SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K
CURRENT REPORT

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

DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JANUARY 1, 2001

SOLUTIA INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
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(STATE OF INCORPORATION)

001-13255 43-1781797
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(COMMISSION (IRS EMPLOYER
FILE NUMBER) IDENTIFICATION NO.)

575 MARYVILLE CENTRE DRIVE, P.O. BOX 66760, ST. LOUIS, MISSOURI 63166-6760
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(314) 674-1000
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE

ITEM 5. OTHER EVENTS.

Recent Developments

In December 2001, Solutia Inc. announced that it would record after-tax
charges in the range of $90 million to $100 million in the fourth quarter
of 2001. These charges will principally be used to cover the company's
share of restructuring costs at its Astaris and Flexsys joint ventures,
increase environmental and self-insurance reserves, cover additional
severance costs associated with its $100 million cost reduction initiative
and to write off certain non-performing assets.

In November 2001, Solutia amended its $800,000,000 revolving credit
facility and terminated its $250,000,000 credit facility. Four of Solutia's
domestic subsidiaries are guarantors of the amended facility. Borrowings under
the amended facility are secured by liens on Solutia's inventory and receivables
and those of material domestic subsidiaries and one foreign subsidiary, pledges
of 65% of the voting stock of two foreign subsidiaries, and specified principal
properties. The aggregate amount of Solutia's obligations entitled to the
benefit of the lien on specified properties will not exceed $236 million. The
lenders under certain other facilities have the right to share in this
collateral. In addition, the amended facility contains modified financial
covenants.

On August 24, 2001, Standard & Poor's lowered its commercial paper rating
on Solutia Inc. to A-3 from A-2 and revised its outlook to negative from
stable. On October 26, 2001, Standard & Poor's affirmed Solutia's senior
unsecured credit facility at BBB and maintained its negative outlook. On
November 1, 2001, Fitch placed Solutia's BBB senior unsecured debt rating on
rating watch negative and lowered its commercial paper rating to F-3. On
November 16, 2001, Moody's changed Solutia's senior unsecured debt rating to
Baa3 from Baa2. Moody's also lowered Solutia's commercial paper rating to P-3
from P-2. Moody's ratings remain under review. As a result of these changes
in Solutia's commercial paper ratings, Solutia has been unable to issue
commercial paper. Consequently, outstanding commercial paper has been
refinanced with drawdowns from Solutia's $800,000,000 revolving credit
facility. Solutia is paying higher interest rates on these drawdowns than
were being paid on the commercial paper.

Effective January 1, 2001, Solutia reorganized its management structure
from a centralized organization to a decentralized organization. This change
redefined segment profitability as the costs for certain functional
services, which were previously managed centrally, are now reflected in the
operating segments. In addition, certain product groups have been moved
between operating segments in recognition of the new management structure
and related product management responsibilities. Following are Solutia's
updated management's discussion and analysis of financial condition and
results of operations and Solutia's updated financial information for the
years ended December 31, 2000, 1999 and 1998, giving effect for this
reorganization.

TABLE OF CONTENTS

PAGE
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3 Updated Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Years ended
December 31, 2000, 1999 and 1998.

14 Updated Financial Information for the Years Ended
December 31, 2000, 1999 and 1998.

14 Management Report

14 Report of Independent Auditors

15 Statement of Consolidated Income

15 Statement of Consolidated Comprehensive Income (Loss)

16 Statement of Consolidated Financial Position

17 Statement of Consolidated Cash Flow

18 Statement of Consolidated Shareholders' Equity (Deficit)

19 Notes to Consolidated Financial Statements

Updated Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Years ended December 31, 2000, 1999 and 1998

The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes thereto included
elsewhere in this Form 8-K. It has been updated to reflect the impact of
the reorganization of Solutia's management structure and operating segments
which became effective January 1, 2001.

OVERVIEW

Solutia's reportable segments and their major products are as
follows:

PERFORMANCE FILMS SPECIALTY PRODUCTS INTEGRATED NYLON
----------------- ------------------ ----------------

SAFLEX(R) plastic interlayer Resins and additives, including Intermediate "building block"
ALFTALAT(R) polyester resins, chemicals
KEEPSAFE(R), SAFLEX INSIDE(R) RESIMENE(R) and MAPRENAL(R)
(in Europe only) and KEEPSAFE crosslinkers and SYNTHACRYL(R)
MAXIMUM(R) glass for residential acrylic resins
security and hurricane protection
windows

LLUMAR(R), VISTA(R) and GILA(R) Industrial products, including Merchant polymer and nylon extrusion
professional and after-market THERMINOL(R) heat transfer fluids, polymers, including VYDYNE(R) and
window films DEQUEST(R) water treatment chemicals, ASCEND(TM)
SKYDROL(R) hydraulic fluids and
Conductive and anti-reflective SKYKLEEN(R) cleaning fluids for Carpet fibers, including the WEAR-
coated films and deep-dyed films aviation, GELVA(R) pressure-sensitive DATED(R) and ULTRON VIP(R) brands
adhesives, and chlorobenzenes
Industrial nylon fibers
Pharmaceutical services- process
research, process development ACRILAN(R) acrylic fibers for
services, scale-up capabilities apparel, upholstery fabrics, craft
and small scale manufacturing for yarns and other applications
the pharmaceutical industry

See Note 18 to the Consolidated Financial Statements for further
information.

RESULTS OF OPERATIONS

Solutia's net sales for 2000 of $3.185 billion were 13 percent higher than
1999 net sales of $2.830 billion and 12 percent higher than 1998 net sales
of $2.835 billion. A number of events affect the comparability of 2000
results with those in 1999 and 1998. These events include the acquisitions
of the Vianova Resins Group in December 1999, CarboGen Holdings AG in
February 2000 and AMCIS AG in March 2000. In addition, Solutia contributed
its Phosphorus Derivatives business to the Astaris joint venture in April
2000 and sold its Polymer Modifiers business in August 2000. Excluding the
sales associated with these businesses, net sales for 2000 were up 3 percent
from the comparable periods of 1999 and 1998. The net sales increases
reflected higher average selling prices, partially offset by unfavorable
currency exchange rate fluctuations and lower volumes. Operating income for
the year ended December 31, 2000, was $24 million, 92 percent lower than
1999 operating income of $294 million and 94 percent lower than 1998
operating income of $386 million. The decline in 2000 operating income was
caused by higher raw material and energy costs that resulted from the sharp
increase in petrochemical and natural gas prices and by special charges
taken in the second and fourth quarters of 2000 related to certain workforce
reductions, asset impairments and facility closures. The remainder of the
decline resulted from higher marketing, administrative, technological and
amortization expenses associated with the acquisition and integration of
newly acquired companies and other growth programs.

PERFORMANCE FILMS

Net sales for Performance Films were $692 million in 2000, compared with
$669 million in 1999 and $570 million in 1998. The 3 percent increase in
2000 net sales over 1999 resulted from the full year's effect of the CPFilms
acquisition and higher volumes in the SAFLEX(R) plastic interlayer business,
partially offset by the loss of sales from

the Polymer Modifiers business and unfavorable currency exchange movements.
Excluding CPFilms and the Polymer Modifiers businesses, 2000 net sales were
up slightly from 1999 net sales. Higher year-over-year volumes in the
SAFLEX(R) plastic interlayer business were driven primarily from increased
demand by North American and European automotive glass manufacturers. Also,
to a lesser extent, businesses in this segment achieved higher average
selling prices than those of the year-ago period. Partially offsetting the
increases in sales volumes and average selling prices were unfavorable
currency exchange movements due to the devaluation of the euro in relation
to the U.S. dollar.

The Performance Films segment's net sales for 1999 increased 17 percent
over 1998 net sales because of an overall volume gain of more than 20
percent, partially offset by selling price declines. The sales volume
increase was attributable to the May 1999 acquisition of CPFilms, and to a
greater than 10 percent increase in SAFLEX(R) plastic interlayer sales
volumes. Volume gains for SAFLEX(R) plastic interlayer resulted from the
full global commercialization of SAFLEX IIIG(R), the continued
commercialization of KEEPSAFE(R), SAFLEX INSIDE(R) (in Europe only) and
KEEPSAFE MAXIMUM(R) brand products and the launch of a SAFLEX(R) product for
Enhanced Protective Glass. Contractual pricing provisions that adjust
pricing downward for increased volume caused the selling price declines.

Segment profit was $106 million in 2000, versus $126 million in 1999, and
$103 million in 1998. The 16 percent decrease in 2000 segment profit
compared with 1999 primarily resulted from higher marketing, administrative,
technological and amortization expenses associated with the acquisition and
integration of CPFilms and other growth programs, increased raw material
costs in the SAFLEX(R) plastic interlayer business and the loss of sales
from the Polymer Modifiers business. The 22 percent improvement in 1999
segment profit over 1998 was due to higher year-over-year net sales, lower
raw material costs and employee benefits cost and other cost reductions,
partially offset by increased marketing expenditures related to the
promotion of KEEPSAFE(R), SAFLEX INSIDE(R) (in Europe only) and KEEPSAFE
MAXIMUM(R) brands and Enhanced Protective Glass.

SPECIALTY PRODUCTS

Solutia's Specialty Products segment had net sales of $1.004 billion in
2000, compared with $760 million in 1999 and $775 million in 1998. The 32
percent increase in 2000 net sales over 1999 was due to the acquisitions of
Vianova Resins, CarboGen and AMCIS, partially offset by the impact of
contributing the Phosphorus Derivatives business to the Astaris joint
venture. Excluding the effects of the acquisitions and the loss of sales
associated with the Phosphorous Derivatives business, net sales declined by
6 percent. Net sales decreased primarily due to unfavorable currency
exchange movements associated with the devaluation of the euro in relation
to the U.S. dollar, and to a lesser extent, the loss of sales from the
Scriptsets line of business which was sold in August 1999.

The 2 percent decrease in 1999 net sales over 1998 resulted from decreased
sales of chlorobenzenes because of lower demand from the Flexsys joint
venture. Flexsys began to utilize its new PPD2 operations which do not
require chlorobenzenes as a raw material. Partially offsetting this sales
decrease was increased sales volumes of Solutia's resins and additives
products and SKYDROL(R) 5 hydraulic fluid for aviation applications. The
growth in sales volumes for resins and additives was attributable to strong
sales in the coatings market, especially during the fourth quarter of 1999.
Also during 1999, Solutia became the sole supplier of hydraulic fluid to
Boeing Corporation for its new commercial aircraft.

Specialty Products' segment profit was $32 million in 2000, compared with
$119 million in 1999 and $124 million in 1998. The 73 percent decrease in
2000 profit resulted primarily from the loss of sales from the Phosphorus
Derivatives business, higher marketing, administrative, technological and
amortization expenses associated with the acquisition and integration of
Vianova Resins, CarboGen and AMCIS, an impairment charge of $15 million
($10 million aftertax, or $0.09 per share) incurred in December of 2000 for
the write down of chlorobenzenes' production equipment and a restructuring
charge of $8 million ($5 million aftertax, or $0.05 per share) incurred in
June of 2000 related to exiting operations at the Port Plastics site in
Addyston, Ohio. The 4 percent decline in 1999 profit from 1998 was primarily
due to lower earnings from lower chlorobenzenes' sales described above.

INTEGRATED NYLON

Solutia's Integrated Nylon segment had net sales in 2000 of $1.490
billion, compared with $1.407 billion in 1999 and $1.497 billion in 1998.
The 6 percent increase in 2000 net sales compared to 1999 net sales was
attributable to the effect of higher average selling prices in each of the
segment's businesses, partially offset by volume declines in the carpet
fiber and nylon plastics and polymer businesses. The majority of the
segment's price increases were in the carpet fiber and intermediates
businesses, and to a lesser extent, the ACRILAN(R) acrylic fiber business.
Considerable pricing actions were taken in the carpet business during 2000
in response to rapid raw material cost increases. Price

increases in the intermediates business were primarily attributable to
contract business with formula pricing tied to raw material costs.
ACRILAN(R) acrylic fiber products experienced higher average selling prices
in the export markets because of the economic recovery in the Asia Pacific
region. Despite the increases in average selling prices, Solutia offset only
approximately 40 percent of the raw material cost increases. Carpet fiber
sales volumes decreased in the second half of 2000 as carpet mills reduced
inventory levels in response to lower retail demand. Decreased sales volumes
in the nylon plastics and polymer business resulted from lower shipments of
VYDYNE(R) nylon molding resins to Dow Plastics and lower demand for textile
polymers principally because of the bankruptcy of a Taiwanese textile
polymer customer.

The 6 percent decline in this segment's 1999 net sales compared with 1998
resulted from lower selling prices for almost all products and lower
ACRILAN(R) acrylic fiber volumes, partially offset by improved sales volumes
of carpet fiber and nylon polymers. Lower selling prices and sales volumes
for ACRILAN(R) acrylic fibers were caused by weak market conditions in the
Asia Pacific region. In addition, that region's lower demand depressed
markets in the Americas as acrylic fiber producers sought alternative
outlets for their products. The impact of these events began early in the
third quarter of 1998 and continued through the third quarter of 1999.
Prices stabilized early in the fourth quarter of 1999 and increased slightly
during the remainder of the year. For 1999 compared with 1998, ACRILAN(R)
acrylic fiber accounted for more than half of Integrated Nylon's net sales
decline. Nylon carpet selling prices were adversely affected in 1999 by the
consolidation of the carpet mill industry in late 1998 and the resultant
increase in the carpet mills' buying leverage. In addition, lower-priced
polyester carpet fiber also put downward pressure on prices. Sales volumes
for the segment's products were mixed, as improved carpet fiber and
VYDYNE(R) nylon molding resins volumes were offset by lower ACRILAN(R)
acrylic fiber volumes and Solutia's exit from the ammonia business in 1999.

The Integrated Nylon segment incurred a loss of $29 million in 2000. This
compares to segment profit of $161 million in 1999 and $260 million in 1998.
The 118 percent decrease in segment profit resulted primarily from higher
raw material and energy costs associated with the sharp increase in
petrochemical and natural gas prices throughout 2000. The cost of propylene,
a major feedstock for the segment, increased more than 60 percent over 1999
levels. The cost of cyclohexane, another major feedstock for the segment,
increased more than 30 percent over 1999 levels. The cost of natural gas,
which is used as an energy source and also affects the cost of various raw
materials within the segment, increased approximately 80 percent over the
year-ago period. The petrochemical and natural gas markets remain extremely
volatile and upward pricing pressures continue because of low worldwide
inventory levels. Elevated petrochemical and natural gas costs, as well as
lower Integrated Nylon volumes, will continue to adversely affect
profitability over the near term. Segment profitability was also negatively
affected by a charge of $14 million ($8 million pretax, or $0.07 per share)
to write down certain Asian investments based upon indicators that the loss
in their values was other than temporary, and charges of $5 million ($3
million aftertax, or $0.03 per share) to accrue for debt payments under
certain loan guarantees associated with one of the investments incurred
during June of 2000, impairment charges of $76 million ($47 million
aftertax, or $0.44 per share) for the write down of certain non-performing
and non-strategic fiber spinning, drawing and packaging equipment which
supports several of Integrated Nylon's product lines, and a charge of $10
million ($6 million aftertax, or $0.06 per share) to reserve for advances
and working capital loans to an Asian equity affiliate incurred in December
of 2000. The 38 percent decrease in 1999 segment profit from 1998 was
principally caused by lower selling prices in 1999. Segment profitability
was also negatively impacted by a restructuring charge of $28 million ($18
million aftertax, or $0.16 per share) to exit the ammonia business and an
impairment charge of $6 million ($4 million aftertax, or $0.03 per share) to
write down a bulk continuous filament spinning machine incurred during the
first quarter of 1999.

