purchases of Equity Securities by the Issuer

Period	Total Number of Shares Purchased (1)		Average Price Paid Per Share (2)		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value (in millions) that May Yet Be Purchased Under the Plans or Programs
April 1-30, 2010		3,466	$	16.80		0	$	0
May 1-31, 2010		1,781	$	17.31		0	$	0
June 1-30, 2010		630	$	15.20		0	$	0
Total		5,877	$	16.78		0	$	0

(1)   Shares surrendered to the Company by employees to satisfy individual tax withholding obligations upon vesting of previously issued shares of restricted common stock.

(2)   Average price paid per share reflects the closing price of Solutia common stock on the business date the shares were surrendered by the employee stockholders to satisfy individual tax withholding obligations upon vesting of restricted common stock.

ITEM 5.  OTHER INFORMATION

ITEM 6.  EXHIBITS

See the Exhibit Index at page 50 of this report.

48

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)
By:	/s/ TIMOTHY J. SPIHLMAN
	(Vice President and Controller)
	(On behalf of the Registrant and as Principal Accounting Officer)

Dated: July 28, 2010

49

EXHIBIT INDEX

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

EXHIBIT NUMBER	DESCRIPTION
4.1	Supplemental Indenture dated June 30, 2010 to the First Supplemental Indenture dated October 15, 2009
4.2	Supplemental Indenture dated June 30, 2010 to the Second Supplemental Indenture dated March 9, 2010
10.1	Credit Agreement dated March 17, 2010, by and among Solutia Inc., the lender parties thereto, Deutsche Bank Trust Company Americas, as Administrative Agent, Collateral Agent, Swing Line Lender and Issuer, Citibank, N.A., HSBC Securities (USA) Inc. and JPMorgan Chase Bank, N.A., as Co-Syndication Agents, Jefferies Finance LLC, as Documentation Agent and Deutsche Bank Securities Inc., Jefferies Finance LLC, HSBC Securities (USA) Inc., Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as Joint Lead Arrangers and as Joint Bookrunners (a)
10.2	Guarantee Agreement, dated as of March 17, 2010, by and among certain subsidiaries of Solutia Inc. party hereto, as Guarantors, and Deutsche Bank Trust Company Americas, as Collateral Agent
10.3	Security Agreement, dated as of March 17, 2010, by and among Solutia Inc., the subsidiaries party thereto, as Grantors, and Deutsche Bank Trust Company Americas, as Collateral Agent
10.4	Pledge Agreement, dated as of March 17, 2010, by and among Solutia Inc., the subsidiaries party thereto, as Pledgors, and Deutsche Bank Trust Company Americas, as Collateral Agent
10.5	Solutia Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.5 to Solutia’s Form 10-Q filed on April 27, 2010)
10.6	Solutia Inc. 2007 Management Long-Term Incentive Plan  as Amended and Restated (incorporated by reference to Exhibit 99.1 to Solutia’s Registration Statement on Form S-8 filed April 23, 2010)
10.7	Form of Stock Option Award Agreement Pursuant to the Solutia Inc. 2007 Management Long-Term Incentive Plan as Amended and Restated (incorporated by reference to Exhibit 10.8 to Solutia’s Form 10-Q filed on April 27, 2010)
10.8	Form of Restricted Stock Award Agreement Pursuant to the Solutia Inc. 2007 Management Long-Term Incentive Plan as Amended and Restated (incorporated by reference to Exhibit 10.9 to Solutia’s Form 10-Q filed on April 27, 2010)
10.9	Form of Performance Stock Award Agreement Pursuant to the Solutia Inc. 2007 Management Long-Term Incentive Plan as Amended and Restated (incorporated by reference to Exhibit 10.10 to Solutia’s Form 10-Q filed on April 27, 2010)
10.10	Form of Restricted Stock Award Agreement Pursuant to the Solutia Inc. Non-Employee Director Stock Compensation Plan (incorporated by reference to Exhibit 10.11 to Solutia’s Form 10-Q filed on April 27, 2010)
10.11	Form of Restricted Stock Unit Agreement Pursuant to the Solutia Inc. Non-Employee Director Stock Compensation Plan (incorporated by reference to Exhibit 10.12 to Solutia’s Form 10-Q filed on April 27, 2010)
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Label Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document

(a) Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and has been filed separately with the Securities and Exchange Commission (“Commission”) pursuant to a Confidential Treatment Application filed with the Commission.

50

EX-4.1

EXHIBIT 4.1

SOLUTIA INC.,

as Issuer

THE GUARANTORS PARTY HERETO, as Guarantors

AND

THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.,

as Trustee

8¾% SENIOR NOTES DUE 2017

SUPPLEMENTAL INDENTURE DATED AS OF

June 30, 2010

TO FIRST SUPPLEMENTAL INDENTURE DATED AS OF

October 15, 2009

This SUPPLEMENTAL INDENTURE, dated as of June 30, 2010 (this “Supplemental Indenture”), is by and among Solutia Inc., a Delaware corporation (such corporation and any successor as defined in the Base Indenture, the “Issuer”), the Guarantors party hereto (the “Guarantors”) and The Bank of New York Mellon Trust Company, N.A., a national banking association, as trustee (such institution and any successor as defined in the Base Indenture, the “Trustee”).

WHEREAS, the Issuer has previously executed and delivered an indenture, dated as of October 15, 2009 (the “Base Indenture”), with the Trustee providing for the issuance from time to time of one or more series of the Issuer’s senior debt securities;

WHEREAS, the Issuer has previously executed and delivered a first supplemental indenture to the Base Indenture, dated as of October 15, 2009 (the “First Supplemental Indenture”), with the Trustee providing for the issuance of 8¾% Senior Notes due 2017 (the “Notes”);

WHEREAS, Section 9.01 of the First Supplemental Indenture provides that the Issuer and the Trustee may enter into an indenture supplemental to the First Supplemental Indenture to provide for the assumption by a successor person of the obligations of any Guarantor in accordance with Section 5.01(b) thereto;

WHEREAS, Solutia Business Enterprises, Inc., a Guarantor, has merged (the “Merger”) with and into the Issuer, with the Issuer being the surviving Person;

WHEREAS, Section 5.01(b) of the First Supplemental Indenture requires that when a Guarantor merges into another Person, the surviving Person shall expressly assume all the obligations of such Guarantor, if any, under its Guarantee and this Indenture;

WHEREAS, the Base Indenture and the First Supplemental Indenture are incorporated herein by reference and the Base Indenture and the First Supplemental Indenture, as supplemented by this Supplemental Indenture, are herein called this “Indenture,” as that term is defined in the Base Indenture; and

WHEREAS, all acts and conditions necessary to authorize the execution and delivery of this Supplemental Indenture and to make it a valid and binding obligation of the Issuer and the Guarantors have been done or performed.

NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Issuer and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Notes.

NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:

That the parties hereto hereby agree as follows:

Section 1                      Defined Terms; Rules of Interpretation.  Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed thereto in the Indenture.  The rules of interpretation set forth in the Indenture shall be applied hereto as if set forth in full herein.

Section 2                      Assumption of Obligations. The Issuer hereby expressly assumes all the obligations of Solutia Business Enterprises, Inc. under its Guarantee and the Notes.

Section 3                      Ratification of Indenture: Supplemental Indentures Part of Indenture.  Except as expressly amended or supplemented hereby, the Base Indenture (as modified by the First Supplemental Indenture) is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect.  This Supplemental Indenture shall form a part of the Base Indenture (as modified by the First Supplemental Indenture) for all purposes with respect to the Notes, and every Holder of any Notes heretofore or hereafter authenticated and delivered pursuant thereto shall be bound he reby.  Except only insofar as the Base Indenture (as modified by the First Supplemental Indenture) may be inconsistent with the express provisions of this Supplemental Indenture, in which case the terms of this Supplemental Indenture shall govern and supersede those contained in the Base Indenture (as modified by the First Supplemental Indenture), this Supplemental Indenture shall henceforth have effect so far as practicable as if all the provisions of the Base Indenture, the First Supplemental Indenture and this Supplemental Indenture were contained in one instrument.

Section 4                      Counterparts.  This Supplemental Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.

Section 5                      Governing Law.  This Supplemental Indenture shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby.

Section 6                      Concerning the Trustee.  In carrying out the Trustee’s responsibilities hereunder, the Trustee shall have all of the rights, protections, and immunities which the Trustee possesses under the Base Indenture (as modified by the First Supplemental Indenture).  The recitals contained herein shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness.  The Trustee makes no representations as to the validity or sufficiency of this Supplemental Indenture.

[Remainder of this page intentionally left blank]

IN WITNESS WHEREOF, the parties have caused this Supplemental Indenture to be duly executed by their respective officers thereunto duly authorized as of the date first above written.

ISSUER:

Solutia Inc.

 By:    /s/ Timothy J. Spihlman

Name:  Timothy J. Spihlman

Title:    Vice President, Corporate Controller

TRUSTEE:

The Bank of New York Mellon Trust Company, N.A.

  By:  /s/Mary Callahan

Name:  Mary Callahan

Title:  Vice President

Signature Page to Supplemental Indenture

EX-4.2

EXHIBIT 4.2

SOLUTIA INC.,

as Issuer

THE GUARANTORS PARTY HERETO, as Guarantors

AND

THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A.,

as Trustee

7⅞% SENIOR NOTES DUE 2020

SUPPLEMENTAL INDENTURE DATED AS OF

June 30, 2010

TO SECOND SUPPLEMENTAL INDENTURE DATED AS OF

March 9, 2010

This SUPPLEMENTAL INDENTURE, dated as of June 30, 2010 (this “Supplemental Indenture”), is by and among Solutia Inc., a Delaware corporation (such corporation and any successor as defined in the Base Indenture, the “Issuer”), the Guarantors party hereto (the “Guarantors”) and The Bank of New York Mellon Trust Company, N.A., a national banking association, as trustee (such institution and any successor as defined in the Base Indenture, the “Trustee”).

WHEREAS, the Issuer has previously executed and delivered an indenture, dated as of October 15, 2009 (the “Base Indenture”), with the Trustee providing for the issuance from time to time of one or more series of the Issuer’s senior debt securities;

WHEREAS, the Issuer has previously executed and delivered a second supplemental indenture to the Base Indenture, dated as of March 9, 2010 (the “Second Supplemental Indenture”), with the Trustee providing for the issuance of 7⅞% Senior Notes due 2020 (the “Notes”);

WHEREAS, Section 9.01 of the Second Supplemental Indenture provides that the Issuer and the Trustee may enter into an indenture supplemental to the Second Supplemental Indenture to provide for the assumption by a successor person of the obligations of any Guarantor in accordance with Section 5.01(b) thereto;

WHEREAS, Solutia Business Enterprises, Inc., a Guarantor, has merged (the “Merger”) with and into the Issuer, with the Issuer being the surviving Person;

WHEREAS, Section 5.01(b) of the Second Supplemental Indenture requires that when a Guarantor merges into another Person, the surviving Person shall expressly assume all the obligations of such Guarantor, if any, under its Guarantee and this Indenture;

WHEREAS, the Base Indenture and the Second Supplemental Indenture are incorporated herein by reference and the Base Indenture and the Second Supplemental Indenture, as supplemented by this Supplemental Indenture, are herein called this “Indenture,” as that term is defined in the Base Indenture; and

WHEREAS, all acts and conditions necessary to authorize the execution and delivery of this Supplemental Indenture and to make it a valid and binding obligation of the Issuer and the Guarantors have been done or performed.

NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the Issuer and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the Notes.

NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:

That the parties hereto hereby agree as follows:

Section 1                      Defined Terms; Rules of Interpretation.  Capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed thereto in the Indenture.  The rules of interpretation set forth in the Indenture shall be applied hereto as if set forth in full herein.

Section 2                      Assumption of Obligations. The Issuer hereby expressly assumes all the obligations of Solutia Business Enterprises, Inc. under its Guarantee and the Notes.

Section 3                      Ratification of Indenture: Supplemental Indentures Part of Indenture.  Except as expressly amended or supplemented hereby, the Base Indenture (as modified by the Second Supplemental Indenture) is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect.  This Supplemental Indenture shall form a part of the Base Indenture (as modified by the Second Supplemental Indenture) for all purposes with respect to the Notes, and every Holder of any Notes heretofore or hereafter authenticated and delivered pursuant thereto shall be bound hereby.  Except only insofar as the Base Indenture (as modified by the Second Supplemental Indenture) may be inconsistent with the express provisions of this Supplemental Indenture, in which case the terms of this Supplemental Indenture shall govern and supersede those contained in the Base Indenture (as modified by the Second Supplemental Indenture), this Supplemental Indenture shall henceforth have effect so far as practicable as if all the provisions of the Base Indenture, the Second Supplemental Indenture and this Supplemental Indenture were contained in one instrument.

Section 4                      Counterparts.  This Supplemental Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.

Section 5                      Governing Law.  This Supplemental Indenture shall be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby.

Section 6                      Concerning the Trustee.  In carrying out the Trustee’s responsibilities hereunder, the Trustee shall have all of the rights, protections, and immunities which the Trustee possesses under the Base Indenture (as modified by the Second Supplemental Indenture).  The recitals contained herein shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness.  The Trustee makes no representations as to the validity or sufficiency of this Supplemental Indenture.

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IN WITNESS WHEREOF, the parties have caused this Supplemental Indenture to be duly executed by their respective officers thereunto duly authorized as of the date first above written.

ISSUER:

Solutia Inc.

  By:  /s/Timothy J. Spihlman

Name: Timothy J. Spihlman

Title:    Vice President, Corporate Controller

TRUSTEE:

The Bank of New York Mellon Trust Company, N.A.

By:  /s/Mary Callahan

Name:  Mary Callahan

Title:  Vice President

Signature Page to Supplemental Indenture

EX-10.2

EXHIBIT 10.2

GUARANTEE AGREEMENT

GUARANTEE AGREEMENT (this “Agreement”) dated as of March 17, 2010, among each of the subsidiaries of SOLUTIA INC., a Delaware corporation (the “Borrower”), listed on Schedule I hereto (each such subsidiary individually, a “Guarantor” and collectively, the “Guarantors”) in favor of DEUTSCHE BANK TRUST COMPANY AMERICAS, as collateral agent (in such capacity, together with its successors and assigns in suc h capacity, the “Collateral Agent”) for the Secured Parties (as defined in the Credit Agreement referred to below).

Reference is made to the Credit Agreement dated as of March 17, 2010 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), among the Borrower; the lending institutions from time to time parties thereto (the “Lenders”); DEUTSCHE BANK TRUST COMPANY AMERICAS, as administrative agent for the Lenders (in such capacity, the “Administrative Agent”), as collateral agent for the Secured Parties, as swing line lender and as an issuer and the other parties thereto.  Capitalized terms used herein without definition shall h ave the meanings assigned to such terms in the Credit Agreement.

The Lenders have agreed to make Loans to the Borrower and issue Letters of Credit pursuant to, and upon the terms and subject to the conditions specified in, the Credit Agreement.  Each of the Guarantors is a direct or indirect Restricted Subsidiary of the Borrower and acknowledges that it will derive substantial benefit from the making of the Loans by the Lenders.  The obligations of the Lenders to make Loans are conditioned on, among other things, the execution and delivery by the Guarantors of a Guarantee Agreement in the form hereof.  As consideration therefor and in order to induce the Lenders to make Loans and issue Letters of Credit, the Guarantors are willing to execute this Agreement.

