UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-13255

SOLUTIA INC.

Delaware		43-1781797
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

575 Maryville Centre Drive, P.O. Box 66760, St. Louis, Missouri		63166-6760
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (314) 674-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
$.01 par value Common Stock		New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act:

Title of each class
None

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o Yes þ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes þ No

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

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller Reporting Company o
				(Do not check if smaller reporting company)

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

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. þ Yes o No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2009): approximately $583.7 million.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 121,432,308 shares of common stock, $.01 par value, outstanding as of the close of business on January 31, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

Portion of Definitive Proxy Statement for Annual Meeting of Stockholders on April 21, 2010		Part III

 

 

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements which can be identified by the use of words such as “believes,” “expects,” “may,” “will,” “intends,” “plans,” “estimates,” “estimated,” or “anticipates,” or other comparable terminology, or by discussions of strategy, plans or intentions. These statements are based on management’s current beliefs, expectations, and assumptions about the industries in which we operate. Forward-looking statements are not guarantees of future performance and are subject to significant risks and uncertainties that may cause actual results or achievements to be materially different from the future results or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, those risks and uncertainties described in the Item 1A. Risk Factors section of this report. We disclaim any intent or obligation to update or revise any forward-looking statements in response to new information, unforeseen events, changed circumstances or any other occurrence.

PART I

ITEM 1.		BUSINESS

Company Overview

We are a global manufacturer and marketer of a variety of high-performance chemical and engineered materials that are used in a broad range of consumer and industrial applications. We maintain a global infrastructure consisting of 25 manufacturing facilities, 6 technical centers and over 26 sales offices globally, including 12 facilities in the United States. We employ approximately 3,400 individuals around the world.

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

On December 17, 2003, we and our 14 U.S. subsidiaries filed voluntary petitions for Chapter 11 to obtain relief from the negative financial impact of liabilities for litigation, environmental remediation and certain postretirement benefits (the “Legacy Liabilities”) and liabilities under operating contracts, all of which were assumed at the time of the Solutia Spinoff. On February 28, 2008 (the “Effective Date”), we consummated our reorganization and emerged from bankruptcy pursuant to our Fifth Amended Joint Plan of Reorganization (the “Plan”). See the accompanying consolidated financial statements for additional discussion of our changes in capitalization relating to this event.

On June 1, 2009, we sold substantially all the assets and certain liabilities, including environmental remediation and pension liabilities of active employees, of our Integrated Nylon business to an affiliate of S.K. Capital Partners II, L.P. (“Buyer”), a New York-based private equity firm. We used the proceeds from the sale to pay down debt under our $350 million senior secured asset-based revolving credit facility (“Revolver”). Completion of the sale of the Integrated Nylon business completes the transformation of Solutia into a pure-play performance materials and specialty chemicals company.

Segments; Principal Products

Our reportable segments are:

•

Saflex;

•

CPFilms; and

•

Technical Specialties.

The tabular and narrative information contained in Note 19 — Segment and Geographic Data — to the accompanying consolidated financial statements is incorporated by reference into this section.

Saflex

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

PVB is a specialty resin used in the production of laminated safety glass sheet, an adhesive interlayer with high tensile strength, impact resistance, transparency and elasticity that makes it particularly useful in the production of safety glass. Laminated safety glass is predominately produced with PVB sheet and is legislated in all industrialized countries for automobile windshields. Developing countries also use laminated safety glass in automotive windshields although it is not formally legislated. Approximately 40 percent of sales to the automotive sector are for aftermarket replacement windows. Architectural laminated safety glass is widely used in the construction of modern office buildings, airports and residential homes. PVB sheet is also used as an encapsulant in the growing thin film solar cell market. Other applications for PVB resin include non-sheet applications such as wash primers and other surface coatings, specialty adhesive formulations and inks.

Principal Products

Major End-Use

Major Products

Major

Major Raw

Major

Major End-Use

Markets

Brand

Description

Competitors

Materials

Plants(1)

Applications

CONSTRUCTION AND HOME FURNISHINGS

SAFLEX® BUTVAR®

Laminated window glass Specialty intermediate PVB resin

DuPont Kuraray Sekisui

Butyraldehyde Ethanol Polyvinyl alcohol Vinyl acetate monomer

Ghent, Belgium Springfield, MA Santo Toribio, Mexico Suzhou, China Sao Jose dos Campos, Brazil

Products to increase the safety, security, sound attenuation, energy efficiency and ultraviolet protection of architectural glass for residential and commercial structures

VEHICLES

SAFLEX® BUTVAR®

Laminated window glass Specialty intermediate PVB resin

DuPont Sekisui

Butyraldehyde Ethanol Polyvinyl alcohol Vinyl acetate monomer

Ghent, Belgium Santo Toribio, Mexico Springfield, MA Suzhou, China Sao Jose dos Campos, Brazil

Products to increase the safety, security, sound attenuation and ultraviolet protection of automotive glass

CPFilms

CPFilms is one of the world’s largest manufacturers of solar control, decorative, safety and security window films for aftermarket automotive and architectural applications marketed predominantly under the trademarks of LLUMAR^®; VISTA^®; GILA^®; and FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS^®. CPFilms also manufactures precision coated films providing performance film enhancement such as vacuum metalizing, sputter coating, deep dyeing and coating and laminating which are used in a wide variety of products including those within the growing industries of electronics and energy.

Principal Products

Major End-Use

Major Products

Major

Major Raw

Major

Major End-Use

Markets

Brand

Description

Competitors

Materials

Plants(1)

Applications

CONSTRUCTION AND HOME FURNISHINGS

LLUMAR® VISTA® GILA®

Professional window films Retail window films

3M Madico Bekaert

Polyester film

Martinsville, VA

After-market films for solar control, security and safety

VEHICLES

LLUMAR® FORMULA ONE® GILA®

Professional window films Retail window films

Johnson Laminating Garware Commonwealth Laminating NovoMatrix Hanita Coatings

Polyester film

Martinsville, VA

Products to increase the safety, security, sound attenuation and ultraviolet protection of automotive glass and give vehicles a custom appearance

INDUSTRIAL APPLICATIONS & ELECTRONICS

Metalized films Sputtered films Deep-dyed films Release liners

Components Enhanced polymer films

3M Intellicoat Mitsubishi Southwall VDI Technimet Nitto Denko Toppan

Polyester film Indium tin Precious metals

Martinsville, VA Canoga Park, CA

Window films’ tapes, automotive badging, optical and colored filters, shades, reprographics, and packaging uses, computer touch-screens, electroluminescent displays for hand-held electronics and watches, and cathode ray tube and LCD monitors

Technical Specialties

Technical Specialties is our specialty chemicals segment which includes the manufacture and sale of chemicals for the rubber, solar energy, process manufacturing and aviation industries.

Chemicals for the rubber industry help cure and protect rubber, impart desirable properties to cured rubber, increase durability and lengthen product life. These products play an important role in the manufacture of tires and other rubber products such as belts, hoses, seals and footwear.

We manufacture approximately 50 different products for the rubber chemicals industry which are classified into two main product groups: vulcanizing agents, principally insoluble sulfur, and rubber chemicals. Insoluble sulfur is a key vulcanizing agent manufactured predominantly for the tire industry. We are the world’s leading supplier of insoluble sulfur and market under the trade name of CRYSTEX^®. We have three product groups within rubber chemicals: antidegradants, accelerators, and other rubber chemicals.

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

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

Principal Products

Major End-Use

Major Products

Major

Major Raw

Major

Major End-Use

Markets

Brand

Description

Competitors

Materials

Plants(1)

Applications

RUBBER CHEMICALS

CRYSTEX® SANTOFLEX® SANTOCURE® PERKACIT®

Insoluble sulfur Antidegradant Primary and ultra accelerators

Lanxess Chemtura Shikoku Oriental Carbon Chemicals Limited (India) NCC Sinorgchem

Benzene derivatives Ketones Sulfur CS2 Napthenic processing oil

Antwerp, Belgium Itupeva, Brazil Kashima, Japan Monongahela, PA Lemoyne, AL Nienburg, Germany Kuantan, Malaysia Sauget, IL Sete, France Termoli, Italy Sao Jose dos Campos, Brazil

Products critical to the manufacture of finished rubber as they increase the productivity of the manufacturing process and the quality of the end product with improved resilience, strength and resistance to wear and tear. Primary application is in the production of tires.

CAPITAL EQUIPMENT

THERMINOL®

Heat transfer fluids

Dow

Benzene Phenol

Anniston, AL Newport, U.K.

Heat transfer fluids for a wide variety of manufacturing and refining uses

AVIATION & TRANSPORTATION

SKYDROL® SKYKLEEN®

Aviation hydraulic fluids Aviation solvents

ExxonMobil

Phosphate esters

Anniston, AL

Hydraulic fluids for commercial aircraft, and environmentally friendly solvents for aviation maintenance

Sale of Products

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

We maintain inventories of finished goods, goods in process and raw materials to meet customer requirements and our scheduled production. In general, we do not manufacture our products against a backlog of firm orders; we schedule production to meet the level of incoming orders and the projections of future demand. However, in the Saflex segment, a large portion of sales for 2009 were pursuant to volume commitments. We do not have material contracts with the government of the United States or any state, local or foreign government. In 2009, no single customer or customer group accounted for 10 percent or more of our net sales.

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

Competition

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

Raw Materials and Energy Resources

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

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

Intellectual Property

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

Research and Development

Research and development constitute an important part of our activities. Our expenses for research and development amounted to $14 million in 2009, $19 million in 2008 and $26 million in 2007, or about 1.1 percent of net sales on average. We focus our expenditures for research and development on process improvements and selected product development.

Our research and development programs in the Saflex segment include new products and processes for the window glazing and photovoltaic markets. Several new products for the photovoltaic market have achieved International Electrotechnical Commission (IEC) qualification and are in various stages of commercialization. New products are designed to help customers reduce encapsulation cost, address quality issues or increase efficiency of thin film photovoltaic cells. Acoustic safety interlayers have been successfully introduced to the automotive and architectural markets. An Absolute Black super-wide privacy interlayer has been introduced in the architectural market. New process technology for super-wide acoustic interlayers is being installed in our Ghent, Belgium facility.

Our research and development programs in the CPFilms segment include new products for the glass treatment, display and electronics markets. Window films and technical coatings that meet the challenges of energy efficiency and energy harvesting continue to be developed. New products using advances in exterior coatings, silicone release formulations, transparent conductive coatings and signal enabling technologies are being commercialized.

Our research and development programs in the Technical Specialties segment include new products for the specialty chemicals markets and emphasize the balance between manufacturing cost reduction and capacity expansion in our rubber chemical business. A new heat transfer fluid has been commercialized and a new aviation fluid continues to perform well in the industry flight service evaluations and approval is expected in 2010. We have made significant progress in cost reduction through process optimization and energy reduction across most of our rubber chemical product lines.

Environmental Matters

The narrative appearing under “Environmental Matters” in Item 7 below is incorporated by reference.

Employee Relations

On December 31, 2009, we had approximately 3,400 employees worldwide: with U.S. employees constituting 52 percent of the total number of employees. Approximately 1,000 of the European employees are represented by either a union delegation, works council or employee forum. Approximately 29 percent of our U.S. workforce is currently represented by various labor unions at the following sites: Anniston, Alabama; Sauget, Illinois; Monongahela, Pennsylvania; Springfield, Massachusetts; and Trenton, Michigan.

Each of our U.S. labor unions (except at the Monongahela, Pennsylvania site) individually ratified a five-year agreement in 2005, which is set to expire December 31, 2010, that established retirement and health and welfare benefits for our employees at the above sites. Local collective bargaining agreements that cover wages and working conditions at the above sites expire between March 2010 and January 2013. The collective bargaining agreement for the Monongahela, Pennsylvania site includes wages, working conditions, retirement and health & welfare benefits.