OPERATING INCOME

Solutia's operating income for 2000 was $24 million, compared with $294
million in 1999 and $386 million in 1998. The decline in 2000 operating
income was caused by higher raw material and energy costs that resulted from
the sharp increase in petrochemical and natural gas prices and by special
charges taken in the second and fourth quarters of 2000 related to certain
workforce reductions, asset impairments and facility closures. The remainder
of the decline resulted from higher marketing, administrative, technological
and amortization expenses associated with the acquisition and integration of
newly acquired companies and other growth programs.

As part of the integration of Vianova Resins with Solutia's resins
businesses, Solutia identified excess production capacity for certain
Solutia resins products that allowed for the consolidation of production
facilities. As a result, Solutia decided to exit operations at the Port
Plastics site in Addyston, Ohio and recorded a restructuring charge of $8
million ($5 million aftertax, or $0.05 per share) to cost of goods sold
during the second quarter of 2000. The financial impact will not be material
to Solutia as production will be shifted to other production facilities.
During the second quarter of 2000, Solutia also recorded an impairment
charge of $6 million ($4 million aftertax, or $0.04 per share) to
administrative expenses for the write down of capitalized software costs
related to the formation of the Astaris joint venture.

During the fourth quarter of 2000, Solutia recorded restructuring
charges of $53 million ($33 million aftertax, or $0.31 per share) to cost of
goods sold for costs associated with work force reductions of approximately
700 people

across all world areas of the company and the closure of certain
non-strategic facilities. The restructuring is part of an enterprise-wide
cost reduction initiative expected to achieve $100 million in annual
savings. Approximately 60 percent of the savings will come from these
restructuring actions and will be reflected primarily in cost of goods sold.
The balance of the savings will come from a variety of projects aimed at
improving efficiencies and work processes and will be reflected primarily in
cost of goods sold. Approximately half of the savings from the cost
reduction initiative is expected to be achieved in 2001, with the full
amount achieved in 2002. The cost savings will primarily result from work
force reductions, a smaller senior management team, efficiencies realized
from the full implementation of enterprise-wide systems and the streamlining
of operations primarily within Integrated Nylon. The restructuring actions
are expected to be carried out by the end of 2001. Cash outlays associated
with the restructuring actions will be funded by operations. Approximately
80 percent of the workforce reductions are planned for North American
business and manufacturing operations, and approximately 20 percent are
planned for European, Asian and Latin American operations and sales offices.
Management and senior management positions represent approximately one-third
of the workforce reductions. The closure of non-strategic facilities is not
anticipated to have a significant impact to future operations.

During the fourth quarter of 2000, Solutia recorded a $76 million ($47
million aftertax, or $0.44 per share) impairment charge to cost of goods
sold primarily for the write off of certain non-performing and non-strategic
fiber spinning, drawing and packaging equipment which supports several of
Integrated Nylon's product lines. Solutia also recorded an impairment charge
to cost of goods sold of $15 million ($10 million aftertax, or $0.09 per
share) for the write off of chlorobenzenes' production equipment. The
impairments were indicated by current period operating losses and
projections of continued losses primarily because of the noncompetitive cost
positions these businesses have and the competitive market conditions that
they face. The carrying values of the assets were written off as determined
by discounting expected future cash flows, using an appropriate discount
rate. The assumptions used in the cash flow projections were not materially
different from the market conditions experienced in 2000. These conditions
are not expected to improve significantly in the foreseeable future. The
cash flow assumptions included declining demand and market share combined
with decreased operating margins. Lower operating margins reflect the
noncompetitive cost position of these businesses and the impact of lower
selling prices associated with an extremely competitive operating
environment. Annual depreciation charges associated with these assets of
approximately $10 million will no longer be reflected in cost of goods sold.
Solutia will continue to operate these assets as they contribute to the
recovery of fixed costs.

During February 1999, certain equipment critical to Solutia's
ammonia production process failed. After analyzing the economics of
purchased ammonia versus the cost to repair the equipment, Solutia
decided to exit the ammonia business. A $28 million ($18 million
aftertax, or $0.16 per share) charge to cost of goods sold was
recorded in the first quarter to complete the exit plan. The charge
included $2 million to write down the assets to their fair value of
approximately $4 million, $4 million of dismantling costs and $22
million of estimated costs for which Solutia is contractually
obligated under an operating agreement. The contractually obligated
costs represented an estimate of the direct manufacturing, overhead
and utilities that Solutia was required to pay to a third-party
operator during a 36-month termination period. Ammonia business net
sales were $1 million in 1999 and $20 million in 1998. Operating
income for those periods was minimal. During the first quarter of
2000, Solutia entered into an agreement for the dismantling of those
assets by a third-party and as a result, transferred the liability
for dismantling to the third-party. During the third quarter of
2000, Solutia reached an agreement with the plant operator for the
final settlement of the contractually obligated costs. As a result,
Solutia transferred the liability for the contractually obligated
costs to accrued liabilities.

During the first quarter of 1999, an impairment charge of $6
million ($4 million aftertax, or $0.03 per share) was recorded to
cost of goods sold primarily to write down a bulk continuous
filament spinning machine that was shut down due to a noncompetitive
cost position. The adjusted carrying value of the machine is $0.5
million. The charge resulted from a SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and Assets to Be Disposed Of"
review, which indicated that the carrying amount of the assets
exceeded the identifiable, undiscounted cash flows related to the
assets. Fair value of the assets was determined based on estimates
of market prices for the machinery. Operating income derived from
the machinery was minimal in the years ended December 31, 1999 and
1998.

During the first quarter of 1999, Solutia also recorded a
$29 million ($18 million aftertax, or $0.16 per share) charge to
cost of goods sold related to the anticipated settlement of two
lawsuits concerning the alleged discharge of polychlorinated biphenyls
("PCBs") from the Anniston, Alabama, plant site. During the third
quarter of 2000, Solutia paid approximately $23 million for the
settlement of these actions. The remainder of the reserve will cover
costs associated with environmental remediation of the allegedly
affected areas.

During the fourth quarter of 1999, Solutia reversed excess
restructuring reserves due to the completion of the actions at a
lower cost than the 1996 restructuring plan contemplated. A reversal
of $1 million ($1 million aftertax, or $0.01 per share) was made to
eliminate a reserve for headcount reductions after the final stage
of headcount reductions was carried out. A second reversal of
$1 million ($1 million aftertax, or $0.01 per share) was made to
eliminate a reserve recorded to shutdown a non-strategic facility
after that shutdown was completed at a lower cost.

See Notes 3 and 4 to the Consolidated Financial Statements for
additional information regarding Solutia's restructuring activities
and asset impairments.

The 24 percent decline in 1999 operating income from 1998
operating income was caused by lower Integrated Nylon segment profit
and charges recorded in the first quarter of 1999, partially offset
by higher profit in the Performance Films and Specialty Products
segments and lower administrative and technological expenses. The
comparison of operating income between 1999 and 1998 was affected by
reversals of excess restructuring reserves to reflect lower cost
estimates for restructuring actions. A reversal of $3 million ($2
million aftertax, or $0.02 per share) was made in the second quarter
of 1998 due to lower cost estimates for the shutdown of certain
facilities included in the 1996 restructuring plan. Reversals made
in the third and fourth quarters of 1998 of $3 million ($2 million
aftertax, or $0.02 per share) and $3 million ($2 million aftertax,
or $0.02 per share), respectively, were due to lower cost estimates
to implement Solutia's employment reduction plans. Estimates were
lowered because of higher than anticipated attrition, which reduced
employment levels without additional cost to Solutia.

Operating income for 1998 was also affected by inventory charges
of $4 million ($3 million aftertax, or $0.03 per share) in the third
quarter and $6 million ($4 million aftertax, or $0.04 per share) in
the fourth quarter. The third quarter charge was taken to reduce
certain slow-moving inventories to their net realizable values. The
fourth quarter charge was primarily caused by losses on the
disposition of certain nonsalable inventories.

EQUITY EARNINGS FROM AFFILIATES

Equity earnings from affiliates were $35 million in 2000,
compared with $36 million in 1999 and $25 million in 1998. The
slight decrease in 2000 was primarily the result of special charges
recorded by the Flexsys and Astaris joint ventures during the second
quarter of 2000. The Flexsys joint venture recorded charges
associated with the closure and impairment of certain manufacturing
operations in the United Kingdom. Solutia's share of these charges
was $13 million ($13 million aftertax, or $0.12 per share). In
addition, the Astaris joint venture recorded charges related to the
closure of certain of its production facilities. Solutia's share of
these charges was approximately $2 million ($2 million aftertax, or
$0.02 per share). Excluding these special charges, equity earnings
from affiliates increased primarily because of the formation and
startup of the Astaris joint venture in April 2000, and improved
sales volumes at the Flexsys and Advanced Elastomer Systems joint
ventures.

The improvement in 1999 equity earnings over 1998 was due to
strong sales volumes for the Flexsys joint venture, and the Advanced
Elastomer Systems joint venture, in which Solutia has 50 percent
ownership interests. In addition, Flexsys had higher earnings as
the result of good manufacturing performance in its PPD2 unit,
which started operations in 1998. The PPD2 unit produces
4-amino-diphenylamine, a product that extends the life of rubber
products.

SALE OF POLYMER MODIFIERS BUSINESS

In August 2000, Solutia completed the sale of its Polymer
Modifiers business and related manufacturing facilities to Ferro
Corporation for approximately $130 million. As a result of this
transaction, Solutia recognized a $73 million pretax gain
($46 million aftertax, or $0.43 per share). Solutia's results of
operations included net sales of approximately $90 million in 2000,
$145 million in 1999 and $147 million in 1998 and operating income
of approximately $16 million in 2000, $36 million in 1999 and
$36 million in 1998, from the Polymer Modifiers business.

OTHER INCOME (EXPENSE)--NET

Other expense in 2000 totaled $8 million. This compares to other
income in 1999 of $13 million and $7 million in 1998. The decline in
income was principally attributed to a charge of $10 million ($6
million aftertax, or $0.06 per share) to reserve for advances and
working capital loans to an Asian equity affiliate, $14 million ($8
million aftertax, or $0.07 per share) for the write-down of certain
equity-method investments in Asia based upon indicators that the
loss in their values was other than temporary, charges of $5 million
($3 million aftertax, or $0.03 per share) to accrue for debt
payments under certain loan guarantees associated with one of the
Asian equity investments and charges of $8 million ($5 million
aftertax, or $0.05 per share) associated with the startup and
formation of the Astaris joint venture incurred during the second
quarter of 2000. Partially offsetting the special charges was a $15
million gain ($9 million aftertax, or $0.08 per share) resulting
from the sale of substantially all of Solutia's 40 percent interest
in P4 Production L.L.C., a phosphorus manufacturing venture.

INCOME TAXES

In July 2000, Germany reduced its corporate tax rate effective
January 1, 2001. In accordance with SFAS No. 109, "Accounting for
Income Taxes," Solutia recognized income of $7 million to income
taxes to record the net effect of the change on deferred income tax
assets and liabilities. Other items reducing Solutia's overall
effective tax rate include effective tax planning strategies and a
greater percentage of after-tax equity earnings from affiliates in
pretax operating income.

SUMMARY OF SPECIAL CHARGES AND OTHER EVENTS AFFECTING COMPARABILITY

Special charges recorded in 2000, 1999 and 1998 and other events
affecting comparability have been summarized in the table below
(dollars in millions).

2000 1999 1998
--------- --------- --------

Cost of goods sold.......................................... $ 8 (a) $ 63 (k) $(9) (m)
53 (b) (2) (l) 10 (n)
91 (c)
----- ---- ---
Total cost of goods sold.................................... 152 61 1
Marketing, administrative and technological expenses........ 6 (d) -- --
----- ---- ---
OPERATING INCOME............................................ (158) (61) (1)
Equity earnings from affiliates............................. (2) (d) -- --
(13) (e)
Gain on sale of Polymer Modifiers business.................. 73 (f) -- --
Other income (expense)-net.................................. (8) (d) -- --
15 (g)
(14) (h)
(5) (h)
(10) (i)
----- ---- ---
INCOME BEFORE INCOME TAXES.................................. (122) (61) (1)
Income taxes (benefit)...................................... (48) (j) (23) --
----- ---- ---
NET INCOME (LOSS)........................................... $ (74) $(38) $(1)
---- ===== ==== ===
<FN>
- --------
(a) Restructuring charge related to exiting operations at the Port Plastics site in Addyston, Ohio ($8
million pretax, $5 million aftertax, or $0.05 per share).

(b) Restructuring charge ($53 million pretax, $33 million aftertax, or $0.31 per share) to cost of goods
sold for work force reductions of approximately 700 people across all world areas and functions of the
company and the closure of certain non-strategic facilities.

(c) Impairment charge ($91 million pretax, $57 million aftertax, or $0.53 per share) to cost of goods sold
primarily for the write down of certain non-performing and non-strategic production assets in the
Integrated Nylon segment.

(d) Special operations charge related to the formation and startup of the Astaris joint venture ($16 million
pretax, $11 million aftertax, or $0.10 per share).

(e) Special operations charge associated with the impairment and closure of certain manufacturing operations
in the United Kingdom for the Flexsys joint venture ($13 million pretax, $13 million aftertax, or $0.12
per share).

(f) A gain on the sale of the Polymer Modifiers business and related manufacturing facilities ($73 million
pretax, $46 million aftertax, or $0.43 per share).

(g) A gain on the sale of P4 Production L.L.C., a phosphorus manufacturing venture ($15 million pretax, $9
million aftertax, or $0.08 per share).

(h) Charges to write-down certain investments in Asia based upon indicators that the loss in their values
was other than temporary ($14 million pretax, $8 million aftertax, or $0.07 per share), and to accrue
for payment of debt obligations associated with one of the investments ($5 million pretax, $3 million
aftertax, or $0.03 per share).

(i) A charge ($10 million pretax, $6 million aftertax, or $0.06 per share) primarily to reserve for advances
and working capital loans to an Asian equity affiliate.

(j) Amount represents the tax effect of the special charges and other events affecting comparability.
Included in this line is the impact of a $7 million (or $0.07 per share) reduction in income tax expense
for changes in German tax rates.

(k) Special charge related to exiting Integrated Nylon's ammonia business, the write down of an Integrated
Nylon segment bulk continuous filament spinning machine and the anticipated settlement of certain
pending property claims litigation related to the Anniston, Alabama plant site ($63 million pretax,
$40 million aftertax, or $0.35 per share).

