body_10q.htm

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 March 31, 2011

[ ] 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 March 31, 2011
Common Stock, $0.01 par value			122,284,101

SOLUTIA INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share amounts)
(Unaudited)

	Three Months Ended
	March 31,

	2011			2010

Net Sales	$	509		$	448
Cost of goods sold		347			300
Gross Profit		162			148
Selling, general and administrative expenses		62			65
Research and development expenses		6			4
Other operating expense (income), net		(11	)		-
Operating Income		105			79
Interest expense		(28	)		(38	)
Other income (loss), net		(1	)		3
Loss on debt extinguishment or modification		(2	)		(89	)
Income (Loss) from Continuing Operations Before Income Tax Expense		74			(45	)
Income tax expense		8			10
Income (Loss) from Continuing Operations		66			(55	)
Loss from Discontinued Operations, net of tax		-			(2	)
Net Income (Loss)		66			(57	)
Net income attributable to noncontrolling interest		1			1
Net Income (Loss) attributable to Solutia	$	65		$	(58	)

Basic and Diluted Income (Loss) per Share attributable to Solutia:
Income (Loss) from Continuing Operations	$	0.54		$	(0.47	)
Loss from Discontinued Operations		-			(0.02	)
Net Income (Loss) attributable to Solutia	$	0.54		$	(0.49	)

SOLUTIA INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Dollars in millions, except per share amounts)
(Unaudited)

	March 31,			December 31,
	2011			2010
ASSETS
Current Assets:
Cash and cash equivalents	$	173		$	191
Trade receivables, net of allowances of $4 in 2011 and 2010		260			228
Miscellaneous receivables		68			75
Inventories		295			275
Prepaid expenses and other assets		32			27
Current assets of discontinued operations		2			5
Total Current Assets		830			801
Net Property, Plant and Equipment		912			911
Goodwill		754			740
Net Identified Intangible Assets		950			938
Other Assets		149			147
Total Assets	$	3,595		$	3,537

LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable	$	186		$	173
Accrued liabilities		216			235
Current liabilities of discontinued operations		20			15
Total Current Liabilities		422			423
Long-Term Debt		1,387			1,463
Postretirement Liabilities		308			308
Environmental Remediation Liabilities		242			244
Deferred Tax Liabilities		245			238
Non-current Liabilities of Discontinued Operations		24			25
Other Liabilities		97			97

Commitments and Contingencies (Note 8)

Equity:
Common stock at $0.01 par value; (500,000,000 shares authorized, 123,158,640 and
122,655,811 shares issued in 2011and 2010, respectively)		1			1
Additional contributed capital		1,641			1,634
Treasury shares, at cost (874,539 in 2011 and 772,686 in 2010)		(8	)		(6	)
Accumulated other comprehensive loss		(134	)		(194	)
Accumulated deficit		(638	)		(703	)
Total Shareholders’ Equity attributable to Solutia		862			732
Equity attributable to noncontrolling interest		8			7
Total Equity		870			739
Total Liabilities and Equity	$	3,595		$	3,537

See accompanying Notes to Consolidated Financial Statements.

SOLUTIA INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
	Three Months Ended
	March 31,
	2011			2010
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss)	$	66		$	(57	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
Loss from discontinued operations, net of tax		-			2
Depreciation and amortization		32			27
Pension contributions in excess of expense		-			(50	)
Other postretirement benefit contributions in excess of expense		(4	)		(1	)
Amortization of debt issuance costs and discount		1			4
Deferred income taxes		6			(11	)
Share-based compensation expense		5			4
Other charges:
Non-cash loss on deferred debt issuance cost and debt discount write-off		-			80
Other (gains) charges, including restructuring expenses		(3	)		20
Changes in assets and liabilities:
Income taxes payable		(3	)		6
Trade receivables		(37	)		(12	)
Inventories		(23	)		(16	)
Accounts payable		16			(8	)
Environmental remediation liabilities		(1	)		(5	)
Other assets and liabilities		(6	)		21
Cash Provided by Operations – Continuing Operations		49			4
Cash Provided by (Used in) Operations – Discontinued Operations		3			(8	)
Cash Provided by (Used in) Operations		52			(4	)

INVESTING ACTIVITIES:
Property, plant and equipment purchases		(17	)		(5	)
Restricted cash		(5	)		-
Asset disposals		29			-
Other		1			(1	)
Cash Provided by (Used in) Investing Activities – Continuing Operations		8			(6	)
Cash Provided by (Used in) Investing Activities		8			(6	)

FINANCING ACTIVITIES:
Proceeds from long-term debt obligations		-			1,144
Payment of long-term debt obligations		(77	)		(876	)
Debt issuance costs		-			(25	)
Purchase of treasury shares		(2	)		(1	)
Other, net		(1	)		(9	)
Cash Provided by (Used in) Financing Activities		(80	)		233

Effect of Exchange Rate Changes on Cash and Cash Equivalents		2			(8	)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(18	)		215
CASH AND CASH EQUIVALENTS:
Beginning of period		191			243
End of period	$	173		$	458

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest	$	26		$	16
Cash payments for income taxes, net of refunds	$	14		$	7

Non-Cash Investing Activities:
Capital expenditures included in accounts payable	$	7		$	3

Non-Cash Financing Activities:
Deferred debt issuance costs included in other liabilities	$	-		$	2

See accompanying Notes to Consolidated Financial Statements.

SOLUTIA INC.
CONSOLIDATED STATEMENT OF EQUITY
(Dollars in millions)
(Unaudited)

	Shareholders' Equity attributable to Solutia
								Accumulated						Equity
			Additional					Other						Attributable to
	Common		Contributed		Treasury			Comprehensive			Accumulated			Noncontrolling		Total
	Stock		Capital		Stock			Loss			Decifit			Interest		Equity
Beginning Balance – January 1, 2010	$	1	$	1,612	$	(2	)	$	(237	)	$	(781	)	$	7	$	600
Comprehensive income (loss):
Net income (loss)		-		-		-			-			(58	)		1		(57	)
Accumulated currency adjustments		-		-		-			(35	)		-			-		(35	)
Postretirement adjustments		-		-		-			2			-			-		2
Treasury stock purchases		-		-		(1	)		-			-			-		(1	)
Share-based compensation expense		-		4		-			-			-			-		4
Ending Balance – March 31, 2010	$	1	$	1,616	$	(3	)	$	(270	)	$	(839	)	$	8	$	513

Beginning Balance – January 1, 2011	$	1	$	1,634	$	(6	)	$	(194	)	$	(703	)	$	7	$	739
Comprehensive income:
Net income		-		-		-			-			65			1		66
Accumulated currency adjustments		-		-		-			57			-			-		57
Postretirement adjustments		-		-		-			1			-			-		1
Hedging activity adjustments		-		-		-			2			-			-		2
Treasury stock purchases		-		-		(2	)		-			-			-		(2	)
Stock option exercises		-		2		-			-			-			-		2
Share-based compensation expense		-		5		-			-			-			-		5
Ending Balance – March 31, 2011	$	1	$	1,641	$	(8	)	$	(134	)	$	(638	)	$	8	$	870

See accompanying Notes to Consolidated Financial Statements.

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, 2010. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly our financial position, results of operations and cash flows for the interim periods reported. Financial information for the first three months of fiscal year 2011 should not be annualized due to the seasonality of our business.

On April 30, 2010, we purchased 100 percent of the shares of Novomatrix Pte. Ltd. (“Novomatrix”) for $72, net of the receipt of $1 in the first quarter 2011 in connection with a preliminary working capital adjustment. 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 product offerings and global footprint into key emerging regions through Novomatrix’s well-established network in Southeast Asia and the Middle East.

On June 1, 2010, we purchased 100 percent of the shares of Etimex Solar GmbH (“Vistasolar”) for $294 and $3 of incremental working capital. Vistasolar is a leading supplier of EVA encapsulants to the photovoltaic market and enables us to expand our Advanced Interlayers product portfolio into each of the dominant photovoltaic encapsulant technologies.

The Novomatrix and Vistasolar acquisitions 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 for Novomatrix is subject to additional adjustments, principally driven by the working capital true-up mechanism. Possible other Novomatrix adjustments to recorded fair value include those relating to deferred tax assets and liabilitites and adjustments to the amount of recorded goodwill as a result of a final working capital true-up. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of both acquisitions.

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. Goodwill resulting from both acquisitions is not deductible for tax purposes.

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 and Vistasolar acquisitions. The fair value of the identified intangible assets was determined using Level 3 inputs as defined by U.S. GAAP under the fair value hierarchy, which included valuation reports prepared by third party appraisal firms.

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 operated as a guest. Our decision to exit this business is consistent with our strategy of focusing on businesses that are leaders in their global markets and that have sustainable competitive advantages. Manufacturing of these products, which had previously been included in our Technical Specialties reportable segment, ceased in the third quarter 2010. Accordingly, we have reported the results of Primary Accelerators as a discontinued operation and applied this presentation on a retrospective basis.