International Operations

We are engaged in manufacturing, sales and research and development in areas outside the United States. Approximately 75 percent of our consolidated sales from continuing operations for the year ended December 31, 2009 were made into markets outside the United States, including Europe, Canada, Latin America and Asia. Of our consolidated sales from continuing operations, 12 percent were made into China for the year ended December 31, 2009.

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

Executive Officers

The following table shows information about our executive officers as of February 17, 2010:

		Year First Became an
Name, Age and Position		Executive Officer of				Other Business Experience Since
with Solutia		Solutia				At Least January 1, 2005
Jeffry N. Quinn, 51 President, Chief Executive Officer and Chairman of the Board			2003			President, Chief Executive Officer and Director since May 2004. Named Chairman of the Board on February 22, 2006. Mr. Quinn previously served as Solutia’s Senior Vice President, General Counsel and Chief Restructuring Officer from 2003 to 2004. Prior to joining Solutia, Mr. Quinn served from 2000 to 2002 as Executive Vice President, Chief Administrative Officer and General Counsel of Premcor Inc., an independent petroleum refiner and supplier of unbranded transportation fuels, heating oil, petrochemical feedstocks, petroleum coke and other petroleum products. Premcor Inc. is now owned by Valero Energy Corp.
James M. Sullivan, 49 Executive Vice President, Chief Financial Officer and Treasurer			2004			Executive Vice President, Chief Financial Officer and Treasurer since 2009. Mr. Sullivan served as Senior Vice President, Chief Financial Officer and Treasurer from 2004 through 2009 and as Vice President and Controller from 1999 through 2004.
James R. Voss, 43 Executive Vice President, Global Operations			2005			Executive Vice President, Global Operations since 2009. Mr. Voss served as Senior Vice President and President, Flexsys from 2007 through 2009 and as Senior Vice President, Business Operations from 2005 through 2007. Mr. Voss served as Senior Vice President and Chief Administrative Officer of Premcor Inc., now owned by Valero Energy Corp.
Robert T. DeBolt, 49 Senior Vice President, Business Operations			2007			Senior Vice President, Business Operations since 2007. Mr. DeBolt served as Vice President of Corporate Strategy from 2005 to 2007 and as the Controller for Integrated Nylon from 2003 through 2004. Prior thereto, Mr. DeBolt was responsible for accounting at all of our manufacturing facilities.
Paul J. Berra, III, 41 Senior Vice President, General Counsel, Legal and Governmental Affairs			2008			Senior Vice President, General Counsel, Legal and Governmental Affairs since December 2009. Mr. Berra served as Senior Vice President, General Counsel and Chief Administrative Officer from 2008. Mr. Berra served as Vice President, Government Affairs and Communications from 2006-2008. Mr. Berra joined Solutia in 2003 as Assistant General Counsel, Human Resources, and added government affairs responsibilities the following year. Prior to joining Solutia, Mr. Berra served as Corporate Counsel at Premcor Inc., now owned by Valero Energy Corp.
Timothy J. Spihlman, 38 Vice President and Corporate Controller			2004			Vice President and Corporate Controller since 2004 and Director, Corporate Analysis and Financial Reporting from 2002 through 2004. Previously, Mr. Spihlman served as Vice President of Finance at CoreExpress, Inc. from 2000 until 2002 and was a public accountant with Ernst & Young from 1993 until 2000.
Andrew B. Stroud, Jr., 51 Vice President, Human Resources			2010			Mr. Stroud was Executive Vice President, DHR International, a privately held provider of executive search solutions from August 2008 until December 2009, when he joined Solutia. He was Vice President, Human Resources for Insituform Technologies, a leading worldwide provider of cured-in place pipe (CIPP) and other technologies and services for the rehabilitation of pipeline systems. Previously, he served as Vice President, Human Resources of Aramark Corporation, a food services, facilities management, and uniform and career apparel provider from 2004. Mr. Stroud has over twenty years of experience in Human Resources.

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

Internet Access to Information

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

ITEM 1A.		RISK FACTORS

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

RISK RELATED TO OUR EMERGENCE FROM BANKRUPTCY

Because our consolidated financial statements reflect fresh-start accounting adjustments made upon emergence from bankruptcy, and because of the effects of the transactions that became effective pursuant to the Plan of Reorganization, financial information in our future financial statements will not be comparable to our financial information from prior periods.

Upon our emergence from Chapter 11 in February 2008, we adopted fresh-start accounting in accordance with Accounting Standards Codification (“ASC”) 852, Reorganizations, pursuant to which our reorganization value, which represents the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the assets of the entity immediately after the reorganization, has been allocated to the fair value of assets in conformity with ASC 805, Business Combinations, using the purchase method of accounting for business combinations. We stated liabilities, other than deferred taxes, at a present value of amounts expected to be paid. The amount remaining after allocation of the reorganization value to the fair value of identified tangible and intangible assets is reflected as goodwill, which is subject to periodic evaluation for impairment. In addition, under fresh-start accounting the accumulated deficit has been eliminated. In addition to fresh-start accounting, our consolidated financial statements reflect all effects of the transactions contemplated by the Plan of Reorganization. Thus, our future statements of financial position and statements of operations data will not be comparable in many respects to our consolidated statements of financial position and consolidated statements of operations data for periods prior to our adoption of fresh-start accounting and prior to accounting for the effects of the reorganization.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

Continued extreme disruption in global financial markets and sustained weakening in our markets could significantly impact our results of operations, liquidity and long term anticipated growth rate.

Our operations and performance are materially affected by worldwide economic conditions, which started deteriorating significantly during 2008 and continued into 2009. Market turmoil and tightened credit availability, downgrades of certain investments and declining valuations of others generally reduced consumer confidence, increased pricing pressure on products and services and led to widespread reduction of global business activity. Uncertainty about current global economic conditions has resulted in decreased consumer spending and a significant decline in sales in automotive, aviation, construction and industrial industries worldwide. The continued tightening of credit in financial markets adversely affects the ability of customers and suppliers to obtain financing for significant purchases and operations and could result in a decrease in or cancellation of orders for our products, our ability to procure necessary raw materials from suppliers, our ability to secure credit from our suppliers at terms granted to us historically and our ability to collect from our customers amounts due on trade receivables at terms previously experienced by us. The continued weakening of these markets, if prolonged, could significantly impact our results of operations, our liquidity, and our long-term anticipated growth rate. Further, stemming from our emergence from Chapter 11, the carrying amount of our goodwill and intangible assets was established at fair value as of February 28, 2008 and therefore is more susceptible to impairment if business operation results and/or macroeconomic conditions deteriorate. Impairment charges, if any, could be material to our results of operations. While we have seen signs of recovery and increased demand in most businesses, continued weakness in worldwide economic conditions could result in a decline in our future profitability and cash from operating activities.

Our operations are restricted by our credit facilities and could be impacted by the failure of our lenders to perform.

Our credit facilities and our indenture governing the 2017 senior unsecured notes include a number of significant restrictive covenants. These covenants could impair our financing and operational flexibility and make it difficult for us to react to market conditions and satisfy our ongoing capital needs and unanticipated cash requirements. Specifically, such covenants restrict our ability and, if applicable, the ability of our subsidiaries to, among other things:

	•		incur additional debt;
	•		make certain investments and acquisitions;
	•		enter into certain types of transactions with affiliates;
	•		limit dividends or other payments by us and certain of our subsidiaries;
	•		use assets as security in other transactions;
	•		pay dividends on our common stock or repurchase our equity interests;
	•		sell certain assets or merge with or into other companies;
	•		guarantee the debts of others;
	•		enter into new lines of business;
	•		make capital expenditures;
	•		prepay, redeem or exchange our debt;
	•		form any joint ventures or subsidiary investments.

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

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

Our current revolving credit facility is a syndicated credit agreement in which each lender is severally liable for only its agreed part of the loan commitments. Although all lenders have performed their individual obligations under the terms of the revolving credit agreement to date, there can be no assurance that this will continue given the current turmoil in the financial services industry. One or more lender’s failure to perform on their obligations could have a material adverse effect on the Company’s ability to fund its ongoing operations and other commitments.

Volatility in the prices of raw materials and energy or their reduced availability could significantly impact our operating margins.

Our manufacturing processes consume significant amounts of energy and large amounts of commodity raw materials, including benzene, vinyl acetate, sulfur, polyvinyl alcohol, 2-ethyl hexanol and natural gas, the cost of which are subject to worldwide supply and demand as well as other factors beyond our control. Also, temporary shortages or over supply of these raw materials and energy sources may occasionally occur. We typically purchase major requirements for key raw materials under medium-term contracts. Pricing under these contracts may fluctuate as a result of unscheduled plant interruptions, worldwide market conditions and government regulation. Volatile raw material and energy costs could impact our operating margins in the future. See also Business — Raw Materials and Energy Resources.

Problems encountered in operating our production facilities could adversely impact our business.

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

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

We have and will continue to have significant indebtedness.

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

•

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

•

Certain levels of indebtedness may make us less attractive to potential acquirers or acquisition targets.

•

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

•

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

Furthermore, our ability to satisfy our debt service obligations will depend, among other things, upon fluctuations in interest rates, our future operating performance and ability to refinance indebtedness when necessary. These factors depend partly on economic, financial, competitive and other factors beyond our control. We have hedged a significant portion of our variable rate debt with derivative instruments. We may not be able to generate sufficient cash from operations to meet our debt service obligations as well as fund necessary capital expenditures, pension funding obligations and investments in research and development. In addition, if we need to refinance our debt, obtain additional financing or sell assets or equity, we may not be able to do so on commercially reasonable terms, if at all. Finally, counterparties to our derivative instruments may not be able to honor their contractual obligations.

The utilization of our net deferred tax assets could be substantially limited if we experienced an ownership change as defined by the Internal Revenue Code.

As of December 31, 2009, we have net deferred tax assets of $555 million related to our U.S. net operating loss (“NOL”) carryforward and $125 million related to our U.S. foreign tax credit (“FTC”) carryforward. We have recorded a valuation allowance of equal amount against each of these assets. Section 382 of the Internal Revenue Code contains rules that limit the ability of a company that undergoes an ownership change to utilize its NOL and FTC carryforwards. Under the rules, such an ownership change is generally any change in ownership of more than 50% of its stock within a rolling three-year period, as calculated in accordance with the rules. The rules generally operate by focusing on changes in ownership among stockholders considered by the rules as owning directly or indirectly 5% or more of the stock of the company and any change in ownership arising from new issuances of stock by the company.

If we undergo an ownership change for purposes of Section 382 as a result of future transactions involving our common stock, our ability to use any of our NOL and FTC carryforwards, at the time of the ownership change would be subject to the limitations of Section 382. The limitation could operate to cause the benefit of the assets to expire before they are utilized. Our inability to use the full benefits of our NOL and FTC carryforwards could have a material effect on our financial position, results of operations and cash flow.

We believe we have not experienced a subsequent ownership change since we experienced an initial ownership change on February 28, 2008, the date we emerged from Chapter 11 bankruptcy. However, the amount by which our ownership may change in the future could be affected by purchases and sales of common stock by 5% stockholders over which we have no control, and new issuances of common stock by us, should we choose to do so. In July 2009, our Board of Directors adopted a Section 382 rights agreement as a measure intended to deter such an ownership change in order to preserve our deferred tax assets. The Section 382 rights agreement, however, may not prevent an ownership change. In addition, while the Section 382 rights agreement is in effect, it could discourage or prevent a merger, tender offer, proxy contest or accumulations of substantial blocks of shares for which some stockholders might receive a premium above market value. It could also adversely affect the liquidity of the market for our shares.

Turnover in the senior management team and losses of other key personnel could have a significant adverse effect on our results of operations.