Accordingly, the parties hereto agree as follows:

SECTION 1.                      Guarantee.  Each Guarantor unconditionally and irrevocably guarantees, jointly with the other Guarantors and severally, as a primary obligor and not merely as a surety, to each of the Secured Parties and their respective successors and permitted assigns the full payment when due (whether at stated maturity or otherwise) of the Obligations (the “Guaranteed Obligations”).  Each Guarantor further agrees that the Guaranteed Obligations may be extended or renewed, in whole or in part, without notice to or further assent fr om it, and that it will remain bound upon its guarantee under this Agreement notwithstanding any extension or renewal of any Obligation.  By execution of this Agreement, each Guarantor agrees to be bound by the terms of the Credit Agreement as a Subsidiary Guarantor as if it were a party to the Credit Agreement.

SECTION 2.                      Guaranteed Obligations Not Waived.  The obligations of the Guarantors under Section 1 shall constitute a guaranty of payment when due and not of collection and to the fullest extent permitted by applicable law, are absolute, irrevocable and unconditional, joint and several, irrespective of the value, genuineness, validity, regularity or enforceability of the Guaranteed Obligations of the Borrower under the Credit Agreement or any other agreement or instrument referred to herein or therein (including interest, fees, expenses and other charges that continue to accrue after the commencement of any bankrupt cy or other similar proceeding, whether or not such interest, fees, expenses and other charges are allowed or allowable under any state, federal or foreign bankruptcy, insolvency, reorganization or other law affecting the rights of credits generally by or against the Borrower, or in any such bankruptcy or other similar proceeding), or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or Guarantor (except for payment in full).  Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or

more of the following shall not alter or impair the liability of the Guarantors hereunder which shall remain absolute, irrevocable and unconditional under any and all circumstances as described above to the extent permitted by applicable law:.

(i)           at any time or from time to time, without notice to the Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived;

(ii)           any of the acts mentioned in any of the provisions of this Agreement or the Credit Agreement or any other agreement or instrument referred to herein or therein shall be done or omitted;

(iii)           the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be amended in any respect, or any right under the Loan Documents or any other agreement or instrument referred to therein shall be amended or waived in any respect or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with;

(iv)           the failure to perfect any security interest in or lien on, or the release of, any of the security held by or on behalf of the Collateral Agent or any other Secured Party; or

(v)           the release of any other Guarantor pursuant to Section 9(b).

The Guarantors hereby expressly waive, to the extent permitted by applicable law, diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that any Secured Party exhaust any right, power or remedy or proceed against the Borrower under this Agreement or the Credit Agreement or any other agreement or instrument referred to herein or therein, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations.  The Guarantors waive, to the extent permitted by applicable law, any and all notice of the creation, renewal, extension, waiver, termination or accrual of any of the Guaranteed Obligations and notice of or proof of reliance by any Secured Party upon this Agreement or acceptance of this Agreement, and the Guaranteed Oblig ations, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Agreement and the guarantees contained herein, and all dealings between the Borrower and the Secured Parties shall likewise be conclusively presumed to have been had or consummated in reliance upon this Agreement.  This Agreement shall be construed as a continuing, absolute, irrevocable and unconditional guarantee of payment without regard to any right of offset with respect to the Guaranteed Obligations at any time or from time to time held by Secured Parties, and the obligations and liabilities of the Guarantors hereunder shall not be conditioned or contingent upon the pursuit by the Secured Parties or any other Person at any time of any right or remedy against Borrower or against any other Person which may be or become liable in respect of all or any part of the Guaranteed Obligations or against any collateral security or guarantee therefor or right of offset with respect ther eto.  This Agreement shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon the Guarantors and the successors and permitted assigns thereof, and shall inure to the benefit of the Secured Parties, and their respective successors and permitted assigns.

SECTION 3.                      Guarantee of Payment.  Each Guarantor hereby jointly and severally agrees that its guarantee constitutes a guarantee of payment when due and not of collection of the Guaranteed Obligations, and waives, to the extent permitted by applicable law, any right to require that any resort be had by the Collateral Agent or any other Secured Party to any of the security held for payment of the Guaranteed Obligations or to any balance of any deposit account or credit on the books of the Collateral Agent or any other Secured Party in favor of the Borrower or any other Person.

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SECTION 4.                      No Discharge or Diminishment of Guarantee.  The obligations of each Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (other than the payment in full in cash of the Guaranteed Obligations (other than contingent indemnification obligations)), including any claim of waiver, release, surrender, alteration or compromise of any of the Guaranteed Obligations, and shall not be subject to (to the extent permitted by applicable law) any defense (other than payment in full in cash of the Guaranteed Obligations (other than contingent indemnification obl igations)) or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise.  Without limiting the generality of the foregoing, the obligations of each Guarantor hereunder shall not be discharged or impaired or otherwise affected by the failure of the Collateral Agent or any other Secured Party to assert any claim or demand or to enforce any remedy under the Credit Agreement, any other Loan Document or any other agreement, by any waiver or modification of any provision of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or omission that may or might in any manner or to any extent vary the risk of any Guarantor or that would otherwise operate as a discharge of each Guarantor as a matter of law or equity (other than the payment in full in cash of all the Guaranteed Obligations (other than contingent indemnificatio n obligations)).

SECTION 5.                      Defenses of Borrower Waived.  To the fullest extent permitted by applicable law, each of the Guarantors waives any defense based on or arising out of any defense of any Loan Party or the unenforceability of the Guaranteed Obligations or any part thereof from any cause, or the cessation from any cause of the liability of any Loan Party, other than the payment in full in cash of the Guaranteed Obligations (other than contingent indemnification obligations).  Subject to the terms of the Security Documents, the Collateral Agent and the other Secured Parties may, at their election, foreclose on any security held by one or more of them by one or more judicial or nonjudicial sales (to the extent any such sale is permitted by applicable law), accept an assignment of any such security in lieu of foreclosure, compromise or adjust any part of the Guaranteed Obligations, make any other accommodation with any Loan Party or any other guarantor or exercise any other right or remedy available to them against any Loan Party or any other guarantor, without affecting or impairing in any way the liability of any Guarantor hereunder except to the extent the Guaranteed Obligations have been fully paid in cash (other than contingent indemnification obligations).  To the extent permitted by applicable law, each of the Guarantors waives any defense arising out of any such election even though such election operates, pursuant to applicable law, to impair or to extinguish any right of reimbursement or subrogation or other right or remedy of such Guarantor against any Loan Party or any other Guarantor or guarantor , as the case may be, or any security.

SECTION 6.                      Agreement to Pay; Subordination.  In furtherance of the foregoing and not in limitation of any other right that the Collateral Agent or any other Secured Party has at law or in equity against any Guarantor by virtue hereof, upon the failure of any Loan Party to pay any Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, promptly upon notice from the Collateral Agent each Guarantor hereby promises to and will forthwith pay, or cause to be paid, to the Collateral Agent or such other Secured Party as designated thereby in cash or the amount of such unpaid Guaranteed Obligations.  Upon payment by any Guarantor of any sums to the Collateral Agent or any other Secured Party as provided above, all rights of such Guarantor against any Loan Party arising as a result thereof by way of right of subrogation, contribution, reimbursement, indemnity or otherwise shall in all respects be subordinate and junior in right of payment to the prior payment in full in cash of all the Guaranteed Obligations (other than contingent indemnification obligations).  In addition, any indebtedness of any Loan Party now or hereafter held by any Guarantor is hereby subordinated in right of payment to the prior payment in full in cash of the Guaranteed Obligations (other than contingent indemnification obligations).  If any amount shall erroneously be paid to any Guarantor on account of (i)  such subrogation, contribution, reimbursement,

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indemnity or similar right or (ii) any such indebtedness of any Loan Party, such amount shall be held for the benefit of the Secured Parties and shall forthwith be paid to the Collateral Agent to be credited against the payment of the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms of the Loan Documents.

SECTION 7.                      Information.  Each of the Guarantors assumes all responsibility for being and keeping itself informed of each other Loan Party’s financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks that such Guarantor incurs hereunder, and agrees that none of the Collateral Agent or the other Secured Parties will have any duty to advise any of the Guarantors of information known to it or any of them regarding such circumstances or risks.

SECTION 8.                      Representations and Warranties.  Each of the Guarantors represents and warrants as to itself that all representations and warranties relating to it contained in the Credit Agreement are true and correct (or true and correct in all material respects if not otherwise qualified by materiality or a Material Adverse Effect) as of the date hereof (unless expressly stated to relate to an earlier date, in which case such representations and warranties shall be true and correct (or true and correct in all material respects if not otherwise qualified by materiality or a Material Adverse Effect) as of such earlier date).

SECTION 9.                      Termination.  (a)  The Guarantees made hereunder (i) shall automatically terminate when all the Loan Obligations (other than contingent indemnification obligations) have been paid in full in cash, all Commitments have terminated and no Letters of Credit are outstanding (or satisfactory arrangements have been entered into with the Issuer to eliminate its credit risk with respect thereto) and (ii) shall continue to be effective or be reinstated, as the case may be, if at any time any payment in respect thereof, of any Obligation is rescinded or must otherwise be restored by any Secured Party or any Guarantor upon the bankruptcy or reorganization of the Borrower, any Guarantor or otherwise.  In connection with any termination referred to above, the Collateral Agent shall promptly execute and deliver to such Guarantor or Guarantor’s designee, at such Guarantor’s expense, any documents or instruments which such Guarantor shall reasonably request from time to time in writing to evidence such termination and release.

(b)           Each Guarantor shall be automatically released from its obligations under this Agreement without further action under the circumstances provided in Section 8.11(c) of the Credit Agreement.  In connection with such release, the Collateral Agent shall promptly execute and deliver to such Guarantor, at such Guarantor’s expense, all documents that such Guarantor shall reasonably request to evidence such termination or release.  Any execution and delivery of documents pursuant to this Section 9(b) shall be without recourse to or warranty by the Collateral Agent.

SECTION 10.                  Successors and Assigns; Several Agreement.  (a)  This Agreement shall be binding upon each Guarantor and their respective permitted successors and assigns, and shall inure to the benefit of such Guarantor, the Collateral Agent and the other Secured Parties and their respective permitted successors and assigns, except that no Guarantor shall have the right to assign or transfer its rights or obligations hereunder or any interest herein (and any such attempted assignment or transfer shall be void) except as permitted by the Credit Agreement.

(b)           This Agreement shall be construed as a separate agreement with respect to each Guarantor and may be amended, modified, supplemented, waived or released with respect to any Guarantor without the approval of any other Guarantor and without affecting the obligations of any other Guarantor hereunder.

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SECTION 11.                                Waivers; Amendment.  (a)  No failure or delay of the Collateral Agent or any other Secured Party in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power.  The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not excl usive of any rights or remedies provided by law or in the other Loan Documents.  No waiver of any provisions of this Agreement or any other Loan Document or consent to any departure by any Guarantor therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given.  No notice to or demand on any Guarantor in any case shall entitle such Guarantor or any other Guarantor to any other or further notice or demand in similar or other circumstances.

(b)           Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into in accordance with Section 9.08 of the Credit Agreement.

SECTION 12.                                Governing Law.  THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

SECTION 13.                                Notices.  All communications and notices hereunder shall (except as otherwise expressly permitted herein) be in writing and given as provided in Section 9.01 of the Credit Agreement.

SECTION 14.                                Survival of Agreement; Severability.  (a)  All covenants, agreements, representations and warranties made by any Guarantor herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Collateral Agent and the other Secured Parties and shall survive the making by the Lenders of the Loans, regardless of any investigation made by the Secured Parties or on their behalf, and shall continue in full fo rce and effect until this Agreement shall terminate.

(b)           In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction).  The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

SECTION 15.                                Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute a single contract (subject to Section 10) and shall become effective as provided in Section 10. Delivery of an executed signature page to this Agreement by facsimile or other electronic transmission shall be effective as delivery of a manually executed counterpart hereof.

SECTION 16.                                Rules of Interpretation; Headings.  (a)  The rules of interpretation specified in Section 1.03 of the Credit Agreement shall be applicable to this Agreement.

(b)           Section headings used herein are for the purpose of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting this Agreement.

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SECTION 17.                                Jurisdiction; Consent to Service of Process.  (a)  Each party hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court.  Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  Nothing in this Agreement shall affect any right that the Collateral Agent or any other Secured Party may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against any Guarantor or its properties in the courts of any jurisdiction.

(b)           Each party hereto hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court referred to in paragraph (a) of this Section.  Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(c)           Each party to this Agreement irrevocably consents to service of process in the manner provided for in Section 9.15 of the Credit Agreement.  Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

SECTION 18.                                WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS.

SECTION 19.                                Additional Guarantors.  To the extent any Subsidiary shall be required to become a Guarantor pursuant to Section 5.15 of the Credit Agreement, upon execution and delivery by the Collateral Agent and such Subsidiary of an instrument in the form of Annex I hereto, such Subsidiary shall become a Guarantor hereunder with the same force and effect as if originally named as a Guarantor herein.  The execution and delivery of any such instrument shall not require the consent of any other Guarantor hereunder.  The rights and obligat ions of each Guarantor hereunder shall remain in full force and effect notwithstanding the addition of any new Guarantor as a party to this Agreement.

SECTION 20.                                Right of Setoff.  If an Event of Default shall have occurred and be continuing, each Secured Party and its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Secured Party or its Affiliates, in each case whether direct or indirect, absolute or contingent, matured or unmatured, to or for the credit or the account of any Guara ntor against any of and all the obligations of such Guarantor now or hereafter existing under this Agreement and other Loan Documents held by such Secured Party, irrespective of whether or not such Secured Party or its Affiliates shall have made any demand under this Agreement or such other Loan Document upon any amount becoming due and payable by the Borrower under the Credit Agreement (whether at stated maturity, by acceleration or otherwise).  In connection with exercising its rights pursuant to the previous sentence, a Secured Party or its Affiliates may at any time use any Guarantor’s credit balances with the Secured Party or its Affiliates to purchase at the

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Secured Party’s or its Affiliates’ applicable spot rate of exchange any other currency or currencies which the Secured Party or its Affiliates considers necessary to reduce or discharge any amount due by such Guarantor to the Secured Party or its Affiliates, and may apply that currency or those currencies in or towards payment of those amounts.  The rights of each Secured Party or its Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) which such Secured Party or its Affiliates may have.  Each Secured Party or its Affiliates agrees promptly to notify such Guarantor and the Administrative Agent after making any such setoff; provided that the failure to give su ch notice shall not affect the validity of such setoff.

[Signature Pages Follow]

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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.

CPFILMS INC.

By:        /s/ James A. Tichenor

Name:  James A. Tichenor

Title:  Vice President and Treasurer

FLEXSYS AMERICA CO.

By:        /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

FLEXSYS AMERICA L.P.

By: Flexsys America Co., its general partner

By:        /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

MONCHEM INTERNATIONAL, INC.

By:        /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

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SOLUTIA BUSINESS ENTERPRISES INC.

By:        /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

SOLUTIA INTER-AMERICA, INC.

By:        /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

SOLUTIA OVERSEAS, INC.

By:        /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

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DEUTSCHE BANK TRUST COMPANY AMERICAS,

as Collateral Agent

By:        /s/ Erin Morrissey

Name: Erin Morrissey

Title: Vice President

By:        /s/ Carin Keegan

Name: Carin Keegan

Title: Director

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Schedule I to the

Guarantee Agreement

Guarantors

Name                                                             

CPFilms Inc.

Flexsys America Co.

Flexsys America L.P.

Monchem International, Inc.

Solutia Business Enterprises Inc.

Solutia Inter-America, Inc.

Solutia Overseas, Inc.