(l) Reversal of excess restructuring reserves related to headcount reductions and facilities closures ($2
million pretax, $2 million aftertax, or $0.02 per share).

(m) Reversal of excess restructuring reserves related to headcount reductions and facilities closures ($9
million pretax, $6 million aftertax, or $0.05 per share).

(n) Charge for the write-down of certain slow-moving inventories and losses on the disposition of certain
nonsalable inventories ($10 million pretax, $7 million aftertax, or $0.06 per share).

OUTLOOK AND ECONOMIC CONDITIONS

Solutia is affected by economic conditions, particularly those
in the domestic housing industry and global automotive and textile
industries. Each of these industries is cyclical. A general
weakening of the economy in the United States impacted consumer
demand in these marketplaces which negatively affected Solutia's
sales volumes in the latter half of 2000.

During 2000, the cost of many feedstocks increased significantly
as the price of crude oil increased above $30 a barrel. During the
second half of 2000, natural gas escalated in price even more
dramatically than crude oil. Natural gas prices affect both
feedstock and energy costs. Recent forecasts indicate that crude oil
and natural gas prices may be moderating somewhat, but appear to
have settled at a price that is 20 to 30 percent higher than
historical averages. These markets remain volatile, which could
cause feedstock and energy costs to fluctuate significantly during
2001. Solutia expects that average selling prices will rise for
those products with formula pricing. Most of Solutia's products,
however, do not have contracts with formula pricing. Solutia will
continue to announce and implement a number of price increases
focused on restoring margins. However, the delay in adjusting
formula pricing and the difficulty in obtaining price increases
because of competitive factors and a weaker economy in the United
States will continue to negatively impact operating margins in 2001.

FINANCIAL CONDITION AND LIQUIDITY

During February 2000, Solutia completed the issuance of euro 200
million ($196 million) of notes, due February 2005. Proceeds from
the notes were used primarily to refinance outstanding commercial
paper, and also for general corporate purposes. At December 31,
2000, Solutia had outstanding commercial paper balances of $485
million, a $227 million reduction from the December 31, 1999,
balance of $712 million.

Solutia's commercial paper program is supported by an $800
million, five-year revolving credit facility ($800 million facility)
with a syndicate of commercial banks. The $800 million facility is
also available for working capital and other general corporate
purposes. This agreement, which expires in August 2002, was amended
during November 1999, principally to allow the issuance of
commercial paper in euros, as well as U.S. dollars.

During November 2000, Solutia put into place a $250 million,
364-day multi-currency revolving credit agreement ($250 million
facility) with a syndicate of commercial banks. The $250 million
facility has terms that are generally consistent with the terms of
the $800 million facility. The $250 million facility supports
Solutia's commercial paper program and is available for working
capital and other general corporate purposes.

In February 2000, Solutia acquired CarboGen Holdings, AG, a
leading process research and development firm serving the global
pharmaceutical industry. In March 2000, Solutia purchased AMCIS AG,
a company serving the global pharmaceutical industry by developing
production processes and by manufacturing active ingredients for
clinical trials and small-volume commercial drugs. The combined
purchase price for these acquisitions was approximately
$118 million, which was financed with commercial paper and the
assumption of debt. During August 2000, Solutia received
approximately $130 million of proceeds associated with the sale of
its Polymer Modifiers business and related manufacturing facilities.
Also during August 2000, Solutia received $85 million from its 50
percent-owned Astaris joint venture that represented a cash
distribution and repayment of working capital loans.

In connection with the finalization of the external financing
agreement for Astaris during the third quarter of 2000, Solutia and
FMC Corporation have independently contractually agreed to provide
Astaris with funding in the event the joint venture fails to meet
certain financial benchmarks. Subsequent to December 31, 2000,
Solutia received notification that such a contribution will be
required in 2001. Solutia believes that this obligation is not
likely to have a significant impact on its consolidated financial
position, liquidity or profitability.

Solutia's working capital at December 31, 2000, decreased to
negative $334 million from negative $213 million at December 31,
1999. The decrease in the working capital position primarily
resulted from the sale of the Polymer Modifiers business and the
contribution of the Phosphorus Derivatives business to the Astaris
joint venture during 2000. Solutia's working capital position was
further reduced by the impact of slowing economic conditions
experienced during the second half of the year. At December 31,
2000, Solutia had short-term debt of $494 million.

Cash from operations was $244 million in 2000 as compared to
$364 million in 1999. The decrease was primarily attributable to
lower net earnings associated with the sharp increase in
petrochemical and natural gas costs during 2000.

Capital expenditures for 2000 were $221 million. These
expenditures were used to fund various cost reduction, maintenance
and capacity expansion projects. The company expects that its
capital requirements will be approximately $130 million in 2001,
principally for capacity expansion and cost reduction projects.
Approximately $7 million of 2001 estimated capital requirements were
committed at December 31, 2000.

Solutia had a shareholders' deficit of $34 million at December
31, 2000, which compares with shareholders' equity of $82 million at
December 31, 1999. This $116 million decline was principally caused
by an $86 million decline in the currency translation adjustment,
principally related to the devaluation of the euro, included in
Accumulated Other Comprehensive Income (Loss) and share repurchases
which more than offset Solutia's net income in 2000.

During 2000, Solutia repurchased 7.7 million shares of its
common stock at a cost of $106 million. On April 26, 2000, the Board
of Directors authorized the repurchase of up to 15 million
additional shares of Solutia common stock. Under this authorization,
Solutia has the authority to repurchase an additional 12.1 million
shares of its common stock.

Solutia believes that its cash flow from operations and
available borrowing capacity under the $800 million facility and the
$250 million facility provide sufficient resources to finance its
operations and planned capital needs for the next 12 months.

ENVIRONMENTAL MATTERS

Solutia continues its strong commitment to comply with laws and
government regulations concerning environmental matters and employee
safety and health in the United States and other countries. U.S.
environmental legislation that has a particular impact on the
company includes the Toxic Substances Control Act; the Resource
Conservation and Recovery Act; the Clean Air Act; the Clean Water
Act; the Safe Drinking Water Act; and the Comprehensive
Environmental Response, Compensation and Liability Act (commonly
known as Superfund). The company is also subject to the Occupational
Safety and Health Act and regulations of the Occupational Safety and
Health Administration ("OSHA") concerning employee safety and health
matters. The U.S. Environmental Protection Agency, OSHA and other
federal agencies have the authority to promulgate regulations that
have an impact on the company's operations. In addition to these
federal activities, various states have been delegated certain
authority under several of these federal statutes. Many state and
local governments have adopted environmental and employee safety and
health laws and regulations, many of which meet federal requirements
for delegation of federal mandates to state entities. State or
federal agencies having enforcement lead authority may seek fines
and penalties for violation of these laws and regulations.

Solutia is dedicated to long-term environmental protection and
compliance programs that reduce and monitor emissions of hazardous
materials into the environment as well as to the remediation of
identified existing environmental concerns. Solutia is among the
leaders in Responsible Care, the chemical industry's
performance-enhancement program.

Expenditures in 2000 were approximately $12 million for
environmental capital projects and approximately $111 million for
the management of environmental programs, including the operation
and maintenance of facilities for environmental control, of which
$28 million was charged against recorded environmental liabilities.
Solutia estimates that a total of approximately $20 million will be
spent during 2001 and 2002 on additional capital projects for
environmental protection and that expenses for the management of
environmental programs in 2001 and 2002 will increase slightly from
the 2000 levels.

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.

At the time of the spinoff, Solutia assumed from the former
Monsanto Company (now Pharmacia Corporation), under the Distribution
Agreement between Monsanto and Solutia, liabilities related to
specified Superfund proceedings. As a result, while Monsanto remains
the named potentially responsible party or defendant for actions
that occurred before September 1, 1997, Solutia will manage these
proceedings and litigation against Monsanto and indemnify it for any
costs, expenses and judgments arising from these proceedings.

Solutia's estimates of its liabilities for Superfund sites are
based on evaluations of currently available facts with respect to
each individual site and take into consideration factors such as
existing technology, laws and agency policy and prior experience in
remediation of contaminated sites. As assessments and remediation
activities progress at individual sites, these liabilities are
reviewed periodically and adjusted to reflect additional technical,
engineering and legal information that becomes available. Solutia
has an accrued liability of $33 million as of December 31, 2000, for
Superfund sites. Major Superfund sites in this category include the
noncompany-owned sites at Brio and MOTCO in Texas, and Fike/Artel in
West Virginia, which account for $23 million of the accrued amount.
Solutia spent approximately $7 million in 2000 for remediation of
Superfund sites. Similar amounts can be expected in future years.

Solutia had an accrued liability of $69 million as of December
31, 2000, for plants no longer in operation and third-party sites
for which it assumed responsibility under the Distribution Agreement
entered into with Monsanto. Solutia's estimate of its liability
related to these sites is based on evaluations of currently
available facts with respect to each individual site. The estimate
takes into consideration factors such as existing technology, laws
and agency policy and prior experience in remediation of
contaminated sites. The company spent $9 million in 2000 for
remediation of these sites. Similar amounts can be expected in
future years.

Solutia had an accrued liability of $79 million as of December
31, 2000, for solid and hazardous waste remediation, and for
post-closure costs at the company's operating locations. Solutia
recognizes certain post-closure costs over the estimated remaining
useful life of the related facilities. Solutia spent $12 million in
2000 for remediation of these facilities. Similar amounts can be
expected in future years.

Uncertainties related to all of Solutia's environmental
liabilities include evolving government policy and regulations, the
method and extent of remediation and future changes in technology.
Because of these uncertainties, Solutia estimates that potential
future expenses associated with these liabilities could be an
additional $20 million to $30 million. Although the ultimate costs
and results of remediation of contaminated sites cannot be predicted
with certainty, they are not expected to result in a material
adverse effect on Solutia's consolidated financial position,
liquidity or profitability in any one year.

DERIVATIVE FINANCIAL INSTRUMENTS

Solutia's business operations give rise to market risk exposures
that result from changes in currency exchange rates, interest rates
and certain commodity prices. To manage the volatility relating to
these exposures, Solutia enters into various hedging transactions
that enable it to alleviate the adverse effects of financial market
risk. Solutia's hedging transactions are carried out under policies
and procedures approved by the Audit and Finance Committee of the
Board of Directors, which do not permit the purchase or holding of
any derivative financial instruments for trading purposes.

Solutia uses value-at-risk ("VAR") testing and analysis to
measure and control risks. VAR estimates the loss in fair market
value, which Solutia would potentially incur, given a certain move
in market prices over a certain period of time, using specified
confidence levels. The tests discussed below for exposure to
interest rate and currency rate exposures are based on a one-day
horizon and a 95 percent confidence level. The model assumes that
financial returns are normally distributed. The VAR model takes into
account correlations and diversification across market factors,
including currencies and interest rates. Estimates of volatility and
correlations of market factors are drawn from the JP Morgan
RiskMetrics dataset as of December 31, 2000. In cases where data is
unavailable, a reasonable approximation is included. Solutia
estimates that the maximum loss that could arise in one day is not
material.

FOREIGN CURRENCY EXCHANGE RATE RISK

Currency forward contracts are used to manage currency exposures
for financial instruments denominated in currencies other than the
entity's functional currency. Gains and losses on contracts that are
designated and effective

as hedges are included in net income and offset the exchange gain or
loss of the transaction being hedged. Solutia's policy prescribes
the range of allowable hedging activity and the instruments that are
permitted for use. Because the counterparties to these contracts are
major international financing institutions, credit risk arising from
these contracts is not significant, and Solutia does not anticipate
any counterparty losses. This hedging activity is intended to
protect Solutia from adverse fluctuations in foreign currency
exchange rates.

At December 31, 2000, Solutia had currency forward contracts to
purchase $265 million and sell $265 million of other currencies,
principally the euro, Swiss Franc and United Kingdom Pound-Sterling,
with average maturities of 10 months. Net unrealized hedging gains
at December 31, 2000, were not material.

Based on the company's overall currency rate exposure at
December 31, 2000, including derivative and other foreign currency
sensitive instruments, a near-term change in currency rates, within
a 95 percent confidence level based on historical currency rate
movements, would not materially affect Solutia's consolidated
financial position, results of operations or cash flows.

INTEREST RATE RISK

Interest rate risk is primarily related to the changes in fair
value of fixed-rate long-term debt and short-term, floating rate
debt. Solutia does not actively manage interest rate risk. Based on
the company's overall interest rate exposure at December 31, 2000, a
near-term change in interest rates, within a 95 percent confidence
level based on historical interest rate movements, would not
materially affect the consolidated financial position, results of
operations or cash flows of the company. This is consistent with the
overall interest rate exposure at December 31, 1999.

COMMODITY PRICE RISK

Certain raw materials and energy sources are subject to price
volatility caused by weather, crude oil prices, supply and demand
conditions and other unpredictable factors. Solutia periodically
employs commodity price option contracts to hedge some of this
exposure. The commodity price risk associated with the derivative
instruments is not material to Solutia's consolidated financial
position, results of operations or cash flow.

RECENTLY ISSUED ACCOUNTING STANDARDS

Effective January 1, 2001, Solutia adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activity," which
provides comprehensive and consistent standards for the recognition
and measurement of derivative and hedging activities. The adoption
of SFAS No. 133 did not have a material effect on Solutia's
consolidated financial statements.

During the fourth quarter of 2000, Solutia adopted Staff
Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" (SAB 101) which provides guidance related to revenue
recognition. The adoption of SAB 101 did not have a material effect
on Solutia's consolidated financial statements.

On July 20, 2001, the Financial Accounting Standards Board issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." The statements will change the accounting for business
combinations and goodwill in two significant ways. SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. Use of the pooling-of-interests method will
be prohibited. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization of
goodwill, including goodwill recorded in past business combinations, will
cease upon adoption of that statement, which for Solutia, will be January 1,
2002. Solutia has not completed an analysis of the potential impact upon
adoption of the impairment test of goodwill; however, Solutia expects that
the adoption of SFAS No. 142 will reduce annual amortization expense by
approximately $20 million to $25 million aftertax.

In July 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." The statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
obligations. Such obligations have a legal commitment requiring settlement
as a result of existing or enacted law, statute, written or oral contract or
by legal construction under the doctrine of promissory estoppel. SFAS No. 143
is effective for fiscal years beginning after June 15, 2002. Solutia is
evaluating SFAS No. 143 to determine its effects, if any, on the
consolidated financial statements.

In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
The statement addresses the financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 supersedes
SFAS No. 121, but retains SFAS No. 121's fundamental provisions for
(a) recognition/measurement of impairment of long-lived assets to be
held and used and (b) measurement of long-lived assets to be disposed
of by sale. SFAS No. 144 also supersedes the accounting/reporting provisions
of APB Opinion No. 30, for segments of a business to be disposed of but
retains APB 30's requirement to report discontinued operations separately
from continuing operations and extends that reporting to a component of an
entity that either has been disposed of or is classified as held for sale.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
Solutia does not expect the adoption of SFAS No. 144 to have a material
effect on its consolidated financial statements.