The services of our senior management team, as well as other key personnel, will be critical to the successful implementation of our business strategies going forward. If the terms of incentive compensation programs are not adequate, we may have difficulty retaining current senior management and other key personnel and be unable to hire qualified personnel to fill any resulting vacancies, which could have a significant adverse effect on our results of operations.

We operate in a highly competitive industry that includes competitors with greater resources than ours.

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

We operate in cyclical business segments and our financial results are likely to fluctuate accordingly.

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

If we are unable to protect our intellectual property rights, our sales and financial performance could be adversely affected.

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

In the future, we may have to rely on litigation to enforce our intellectual property rights and contractual rights. In addition, we may face claims of infringement that could interfere with our ability to use technology or other intellectual property rights that are material to our business operations. If litigation that we initiate is unsuccessful, we may not be able to protect the value of some of our intellectual property. In the event a claim of infringement against us is successful, we may be required to pay royalties or license fees to continue to use technology or other intellectual property rights that we had been using or we may be unable to obtain necessary licenses from third parties at a reasonable cost or within a reasonable period of time. If we are unable to obtain licenses on reasonable terms, we may be forced to cease selling or using any of our products that incorporate the challenged intellectual property, or to redesign or, in the case of trademark claims, rename our products to avoid infringing the intellectual property rights of third parties, which may not be possible and may be time-consuming. Any litigation of this type, whether successful or unsuccessful, could result in substantial costs to us and diversions of some of our resources. Our intellectual property rights may not have the value that we believe them to have, which could result in a competitive disadvantage or adversely affect our business and financial performance. See also Business — Intellectual Property.

Legal proceedings including proceedings related to environmental and other regulatory obligations may have a materially negative impact on our future results of operations.

We have been, and may in the future be, subject to various lawsuits and other legal proceedings, including proceedings related to our environmental and other regulatory obligations. As a manufacturer of chemical-based materials, we may become subject to litigation alleging personal injury, or product liability associated with our products and businesses. Adverse judgments or rulings against us in these legal proceedings, or the filing of additional environmental or other damage claims against us, may have a materially negative impact on our future results of operations, cash flows and financial condition. Additionally, we may incur significant administrative and legal costs associated with defending or settling litigation.

The applicability of numerous environmental laws to our manufacturing facilities and other locations could cause us to incur material costs and liabilities.

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

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

At any given time, we are involved in litigation, administrative proceedings and investigations of various types in a number of jurisdictions involving potential environmental liabilities, including clean-up costs associated with contaminated sites, natural resource damages, property damages and personal injury. For example, during our Chapter 11 case, natural resource trustees asserted certain natural resource damage claims against us principally relating to our Anniston and Sauget facilities, the liability for which we share with the Monsanto Company (“Monsanto”) pursuant to our Plan. We may be required to spend substantial sums to defend or settle these and other actions, to pay any fines levied against us or satisfy any judgments or other rulings rendered against us and such sums may be material.

Under certain environmental laws, we can be held strictly liable for hazardous substance contamination at real property we have owned, operated or used as a disposal site or for natural resource damages associated with such contamination. Liability under environmental laws relating to contaminated sites can be imposed retroactively and on a joint and several basis. One liable party can be held responsible for all costs at a site, regardless of fault, percentage of contribution to the site or the legality of the original disposal. As described in more detail above and in the following paragraph, we could incur significant costs, including cleanup costs, natural resources damages, civil or criminal fines and sanctions and third-party claims as a result of hazardous substance contamination.

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

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

We face currency and other risks associated with international sales.

Sales and operations outside the United States constituted a majority of our revenues in fiscal 2009. Our operations outside the United States expose us to risks including fluctuations in currency values, trade restrictions, tariff and trade regulations, U.S. export controls, reduced protection of intellectual property rights; foreign tax laws, shipping delays, economic and political instability; the effect of global health, safety and environmental matters on economic conditions and market opportunities and changes in financial policy.

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

Many of our products and manufacturing processes are subject to technological change and our business will suffer if we fail to keep pace.

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

Significant payments may be required to maintain the funding of our domestic qualified pension plans.

We maintain qualified pension plans under which certain of our domestic employees and retirees are entitled to receive benefits. Although we have frozen future benefit accruals under our U.S. pension plans, significant liabilities still remain. In order to fund these pension plans, we made significant contributions in 2009 amounting to approximately $65 million and will have to fund more going forward. We may be unable to obtain financing to make these pension plan contributions. In addition, even if financing for these contributions is obtained, the funding obligations and the carrying costs of debt incurred to fund the obligations could have a significant adverse effect on our results of operations.

Labor disruptions with the unionized portion of our workforce could have a negative effect.

While we believe that our relations with our employees are good, we may not be able to negotiate these or other collective bargaining agreements on the same or more favorable terms as the current agreements, or at all, and without production interruptions, including labor stoppages. A prolonged labor dispute, which could include a work stoppage, could impact our ability to satisfy our customers’ requirements and negatively affect our financial condition.

We may engage in acquisitions that could disrupt our business and harm our operating results or financial condition.

We expect to make selective domestic and international acquisitions of and investments in businesses that represent synergistic bolt-ons to our existing businesses or represent one or more businesses in the performance material and specialty chemical sector that would be new platforms for the Company. We may not be able to identify suitable acquisition, investment, alliance, or joint venture opportunities or consummate any such transactions or relationships on terms and conditions acceptable to us. Further, notwithstanding thorough pre-acquisition due diligence and careful analysis performed by the Company, we may not have identified all possible issues that might arise with respect to such acquired assets and such transaction that we enter into may not be as successful as the Company’s premises as of the acquisition date.

These transactions or any other acquisitions or dispositions involve risks and uncertainties, which may have a material adverse effect on our business. A critical component of the success of certain acquisitions is the Company’s ability to quickly and effectively integrate the acquired business or businesses into Solutia. Notwithstanding the fact that the Company’s integration of the 2007 acquisition of Flexsys was successful in terms of timeliness of the integration and resulting cost savings realized, the integration of future acquired businesses may not be as successful given the complexities involved in such activities. Also, these integration efforts could result in disruption to other parts of our business and the diversion of management’s attention from daily operations.

Any acquisition may also cause us to assume liabilities, record goodwill and indefinite-lived intangible assets that will be subject to impairment testing and potential impairment charges, incur significant restructuring charges and increased working capital and capital expenditure requirements, which would reduce our return on invested capital.

Changes in supply-demand balance in the regions and the industries in which we operate may adversely affect our financial results.

Our key markets are shifting from mature markets such as North America and Western Europe to emerging regions such as Asia, in particular China and India. Although we are responding to meet these market demand conditions, we cannot be certain that we will be successful in expanding capacity in emerging regions (which depends in part on economic and political conditions in these regions and, in some cases, on our ability to acquire or form strategic business alliances) or in reducing capacity in mature regions commensurate with industry demand.

Failure to make continued improvements in our technology and productivity could hurt our competitive position.

We believe that we must continue to enhance our existing products and to develop and manufacture new products with improved capabilities in order to continue to be a market leader. We also believe that we must continue to make improvements in our productivity in order to maintain our competitive position. When we invest in new technologies, processes or production facilities, we face risks related to construction delays, cost over-runs and unanticipated technical difficulties. Our inability to anticipate, respond to or utilize changing technologies could have a material adverse effect on our business and our consolidated results of operations.

ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.

ITEM 2.		PROPERTIES

We lease the property on which our headquarters is located in St. Louis County, Missouri. Our principal European offices are located in Louvain-la-Neuve, Belgium, on land leased from the University of Louvain. For our Asia Pacific operations, we lease offices in Shanghai, China and other locations in the region. Information about our major manufacturing locations worldwide and segments that used these locations as of February 1, 2010, appears under “Segments; Principal Products” in Item 1 of this report and is incorporated herein by reference.

Our principal plants are suitable and adequate for their use. Utilization of these facilities varies with seasonal, economic and other business conditions. None of our principal plants are substantially idle. Our facilities generally have sufficient capacity for existing needs and expected near-term growth.

We own most of our principal plants. However, at Antwerp, Belgium and Sao Jose dos Campos, Brazil, both of which belong to Monsanto, we own certain buildings and production equipment and lease the underlying land. We operate as a guest at these facilities with Monsanto as the operator under terms of master operating agreements. For facilities used in the manufacture of Saflex products, the master operating agreement has 9 years remaining on its initial term. For facilities used to manufacture rubber chemical products, the master operating agreement has 15 years remaining on its initial term. After the initial terms, the master operating agreements for both manufacturing facilities and each of the product lines provide that they continue indefinitely unless either party terminates on at least 24 months’ prior written notice. The master operating agreements also provides that, under certain circumstances, either the operator or the guest may terminate the operating agreement before the expiration of the applicable term, subject to early termination penalties.

In addition, we lease and operate as a guest at manufacturing facilities in Lemoyne, Alabama and Itupeva, Brazil, under master operating agreements with Akzo Nobel as the operator where we manufacture certain rubber chemical products. The initial term of these master operating agreements run until 2027. The master operating agreements may be terminated by either party upon 24 months notice, which notice shall not be effective before the expiration of the initial term.

We operate several facilities for other third parties on our sites, principally within the Nienburg, Germany; Sauget, Illinois; Newport, Wales (U.K.); and Springfield, Massachusetts sites under long-term lease and operating agreements.

Mortgages on our plants at the following locations constitute a portion of the collateral securing our Term Loan and Revolver credit facilities: Springfield, Massachusetts; Trenton, Michigan; and Martinsville, Virginia.

ITEM 3.		LEGAL PROCEEDINGS

Litigation

We are a party to legal proceedings, which have arisen in the ordinary course of business and involve claims for money damages.

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

Legacy Tort Claims Litigation

Pursuant to the Amended and Restated Settlement Agreement effective February 28, 2008, entered into by Solutia and Monsanto in connection with our emergence from Chapter 11 (the “Monsanto Settlement Agreement”), Monsanto is responsible to defend and indemnify Solutia for any Legacy Tort Claims as that term is defined in the agreement, while Solutia retains responsibility for tort claims arising out of exposure occurring after the Solutia Spinoff. Solutia or 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 exposure or such matters are not within the meaning of “Legacy Tort Claims” within the Monsanto Settlement Agreement, we would potentially be liable. All claims in the Flexsys tort litigation matters described below concern alleged conduct occurring while Flexsys was a joint venture of Solutia and Akzo Nobel, and any potential damages in these cases would be evenly apportioned between Solutia and Akzo Nobel. In addition to the below actions, Monsanto has sought indemnity from us for certain tort and workers’ compensation claims in which Monsanto has been named a defendant. We have rejected such demand pursuant to the Monsanto Settlement Agreement. There are no pending legal actions regarding these alleged indemnification rights.

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, Flexsys, Monsanto and Pharmacia as defendants.

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

St. Clair County, Illinois 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 their property from PCBs, dioxins, furans, and other alleged hazardous substances emanating from the defendants’ facilities in Sauget, Illinois (including our W.G. Krummrich site in Sauget, Illinois). The proposed class 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 alleged contaminants from their property.

In addition to the purported class action lawsuit, twenty additional individual lawsuits have been filed since February 2009 against the same defendants (including Solutia) comprised of claims from over one thousand individual residents of Illinois who claim they suffered illnesses and/or injuries as well as property damages as a result of the same PCB’s, dioxins, furans, and other alleged hazardous substances allegedly emanating from the defendants’ facilities in Sauget.

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 litigation against us is remote and, accordingly, we have not recorded a loss contingency. Nonetheless, if it were subsequently determined these matters are not within the meaning of “Legacy Tort Claims,” as defined in the Monsanto Settlement Agreement, or other defenses to us were unsuccessful, it is reasonably possible we would be liable for an amount which cannot be estimated but which could have a material adverse effect on our consolidated financial statements.