Annex I to the

Guarantee Agreement

Form of Joinder Agreement

SUPPLEMENT NO. ___ dated as of [               ], to the Guarantee Agreement, dated as of March 17, 2010 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Guarantee Agreement”), among each of the subsidiaries of SOLUTIA INC., a Delaware corporation (the “Borrower”) listed on Schedule I thereto (each such subsidiary individually, a “Subsidiary Guarantor” and collectively, together with each other Subsidiary that becomes a party thereto, the “Subsidiary Guarantors”) in favor of DEUTSCHE BANK TRUST COMPANY AMERICAS, as collateral agent (in such capacity, together with its successors in such capacity, the “Collateral Agent”) on behalf of the Secured Parties (as defined in the Credit Agreement referred to below).

A.           Reference is made to the Credit Agreement dated as of March 17, 2010 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), among the Borrower, the Collateral Agent, Deutsche Bank Trust Company Americas, as administrative agent (in such capacity and together with any successors in such capacity, the “Administrative Agent”) for the Lenders (as defined herein), the lending institutions from time to time party thereto (the “Lenders”), and the other parties t hereto.  Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement.

B.           The Guarantors have entered into the Guarantee Agreement in order to induce the Lenders to enter into the Credit Agreement and to induce the Lenders to make Loans to the Borrower and issue Letters of Credit under the Credit Agreement.

C.           Pursuant to Section 5.15 of the Credit Agreement and Section 19 of the Guarantee Agreement, each Subsidiary (other than any Excluded Subsidiary) of the Borrower that was not in existence or not a Subsidiary on the date of the Credit Agreement is required to enter into the Guarantee Agreement upon becoming a Subsidiary.  Each undersigned Subsidiary (“New Subsidiary”) is executing this Supplement in accordance with the requirements of the Credit Agreement and Guarantee Agreement to become a Guarantor under the Guarantee Agreement.

Accordingly, the Collateral Agent and each New Subsidiary agree as follows:

SECTION 1.                      In accordance with Section 19 of the Guarantee Agreement, each New Subsidiary by its signature below becomes a Guarantor under the Guarantee Agreement with the same force and effect as if originally named therein as a Guarantor and each New Subsidiary hereby (a) agrees to all the terms and provisions of the Guarantee Agreement applicable to it as a Guarantor thereunder and (b) represents and warrants that the representations and warranties made by it as a Guarantor thereunder are true and correct (or true and correct in all material respects if not otherwise qualified by materiality or a Material Adverse Effect) on and as of the date hereof (except to the extent that they expr essly relate to an earlier date, in which case they shall be true and correct (or true and correct in all material respects if not otherwise qualified by materiality or a Material Adverse Effect) as of such earlier date).  As of the date hereof, each reference to a Guarantor in the Guarantee Agreement shall be deemed to include each New Subsidiary.  The Guarantee Agreement is hereby incorporated herein by reference.

SECTION 2.                      Each New Subsidiary represents and warrants to the Collateral Agent and the other Secured Parties that this Supplement has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except that the enforcement thereof may be subject to bankruptcy, insolvency, reorganization, moratorium

or other similar laws now or hereafter in effect relating to creditors’ rights generally and to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

SECTION 3.                      This Supplement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.  Delivery of an executed signature page to this Supplement by facsimile or other electronic transmission shall be as effective as delivery of a manually signed counterpart of this Supplement.

SECTION 4.                      Except as expressly supplemented hereby, the Guarantee Agreement shall remain in full force and effect.

SECTION 5.                      THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

SECTION 6.                      In case any one or more of the provisions contained in this Supplement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and in the Guarantee Agreement shall not in any way be affected or impaired thereby (it being understood that the invalidity a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction).  The parties hereto shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.

SECTION 7.                      All communications and notices hereunder shall (except as otherwise expressly permitted herein) be in writing and given as provided in Section 9.01 of the Credit Agreement.  All communications and notices hereunder to any New Subsidiary shall be given to it c/o the Borrower at the Borrower’s address as provided in Section 9.01 of the Credit Agreement, with a copy to the Borrower.

SECTION 8.                      Each New Subsidiary agrees to reimburse the Collateral Agent for its reasonable out-of-pocket expenses in connection with this Supplement, including the reasonable fees, other charges and disbursements of counsel for the Collateral Agent in each case in accordance with the terms of the Credit Agreement.

[Signature Page Follows]

IN WITNESS WHEREOF, each New Subsidiary and the Collateral Agent have duly executed this Supplement as of the day and year first above written.

[Name of New Subsidiary]

By:   ___________________     

Name:

Title:

Address:

DEUTSCHE BANK TRUST COMPANY AMERICAS,

as Collateral Agent

By:      ___________________    

Name:

Title:

Address:

By:     ___________________     

Name:

Title:

Address:

EX-10.3

EXHIBIT 10.3

SECURITY AGREEMENT

by

SOLUTIA INC.

and

THE SUBSIDIARIES PARTY HERETO,

as Grantors,

and

DEUTSCHE BANK TRUST COMPANY AMERICAS,

as Collateral Agent

______________________

Dated as of March 17, 2010

TABLE OF CONTENTS

ARTICLE I

DEFINITIONS

		Page
SECTION 1.01.	Uniform Commercial Code Defined Terms	2
SECTION 1.02.	Credit Agreement Defined Terms	2
SECTION 1.03.	Definition of Certain Terms Used Herein	2
SECTION 1.04.	Interpretation	7
SECTION 1.05.	Resolution of Drafting Ambiguities	7
SECTION 1.06.	Perfection Certificate	7

ARTICLE II

SECURITY INTERESTS

SECTION 2.01.	Grant of Security Interest	7
SECTION 2.02.	No Assumption of Liability	8

ARTICLE III

REPRESENTATIONS AND WARRANTIES

SECTION 3.01.	Title and Authority	8
SECTION 3.02.	Filings	9
SECTION 3.03.	Validity of Security Interests	9
SECTION 3.04.	Limitations on and Absence of Other Liens	9
SECTION 3.05.	Other Actions	10
SECTION 3.06.	Condition and Maintenance of Equipment	12

ARTICLE IV

COVENANTS

SECTION 4.01.	Change of Name; Location of Collateral; Records; Place of Business	12
SECTION 4.02.	Protection of Security	13
SECTION 4.03.	Further Assurances	13
SECTION 4.04.	Inspection and Verification	13
SECTION 4.05.	Taxes; Encumbrances	14
SECTION 4.06.	Assignment of Security Interest	14
SECTION 4.07.	Continuing Obligations of the Grantors	14
SECTION 4.08.	Use and Disposition of Collateral	14
SECTION 4.09.	Insurance	14
SECTION 4.10.	Certain Covenants and Provisions Regarding Patent, Trademark and Copyright Collateral	14

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SECTION 4.11. Certain Covenants and Provisions Regarding Receivables 17

ARTICLE V

REMEDIES

SECTION 5.01.	Remedies upon Default	18
SECTION 5.02.	Notice of Sale	20
SECTION 5.03.	Waiver of Notice and Claims	21
SECTION 5.04.	Certain Sales of Collateral	21
SECTION 5.05.	No Waiver; Cumulative Remedies	22
SECTION 5.06.	Certain Additional Actions Regarding Intellectual Property	22
SECTION 5.07.	Application of Proceeds	23
SECTION 5.08.	Collateral Agent’s Calculations	23

ARTICLE VI

The Collateral Agent

SECTION 6.01.	General Authority of the Collateral Agent over the Collateral	23
SECTION 6.02.	Exercise of Powers	24
SECTION 6.03.	Remedies Not Exclusive	24
SECTION 6.04.	Waiver and Estoppel	24
SECTION 6.05.	Limitation on Collateral Agent’s Duty in Respect of Collateral	25
SECTION 6.06.	Limitation by Law	25
SECTION 6.07.	Rights of Secured Parties in Respect of Obligations	25
SECTION 6.08.	Compensation and Expenses	25
SECTION 6.09.	Stamp and Other Similar Taxes	26
SECTION 6.10.	Filing Fees, Excise Taxes, etc	26
SECTION 6.11.	Indemnification	26

ARTICLE VII

MISCELLANEOUS

SECTION 7.01.	Notices	26
SECTION 7.02.	Survival of Agreement	26
SECTION 7.03.	Binding Effect	26
SECTION 7.04.	GOVERNING LAW	27
SECTION 7.05.	Waivers; Amendment; Several Agreement	27
SECTION 7.06.	WAIVER OF JURY TRIAL	27
SECTION 7.07.	Severability	27
SECTION 7.08.	Counterparts	28
SECTION 7.09.	Headings	28
SECTION 7.10.	Jurisdiction; Consent to Service of Process	28
SECTION 7.11.	Termination	28
SECTION 7.12.	Additional Grantors	29

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SECTION 7.13.	Financing Statements	29
SECTION 7.14.	Collateral Agent Appointed Attorney-in-Fact	30
SECTION 7.15.	Intercreditor Agreement	31
SECTION 7.16.	Mortgages	31
SECTION 7.17.	Conflicts	31

SCHEDULES

Schedule I                      Subsidiary Guarantors

ANNEXES

Annex I                      Form of Joinder Agreement

Annex II                      Form of Perfection Certificate

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SECURITY AGREEMENT

SECURITY AGREEMENT (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, this “Agreement”) dated as of March 17, 2010 among SOLUTIA INC., a Delaware corporation (the “Borrower”), each Subsidiary of the Borrower listed on Schedule I hereto (collectively, together with each Subsidiary that becomes a party hereto pursuant to Section 7.12 of this Agreement, the “Subsidiary Guarantors” and, together with the Borrower, the “Grantors”), and DEUTSCHE BANK TRUST COMPANY AMERICAS, as collateral agent (in such capacity, together with its successors in such capacity, the “Collateral Agent”) for the Secured Parties (as defined in the Credit Agreement referred to below).

R E C I T A L S

A.           The Borrower, the Collateral Agent, Deutsche Bank Trust Company Americas, as administrative agent (in such capacity and together with any successors in such capacity, the “Administrative Agent”) for the Lenders (as defined herein), the lending institutions from time to time party thereto (the “Lenders”) and the other agents party thereto have entered into that certain Credit Agreement, dated as of the date hereof (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), providing for the making of Loans to the Borrower and the issuance of Letters of Credit pursuant to, and upon the terms and subject to the conditions specified in, the Credit Agreement.

B.           Each Subsidiary Guarantor has, pursuant to the Guarantee Agreement, dated as of the date hereof, among other things, unconditionally guaranteed the obligations of the Borrower under the Credit Agreement.

C.           The Borrower and each Subsidiary Guarantor will receive substantial benefits from the execution, delivery and performance of the obligations of the Borrower under the Credit Agreement and are, therefore, willing to enter into this Agreement.

D.           Contemporaneously with the execution and delivery of this Agreement, the Borrower and Subsidiary Guarantors have executed and delivered to the Collateral Agent a Pledge Agreement (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Pledge Agreement”).

E.           This Agreement is given by each Grantor in favor of the Collateral Agent for the benefit of the Secured Parties to secure the payment and performance of all of the Obligations (as hereinafter defined).

NOW THEREFORE, in consideration of the foregoing and other benefits accruing each Grantor, the receipt and sufficiency of which are hereby acknowledged, each Grantor and the Collateral Agent hereby agree as follows:

ARTICLE I

DEFINITIONS

SECTION 1.01.Uniform Commercial Code Defined Terms.  Unless otherwise defined herein, terms used herein that are defined in the UCC shall have the meanings assigned to them in the UCC, including the following which are capitalized herein:

“Account Debtor”; “Accounts”; “Bank”; “Certificates of Title”; “Chattel Paper”; “Commercial Tort Claim”; “Commodity Account”; “Commodity Contract”; “Commodity Intermediary”; “Deposit Accounts”; “Documents”; “Electronic Chattel Paper”; “Entitlement Holder”, “Entitlement Order”; “Equipment”; “Fixtures”; “General Intangibles”; “Goods”; “Instruments” (as defined in Article 9 rather t han Article 3); “Inventory”; “Investment Property”; “Letter-of-Credit Rights”; “Letters of Credit”; “Money”; “Proceeds”; “Records”; “Securities Account”; “Securities Intermediary”; “Security Entitlement”; “Supporting Obligations”; and “Tangible Chattel Paper”.

SECTION 1.02.Credit Agreement Defined Terms.  Capitalized terms used but not otherwise defined herein that are defined in the Credit Agreement shall have the meanings given to them in the Credit Agreement.

SECTION 1.03.Definition of Certain Terms Used Herein.  As used herein, the following terms shall have the following meanings:

“Accounts Receivable” shall mean all Accounts and all right, title and interest in any returned goods, together with all rights, titles, securities and guarantees with respect thereto, including any rights to stoppage in transit, replevin, reclamation and resales, and all related security interests, liens and pledges, whether voluntary or involuntary, in each case whether now existing or owned or hereafter arising or acquired.

“Agreement” shall have the meaning assigned to such term in the Preamble of this Agreement.

 “Bankruptcy Code” shall mean Title 11 of the United States Code entitled “Bankruptcy”, as now and hereinafter in effect, or any successor statute.

“Books and Records” shall mean all instruments, files, Records, ledger sheets and documents.

“Borrower” shall have the meaning assigned to such term in the Preamble of this Agreement.

“Charges” shall mean any and all property and other taxes, assessments and special assessments, levies, fees and all governmental charges imposed upon or assessed against, and all claims (including, without limitation, landlords’, carriers’, mechanics’, maritime, workmen’s, repairmen’s, laborers’, materialmen’s, suppliers’ and warehousemen’s Liens and other claims arising by operation of law) against, all or any portion of the Collateral.

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“Collateral” shall have the meaning assigned to such term in Section 2.01.

“Collateral Agent” shall have the meaning assigned to such term in the Preamble of this Agreement.

“Collateral Agent Fees” shall mean all fees, costs and expenses of the Collateral Agent of thetypes described inSections 6.08, 6.09, 6.10 and 6.11.

“Collateral Estate” shall have the meaning assigned to such term in Section 6.01(c).

“Collateral Support” shall mean all property (real or personal) assigned, hypothecated or otherwise securing any Collateral and shall include any security agreement or other agreement granting a lien or security interest in such real or personal property.

 “Copyrights” shall mean all U.S. and foreign copyrights (whether registered or unregistered and whether published or unpublished) and all mask works (as such term is defined in 17 U.S.C. Section 901, et seq.), together with any and all (i) registrations and applications therefor, including those listed on Schedule 13(b) of the Perfection Certificate, (ii) rights arising under applicable law with respect thereto, (iii) renewals and extensions thereof, (iv) income, fees, royalties, damages, claims and payments now or hereafter due and/or payable with respect thereto, including damage awards and payments for past, present or future infringements or other violations thereof and (v) rights to sue for past, present or future infringements thereof.

“Credit Agreement” shall have the meaning assigned to such term in the Recitals of this Agreement.

“Distribution Date” shall mean each date fixed by the Collateral Agent in its sole discretion for a distribution to the Secured Parties of funds held by the Collateral Agent for the benefit of the Secured Parties.

“Excluded Account” shall mean (i) any deposit account(s) used solely as a payroll, trust, employee benefit, tax or other fiduciary account and any zero balance accounts, (ii) any escrow account that is holding funds solely for the benefit of third parties and (iii) the deposit account in connection with the Pledge Agreement, dated as of June 1, 2009, among the Borrower and Citibank, N.A.