Updated Financial Information for the Years Ended
December 31, 2000, 1999 and 1998

MANAGEMENT REPORT

Management is responsible for the integrity, objectivity and
preparation of Solutia Inc.'s consolidated financial statements and
all of the related information appearing in this annual report. The
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. Where
necessary, this information reflects estimates that are based upon
currently available information and management's judgments.

Management is also responsible for maintaining a system of
internal accounting controls designed to provide reasonable
assurance that Solutia's assets are safeguarded against material
loss from unauthorized use or disposition and that authorized
transactions are properly recorded to permit the preparation of
accurate financial information. Cost/benefit judgments are an
important consideration in this regard. The effectiveness of
internal controls is maintained by careful personnel selection and
thorough training, division of responsibilities, establishment and
communication of policies and ongoing internal review programs and
audits.

Management believes that Solutia's system of internal accounting
controls as of and for the period ended December 31, 2000, was
effective and adequate to accomplish the objectives described above.

/s/ John C. Hunter III /s/ Robert A. Clausen

John C. Hunter III Robert A. Clausen
Chairman, President and Senior Vice President and
Chief Executive Officer Chief Financial Officer

February 28, 2001

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of Solutia Inc.:

We have audited the accompanying statements of consolidated
financial position of Solutia Inc. and subsidiaries as of December
31, 2000 and 1999, and the related statements of consolidated
income, comprehensive income (loss), cash flow, and shareholders'
equity (deficit) for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility
of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of Solutia
Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States
of America.

/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
St. Louis, Missouri

February 28, 2001
(December 21, 2001 as to Note 18)

SOLUTIA INC.

STATEMENT OF CONSOLIDATED INCOME

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Year Ended December 31,
--------------------------
2000 1999 1998
------ ------ ------

NET SALES................................................... $3,185 $2,830 $2,835
Cost of goods sold.......................................... 2,699 2,178 2,085
------ ------ ------
GROSS PROFIT................................................ 486 652 750
Marketing expenses.......................................... 165 153 145
Administrative expenses..................................... 173 122 136
Technological expenses...................................... 91 80 83
Amortization expense........................................ 33 3 --
------ ------ ------
OPERATING INCOME............................................ 24 294 386
Equity earnings from affiliates............................. 35 36 25
Interest expense............................................ (83) (40) (43)
Gain on sale of Polymer Modifiers business.................. 73 -- --
Other income (expense)--net................................. (8) 13 7
------ ------ ------
INCOME BEFORE INCOME TAXES.................................. 41 303 375
Income taxes (benefit)...................................... (8) 97 126
------ ------ ------
NET INCOME.................................................. $ 49 $ 206 $ 249
====== ====== ======
BASIC EARNINGS PER SHARE.................................... $ 0.46 $ 1.86 $ 2.16
====== ====== ======
DILUTED EARNINGS PER SHARE.................................. $ 0.46 $ 1.80 $ 2.03
====== ====== ======

Weighted average equivalent shares (in millions):
Basic..................................................... 105.9 110.8 115.5
Effect of dilutive securities:
Common share equivalents--common stock issuable upon
exercise of outstanding stock options.................. 1.6 3.8 7.3
------ ------ ------
Diluted................................................... 107.5 114.6 122.8
====== ====== ======

STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(DOLLARS IN MILLIONS)

Year Ended December 31,
-------------------------
2000 1999 1998
---- ---- ----

NET INCOME.................................................. $ 49 $206 $249
OTHER COMPREHENSIVE INCOME (LOSS):
Currency translation adjustments............................ (86) (44) 10
Minimum pension liability adjustments, net of tax of $4 in
2000, $2 in 1999, and $2 in 1998........................... 7 (4) (3)
------ ---- ----
COMPREHENSIVE INCOME (LOSS)................................. $ (30) $158 $256
====== ==== ====

See accompanying Notes to Consolidated Financial Statements.

SOLUTIA INC.

STATEMENT OF CONSOLIDATED FINANCIAL POSITION

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

As of December 31,
------------------
2000 1999
------ ------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents................................... $ 19 $ 28
Trade receivables, net of allowances of $12 in 2000 and $12
in 1999.................................................... 406 483
Miscellaneous receivables and prepaid expenses.............. 126 131
Deferred income tax benefit................................. 107 101
Inventories................................................. 357 371
------ ------
TOTAL CURRENT ASSETS........................................ 1,015 1,114
PROPERTY, PLANT AND EQUIPMENT:
Land........................................................ 60 68
Buildings................................................... 421 436
Machinery and equipment..................................... 2,982 2,919
Construction in progress.................................... 62 272
------ ------
Total property, plant and equipment......................... 3,525 3,695
Less accumulated depreciation............................... 2,320 2,379
------ ------
NET PROPERTY, PLANT AND EQUIPMENT........................... 1,205 1,316
INVESTMENTS IN AFFILIATES................................... 351 377
GOODWILL, net of accumulated amortization of $24 in 2000 and
$2 in 1999................................................. 421 511
IDENTIFIED INTANGIBLE ASSETS, net of accumulated
amortization of $16 in 2000 and $5 in 1999................. 217 33
LONG-TERM DEFERRED INCOME TAX BENEFIT....................... 190 232
OTHER ASSETS................................................ 182 187
------ ------
TOTAL ASSETS................................................ $3,581 $3,770
====== ======

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................ $ 359 $ 312
Wages and benefits.......................................... 45 59
Postretirement liabilities.................................. 78 86
Miscellaneous accruals...................................... 373 359
Short-term debt............................................. 494 511
------ ------
TOTAL CURRENT LIABILITIES................................... 1,349 1,327
LONG-TERM DEBT.............................................. 784 802
POSTRETIREMENT LIABILITIES.................................. 941 998
OTHER LIABILITIES........................................... 541 561
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock (authorized, 600,000,000 shares, par value
$0.01)
Issued: 118,400,635 shares in 2000 and 1999............... 1 1
Additional contributed capital............................ (141) (137)
Treasury stock, at cost (15,484,194 and 8,859,764 shares
in 2000 and 1999, respectively).......................... (296) (209)
Unearned ESOP shares........................................ (9) (18)
Accumulated other comprehensive income (loss)............... (108) (29)
Reinvested earnings......................................... 519 474
------ ------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........................ (34) 82
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)........ $3,581 $3,770
====== ======

See accompanying Notes to Consolidated Financial Statements.

SOLUTIA INC.

STATEMENT OF CONSOLIDATED CASH FLOW

(DOLLARS IN MILLIONS)

Year Ended December 31,
-------------------------
2000 1999 1998
---- ---- ----

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING
ACTIVITIES:
Net income.................................................. $ 49 $ 206 $ 249
Adjustments to reconcile to Cash From Operations:
Items that did not use (provide) cash:
Deferred income taxes................................... 23 23 32
Depreciation and amortization........................... 191 151 147
Amortization of deferred credits........................ (12) (10) (7)
Restructuring expenses and other special
charges--net........................................... 195 63 --
Other................................................... (15) 15 17
Working capital changes that provided (used) cash:
Trade receivables....................................... 69 (18) 68
Inventories............................................. (18) 42 (6)
Accounts payable and accrued liabilities................ (64) (114) 3
Other................................................... (1) 6 15
Net pretax gains from asset disposals..................... (79) -- --
Other items............................................... (94) -- 19
----- ----- -----
CASH FROM OPERATIONS........................................ 244 364 537
----- ----- -----
INVESTING ACTIVITIES:
Property, plant and equipment purchases..................... (221) (257) (158)
Acquisition and investment payments, net of cash acquired... (110) (835) (8)
Property disposals and investment proceeds.................. 220 30 22
----- ----- -----
CASH USED IN INVESTING ACTIVITIES........................... (111) (1,062) (144)
----- ----- -----
FINANCING ACTIVITIES:
Net change in short-term debt obligations................... (23) 511 (190)
Long-term debt proceeds..................................... -- 201 --
Long-term debt reductions................................... (13) -- --
Treasury stock purchases.................................... (106) (79) (161)
Dividend payments........................................... (4) (4) (5)
Common stock issued under employee stock plans.............. 4 8 28
----- ----- -----
CASH (USED IN) FROM FINANCING ACTIVITIES.................... (142) 637 (328)
----- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (9) (61) 65
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR........................................... 28 89 24
----- ----- -----
END OF YEAR................................................. $ 19 $ 28 $ 89
===== ===== =====

See accompanying Notes to Consolidated Financial Statements.

The effect of exchange rate changes on cash and cash equivalents
was not material. Cash payments for interest (net of amounts
capitalized) were $88 million in 2000, $41 million in 1999 and $44
million in 1998. Cash payments for income taxes were $17 million in
2000, $43 million in 1999 and $94 million in 1998.

SOLUTIA INC.

STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY (DEFICIT)

(DOLLARS IN MILLIONS)

Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----

COMMON STOCK:
BALANCE, JANUARY 1.......................................... $ 1 $ 1 $ 1
----- ----- -----
BALANCE, DECEMBER 31........................................ $ 1 $ 1 $ 1
----- ----- -----
ADDITIONAL CONTRIBUTED CAPITAL:
BALANCE, JANUARY 1.......................................... $(137) $(131) $(119)
Employee stock plans and ESOP............................. (4) (6) (12)
----- ----- -----
BALANCE, DECEMBER 31........................................ $(141) $(137) $(131)
----- ----- -----
TREASURY STOCK:
BALANCE, JANUARY 1.......................................... $(209) $(143) $ (22)
Shares purchased (7,717,300 shares in 2000, 3,781,700
shares in 1999, 6,246,300 shares in 1998)................ (106) (79) (161)
Net shares issued under employee stock plans (1,092,870
shares in 2000, 551,613 shares in 1999, 1,609,451
shares in 1998).......................................... 19 13 40
----- ----- -----
BALANCE, DECEMBER 31........................................ $(296) $(209) $(143)
----- ----- -----
UNEARNED ESOP SHARES:
BALANCE, JANUARY 1.......................................... $ (18) $ (25) $ (31)
Amortization of ESOP balance.............................. 9 7 6
----- ----- -----
BALANCE, DECEMBER 31........................................ $ (9) $ (18) $ (25)
----- ----- -----
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
ACCUMULATED CURRENCY ADJUSTMENT:
BALANCE, JANUARY 1...................................... (15) 29 19
Currency translation adjustments........................ (86) (44) 10
----- ----- -----
BALANCE, DECEMBER 31.................................... (101) (15) 29
----- ----- -----
MINIMUM PENSION LIABILITY:
BALANCE, JANUARY 1...................................... (14) (10) (7)
Minimum pension liability adjustments................... 7 (4) (3)
----- ----- -----
BALANCE, DECEMBER 31.................................... (7) (14) (10)
----- ----- -----
BALANCE, DECEMBER 31........................................ $(108) $ (29) $ 19
----- ----- -----
REINVESTED EARNINGS:
BALANCE, JANUARY 1.......................................... $ 474 $ 272 $ 28
Net income................................................ 49 206 249
Dividends................................................. (4) (4) (5)
----- ----- -----
BALANCE, DECEMBER 31........................................ $ 519 $ 474 $ 272
----- ----- -----
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)........................ $ (34) $ 82 $ (7)
===== ===== =====

See accompanying Notes to Consolidated Financial Statements.

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

1. SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Solutia Inc. and its subsidiaries produce and market a variety
of high-performance chemical-based materials. Solutia's strategic
focus is built on key strengths, including complex manufacturing
capabilities, process engineering expertise, technical service,
customer problem solving, polymer chemistry and fiber technology.
These world-class skills are applied to create solutions and
products for customers in the consumer, household, automotive,
industrial products and pharmaceutical industries. Solutia's
products and services include SAFLEX(R) plastic interlayer; window
and industrial films; GELVA(R) pressure-sensitive adhesives; liquid,
powder and waterborne resins; VYDYNE(R) and ASCEND(TM) nylon
polymers; process research, process development and scale-up
services for the pharmaceutical industry; and nylon fibers.

Prior to September 1, 1997, Solutia was a wholly-owned
subsidiary of the former Monsanto Company (now known as Pharmacia
Corporation). On September 1, 1997, Monsanto distributed all of the
outstanding shares of common stock of the company as a dividend to
Monsanto stockholders (the spinoff). As a result of the spinoff, on
September 1, 1997, Solutia became an independent publicly held
company listed on the New York Stock Exchange and its operations
ceased to be owned by Monsanto. Negative additional contributed
capital arose upon the spinoff.

Basis of Consolidation

The consolidated financial statements include the accounts of
Solutia and its majority-owned subsidiaries. Other companies in
which Solutia has a significant interest (20 to 50 percent) are
included in "Investments in Affiliates" in the Statement of
Consolidated Financial Position. Solutia's share of these companies'
net earnings or losses is reflected in "Equity Earnings from
Affiliates" in the Statement of Consolidated Income.

Use of Estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and that affect revenues and
expenses during the period reported. Estimates are adjusted when
necessary to reflect actual experience. Significant estimates were
used to account for restructuring reserves, environmental reserves,
self-insurance reserves, employee benefit plans, asset impairments
and contingencies.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and temporary
investments with maturities of three months or less when purchased.

Inventory Valuation

Inventories are stated at cost or market, whichever is less.
Actual cost is used to value raw materials and supplies. Standard
cost, which approximates actual cost, is used to value finished
goods and goods in process. Standard cost includes direct labor and
raw materials, and manufacturing overhead based on practical
capacity. The cost of certain inventories (69 percent as of December
31, 2000) is determined by the last-in, first-out (LIFO) method,
which generally reflects the effects of inflation or deflation on
cost of goods sold sooner than other inventory cost methods. The
cost of other inventories generally is determined by the first-in,
first-out (FIFO) method.

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. The cost of
plant and equipment is depreciated over weighted average periods of
20 years for buildings and 12 years for machinery and equipment, by
the straight-line method.

Intangible Assets

The cost of intangible assets is amortized on a straight-line
basis over the estimated periods benefited, generally 20 years for
goodwill and periods ranging from 5 to 20 years for identified
intangible assets.

Impairment of Long-Lived Assets

Impairment tests of long-lived assets are made when conditions
indicate a possible loss. Such impairment tests are based on a
comparison of undiscounted cash flows to the recorded value of the
asset. 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.

Environmental Remediation

Costs for remediation of waste disposal sites are accrued in the
accounting period in which the obligation is probable and when the
cost is reasonably estimable. Postclosure costs for hazardous and
other waste facilities at operating locations are accrued over the
estimated life of the facility as part of its anticipated closure
cost. Environmental liabilities are not discounted, and they have
not been reduced for any claims for recoveries from insurance or
third parties. In those cases where insurance carriers or
third-party indemnitors have agreed to pay any amounts and
management believes that collectability of such amounts is probable,
the amounts are reflected as receivables in the consolidated
financial statements.

Revenue Recognition

Revenues are recorded when products are shipped. In the case of
the pharmaceutical services businesses, revenues are primarily
recorded on a percentage of completion method.