Solutia Inc. Employees’ Pension Plan Litigation

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

Medicare Reimbursement Litigation

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

Solutia denies the allegations, and asserts that liability for such reimbursements should be the responsibility of the plaintiffs’ counsel who were actually responsible for the distribution of the settlement funds to the plaintiffs. Defendants’ initial responses to the claim are due in February 2010, and no trial is expected until at least 2011.

Flexsys Patent and Related Litigation

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

United States Civil Patent Infringement Litigation. In January 2005, Flexsys filed suit in United States District Court for the Northern District of Ohio for patent infringement against Sinorgchem Co. Shangdong, a Chinese entity ("Sinorgchem"), Korea Kumho Petrochemical Company, a Korean company ("KKPC"), Kumho Tire Korea and Kumho Tire USA. Flexsys claims the process Sinorgchem uses to make 4-ADPA and 6PPD infringes Flexsys' patented process, and that Sinorgchem's importation of 6PPD, KKPC's importation of 6PPD (which is made from Sinorgchem's 4-ADPA), and Kumho Tire's importation of tires (which include KKPC's 6PPD) infringe upon Flexsys' patents. The lawsuit was stayed for an extended period of time while Flexsys pursued parallel infringement proceedings against Sinorgchem and KKPC before the United States International Trade Commission. Although Flexsys initially had success in the ITC action, the underlying decision was overturned by the Federal Circuit Court of Appeals which held that Sinorgchem and KKPC did not literally infringe Flexsys' patents. Flexsys did not pursue further appeals in the ITC matter, and, instead, decided to continue its pursuit of its civil patent infringement action in Ohio. In February 2009, the district court lifted the stay on the civil case and allowed the case to go forward. Flexsys is seeking monetary damages as well as injunctive relief in the civil case. In October 2009, the court held a hearing to determine the interpretation of the patent claims at issue in the case. In its subsequent ruling, the court limited the claims Flexsys could bring with respect to its base patent. Sinorgchem and KKPC have recently filed summary judgment motions asking the court to dismiss the case as a matter of law. If summary judgment is denied, trial on this matter is scheduled for the second quarter of 2011.

Rubber Chemicals Antitrust Litigation. In April 2006, KKPC filed suit against Flexsys in the United States District Court for the Central District of California for alleged violations of the Sherman Act, breach of contract, breach of the implied covenant of good faith and fair dealing, declaratory relief, intentional interference with prospective economic advantage, disparagement and violations of the California Business & Professions Code. This matter was subsequently transferred to the United States District Court, Northern District of California. In its complaint, KKPC primarily claimed Flexsys' alleged statements to customers regarding Flexsys' belief that KKPC's products infringed upon Flexsys' patents were in violation of antitrust laws. The court dismissed KKPC's initial complaint, but granted KKPC the right to refile an amended complaint, which KKPC filed in September 2007. Flexsys filed a motion to dismiss the amended complaint, which was granted in part, and denied in part. Specifically, the court dismissed all pending antitrust claims against Flexsys and dismissed the two state law claims for unfair competition and tortious interference without prejudice. The court granted KKPC the right to refile another amended complaint, which KKPC filed in April 2008 (which did not include the state law claims). Flexsys moved to dismiss the latest amended complaint, and its motion was granted in December 2008, thereby fully dismissing the case. KKPC has appealed the decision to the Ninth Circuit Court of Appeals, and a hearing was held in February 2010. A decision is expected in mid-2010.

Legal proceedings outside the United States. Various parties, including Sinorgchem and other competitors of Flexsys, have filed other separate actions in patent courts in Europe and Asia seeking to invalidate certain of Flexsys' patents issued in those jurisdictions. However, Flexsys has had substantial success in upholding the validity of its patents throughout the world. Specifically, on October 28, 2009, the Korean Patent Court rendered a decision finding an important group of claims within Flexsys' patents were valid, subverting attempts by Sinorgchem to invalidate the Korean patent. On January 25, 2010, the German Patent Court decided to maintain Flexsys' patent in Germany and to reject Sinorgchem's attempt to invalidate this patent. Additionally, on January 31, 2010, the Beijing Number 1 Intermediate People's Court rejected Sinorgchem's efforts to invalidate Flexsys' patent in China. Further, Sinorgchem has recently filed an action to invalidate Flexsys' patent in Japan. Flexsys will continue to defend its patent wherever it is challenged.

ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

We did not submit any matters to our security holders during the fourth quarter of 2009.

PART II

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER’S PURCHASES OF EQUITY SECURITIES

Market for Registrant’s Common Equity and Related Stockholder Matters

Our common stock trades on the New York Stock Exchange (“NYSE”) under the symbol “SOA”. Our new common stock traded on a “when-issued” basis on the NYSE from December 20, 2007 until shortly after our emergence from Chapter 11 on February 28, 2008, at which time our new common stock began trading on a “regular way” basis. Upon emergence, all of our old common stock was cancelled in accordance with the Plan.

Because the value of one share of our old common stock bears no relation to the value of one share of our new common stock, only the trading prices of our new common stock following our listing on the NYSE are set forth below.

The following table sets forth the high and low sales prices per share of our new common stock for the period from February 28, 2008 through December 31, 2009.

2008		High				Low
First Quarter		$	15.97			$	10.06
Second Quarter		$	15.49			$	11.09
Third Quarter		$	17.29			$	12.38
Fourth Quarter		$	13.61			$	3.64

2009		High				Low
First Quarter		$	6.86			$	1.18
Second Quarter		$	6.49			$	2.02
Third Quarter		$	13.76			$	5.64
Fourth Quarter		$	13.05			$	10.68

On January 31, 2010, we had 5,278 shareholders of record.

No dividends were paid by us in the two months ended February 29, 2008 since we were prohibited by both the U.S. Bankruptcy Code and the debtor-in-possession (“DIP”) credit facility from paying dividends to shareholders. No dividends were paid by us in the ten months ended December 31, 2008 or twelve months ended December 31, 2009 and we have no current plans to do so.

Equity Compensation Plan Information

Number of securities

(a)

remaining available for

Number of securities to be

Weighted-average

future issuance under

issued upon exercise of

exercise price of

equity compensation

outstanding options,

outstanding options,

plans (excluding

Plan Category

warrants, and rights

warrants, and rights

securities reflected by (a))

Equity compensation plans approved by security holders

—

—

—

Equity compensation plans not approved by security holders

1,901,959

17.21

1,713,528

Total

1,901,959

17.21

1,713,528

Purchases of Equity Securities by the Issuer

										Total Number of				Approximate Dollar
										Shares Purchased as				Value (in millions)
		Total Number of								Part of Publicly				that May Yet Be
		Shares				Average Price Paid				Announced Plans or				Purchased Under the
Period		Purchased (1)				Per Share (2)				Programs				Plans or Programs
October 1-31, 2009			0			$	0.00				0			$	0
November 1-30, 2009			89			$	11.02				0			$	0
December 1-31, 2009			0			$	0.00				0			$	0
Total			89			$	11.02				0			$	0

Stock Performance Graph

The following graph shows the cumulative total stockholder returns (assuming reinvestment of dividends) following assumed investment of $100 in shares of new common stock that were outstanding on February 28, 2008, the date of our emergence from Chapter 11 bankruptcy. The indices shown below are included for comparative purposes only and do not necessarily reflect our opinion that such indices are an appropriate measure of the relative performance of our new common stock. Data for periods prior to February 28, 2008 is not shown because the period we were in Chapter 11 bankruptcy and the financial results of the Successor are not comparable with the results of the Predecessor.

Cumulative Total Returns

ITEM 6.		SELECTED FINANCIAL DATA

Financial Summary

		Twelve Months				Ten Months				Two Months
		Ended				Ended				Ended				Twelve Months Ended
(Dollars and shares in millions,		December 31,				December 31,				February 29,				December 31,
except per share amounts)		2009				2008				2008				2007				2006				2005
Operating Results:
Net Sales		$	1,667			$	1,775			$	335			$	1,643			$	1,064			$	1,003
Gross Profit		$	470			$	367			$	94			$	383			$	271			$	219
As percent of net sales			28	%			21	%			28	%			23	%			25	%			22	%
Operating Income (1)		$	233			$	115			$	49			$	141			$	69			$	19
As percent of net sales			14	%			6	%			15	%			9	%			6	%			2	%
Income (Loss) from Continuing Operations Before Taxes		$	74			$	(2	)		$	1,464			$	(252	)		$	(58	)		$	(5	)
Income (Loss) from Continuing Operations (2)		$	60			$	(15	)		$	1,250			$	(269	)		$	(76	)		$	(14	)
Income (Loss) from Discontinued Operations, net of tax		$	(169	)		$	(648	)		$	204			$	64			$	80			$	26
Cumulative Effect of Change in Accounting Principle, net of tax (3)			—				—				—				—				—				(3	)
Net Income attributable to noncontrolling interest		$	4			$	5				—			$	3			$	2			$	1
Net Income (Loss) attributable to Solutia		$	(113	)		$	(668	)		$	1.454			$	(208	)		$	2			$	8
Per Share Data:
Basic and Diluted Earnings (Loss) per Share from Continuing Operations attributable to Solutia (2)		$	0.53			$	(0.27	)		$	11.96			$	(2.60	)		$	(0.75	)		$	(0.14	)
Basic Weighted Average Shares Outstanding			106.5				74.7				104.5				104.5				104.5				104.5
Diluted Weighted Average Shares Outstanding			106.7				74.7				104.5				104.5				104.5				104.5
Dividends per Share			—				—				—				—				—				—
Financial Position — Continuing Operations:
Total Assets		$	3,256			$	3,244			$	3,663			$	1,832			$	1,298			$	1,217
Liabilities not Subject to Compromise		$	2,616			$	2,903			$	3,315			$	2,013			$	1,350			$	926
Liabilities Subject to Compromise		$	—			$	—			$	—			$	1,922			$	1,849			$	2,176
Long-Term Debt (4)		$	1,264			$	1,359			$	1,796			$	359			$	210			$	247
Shareholders’ Equity (Deficit)		$	600			$	529			$	1,043			$	(1,589	)		$	(1,399	)		$	(1,429	)
Other Data from Continuing Operations:
Working Capital (5)		$	484			$	329			$	492			$	(510	)		$	(393	)		$	(31	)
Interest Expense (6)		$	159			$	141			$	21			$	134			$	100			$	79
Income Tax Expense (7)		$	14			$	13			$	214			$	17			$	18			$	9
Depreciation and Amortization		$	107			$	89			$	11			$	59			$	46			$	40
Capital Expenditures		$	44			$	84			$	15			$	99			$	55			$	49
Employees (Year-End)			3,400				3,700				3,700				3,700				2,900				3,400

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

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a leading global manufacturer and marketer of high-performance chemical-based materials that are used across automotive, construction, industrial and consumer applications. We report our operations in three segments: Saflex, CPFilms and Technical Specialties. Through our Saflex segment, we produce Polyvinyl Butyral (“PVB”) sheet used in the manufacture of laminated glass for automotive, architectural and solar applications in addition to the manufacture of specialized technical films for use in a wide variety of industrial applications. Our CPFilms segment manufactures, markets and distributes custom-coated window films for aftermarket automotive and architectural applications. Technical Specialties is our specialty chemicals segment, which includes the manufacture and sale of chemicals for the rubber, solar energy, process manufacturing and aviation industries. The major products by reportable segment are as follows:

Reportable Segment		Products
Saflex		•    SAFLEX® plastic interlayer
		•    Specialty intermediate Polyvinyl Butyral resin and plasticizer
CPFilms		•    LLUMAR®, VISTA®, GILA® and FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS® professional and retail window films
		•    Other enhanced polymer films for industrial customers
Technical Specialties		•    CRYSTEX® insoluble sulphur
		•    SANTOFLEX® antidegradants
		•    SANTOCURE® and PERKACIT® primary and ultra accelerators
		•    THERMINOL® heat transfer fluids
		•    SKYDROL® aviation hydraulic fluids
		•    SKYKLEEN® brand of aviation solvents

See Note 19 — Segment and Geographic Data — to the accompanying consolidated financial statements for further information regarding our reportable segments.