 “Excluded Property” shall mean:

(a)           any permit, lease, license, contract, instrument, security, franchise or other document, held by any Grantor that validly prohibits the creation by such Grantor of a security interest therein or thereon (other than to the extent that any such prohibition would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC (or any successor provision or provisions) of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity);

(b)           any permit, lease, license, contract, instrument, security, franchise or other document, or the assets subject thereto or covered thereby, held by any Grantor to the extent that any Requirement of Law applicable thereto prohibits the creation of a security

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interest therein or thereon (other than to the extent that any such prohibition would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC (or any successor provision or provisions) of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity);

(c)           goods owned by any Grantor on the date hereof or hereafter acquired that are subject to a Lien securing a purchase money obligation (as defined in the UCC) or Capital Lease Obligation permitted to be incurred pursuant to the provisions of Section 6.01(vi) of the Credit Agreement if the contract or other agreement in which such Lien is granted (or the documentation providing for such purchase money obligation or Capital Lease Obligation) validly prohibits the creation of any other Lien on such Goods;

(d)           any Collateral consisting of Intellectual Property (i) in which the grant by a Grantor of a security interest therein is prohibited or would result in the voiding or cancellation of such Intellectual Property without the consent of a third party or by Requirement of Law or (ii) including any Trademark application filed in the United States Patent and Trademark Office on the basis of such Grantor’s “intent-to-use” such Trademark, unless and until acceptable evidence of use of the Trademark has been filed with and duly accepted by the United States Patent and Trademark Office pursuant to Section 1(c) or 1(d) of the Lanham Act (at which time such Trademark application will no longer be considered Excluded Property), in each case, oth er than to the extent that any such prohibition would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC (or any successor provision or provisions) of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity);

(e)           Securities Collateral (as defined in the Pledge Agreement) and the Equity Interests and debt securities excluded from the definition of “Securities Collateral” in the Pledge Agreement;

(f)           any issued and outstanding shares of voting stock of any Subsidiary of a Grantor organized under the laws of a Non-U.S. Jurisdiction that is expressly excluded from the pledge contained in any Non-U.S. Pledge Agreement;

(g)           motor vehicles and other assets subject to certificates of title;

(h)           any Equity Interests or debt securities owned by such Grantor if and to the extent that the grant of the security interest shall, after giving effect to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC (or any successor provision or provisions) or any other applicable law, (A) except in the case of a Wholly Owned Subsidiary, constitute or result in the abandonment, invalidation or unenforceability of any right, title or interest of such Grantor therein, (B) except in the case of a Wholly Owned Subsidiary, constitute or result in a breach or termination pursuant to the terms of, or a default under, any such Equity Interest or debt securities, (C) be void or illegal under any applicable governmental law, rule or regulation, or (D) except in the case of a Wholly Owned Subsidiary, be prohibited by (i) the organizational documents of the issuer of such Equity Interests or debt securities or (ii) agreements among the equity holders of the issuer of such Equity Interests or debt securities, in each case, as in effect on the Effective Date;

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(i)           any Commercial Tort Claim with a value of less than $500,000; and

(j)           any Excluded Accounts;

provided that the term “Excluded Property” shall not include any Proceeds, substitutions or replacements of any Excluded Property (unless such Proceeds, substitutions or replacements would constitute Excluded Property).

“Grantors” shall have the meaning assigned to such term in the Preamble of this Agreement.

“Intellectual Property” shall mean, collectively, with respect to any Grantor, all intellectual and similar property rights of every kind and nature, whether arising under United States, multinational or foreign laws or otherwise, including Patents, Copyrights, Trademarks, Trade Secrets, intangible rights in software and databases not otherwise included in the foregoing, and the right to sue or otherwise recover for any past, present and future infringement, dilution, misappropriation, or other violation or impairment thereof, including the right to receive all proceeds therefrom.

“Intellectual Property Licenses” shall mean, collectively, with respect to each Grantor, all agreements pursuant to which such Grantor receives or grants any right in, to, or under Intellectual Property, including license agreements, distribution agreements and covenants not to sue (regardless of whether such agreements and covenants are contained within an agreement that also covers other matters, such as development or consulting) with respect to any Patent, Trademark, Copyright, Trade Secrets or other Intellectual Property, whether such Grantor is a licensor or licensee, distributor or distributee under any such agreement, including those listed on Schedules 13(a) and < font style="DISPLAY: inline; TEXT-DECORATION: underline">13(b) of the Perfection Certificate, together with any and all (i) amendments, renewals, extensions, supplements and continuations thereof, and (ii) income, fees, royalties, damages, claims and payments now and hereafter due and/or payable thereunder and with respect thereto including damages and payments for past, present or future infringements or violations thereof.

 “Lenders” shall have the meaning assigned to such term in the Recitals of this Agreement.

“Patents” shall mean, collectively, all United States and foreign patents, patent applications, certificates of inventions, and industrial designs, together with any and all (i) rights arising under applicable law with respect to any of the foregoing, (ii) inventions and improvements described and claimed therein, (iii) reissues, divisions, continuations extensions and continuations-in-part thereof and amendments thereto, (iv) income, fees, royalties, damages, claims and payments now or hereafter due and/or payable thereunder and with respect thereto including damages and payments for past, present or future infringements or other violations thereof and (v) rights to sue for past, present or future infringements or other violations thereof.< /font>

“Perfection Certificate” shall mean a certificate substantially in the form of Annex II hereto, completed and supplemented with the schedules and attachments contemplated thereby, and duly executed by the Grantors.

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“Pledge Agreement” shall have the meaning assigned to such term in the Recitals of this Agreement.

“Pledged Securities” shall have the meaning assigned to such term in the Pledge Agreement and shall include Equity Interests pledged pursuant to Non-U.S. Pledge Agreements.

“Receivables” shall mean all (i) Accounts, (ii) Chattel Paper, (iii) Payment Intangibles, (iv) General Intangibles, (v) Instruments and (vi) all other rights to payment, whether or not earned by performance, for goods or other property sold, leased, licensed, assigned or otherwise disposed of, or services rendered or to be rendered, regardless of how classified under the UCC together with all of Grantors’ rights, if any, in any goods or other property giving rise to such right to payment to the extent not constituting Excluded Property and all Collateral Support and Supporting Obligations related thereto and all Records relating thereto.

“Securities Collateral” shall have the meaning assigned to such term in the Pledge Agreement.

“Security Interests” shall have the meaning assigned to such term in Section 2.01.

“Subsidiary Guarantors” shall have the meaning assigned to such term in the Preamble of this Agreement.

“Trademarks” shall mean, collectively, all United States, state, and foreign trademarks,  service marks, slogans, logos, certification marks, trade dress, Internet domain names, corporate names, trade names, and other source or business identifiers, whether registered or unregistered (whether statutory or common law and whether established or registered in the United States or any other country or any political subdivision thereof), together with any and all (i) registrations and applications for any of the foregoing, including those listed on Schedule 13(a) of the Perfection Certificate, (ii) goodwill connected with the use thereof and symbolized thereby, ( iii) rights arising under applicable law with respect to the use of any of the foregoing, (iv) renewals thereof and amendments thereto, (v) income, fees, royalties, damages and payments now and hereafter due and/or payable thereunder and with respect thereto, including damages, claims and payments for past, present or future infringements, dilutions or other violations thereof and (vi) rights to sue for past, present and future infringements, dilutions or other violations thereof.

“Trade Secrets” shall mean all trade secrets and all other confidential or proprietary information and know-how, whether or not such information has been reduced to a writing or other tangible form, together with all (i) rights arising under applicable law with respect to the use of any of the foregoing, (ii) income, fees, royalties, damages and payments now and hereafter due and/or payable thereunder and with respect thereto, including damages, claims and payments for past, present or future misappropriation or other violations thereof and (iii) rights to sue for past, present and future misappropriation or other violations thereof.

“UCC” shall mean the Uniform Commercial Code as in effect on the date hereof in the State of New York; provided, however, that if by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of the Collateral Agent’s and the Secured Parties’ security interest in any item or portion of the Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term “UCC” shall mean the Uniform Commercial Code as in effect on the date hereof in such other jurisdiction for puposes of the provisions h ereof relating to such attachment, perfection or priority and for purposes of definitions relating to such provisions.

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SECTION 1.04.Interpretation.  The rules of interpretation specified in the Credit Agreement (including Section 1.03 thereof) shall be applicable to this Agreement.

SECTION 1.05.Resolution of Drafting Ambiguities.  Each Grantor acknowledges and agrees that it was represented by counsel in connection with the execution and delivery hereof, that it and its counsel reviewed and participated in the preparation and negotiation hereof and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party (i.e., the Collateral Agent) shall not be employed in the interpretation hereof.

SECTION 1.06.Perfection Certificate.  The Collateral Agent and each Grantor agree that the Perfection Certificate and all schedules, amendments and supplements thereto are and shall at all times remain a part of this Agreement.

ARTICLE II  

SECURITY INTERESTS

SECTION 2.01.Grant of Security Interest.  As collateral security for the payment and performance in full of all the Obligations, each Grantor hereby pledges and grants to the Collateral Agent, for the benefit of the Secured Parties, a lien on and security interest in and to all of the right, title and interest of such Grantor in, to and under the following property, wherever located, and whether now existing or hereafter arising or acquired from time to time (collectively, the “Collateral”):

(a)Accounts Receivable;

(b)Books and Records;

(c)Money and Deposit Accounts;

(d)Chattel Paper;

(e)Commercial Tort Claims described on Schedule 14 to the Perfection Certificate (as such schedule may be amended or supplemented from time to time);

(f)Documents;

(g)Equipment;

(h)Fixtures;

(i)General Intangibles (including Intellectual Property and Intellectual Property Licenses);

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(j)Goods;

(k)Instruments;

(l)Inventory;

(m)Investment Property;

(n)Supporting Obligations; and

(o)all other personal property of such Grantor, whether tangible or intangible, and all Proceeds and products of each of the foregoing and all accessions to, substitutions and replacements for, and rents, profits and products of, each of the foregoing, any and all Proceeds of any insurance, indemnity, warranty or guaranty payable to such Grantor from time to time with respect to any of the foregoing.

Notwithstanding anything to the contrary contained in clauses (a) through (o) above, (x) the security interest created by this Agreement shall not extend to, and the term “Collateral” shall not include, any Excluded Property and (y) from and after the Effective Date, no Grantor shall permit to become effective in any document creating, governing or providing for any permit, license or agreement a provision that would prohibit the creation of a Lien on such permit, license or agreement in favor of the Collateral Agent unless such prohibition is permitted under Section 6.09 of the Credit Agreement.

The Liens granted hereunder to secure the Obligations are collectively referred to herein as the “Security Interests”.

SECTION 2.02.No Assumption of Liability.  The Security Interests are granted as security only and shall not subject the Collateral Agent or any other Secured Party to, or in any way alter or modify, any obligation or liability of any Grantor with respect to or arising out of the Collateral.

ARTICLE III   

REPRESENTATIONS AND WARRANTIES

The Grantors jointly and severally represent and warrant to the Collateral Agent and the Secured Parties that:

SECTION 3.01.Title and Authority.  Each Grantor has good and valid rights in and title (or right to use in the case of Intellectual Property) to the Collateral with respect to which it has purported to grant a Security Interest hereunder and has full power and authority to grant to the Collateral Agent the Security Interest in such Collateral pursuant hereto and to execute, deliver and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other Person other than any consent or approval which has been obtained.

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SECTION 3.02.Filings.  (a)  All information set forth herein as of the date hereof and in the Perfection Certificate as of the date hereof, including the Schedules annexed hereto and thereto, has been duly prepared, completed and executed and the information set forth herein and therein is correct and complete in all material respects.  The Collateral described on the Schedules annexed to the Perfection Certificate constitutes all of the property of such type of Collateral owned or held by the Grantors to the extent re quired to be scheduled thereon.  Fully completed and, to the extent necessary or appropriate, duly executed UCC financing statements (including fixture filings, as applicable) or other appropriate filings, recordings or registrations containing a description of the Collateral have been delivered to the Collateral Agent for filing in each governmental, municipal or other office specified in Schedule 7 to the Perfection Certificate, which are all the filings, recordings and registrations (along with the concurrent payment of any applicable taxes or filing fees) that are necessary to publish notice of and protect the validity of and to establish a legal, valid and perfected security interest in favor of the Collateral Agent (for the benefit of the Secured Parties) in respect of all Collateral in which a security interest may be perfected by filing, recording or registration in the United States (or any political subdivision thereof) and its territories and possessions (provided that additional filings may be required to perfect the security interest in any Patents, Trademarks and Copyrights acquired after the date hereof), and no further or subsequent filing, refiling, recording, rerecording, registration or reregistration under Article 9 of the UCC is necessary in any such jurisdiction, except as provided under applicable law with respect to the filing of continuation statements.

(b)Each Grantor represents and warrants that a fully executed security agreement in the form hereof (or short form security agreements in a form reasonably satisfactory to the Collateral Agent) identifying all Collateral consisting of (x) United States issued Patents and Patent applications and United States registered Trademarks and Trademarks applications, in each case, owned by such Grantor, have been delivered contemporaneously with the execution of this Agreement to the Collateral Agent for recordation with the United States Patent and Trademark Office, and (y) United States registered Copyrights and Copyright applications owned by such Grantor have been delivered contemporaneously with the execution of this Agreement to the Co llateral Agent for registration with the United States Copyright Office.

SECTION 3.03.Validity of Security Interests.  This Agreement creates legal and valid security interests in all the Collateral securing the payment and performance of the Obligations; provided, however, that, for the avoidance of doubt, the foregoing representation shall not be made with respect to, or construed in accordance with, the laws of any jurisdiction other than the United States, any State thereof or the District of Columbia.  The Security Interests are and shall be prior to any other Lien on any of the Collateral, other than Permitted Liens.

SECTION 3.04.Limitations on and Absence of Other Liens.  The Collateral is owned by the Grantors or the Grantors have rights therein, free and clear of any Lien, except for Permitted Liens.  The Grantors have not filed or consented to the filing of (a) any financing statement or analogous document under the UCC or any other applicable laws covering any Collateral, (b) any assignment in which any Grantor assigns any Collateral or any security agreement or similar instrument covering any Collateral with the United States Patent and Trademark Office and the United States Copyright Office or (c) any assignment in which any Grantor assigns any Collateral or any security agreement or similar instrument covering any Collateral with any foreign governmental, municipal or other office, which financing statement or analogous document, assignment, security agreement or similar instrument is still in effect, except, in each case, for filings required under this Agreement or any other Loan Document, Permitted Liens or filings as to which a duly authorized termination statement relating to such financing statement or other instrument has been delivered to the Collateral Agent on the Effective Date.

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SECTION 3.05.Other Actions.  In order to further ensure the attachment, perfection and priority of, and the ability of the Collateral Agent to enforce, preserve and protect, the Collateral Agent’s security interests in the Collateral, each Grantor hereby represents and warrants as follows and agrees, in each case at such Grantor’s own expense, to take the following actions with respect to the following Collateral:

(a)Instruments and Tangible Chattel Paper. As of the date hereof, (x) each Instrument representing indebtedness between or among the Grantors or owed to any Grantor by any of the Borrower’s other Restricted Subsidiaries and (y) each other Instrument and each other item of Tangible Chattel Paper specified in Schedule 12 to the Perfection Certificate valued in excess of $500,000 has been properly endorsed, assigned and delivered to the Collateral Agent, and, if necessary, accompanied by instruments of transfer or assignment du ly executed in blank; provided, that, to the extent that any such Instrument constitutes an Intercompany Note and to the extent that any Grantor is required hereunder to deliver any such Intercompany Note to the Collateral Agent for purposes of possession, such Grantor’s obligations hereunder with respect to such delivery shall be deemed satisfied by the delivery to the Collateral Agent of the Master Intercompany Note.  If any amount individually or in the aggregate in excess of $500,000 payable under or in connection with any of the Collateral shall be evidenced by any Instrument or Tangible Chattel Paper, the Grantor acquiring such Instrument or Tangible Chattel Paper shall notify the Collateral Agent and, on each date on which financial statements are required to be delivered under Section 5.01(a) or (b) of the Credit Agreement, endorse, assign and deliver the same to the Collateral Agent, accompanied by such instruments of t ransfer or assignment duly executed in blank as the Collateral Agent may from time to time reasonably request; provided, however, that so long as no Event of Default shall have occurred and be continuing, the Collateral Agent shall return such Instrument or Tangible Chattel Paper to such Grantor from time to time, to the extent necessary for collection in the ordinary course of such Grantor’s business.