Derivative Financial Instruments

Currency forward contracts are used to manage currency exposures
for financial instruments denominated in currencies other than the
entity's functional currency. Natural gas contracts are used to
manage some of the exposure for the cost of natural gas. Gains and
losses on contracts that are designated and effective as hedges are
included in net income and offset the exchange gain or loss of the
transaction being hedged.

Major currencies affecting the company's business are the U.S.
dollar, the British pound sterling, the euro, the Canadian dollar
and the Brazilian real. Currency restrictions are not expected to
have a significant effect on Solutia's cash flow, liquidity or
capital resources.

Income Taxes

Solutia accounts 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 bases of assets and liabilities
at enacted rates.

Currency Translation

The local currency has been used as the functional currency for
nearly all worldwide locations. The financial statements for most of
Solutia's ex-U.S. operations are translated into U.S. dollars at
current exchange rates.

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Unrealized currency translation adjustments in the Statement of
Consolidated Financial Position are accumulated in equity.

Earnings per Share

Solutia measures earnings per share under the guidance of
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share." Basic earnings per share is a measure of
operating performance that assumes no dilution from securities or
contracts to issue common stock. Diluted earnings per share is a
measure of operating performance by giving effect to the dilution
that would occur if securities or contracts to issue common stock
were exercised or converted.

New Accounting Pronouncements

Reclassifications

Certain reclassifications to prior years' financial information
have been made to conform to the 2000 presentation.

2. ACQUISITIONS AND DIVESTITURES

During the third quarter of 2000, Solutia completed the sale of
its Polymer Modifiers business and related manufacturing facilities
to Ferro Corporation for approximately $130 million. As a result of
this transaction, Solutia recognized a $73 million pretax gain
($46 million aftertax). Solutia's results of operations included net
sales of approximately $90 million in 2000, $145 million in 1999 and
$147 million in 1998 and operating income of approximately
$16 million in 2000, $36 million in 1999 and $36 million in 1998,
from the Polymer Modifiers business. During the second quarter of
2000, Solutia recognized a $15 million pretax gain ($9 million
aftertax) on the sale of substantially all of its minority interest
in P4 Production L.L.C., a phosphorus manufacturing venture. The
results of operations from Solutia's minority interest in P4
Production L.L.C. were not material to Solutia's consolidated
results of operations.

During the first quarter of 2000, Solutia completed two
acquisitions in the Specialty Products segment, which provide custom
process and technology services to the global pharmaceutical
industry. In the first acquisition, which closed on February 10,
Solutia acquired CarboGen Holdings AG. CarboGen is a leading process
research and development firm. In the second acquisition, which
closed on March 24, Solutia purchased AMCIS AG. AMCIS serves the
global pharmaceutical industry by developing production processes
and by manufacturing active ingredients for clinical trials and
small-volume commercial drugs. The combined purchase price for these
acquisitions was approximately $118 million, which was financed with
commercial paper and the assumption of debt.

Both of the acquisitions have been accounted for using the
purchase method. The allocations of the purchase price to the assets
and liabilities acquired resulted in current assets of $17 million,
non-current assets of $27 million, goodwill of $57 million, other
intangible assets of $41 million, current liabilities of $21 million
and non-current liabilities of $3 million. Goodwill is being
amortized over its estimated useful life of 20 years, and other
intangible assets are being amortized over their estimated useful
lives, which average 18 years.

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Results of operations for CarboGen and AMCIS were included in
Solutia's results of operations from the acquisition dates. The
results of operations for the acquired businesses were not material
to Solutia's consolidated results of operations for 2000.

On December 22, 1999, Solutia acquired Vianova Resins from
Morgan Grenfell Private Equity Ltd. for approximately 1.2 billion
deutsche marks (approximately $617 million), which was financed with
commercial paper and the assumption of debt. Vianova Resins is a
leading European producer of resins and additives for coatings and
technical applications for the specialty, industrial and automotive
sectors.

The acquisition has been accounted for using the purchase
method. The allocation of the purchase price to the assets and
liabilities acquired resulted in current assets of $192 million,
non-current assets of $227 million, goodwill of $321 million, other
intangible assets of approximately $163 million, current liabilities
of $99 million and non-current liabilities of $187 million. Goodwill
is being amortized over its estimated useful life of 20 years, and
other intangible assets are being amortized over their estimated
useful lives, which average 19 years.

On May 25, 1999, Solutia acquired CPFilms Inc. from Akzo Nobel
N.V. for approximately $200 million, which was financed with
commercial paper. CPFilms is a leading manufacturer and marketer of
window film and other high-technology film products for automotive
and architectural after-markets and a variety of other specialty
film applications. The acquisition has been accounted for using the
purchase method. The allocation of the purchase price to the
identifiable assets and liabilities acquired resulted in goodwill of
approximately $80 million. Goodwill and other intangible assets will
be amortized over their estimated useful lives of 20 years. CPFilms'
results of operations from May 25, 1999, through December 31, 1999,
were included in Solutia's Statement of Consolidated Income for the
year ended December 31, 1999.

The following unaudited pro forma condensed information for the
years ended December 31, 1999 and 1998, give effect to the
acquisitions of CPFilms and Vianova Resins, and the associated debt
financing, as if the acquisitions and the financing had occurred as
of the beginning of the periods presented.

For the Year Ended
December 31
-------------------
1999 1998
------ ------
(Unaudited)

Net sales........................................... $3,357 $3,465
Net income.......................................... 203 241

Basic earnings per share............................ 1.83 2.09
Diluted earnings per share.......................... 1.77 1.97

3. RESTRUCTURING AND BUSINESS COMBINATION RESERVES

During the fourth quarter of 2000, Solutia recorded
restructuring charges of $53 million ($33 million aftertax) to cost
of goods sold for costs associated with work force reductions of
approximately 700 people across all world areas of the company and
the closure of certain non-strategic facilities. The restructuring
actions are expected to be carried out by the end of 2001.
Approximately 80 percent of the workforce reductions are planned for
North American business and manufacturing operations, and
approximately 20 percent are planned for European, Asian and Latin
American operations and sales offices. Management and senior
management positions represent approximately one-third of the
workforce reductions. The closure of non-strategic facilities is not
anticipated to have a significant impact on future operations.

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The following table summarizes the 2000 restructuring charge and
amounts utilized to carry out those plans:

Employment Shutdown of
Reductions Facilities Total
---------- ----------- -----

Balance at January 1, 2000.......... $-- $-- $--
Charges taken.................. 50 3 53
Amounts utilized............... -- (3) (3)
--- --- ---
BALANCE AT DECEMBER 31, 2000........ $50 $-- $50
=== === ===

During the second quarter of 2000, Solutia completed plans to
integrate Vianova Resins operations with Solutia's resins business
and service organizations and recorded a liability of $11 million to
accrue for costs of integration, in accordance with Emerging Issues
Task Force Issue 95-3, "Recognition of Liabilities in Connection
with a Purchase Business Combination." The integration plans include
employment reductions of approximately 130 people, primarily from
Vianova Resin's service organizations located in more than 10
countries. In addition, the plans include amounts to shut down
certain Vianova Resins sales offices. The integration actions are
expected to be carried out by the end of the second quarter of 2001.

The following table summarizes the Vianova Resins integration
costs and amounts utilized to carry out those plans:

Employment Shutdown of
Reductions Facilities Total
---------- ----------- -----

Balance at January 1, 2000.......... $-- $-- $--
Charges taken.................. 10 1 11
Amounts utilized............... (2) -- (2)
--- --- ---
BALANCE AT DECEMBER 31, 2000........ $ 8 $ 1 $ 9
=== === ===

As part of the integration of Vianova Resins with Solutia's
resins businesses, Solutia identified excess production capacity for
certain Solutia resins products that will allow for the
consolidation of production facilities. As a result, Solutia decided
to exit operations at the Port Plastics site in Addyston, Ohio. An
$8 million ($5 million aftertax) charge to cost of goods sold was
recorded in the second quarter of 2000 to carry out the exit plan.
The charge included $2 million to write down plant assets to their
fair value of approximately $1 million, $2 million of dismantling
costs and $4 million of estimated costs for which Solutia is
contractually obligated under an operating agreement. Fair value was
determined by discounting future cash flows using an appropriate
discount rate. Under the operating agreement, Solutia is required to
provide 24 months notice of intent to exit and to pay contractually
obligated costs for an additional 18 months thereafter to a
third-party operator. The contractually obligated costs represent
direct manufacturing, overhead, utilities and severance. The
financial impact will not be material to Solutia as production will
be shifted to other production facilities.

The following table summarizes the 2000 restructuring charge and
amounts utilized to carry out those plans:

Shutdown of Asset Write- Other
Facilities downs Costs Total
----------- ------------ ----- -----

Balance at January 1, 2000..... $-- $-- $-- $--
Charges taken............. 2 2 4 8
Amounts utilized.......... -- (2) -- (2)
--- --- --- ---
BALANCE AT DECEMBER 31, 2000... $ 2 $-- $ 4 $ 6
=== === === ===

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In February 1999, Integrated Nylon's ammonia unit experienced
the failure of certain equipment critical to the production process.
Based on an analysis of the economics of purchased ammonia and the
cost to repair the equipment, Solutia decided to exit the ammonia
business. A $28 million ($18 million aftertax) special operations
charge to cost of goods sold was recorded in the first quarter of
1999 to implement the exit plan. The charge included $2 million to
write down the assets to their fair value of approximately $4 million,
$4 million of dismantling costs and $22 million of costs for which
Solutia is contractually obligated under an operating agreement. During
the first quarter of 2000, Solutia entered into an agreement for the
dismantling of those assets by a third-party and as a result, transferred
the liability for dismantling to the third-party. During the third quarter
of 2000, Solutia reached an agreement with the plant operator for the final
settlement of the contractually obligated costs. As a result, Solutia
transferred the liability for the contractually obligated costs to accrued
liabilities. Net sales for the ammonia business were $1 million for
the year ended December 31, 1999, and $20 million in 1998. Operating
income for those periods was minimal.

The following table summarizes the 1999 restructuring charge and
amounts utilized to carry out those plans:

Shutdown of Asset Write- Other
Facilities downs Costs Total
----------- ------------ ----- -----

Balance at January 1, 1999...... $-- $-- $ -- $ --
Charges taken.............. 4 2 22 28
Amounts utilized........... -- (2) (6) (8)
--- --- ---- ----
Balance at December 31, 1999.... $ 4 $-- $ 16 $ 20
--- --- ---- ----
Amounts utilized........... (4) -- (16) (20)
--- --- ---- ----
BALANCE AT DECEMBER 31, 2000.... $-- $-- $ -- $ --
=== === ==== ====

In December 1996, Solutia recorded pretax restructuring charges
of $256 million ($164 million aftertax) to cover costs associated
with the closure or sale of certain facilities, asset write-offs and
work force reductions of approximately 900 people across all world
areas and functions of the company. The workforce reductions were
required to reduce staffing for the spinoff and for the
implementation of new business systems and methodologies.
Approximately two-thirds of the workforce reductions were planned
for North American business and manufacturing operations, and
approximately one-third were planned for European, Asian and Latin
American operations and sales offices. Of the North American
reductions, approximately half of the reductions were management and
senior management positions.

Activities completed during 1999 included the shutdowns of
certain facilities and the final stage of headcount reductions
totaling approximately 150 people. The 1999 headcount reductions
occurred in Solutia's Asian, European and North American operations.
Total headcount reductions under the 1996 restructuring were
approximately 900 people. The headcount reductions occurred over a
longer period of time than management estimated due to the efforts
required to complete the separation from Monsanto and the transition
to new business systems and methodologies. In the fourth quarter of
1999, Solutia reversed excess restructuring reserves due to the
completion of the actions at a lower cost than contemplated in the
1996 plan. A reversal of $1 million ($1 million aftertax) was made
to eliminate a reserve for headcount reductions after the final
stage of headcount reductions was carried out. A second reversal of
$1 million ($1 million aftertax) was made to eliminate a reserve
recorded to shutdown a non-strategic facility after that shutdown
was completed at a lower cost.

During 1998, actions taken under the 1996 restructuring plan
included continuing the shutdowns of certain facilities and
headcount reductions of approximately 50 people. The 50 people
affected were in almost all areas of Solutia, but primarily in
Solutia's shared service operations, and left the company by the end
of 1998. During December 1998, Solutia also terminated approximately
100 individuals who left on various dates in the first half of 1999.
During 1998, evaluations of the costs to complete Solutia's
restructuring plans yielded lower cost estimates for certain of the
restructuring actions. The second quarter 1998 review yielded lower
cost estimates to complete the

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

shutdown of certain facilities and resulted in the reversal of
$3 million ($2 million aftertax) in that quarter. The third and
fourth quarter 1998 reviews yielded downward revisions of the costs
to implement the employment reduction plans due to higher than
anticipated attrition that reduced employment levels without
additional cost to the company. As a result, the company reversed
restructuring reserves of $3 million ($2 million aftertax) in the
third quarter 1998 and $3 million ($2 million aftertax) in the
fourth quarter.

The following table summarizes the actions of the 1996 plan
carried out during 1998 and 1999:

Employee Shutdown of
Reductions Facilities Total
---------- ----------- -----

Balance at January 1, 1998........... $ 67 $29 $ 96
Amounts utilized................ (24) (8) (32)
Adjustments..................... (6) (3) (9)
---- --- ----
Balance at December 31, 1998......... $ 37 $18 $ 55
---- --- ----
Amounts utilized................ (36) (17) (53)
Adjustments..................... (1) (1) (2)
---- --- ----
Balance at December 31, 1999......... $ -- $-- $ --
==== === ====

For all of Solutia's restructuring charges, expenses were
recorded based on estimates prepared at the time the restructuring
actions were approved by the board of directors or management.
Adjustments to these estimates, shown in the tables above, were
credited to costs of goods sold in the respective year.

4. ASSET IMPAIRMENTS

During the fourth quarter of 2000, Solutia recorded a $76 million
($47 million aftertax) impairment charge to cost of goods sold primarily
for the write-off of certain non-performing and non-strategic fiber
spinning, drawing and packaging equipment which supports several of
Integrated Nylon's product lines. Solutia also recorded an impairment
charge to cost of goods sold of $15 million ($10 million aftertax) for
the write-off of chlorobenzenes' production equipment. The impairments
were indicated by current period operating losses and projections of
continued losses primarily because of the noncompetitive cost positions
these businesses have and the competitive market conditions that they
face. The carrying values of the assets were written off as
determined by discounting expected future cash flows, using an
appropriate discount rate. The assumptions used in the cash flow
projections were not materially different from the market conditions
experienced in 2000. These conditions are not expected to improve
significantly in the foreseeable future. The cash flow assumptions
included a declining demand and market share combined with decreased
operating margins. Lower operating margins reflect the
non-competitive cost position of these businesses and the impact of
lower selling prices associated with an extremely competitive
operating environment.

During the second quarter of 2000, Solutia recorded a $6 million
($4 million aftertax) impairment charge to administrative expenses
for the write-down of capitalized software costs related to the
formation of the Astaris joint venture. The software had previously
been fully dedicated to Solutia's Phosphorus Derivatives business.
Impairment was indicated by a significant change in the extent and
manner in which Astaris was expected to utilize the asset under a
transition services agreement. The carrying value of the asset was
written down to its estimated fair value, as determined by
discounting expected future cash flows, using an appropriate
discount rate.