Non-U.S. GAAP Financial Measures

Our emergence from bankruptcy required our adoption of fresh-start accounting on February 29, 2008. This resulted in our becoming a new reporting entity on March 1, 2008, which has a new capital structure and a new basis in the assets and liabilities assumed. Accordingly, the financial information set forth in this report, unless otherwise expressly set forth or as the context otherwise indicates, reflects the consolidated results of operations and financial condition of Solutia Inc. and its subsidiaries for the periods following March 1, 2008 (“Successor”), and of Solutia Inc. and its subsidiaries for the periods through February 29, 2008 (“Predecessor”). One impact resulting from the adoption of fresh-start accounting is the significant change in interest expense, taxes, depreciation and amortization as triggered by our requirement to institute a new capital structure and fully re-measure our tangible and identifiable intangible assets.

This discussion and analysis includes financial information prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) along with certain non-U.S. GAAP measures and presentation. These non-U.S. GAAP measures and presentation include the use of the financial measure EBITDA and the combined presentation of the Predecessor and Successor for the twelve months ended December 31, 2008. EBITDA is defined as earnings from continuing operations before interest expense, income taxes, depreciation and amortization less net income attributable to noncontrolling interest and reorganization items, net. The use of EBITDA by management, which is used to measure segment profit, enhances comparability between Successor and Predecessor periods, along with comparability with the performance of our peers. Likewise, we have combined the results of operations and the sources and uses of cash for the two months ended February 29, 2008 of the Predecessor and the ten months ended December 31, 2008 of the Successor, and compared these combined results with the corresponding periods in 2009 and 2007 to provide a more meaningful perspective on our financial and operational performance and trends than if we did not combine the results of operations and sources and uses of cash of the Predecessor and the Successor in this manner.

The presentation of EBITDA and the combined results for the twelve months ended December 31, 2008 are intended to supplement investors’ understanding of our operating performance and liquidity. However, the use of EBITDA and the combined presentation of the twelve months ended December 31, 2008 are not intended to replace net income (loss), cash flows, financial position or comprehensive income (loss), as determined in accordance with U.S. GAAP for the Predecessor and Successor periods. The Consolidated Financial Statements on or after March 1, 2008 are not comparable to the Consolidated Financial Statements prior to that date.

Summary of Significant 2009 Events

Restructuring and Portfolio Realignment: The sharp decline in demand across the global construction, automotive and industrial markets realized in the fourth quarter 2008 continued into 2009. In order to mitigate the impact of a recessionary macroeconomic environment and the resulting weakened demand profile, we implemented immediate actions in early 2009 including the freezing of all salary and wages to the extent allowable, significantly reducing the payment of our 2008 annual incentive plan, suspension of our 2009 annual incentive plan and suspension of the employer 401(k) match to the extent allowable, reduction of capital expenditures to maintenance levels, temporary idling of certain lines and strict management of working capital. Further, a global restructuring initiative, which was targeted to increase the cost effectiveness of our support operations and reduce the operational personnel in alignment with near term production levels, was implemented throughout 2009 resulting in $35 million in restructuring charges necessary for severance and retraining costs for impacted employees along with future contractual payments related to the relocation of certain regional support operations from Singapore to Shanghai, China. In an effort to balance our North America production with customer demand, we closed our SAFLEX^Ò plastic interlayer manufacturing line at our facility in Trenton, Michigan (“Trenton Facility”) in the first quarter 2009 and transferred the required production volume to our facility in Ghent, Belgium. In association with this action, we incurred an additional $5 million in restructuring charges in 2009, predominantly in the form of severance and retraining costs for impacted employees. The reduction of both salaried and union personnel from these actions resulted in a significant amount of lump sum distributions from our U.S. and Belgium pension plans requiring us to record a noncash settlement charge of $11 million in 2009.

As discussed in Note 4 — Acquisitions and Divestitures — to the accompanying consolidated financial statements, in the second quarter 2009, we completed the sale of substantially all the assets and certain liabilities, including environmental remediation and pension liabilities of active employees of our Integrated Nylon business. We used the proceeds from the sale to pay down debt under our Revolver. Completion of the sale of the Integrated Nylon business completes the transformation of Solutia into a pure-play performance materials and specialty chemicals company.

Long-term Capital Structure: Subsequent to the sale of the Integrated Nylon business, we significantly adjusted our long-term capital structure, including the underlying debt agreements and maturities, in an effort to better align our capital structure with our business portfolio and growth expectations. In the second quarter 2009, we completed a public offering of 24.7 million shares of common stock for $5.00 per share. Net proceeds, after deducting underwriting discounts and commissions, of $119 million were used to fully repay $74 million of long term debt and for general corporate purposes. In the fourth quarter 2009, we issued $400 million of senior unsecured notes, due 2017 (“2017 Notes”) at par bearing interest at 8.75 percent. Net proceeds were partially used to pay down $300 million of principal on our $1.2 billion senior secured term loan facility (“Term Loan”) which matures in 2014. Finally, we amended our Revolver and Term Loan credit agreements in order to provide greater operational and strategic flexibility in addition to increasing our liquidity and covenant cushion.

In the third quarter 2009, our Board of Directors adopted a shareholder rights plan designed to preserve the value of our significant United States federal and state NOL carryforwards and other related tax assets under Section 382 of the Internal Revenue Code (“Code”). Section 382 of the Code would limit the value of those tax assets upon an “ownership change.” An “ownership change” is generally defined as a more than 50 percentage point increase in stock ownership, during a rolling three-year testing period, by “5% shareholders” as defined in Section 382 of the Code. The shareholder rights plan was adopted to reduce the likelihood of this occurring by deterring the acquisition of stock by persons or groups that would create such “5% shareholders.”

Throughout the course of 2009, Harbinger Capital Partners Master Fund I, Ltd. and Harbinger Capital Partners Special Situations Fund, L.P. (collectively, the “Harbinger Funds”) have steadily decreased their ownership interest in the Company. At the beginning of 2009, the Harbinger Funds held 32,210,720 shares of our stock or approximately 34.1 percent of the Company. Based on the Harbinger Funds’ amended Schedule 13D dated December 3, 2009, as of December 1, 2009 the Harbinger Funds ceased to be the beneficial owner of more than five percent of our common stock.

Summary Results of Operations: For the full year 2009, we reported $1,667 million in net sales, a 21 percent decrease as compared to the same period in 2008. The decrease is due to the sharp decline in demand across the global construction, automotive and industrial markets precipitated by volatility in global capital and credit markets. As the macroeconomic environment improved in 2009, we experienced a steady return of volumes resulting in sequentially increasing net sales in each quarter of 2009. Gross profit for the full year 2009 increased $9 million or 2 percent as compared to the same period in 2008 due to the positive impacts of certain cost reduction programs, lower restructuring charges and the absence of fresh-start accounting expenses caused by our emergence from bankruptcy in February 2008. Furthermore, with the exception of the fourth quarter 2009, which traditionally is our weakest quarter due to seasonal impacts, our gross profit percentage for each of the quarters steadily improved throughout the year and were significantly higher than the gross profit percentages reported in each of the quarters of 2008. Selling, general and administrative expenses decreased $58 million or 20 percent in 2009 as compared to the full year 2008, as we significantly reduced our support organizations in reaction to the challenging economic conditions coupled with a global restructuring program initiated in early 2009 in anticipation of the divestiture of our Integrated Nylon business. In summary, operating income for 2009 was $233 million or 14 percent of net sales as compared to $164 million or 8 percent of net sales for the full year 2008.

Summary of Financial Condition and Liquidity: Preservation and enhancement of our liquidity position, along with optimization of our long-term capital structure, were each a significant focus in 2009. To this end, net proceeds from the issuance of 24.7 million shares of common stock and the 2017 Notes, in conjunction with $230 million in net cash provided after operations and investing activities, which already incorporates a voluntary contribution to our domestic pension plans of $39 million, were predominantly used to reduce our debt by $106 million, increase our cash position by $211 million and extend the maturity of $400 million of long-term debt into 2017. Payment of the above noted voluntary contribution in 2009 will reduce our required contributions in 2010 by approximately the same amount. Furthermore, we amended our Revolver and Term Loan credit agreements in the fourth quarter 2009 in order to provide us with greater operational and strategic flexibility. Among other things, the amendment holds our Leverage Ratio constant at 4.50 from September 30, 2009 through December 31, 2010. In summary, cash flow provided by operations of $251 million, along with the impacts from the changes in our long-term capital structure noted above, as partially offset by certain investments in capital infrastructure, resulted in liquidity of $363 million as of December 31, 2009 or $138 million higher than December 31, 2008.

Outlook

As noted previously, throughout 2009, we experienced a modest but steady improvement in sales volumes as demand for our products increased as global markets, particularly markets in Asia Pacific, experienced growth in comparison to late 2008. Our current operating premise is that automotive markets will grow globally in 2010, with the most significant growth in China and other emerging markets. Growth in the U.S. and Western Europe will be modest. We are not premising growth in the global architectural market, except for the Chinese market, in which we have a lower share in comparison with our architectural market position in other major world areas. Coupled with this volume assumption, we are premising modest price reduction in certain product lines, due to the overall low utilization rates currently being experienced in many of our industries.

In addition, as a result of the completion of the Integrated Nylon divestiture and the continued global investment and focus on alternative energy and energy efficiency initiatives and activities, approximately 5 percent of our 2009 revenue was generated from this market. Management believes that global investment by governments and private industry into these initiatives and activities will continue, and potentially increase, in future years for many reasons, including the continued escalation in the price of oil and energy, a trend we believe will likely continue. We believe that our products and services will benefit significantly from this trend. We, therefore, expect our revenues into this market to grow in future years at rates significantly higher than our other products and services.

In aggregating these premises, our expectation for 2010 is an increase in net sales in the range of 5 percent — 10 percent.

With respect to profitability, the actions we have taken in 2009, including the divestiture of our Integrated Nylon business and the implementation of significant restructuring actions, position us well to benefit from a continued recovery. Generally, our manufacturing facilities are operating at low utilization rates, and the incremental volume premised in 2010 will carry very high incremental profitability. Offsetting these benefits will be the costs associated with the return of certain employee incentive plans, which were suspended in 2009, along with higher raw material costs for certain of our product lines. Overall, therefore, we expect operating margins from continuing operations to remain consistent or modestly higher as compared to the results delivered in 2009.

Our incremental earnings premised in 2010 versus 2009 will generate additional operating cash, which will be offset by higher tax payments, higher environmental remediation payments due to the exhaustion of a restricted fund dedicated for this purpose, new product and growth related capital spending, as well as modest investments into inventory related to the revenue growth. In 2010, we are currently anticipating generating cash from operations less capital spending in the range of $100 million — $150 million from continuing operations.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these consolidated financial statements, we have made our best estimate of certain amounts included in these consolidated financial statements. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. Management has discussed the development, selection and disclosure of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on the consolidated financial statements and require assumptions that can be highly uncertain at the time the estimate is made. We consider the following items to be our critical accounting policies:

•

Environmental Remediation

•

Litigation and Other Contingencies

•

Income Taxes

•

Impairment of Long-Lived Assets

•

Impairment of Goodwill and Indefinite-Lived Intangible Assets

•

Pension and Other Postretirement Benefits

We have other significant accounting policies but we believe that, compared to the critical accounting policies listed above, the other policies either do not generally require estimates and judgments that are as difficult or as subjective, or are less likely to have a material impact on the reported results of operations for a given period.