(b)Investment Property.  (i)  Each Grantor hereby represents and warrants that it does not hold, own or have any interest in any certificated securities or uncertificated securities other than those constituting Securities Collateral under the Pledge Agreement and those not required to be pledged pursuant to the terms of the Pledge Agreement or this Agreement.  If any Grantor shall at any time hold or acquire any certificated securities constituting Investment Property (other than any Excluded Property) valued in excess of $500,000 that are not Pledged Securities under the Pledge Agreement, such Grantor shall, on each date on which financial statements are required to be delivered under Section 5.01(a) or (b) of the Credit Agreement, endorse, assign and deliver the same to the Collateral Agent, accompanied by such instruments of transfer or assignment duly executed in blank, all in form and substance reasonably satisfactory to the Collateral Agent.  If any securities now or hereafter acquired by any Grantor constituting Investment Property (other than any Excluded Property) that are not Pledged Securities are uncertificated, such Grantor shall promptly notify the Collateral Agent thereof and use its commercially reasonable efforts to, pursuant to an agreement in form and substance resonably satisfactory to the Collateral Agent, cause the issuer to agree to comply with instructions from the Collateral Agent as to such securities, without further consent of any Grantor.

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(ii)Each Grantor shall promptly pay all Charges and fees with respect to the Investment Property pledged by it under this Agreement; provided that no Grantor shall be required to pay any such Charge or fee that is being contested in good faith and by proper proceedings diligently conducted, which proceedings have the effect of preventing the forfeiture or sale of such Investment Property, if it has maintained adequate reserves with respect thereto in accordance with and to the extent required by GAAP and such failure to pay could not reasonably be expected to have a Material Adverse Effect; provided, further, that no Liens shall be permitted to exist, directly or indirectly, on any Investment Property other than Liens in favor of the Collateral Agent and Permitted Liens.  In the event any Grantor shall fail to make such payment contemplated in the immediately preceding sentence (except to the extent any Grantor is contesting such Charges and fees in good faith), the Collateral Agent may upon written notice to such Grantor, do so for the account of such Grantor and the Grantors shall promptly reimburse and indemnify the Collateral Agent from all reasonable costs and expenses incurred by the Collateral Agent under this Section 3.05(c).

(c)Electronic Chattel Paper and Transferable Records.If any amount individually or in the aggregate in excess of $500,000 payable under or in connection with any of the Collateral shall be evidenced by any Electronic Chattel Paper or any “transferable record,” as that term is defined in Section 201 of the Federal Electronic Signatures in Global and National Commerce Act, or in Section 16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, the Grantor acquiring such Electronic Chattel Paper or transferable record shall, on each date on whic h financial statements are required to be delivered under Section 5.01(a) or (b) of the Credit Agreement, notify the Collateral Agent and take such action as the Collateral Agent may reasonably request in writing to vest in the Collateral Agent control under UCC Section 9-105 of such Electronic Chattel Paper or control under Section 201 of the Federal Electronic Signatures in Global and National Commerce Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record.

(d)Intellectual Property. (i) Schedules 13(a) and (b) of the Perfection Certificate set forth a true and complete list of (A) all United States registrations of and applications for Patents, Trademarks, and Copyrights owned by such Grantor as of the date hereof and (B) to the best of each Grantor’s knowledge, all material know-how and patent Intellectual Property Licenses currently in effect; (ii) such Grantor is the owner of the entire right, title, and intere st in and to all U.S. Intellectual Property listed on Schedule 13(a) of the Perfection Certificate, and such Grantor owns or has the valid right to use all other Intellectual Property used in the conduct of its business, free and clear of all Liens, claims, encumbrances, and licenses, except for Permitted Liens, and except as could not be reasonably expected to have a Material Adverse Effect; (iii) all Intellectual Property

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listed on Schedule 13(a) of the Perfection Certificate is subsisting and such Grantor has performed all acts and has paid all renewal, maintenance, and other fees and taxes required to maintain such Intellectual Property in full force and effect except as may be permitted under Section 4.10(f) and except as could not be reasonably expected to have a Material Adverse Effect; (iv) to the best of such Grantor’s knowledge, all Intellectual Property owned by such Grantor is valid and enforceable, and no holding, decision, or judgment has been rendered in any action or proceeding before any court or administrative authority challenging the validity of, such Grantor’s right to register, or such Grantor’s rights to own or use, any such Intellectual Property and no such action or proceeding is pending or, to the best of such Grantor’s knowledge, threatened, except as could not be reasonably expected to have a Material Effect; (v) to the best of such Grantor’s knowledge, the conduct of such Grantor’s business does not infringe upon or otherwise violate any Intellectual Property right of any third party except as could not reasonably be expected to have a Material Adverse Effect; (vi) to the best of each Grantor’s knowledge, no third party is infringing upon or otherwise violating any rights in any Intellectual Property owned or used by such Grantor, or any of its respective licensees except as could not reasonably be expected to have a Material Adverse Effect; (vii) no settlement or consents, covenants not to sue, non-assertion assurances, or releases  have been entered into by such Grantor or to which such Grantor is bound adversely affect Grantor’s rights to own or use any Intellectual Prope rty that is material to the business of such Grantor as currently conducted, except as could not be reasonably expected to have a Material Adverse Effect; and (viii) such Grantor has not made a previous assignment, sale, transfer or agreement constituting a present or future assignment, sale, transfer or agreement of any material Intellectual Property owned by such Grantor that has not been terminated or released.

(e)Commercial Tort Claims.  As of the date hereof, each Grantor hereby represents and warrants that it holds no Commercial Tort Claims other than those listed in Schedule 14 to the Perfection Certificate.  If any Grantor shall at any time hold or acquire a Commercial Tort Claim having a value of $500,000, such Grantor shall, on each date on which financial statements are required to be delivered under Section 5.01(a) or (b) of the Credit Agreement, notify the Collateral Agent in writing signed by such Grantor of the brief details thereof and grant to the Collateral Agent i n such writing a security interest therein and in the Proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to the Collateral Agent.

SECTION 3.06.Condition and Maintenance of Equipment.  The Equipment of the Grantors, taken as a whole, is in good repair, operating order and condition, ordinary wear and tear, casualty and condemnation excepted.  Each Grantor will maintain its Equipment in accordance with Section 5.03 of the Credit Agreement.

ARTICLE IV

COVENANTS

SECTION 4.01.Change of Name; Location of Collateral; Records; Place of Business.

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(a) Each Grantor shall comply with the provisions of Section 5.07 of the Credit Agreement.

(b)Each Grantor agrees to maintain, at its own cost and expense, records which are complete and accurate in all material respects with respect to the Collateral owned by it and to permit the Collateral Agent to examine its records in accordance with Section 5.05 of the Credit Agreement.

SECTION 4.02.Protection of Security.  Except to the extent otherwise permitted by the Credit Agreement, each Grantor shall, at its own cost and expense, defend title to the Collateral pledged by it hereunder and the security interest therein and Lien thereon granted to the Collateral Agent and the priority thereof against all claims and demands of all Persons at any time claiming any interest therein adverse to the Collateral Agent or any other Secured Party other than Permitted Liens.  Except as permitted by the Credit Agreement and except for restrictions in agreements entered into in the ordinary course of b usiness with respect to Intellectual Property, which restrictions would not, individually or in the aggregate, have a Material Adverse Effect on the business of any Grantor, there is no agreement, order, judgment or decree, and no Grantor shall enter into any agreement or take any other action, that would restrict the transferability of any of the Collateral or otherwise materially impair or conflict with such Grantor’s obligations or the rights of the Collateral Agent hereunder.

SECTION 4.03.Further Assurances.  Each Grantor agrees, at its own expense, to promptly execute, acknowledge, deliver and cause to be duly filed all such further instruments and documents and take all such further actions as the Collateral Agent may reasonably request for the purpose of obtaining or to preserve, protect and perfect the Security Interests in the United States and the rights and remedies created hereby and the rights and powers herein granted, including the payment of any fees and taxes required in connection with the execution and delivery of this Agreement, the granting of the Security Interests and the f iling of any financing or continuation statement required under the UCC (or other similar laws) in effect in the United States with respect to the security interest created hereby.  In the event that the Collateral Agent desires to exercise any remedies, voting or consensual rights or attorney-in-fact powers set forth in this Agreement and determines it reasonably necessary to obtain any approvals or consent of any Governmental Authority or any other Person therefor, then, upon request of the Collateral Agent, each Grantor agrees to use its commercially reasonable efforts to assist and aid the Collateral Agent to obtain as soon as practicable any necessary approvals or consents for the exercise of any such remedies, rights and powers.

SECTION 4.04.Inspection and Verification.  The Collateral Agent and its representatives as the Collateral Agent may reasonably designate shall have the right, at the Grantors’ own cost and expense, to at all reasonable times and reasonable intervals and upon reasonable prior notice inspect the Collateral, all records related thereto (and to make extracts and copies from such records) and the premises upon which any of the Collateral is located in each case during business hours.  Notwithstanding the previous sentence, prior to the occurrence and continuance of an Event of Default, the Collateral Agent may make no more than two such inspections during any fiscal year and, in any event, the Grantor shall pay for no more than two inspections each fiscal year.  The Collateral Agent shall have the absolute right to share any information it gains from such inspection or verification with any Secured Party (subject to Section 9.16 of the Credit Agreement).

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SECTION 4.05.Taxes; Encumbrances.  Each Grantor shall pay and discharge all of its material Taxes and all lawful claims in accordance with Section 5.14 of the Credit Agreement.  In its reasonable discretion, the Collateral Agent may discharge past due taxes, assessments, charges, fees, Liens, security interests or other encumbrances at any time levied or placed on the Collateral except to the extent the same constitute Permitted Liens or to the extent such charges, fees, Liens, security interests or other encumbrances are being contested in accordance with Section 5.14 of the Credit Agreement, and may pay for t he maintenance and preservation of the Collateral to the extent any Grantor fails to do so as required by this Agreement (in each case with reasonable prior written notice to such Grantor), and each Grantor jointly and severally agrees to reimburse the Collateral Agent within 30 days of written demand for any payment made or any expense incurred by the Collateral Agent pursuant to the foregoing authorization; provided, however, that nothing in this Section 4.05 shall be interpreted as excusing any Grantor from the performance of, or imposing any obligation on the Collateral Agent or any Secured Party to cure or perform, any covenants or other promises of any Grantor with respect to taxes, assessments, charges, fees, liens, security interests or other encumbrances and maintenance as set forth herein or in the other Loan Documents.

SECTION 4.06.Assignment of Security Interest.  If at any time any Grantor shall take a security interest in any Property of an Account Debtor or any other Person to secure payment and performance of an Account valued in excess of $500,000, such Grantor shall, on each date on which financial statements are required to be delivered under Section 5.01(a) or (b) of the Credit Agreement, notify the Collateral Agent and take such actions as may be requested by the Collateral Agent to make the Collateral Agent’s interest in such Property a matter of public record.

SECTION 4.07.Continuing Obligations of the Grantors.  Each Grantor shall remain liable to observe and perform all the conditions and obligations to be observed and performed by it under each contract, agreement or instrument relating to the Collateral, all in accordance with the terms and conditions thereof.

SECTION 4.08.Use and Disposition of Collateral.  No Grantor shall make or permit to be made an assignment for security, pledge or hypothecation of the Collateral, execute, authorize or permit to be filed in any public office any financing statement (or similar statement, instrument of registration or public notice under the law of any jurisdiction) relating to any Collateral or shall grant any other Lien in respect of the Collateral other than Permitted Liens.

SECTION 4.09.Insurance.  The Grantors, at their own expense, shall maintain or cause to be maintained insurance covering physical loss or damage to the Inventory and Equipment in accordance with Section 5.04 of the Credit Agreement.

SECTION 4.10.Certain Covenants and Provisions Regarding Patent, Trademark and Copyright Collateral.

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(a)Each Grantor agrees that it will not, nor will it permit any of its licensees to, do any act, or omit to do any act, whereby any Patent owned by such Grantor which is material to the conduct of such Grantor’s business may become invalidated, unenforceable, or dedicated to the public (other than at the end of its statutory term), and agrees that it shall use commercially reasonable efforts to continue to mark any products covered by a Patent with the relevant patent number as necessary and sufficient to establish and preserve its rights under applicable patent laws; provided, however, that nothing in this Section 4.10(a) shall prevent such Grantor from discontinuing the prosecution or maintenance of such Patent if, in the reasonable business judgment of such Grantor, such Patent is no longer necessary or desirable in the conduct of its business.

(b)Each Grantor (either itself or through its licensees or its sublicenses) will, for each Trademark owned by such Grantor which is material to the conduct of such Grantor’s business, use its commercially reasonable efforts to (i) maintain each such registered Trademark in full force free from any claim of abandonment or invalidity for nonuse, (ii) maintain substantially the same (or higher) quality of products and services offered under such Trademark as are currently maintained, (iii) display such Trademark with notice of Federal or foreign registration to the extent necessary and sufficient to establish and preserve its rights under applicable law and (iv) not knowingly use or knowingly permit the use of such Trademark in violation of any third party rights; provided, however, that nothing in this Section 4.10(b) shall prevent such Grantor from discontinuing the use, prosecution, or maintenance of such Trademark, if such discontinuance is, in the reasonable business judgment of such Grantor, no longer necessary or desirable in the conduct of its business.

(c)Each Grantor shall promptly notify the Collateral Agent upon such Grantor obtaining knowledge of any Patent, Trademark or Copyright owned by such Grantor and material to the conduct of its business which may become abandoned, lost, unenforceable, invalidated, or dedicated to the public (other than at the end of such item’s statutory term), or of any materially adverse determination or development including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office or United States Copyright Office (or any court or similar office of any country) regarding such Grantor’s ownership of any Patent, Trademark or Copyright material to the conduct of its bu siness, or its right to register the same, or to keep and maintain the same; provided, further, that nothing in this Section 4.10(c) shall require providing notice in connection with officer actions for pending Patent, Trademark or Copyrights applications.