We granted options to purchase a total of 853,182 and 10,000 shares of common stock to eligible employees during the three months ended March 31, 2011 and 2010, respectively, under our 2007 Management Long-Term Incentive Plan (“2007 Management Plan”). The options granted (i) have an exercise price of not less than 100 percent of the quoted market price of the common stock on the grant date, (ii) become exercisable in four equal installments on the first, second, third and fourth anniversary of the grant date for the 2011 grants or in three equal installments on the first, second and third anniversary of the grant date for the 2010 grants, both subject to the employee’s continued employment and (iii) expire on the tenth anniversary of the grant date. We did not grant any options under our 2007 Non-Employee Director Stock Compensation Plan (“2007 Director Plan”) during the three months ended March 31, 2011 or 2010.

We determine the fair value of stock options 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. Due to our emergence from bankruptcy in 2008, our historical volatility data and employee stock option exercise patterns were not considered in determining the volatility data and expected life assumptions. Instead, volatility assumptions were based on (i) historical volatilities of the stock of comparable chemical companies whose shares are traded using daily stock price returns over a term 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.

We granted 413,723 shares of restricted stock awards with a weighted average grant date fair value of $ 25.39 per share to certain employees under our 2007 Management Plan during the three months ended March 31, 2011. Half of the 2007 Management Plan shares granted during the three months ended March 31, 2011 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 in four equal installments on the first, second, third and fourth anniversary of the grant date and the Performance Shares vest in 2014 if attainment of the performance and market conditions is achieved. The actual vesting of the Performance Shares could range 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 Director Plan during the three months ended March 31, 2011 and 2010, nor were any restricted stock awards granted under the 2007 Management Plan during the three months ended March 31, 2010.

During the three months ended March 31, 2011 and 2010, we recognized $ 4 and $3, respectively, of compensation expense related to our restricted stock awards. Pre-tax unrecognized compensation expense for restricted stock awards, net of estimated forfeitures, was $ 21 as of March 31, 2011 which will be recognized as expense over a remaining weighted average period of 2 years.

	March 31, 2011											December 31, 2010
	Estimated											Estimated
	Useful	Gross							Net			Useful	Gross							Net
	Life in	Carrying			Accumulated				Carrying			Life in	Carrying			Accumulated				Carrying
	Years	Value			Amortization				Value			Years	Value			Amortization				Value
Amortizable intangible assets:
Customer relationships	13 to 27		$	619		$	(63	)		$	556	13 to 27		$	606		$	(56	)		$	550
Technology	5 to 26			232			(32	)			200	5 to 26			225			(29	)			196
Trade names	10 to 25			20			(2	)			18	10 to 25			20			(1	)			19
Patents	13			5			(1	)			4	13			5			(1	)			4
Other	3 to 5			6			(2	)			4	3 to 5			6			(1	)			5
Non-amortizable intangible assets:
Trademarks				168			-				168				164			-				164
Total identified intangible assets			$	1,050		$	(100	)		$	950			$	1,026		$	(88	)		$	938

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, consistent with all of our other operations. We believe this change is preferable as the FIFO method better reflects the current value of inventories on the Consolidated Statement of Financial Position and provides a uniform costing method across our global operations. Prior financial statements were not 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.

We recorded net income tax expense of $8 and $10 for the three months ended March 31, 2011 and 2010. 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. For both of the periods of 2011 and 2010, we recorded income tax expense on ex-U.S. earnings. No income tax expense was recorded on income from U.S. operations for the first quarter of 2011 because we have a U.S. net operating loss deferred tax asset, against which a full valuation allowance has been provided. For the three months ended March 31, 2010, we experienced a loss from U.S. operations but no income tax benefit was recognized as a full valuation allowance has been provided against the U.S. deferred tax assets.

We file income tax returns in the U.S. and various state and foreign jurisdictions. We are no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2002. With few exceptions, we are no longer subject to foreign income tax examinations by tax authorities for years before 2006. It is reasonably possible that within the next 12 months as a result of the resolution of Federal, state and foreign examinations and appeals and the expiration of various statutes of limitation that the unrecognized tax benefits that would affect the effective tax rate will decrease by a range of $0 to $42 and the unrecognized tax benefits that would not affect the effective tax rate will decrease by a range of $0 to $2.

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. Many of these activities are associated with certain strategic divestitures or plant shut-downs executed in order to eliminate non-core products that lack a sustainable competitive advantage. The region that has historically been most significantly impacted by these actions has been Europe.

To right-size our support structure in Europe and lower our operating costs in the region, we anticipate a relocation of our European regional headquarters in the second quarter 2011 from a building located in Louvain-la-Neuve, Belgium (“LLN”), which we own, to a multi-tenant building in which we lease office space in Zaventem, Belgium. Accordingly, we have initiated a process to sell the LLN building and have reclassified this asset as held for sale. In conjunction with this reclassification, we were required to perform an impairment test of this asset group. For purposes of testing for impairment and using all available evidence as of March 31, 2011, we estimated the fair value of this asset group by weighting estimated sales proceeds and discounted cash flows that the asset group could be expected to generate through the time of an assumed sale using a Level 3 fair value measurement as defined by U.S. GAAP under the fair value hierarchy. Our test concluded impairment existed on March 31, 2011 and, accordingly, we recorded a charge of $8 to other operating expense (income) to reduce the carrying value of this asset to its estimated fair value and reclassified the asset to prepaid expenses and other current assets. Further and in addition to the above, we initiated a reduction in support personnel in this region which resulted in a charge of $4 to selling, general and administrative. A summary of the charges recorded to Unallocated and Other related to this restructuring action for the three months ended March 31, 2011 are as follows:

Pursuant to the Amended and Restated Settlement Agreement effective February 28, 2008, entered into by us and Monsanto in connection with our emergence from Chapter 11 (the “Monsanto Settlement Agreement”), Monsanto is responsible to defend and indemnify us for any Legacy Tort Claims as that term is defined in the Monsanto Settlement Agreement, while we retain responsibility for tort claims, if any, which may arise out of our conduct after our spinoff from Pharmacia, which occurred on September 1, 1997. We or our 100 percent owned subsidiary, Flexsys, have been named as defendants in the following actions, and have submitted the matters to Monsanto as Legacy Tort Claims. However, to the extent these matters relate to post Solutia Spinoff conduct or such matters are not within the meaning of Legacy Tort Claims as defined in the Monsanto Settlement Agreement, we could 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.

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, and one additional complaint was filed in January 2011.

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, an Integrated Nylon asset that was included in the divestiture of our Integrated Nylon business. The lawsuit, entitled John Allen, et al. v. Monsanto Company, et al., alleges that the defendants are responsible for elevated levels of PCBs in the Escambia River and Escambia Bay due to past and 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 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 plaintiffs are seeking damages for medical monitoring and the costs associated with remediation and removal of 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 PCBs, dioxins, furans and other hazardous substances allegedly emanating from the defendants’ facilities in Sauget. In June 2010, a group of approximately 1,200 plaintiffs also filed wrongful death claims in a lawsuit in St. Clair County arising out of alleged contamination from the defendants’ facilities. Moreover, four additional individual lawsuits comprised of claims from twelve plaintiffs were filed between January and April 2010 in Madison County, Illinois, alleging that 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 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.

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.

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 as of March 31, 2011 and December 31, 2010, which is exclusive of the balances noted below. In almost all cases, our potential liability arising from historical 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 March 31, 2011, we have made cash payments of $27 toward remediation of the Shared Sites and have accrued an additional $165 to be paid over the life of the Shared Sites remediation activity.

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, which would be settled through cash payment over an extended period of time.

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:

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 of available properties was completed in 2010. Furthermore, in 2010 the Anniston Plant Site RI/FS was approved by the United States Environmental Protection Agency (“USEPA”) and we expect the Record of Decision setting out the required remedies to be issued in 2011. The RI/FS for the non-residential properties and the creeks/floodplain are ongoing but it is probable that some level of remediation and/or sediment removal will be required in the future. 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 March 31, 2011 does not incorporate this potential reimbursement. State and Federal Natural Resource Damage Trustees have asserted a claim for potential natural resource damage and advised us that they are preparing to undertake an assessment as to the nature and extent of such damages. These Trustees have requested we consider entering into a cooperative agreement to perform a damage assessment and discussions on such an agreement are ongoing. As of March 31, 2011, we have accrued $111 for all environmental remediation projects in the Anniston, Alabama area which represents our best estimate of the ultimate 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, which will take several years.

- 15 -

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Unaudited)

Sauget, Illinois. A number of industries, including our W.G. Krummrich Plant, have operated and disposed of wastes 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 timing 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. 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. With respect to the Sauget Area 2 Sites, we, in coordination with 19 other PRPs, are 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 these 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 PRP’s share of the liability for the investigation and remediation costs. For each of the Sauget Area 1 and 2 Sites, we anticipate the USEPA and Illinois Environmental Protection Agency (“IEPA”) to issue a Record of Decision with final action for the landfill/impoundment covers within the next two years. However, although an interim groundwater remedy has been installed pursuant to a Unilateral Administrative Order issued on October 3, 2002, it is uncertain when the USEPA and IEPA will issue a final remedy for the groundwater operable unit. 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 the 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 for 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 $68 which we have accrued as of March 31, 2011.