An impairment charge of $6 million ($4 million aftertax) was
recorded in the first quarter of 1999 to cost of goods sold
primarily to write down a bulk continuous filament spinning machine
as a result of management's decision to shut down the equipment due
to a noncompetitive cost position. The adjusted carrying value of
the machine is $0.5 million. The charge is due to a review under
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and Assets to Be Disposed Of," which indicated that the carrying
amount of the assets exceeded the identifiable, undiscounted cash
flows related to the assets. Fair value of the assets was determined
based on estimates

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

of market prices for the machinery. Operating income derived from
the machinery was minimal in the years ended December 31, 1999 and
1998.

5. INVESTMENTS IN AFFILIATES

In April 2000, Astaris L.L.C., a joint venture between Solutia
and FMC Corporation, started operations to manufacture and market
phosphorus chemicals. Solutia contributed its Phosphorus Derivatives
business to the joint venture in exchange for a 50 percent ownership
share. Net assets contributed to the venture totaled approximately
$87 million. Solutia accounts for the joint venture using the equity
method of accounting. During the third quarter of 2000, Solutia
received $85 million from Astaris representing a cash distribution
and repayment of working capital loans.

At December 31, 2000, Solutia's investments in affiliates
consisted principally of its 50 percent interests in the Flexsys,
Advanced Elastomers Systems and Astaris joint ventures for which
Solutia uses the equity method of accounting. Summarized combined
financial information for 100 percent of the Flexsys, AES and
Astaris joint ventures is as follows:

2000 1999 1998
------ ---- ----

Results of operations:
Net sales............................... $1,247 $869 $838
Gross profit............................ 327 267 256
Operating income........................ 138 108 116
Net income.............................. 95 85 94

Financial position:
Current assets.......................... $ 552 $398
Noncurrent assets....................... 744 518
Current liabilities..................... 347 275
Noncurrent liabilities.................. 334 48

6. INVENTORY VALUATION

The components of inventories were:

2000 1999
----- -----

Finished goods....................................... $ 305 $ 260
Goods in process..................................... 105 121
Raw materials and supplies........................... 108 109
----- -----
Inventories, at FIFO cost............................ 518 490
Excess of FIFO over LIFO cost........................ (161) (119)
----- -----
TOTAL................................................ $ 357 $ 371
===== =====

Inventories at FIFO approximate current cost. The effects of
LIFO inventory liquidations were not significant.

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES

The components of income before income taxes were:

2000 1999 1998
---- ---- ----

United States................................. $(23) $224 $285
Outside United States......................... 64 79 90
---- ---- ----
TOTAL......................................... $ 41 $303 $375
==== ==== ====

The components of income tax expense (benefit) charged to
operations were:

2000 1999 1998
---- ---- ----

Current:
U.S. federal.............................. $(63) $ 48 $ 66
U.S. state................................ (2) 6 3
Outside United States..................... 34 20 25
---- ---- ----
(31) 74 94
---- ---- ----

Deferred:
U.S. federal.............................. 46 18 21
U.S. state................................ (7) -- 6
Outside United States..................... (16) 5 5
---- ---- ----
23 23 32
---- ---- ----
TOTAL......................................... $ (8) $ 97 $126
==== ==== ====

During 2000, Germany reduced its corporate tax rate effective
January 1, 2001. In accordance with SFAS No. 109, "Accounting for
Income Taxes," Solutia recognized $7 million of income to record the
net effect of the change on deferred income tax assets and
liabilities. This adjustment is included as part of the deferred tax
provision above.

Factors causing Solutia's effective tax rate to differ from the
U.S. federal statutory rate were:

2000 1999 1998
---- ---- ----

U.S. federal statutory rate..................... 35% 35% 35%
U.S. state income taxes......................... (15) 2 2
Tax benefit of foreign sales corporation........ (13) (2) (2)
Taxes related to foreign income, net of
credits....................................... (17) (1) --
Valuation allowances............................ 32 -- --
Income from equity affiliates recorded net of
tax........................................... (37) (4) (2)
Other........................................... (6) 2 1
--- -- --
EFFECTIVE INCOME TAX RATE....................... (21)% 32% 34%
=== == ==

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Deferred income tax balances were related to:

2000 1999
----- -----

Property............................................. $(173) $(197)
Postretirement benefits.............................. 377 399
Restructuring reserves............................... 29 7
Environmental liabilities............................ 64 76
Intangible assets.................................... (66) --
Inventory............................................ -- (3)
Valuation allowances................................. (13) --
Other................................................ (21) 17
----- -----
NET DEFERRED TAX ASSETS.............................. $ 197 $ 299
===== =====

At December 31, 2000, foreign tax credit carryforwards available
to reduce possible future U.S. income taxes amounted to
approximately $13 million, all of which expire in 2005. Valuation
allowances have been provided for the foreign tax credit
carryforwards that are not likely to be utilized. Income taxes and
remittance taxes have not been recorded on $77 million in
undistributed earnings of subsidiaries, either because any taxes on
dividends would be offset substantially by foreign tax credits or
because Solutia intends to reinvest those earnings indefinitely. It
is not practicable to estimate the tax effect of remitting these
earnings to the United States.

8. DEBT OBLIGATIONS

Solutia's debt obligations include commercial paper, notes and
debentures. The weighted average interest rate on total debt
outstanding at December 31, 2000, was 6.7 percent and was 6.8
percent at December 31, 1999.

Debt Maturing in One Year

Debt maturing in one year consisted of commercial paper balances
of $485 million at December 31, 2000, and $511 million at December
31, 1999. Weighted average interest rates on commercial paper
balances were 6.6 percent during 2000, 5.5 percent in 1999 and 5.7
percent during 1998.

At December 31, 1999, $201 million of outstanding commercial
paper was reclassified from short-term debt to long-term debt based
on Solutia's intention to refinance that amount through the issuance
of euro 200 million of notes, due February 2005.

Solutia's commercial paper program is principally supported by
an $800 million, five-year revolving credit facility ($800 million
facility) with a syndicate of commercial banks. The $800 million
facility is also available for working capital and other general
corporate purposes. This agreement was amended during November 1999,
principally to allow the issuance of commercial paper in euros, as
well as U.S. dollars.

During November 2000, Solutia put in place a $250 million,
364-day multi-currency revolving credit agreement ($250 million
facility) with a syndicate of commercial banks. The $250 million
facility has terms that are generally consistent with the terms of
the $800 million facility. The $250 million facility supports
Solutia's commercial paper program and is available for working
capital and other general corporate purposes.

Both the $800 million facility and the $250 million facility
contain various covenants that, among other things, restrict
Solutia's ability to merge with another entity and require Solutia
to meet certain leverage and interest coverage ratios. Solutia does
not anticipate that future borrowings will be limited by the terms
of these agreements. Interest on amounts borrowed under these credit
facilities is expected to approximate money market rates.

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Long-Term Debt

Long-term debt consisted of the following:

2000 1999
---- ----

Commercial paper....................................... $ -- $201
6.5% notes due 2002.................................... 150 150
7.375% debentures due 2027............................. 300 300
6.72% debentures due 2037.............................. 150 150
6.25% euro notes due 2005.............................. 186 --
Other.................................................. 1 4
Unamortized debt discount.............................. (3) (3)
---- ----
TOTAL.................................................. $784 $802
==== ====

Other notes of $1 million at December 31, 2000, and $4 million
at December 31, 1999, were assumed in the acquisition of Vianova
Resins.

The notes and debentures are unsecured obligations. Interest is
payable semiannually, on April 15 and October 15 of each year. The
holders of the 2037 debentures have the right to require repayment
on October 15, 2004. The notes and debentures contain provisions
that, among other things, restrict Solutia's ability to create liens
against assets and its ability to enter into sale and leaseback
transactions.

9. FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair value of Solutia's long-term debt was $685 million
as of December 31, 2000, and $761 million as of December 31, 1999. These
estimates compare with the recorded amount of $784 million in 2000 and
$802 million in 1999.

The recorded amounts of cash, trade receivables, third-party
guarantees, accounts payable and short-term debt approximate their
fair values at both December 31, 2000, and December 31, 1999. The
estimated fair value of the company's foreign currency forward
contracts and natural gas contracts was not material. Notional
amounts for purchase contracts were $286 million at December 31,
2000, and $44 million at December 31, 1999, and for sell contracts
the notional amounts were $265 million at December 31, 2000, and
$44 million at December 31, 1999.

Fair values are estimated by the use of quoted market prices,
estimates obtained from brokers and other appropriate valuation
techniques and are based upon information available as of December 31,
2000, and December 31, 1999. The fair-value estimates do not necessarily
reflect the values Solutia could realize in the current market.

10. POSTRETIREMENT BENEFITS

Pension benefits are based on the employee's age, years of
service and/or compensation level. The qualified pension plan is
funded in accordance with Solutia's long-range projections of the
plan's financial conditions. These projections take into account
benefits earned and expected to be earned, anticipated returns on
pension plan assets and income tax and other regulations. Prior to
the spinoff, the majority of Solutia's employees participated in
Monsanto's noncontributory pension plans. In conjunction with the
spinoff, Monsanto assumed pension liabilities and received related
assets from those plans for its applicable active employees and for
certain former employees who left Monsanto in earlier years.

The majority of Solutia's employees also participate in benefit
programs that provide certain health care and life insurance
benefits for retired employees. Substantially all regular, full-time
U.S. employees and certain employees in other countries may become
eligible for these benefits if they reach retirement age while
employed by Solutia and have the required years of service. These
postretirement benefits are unfunded and are generally based on the

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

employee's age, years of service and/or compensation level. The
costs of postretirement benefits are accrued by the date the
employees become eligible for the benefits. In connection with the
spinoff, Solutia assumed retiree medical liabilities for its
applicable active employees and for approximately two-thirds of the
retired U.S. employees of Monsanto.

During the second quarter of 1998, Solutia amended certain of
its postretirement health care plans, primarily to adjust
cost-sharing provisions. The amendment resulted in a $161 million
reduction in the company's accumulated postretirement benefit
obligation, which is being amortized over the average remaining
service life of plan participants of approximately 12 years.

For 2000, 1999 and 1998, Solutia's pension and healthcare and
other benefit costs were as follows:

Pension Benefits Healthcare and Other Benefits
----------------------------- -----------------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ----- ----- -----

Service costs for benefits earned......... $ 32 $ 38 $ 33 $10 $11 $11
Interest cost on benefit obligation....... 131 132 130 53 49 54
Assumed return on plan assets............. (144) (153) (147) -- -- --
Prior service costs....................... 21 21 19 (18) (18) (12)
Transition asset.......................... (10) (10) (10) -- -- --
Unrecognized net (gain)/loss.............. 4 (3) (3) 7 6 1
Settlement................................ (23) -- -- -- -- --
----- ----- ----- --- --- ---
TOTAL..................................... $ 11 $ 25 $ 22 $52 $48 $54
===== ===== ===== === === ===

Components of the changes in fair value of plan assets, changes
in the benefit obligation and the funding status of Solutia's
postretirement plans are as follows:

Healthcare and
Pension Benefits Other Benefits
------------------- ---------------
2000 1999 2000 1999
------ ------ ---- ----

CHANGES IN FAIR VALUE OF PLAN ASSETS
Fair value of plan assets at January 1.................. $1,973 $1,910 $ -- $ --
Actual return on plan assets............................ 92 349 -- --
Acquisitions............................................ -- 2 -- --
Settlements............................................. (37) -- -- --
Benefits paid........................................... (304) (288) -- --
------ ------ ---- ----
FAIR VALUE OF PLAN ASSETS AT DECEMBER 31................ $1,724 $1,973 $ -- $ --
------ ------ ---- ----
CHANGES IN BENEFIT OBLIGATION
Benefit obligation at January 1......................... $1,833 $1,983 $720 $726
Service costs........................................... 32 38 10 11
Interest cost........................................... 131 132 53 49
Participant contributions............................... -- -- 7 2
Actuarial gains and losses.............................. 111 (54) 51 12
Acquisitions............................................ -- 21 -- --
Settlements............................................. (37) -- (17) --
Benefits paid........................................... (326) (300) (92) (80)
Plan amendments......................................... 2 13 -- --
------ ------ ---- ----
BENEFIT OBLIGATION AT DECEMBER 31....................... $1,746 $1,833 $732 $720
====== ====== ==== ====

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Plan assets consist principally of common stocks and U.S.
government and corporate obligations. Contributions to the pension
benefit plans were neither required nor made in 2000 and 1999
because Solutia's principal pension plan is adequately funded, using
assumed returns.

The funded status of Solutia's postretirement benefit plans at
December 31, 2000, and 1999 was as follows:

Healthcare and
Pension Benefits Other Benefits
----------------- -----------------
2000 1999 2000 1999
----- ----- ----- -----

FUNDED STATUS............................................... $ (22) $ 140 $(732) $(720)
Unrecognized actuarial (gain)/loss.......................... (294) (464) 65 18
Unrecognized prior service costs............................ 135 149 (141) (159)
Additional liability........................................ (13) (25) -- --
Unrecognized transition (gain)/loss......................... (5) (13) -- --
----- ----- ----- -----
ACCRUED NET LIABILITY AT DECEMBER 31........................ $(199) $(213) $(808) $(861)
===== ===== ===== =====

The accrued net liability was included in:

Healthcare and
Pension Benefits Other Benefits
----------------- -----------------
2000 1999 2000 1999
----- ----- ----- -----

Current postretirement liabilities.......................... $ -- $ -- $ (78) $ (86)
Long-term postretirement liabilities........................ (211) (223) (730) (775)
Less: Other assets.......................................... 12 10 -- --
----- ----- ----- -----
ACCRUED NET LIABILITY....................................... $(199) $(213) $(808) $(861)
===== ===== ===== =====

Certain of Solutia's pension benefit plans are unfunded and
therefore have accumulated benefit obligations in excess of plan
assets. Information regarding these unfunded plans is as follows:

2000 1999
---- ----

Projected benefit obligation............................ $25 $30
Accumulated benefit obligation.......................... 23 24
Fair value of plan assets............................... -- --

The significant actuarial assumptions used to estimate the
projected benefit obligation for the company's principal pension,
healthcare and other benefit plans were as follows:

Healthcare and
Pension Benefits Other Benefits
----------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----

Discount rate............................................... 7.25% 7.50% 7.25% 7.50%
Assumed long-term rate of return on plan assets............. 9.50% 9.50% -- --
Annual rates of salary increase (for plans that base
benefits on final compensation level)..................... 4.25% 4.50% -- --
Assumed trend rate for healthcare costs..................... -- -- 5.00% 5.25%
Ultimate trend rate for healthcare costs.................... -- -- 5.00% 5.25%

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A 1 percent change in the assumed health care cost trend rates
would have the following effect as of December 31, 2000:

1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------

Effect on total service and interest
cost components........................ $ 1 $ (1)
Effect on postretirement benefit
obligation............................. 12 (13)

11. EMPLOYEE SAVINGS PLANS

In connection with the spinoff, Monsanto common stock held by
the Monsanto Employee Stock Ownership Plan (ESOP) and related
Monsanto ESOP borrowings were allocated between Solutia and Monsanto.
As a result of this allocation, Solutia received 2.4 million shares
of Monsanto common stock and assumed $29 million of ESOP debt to third
parties. Simultaneously, Solutia created its own ESOP, established a
trust to hold the Monsanto shares, and issued a $29 million loan to the
trust. The trust used the proceeds of the loan to repay the assumed
third-party debt. Subsequent to the spinoff, the ESOP trust was required
by government regulations to divest its holdings of Monsanto common stock
and to use the proceeds to acquire Solutia common stock. The divestiture
of Monsanto common stock and the purchase of Solutia common stock were
completed in early 1998. At inception, the trust held 10,737,097 shares of
Solutia common stock. As of December 31, 2000, there have been 9,143,358 shares
allocated to participants.