(d)If any Grantor shall at any time after the date hereof (i) obtain any ownership or other rights in and/or to any additional Intellectual Property (including any Trademark applications filed by such Grantor on an “intent-to-use” basis for which evidence of the use of such Trademarks in interstate commerce has been submitted to and duly accepted by the United States Patent and Trademark Office pursuant to 15 U.S.C. Section 1060(a) (or a successor provision)) or (ii) become entitled to the benefit of any additional Collateral consisting of Intellectual Property or any renewal or extension thereof, including any reissue, division, continuation, or continuation-in-part of any Collateral consisting of Intellectual Prop erty, or any improvement on any Collateral consisting of Intellectual Property, the provisions of this Agreement shall automatically apply thereto and any such item described in the preceding clause (i) or (ii) (other than any Excluded Property) shall automatically constitute Collateral as if such would have constituted Collateral at the time of execution hereof and such Collateral consisting of Intellectual Property (other than any Excluded Property) shall be subject to the Lien and security interest created by this Agreement without further action by any party.  Each Grantor shall within thirty (30) days with respect to Copyrights and within ninety (90) days with respect to Patents and Trademarks provide to the Collateral Agent written notice of any of the foregoing Collateral consisting of Intellectual Property owned by such Grantor which is the subject of a registration or application in the United States and confirm the attachment of the Lien and security interest created by this Agreement to any rights described in clauses (i) and (ii) above by execution and delivery, within ten (10) days of providing such notice or such longer period as may be determined by the Collateral Agent in its sole discretion of the acquisition by such Grantor of such Intellectual Property, of an instrument in form and substance reasonably acceptable to the Collateral Agent and the filing of any instruments or statements as shall be reasonably necessary or requested by the Collateral Agent to create, record, preserve, protect or perfect the Collateral Agent’s lien and security interest in such Intellectual Property.

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(e)Each Grantor will take all necessary steps in any proceeding before the United States Patent and Trademark Office or United States Copyright Office, or any office or agency in any political subdivision of the United States or in any other country or any political subdivision thereof, to maintain and pursue each material application relating to the Patents, Trademarks and/or Copyrights (and to obtain the relevant grant or registration) and to maintain each issued Patent and each registration of the Trademarks or Copyrights owned by such Grantor that is material to the conduct of any Grantor’s business, including timely filings of applications for renewal, affidavits of use, affidavits of incontestability and payment of maint enance fees, and, if consistent with such Grantor’s commercially reasonable business judgment, to initiate opposition, interference and cancellation proceedings against third parties; provided, however, that nothing in this Section 4.10(f) shall prevent such Grantor from failing to maintain or pursue any such Trademark or Patent if, in the reasonable business judgment of such Grantor, the likely costs of such maintenance or pursuit are likely to outweigh the likely benefits of such maintenance or pursuit and such failure could not reasonably be expected to have a Material Adverse Effect.

(f)In the event that any Grantor has actual knowledge that any Collateral consisting of a material Patent, Trademark or Copyright owned or exclusively licensed by such Grantor has been or is about to be infringed, misappropriated or diluted by a third party, such Grantor promptly shall notify the Collateral Agent and, if within such Grantor’s good faith business judgment, the likely benefits outweigh the likely costs, shall promptly sue for infringement, misappropriation or dilution and to recover any and all damages for such infringement, misappropriation or dilution, and shall take such actions as are deemed by such Grantor in its reasonable business judgment to be reasonably appropriate under the circumstances to protect su ch Collateral.

(g)For the purpose of enabling the Collateral Agent, during the continuance of an Event of Default, to exercise rights and remedies under Article V hereof at such time as the Collateral Agent shall be lawfully entitled to exercise such rights and remedies, and for no other purpose, each Grantor hereby grants to the Collateral Agent an irrevocable, non-exclusive license and, to the extent permitted under Intellectual Property Licenses granting such Grantor rights in Intellectual Property, sublicense (in each case, exercisable without payment of royalties or other compensation to such Grantor) to use, license or sublicense any of the Intellectual Property included in the Collateral, wherever the same may be located (excluding, for the avoidance of doubt, any rights under any Intellectual Property License that are prohibited by the terms of such License from being so licensed or to the extent that the grant of such license would otherwise breach the terms of any agreement to which such Grantor as a party).  Such license shall include access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout hereof, to the extent permitted under license agreements governing use of such computer programs.  With respect to Trademarks owned by such Grantor, the license granted hereunder shall be subject to sufficient rights of quality control and inspection in favor of such Grantor to avoid the risk of invalidation of such Trademarks.

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(h)Unless there shall occur and be continuing any Event of Default, each Grantor shall have the right to commence and prosecute in its own name, as the party in interest, for its own benefit and at the sole cost and expense of the Grantors, such applications for protection of the Intellectual Property owned by such Grantor and suits, proceedings or other actions to prevent the infringement, misappropriation, counterfeiting, unfair competition, dilution, diminution in value or other damage as are necessary to protect the Intellectual Property owned and/or exclusively licensed by such Grantors.  Upon the occurrence and during the continuance of any Event of Default, upon notice to the applicable Grantor, the Collateral Agent shall have the right but shall in no way be obligated to file applications for protection of the Intellectual Property owned by any Grantor and/or bring suit in the name of any Grantor, the Collateral Agent or the Secured Parties to enforce such Intellectual Property and any license thereunder.  In the event of such suit filed in the name of any Grantor by the Collateral Agent or the Secured Parties upon the occurrence and during the continuance of any Event of Default, each Grantor shall, at the reasonable request of the Collateral Agent, do any and all lawful acts and execute any and all documents requested by the Collateral Agent in aid of such enforcement and the Grantors shall promptly reimburse and indemnify the Collateral Agent for all costs and expenses incurred by the Collateral Agent in the exercise of its rights under this Section 4.10(i) in accordance with Section 9.05 of the Credit Agreement.  In the event that the Collateral Agent shall elect not to bring suit to enfor ce the Intellectual Property owned and/or exclusively licensed by any Grantor, each Grantor agrees, at the reasonable request of the Collateral Agent, to take all commercially reasonable actions necessary, whether by suit, proceeding or other action, to prevent the infringement, counterfeiting, unfair competition, dilution, diminution in value of or other damage to any of the Intellectual Property by any Person.

SECTION 4.11.Certain Covenants and Provisions Regarding Receivables.

(a)Each Grantor shall keep and maintain at its own reasonable cost and expense complete records of each Receivable, in a manner consistent with its customary business practice, including records of all payments received, all credits granted thereon, all merchandise returned and all other documentation relating thereto.  Each Grantor shall, at such Grantor’s sole cost and expense, upon the Collateral Agent’s demand made at any time after the occurrence and during the continuance of any Event of Default, deliver copies of evidence of Receivables, including copies of all documents evidencing Receivables and any Books and Records relating thereto to the Collateral Agent or to its representatives (original copies of which evidence and Books and Records may be retained by such Grantor).  Upon the occurrence and during the continuance of any Event of Default, the Collateral Agent may transfer a full and complete copy of any Grantor’s books, records, credit information, reports, memoranda and all other writings relating to the Receivables to and for the use by any Person that has acquired or is contemplating acquisition of an interest in the Receivables or the Collateral Agent’s security interest therein without the consent of any Grantor; provided that any such Person shall agree to be bound by Section 9.16 of the Credit Agreement; provided, further, that, the Collateral Agent may transfer such a copy to a Person engaged principally in the business of manufacture or sale of high performance chemical based pr oducts that is a competitor of the Borrower or any of its Subsidiaries only upon the occurrence and during the continuance of any Event of Default under Section 7.01(a) or 7.01(i) of the Credit Agreement.

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(b)No Grantor shall rescind or cancel any obligations evidenced by any Receivable or modify any term thereof or make any adjustment, discount, credit, rebate or reduction with respect thereto except in the ordinary course of business consistent with its customary business practice, or extend or renew any such obligations except in the ordinary course of business consistent with its customary business practice or compromise or settle any dispute, claim, suit or legal proceeding relating thereto or sell any Receivable or interest therein without the prior written consent of the Collateral Agent except for (i) sales of assets permitted by Section 6.05 of the Credit Agreement and (ii) in the ordinary course of business consistent with i ts customary business practice.  Each Grantor shall timely fulfill all obligations on its part to be fulfilled under or in connection with the Receivables except in the ordinary course of business consistent with its customary business practice.

(c)Each Grantor shall cause to be collected from the Account Debtor of each of the Receivables, as and when due in the ordinary course of business (including Receivables that are delinquent, such Receivables to be collected in accordance with generally accepted commercial collection procedures), any and all amounts owing under or on account of such Receivable, and apply promptly upon receipt thereof all such amounts as are so collected to the outstanding balance of such Receivable, except that any Grantor may, with respect to a Receivable, allow in the ordinary course of business (i) a refund or credit due as a result of returned or damaged or defective merchandise and (ii) such extensions of time to pay amounts due in respect of Re ceivables and such other modifications of payment terms or settlements in respect of Receivables as shall be commercially reasonable in the circumstances, all in accordance with such Grantor’s ordinary course of business consistent with its collection practices as in effect from time to time.  The costs and expenses (including reasonable attorneys’ fees) of collection, in any case, whether incurred by any Grantor, the Collateral Agent or any Secured Party, shall be paid by the Grantors.

ARTICLE V  

REMEDIES

SECTION 5.01.Remedies upon Default.  Upon the occurrence and during the continuance of any Event of Default, the Collateral Agent may from time to time (alternatively, successively or concurrently on any one or more occasions) exercise in respect of the Collateral, in addition to the other rights and remedies provided for herein or otherwise available to it, the following remedies:

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(a)Personally, or by agents or attorneys, immediately take possession of the Collateral or any part thereof, from any Grantor or any other Person who then has possession of any part thereof with or without notice or process of law, and for that purpose may enter upon any Grantor’s premises where any of the Collateral is located, remove such Collateral, remain present at such premises to receive copies of all communications and remittances relating to the Collateral and use in connection with such removal and possession any and all services, supplies, aids and other facilities of any Grantor;

(b)Demand, sue for, collect or receive any money or property at any time payable or receivable in respect of the Collateral including, upon any Event of Default under Section 7.01(a) or 7.01(i) of the Credit Agreement, instructing the obligor or obligors on any agreement, instrument or other obligation constituting part of the Collateral to make any payment required by the terms of such agreement, instrument or other obligation directly to the Collateral Agent, and in connection with any of the foregoing, compromise, settle, extend the time for payment and make other modifications with respect thereto; provided, however, that in the event that any such payments are made directly to any Grantor, prior to receipt by any such obligor of such instruction, such Grantor shall segregate all amounts received pursuant thereto in trust for the benefit of the Collateral Agent and shall promptly (but in no event later than one Business Day after receipt thereof) pay such amounts to the Collateral Agent;

(c)Sell, assign, grant a license to use or otherwise liquidate, or direct any Grantor to sell, assign, grant a license to use or otherwise liquidate and dispose of, any and all investments made in whole or in part with the Collateral or any part thereof, and take possession of the proceeds of any such sale, assignment, license, liquidation or disposition;

(d)Take possession of the Collateral or any part thereof, by directing any Grantor in writing to assemble all or part of the Collateral as directed by the Collateral Agent at a place reasonably designated by the Collateral Agent.  Each Grantor’s obligation to deliver the Collateral as contemplated in this Section 5.01(d) is of the essence hereof.  Upon application to a court of equity having jurisdiction, the Collateral Agent shall be entitled to a decree requiring specific performance by any Grantor of such obligation;

(e)Withdraw all moneys, instruments, securities and other property in any bank, financial securities, deposit or other account of any Grantor constituting Collateral for application to the Obligations as provided in Section 5.07 hereof;

(f)Retain and apply the distributions to the Obligations as provided in Section 5.07 hereof;

(g)Exercise any and all rights as beneficial and legal owner of the Collateral, including perfecting assignment of and exercising any and all voting, consensual and other rights and powers with respect to any Collateral;

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(h)In the Collateral Agent’s own name, in the name of a nominee of the Collateral Agent, or in the name of any Grantor communicate (by mail, telephone, facsimile or otherwise) with the Account Debtors and other obligors in respect of Receivables of such Grantor and parties to contracts with such Grantor, to verify with such Persons, to the Collateral Agent’s satisfaction, the existence, amount, terms of, and any other matter relating to, Accounts, Chattel Paper, Payment Intangibles, General Intangibles, Instruments and other Receivables that are Collateral; and

(i)Exercise all the rights and remedies of a secured party on default under the UCC, and the Collateral Agent may also in its sole discretion, without notice except as specified in Section 5.02 hereof, sell, assign or grant a license to use the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker’s board or at any of the Collateral Agent’s offices or elsewhere, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Collateral Agent may deem commercially reasonable.  The Collateral Agent or any other Secured Party or any of their respective Affiliates may be the purchaser, licensee, assignee or recipient of the Collateral or any part thereof at any such public sale, and, to the extent permitted by applicable law, at any such private sale, and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold, assigned or licensed at such sale, to use and apply any of the Obligations owed to such Person as a credit on account of the purchase price of the Collateral or any part thereof payable by such Person at such sale.  Each purchaser, assignee, licensee or recipient at any such sale shall acquire the property sold, assigned or licensed absolutely free from any claim or right on the part of any Grantor, and each Grantor hereby waives, to the fullest extent permitted by law, all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted.  The Collateral Agent shall not be obligated to make any sale of the Colla teral or any part thereof regardless of notice of sale having been given.  The Collateral Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.  Each Grantor hereby waives, to the fullest extent permitted by law, any claims against the Collateral Agent arising by reason of the fact that the price at which the Collateral or any part thereof may have been sold, assigned or licensed at such a private sale was less than the price which might have been obtained at a public sale, even if the Collateral Agent accepts the first offer received and does not offer such Collateral to more than one offeree.

SECTION 5.02.Notice of Sale.  Each Grantor acknowledges and agrees that, to the extent notice of sale or other disposition of the Collateral or any part thereof shall be required by law, 10 days’ prior notice to such Grantor of the time and place of any public sale or of the time after which any private sale or other intended disposition is to take place shall be commercially reasonable notification of such matters.  No notification need be given to any Grantor if it has signed, after the occurrence of an Event of Default, a statement renouncing or modifying any right to notification of sale or other inte nded disposition.

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SECTION 5.03.Waiver of Notice and Claims.  Each Grantor hereby waives, to the fullest extent permitted by applicable law, notice or judicial hearing in connection with the Collateral Agent’s taking possession or the Collateral Agent’s disposition of the Collateral or any part thereof, including any and all prior notice and hearing for any prejudgment remedy or remedies and any such right which such Grantor would otherwise have under law, and each Grantor hereby further waives, to the fullest extent permitted by applicable law:   (i) except to the extent arising out of gross negligence, bad faith or willful misconduct on the part of the Collateral Agent, all damages occasioned by such taking of possession, (ii) all other requirements as to the time, place and terms of sale or other requirements with respect to the enforcement of the Collateral Agent’s rights hereunder and (iii) all rights of redemption, appraisal, valuation, stay, extension or moratorium now or hereafter in force under any applicable law.  To the fullest extent permitted by applicable law, the Collateral Agent shall not be liable for any incorrect or improper payment made pursuant to this Article V in the absence of gross negligence or willful misconduct on the part of the Collateral Agent.  Any sale of, or the grant of options to purchase, or any other realization upon, any Collateral shall operate to divest all right, title, interest, claim and dema nd, either at law or in equity, of the applicable Grantor therein and thereto, and shall be a perpetual bar both at law and in equity against such Grantor and against any and all Persons claiming or attempting to claim the Collateral so sold, optioned or realized upon, or any part thereof, from, through or under such Grantor.

SECTION 5.04.Certain Sales of Collateral.

(a)Each Grantor recognizes that, by reason of certain prohibitions contained in law, rules, regulations or orders of any Governmental Authority, the Collateral Agent may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who meet the requirements of such Governmental Authority.  Each Grantor acknowledges that any such sales may be at prices and on terms less favorable to the Collateral Agent than those obtainable through a public sale without such restrictions, and, notwithstanding such circumstances, agrees that any such restricted sale shall be deemed to have been made in a commercially reasonable manner and that, except as may be required by applicable law, the Coll ateral Agent shall have no obligation to engage in public sales.