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. Required pilot testing has been completed and the design/implementation of full scale remediation systems has commenced with operation of these systems expected until at least 2015. Our best estimate of the ultimate cost of all corrective measures that will be required at the W.G. Krummrich Site is $23, which we have accrued as of March 31, 2011.

9. Debt Obligations

At December 31, 2010, our senior secured credit facility (“Credit Facility”) consisted of an $850 term loan maturing in March 2017 (“2017 Term Loan”) and a $300 revolving credit facility maturing in 2015 (“2015 Revolver”). In the first quarter of 2011, we amended the 2017 Term Loan. The effect of the amendment resulted in the term of the debt being extended to August 2017, a reduction in the interest rate of 100 basis points, greater strategic flexibility and the replacement of previous financial covenants with a single senior secured leverage ratio. In connection with the amendment, we incurred $2 of fees which were recorded in loss on debt extinguishment or modification in the three months ended March 31, 2011. In addition, in the three months ended March 31, 2011, we made $77 of principal payments on our 2017 Term Loan.

In the first quarter of 2010, we issued $300 of senior unsecured notes, due 2020 (“2020 Notes”), which resulted in net proceeds of $292 after deducting underwriting fees and discounts. In addition, we extinguished our previous term loan and revolving credit facility, replacing them with our Credit Facility. As a result of the early extinguishment, we incurred an $80 non-cash charge related to the write-off of deferred debt issuance costs and a $9 prepayment penalty for the early extinguishment. These amounts were recorded in loss on debt extinguishment and modification for the three months ended March 31, 2010.

We had no short-term borrowings at March 31, 2011and December 31, 2010. Components of long-term debt are as follows:

	March 31, 2011			December 31, 2010
2017 Term Loan	$	691		$	768
8.75% Notes due 2017		400			400
7.875% Notes due 2020		300			300
Total principal amount		1,391			1,468
Less: Unamortized debt discount		(4	)		(5	)
Total	$	1,387		$	1,463

The weighted average interest rate on our total debt outstanding was 6 percent and 6.4 percent at March 31, 2011 and December 31, 2010, respectively.

The $400 notes due in 2017 (“2017 Notes”) were issued at par bearing interest at 8.75 percent and require semi-annual interest payments. The 2020 Notes were issued at 99.5 percent of par bearing interest at 7.875 percent and require semi-annual interest payments. Our current subsidiaries CPFilms Inc., Flexsys America L.P., Flexsys America Co., Monchem International, Inc., Solutia Overseas, Inc., S E Investment LLC and future subsidiaries as defined by the 2017 Notes and 2020 Notes (collectively “the Notes”), subject to certain exceptions, are guarantors (“Note Guarantors”) of the Notes as of March 31, 2011.

The 2017 Term loan was originally issued for $850 at 99.5 percent of the principal amount. After the amendment, the principal amount was $700 and bears interest at one month LIBOR plus 2.75 percent with a 0.75 percent LIBOR floor. We are required to pay 1 percent of principal annually via quarterly payments. The 2015 Revolver bears interest, at our option, at LIBOR plus 3.25 percent, with no LIBOR floor, or at the prime rate plus 2.25 percent. LIBOR-based interest for the 2017 Term Loan is payable on the last day of each month while interest on the 2015 Revolver is payable on the last day of each relevant interest period (defined as one month for the 2015 Revolver or one month, two, three or six months or other periods available to all lenders under the 2015 Revolver) 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 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 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 a maximum senior secured indebtedness financial covenant as defined by the Credit Facility. We were in compliance with all applicable covenants as of March 31, 2011.

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. We evaluate hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective or if the hedged transaction is no longer probable of occurring, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded into earnings.

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 achieved through diversification and credit rating reviews of the firms with whom we transact.

Interest Rate Risk

We occasionally enter into interest rate swap and cap contracts to manage interest rate exposures. In 2008, we entered into interest rate swap agreements with a total notional amount of $800 (“2008 Swaps”) in order to secure a fixed interest rate on a portion of our then existing floating interest rate term debt. Through first quarter 2009, we designated the 2008 Swaps as cash flow hedges and any changes in fair value were recorded to accumulated other comprehensive loss, a component of equity. Thereafter, and as more fully described below, we discontinued hedge accounting on the 2008 Swaps because these derivatives were no longer expected to be effective.

The 2008 Swaps have declining total notional amounts of $800 to $150 which are operational from the second quarter of 2010 through the first quarter of 2014. As these derivatives were no longer expected to be effective, we discontinued hedge accounting in first quarter 2009 and all subsequent changes in fair value are recognized as interest expense in the Consolidated Statement of Operations. After assessing existing interest rate market conditions and to neutralize the impact to earnings, in the third quarter of 2010, we entered into interest rate swap agreements that offset the 2008 Swaps (“Offsetting Swaps”). The Offsetting Swaps are operational beginning in the third quarter of 2010 with total notional amounts, operational dates and other terms that effectively mirror the 2008 Swaps. Further, to mitigate the exposure to variable interest rates on the 2017 Term Loan, we entered into interest rate swap agreements with a total notional amount of $600 (“2010 Swaps”) that were operational beginning in the third quarter of 2010 in order to secure a fixed interest rate on a portion of the floating interest rate term debt. The total notional amount of the 2010 Swaps declines to $200 through the fourth quarter of 2015. The 2010 Swaps were designated as cash flow hedges and therefore any changes in fair value were recorded to accumulated other comprehensive loss.

In the first quarter 2011, we terminated the 2010 Swaps in conjunction with the debt modification discussed in Note 9 – Debt Obligations. To protect cash flows on a portion of the variable rate term loan against adverse interest rate changes, we entered into interest rate caps. These caps (“2011 Caps”) became operative in the first quarter 2011 and have notional amounts of $500 in 2011, $400 in 2012 and 2013, $300 in 2014 and $200 in 2015. Under the 2011 Caps, when the one-month LIBOR rates exceeds 0.75%, we will receive payments from the cap providers. The combination of the 0.75% LIBOR floor on our 2017 Term Loan along with cash payment on the 2011 Caps results in total payments at a fixed rate of 2.21%, plus the margin of 2.75%, for a total of 4.96% on the notional amounts hedged through 2015. The 2011 Caps were designated as cash flow hedges and therefore any changes in fair value were recorded to accumulated other comprehensive loss.

Foreign Currency Exchange Rate Risk

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 remeasurement of the underlying assets and liabilities in the Consolidated Statement of Operations. We had currency forward contracts to purchase and sell $110 and $104 of currencies comprised principally of the Euro, U.S. Dollar and Malaysian Ringgit as of March 31, 2011 and December 31, 2010, respectively.

	March 31, 2011
	Asset Derivatives				Liability Derivatives
	Consolidated Statement of Financial Position Presentation	Fair Value			Consolidated Statement of Financial Position Presentation	Fair Value
Derivatives designated as hedging instruments:
Interest rate contracts	Other Assets		$	1	Other Liabilities		$	2
Total Interest rate contracts				1				2

Derivative not designated as hedging instruments:
Interest rate contracts	Miscellaneous Receivables		$	-	Accrued Liabilities		$	12
	Other Assets			5	Other Liabilities			17
Total Interest rate contracts				5				29
Foreign exchange contracts	Miscellaneous Receivables			1	Accrued Liabilities			-
Total Derivatives			$	7			$	31

	December 31, 2010
	Asset Derivatives				Liability Derivatives
	Consolidated Statement of Financial Position Presentation	Fair Value			Consolidated Statement of Financial Position Presentation	Fair Value
Derivatives designated as hedging instruments:
Interest rate contracts	Miscellaneous Receivables		$	-	Accrued Liabilities		$	3
	Other Assets			6	Other Liabilities			-
Total Interest rate contracts				6				3

Derivative not designated as hedging instruments:
Interest rate contracts	Miscellaneous Receivables		$	-	Accrued Liabilities		$	13
	Other Assets			5	Other Liabilities			20
Total Interest rate contracts				5				33
Foreign exchange contracts	Miscellaneous Receivables			1	Accrued Liabilities			1
Total Derivatives			$	12			$	37

	Change in Unrealized Gain (Loss) Recognized in Accumulated Other Comprehensive Loss						Amount of Gain (Loss) Recognized in Income								Consolidated Statement of Operations Presentation

	2011			2010			2011				2010
Derivatives designated as hedging instruments:
Interest rate contracts		$	-		$	-		$	-			$	-		Interest expense

Derivatives not designated as hedging instruments:
Interest rate contracts		$	-		$	-		$	(2	)		$	(6	)	Interest expense (a)
Foreign exchange contracts			-			-			1				2		Other income (loss), net
Total Derivatives not designated as hedging instruments		$	-		$	-		$	(1	)		$	(4	)
Total Derivatives		$	-		$	-		$	(1	)		$	(4	)

(a)	We reclassified $2 of losses from accumulated other comprehensive loss to interest expense during the three months ended March 31, 2011 related to the 2008 and 2010 Swaps.