Environmental Remediation

With respect to environmental remediation obligations, our policy is to accrue costs for remediation of contaminated sites in the accounting period in which the obligation becomes probable and the cost is reasonably estimable. Cost estimates for remediation are developed by assessing, among other items, (i) the extent of our contribution to the environmental matter; (ii) the number and financial viability of other potentially responsible parties; (iii) the scope of the anticipated remediation and monitoring plan; (iv) settlements reached with governmental or private parties; and (v) our past experience with similar matters. Our estimate of the environmental remediation reserve requirements typically fall within a range. If we believe no better estimate exists within a range of possible outcomes, the minimum loss is accrued. Environmental liabilities are not discounted, and they have not been reduced for any claims for recoveries from third parties.

These estimates are critical because we must forecast environmental remediation activity into the future, which is highly uncertain and requires a large degree of judgment. These reserves include liabilities expected to be paid out over the next fifteen years. Therefore, the environmental reserves may materially differ from the actual liabilities if our estimates prove to be inaccurate, which could materially affect results of operations in a given period. Uncertainties related to recorded environmental liabilities include changing governmental policy and regulations, judicial proceedings, the number and financial viability of other potentially responsible parties, the method and extent of remediation and future changes in technology. Because of these uncertainties, the potential liability for existing environmental remediation reserves may range up to two times the amounts recorded.

Litigation and Other Contingencies

We are a party to legal proceedings involving intellectual property, tort, contract, antitrust, employee benefit, environmental, government investigations and other litigation, claims and legal proceedings. We routinely assess the likelihood of adverse judgments or outcomes to those matters, as well as ranges of probable losses, to the extent losses are reasonably estimable. To the extent that we conclude their occurrence is probable and the financial impact, should an adverse outcome occur, is reasonably estimable, an accrual for such a contingency is recorded. When a single amount cannot be reasonably estimated but the cost can be estimated within a range, we accrue the low end of the range. In addition, we accrue for legal costs expected to be incurred with a loss contingency.

Pursuant to the Monsanto Settlement Agreement, Monsanto is responsible to defend and indemnify Solutia for any Legacy Tort Claims as that term is defined in the agreement, while Solutia retains responsibility for tort claims arising out of exposure occurring after the Solutia Spinoff. To the extent Solutia has been named as defendants in certain actions and have submitted the matters to Monsanto as Legacy Tort Claims and such matters are not within the meaning of “Legacy Tort Claims” within the Monsanto Settlement Agreement, we would potentially be liable.

Disclosure for specific legal contingencies is provided if the likelihood of occurrence is at least reasonably possible and the exposure is considered material to the consolidated financial statements. In making determinations of likely outcomes of litigation matters, we consider many factors. These factors include, but are not limited to, past experience, scientific and other evidence, interpretation of relevant laws or regulations and the specifics and status of each matter. If the assessment of the various factors changes, the estimates may change and could result in the recording of an accrual or a change in a previously recorded accrual. Predicting the outcome of claims and litigation and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates and accruals.

Income Taxes

As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with inherent uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. We assess the income tax positions and record tax liabilities for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities at enacted rates. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. The consolidated financial statements include increases in valuation allowances as a result of uncertainty regarding our ability to realize deferred tax assets in the future.

Our accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates. Changes in existing tax laws, regulations, rates and future operating results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time.

The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are also subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Although we believe the measurement of liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If we ultimately determine that the payment of these liabilities will be unnecessary, the liability is reversed and a tax benefit is recognized during the period in which it is determined the liability no longer applies. Conversely, additional tax charges are recorded in a period in which it is determined that a recorded tax liability is less than the ultimate assessment is expected to be. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on our income tax provision and net income in the period or periods for which that determination is made.

Impairment of Long-Lived Assets

Impairment tests of long-lived assets, including finite-lived intangible assets, are made when conditions indicate the carrying value may not be recoverable under the provisions of U.S. GAAP. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from such asset are separately identifiable and are less than its carrying value. Our estimate of the cash flows is based on information available at that time including these and other factors: sales forecasts, customer trends, operating rates, raw material and energy prices and other global economic indicators and factors. If an impairment is indicated, the asset value is written down to its fair value based upon market prices or, if not available, upon discounted cash value, at an appropriate discount rate determined by us to be commensurate with the risk inherent in the business model. These estimates are critical because changes to our assumptions used in the development of the impairment analyses can materially affect earnings in a given period and we must forecast cash flows into the future which is highly uncertain and requires a significant degree of judgment.

Impairment of Goodwill and Indefinite-Lived Intangible Assets

As of December 31, 2009 and 2008, we had goodwill and indefinite-lived intangible asset balances of $658 million and $656 million, respectively, which relate to our emergence from bankruptcy and adoption of fresh-start accounting. We perform goodwill and indefinite-lived intangible asset impairment tests during the fourth quarter of each year but on a more frequent basis if changes in circumstances indicate the carrying value may not be recoverable during the intervening period. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; and the testing for recoverability of a significant asset group within a reporting unit. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.

We perform the review for goodwill impairment at the reporting unit level and the test involves a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. We estimate fair value using the best information available using both a market approach and an income approach. The market approach estimates fair value by applying multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting units. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions. The projection uses management’s best estimates of economic and market conditions over the projected period including growth rates in sales, costs, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements.

If the fair value of a reporting unit is less than its carrying value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, we would allocate the fair value to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment charge for the difference.

Other indefinite-lived intangible assets are the Company’s trademarks. Fair values used in testing for potential impairment of our trademarks are calculated by applying an estimated market value royalty rate to the forecasted revenues of the reporting unit that utilize those assets. The assumed cash flows from this calculation are discounted using a weighted-average cost of capital that reflects current market conditions. The shortfall of the fair value below carrying value represents the amount of impairment.

Our fourth quarter reviews concluded that there was no goodwill or indefinite-lived intangible asset impairment in 2009 due to the substantial excess of fair value over the respective carrying value.

Pension and Other Postretirement Benefits

Measurement of the obligations under our defined benefit pension plans and our other postretirement benefit (“OPEB”) plans are subject to several significant estimates. These estimates include the rate of return on plan assets, the rate at which the future obligations are discounted to value the liability and health care cost trend rates. Additionally, the cost of providing benefits depends on demographic assumptions including retirements, mortality, turnover and plan participation. We typically use actuaries to assist us in preparing these calculations and determining these assumptions. Our annual measurement date is December 31 for our defined benefit pension plans and our OPEB plans. The below sensitivity analysis solely relates to our U.S. defined benefit pension and OPEB plans since they both comprise approximately 75 percent of our consolidated funded status on our defined benefit pension plans and OPEB plans.

The expected long-term rate of return on pension plan assets assumption was 8.50 percent in both 2009 and 2008. The expected long-term rate of return on pension plan assets assumption is based on the target asset allocation policy and the expected future rates of return on these assets. A hypothetical 25 basis point change in the assumed long-term rate of return would result in a change of approximately $1 million to pension expense.

The discount rates used to re-measure the pension plans were 5.25 percent and 6.25 percent at December 31, 2009 and 2008, respectively. The discount rates to re-measure the OPEB plans were 4.75 percent and 6.25 percent at December 31, 2009 and 2008. We establish our discount rate based upon the internal rate of return for a portfolio of high quality bonds with maturities consistent with the nature and timing of future cash flows for each specific plan. A hypothetical 25 basis point change in the discount rate for our pension plans results in a change of approximately $11 million in the projected benefit obligation and no change in pension expense. A hypothetical 25 basis point change in the discount rate for our OPEB plans results in a change of approximately $3 million in the accumulated benefit obligation and no impact to OPEB expense.

We estimated the five-year assumed trend rate for healthcare costs in 2009 to be 8.5 percent with the ultimate trend rate for healthcare costs grading by 0.5 percent each year to 5 percent by 2016 and remaining at that level thereafter. A 1 percent change in the assumed health care cost trend rate would have changed the postretirement benefit obligation by $1 million as of December 31, 2009 and would have no impact to OPEB expense in 2009. Our costs for postretirement medical benefits are capped for many current retirees and active employees; therefore, the impact of this hypothetical change in the assumed health care cost trend rate is limited.

Results of Operations

Consolidated Solutia

														$								%
														Increase								Increase
		Successor				Combined				Predecessor				(Decrease)								(Decrease)
														2009 vs.				2008 vs.				2009 vs.				2008 vs.
(dollars in millions)		2009				2008				2007				2008				2007				2008				2007
Net Sales		$	1,667			$	2,110			$	1,643			$	(443	)		$	467				(21	)%			28	%
Operating Income:
Reportable Segment Profit (a)		$	432			$	328			$	263			$	104			$	65				32	%			25	%
Unallocated and Other			(96	)			(42	)			(27	)		$	(54	)		$	(15	)			(129	)%			(56	)%
Less: Depreciation and Amortization			(107	)			(100	)			(59	)
Less: Equity Earnings from Affiliates, Other Income, Loss on Debt Modification and Net Income Attributable to Noncontrolling Interest included in Segment Profit and Unallocated and Other			4				(22	)			(36	)
Operating Income		$	233			$	164			$	141			$	69			$	23				42	%			16	%
Net Charges included in Operating Income		$	(32	)		$	(100	)		$	(41	)

The decrease in 2009 net sales as compared to 2008 resulted from decreased sales volumes of $412 million or 20 percent and the effect of unfavorable exchange rate fluctuations of $31 million or 1 percent, while overall selling prices were flat year over year. Lower sales volumes were realized by all of our reporting segments due to continued weakness in demand across the global construction, automotive and industrial markets related to the deterioration in the macroeconomic environment which began in the fourth quarter of 2008. The unfavorable currency impact was driven most notably by the increased strength of the U.S. dollar versus the Euro, in comparison to the prior year, due to our strong market positions in Europe by the Saflex and Technical Specialties reporting segments. Higher selling prices experienced in our Technical Specialties and CPFilms reporting segments were offset by price decreases in our Saflex reporting segment.

The increase in 2008 net sales as compared to 2007 resulted from our acquisition of Akzo Nobel’s 50 percent interest in the Flexsys joint venture, which was completed on May 1, 2007 (the “Flexsys Acquisition”), increased selling prices and the effect of favorable currency exchange rate fluctuations, partially offset by lower sales volumes. Prior to our acquisition on May 1, 2007, the results of Flexsys were accounted for using the equity method and recorded as equity earnings from affiliates on the Consolidated Statement of Operations. Net sales increased $281 million or 17 percent in 2008 as a result of the Flexsys Acquisition. The remaining $186 million or 11 percent increase in net sales was a result of higher average selling prices of $164 million or 10 percent and favorable currency exchange rate fluctuations of $53 million or 3 percent, partially offset by lower sales volumes of $31 million or 2 percent. Higher average selling prices were experienced across all reporting segments in response to an escalating raw material profile and, with respect to Technical Specialties and Saflex, in conjunction with generally favorable supply/demand profile in these markets. The favorable currency benefit was driven most notably by the continued weakening of the U.S. dollar versus the Euro, in comparison to the prior year. Other currency movements against the U.S. dollar also benefited our net sales, however, given the strong market positions in Europe within Saflex and Technical Specialties, movements in the Euro versus the U.S. dollar had the most significant impact on our revenues. The lower sales volumes were experienced most notably in our Technical Specialties reporting segment, partially offset by increased volumes in Saflex. The decline in Technical Specialties is due to the shutdown of our product lines at our manufacturing facility in Ruabon, United Kingdom (“Ruabon Facility”) and significant demand decline within the tire industry during the fourth quarter 2008. The volumes in Saflex increased due to growth in international demand.

The increase in 2009 operating income as compared to 2008 resulted primarily from lower net charges as further described below in the Summary of Events Affecting Comparability section, lower raw material and energy costs of approximately $84 million, favorable exchange rate fluctuations, effective implementation of cost containment initiatives which resulted in better plant cost performance and lower selling, general and administrative expenses, significantly offset by lower net sales, lower fixed cost absorption, higher depreciation and amortization due to fresh-start accounting of $7 million and higher share-based compensation expense of $6 million.