(b)Each Grantor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, and applicable state securities laws, the Collateral Agent may be compelled, with respect to any sale of all or any part of the Investment Property, to limit purchasers to Persons who will agree, among other things, to acquire such Investment Property for their own account, for investment and not with a view to the distribution or resale thereof.  Each Grantor acknowledges that any such private sales may be at prices and on terms less favorable to the Collateral Agent than those obtainable through a public sale without such restrictions (including a public offering made pursuant to a registration statement under the Securities Act of 1933), and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Collateral Agent shall have no obligation to engage in public sales and no obligation to delay the sale of any Investment Property for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act of 1933 or under applicable state securities laws, even if such issuer would agree to do so.

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(c)If the Collateral Agent determines to exercise its right to sell any or all of the Securities Collateral or Investment Property, upon written request, the applicable Grantor shall from time to time furnish to the Collateral Agent all such information as the Collateral Agent may request in order to determine the number of securities included in the Securities Collateral or Investment Property which may be sold by the Collateral Agent as exempt transactions under the Securities Act and the rules of the Securities and Exchange Commission thereunder, as the same are from time to time in effect.

(d)Each Grantor further agrees that a breach of any of the covenants contained in this Section 5.04 will cause irreparable injury to the Collateral Agent and the other Secured Parties, that the Collateral Agent and the other Secured Parties have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 5.04 shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred and is continuing.

SECTION 5.05.No Waiver; Cumulative Remedies.

(a)No failure on the part of the Collateral Agent to exercise, no course of dealing with respect to, and no delay on the part of the Collateral Agent in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power, privilege or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power, privilege or remedy; nor shall the Collateral Agent be required to look first to, enforce or exhaust any other security, collateral or guaranties.  All rights and remedies herein provided are cumulative and are not exclusive of any rights or remedies provided by law or otherwise available.

(b)In the event that the Collateral Agent shall have instituted any proceeding to enforce any right, power, privilege or remedy under this Agreement or any other Loan Document by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Collateral Agent, then and in every such case, the Grantors, the Collateral Agent and each other Secured Party shall be restored to their respective former positions and rights hereunder with respect to the Collateral, and all rights, remedies, privileges and powers of the Collateral Agent and the other Secured Parties shall continue as if no such proceeding had been instituted.

SECTION 5.06.Certain Additional Actions Regarding Intellectual Property.  If any Event of Default shall have occurred and be continuing, upon the written demand of the Collateral Agent, each Grantor shall execute and deliver to the Collateral Agent an assignment or assignments (in a form satisfactory to the Collateral Agent) of such Grantor’s rights in the Intellectual Property, and, with respect to those items of the Intellectual Property Collateral consisting of issued Patents, registered Trademarks and/or registered Copyrights (or applications therefor) owned by such Grantor, such assignment shall be in recordab le form satisfactory to the Collateral Agent, and such other documents as are necessary or appropriate to carry out the intent and purposes hereof.

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SECTION 5.07.Application of Proceeds.  All Proceeds received by the Collateral Agent in respect of any sale of, collection from or other realization upon all or any part of the Collateral pursuant to the exercise by the Collateral Agent of its remedies shall, to the extent available for distribution (it being understood that the Collateral Agent may liquidate investments prior to maturity in order to make a distribution pursuant to this Section 5.07), be distributed (subject to the provisions of Section 5.08) by the Collateral Agent on each Distribution Date in the order specified in Section 7.04 of the Credit Agreement.

SECTION 5.08.Collateral Agent’s Calculations.  In making the determinations and allocations required by Section 5.07, the Collateral Agent may conclusively rely upon information supplied by the Administrative Agent or any Secured Hedging Counterparty as to the amounts of unpaid principal and interest and other amounts outstanding with respect to any Obligations, and the Collateral Agent shall have no liability to any of the Secured Parties for actions taken in reliance on such information; provided that nothing in this sentence shall prevent any Grantor from contesting any amounts claimed by any Secured Party in any information so supplied.  In addition, for purposes of making the allocations required by Section 5.07 with respect to any amount that is denominated in any currency other than Dollars, the Collateral Agent shall, on the applicable Distribution Date, convert such amount into an amount of Dollars based upon the relevant Spot Selling Rate.  All distributions made by the Collateral Agent pursuant to Section 5.07 shall be (subject to any decree of any court of competent jurisdiction) final (absent manifest error), and the Collateral Agent shall have no duty to inquire as to the application by the Administrative Agent of any amounts distributed to it for distribution to any Lenders.

ARTICLE VI

The Collateral Agent

SECTION 6.01.General Authority of the Collateral Agent over the Collateral.

(a)Until the termination of this Agreement pursuant to Section 7.11, subject to the provisions herein, each Grantor hereby appoints the Collateral Agent as its true and lawful attorney-in-fact for the purpose, during the continuance of an Event of Default, of taking any action and executing any and all documents and instruments that the Collateral Agent may deem necessary to carry out the terms of this Agreement and accomplish the purposes hereof and, without limiting the generality of the foregoing, each Grantor hereby acknowledges that the Collateral Agent shall have all powers and remedies set forth in the Security Documents.  The foregoing grant of authority is a power of attorney coupled with an interest and such appo intment shall be irrevocable for the term hereof.

(b)By acceptance of the benefits of this Agreement and the Security Documents:  each Secured Party shall be deemed irrevocably (1) to consent to the appointment of the Collateral Agent as its agent hereunder and under the other Security Documents, (2) to confirm that the Collateral Agent shall have the authority to act as the exclusive agent of such Secured Party for enforcement of any provisions of this Agreement and the other Security Documents against any Grantor or the exercise of remedies hereunder or thereunder, (3) to agree that such Secured Party shall not take any action to enforce any provisions of this Agreement or any other Security Document against any Grantor or to exercise any remedy hereunder or thereunder and (4) to agree to be bound by the terms of this Agreement and the other Security Documents.

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(c)The Collateral Agent hereby agrees that it holds and will hold all of its right, title and interest in, to and under the Security Documents and the Collateral granted to the Collateral Agent thereunder whether now existing or hereafter arising (all such right, title and interest being hereinafter referred to as the “Collateral Estate”) under and subject to the conditions set forth in this Agreement; and the Collateral Agent further agrees that it will hold such Collateral Estate for the benefit of the Secured Parties, for the enforcement of the payment of all Obligat ions (subject to the limitations and priorities set forth herein and in the respective Security Documents) and as security for the performance of and compliance with the covenants and conditions of this Agreement and each of the Security Documents.

SECTION 6.02.Exercise of Powers.  All of the powers, remedies and rights of the Collateral Agent as set forth in this Agreement may be exercised by the Collateral Agent in respect of any Security Document as though set forth in full therein and all of the powers, remedies and rights of the Collateral Agent as set forth in any Security Document may be exercised from time to time as herein and therein provided.

SECTION 6.03.Remedies Not Exclusive

(a)No remedy conferred upon or reserved to the Collateral Agent herein or in the other Security Documents is intended to be exclusive of any other remedy or remedies, but every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or in any other Security Document or now or hereafter existing at law or in equity or by statute.

(b)No delay or omission by the Collateral Agent to exercise any right, remedy or power hereunder or under any Security Document shall impair any such right, remedy or power or shall be construed to be a waiver thereof, and every right, power and remedy given by this Agreement or any Security Document to the Collateral Agent may be exercised from time to time and as often as may be deemed expedient by the Collateral Agent.

(c)If the Collateral Agent shall have proceeded to enforce any right, remedy or power under this Agreement or any Security Document and the proceeding for the enforcement thereof shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Collateral Agent, then the Grantors, the Collateral Agent and the other Secured Parties shall, subject to any determination in such proceeding, severally and respectively be restored to their former positions and rights hereunder or thereunder with respect to the Collateral Estate and in all other respects, and thereafter all rights, remedies and powers of the Collateral Agent shall continue as though no such proceeding had been taken.

SECTION 6.04.Waiver and Estoppel.

(a)Each Grantor, to the extent it may lawfully do so, on behalf of itself and all who may claim through or under it, including without limitation any and all subsequent creditors, vendees, assignees and licensors, waives and releases all rights to demand or to have any marshaling of the Collateral upon any sale, whether made under any power of sale granted herein or in any Security Document or pursuant to judicial proceedings or upon any foreclosure or any enforcement of this Agreement or any Security Document and consents and agrees that all the Collateral may at any such sale be offered and sold as an entirety.

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(b)Each Grantor waives, to the extent permitted by applicable law, presentment, demand, protest and any notice of any kind (except notices explicitly required hereunder or underany Security Document) in connection with this Agreement and the Security Documents and any action taken by the Collateral Agent with respect to the Collateral.

SECTION 6.05.Limitation on Collateral Agent’s Duty in Respect of Collateral.  Except as required by applicable law, beyond its express duties specified in the Security Documents, the Collateral Agent shall not have any duty to the Grantors or to the Secured Parties as to any Collateral in its possession or control or in the possession or control of any of its agents or nominees, or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto.

SECTION 6.06.Limitation by Law.  All rights, remedies and powers provided in this Agreement or any Security Document may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions hereof are intended to be subject to all applicable mandatory provisions of law which may be controlling and to be limited to the extent necessary so that they will not render this Agreement invalid, unenforceable in whole or in part or not entitled to be recorded, registered or filed under the provisions of any applicable law.

SECTION 6.07.Rights of Secured Parties in Respect of Obligations.  Notwithstanding any other provision of this Agreement or any Security Document, the right of each Secured Party to receive payment of the Obligations held by such Secured Party when due (whether at the stated maturity thereof, by acceleration or otherwise), as expressed in the instruments evidencing or agreements governing such Obligations, or to institute suit for the enforcement of such payment on or after such due date, shall not be impaired or affected without the consent of such Secured Party given in the manner prescribed by the instruments evidencing or agreements governing such Obligations.

SECTION 6.08.Compensation and Expenses.  Without limitation of its obligations under the other Loan Documents, each Grantor agrees to pay to the Collateral Agent, from time to time upon written demand, all of the reasonable out-of-pocket costs and expenses of the Collateral Agent (including, without limitation, the reasonable fees and disbursements of its counsel) (i) arising in connection with the administration of the Collateral, the preparation, execution, delivery, modification and termination of this Agreement and each Security Document or the enforcement of any of the provisions hereof or thereof or (ii) incurred o r required to be advanced in connection with the sale or other disposition of Collateral pursuant to any Security Document and the preservation, protection or defense of the Collateral Agent’s rights under this Agreement and the Security Documents and in and to the Collateral and the Collateral Estate, in each case, to the extent the Borrower would be required to do so pursuant to Section 9.05 of the Credit Agreement.  Such fees, costs and expenses are intended to constitute expenses of administration under any bankruptcy law relating to creditors’ rights generally.

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SECTION 6.09.Stamp and Other Similar Taxes.  Each Grantor agrees to indemnify and hold harmless the Collateral Agent, the Administrative Agent and each other Secured Party from any present or future claim for liability for any stamp or any other similar tax, and any penalties or interest with respect thereto, which may be assessed, levied or collected by any jurisdiction in connection with this Agreement, any Security Document, the Collateral Estate or any Collateral.  The obligations of each Grantor under this Section 6.09 shall survive the termination of the other provisions of this Agreement and the resignation or removal of the Collateral Agent hereunder.

SECTION 6.10.Filing Fees, Excise Taxes, etc.  Each Grantor agrees to pay or to reimburse the Collateral Agent for any and all payments made by the Collateral Agent in respect of all search, filing, recording and registration fees, taxes, excise taxes and other similar imposts which are payable in respect of the execution and delivery of this Agreement and each Security Document.  The obligations of each Grantor under this Section 6.10 shall survive the termination of the other provisions of this Agreement and the resignation or removal of the Collateral Agent hereunder.

SECTION 6.11.Indemnification.  Without limitation of its indemnification obligations under the other Loan Documents, each Grantor agrees to pay, and to save the Collateral Agent and the other Secured Parties harmless from, any and all losses, claims, damages, liabilities and out-of-pocket expenses (including reasonable counsel fees, charges and disbursements) arising out of, in any way connected with, or as a result of the execution, delivery, enforcement, performance and administration of this Agreement to the extent the Borrower would be required to do so pursuant to Section 9.05 of the Credit Agreement.

ARTICLE VII 

MISCELLANEOUS

SECTION 7.01.Notices.  All communications and notices hereunder shall (except as otherwise expressly permitted herein) be in writing and given as provided in Section 9.01 of the Credit Agreement.  All communications and notices hereunder to any Subsidiary Guarantor shall be given to it c/o the Borrower at the Borrower’s address as provided in Section 9.01 of the Credit Agreement, with a copy to the Borrower.

SECTION 7.02.Survival of Agreement.  All covenants, agreements, representations and warranties made by any Grantor herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Collateral Agent and the other Secured Parties and shall survive the making by the Lenders of the Loans, regardless of any investigation made by the Secured Parties or on their behalf, and shall continue in full force and effect until this Agreement shall terminate.

SECTION 7.03.Binding Effect.  This Agreement shall be binding upon each Grantor and the Collateral Agent and their respective successors and permitted assigns, and shall inure to the benefit of each Grantor, the Collateral Agent and the other Secured Parties and their respective permitted successors and assigns, except that no Grantor shall have the right to assign or transfer its rights or obligations hereunder or any interest herein or in the Collateral (and any such assignment or transfer shall be void) except as expressly permitted by this Agreement or the Credit Agreement.

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SECTION 7.04.GOVERNING LAW.  THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

SECTION 7.05.Waivers; Amendment; Several Agreement.

(a)No failure or delay of the Collateral Agent in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power.  The rights and remedies of the Collateral Agent hereunder and of the other Secured Parties under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have.  No waiver of any provisions of this Agreement or any other Loan Document or consent to any departure by any Grantor therefrom shall in an y event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given.  No notice to or demand on any Grantor in any case shall entitle such Grantor or any other Grantor to any other or further notice or demand in similar or other circumstances.

(b)Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into in accordance with Section 9.08 of the Credit Agreement.

(c)This Agreement shall be construed as a separate agreement with respect to each Grantor and may be amended, modified, supplemented, waived or released with respect to any Grantor without the approval of any other Grantor and without affecting the obligations of any other Grantor hereunder.

SECTION 7.0 6.WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS.

SECTION 7.07.Severability.  In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction).  The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with v alid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions.  It is understood and agreed among the parties that this Agreement shall create separate security interests in the Collateral securing the Obligations as provided in Section 2.01, and that any determination by any court with jurisdiction that the security interest securing any Obligation or class of Obligations is invalid for any reason shall not in and of itself invalidate the Security Interests securing any other Obligations hereunder.

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SECTION 7.08.Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute a single contract and shall become effective as provided in Section 7.03.  Delivery of an executed signature page to this Agreement by facsimile or other electronic transmission (e.g., “PDF” or “tif” via e-mail) shall be effective as delivery of a manually executed counterpart hereof.

SECTION 7.09.Headings.  Article and Section headings used herein are for the purpose of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement.

SECTION 7.10.Jurisdiction; Consent to Service of Process.

(a)Each party to this Agreement hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America for the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each Grantor hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court.  Each party to this Agree ment agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  Nothing in this Agreement shall affect any right that the Collateral Agent or any other Secured Party may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against any Grantor or its properties in the courts of any jurisdiction.

(b)Each party to this Agreement hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court referred to in paragraph (a) of this Section.  Each Grantor hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(c)Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.15 of the Credit Agreement.  Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

SECTION 7.11.Termination.