As of March 31, 2011, deferred losses of $15 related to our interest rate derivatives are expected to be reclassified into earnings as interest expense over the next twelve months.

	Fair Value Measurements at March 31, 2011
	Total			Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
	Total			(Level 1)			(Level 2)			(Level 3)
Assets:
Cash Equivalents (a)		$	20		$	20		$	-		$	-
Derivatives – Foreign Exchange (b)			1			-			1			-
Derivatives – Interest Rates (c)			6			-			6			-
Total		$	27		$	20		$	7		$	-

Liabilities:
Derivatives – Interest Rates (c)		$	31		$	-		$	31		$	-
Total		$	31		$	-		$	31		$	-


	Fair Value Measurements at December 31, 2010
		Total		Quoted Prices in Active Markets for Identical Assets			Significant Other Observable Inputs			Significant Unobservable Inputs
		Total		(Level 1)			(Level 2)			(Level 3)
Assets:
Cash Equivalents (a)		$	60		$	60		$	-		$	-
Derivatives – Foreign Exchange (b)			1			-			1			-
Derivatives – Interest Rates (c)			11			-			11			-
Total		$	72		$	60		$	12		$	-

Liabilities:
Derivatives – Foreign Exchange (b)		$	1		$	-		$	1		$	-
Derivatives – Interest Rates (c)			36			-			36			-
Total		$	37		$	-		$	37		$	-

13. Accumulated Other Comprehensive Income (Loss)

The following table presents the balances of related after-tax components of accumulated other comprehensive income (loss).

	Accumulated Currency Adjustments			Postretirement Adjustments			Hedging Activity Adjustments			Accumulated Other Comprehensive Loss
Beginning Balance - January 1, 2010	$	(56	)	$	(160	)	$	(21	)	$	(237	)
Currency translation adjustments		(35	)		-			-			(35	)
Pension settlement charge		-			1			-			1
Amortization of net actuarial loss		-			1			-			1
Ending Balance - March 31, 2010	$	(91	)	$	(158	)	$	(21	)	$	(270	)

Beginning Balance - January 1, 2011	$	(66	)	$	(117	)	$	(11	)	$	(194	)
Currency translation adjustments		57			-			-			57
Amortization of net actuarial loss		-			1			-			1
Realized loss on derivative instruments		-			-			2			2
Ending Balance - March 31, 2011	$	(9	)	$	(116	)	$	(9	)	$	(134	)

The performance of our operating segments is evaluated based on Segment Profit, defined as income from continuing operations attributable to Solutia before interest expense, loss on debt extinguishment or modification, income taxes, depreciation and amortization. Segment Profit includes selling, general and administrative, research and development expenses, other operating income or expenses, gains and losses from asset dispositions and restructuring charges, the reduction for 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 valuation reserve, adjustments to our environmental liabilities, 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 non-core operations that do not meet the quantitative threshold for determining reportable segments. There were no inter-segment sales in the periods presented below.

	Three Months Ended March 31,
	2011					2010
	Net		Profit			Net		Profit
	Sales		(Loss)			Sales		(Loss)
Reportable Segments:
Advanced Interlayers	$	213	$	49		$	186	$	48
Performance Films		76		19			52		9
Technical Specialties		220		98			206		77
Reportable Segment Totals		509		166			444		134
Unallocated and Other		-		(31	)		4		(26	)
Total		509		135			448		108

Reconciliation to Consolidated Totals:
Depreciation and amortization				(32	)				(27	)
Interest expense				(28	)				(38	)
Loss on debt extinguishment or modification				(2	)				(89	)
Net income attributable to noncontrolling interest				1					1
Consolidated Totals
Net Sales	$	509				$	448

Income (Loss) from Continuing Operations Before Income Taxes			$	74				$	(45	)

15. Earnings (Loss) Per Share

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

(Shares in millions)	Three Months Ended March 31,
	2011		2010

Consolidated Statement of Operations:
Income (Loss) from continuing operations	$	66	$	(55	)
Less: Net Income attributable to noncontrolling interest		1		1
Income (Loss) from continuing operations attributable to Solutia		65		(56	)
Loss from discontinued operations, net of tax		-		(2	)
Net Income (Loss) attributable to Solutia	$	65	$	(58	)

Weighted-average number of shares outstanding used for basic earnings (loss) per share		119.4		118.5
Non-vested restricted shares		1.3		N/A	(a)
Stock options		0.5		N/A	(a)
Weighted average number of shares outstanding and common equivalent shares used for diluted earnings (loss) per share		121.2		118.5

(a)	1.5 million shares of non-vested restricted stock for the three months ended March 31, 2010 would have been considered dilutive for purposes of the earnings per share calculation in the event that operations resulted in income.

The following consolidating financial statements present, in separate columns, financial information for: (i) Solutia, on a parent-only basis, carrying its investment in subsidiaries under the equity method; (ii) Note Guarantors on a combined basis (“Guarantors”), carrying investments in subsidiaries which do not guarantee the debt (the “Non-Guarantors”) under the equity method; (iii) Non-Guarantors on a combined basis; (iv) eliminating entries and (v) consolidated totals as of March 31, 2011 and December 31, 2010 and for the three months ended March 31, 2011 and 2010. 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.

Condensed Consolidating Statement of Operations
Three Months Ended March 31, 2011

	Parent-Only						Non-						Consolidated
	Solutia			Guarantors			Guarantors			Eliminations			Solutia

Net Sales	$	135		$	107		$	465		$	(198	)	$	509
Cost of goods sold		118			69			366			(206	)		347
Gross Profit		17			38			99			8			162

Selling, general and administrative expenses		27			13			22			-			62
Research and development expenses and other operating (income), net		7			(1	)		(11	)		-			(5	)

Operating Income (Loss)		(17	)		26			88			8			105

Equity earnings from affiliates		98			59			-			(157	)		-
Interest expense		(32	)		-			(46	)		50			(28	)
Other income (loss), net		18			13			26			(58	)		(1	)
Loss on debt modification		(2	)		-			-			-			(2	)

Income from Continuing Operations Before Income Tax Expense		65			98			68			(157	)		74
Income tax expense		-			-			7			1			8
Net Income		65			98			61			(158	)		66
Net Income attributable to noncontrolling interest		-			-			1			-			1
Net Income attributable to Solutia	$	65		$	98		$	60		$	(158	)	$	65

Condensed Consolidating Statement of Operations
Three Months Ended March 31, 2010

	Parent-Only						Non-						Consolidated
	Solutia			Guarantors			Guarantors			Eliminations			Solutia

Net Sales	$	112		$	97		$	406		$	(167	)	$	448
Cost of goods sold		95			63			314			(172	)		300
Gross Profit		17			34			92			5			148

Selling, general and administrative expenses		28			14			23			-			65
Research and development expenses and other operating expense, net		2			1			1			-			4

Operating Income (Loss)		(13	)		19			68			5			79

Equity earnings from affiliates		70			39			-			(109	)		-
Interest expense		(38	)		-			(34	)		34			(38	)
Other income, net		11			13			21			(42	)		3
Loss on debt extinguishment		(88	)		-			(1	)		-			(89	)

Income (Loss) from Continuing Operations Before Income Tax Expense		(58	)		71			54			(112	)		(45	)
Income tax expense		-			-			12			(2	)		10
Income (Loss) from Continuing Operations		(58	)		71			42			(110	)		(55	)
Loss from discontinued operations, net of tax		-			(1	)		(1	)		-			(2	)
Net Income (Loss)		(58	)		70			41			(110	)		(57	)
Net Income attributable to noncontrolling interest		-			-			1			-			1
Net Income (Loss) attributable to Solutia	$	(58	)	$	70		$	40		$	(110	)	$	(58	)

Condensed Consolidating Balance Sheet
March 31, 2011

	Parent-Only					Non-					Consolidated
	Solutia			Guarantors		Guarantors		Eliminations			Solutia
ASSETS
Current Assets:
Cash and cash equivalents	$	80		$	1	$	92	$	-		$	173
Trade receivables, net		34			47		179		-			260
Intercompany receivables		99			537		426		(1,062	)		-
Miscellaneous receivables		11			-		57		-			68
Inventories		68			55		212		(40	)		295
Prepaid expenses and other current assets		2			2		19		9			32
Current assets of discontinued operations		-			-		2		-			2
Total Current Assets		294			642		987		(1,093	)		830
Net Property, Plant and Equipment		178			137		597		-			912
Investments in Affiliates		2,403			639		933		(3,975	)		-
Goodwill		150			191		413		-			754
Net Identified Intangible Assets		185			305		460		-			950
Intercompany Advances		459			546		1,858		(2,863	)		-
Other Assets		72			3		74		-			149
Total Assets	$	3,741		$	2,463	$	5,322	$	(7,931	)	$	3,595

LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable	$	48		$	27	$	111	$	-		$	186
Intercompany payables		662			12		388		(1,062	)		-
Accrued liabilities		96			8		113		(1	)		216
Intercompany short-term debt		40			-		430		(470	)		-
Current liabilities of discontinued operations		-			-		20		-			20
Total Current Liabilities		846			47		1,062		(1,533	)		422
Long-Term Debt		1,387			-		-		-			1,387
Intercompany Long-Term Debt		132			24		2,237		(2,393	)		-
Postretirement Liabilities		224			2		82		-			308
Environmental Remediation Liabilities		223			3		16		-			242
Deferred Tax Liabilities		21			11		213		-			245
Non-Current Liabilities of Discontinued Operations		-			-		24		-			24
Other Liabilities		46			6		45		-			97

Equity:
Common stock		1			-		-		-			1
Additional contributed capital		1,641			2,370		1,635		(4,005	)		1,641
Treasury stock		(8	)		-		-		-			(8	)
Accumulated other comprehensive loss		(134	)		-		-		-			(134	)
Accumulated deficit		(638	)		-		-		-			(638	)
Total Shareholders' Equity attributable to Solutia		862			2,370		1,635		(4,005	)		862
Equity attributable to noncontrolling interest		-			-		8		-			8
Total Equity		862			2,370		1,643		(4,005	)		870
Total Liabilities and Equity	$	3,741		$	2,463	$	5,322	$	(7,931	)	$	3,595

Condensed Consolidating Balance Sheet
December 31, 2010

	Parent-Only					Non-					Consolidated
	Solutia			Guarantors		Guarantors		Eliminations			Solutia
ASSETS
Current Assets:
Cash and cash equivalents	$	98		$	7	$	86	$	-		$	191
Trade receivables, net		26			40		162		-			228
Intercompany receivables		100			497		398		(995	)		-
Miscellaneous receivables		14			-		61		-			75
Inventories		69			47		199		(40	)		275
Prepaid expenses and other current assets		7			2		9		9			27
Current assets of discontinued operations		-			-		5		-			5
Total Current Assets		314			593		920		(1,026	)		801
Net Property, Plant and Equipment		180			139		592		-			911
Investments in Affiliates		2,280			559		908		(3,747	)		-
Goodwill		149			192		399		-			740
Net Identified Intangible Assets		186			309		443		-			938
Intercompany Advances		439			514		1,693		(2,646	)		-
Other Assets		78			2		67		-			147
Total Assets	$	3,626		$	2,308	$	5,022	$	(7,419	)	$	3,537

LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable	$	53		$	21	$	99	$	-		$	173
Intercompany payables		630			11		354		(995	)		-
Accrued liabilities		103			10		123		(1	)		235
Intercompany short-term debt		17			-		479		(496	)		-
Current liabilities of discontinued operations		-			-		15		-			15
Total Current Liabilities		803			42		1,070		(1,492	)		423
Long-Term Debt		1,463			-		-		-			1,463
Intercompany Long-Term Debt		108			23		2,019		(2,150	)		-
Postretirement Liabilities		225			3		80		-			308
Environmental Remediation Liabilities		225			3		16		-			244
Deferred Tax Liabilities		21			11		206		-			238
Non-Current Liabilities of Discontinued Operations		-			-		25		-			25
Other Liabilities		49			6		42		-			97

Equity:
Common stock		1			-		-		-			1
Additional contributed capital		1,634			2,220		1,557		(3,777	)		1,634
Treasury stock		(6	)		-		-		-			(6	)
Accumulated other comprehensive loss		(194	)		-		-		-			(194	)
Accumulated deficit		(703	)		-		-		-			(703	)
Total Shareholders' Equity attributable to Solutia		732			2,220		1,557		(3,777	)		732
Equity attributable to noncontrolling interest		-			-		7		-			7
Total Equity		732			2,220		1,564		(3,777	)		739
Total Liabilities and Equity	$	3,626		$	2,308	$	5,022	$	(7,419	)	$	3,537

Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2011

	Parent-Only						Non-					Consolidated
	Solutia			Guarantors			Guarantors			Eliminations		Solutia

Cash Provided by (Used in) Operations	$	(33	)	$	31		$	54		$	-	$	52

INVESTING ACTIVITIES:
Property, plant and equipment purchases		(4	)		(1	)		(12	)		-		(17	)
Restricted Cash		-			-			(5	)		-		(5	)
Asset disposals		-			3			26			-		29
Other		-			-			1			-		1
Cash Provided by (Used in) Investing Activities		(4	)		2			10			-		8

FINANCING ACTIVITIES:
Payment of long-term debt obligations		(77	)		-			-			-		(77	)
Purchase of treasury shares		(2	)		-			-			-		(2	)
Other, net		(1	)		-			-			-		(1	)
Changes in investments and advances from (to) affiliates		99			(39	)		(60	)		-		-
Cash Provided by (Used in) Financing Activities		19			(39	)		(60	)		-		(80	)

Effect of Exchange Rate Changes on Cash and Cash Equivalents		-			-			2			-		2

Increase (Decrease) in Cash and Cash Equivalents		(18	)		(6	)		6			-		(18	)

CASH AND CASH EQUIVALENTS:
Beginning of year		98			7			86			-		191
End of year	$	80		$	1		$	92		$	-	$	173

Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2010

	Parent-Only						Non-					Consolidated
	Solutia			Guarantors			Guarantors			Eliminations		Solutia

Cash Provided by (Used in) Operations	$	(72	)	$	30		$	38		$	-	$	(4	)

INVESTING ACTIVITIES:
Property, plant and equipment purchases		(2	)		(1	)		(2	)		-		(5	)
Other		-			(1	)		-			-		(1	)
Cash Used in Investing Activities		(2	)		(2	)		(2	)		-		(6	)

FINANCING ACTIVITIES:
Proceeds from long-term debt obligations		1,144			-			-			-		1,144
Payment of long-term debt obligations		(876	)		-			-			-		(876	)
Debt issuance costs		(25	)		-			-			-		(25	)
Purchase of treasury shares		(1	)		-			-			-		(1	)
Other, net		(9	)		-			-			-		(9	)
Changes in investments and advances from (to) affiliates		(15	)		(28	)		43			-		-
Cash Provided by (Used in) Financing Activities		218			(28	)		43			-		233

Effect of Exchange Rate Changes on Cash and Cash Equivalents		-			-			(8	)		-		(8	)

Increase in Cash and Cash Equivalents		144			-			71			-		215

CASH AND CASH EQUIVALENTS:
Beginning of period		104			1			138			-		243
End of period	$	248		$	1		$	209		$	-	$	458

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 benefit assumptions.

We are a global manufacturer and marketer of a variety of high-performance chemical-based materials that are used across automotive, construction, industrial and consumer applications. We report and manage our operations in three reportable segments consisting of Advanced Interlayers, Performance Films and Technical Specialties. 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. Our Performance Films segment manufactures, markets and distributes custom-coated window films for aftermarket automotive and architectural applications in addition to the manufacture of specialized technical films for use in a wide variety of industrial applications. Technical Specialties is our specialty chemicals segment, which includes the manufacture and sale of specialty chemicals for the rubber, solar energy, process manufacturing and aviation industries. The major products by reportable segment are as follows:

In the first quarter 2011, we initiated the expansion of our Suzhou, China and Ghent, Belgium facilities, both of which we expect to complete in 2011. The China upgrade will incorporate a second Saflexâ manufacturing line to serve the architectural, photovoltaic and automotive markets, plus a new facility enabling the production of Vistasolarâ necessary to serve the growing photovoltaic market. The Belgium expansion will significantly expand our capacity to produce Saflexâ acoustic interlayer for automotive applications. We also announced plans to expand our current Crystexâ operations in Kuantan, Malaysia, which will double the capacity of this facility. Finally, on March 24, 2011, we entered into an agreement to acquire selected assets from a leading conductive film manufacturing firm based in Taiwan for $7 million, which will increase our manufacturing capacity for the production of our Flexvue™ film components.

In the first quarter 2011, we reported net sales of $509 million, a 14 percent increase as compared to $448 million reported in the first quarter 2010. The increase was driven by higher sales volumes of $43 million or 9 percent, the impact of the Vistasolar and Novomatrix acquired businesses of $30 million or 7 percent, and higher selling prices of $7 million or 2 percent, partially offset by the impact of divestitures of $17 million or 4 percent and unfavorable currency exchange rate fluctuations of $2 million. Net income attributable to Solutia of $65 million for first quarter 2011 represents an improvement of $123 million as compared to a loss of $58 million as reported in the same period in 2010. Significantly impacting results for the three months ended March 31, 2010 is an $89 million charge on the write-off of deferred debt issuance costs and a prepayment penalty associated with the early extinguishment of our previous credit facility (“2014 Term Loan” and “2013 Revolver”). The remaining improvement was predominately due to higher Adjusted EBITDA of $11 million, as further explained below, gains realized on the sale of certain other rubber chemical businesses sold in the first quarter of 2011, lower interest expense and lower tax expense.