The increase in 2008 operating income as compared to 2007 resulted primarily from the Flexsys Acquisition, increased net sales and higher asset utilization and lower manufacturing costs in our Saflex and Technical Specialties reporting segments, partially offset by higher raw material and energy costs of approximately $105 million, higher net charges, increased amortization related to intangible assets as a result of fresh-start accounting of $23 million and increased share-based compensation expense of $11 million. As indicated in the preceding table, operating results were affected by various charges which are described in detail in the Summary of Events Affecting Comparability section. The raw material increases were most impactful within the Technical Specialties and Saflex reporting segments, with the most significant increase experienced in sulfur cost. The increases in raw materials are primarily driven by continued tight supply of these materials, as well as the substantial increases in average oil prices during the year when compared with the prior year.

Saflex

														$								%
														Increase								Increase
		Successor				Combined				Predecessor				(Decrease)								(Decrease)
														2009 vs.				2008 vs.				2009 vs.				2008 vs.
(dollars in millions)		2009				2008				2007				2008				2007				2008				2007
Net Sales		$	690			$	822			$	727			$	(132	)		$	95				(16	)%			13	%
Segment Profit		$	145			$	94			$	111			$	51			$	(17	)			54	%			(15	)%
Net Charges included in Segment Profit		$	(14	)		$	(47	)		$	(2	)

The decrease in 2009 net sales as compared to 2008 was a result of lower sales volumes of $97 million or 12 percent, lower average selling prices of $18 million or 2 percent, and unfavorable currency exchange rate fluctuations of $17 million or 2 percent. Lower sales volumes were due to weakness in demand across the global automotive and, to a lesser extent, construction markets, which negatively impacted sales volumes of SAFLEX^® plastic interlayer and Polyvinyl Butyral resin, partially offset by higher volumes experienced in the solar energy market. The lower average selling prices are predominantly due to the weaker demand environment in 2009. The unfavorable exchange rate fluctuations occurred primarily as a result of the strengthening of the U.S. dollar in relation to the Euro in comparison to the comparable period in 2008.

The increase in 2008 net sales as compared to 2007 was a result of higher average selling prices of $38 million or 5 percent, higher sales volumes of $25 million or 4 percent, and favorable currency exchange rate fluctuations of $32 million or 4 percent. The increase in selling prices is related to our global price increase on SAFLEX^® plastic interlayer, Polyvinyl Butyral resin and plasticizer in response to higher raw material costs and favorable supply/demand profile. Higher sales volumes were experienced in targeted growth markets of Europe and Asia Pacific, as sales volumes into the domestic market were lower than the prior year. The increased sales in Asia Pacific were a result of the continued expanding demand for laminated glass in that market, which was partially supported by our plant in Suzhou, China which opened in the third quarter 2007. The favorable currency exchange rate fluctuations occurred primarily as a result of the weakening U.S. dollar in relation to the Euro in comparison to 2007.

The increase in 2009 segment profit in comparison to 2008 resulted primarily from lower net charges, which are described in detail in the Summary of Events Affecting Comparability section, lower raw material costs of $30 million, and effective implementation of cost containment initiatives and plant shutdown activities, which resulted in improved plant cost performance and lower selling, general and administrative expenses, partially offset by lower net sales as described above and lower fixed cost absorption.

The decrease in 2008 segment profit in comparison to 2007 resulted primarily from higher net charges as described in detail in the Summary of Events Affecting Comparability section, partially offset by increased net sales as described above, improved asset utilization, lower manufacturing costs and a flat cost profile for selling, general and administrative expenses. The segment experienced approximately $31 million of higher raw material costs in comparison to the prior year, which was recovered through increased selling prices.

CPFilms

														$								%
														Increase								Increase
		Successor				Combined				Predecessor				(Decrease)								(Decrease)
														2009 vs.				2008 vs.				2009 vs.				2008 vs.
(dollars in millions)		2009				2008				2007				2008				2007				2008				2007
Net Sales		$	185			$	236			$	234			$	(51	)		$	2				(22	)%			1	%
Segment Profit		$	26			$	42			$	58			$	(16	)		$	(16	)			(38	)%			(28	)%
Net Charges included in Segment Profit		$	(7	)		$	(13	)		$	—

The decrease in 2009 net sales as compared to 2008 resulted primarily from lower sales volumes of $53 million or 22 percent, and, to a lesser extent, unfavorable currency exchange rate fluctuations of $3 million or 1 percent, partially offset by higher average selling prices of $5 million or 1 percent. With the exception of Asia Pacific, where sales volumes increased modestly in 2009, sales volumes decreased in all major geographic markets due to the severe global economic downturn and its effect on the automotive, residential housing, and commercial construction markets, but the decrease was more pronounced in Russia due to credit issues in the region.

The increase in 2008 net sales compared to 2007 resulted from higher selling prices of $7 million or 3 percent, partially offset by decreased sales volumes of $5 million or 2 percent. Higher average selling prices and lower volumes were experienced in LLUMAR^â and VISTA^â professional film products. The lower volumes were primarily experienced in the domestic market throughout 2008 and in the fourth quarter 2008 across all major geographic markets in conjunction with the severe global economic downturn.

The decrease in 2009 segment profit in comparison to 2008 resulted primarily from decreased net sales as described above and lower fixed cost absorption, partially offset by effective implementation of cost containment initiatives, which resulted in lower selling, general and administrative expenses, lower raw material costs of $5 million and lower net charges, which are described in detail in the Summary of Events Affecting Comparability section.

The decrease in 2008 segment profit in comparison to 2007 resulted primarily from higher charges in 2008, as described in detail in the Summary of Events Affecting Comparability section, higher manufacturing, raw material and energy costs, increased investment in sales and marketing infrastructure and in market development programs globally.

Technical Specialties

														$								%
														Increase								Increase
		Successor				Combined				Predecessor				(Decrease)								(Decrease)
														2009 vs.				2008 vs.				2009 vs.				2008 vs.
(dollars in millions)		2009				2008				2007				2008				2007				2008				2007
Net Sales		$	774			$	1,015			$	646			$	(241	)		$	369				(24	)%			57	%
Segment Profit		$	261			$	192			$	94			$	69			$	98				36	%			104	%
Net Gains (Charges) included in Segment Profit		$	14			$	(43	)		$	(30	)

The decrease in 2009 net sales as compared to 2008 resulted from lower sales volumes of $246 million or 24 percent and unfavorable currency exchange rate fluctuations of $9 million or 1 percent, partially offset by higher average selling prices of $14 million or 1 percent. Sales volumes decreased in all products within Technical Specialties due to the global economic downturn but this decrease, on a rate of decline basis, was more pronounced within SANTOFLEX^® antidegradants, SANTOCURE^® and PERKACIT^® primary and ultra accelerators and other rubber chemicals products. The decline in sales volumes for SANTOFLEX^® antidegradants and SANTOCURE^® primary accelerators were significantly affected by increasing pressure from Far Eastern producers. The unfavorable exchange rate fluctuations occurred primarily as a result of the strengthening U.S. dollar in relation to the Euro in comparison to the comparable period in 2008. Higher average selling prices were experienced primarily within CRYSTEX^® insoluble sulphur, THERMINOL^® heat transfer fluids and SKYDROL^® aviation hydraulic fluids. The increase in selling prices is related to our global price increases initiated in the third quarter 2008.

The increase in 2008 net sales as compared to 2007 resulted primarily from the Flexsys Acquisition. Prior to our acquisition on May 1, 2007, the results of Flexsys were accounted for using the equity method and were not recorded within the Technical Specialties reportable segment. The Flexsys Acquisition resulted in an increase in net sales of $281 million or 43 percent. The remaining increase in net sales of $88 million or 14 percent was a result of higher average selling prices of $119 million or 19 percent and favorable currency exchange rate fluctuations of $19 million or 3 percent, partially offset by lower sales volumes of $50 million or 8 percent. Higher average selling prices were experienced primarily in CRYSTEX^® insoluble sulphur, SANTOFLEX^® antidegradants and THERMINOL^® heat transfer fluids. The higher average selling prices are in response to higher raw material costs across all products within Technical Specialties in addition to a favorable supply/demand profile in certain specialty chemical markets. The lower sales volumes were primarily experienced in the fourth quarter 2008 in conjunction with the severe global economic downturn and the closure of our product lines at our Ruabon Facility. The economic downturn primarily impacted CRYSTEX^® insoluble sulphur, partially offset by increased volumes in THERMINOL^® heat transfer fluids. The favorable currency exchange rate fluctuations occurred primarily as a result of the weakening U.S. dollar in relation to the Euro in comparison to the same period in 2007.

The increase in 2009 segment profit in comparison to 2008 resulted primarily from higher net gains, which are described in detail in the Summary of Events Affecting Comparability section, favorable exchange rate fluctuations, effective implementation of cost containment initiatives, which resulted in improved plant cost performance and lower selling, general and administrative expenses, and lower raw material costs of $48 million, partially offset by lower net sales and lower fixed cost absorption. The favorable exchange rate fluctuation on segment profit is due to a higher percentage of our operating costs transacted in Euros than net sales in the same currency.

The increase in 2008 segment profit in comparison to 2007 resulted primarily from the Flexsys Acquisition, increased net sales as described above and improved manufacturing costs, partially offset by increased raw material costs, higher charges, which are described in detail in the Summary of Events Affecting Comparability section and unfavorable currency exchange rate fluctuations. The increased selling prices more than offset the increase of $48 million in raw material costs primarily related to sulphur. Improved manufacturing cost was a result of controlled spending. The unfavorable currency exchange rate fluctuation is a result of a significant portion of Technical Specialties manufacturing capacity being located in Europe and the weakening of the U.S. Dollar versus the Euro.

Unallocated and Other

														$								%
														Increase								Increase
		Successor				Combined				Predecessor				(Decrease)								(Decrease)
														2009 vs.				2008 vs.				2009 vs.				2008 vs.
(dollars in millions)		2009				2008				2007				2008				2007				2008				2007
Components of Unallocated and Other
Other Operations Segment Profit (Loss)		$	(12	)		$	(2	)		$	1
Corporate Expenses			(46	)			(55	)			(53	)
Share-Based Compensation Expense			(17	)			(11	)			—
Equity Earnings from Affiliates			—				—				12
Other Unallocated Income (Expense), net			(21	)			26				13
Unallocated and Other results		$	(96	)		$	(42	)		$	(27	)		$	(54	)		$	(15	)			(129	)%			(55	)%
Gains (Charges) included in Unallocated and Other		$	(25	)		$	10			$	5

Unallocated and Other results in 2009 decreased as compared to 2008 primarily due to higher net charges, losses on foreign currency exposure, higher charges for environmental remediation projects, higher share-based compensation expense, lower interest income and lower segment profit from other operations, partially offset by lower corporate expenses. Included in the results of Unallocated and Other in 2009 is (i) a charge of $12 million related to the general corporate restructuring with $10 million recorded in corporate expenses and $2 million recorded in other operations segment profit (loss); (ii) an $11 million net pension plan settlement charge recorded in other unallocated income (expense), net; (iii) a $6 million loss resulting from the sale of the North America plastic products business (“Plastic Products Sale”) recorded in other operations segment profit (loss); and (iv) a $4 million gain related to the reduction in the 2008 annual incentive plan recorded in corporate expenses. In 2008, we recorded (i) a $7 million gain resulting from the settlement of emergence related incentive accruals recorded in other unallocated income (expense), net; (ii) a $6 million gain resulting from surplus land sales with $3 million recorded in both other unallocated income (expense), net and other operations segment profit (loss); (iii) a $3 million gain related to joint settlements with Monsanto of legacy insurance policies with insolvent insurance carriers recorded in other unallocated income (expense), net; (iv) a $3 million charge resulting from general corporate restructuring involving headcount reductions recorded in corporate expenses; (v) a $2 million charge resulting from the relocation of our plastic products business from our manufacturing facility in Ghent, Belgium to Oradea, Romania recorded in other operations segment profit (loss); and (vi) a $1 million charge resulting from the expensing of the step-up in basis of inventory in accordance with fresh-start accounting recorded in other operations segment profit (loss).