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(a)This Agreement and the Security Interests (i) shall automatically terminate when all the Loan Obligations (other than unasserted contingent indemnification obligations or other contingent obligations, in each case, not due and payable) have been paid in full and no Lettersof Credit are outstanding pursuant to the Credit Agreement unless arrangements reasonably satisfactory to the Issuer have been made to eliminate the Issuer’s credit risk with respect to such L/C Obligation and all Commitments have terminated (at which time the Collateral Agent shall execute and deli ver to the Grantors, at the Grantors’ expense, all UCC termination statements and other documents which the Grantors shall reasonably request to evidence such termination) and (ii) shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment in respect of any Obligation is rescinded or must otherwise be restored by any Secured Party upon any bankruptcy or reorganization of any Grantor or otherwise.  Any execution and delivery of termination statements or documents pursuant to this Section 7.11(a) shall be without recourse to or warranty by the Collateral Agent.  A Subsidiary Guarantor shall automatically be released from its obligations hereunder and the Security Interests in the Collateral of such Subsidiary Guarantor shall be automatically released in the event that (x) the Equity Interests of such Subsidiary Guarantor shall be sold, transferred or otherwise disposed of pursuant to a transaction permitted under the Credit Agreemen t to a Person that is not an Affiliate of Borrower such that such Person is no longer a Restricted Subsidiary of Borrower or (y) such Subsidiary Grantor ceases to be a Restricted Subsidiary as a result of a transaction permitted under the Credit Agreement and, in each case, the Collateral Agent shall execute and deliver to any Grantor, at such Grantor’s expense, all UCC termination statements and other documents that such Grantor shall reasonably request to evidence such release.

(b)Upon any sale or other transfer by any Grantor of any Collateral to a Person that is not a Loan Party that is permitted under the Credit Agreement or, upon the effectiveness of any written consent to the release of the security interests granted hereby in any Collateral pursuant to Section 9.08 of the Credit Agreement, security interests in such Collateral shall be automatically released.  In connection with such release, the Collateral Agent shall execute and deliver to any Grantor, at such Grantor’s expense, all UCC termination statements and other documents that such Grantor shall reasonably request to evidence such release.  Any execution and delivery of UCC termination statements and similar do cuments pursuant to this Section 7.11(b) shall be without recourse to or warranty by the Collateral Agent.

SECTION 7.12.Additional Grantors.  To the extent any Subsidiary shall be required to become a Grantor pursuant to any Loan Document, upon execution and delivery by the Collateral Agent and such Subsidiary of an instrument in the form of Annex I hereto, such Subsidiary shall become a Grantor hereunder with the same force and effect as if originally named as a Grantor herein.  Each such Subsidiary shall at such time deliver to the Collateral Agent a completed Perfection Certificate.  The execution and delivery of any such instrument s hall not require the consent of any other Grantor hereunder.  The rights and obligations of each Grantor hereunder shall remain in full force and effect notwithstanding the addition of any new Grantor as a party to this Agreement.

SECTION 7.13.Financing Statements.  Each Grantor hereby irrevocably authorizes the Collateral Agent at any time and from time to time to file in any relevant jurisdiction (a) a short form security agreement with the United States Patent and Trademark Office or United States Copyright Office (or any successor office or any similar office in any other country), (b) any initial financing statements (including fixture filings) and amendments thereto that contain the information required by Article 9 of the Uniform Commercial Code of each applicable jurisdiction for the filing of any financing statement or amendment relating to the Collateral, including (i) whether such Grantor is an organization, the type of organization and any organizational identification number issued to such Grantor, (ii) any financing or continuation statements or other documents without the signature of such Grantor where permitted by law, and such financing statements may contain an indication or description of Collateral that describes such property (x) in the same manner as described in this Agreement or (z) in any other manner as the Collateral Agent may determine, in its sole discretion, is necessary or prudent to ensure the perfection of the security interest in the Collateral granted to the Collateral Agent in connection herewith, including, without limitation, describing such property as “all assets of the debtor now owned or hereafter acquired” (or using words of similar import) and (iii) in the case of a financing statement filed as a fixture filing or covering Collateral constituting minerals or the like to be extracted or tim ber to be cut, a sufficient description of the real property to which such Collateral relates, and (c) any other documents for the purpose of perfecting, confirming, continuing, enforcing or protecting the Security Interests in the Collateral granted by each Grantor without the signature of any Grantor.  Each Grantor agrees to provide all information described in the immediately preceding sentence to the Collateral Agent promptly upon written request.  Each Grantor hereby ratifies its authorization for the Collateral Agent to file in any relevant jurisdiction any financing statements relating to the Collateral if filed prior to the date hereof.

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SECTION 7.14.Collateral Agent Appointed Attorney-in-Fact.  Each Grantor hereby appoints the Collateral Agent the attorney-in-fact of such Grantor for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instrument that the Collateral Agent may deem necessary to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest.  Without limiting the generality of the foregoing, the Collateral Agent shall have the right, upon the occurrence and during the continuance of an Event of Default, with full power of substitution either in the Co llateral Agent’s name or in the name of such Grantor, (a) to receive, endorse, assign or deliver any and all notes, acceptances, checks, drafts, money orders or other evidences of payment relating to the Collateral or any part thereof; (b) to demand, collect, receive payment of, give receipt for and give discharges and releases of all or any of the Collateral; (c) to ask for, demand, sue for, collect, receive and give acquittance for any and all moneys due or to become due under and by virtue of any Collateral; (d) to sign the name of any Grantor on any invoice or bill of lading relating to any of the Collateral; (e) to send verifications of Accounts to any Account Debtor; (f) to commence and prosecute any and all suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect or otherwise realize on all or any of the Collateral or to enforce any rights in respect of any Collateral; (g) to settle, compromise, compound, adjust or defend a ny actions, suits or proceedings relating to all or any of the Collateral; (h) with at least 5 Business Days’ prior notice to the Grantor to notify, or to require any Grantor to notify Account Debtors to make payment directly to the Collateral Agent; and (i) to use, sell, assign, transfer, pledge, make any agreement with respect to or otherwise deal with all or any of the Collateral, and to do all other acts and things necessary to carry out the purposes of this Agreement, as fully and completely as though the Collateral Agent were the absolute owner of the Collateral for all purposes; provided that nothing herein contained shall be construed as requiring or obligating the Collateral Agent to make any commitment or to make any inquiry as to the nature or sufficiency of any payment received by the Collateral Agent, or to present or file any claim or notice, or to take any action with respect to the Collateral or any part thereof or the moneys due or to become due in respect thereof or any property covered thereby.  The Collateral Agent and the other Secured Parties shall be accountable only for amounts actually received as a result of the exercise of the powers granted to them herein, and neither they nor their officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence, willful misconduct or bad faith.

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SECTION 7.15.Intercreditor Agreement.  Notwithstanding anything to the contrary contained herein, the liens and security interest granted to the Collateral Agent and the exercise of any right or remedy by the Collateral Agent hereunder, in each case, may become subject to the provisions of the First Lien Intercreditor Agreement.  In the event of any conflict between the terms of the First Lien Intercreditor Agreement and the terms of this Agreement, the terms of the First Lien Intercreditor Agreement shall govern and control.

SECTION 7.16.Mortgages.  In the case of a conflict between this Agreement and the Mortgages with respect to Collateral that is real property (including Fixtures), the Mortgages shall govern.  In all other conflicts between this Agreement and the Mortgages, this Agreement shall govern.

SECTION 7.17.Conflicts.  In the case of any conflict between this Agreement and the Credit Agreement, the provisions of the Credit Agreement shall govern.

[Signature Pages Follow]

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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.

SOLUTIA INC.

By:  /s/ James M. Sullivan

Name: James M. Sullivan

Title: Executive Vice President, Chief Financial Officer and Treasurer

CPFILMS INC.

By:  /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

FLEXSYS AMERICA CO.

By:  /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

FLEXSYS AMERICA L.P.

by FLEXSYS AMERICA CO.,

its general partner

By:  /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

S-1

MONCHEM INTERNATIONAL, INC.

By:  /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

SOLUTIA BUSINESS ENTERPRISES INC.

By:  /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

SOLUTIA INTER-AMERICA, INC.

By:  /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

SOLUTIA OVERSEAS, INC.

By:  /s/ James A. Tichenor

Name: James A. Tichenor

Title: Vice President and Treasurer

DEUTSCHE BANK TRUST COMPANY AMERICAS,

as Collateral Agent

By:  /s/ Erin Morrissey

Name: Erin Morrissey

By:  /s/ Carin Keegan

Name: Carin Keegan

Title: Director

S-2

SCHEDULE I to the

Security Agreement

SUBSIDIARY GUARANTORS

Name

CPFilms Inc.

Flexsys America Co.

Flexsys America L.P.

Monchem International, Inc.

Solutia Business Enterprises Inc.

Solutia Inter-America, Inc.

Solutia Overseas, Inc.

Annex I to the

Security Agreement

Form of Joinder Agreement

SUPPLEMENT NO. ___ dated as of [               ], to the Security Agreement (the “Security Agreement”) dated as of March 17, 2010, among SOLUTIA INC., a Delaware corporation (the “Borrower”), each Subsidiary of the Borrower listed on Schedule I thereto (collectively, together with each other Subsidiary that becomes a party thereto, the “Subsidiary Guarantors” and, together with Borrower, the “Grantors”), and DEUTSCHE BANK TRUST COMPANY AMERICAS, as collateral agent (in such capacity, together with its successors in such capacity, the “Collateral Agent”) on behalf of the Secured Parties (as defined in the Credit Agreement referred to below).

A.           Reference is made to (a) the Credit Agreement dated as of March 17, 2010 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), among the Borrower, the Collateral Agent, Deutsche Bank Trust Company Americas, as administrative agent (in such capacity and together with any successors in such capacity, the “Administrative Agent”) for the Lenders (as defined herein), the lending institutions from time to time party thereto (the “Lenders”), and the other a gents party thereto, (b) the Guarantee Agreement, dated as of March 17, 2010 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Guarantee Agreement”), made by the Subsidiary Guarantors in favor or the Collateral Agent, and (c) the Pledge Agreement, dated March 17, 2010, made by certain Grantors in favor of the Collateral Agent (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Pledge Agreement” and, together with the Security Agreement and the Guarantee Agreement, the “Collateral Documents”).

B.           Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Security Agreement.

C.           Pursuant to Section 5.15 of the Credit Agreement, each Subsidiary (other than any Excluded Subsidiary) of the Borrower that was not in existence or not a Subsidiary on the date of the Credit Agreement is required to enter into the Collateral Documents upon becoming a Subsidiary.  Each of the Collateral Documents provides that such Subsidiary may become a party to the Collateral Documents by execution and delivery of an instrument in the form of this Supplement.  The undersigned Subsidiary (the “New Subsidiary”) is executing this Supplement in accordance with the requirements of the Credit Agreement to become a party to the Collateral Documents.

Accordingly, the Collateral Agent and the New Subsidiary agree as follows:

SECTION 1.                      In accordance with Section 5.15 of the Credit Agreement, the New Subsidiary by its signature below becomes a Grantor and Pledgor under each of the Collateral Documents with the same force and effect as if originally named therein as a party thereto and hereby (a) agrees to all terms and provisions of the Collateral Documents applicable to it as a Grantor, Guarantor and Pledgor thereunder and (b) represents and warrants that the representations and warranties made by it as a Grantor, Guarantor and Pledgor thereunder are true and correct in all material respects on and as of the date hereof (except to the extent such representations and warranties relate to a n earlier date and in such case they shall be true and correct in all material respects as of such date).  In furtherance of the foregoing, the New Subsidiary, as security for the payment and performance in full of the Obligations, does hereby create and grant to the Collateral Agent for the benefit of the Secured Parties and their permitted successors and assigns a security interest in and lien on all of the New Subsidiary’s right, title and interest in and to the Collateral (as defined in the Security Agreement) and the Securities Collateral (as defined in the Pledge Agreement) of the New Subsidiary.  Each of the Collateral Documents is hereby incorporated herein by reference.

SECTION 2.                      The New Subsidiary represents and warrants to the Collateral Agent and the other Secured Parties that this Supplement has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except that the enforcement thereof may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors’ rights generally.

SECTION 3.                      This Supplement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.  Delivery of an executed signature page to this Supplement by facsimile or other electronic transmission (e.g., “PDF” or “tif” via e-mail) shall be as effective as delivery of a manually signed counterpart of this Supplement.

SECTION 4.                      The New Subsidiary hereby represents and warrants that (a) all information set forth in the Perfection Certificate (substantially in the form of Annex II to the Security Agreement), including the schedules annexed thereto, has been duly prepared, completed and executed by the New Subsidiary and the information set forth therein is correct and complete in all material respects and (b) set forth on Schedule I attached hereto is a true and correct schedule describing the securities of the New Subsidiary being pledged hereunder.

SECTION 5.                      Except as expressly supplemented thereby, each of the Collateral Documents shall remain in full force and effect.

SECTION 6.                      THIS SUPPLEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

SECTION 7.                      In case any one or more of the provisions contained in this Supplement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and in the Collateral Documents shall not in any way be affected or impaired thereby (it being understood that the invalidity a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction).  The parties hereto shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which com es as close as possible to that of the invalid, illegal or unenforceable provisions.

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SECTION 8.                      All communications and notices hereunder shall (except as otherwise expressly permitted herein) be in writing and given as provided in Section 9.01 of the Credit Agreement.  All communications and notices hereunder to any New Subsidiary shall be given to it c/o the Borrower at the Borrower’s address as provided in Section 9.01 of the Credit Agreement, with a copy to the Borrower.

SECTION 9.                      The New Subsidiary agrees to reimburse the Collateral Agent for its reasonable out-of-pocket expenses in connection with this Supplement, including the reasonable fees, other charges and disbursements of counsel for the Collateral Agent in each case in accordance with the terms of the Credit Agreement.

[Signature Page Follows]

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IN WITNESS WHEREOF, the New Subsidiary and the Collateral Agent have duly executed this Supplement as of the day and year first above written.

[Name of New Subsidiary]

By:   ____________________

Name:

Title:

Address:

DEUTSCHE BANK TRUST COMPANY AMERICAS,

as Collateral Agent

By:  ____________________

Name:

Title:

By:   ____________________

Name:

Title:

S-1

SCHEDULE I

to the Joinder Agreement

Pledged Securities of the New Subsidiary

PLEDGED EQUITY INTERESTS

  Issuer Number of Certificate   Registered Owner Number and Class of Shares Percentage of Shares

PLEDGED DEBT

Issuer Principal Amount Date of Note Maturity Date

Annex II to the

Security Agreement

Form of Perfection Certificate

EX-10.4

EX-31.1

EXHIBIT 31.1

Certification

I, Jeffry N. Quinn, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Solutia Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: July 28, 2010

/s/ Jeffry N. Quinn

Jeffry N. Quinn

President, Chief Executive Officer and Chairman of the Board

EX-31.2

EXHIBIT 31.2

Certification

I, James M. Sullivan, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Solutia Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: July 28, 2010

/s/ James M. Sullivan

James M. Sullivan

Executive Vice President

and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, Jeffry N. Quinn, Chief Executive Officer of Solutia Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge:

(1)	the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: July 28, 2010

/s/ Jeffry N. Quinn

Jeffry N. Quinn

President, Chief Executive Officer and Chairman of the Board

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Solutia Inc. and will be retained by Solutia Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, James M. Sullivan, Chief Financial Officer of Solutia Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of my knowledge:

(1)	the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2010 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: July 28, 2010

/s/ James M. Sullivan

James M. Sullivan

Executive Vice President

and Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Solutia Inc. and will be retained by Solutia Inc. and furnished to the Securities and Exchange Commission or its staff upon request.