Substantially all U.S. employees of Solutia are eligible to
participate in the Solutia Inc. Savings and Investment Plan, a
401(k) plan. Shares held in the ESOP are used to make Solutia's
matching contribution to eligible participants' accounts under this
plan. The number of shares released is computed on each pay date
based on a formula that considers the participant contribution, the
Solutia matching rate and Solutia's closing stock price. Shares
allocated to participant accounts totaled 1,314,341 shares in 2000,
979,439 shares in 1999 and 622,598 shares in 1998, leaving 1,593,739
unallocated shares as of December 31, 2000. The value of these
contributions was $17 million in 2000, $18 million in 1999, and
$16 million in 1998. Compensation expense is equal to the cost of the
shares allocated to participants, less dividends paid on the shares
held by the ESOP. Information regarding the ESOP follows:

2000 1999 1998
---- ---- ----

Total ESOP expense............................. $10 $ 8 $6
Interest portion of total ESOP expense......... 1 2 2
Cash contributions............................. 10 10 7

12. STOCK OPTION PLANS

Solutia has two stock-based incentive plans under which awards
are being granted to officers and employees, the Solutia Inc. 2000
Stock-Based Incentive Plan and the Solutia Inc. 1997 Stock-Based
Incentive Plan. The 2000 plan authorizes up to 5,400,000, and the
1997 plan up to 7,800,000, shares of Solutia common stock for grants
of non-qualified and incentive stock options, stock appreciation
rights, restricted stock awards and bonus stock awards. The shares
used may be newly issued shares, treasury shares or a combination.
Under both plans, the exercise price of a stock option must be no
less than the fair market value of Solutia's common stock on the
option grant date. Additionally, the plans provide that the term of
any stock option granted may not exceed 10 years. At December 31,
2000, approximately 4,191,380 shares from the 2000 plan and 356,374
shares from the 1997 plan remained available for grants.

During 2000, non-qualified options to purchase 456,000 shares of
Solutia common stock were granted under the plans to current
executive officers and other senior executives as a group, and
non-qualified stock options to purchase 1,430,876 shares were
granted to other employees at an average exercise price of $13.98
per share. Total shares covered by options granted under the plans
to current executive officers and other senior executives as a group
totaled 2,099,000 and other employees totaled 6,631,268, through
December 31, 2000. The options granted to Solutia's

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

executive officers and other senior executives are performance
options that become exercisable upon the earlier of achievement of
specified share price targets or the ninth anniversary of the option
grant. The options granted to the other management employees are
time-based. They generally become exercisable in thirds, one-third
on each of the first three anniversaries of the option grant date.

The Solutia Inc. Non-Employee Director Compensation Plan
provides incentives to non-employee members of Solutia's board of
directors. This plan authorizes up to 400,000 shares for grants of
non-qualified stock options and for grants of deferred shares in
payment of all or a portion of the annual retainer for the
non-employee directors. Only treasury shares may be used. Under this
plan, the exercise price of a stock option must be no less than the
fair market value of Solutia's common stock on the grant date and
the term of any stock option granted under the plan may not exceed
10 years. At December 31, 2000, 257,717 shares of Solutia's common
stock remained available for grants under the plan. Shares covered
by options granted, and deferred shares credited to non-employee
directors' accounts totaled 25,167 in 2000, 34,333 in 1999 and
16,000 in 1998.

As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation," Solutia has elected to continue following the
guidance of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," for measurement and recognition of
stock-based transactions with employees. Accordingly, no
compensation cost has been recognized for Solutia's option plans.
Had the determination of compensation cost for these plans been
based on the fair value at the grant dates for awards under these
plans, consistent with the method of SFAS No. 123, Solutia's net
income would have been reduced to the pro forma amounts indicated
below:

2000 1999 1998
----- ----- -----

NET INCOME:
As reported............................. $ 49 $ 206 $ 249
Pro forma............................... 42 187 224
DILUTED EARNINGS PER SHARE:
As reported............................. $0.46 $1.80 $2.03
Pro forma............................... 0.39 1.63 1.82

Compensation expense resulting from the fair value method of
SFAS No. 123 may not be representative of compensation expense to be
incurred on a pro forma basis in future years. The fair value of
each option grant is estimated on the date of grant by use of the
Black-Scholes option-pricing model.

The following weighted-average assumptions were used for grants
of Solutia options in 2000, 1999 and 1998:

2000 1999 1998
---- ---- ----

Expected dividend yield........................ 0.2% 0.2% 0.2%
Expected volatility............................ 34.0% 34.0% 28.0%
Risk-free interest rates....................... 5.8% 6.0% 5.1%
Expected option lives (years).................. 5.0 5.0 5.0

The weighted-average fair values of options granted were $5.30
in 2000, $8.05 in 1999 and $9.33 in 1998.

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of the status of Solutia's stock option plans for
years ended December 31, 2000, 1999 and 1998 follows:

Outstanding
---------------------------------
Exercisable Weighted-Average
Shares Shares Exercise Price
----------- ---------- ----------------

December 31, 1997 9,517,858 27,892,400 $14.53
---------- ---------- ------
Granted............... 273,567 $27.12
Exercised............. (1,833,225) 12.19
Expired............... (475,637) 16.22
---------- ---------- ------
December 31, 1998......... 17,116,842 25,857,105 $14.79
---------- ---------- ------
Granted............... 2,054,658 $20.61
Exercised............. (678,710) 10.93
Expired............... (495,232) 18.43
---------- ---------- ------
December 31, 1999......... 18,852,246 26,737,821 $15.27
---------- ---------- ------
Granted............... 1,912,043 $13.98
Exercised............. (379,687) 6.74
Expired............... (1,279,514) 17.21
---------- ---------- ------
DECEMBER 31, 2000......... 23,590,921 26,990,663 $15.21
========== ========== ======

The following table summarizes information about stock options
outstanding at December 31, 2000:

OPTIONS OUTSTANDING:

Range of Weighted-Average
Exercise Remaining Weighted-Average
Prices Shares Contractual Life Exercise Price
- ----------------------- ---------- ---------------- ----------------

$ 3 to 7............... 4,353,760 2.4 $ 5.90
8 to 11.............. 50,029 7.0 10.58
12 to 15.............. 3,081,363 7.8 13.42
16 to 18.............. 13,206,730 6.0 16.44
19 to 22.............. 6,061,700 7.3 19.69
23 to 29.............. 237,081 7.4 27.65
---------- --- ------
$ 3 to 29.............. 26,990,663 5.9 $15.21
========== === ======

OPTIONS EXERCISABLE:

Range of Weighted-Average
Exercise Prices Shares Exercise Price
- ----------------------------------------- ---------- ----------------

$ 3 to 7................................. 4,353,760 $ 5.90
8 to 11................................ 28,862 9.74
12 to 15................................ 1,261,713 12.56
16 to 18................................ 13,206,730 16.44
19 to 22................................ 4,619,940 19.43
23 to 29................................ 119,916 27.49
---------- ------
$ 3 to 29................................ 23,590,921 $14.92
========== ======

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. CAPITAL STOCK

Solutia's board of directors declared a dividend of one
preferred stock purchase right for each share of Solutia's common
stock issued in the distribution of shares by Monsanto to its
shareholders on the effective date of the spinoff and authorized the
issuance of one right for each share of common stock issued after
the effective date of the spinoff until the earlier of the date the
rights become exercisable and the termination date of the rights
plan. If a person or group acquires beneficial ownership of 20
percent or more, or announces a tender offer that would result in
beneficial ownership of 20 percent or more, of Solutia's outstanding
common stock, the rights become exercisable. Then, for every right
held, the owner will be entitled to purchase one one-hundredth of a
share of a series of preferred stock for $125. If Solutia is
acquired in a business combination transaction while the rights are
outstanding, for every right held, the holder will be entitled to
purchase, for $125, common shares of the acquiring company having a
market value of $250. In addition, if a person or group acquires
beneficial ownership of 20 percent or more of Solutia's outstanding
common stock, for every right held, the holder (other than such
person or members of such group) will be entitled to purchase, for
$125, a number of shares of Solutia's common stock having a market
value of $250. Furthermore, at any time after a person or group
acquires beneficial ownership of 20 percent or more (but less than
50 percent) of Solutia's outstanding common stock, Solutia's board
of directors may, at its option, exchange part or all of the rights
(other than rights held by the acquiring person or group) for shares
of Solutia's common stock on a one-share-for-every-one-right basis.
At any time prior to the acquisition of such a 20 percent position,
Solutia can redeem each right for $0.01. The board of directors is
also authorized to reduce the aforementioned 20 percent thresholds
to not less than 10 percent. The rights expire in the year 2007.

The company has 10 million shares of preferred stock, par value
$0.01 per share, authorized. As of December 31, 2000, there were no
preferred shares issued or outstanding.

14. COMMITMENTS AND CONTINGENCIES

Commitments, principally in connection with uncompleted
additions to property, were approximately $7 million at December 31,
2000. Solutia was contingently liable as a guarantor principally in
connection with bank loans totaling approximately $16 million at
December 31, 2000. In addition, as of December 31, 2000, the company
was contingently liable under letters of credit, primarily related
to environmental remediation, totaling $37 million. Solutia's future
minimum payments under noncancelable operating leases and unconditional
purchase obligations are $30 million for 2001, $25 million for 2002,
$58 million for 2003, $18 million for 2004, $17 million for 2005 and
$87 million thereafter.

Solutia has entered into agreements with customers to supply a
guaranteed quantity of certain products annually at prices specified
in the agreements. In return, the customers have advanced funds to
Solutia to cover the costs of expanding capacity to provide the
guaranteed supply. Solutia has recorded the advances as deferred
credits and amortizes the amounts to income as the customers
purchase the products. The unamortized deferred credits were
approximately $171 million at December 31, 2000, and approximately
$183 million at December 31, 1999.

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The more significant concentrations in Solutia's trade
receivables at year-end were:

2000 1999
---- ----

U.S. chemical industry................................. $ 51 $ 51
U.S. carpet industry................................... 42 41
European glass industry................................ 38 50
European chemical industry............................. 101 28

Management does not anticipate losses on its trade receivables
in excess of established allowances.

Solutia's Statement of Consolidated Financial Position included
accrued liabilities of $181 million at December 31, 2000, and $201 million
at December 31, 1999, for the remediation of identified waste disposal
sites. Expenditures related to remediation activities were $29 million
in 2000, $22 million in 1999 and $22 million in 1998.

Uncertainties related to all of Solutia's environmental
liabilities include evolving government policy and regulations, the
method and extent of remediation and future changes in technology.
Because of these uncertainties, Solutia estimates that potential
future expenses associated with these liabilities could be an
additional $20 million to $30 million. Although the ultimate costs
and results of remediation of contaminated sites cannot be predicted
with certainty, they are not expected to have a material adverse
effect on Solutia's consolidated financial position, liquidity or
profitability in any one year.

On October 12, 2000, the printing ink resins unit and a small
phenolics production unit at Wiesbaden, Germany were severely
damaged by an explosion and fire. No fatalities, serious injuries or
environmental damage resulted from the incident. Solutia has
determined that all probable losses will be recovered from insurance
proceeds and has not recorded a loss from the incident. Solutia
anticipates that the insurance recoveries will exceed the net book
value of the plant assets and associated losses resulting in a gain.
The results of operations from these production units were not
material to Solutia's consolidated results of operations.

During the first quarter of 1999, Solutia recorded a $29 million
($18 million aftertax) charge to cost of goods sold to increase
reserves related to the anticipated settlement of two lawsuits
brought against Monsanto, for which Solutia assumed responsibility
in the 1997 spinoff from Monsanto, relating to the alleged discharge
of polychlorinated biphenyls ("PCBs") from the Anniston, Alabama
plant site, and to environmental remediation of the allegedly
affected areas. During the third quarter of 2000, Solutia paid
approximately $23 million for the settlement of these actions. The
remainder of the reserve will cover costs associated with
environmental remediation of the allegedly affected areas.

Because of the size and nature of its business, Solutia is a
party to numerous legal proceedings. Most of these proceedings have
arisen in the ordinary course of business and involve claims for
money damages. In addition, at the time of the spinoff, Solutia
assumed from Monsanto, under the Distribution Agreement, liabilities
related to specified legal proceedings. As a result, although
Monsanto remains the named defendant, Solutia is required to manage
the litigation and indemnify Monsanto for costs, expenses and
judgments arising from the litigation. Such matters arise out of the
normal course of business and relate to product liability;
government regulation, including environmental issues; employee
relations and other issues. Certain of the lawsuits and claims seek
damages in very large amounts. Although the results of litigation
cannot be predicted with certainty, management's belief is that the
final outcome of such litigation, except as noted below, will not
have a material adverse effect on Solutia's consolidated financial
position, liquidity or profitability in any one year.

Monsanto manufactured PCBs at the Anniston, Alabama plant from
1935 to 1971. Solutia is defending a number of actions in state and
federal court in Alabama relating to the alleged emission of PCBs
and other allegedly hazardous materials from that plant. Plaintiffs
claim to suffer from various personal injuries and are allegedly
fearful of future illness. Some claim property damage. These cases
are being vigorously defended. Management does not believe that the
ultimate resolution of these cases will have a material adverse
impact on its consolidated financial

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

position or liquidity. However, it is possible that a resolution of
these cases may have a material adverse impact on Solutia's net
income in a given year, although it is impossible at this time to
estimate the range or amount of any such liability.