Adjusted EBITDA for the first three months of 2011 was $135 million as compared to $124 million for the same period in 2010, which represents an $11 million or 9 percent improvement. The increase in Adjusted EBITDA was driven by $32 million on higher sales volumes, including the impact of the Vistasolar and Novomatix acquired businesses, $7 million in higher sales prices and $11 million of lower operating expenses, partially offset by the negative impact from higher raw materials of $32 million, the divestiture of certain other rubber chemical businesses of $4 million and unfavorable currency exchange rate fluctuations of $3 million. Lower operating expenses were predominantly driven by improved absorption of manufacturing costs due to higher utilization and lower expenses associated with our annual incentive plan.

Adjusted Earnings Per Share for the first three months of 2011 was $0.50 as compared to $0.35 for the same period in 2010, which represents $0.15 or a 43 percent improvement. This improvement was significantly higher than the increase in Adjusted EBITDA due to lower interest expense, resulting from our debt paydown throughout 2010 and into 2011 and our term debt refinancings, and a lower effective tax rate, which was partially offset by higher depreciation and amortization associated with assets acquired in the Vistasolar and Novomatrix purchases.

Our current operating premise is that automotive, energy solutions and the electronics markets will continue to grow globally in 2011 at higher than GDP rates, with the most significant growth in China and other emerging markets. We are not premising growth in the global architectural market, except for China, where we have a lower market share in comparison with our architectural market in other major world areas. Further, as the Euro strengthens relative to the U.S. Dollar and as compared to 2010, we expect net sales for 2011 to increase. Coupled with these assumptions, and in response to a rising raw material environment, we are premising price increases on certain products for the remainder of the year. Finally, the divestiture of certain other rubber chemicals businesses in the first quarter 2011 is expected to reduce full year net sales as compared to 2010 by approximately $40 million. In aggregating these premises, our expectation for 2011 is net sales will be within the range of $2.125 billion and $2.2 billion.

With respect to profitability and after excluding restructuring items and certain gains realized in the first quarter on the sale of certain other rubber chemical businesses, we expect operating margins in the second and third quarters to be consistent with results reported in the first quarter, declining slightly in the fourth quarter due to expected lower manufacturing utilization rates on seasonally driven lower volumes. Raw material increases, which negatively impacted first quarter 2011 results by $32 million as compared to the same period in 2010, are expected to continue to rise in the second quarter as compared to the first quarter of 2011, but at a lesser rate. We expect these raw material increases to be more than offset by sales volume and sales price increases. Finally, on a full year basis, the sale of certain other rubber chemicals businesses in the first quarter 2011 is expected to reduce full year operating income as compared to 2010 by approximately $7 million.

Our incremental earnings premised in 2011 will generate additional operating cash, which will be offset by higher ex-U.S. tax payments, new product and growth related capital spending, as well as modest investments in working capital related to revenue growth. In summary, we are currently anticipating generating cash from operations less capital spending in 2011 in the range of $150 million to $200 million from continuing operations.

Non-GAAP Financial Measures

Management’s Discussion and Analysis (“MD&A”) includes financial information prepared in accordance with U.S. generally accepted accounting principles (GAAP), as well as three other financial measures including Adjusted EBITDA, Adjusted Earnings and Adjusted Earnings per Share, that are considered “non-GAAP financial measures.” Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The presentation of Adjusted EBITDA, Adjusted Earnings and Adjusted Earnings per Share are intended to supplement investors’ understanding of our operating performance. These non-GAAP financial measures are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than other GAAP measures and may not be comparable to similarly titled measures presented by other companies.

Adjusted EBITDA is defined as income from continuing operations attributable to Solutia before interest expense, loss on debt extinguishment or modification, income taxes, depreciation and amortization, certain gains and losses that affect comparability, cost overhang associated with discontinued operations and non-cash stock compensation expense. Adjusted Earnings is defined as income from continuing operations attributable to Solutia excluding certain gains and losses, net of tax that affect comparability. Adjusted Earnings per Share is defined as Adjusted Earnings divided by weighted average diluted shares outstanding. We believe Adjusted EBITDA, Adjusted Earnings and Adjusted Earnings per Share assist us in comparing our performance over various reporting periods and against our peers on a consistent basis because it removes from our operating results the impact of items that do not reflect our core operating performance. Further, we believe Adjusted EBITDA, Adjusted Earnings and Adjusted Earnings per Share are useful to investors. The compensation committee of our board of directors determines the annual incentive compensation for certain members of our management based, in part, using each of these financial measures.

See the Non-GAAP Reconciliations section of this MD&A for reconciliations of these non-GAAP financial measures to their most comparable measure calculated and presented in accordance with GAAP.

Advanced Interlayers

(dollars in millions)	Three Months Ended
	March 31,				Increase		% Increase
	2011		2010		(Decrease)		(Decrease)
Net Sales	$	213	$	186	$	27		15	%

Segment Profit	$	49	$	48	$	1		2	%
Charges included in Segment Profit		-		-

The increase in net sales in the first quarter 2011 resulted from higher sales volumes of $12 million or 7 percent, the impact of the Vistasolar acquisition of $15 million or 8 percent and higher average selling prices of $2 million or 1 percent, partially offset by unfavorable currency exchange rate fluctuations of $2 million or 1 percent. Higher sales volumes were experienced in our sheet business due to increased demand primarily in the global automotive market, led by Europe. Sales volumes in our architectural markets were effectively flat compared to the prior year. The increase in selling prices is the result of price increases in 2011 annual customer contracts, predominately related to our SAFLEX® plastic interlayer. 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 2010, due to our strong market positions in Europe.

The increase in segment profit in the first quarter 2011 resulted primarily from higher net sales, the impact of the Vistasolar acquisition, and lower compensation expense related to our annual incentive plan, partially offset by higher raw material costs.

Performance Films

(dollars in millions)	Three Months Ended
	March 31,					Increase		% Increase
	2011		2010			(Decrease)		(Decrease)
Net Sales	$	76	$	52		$	24		46	%

Segment Profit	$	19	$	9		$	10		111	%
Charges included in Segment Profit		-		(1	)

The increase in net sales in the first quarter 2011 resulted from higher sales volumes of $9 million or 17 percent and the impact of the Novomatrix acquisition of $15 million or 29 percent. Higher sales volumes were experienced in all global markets due mainly to improved demand in the global automotive markets as well as electronic sectors. The most significant improvement was in the Asia Pacific region, partially driven by our Novomatrix acquisition.

The increase in segment profit in the first quarter 2011 resulted primarily from higher net sales and the impact of the Novomatrix acquisition, partially offset by higher selling costs on products, including those associated with our Novomatrix acquisition.

The increase in net sales in the first quarter 2011 resulted from higher sales volumes of $22 million or 11 percent and higher average selling prices of $5 million or 2 percent, partially offset by the divestiture of various other rubber chemical businesses of $13 million or 6 percent. Higher sales volumes were experienced most significantly by our THERMINOL® heat transfer fluids and CRYSTEX® insoluble sulphur due to strengthening demand in the Asia Pacific market and global automotive market, respectively. Higher average selling prices were experienced across all of our products except SANTOFLEX® antidegradants.

The increase in segment profit in comparison to the first quarter 2010 resulted primarily from higher net sales, higher gains as discussed in the Summary of Events Affecting Comparability, improved manufacturing costs and lower compensation expense related to our annual incentive plan, partially offset by higher raw material costs and the impact of divesting various other rubber chemical businesses.

Unallocated and Other

(dollars in millions)	Three Months Ended
	March 31,						Increase			% Increase
Components of Unallocated and Other	2011			2010			(Decrease)			(Decrease)
Other Operations Segment Profit (Loss)	$	-		$	1
Corporate Expenses		(15	)		(15	)
Share-based Compensation Expense		(5	)		(4	)
Other Unallocated Expense, net		(11	)		(8	)
Unallocated and Other results	$	(31	)	$	(26	)	$	(5	)		(19	)%

Charges Included in Unallocated and Other
Corporate Expenses		(4	)		-
Other Unallocated Expense, net		(8	)		(5	)
Charges Included in Unallocated and Other results	$	(12	)	$	(5	)	$	(7	)		(140	)%

Net losses on Unallocated and Other results increased $5 million in the first quarter 2011 as compared to the same period in 2010 primarily due to higher charges as described in the Summary of Events Affecting Comparability, partially offset by lower corporate expenses. After taking into consideration the higher charges in 2011, corporate expenses decreased in 2011 due predominately to lower compensation expense related to our annual incentive plan and the effects of restructuring events executed in previous periods.

Interest Expense

Interest expense decreased in 2011 compared to 2010 due to a lower average interest rate, lower debt issue costs and lower expense related to our interest swaps, partially offset by a higher average debt balance. For the quarter ended March 31, 2011, our average debt balance was $1.5 billion compared to $1.3 billion for the same period in 2010. Our average interest rate dropped from 7.5 percent for the quarter ended March 31, 2010 to 6.1 percent for the same period in 2011 as a result of the restructurings and modifications to our debt facility as discussed in Note 9 in the accompanying consolidated financial statements. Further, we experienced lower amortization of debt issue costs of $ 3 million in 2011 versus 2010 due to the debt restructuring which occurred in the first quarter 2010. Finally, we realized lower losses of $ 4 million on our interest rate swap agreements in the first quarter 2011 as compared to the same period in 2010. Our 2010 losses of $ 6 million related to mark-to-market changes while 2011 losses are comprised of $ 2 losses that were reclassified out of Other Comprehensive Loss into earnings.