After consideration of the aforementioned items in 2009 and 2008, corporate expenses decreased $12 million primarily due to lower discretionary expenses resulting from the implementation of certain cost reduction programs. Share-based compensation expense increased $6 million due to management incentive and director stock compensation plans adopted upon our emergence from bankruptcy and an additional award granted early in the third quarter of 2009. After consideration of the aforementioned items in 2009 and 2008, other unallocated income (expense), net decreased by $23 million primarily due to losses on foreign currency exposure and higher charges for environmental remediation projects. The higher charges for environmental remediation projects is due to a full year in 2009 of operations and maintenance costs on projects classified as liabilities subject to compromise prior to our emergence from bankruptcy in February 2008 in addition to increased legal spending on remediation projects in Anniston, Alabama as we seek recovery from other parties. After consideration of the aforementioned items recorded in 2009 and 2008, other operations segment loss decreased by $2 million as compared to the comparable period in 2008 due to the global economic downturn.

Unallocated and other results in 2008 decreased in comparison to 2007 primarily due to lower equity earnings from affiliates, higher corporate expenses, lower gains from adjustments to the LIFO reserve, lower interest income and decreased profit from our other operations, partially offset by higher gains on foreign currency and higher net gains. In 2007, we recorded the following net gains in other unallocated income (expense), net: (i) a gain on a litigation matter of $21 million; (ii) a charge of $7 million recorded to write-off debt issuance costs and to record the DIP credit facility as modified at its fair value as of the amendment date; (iii) $5 million of net pension plan settlement charges; and (iv) a $4 million restructuring charge due to the termination of a third-party agreement at one of our facilities.

After consideration of the aforementioned items recorded in 2008, corporate expenses decreased $1 million primarily due to lower functional expense. Share-based compensation increased due to the adoption of management incentive and director stock compensation plans upon our emergence from bankruptcy. The decrease in equity earnings from affiliates of $12 million is a result of the Flexsys Acquisition completed on May 1, 2007. After consideration of the aforementioned items recorded in 2008 and 2007, other unallocated income (expense), net increased by $5 million due to gains on foreign currency, partially offset by lower interest income. After consideration of the aforementioned items recorded in 2008, other operations segment profit (loss) decreased by $3 million due to other costs associated with the relocation of our plastic products business.

Interest Expense

														$								%
														Increase								Increase
		Successor				Combined				Predecessor				(Decrease)								(Decrease)
														2009 vs.				2008 vs.				2009 vs.				2008 vs.
(dollars in millions)		2009				2008				2007				2008				2007				2008				2007
Interest Expense		$	159			$	162			$	134			$	(3	)		$	28				(2	)%			21	%
Charges included in Interest Expense		$	(38	)		$	(1	)		$	(8	)

Interest expense decreased in 2009 compared to 2008 due to decreased cash interest expense from lower debt outstanding with lower interest rates in 2009 than in 2008, substantially offset by higher charges. Included in our debt to fund our emergence from Chapter 11 was a $400 million senior unsecured bridge facility (“Bridge”), which was subsequently repaid in August 2008. In October 2009, we issued the 2017 Notes and a portion of the net proceeds were used to pay down $300 million of principal on our Term Loan. The repayment of the Bridge and significantly lower borrowings outstanding on our Revolver during 2009, partially offset by the net increase in debt related to the issuance of the 2017 Notes resulted in overall lower average debt outstanding in 2009 of approximately $350 million. In addition, the interest rate on the Bridge was 15.5 percent and the repayment allowed our weighted average interest rate during 2009 to be approximately 100 basis points lower than in 2008. In February 2009, we discontinued hedge accounting on our interest rate swap agreements related to our Term Loan. As interest rates fluctuate, mark-to-market gains or losses on our interest rate swap agreements, which do not affect cash flow, are recognized in interest expense. These gains or losses may create volatility in our Consolidated Statement of Operations.

Interest expense in 2009 includes (i) a charge of $30 million related to the $300 million pay down on the Term Loan to write-off unamortized debt issuance costs and (ii) a charge of $8 million to write-off unamortized debt issuance costs and debt discount related to the repayment of the German term loan. Interest expense in 2008 included a charge of $1 million to write-off unamortized debt issuance costs related to the repayment of the Bridge.

The increase in interest expense in 2008 in comparison to 2007 resulted principally from higher debt outstanding with higher interest rates in 2008 than in 2007. Average debt outstanding increased $513 million or 47 percent to fund the Flexsys Acquisition, as only a portion of debt utilized to acquire Flexsys was incurred prior to the end of the first quarter of 2007, and our emergence from Chapter 11 on the Effective Date. Included in our debt to fund our emergence from Chapter 11 is the Bridge, which was subsequently repaid in August 2008. The higher interest rates are a result of a changed interest rate profile of our debt structure due to the replacement of the DIP credit facility with the Term Loan and Revolver (“Financing Agreements”). The 2008 results include a $1 million charge related to the repayment of the Bridge compared to an $8 million interest expense charge related to claims recognized as allowed secured claims through settlements approved by the Bankruptcy Court

Reorganization Items, net

														$								%
														Increase								Increase
		Successor				Combined				Predecessor				(Decrease)								(Decrease)
														2009 vs.				2008 vs.				2009 vs.				2008 vs.
(dollars in millions)		2009				2008				2007				2008				2007				2008				2007
Reorganization Items, net		$	—			$	1,433			$	(298	)		$	(1,433	)			1,731				N.M.				N.M.

Reorganization items, net are presented separately in the Consolidated Statement of Operations and represent items of income, expense, gain, or loss that are realized or incurred by us because we were in reorganization under Chapter 11 of the U.S. Bankruptcy Code. We did not record any charges in reorganization items in 2009 due to our emergence from Chapter 11 on February 28, 2008.

Reorganization items incurred in 2008 included a $104 million charge on the settlement of liabilities subject to compromise, $1,589 million gain from fresh-start accounting adjustments, which excludes the gain allocated to discontinued operations of $212 million, and $52 million of professional fees for services provided by debtor and creditor professionals directly related to our reorganization proceedings. The increase in reorganization items, net as compared to 2007 is due to the aforementioned effects of settling the liabilities subject to compromise and adopting fresh-start accounting.

Income Tax Expense

														$								%
														Increase								Increase
		Successor				Combined				Predecessor				(Decrease)								(Decrease)
														2009 vs.				2008 vs.				2009 vs.				2008 vs.
(dollars in millions)		2009				2008				2007				2008				2007				2008				2007
Income Tax Expense		$	14			$	227			$	17			$	(213	)		$	210				N.M.				N.M.
Increase (Decrease) in Valuation Allowance included in Income Tax Expense		$	23			$	(251	)		$	82

Our income tax expense is affected by the mix of income and losses in the tax jurisdictions in which we operate. The decrease in income tax expense in 2009 as compared to 2008 is primarily due to $202 million of income tax expense recognized in 2008 resulting from our emergence from bankruptcy and the effect of our adoption of fresh-start accounting. After consideration of these items, the remaining income tax expense recognized is almost entirely attributable to operations outside the U.S. resulting in an effective tax rate on operations outside the U.S. in 2009 and 2008 of 11 percent and 38 percent, respectively. The decrease in the ex-U.S. effective rate in 2009 compared to 2008 is due to an improved mix of earnings and implementation of tax strategies as well as a decrease in contingency reserves of $8 million in 2009 related to uncertain tax positions, as compared to an increase in contingency reserves of $4 million in 2008.

The increase in income tax expense in 2008 as compared to 2007 is primarily attributable to the income tax expense related to our emergence from bankruptcy and the effect of our adoption of fresh-start accounting, as discussed above. After consideration of these items, the remaining income tax expense recognized is almost entirely attributable to operations outside the U.S resulting in an effective tax rate on operations outside the U.S. in 2008 and 2007 of 38 percent and 49 percent, respectively. The decrease in the ex-U.S. effective rate in 2008 compared to 2007 is due to an increase in contingency reserves of $4 million in 2008 compared to an increase of $10 million in 2007.

As a result of the issuance of new common stock upon emergence from bankruptcy, we realized a change of ownership for purposes of Section 382 of the Code. We do not currently expect this change to significantly limit our ability to utilize our NOL in the carryforward period, which we estimate to be approximately $1.6 billion at December 31, 2009, of which approximately $600 million was available without limitation.

Discontinued Operations

														$								%
														Increase								Increase
		Successor				Combined				Predecessor				(Decrease)								(Decrease)
														2009 vs.				2008 vs.				2009 vs.				2008 vs.
(dollars in millions)		2009				2008				2007				2008				2007				2008				2007
Integrated Nylon business		$	(170	)		$	(445	)		$	50
Dequest business			—				—				19
Other			1				1				(5	)
Income (Loss) from Discontinued Operations, net of tax		$	(169	)		$	(444	)		$	64			$	275			$	(508	)			62	%			N.M.
Reorganization items included in income (loss) from discontinued operations		$	—			$	212			$	—

Income (loss) from discontinued operations consists of the results of our Integrated Nylon business, our water treatment phosphonates business (“DEQUEST^®”) and other previously divested businesses.

As described in Note 4 — Acquisitions and Divestitures — to the accompanying consolidated financial statements, we sold our Integrated Nylon business on June 1, 2009 and recorded a loss on the sale in 2009 of $76 million. After consideration of this loss, the operating results of the Integrated Nylon business for the 2009 period through the date of sale resulted in losses of $94 million, net of tax, including a $31 million charge, net of tax, to write down the carrying value of long-lived assets to zero. For 2008, losses of $445 million related to Integrated Nylon include an impairment charge of long-lived assets of $461 million as partially offset by reorganization items primarily related to the elimination of the LIFO reserve of $204 million and the expensing of the step-up in basis of the inventory of $7 million.

Included in the results of discontinued operations in 2007 is a gain on the sale of the DEQUEST^® business of $34 million, partially offset by income taxes of $15 million.

Charges and gains recorded in 2009, 2008 and 2007 and other events affecting comparability have been summarized and described in the table and accompanying footnotes below (dollars in millions):

2009 Events

										Technical
Increase/(Decrease)		Saflex				CPFilms				Specialties				Unallocated/Other				Consolidated
Impact on:
Cost of goods sold		$	(2	)		$	—			$	(3	)		$	(1	)		$	(6	)	(a)
			3				1				1				1				6		(b)
			5				—				—				—				5		(c)
			—				—				(2	)			—				(2	)	(d)
			—				—				—				7				7		(e)
			—				4				—				—				4		(f)
			—				—				—				1				1		(g)
Selling, general and administrative expenses			(4	)			—				(9	)			(3	)			(16	)	(a)
			12				3				2				11				28		(b)
			—				—				—				4				4		(e)
			—				—				1				—				1		(h)
Research, development and other operating expenses			(1	)			—				—				—				(1	)	(a)
			1				—				—				—				1		(b)
			—				—				(4	)			—				(4	)	(i)
			—				—				—				5				5		(j)
			—				(1	)			—				—				(1	)	(f)
Operating Income Impact			(14	)			(7	)			14				(25	)			(32	)
Interest expense			—				—				—				(30	)			(30	)	(k)
			—				—				—				(8	)			(8	)	(l)
Pre-tax Income Statement Impact		$	(14	)		$	(7	)		$	14			$	(63	)			(70	)
Income tax impact																			(3	)	(m)
After-tax Income Statement Impact																		$	(67	)