15. SUPPLEMENTAL DATA

Supplemental income statement data were:

2000 1999 1998
------ ---- ----

Raw material and energy costs........................... $1,300 $984 $994
Employee compensation and benefits...................... 824 728 757
Current income and other taxes.......................... 82 166 176
Rent expense............................................ 38 26 26
Technological expenses:
Research and development............................ 67 58 60
Engineering, commercial development and patent...... 24 22 23
------ ---- ----
Total technological expenses............................ 91 80 83
Interest expense:
Total interest cost................................. 101 53 49
Less capitalized interest........................... 18 13 6
------ ---- ----
Net interest expense.................................... 83 40 43

16. SEGMENT AND GEOGRAPHIC DATA

Solutia's management is organized around four strategic business
platforms: Performance Films, Resins and Additives, Specialties and
Integrated Nylon. Resins and Additives and Specialties have been
aggregated into the Specialty Products reportable segment because of
their similar economic characteristics, as well as their similar
products and services, production processes, types of customers and
methods of distribution. Solutia's reportable segments and their
major products are as follows:

Performance Films Specialty Products Integrated Nylon
- ------------------------------------ -------------------------------------- ------------------------------------

SAFLEX(R) plastic interlayer Resins and additives, including Intermediate "building block"
ALFTALAT(R) polyester resins, chemicals
KEEPSAFE(R), SAFLEX INSIDE(R) (in RESIMENE(R) and MAPRENAL(R)
Europe only) and KEEPSAFE crosslinkers and SYNTHACRYL(R)
MAXIMUM(R) glass for residential acrylic resins
security and hurricane protection
windows

LLUMAR(R), VISTA(R) and GILA(R) THERMINOL(R) heat transfer fluids Merchant polymer and nylon extrusion
professional and after-market polymers, including VYDYNE(R) and
window films ASCEND(TM)

Conductive and anti-reflective DEQUEST(R) water treatment chemicals Carpet fibers, including the WEAR-
coated films and deep-dyed films DATED(R) and ULTRON VIP(R) brands

GELVA(R) pressure-sensitive SKYDROL(R) hydraulic fluids and Industrial nylon fibers
adhesives SKYKLEEN(R) cleaning fluids for
aviation

Process research, process development, ACRILAN(R) acrylic fibers for
scale-up capabilities and small apparel, upholstery fabrics, craft
scale manufacturing for the yarns and other applications
pharmaceutical industry

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Accounting policies of the segments are the same as those
described in the summary of significant accounting policies in Note 1.
However, segment profit reflects only operating expenses that are
directly attributable to the segment. Unallocated service costs are
managed centrally and primarily include costs of technology,
engineering and manufacturing services that are provided to the
segments. These amounts also include corporate administration costs.
The company accounts for intersegment sales at agreed upon transfer
prices. Intersegment sales are eliminated in consolidation. Segment
assets consist primarily of customer receivables, finished goods
inventories and fixed assets directly associated with the production
processes of the segment (direct fixed assets). Segment depreciation
and amortization is based upon direct fixed assets. Unallocated
assets consist primarily of goodwill, identified intangible assets,
deferred taxes, certain investments in equity affiliates and
indirect fixed assets.

Solutia's 2000, 1999 and 1998 segment information follows:

Year Ended December 31,
---------------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- -------------------------
INTER- Inter- Inter-
NET SEGMENT Net segment Net segment
SALES SALES PROFIT Sales Sales Profit Sales Sales Profit
------ ------- ------ ------ ------- ------ ------ ------- ------

SEGMENT:
Performance Films............. $ 731 $-- $ 185 $ 713 $-- $ 189 $ 614 $-- $ 168
Specialty Products............ 866 -- 182 615 2 159 613 3 152
Integrated Nylon.............. 1,580 1 160 1,508 4 289 1,613 4 376
------ --- ----- ------ --- ----- ------ --- -----
SEGMENT TOTALS.................... 3,177 1 527 2,836 6 637 2,840 7 696
RECONCILIATION TO CONSOLIDATED
TOTALS:
Sales eliminations............ (1) (1) (6) (6) (7) (7)
Other revenues................ 9 -- 2
Less unallocated service
costs:
Cost of goods sold........ (207) (124) (70)
Marketing, administrative
and technological
expenses................ (263) (216) (240)
Amortization expense.......... (33) (3) --
Equity earnings from
affiliates.................. 35 36 25
Interest expense.............. (83) (40) (43)
Gain on sale of Polymer
Modifiers business.......... 73 -- --
Other income (expense)--net... (8) 13 7
------ --- ------ --- ------ ---
CONSOLIDATED TOTALS:
NET SALES..................... $3,185 $-- $2,830 $-- $2,835 $--
====== === ----- ====== === ----- ====== === -----
INCOME BEFORE INCOME TAXES.... $ 41 $ 303 $ 375
===== ===== =====

Year Ended December 31,
------------------------------------------------------------------------------
2000 1999
------------------------------------ ------------------------------------
DEPRECIATION Depreciation
CAPITAL AND Capital and
ASSETS EXPENDITURES AMORTIZATION Assets Expenditures Amortization
------ ------------ ------------ ------ ------------ ------------

SEGMENT:
Performance Films... $ 411 $ 26 $ 28 $ 484 $ 21 $ 30
Specialty
Products........... 508 29 27 677 8 18
Integrated Nylon.... 1,041 137 58 985 189 57
------ ---- ---- ------ ---- ----
SEGMENT TOTALS....... $1,960 $192 113 $2,146 218 105
RECONCILIATION TO
CONSOLIDATED TOTALS:
Unallocated
amounts............ 1,621 29 78 1,624 39 46
------ ---- ---- ------ ---- ----
CONSOLIDATED
TOTALS.............. $3,581 $221 $191 $3,770 $257 $151
====== ==== ==== ====== ==== ====

Year Ended December 31,
------------------------------------
1998
------------------------------------
Depreciation
Capital and
Assets Expenditures Amortization
------ ------------ ------------

SEGMENT:
Performance Films... $ 371 $ 24 $ 27
Specialty
Products........... 324 20 19
Integrated Nylon.... 887 81 56
------ ---- ----
SEGMENT TOTALS....... $1,582 125 102
RECONCILIATION TO
CONSOLIDATED TOTALS:
Unallocated
amounts............ 1,183 33 45
------ ---- ----
CONSOLIDATED
TOTALS.............. $2,765 $158 $147
====== ==== ====

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Solutia's geographic information for 2000, 1999 and 1998
follows:

Net Sales Long-Lived Assets
-------------------------------- -------------------
2000 1999 1998 2000 1999
------ ------ ------ ------ ------

U.S.......................................... $1,939 $1,992 $2,009 $ 899 $1,001
Other countries.............................. 1,246 838 826 306 315
------ ------ ------ ------ ------
CONSOLIDATED TOTALS.......................... $3,185 $2,830 $2,835 $1,205 $1,316
====== ====== ====== ====== ======

17. QUARTERLY DATA--UNAUDITED

First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ------

Net Sales........................... 2000 $ 846 $ 834 $ 774 $ 731 $3,185
1999 652 711 731 736 2,830

Gross Profit........................ 2000 199 158 143 (14) 486
1999 105 193 183 171 652

Operating Income.................... 2000 79 37 35 (127) 24
1999 26 102 94 72 294

Net Income.......................... 2000 51 4 78 (84) 49
1999 23 71 61 51 206

Basic Earnings per Share............ 2000 0.47 0.04 0.75 (0.82) 0.46
1999 0.21 0.64 0.55 0.46 1.86

Diluted Earnings per Share.......... 2000 0.46 0.04 0.74 (0.81) 0.46
1999 0.20 0.61 0.53 0.46 1.80

Common Stock Price:
2000............................ HIGH 17.19 15.56 15.69 13.00 17.19
LOW 11.63 11.25 10.38 10.88 10.38

1999............................ High 24.38 26.31 22.94 18.88 26.31
Low 15.88 16.06 16.13 13.50 13.50

Net income in the second quarter of 2000 includes special net
aftertax charges of $31 million principally associated with the
formation and start-up of the Astaris joint venture and Solutia's
share of restructuring and asset impairment charges recorded by the
Flexsys joint venture. Net income in the third quarter of 2000
includes a $46 million aftertax gain on sale of the Polymer
Modifiers business and income of $7 million recorded in income taxes
related to changes in German income tax laws. Net income in the
fourth quarter of 2000 includes restructuring and asset impairment
charges of $96 million aftertax.

Net income in the first quarter of 1999 includes aftertax
charges of $18 million related to exiting Integrated Nylon's ammonia
business, $4 million related to the write down of an Integrated
Nylon bulk continuous filament spinning machine to fair value and
$18 million related to the anticipated settlement of certain
property claims litigation involving the Anniston, Alabama plant
site.

Under SFAS No. 128, "Earnings per Share," the quarterly and
total year calculations of basic and diluted earnings per share are
based on weighted average shares outstanding for that quarterly or
total year period, respectively. As a result, the sum of diluted
earnings per share for the quarterly periods may not equal total
year earnings per share.

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. SUBSEQUENT EVENTS

Segment and Geographic Data

The following information presents the required segment disclosures
giving effect for the reorganization described above and supercedes the
disclosures presented in Note 16.

PERFORMANCE FILMS SPECIALTY PRODUCTS INTEGRATED NYLON
----------------- ------------------ ----------------

Accounting policies of the segments are the same as those used in
the preparation of Solutia's consolidated financial statements.
Solutia evaluates the performance of its operating segments based on
segment earnings before interest expense and income taxes (EBIT),
which includes marketing, administrative, technological and
amortization expenses and other non-recurring charges such as
restructuring and asset impairment charges that can be directly
attributable to the operating segment. Certain expenses and other
items that are managed outside of the segments are excluded. These
unallocated items consist primarily of corporate expenses, equity
earnings from affiliates, interest expense, other income--net and
expense items, and certain non-recurring items such as gains and
losses on asset dispositions and restructuring charges that are not
directly attributable to the operating segment. Solutia accounts for
intersegment sales at agreed upon transfer prices. Intersegment sales
are eliminated in consolidation. Segment assets consist primarily of
customer receivables, raw materials and finished goods inventories,
fixed assets, goodwill and identified intangible assets directly
associated with the production processes of the segment (direct fixed
assets). Segment depreciation and amortization are based upon direct
tangible and intangible assets. Unallocated assets consist primarily
of deferred taxes, certain investments in equity affiliates and
indirect fixed assets.

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Solutia's 2000, 1999 and 1998 segment information follows:

Year Ended December 31,
---------------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------
INTER- INTER- INTER-
NET SEGMENT NET SEGMENT NET SEGMENT
SALES SALES PROFIT SALES SALES PROFIT SALES SALES PROFIT
------ ------- ------ ------ ------- ------ ------ ------- ------

SEGMENT:
Performance Films............. $ 692 $-- $ 106 $ 669 $-- $ 126 $ 570 $-- $ 103
Specialty Products............ 1,004 -- 32 760 2 119 775 3 124
Integrated Nylon.............. 1,490 1 (29) 1,407 4 161 1,497 4 260
------ --- ----- ------ --- ----- ------ --- -----
SEGMENT TOTALS.................... 3,186 1 109 2,836 6 406 2,842 7 487
RECONCILIATION TO CONSOLIDATED
TOTALS:
Sales eliminations............ (1) (1) (6) (6) (7) (7)
Corporate expenses............ (107) (111) (108)
Equity earnings from
affiliates.................. 37 38 31
Interest expense.............. (83) (40) (43)
Gain on sale of Polymer
Modifiers business.......... 73 -- --
Other income (expense)--net... 12 10 8
------ --- ------ --- ------ ---
CONSOLIDATED TOTALS:
NET SALES..................... $3,185 $-- $2,830 $-- $2,835 $--
====== === ----- ====== === ----- ====== === -----
INCOME BEFORE INCOME TAXES.... $ 41 $ 303 $ 375
===== ===== =====

YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------
DEPRECIATION DEPRECIATION
CAPITAL AND CAPITAL AND
ASSETS EXPENDITURES AMORTIZATION ASSETS EXPENDITURES AMORTIZATION
------ ------------ ------------ ------ ------------ ------------

SEGMENT:
Performance Films... $ 565 $ 28 $ 44 $ 663 $ 21 $ 42
Specialty
Products........... 1,144 31 61 1,274 20 29
Integrated Nylon.... 1,102 159 83 1,089 210 79
------ ---- ---- ------ ---- ----
SEGMENT TOTALS....... $2,811 $218 $188 $3,026 $251 $150
RECONCILIATION TO
CONSOLIDATED TOTALS:
Unallocated
amounts............ 770 3 3 744 6 1
------ ---- ---- ------ ---- ----
CONSOLIDATED
TOTALS.............. $3,581 $221 $191 $3,770 $257 $151
====== ==== ==== ====== ==== ====

YEAR ENDED DECEMBER 31,
------------------------------------
1998
------------------------------------
DEPRECIATION
CAPITAL AND
ASSETS EXPENDITURES AMORTIZATION
------ ------------ ------------

SEGMENT:
Performance Films... $ 435 $ 33 $ 36
Specialty
Products........... 479 24 27
Integrated Nylon.... 1,003 97 81
------ ---- ----
SEGMENT TOTALS....... $1,917 $154 $144
RECONCILIATION TO
CONSOLIDATED TOTALS:
Unallocated
amounts............ 848 4 3
------ ---- ----
CONSOLIDATED
TOTALS.............. $2,765 $158 $147
====== ==== ====

SOLUTIA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Solutia's geographic information for 2000, 1999 and 1998
follows:

NET SALES LONG-LIVED ASSETS
-------------------------------- -------------------
2000 1999 1998 2000 1999
------ ------ ------ ------ ------

Other Events

As discussed in Note 14, certain production facilities at Wiesbaden,
Germany were severely damaged by an explosion and fire. On March 27, 2001,
Solutia finalized insurance recoveries and, accordingly, recognized a $28
million gain ($17 million aftertax) during the first quarter of 2001 from
insurance settlements in excess of the net book value of plant assets and
associated losses.

As discussed in Note 14, the Company has been defending a number of
actions relating to the alleged emission of PCB's and other hazardous
materials. On April 14, 2001, Solutia reached an agreement to settle the
claims brought by 1,596 plaintiffs in one of the actions pending in the U.S.
District Court for the Northern District of Alabama. The settlement
agreement was approved by the court and will not have a material adverse
effect on Solutia's consolidated financial position, liquidity or
profitability in any one year.

On November 16, 2001, Solutia amended its $800,000,000 revolving
credit facility and terminated its $250,000,000 credit facility. Four of
Solutia's domestic subsidiaries are guarantors of the amended facility.
Borrowings under the amended facility are secured by liens on Solutia's
inventory and receivables and those of material domestic subsidiaries and
one foreign subsidiary, pledges of 65% of the voting stock of two foreign
subsidiaries, and specified principal properties. The aggregate amount of
our obligations entitled to the benefit of the lien on specified principal
properties will not exceed $236 million. The lenders under certain other
facilities have the right to share in this collateral. In addition, the
amended facility contains modified financial covenants.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

SOLUTIA INC.
------------------------------------------------
(Registrant)

/s/ James M. Sullivan
------------------------------------------------
Vice President and Controller
(Principal Accounting Officer)

DATE: DECEMBER 20, 2001

EXHIBIT INDEX

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

Exhibit
Number Description
- ------ -----------

23 Consent of Deloitte & Touche LLP

99.1 Press release of Solutia Inc. dated December 19, 2001

99.2 Amendment No. 3, dated as of November 15, 2001, to U.S. $800,000,000
Amended and Restated Five-Year Credit Agreement, dated as of
November 23, 1999, among Solutia Inc., the lenders named therein,
Bank of America, N.A., as Syndication Agent and Citibank, N.A., as
Administrative Agent