The decrease in the loss on debt extinguishment or modification for the first quarter 2011 is the result of the early extinguishment of our 2014 Term Loan and 2013 Revolver in 2010 as compared to the modification of our $700 million senior term loan facility (“2017 Term Loan”) in 2011 as discussed in the Summary of Events Affecting Comparability. As a result of the early retirement of our 2014 Term Loan and 2013 Revolver in 2010, 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 while we only incurred $2 million of fees related to the modification in 2011.

Income Tax Expense

Notwithstanding the fact that income from continuing operations before income tax expense improved $119 million in the first quarter 2011 as compared to the same period of 2010, income tax expense declined $2 million predominantly due to the mix of income and losses in the tax jurisdictions in which we operate. Most significantly affecting this mix, and as more fully discussed in the Summary of Events Affecting Comparability, we recognized $100 million of restructuring and other charges in the first quarter 2010, including an $89 million charge related to the early extinguishment of a portion of our debt, with the majority of these charges being recorded as a reduction of U.S. earnings. Losses on U.S. operations do not result in the recognition of an income tax benefit as a full valuation allowance has been provided against the U.S. deferred tax assets. Further, we generated income in the first quarter 2011 on U.S. operations, where we have a full valuation allowance against the deferred tax assets related to our net operating losses available, and therefore recognized no income tax expense on these earnings. Finally, in the first quarter 2011, we recognized a discrete tax benefit of $2 million, primarily related to the re-evaluation of tax positions not yet settled.

During the first quarter 2011, we made voluntary prepayments of $68 million on our existing senior term loan and subsequently refinanced the remaining $700 million outstanding in order to lower our interest rate and modify the terms in order to provide additional strategic and financial flexibility. In conjunction with this refinancing, we paid $2 million in financing fees. Our refinanced senior term loan facility is due August 1, 2017 (“2017 Term Loan”) and has initial pricing of LIBOR plus 2.75 percent (with a leverage-based step-down to 2.50 percent) and a 0.75 percent LIBOR floor, for a current yield of 3.50 percent versus 4.50 percent under the initial term loan. Subsequent to the refinancing, we paid our first quarter required amortization of $2 million along with a $7 million voluntary prepayment of the required principal for the subsequent four quarters, eliminating all required principal payments through the first quarter of 2012.

For the remainder of 2011, our anticipated use of cash includes fulfillment of our interest, pension, environmental, restructuring and tax obligations, in addition to certain capital expenditures for innovative initiatives, capacity expansion and productivity enhancement and for maintenance and safety requirements, as well as any voluntary debt reductions. Further, to the extent it is necessary to fund certain seasonal demands of our operations and to support revenue growth, an additional modest use of cash may be needed for working capital. 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.

Our 2015 Revolver, 2017 Term Loan, $400 million of senior unsecured notes due 2017 and $300 million of senior unsecured notes due 2020 ("2020 Notes") include a number of customary covenants and events of default, including the maintenance of certain 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 2015 Revolver and 2017 Term Loan also include the maintenance of a maximum senior secured indebtedness financial covenant, as defined by our credit facility. We were in compliance with all applicable covenants at March 31, 2011. See Note 9 to the accompanying consolidated financial statements for additional information.

Operating activities: The increase in cash provided by operating activities is primarily attributable to higher operating income, lower payments on our postretirement obligations and lower working capital requirements as partially offset by higher payments on our annual incentive plan, higher interest payments and higher tax payments due to higher ex-U.S. earnings. In the first quarter 2011, no minimum payments were required or made on our frozen U.S. pension plans, while for the same period in 2010 we contributed $50 million to these plans, which fully satisfied our minimum funding requirement for 2010 and a portion of the 2011 minimum funding requirements. Excluding the effects of foreign currency exchange rates, cash required for working capital was $15 million lower in the first three months of 2011 as compared to the same period in 2010 on significantly higher sales, reflective of management’s focus throughout 2010 to minimize working capital. Higher interest payments for the three months ended 2011 as compared to the same period in 2010 are due to the timing of scheduled interest payments associated with the 2020 Notes, which were issued in 2010, along with cash payments associated with our interest rate swap agreements that were not operational in the first quarter 2010. Finally, in the first three months of 2011, we paid the remaining portion of our annual incentive plan to our employees, which was earned throughout 2010. There were no similar payments in the first three months of 2010 as the prior year incentive plan was temporarily suspended.

Investing activities: Cash provided by investing activities is $8 million in the first three months of 2011 as compared to a usage of $6 million for the same period in 2010 due to the receipt of $29 million in proceeds from the sale of certain businesses and selected assets within our Technical Specialties segment as partially offset by an increase in capital expenditures predominantly associated with our previously announced expansions in Suzhou, China and Ghent Belgium. Furthermore, cash used in the first three months of 2011 include the payment of $5 million into a restricted cash fund related to cash collateral required by our foreign subsidiaries.

Financing activities: Cash used by financing activities is $80 million in the first three months of 2011 as compared to cash provided by financing activities of $233 million for the same period in 2010. During the first quarter 2011, we made $77 million in payments on our existing senior term loan facility and refinanced the outstanding amount in order to lower our interest rate and modify the terms resulting in additional strategic and financial flexibility. In conjunction with this refinancing, we paid $2 million in fees. 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 a prepayment penalty. These net proceeds were used to partially fund our acquisition of Novomatrix and Vistasolar in the second quarter 2010.

Cash Flows – Discontinued Operations

	Three Months Ended
Cash Flow Summary - Discontinued Operations	March 31,					Increase
(dollars in millions)	2011		2010			(Decrease)
Cash provided by (used in) operating activities	$	3	$	(8	)	$	11
Net change in cash for period attributable to discontinued operations	$	3	$	(8	)	$	11

Cash provided by discontinued operations for the three months ended March 31, 2011 is comprised of $3 million in cash proceeds from the monetization of Primary Accelerators working capital, which ceased manufacturing in the third quarter 2010. For the same period in 2010, cash used by discontinued operations of $8 million is comprised of $4 million in settlement payments related to contingent liabilities associated with the sale of Integrated Nylon and $4 million in operating costs of Primary Accelerators.

We sponsor several defined benefit pension plans into which we made cash contributions of $3 million in the first quarter 2011. We expect to contribute an additional $47 million in cash to these pension plans during 2011 but actual contributions to the plans may differ as a result of a variety of factors, including changes in laws that impact funding. Our ultimate cash flow impact required to satisfy these outstanding liabilities will depend on numerous variables, including future changes in actuarial assumptions, legislative changes to pension funding laws, market conditions and whether we choose to make additional voluntary contributions or to contribute our common stock rather than cash to the plans.

Increase/(Decrease)	Advanced Interlayers		Performance Films			Technical Specialties			Unallocated/ Other			Consolidated
Impact on:
Cost of goods sold	$	-	$	1		$	-		$	-		$	1		(a)
		-		-			1			-			1		(b)
		-		-			2			-			2		(c)
Selling, general and administrative expenses		-		-			1			1			2		(a)
		-		-			1			-			1		(c)
		-		-			-			4			4		(d)
Operating Income Impact	$	-	$	(1	)	$	(5	)	$	(5	)	$	(11	)
Loss on debt extinguishment or modification		-		-			-			(89	)		(89	)	(e)
Pre-tax Income Statement Impact	$	-	$	(1	)	$	(5	)	$	(94	)	$	(100	)
Income tax impact													(2	)	(f)
After-tax Income Statement Impact												$	(98	)

(a)	Severance, pension settlement and retraining costs related to the general corporate restrcuturing ($3 million pre-tax and 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)	Acquisition costs related to our agreement to purchase Vistasolar ($4 million pre-tax and after-tax)
(e)	Charges related to the early extingsuishment of our 2014 Term Loan and 2013 Revolver ($89 million pre-tax and $88 million after-tax)
(f)	Income tax impact has been provided on gains and charges in the quarter recognized at the tax rate in the jurisdiction in which they have been or will be realized.

Non-GAAP Reconciliations

Reconciliations of our non-GAAP measures to GAAP measures are included below:

	Three Months Ended
	March 31,
Adjusted EBITDA (in millions)	2011			2010
Net income (loss) attributable to Solutia	$	65		$	(58	)
Plus: Loss from discontinued operations, net of tax		-			2
Income (Loss) from Continuing Operations attributable to Solutia	$	65		$	(56	)
Plus:
Income tax expense	$	8		$	10
Interest expense		28			38
Loss on debt extinguishment or modification		2			89
Depreciation and amortization		32			27
Subtotal	$	135		$	108
Plus:
Events affecting comparability (a)	$	(5	)	$	11
Non-cash share-based compensation expense		5			4
Primary Accelerators cost overhang (b)		-			1
Adjusted EBITDA	$	135		$	124

(a)	See table of Events Affecting Comparability.
(b)	Costs incurred related to the shutdown of our Primary Accelerators business that is not reflective of costs of the ongoing operations.

	Three Months Ended
Adjusted Earnings and Adjusted EPS	March 31,
(in millions except per share data)	2011			2010
Income (Loss) from continuing operations attributable to Solutia	$	65		$	(56	)
Plus: Events affecting comparability, net of tax (a)		(5	)		98
Adjusted Earnings	$	60		$	42
Weighted average diluted shares outstanding		121.2			120.0		(b)
Adjusted Earnings per Share	$	0.50		$	0.35

(a)	See table of Events Affecting Comparability
(b)	1.5 million shares for the three months ended March 31, 2010 were considered dilutive for purposes of the adjusted earnings per share calculation as adjusted operations resulted in income.

Contingencies

See Note 8 to the accompanying consolidated financial statements for a summary of our contingencies as of March 31, 2011.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS

There have been no material changes in market risk exposures during the three months ended March 31, 2011 that affect the disclosures presented in the information appearing under “Derivative Financial Instruments” as presented in our 2010 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 March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Our 2010 Form 10-K describes a federal court action filed by current or former participants in our U.S. pension plan (the “U.S. Plan”) and the pension plans of Monsanto and Pharmacia. On December 13, 2010, after the Seventh Circuit Court of Appeals affirmed the order of the United States District Court for the Southern District of Illinois granting summary judgment in favor of the U.S. Plan, the plaintiff’s filed a petition for a writ of certiorari to the United States Supreme Court. On March 21, 2011, the petition for a writ of certiorari was denied, thus terminating the case in favor of the U.S. Plan.

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

Our Credit Facility and our indentures for the 2017 and 2020 Notes include restrictive covenants that limit our ability to repurchase stock and pay dividends.

(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
January 1-31, 2011		8,641	$	23.08		-	$	-
February 1-28, 2011		836	$	24.43		-	$	-
March 1-31, 2011		75,068	$	23.18		-	$	-
Total		84,545	$	23.18		-	$	-

(1)	Shares surrendered to the Company by an employee to satisfy individual tax withholding obligations upon vesting of previously issued shares of restricted common stock. Shares surrendered are held in treasury.
(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 stockholder 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 45 of this report.

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

EXHIBIT NUMBER		DESCRIPTION
10.1		Amendment No. 1, dated as of March 3, 2011, to the 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 LLC, as Joint Lead Arrangers and as Joint Bookrunners (incorporated by reference to Exhibit 10.1 to Solutia’s Form 8-K filed on March 9, 2011)
10.2		Additional Term-1 Joinder Agreement, dated March 3, 2011, by and among Solutia Inc. and Deutsch Bank Trust Company Americas, as additional lender and Administrative Agent (incorporated by reference to Exhibit 10.1 to Solutia’s Form 8-K filed on March 9, 2011)
10.3		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 for the quarter ended March 31, 2010)
10.4		Form of Restricted Stock Award Agreement Pursuant to the Solutia Inc. 2007 Management Long-Term Incentive Plan as Amended and Restated
10.5		Form of Performance Stock Award Agreement Pursuant to the Solutia Inc. 2007 Management Long-Term Incentive Plan as Amended and Restated
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

	Three Months Ended
	March 31, 2010
Net sales	$	482
Net loss	$	(52	)
Net loss per basic and dilutive share	$	(0.44	)
Net loss attributable to Solutia	$	(53	)
Net loss attributable to Solutia per basic and dilutive share	$	(0.45	)

	March 31, 2011			March 31, 2010

Expected volatility		37.77	%		35.13	%
Expected term (in years)		6.3			6.0
Risk-free rate		2.89	%		2.44	%
Weighted average grant date fair value	$	9.75		$	4.98

	Options	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life	Aggregate Intrinsic Value (a)
Vested or Expected to Vest at March 31, 2011	3,194,041	$	18.42	8.2	$	22
Exercisable at March 31, 2011	1,611,794	$	17.30	6.9	$	13

	March 31,			December 31,
Property, Plant and Equipment	2011			2010

Land	$	35		$	35
Leasehold improvements		11			10
Buildings		219			214
Machinery and equipment		823			796
Construction in progress		58			54
Total property, plant and equipment		1,146			1,109
Less: Accumulated depreciation		(234	)		(198	)
Net Property, Plant, and Equipment	$	912		$	911

	Contract						Impairment of
	Termination			Employment			Long-Lived
	Payments			Reductions			Assets				Total
Balance at December 31, 2010		$	2		$	5		$	-			$	7
Charges taken			-			4			8				12
Non-cash reductions			-			-			(8	)			(8	)
Balance at March 31, 2011		$	2		$	9		$	-			$	11

We expect $9 of restructuring liabilities as of March 31, 2011 to be utilized within the next twelve months.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
(Unaudited)

	Three Months Ended
	March 31,

	2011			2010

Net Income (Loss)		$	66		$	(57	)
Other Comprehensive Income (Loss):
Accumulated currency adjustments			57			(35	)
Postretirement adjustments			1			2
Hedging activity adjustments			2			-
Comprehensive Income (Loss)			126			(90	)
Comprehensive Income attributable to noncontrolling interest			1			1
Comprehensive Income (Loss) attributable to Solutia		$	125		$	(91	)

See accompanying Notes to Consolidated Financial Statements.

	Novomatrix		Vistasolar
	April 30, 2010		June 1, 2010
Assets:
Trade receivables	$	2	$	10
Miscellaneous receivables		1		-
Inventories		9		3
Property, plant and equipment		-		16
Identified intangible assets		50		119
Goodwill		25		187
Total assets acquired	$	87	$	335

Liabilities:
Accounts payable	$	4	$	2
Accrued liabilities		3		1
Postretirement liabilities		-		1
Deferred tax liabilities		8		34
Total liabilities assumed	$	15	$	38

	Advanced			Performance			Technical
	Interlayers			Films			Specialties			Total
Balance at December 31, 2010		$	407		$	186		$	147		$	740
Currency fluctuations			14			-			-			14
Balance at March 31, 2011		$	421		$	186		$	147		$	754

	Total
Balance at December 31, 2010	$	273
Net charges taken		2
Amounts utilized		(5)
Currency fluctuations		2
Balance at March 31, 2011	$	272

	March 31, 2011		December 31, 2010
Environmental Remediation Liabilities, current	$	30	$	29
Environmental Remediation Liabilities, long-term		242		244
Total	$	272	$	273

(a)	Includes cash invested in money market funds.
(b)	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.
(c)	Includes interest rate caps and swaps which are valued using counterparty quotes, which use discounted cash flows and the then-applicable forward interest rates.

	Pension Benefits						Healthcare and Other Benefits
	Three Months Ended March 31,						Three Months Ended March 31,
	2011			2010			2011			2010
Service costs for benefits earned	$	1		$	1		$	1		$	1
Interest costs on benefit obligation		12			12			2			2
Assumed return on plan assets		(13	)		(13	)		(2	)		(1	)
Amortization of actuarial net loss (gain)		3			2			(2	)		(1	)
Settlement Charges		-			1			-			-
Total	$	3		$	3		$	(1	)	$	1

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 FORMULAONE® professional and retail window films · FLEXVUE™ precision coated films and other enhanced polymer films for industrial customers
Technical Specialties	· CRYSTEX® insoluble sulphur · SANTOFLEX® antidegradants · THERMINOL® heat transfer fluids · SKYDROL® aviation hydraulic fluids

	Three Months Ended
Cash Flow Summary - Continuing Operations	March 31,						Increase
(dollars in millions)	2011			2010			(Decrease)
Cash provided by operating activities	$	49		$	4		$	45
Cash provided by (used in) investing activities		8			(6	)		14
Cash provided by (used in) financing activities		(80	)		233			(313	)
Effect of exchange rate changes on cash		2			(8	)		10
Net change in cash for period attributable to continuing operations	$	(21	)	$	223		$	(244	)

Working Capital - Continuing Operations	March 31,		December 31,			Increase
(dollars in millions)	2011		2010			(Decrease)

Cash and cash equivalents	$	173	$	191
Trade receivables, net		260		228
Inventories		295		275
Other current assets		100		102
Total current assets	$	828	$	796

Accounts Payable	$	186	$	173
Accrued Liabilities		216		235
Total current liabilities	$	402	$	408

Working Capital	$	426	$	388	$	38

(a)	Charges related to the restructurings and impairment incurred in conjunction with the relocation of our European regional headquarters ($12 million pre-tax and $8 million after tax)
(b)	Gain on certain other rubber chemicals divestitures ($17 million pre-tax and $15 million after-tax)
(c)	Charges related to the modification of our 2017 Term Loan ($2 million pre-tax and after-tax)
(d)	Income tax impact has been provided on gains and charges in the quarter recognized at the tax rate in the jurisdiction in which they have been or will be realized