SOLUTIA INC, 424B1, 1997-10-17

SOLUTIA INC
424B1, 1997-10-17
CHEMICALS & ALLIED PRODUCTS

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<PAGE> 1
Filed pursuant to Rule 424(b)(1)
[SOLUTIA LOGO] Registration No. 333-36355

$600,000,000

SOLUTIA INC.
$150,000,000 6.50% NOTES DUE 2002
$300,000,000 7.375% DEBENTURES DUE 2027
$150,000,000 6.72% DEBENTURES DUE 2037

------------------------

Interest on the 6.50% Notes due 2002, on the 7.375% Debentures due 2027 and
on the 6.72% Debentures due 2037 (the Notes, the 2027 Debentures and the 2037
Debentures, collectively, the "Securities") of Solutia Inc. (the "Company" or
"Solutia") offered hereby is payable semiannually on April 15 and October 15 of
each year, commencing April 15, 1998. The Securities will be unsecured senior
obligations of the Company and will rank pari passu with each other and with all
other unsecured senior indebtedness of the Company. The Notes are not redeemable
at the option of the Company prior to maturity. The 2027 Debentures are
redeemable at any time and the 2037 Debentures are redeemable at any time after
October 15, 2004, in either case, in whole or in part, at the option of the
Company at a redemption price equal to the greater of (i) 100% of the principal
amount of such 2027 Debenture or such 2037 Debenture, respectively, or (ii) as
determined by an Independent Investment Banker (as defined herein), the sum of
the present values of the remaining scheduled payments of principal and interest
thereon (not including the portion of any such payments of interest accrued as
of the date of redemption) discounted to the date of redemption on a semiannual
basis (assuming a 360-day year consisting of twelve 30-day months) at the
Adjusted Treasury Rate (as defined herein), plus, in each case, accrued interest
thereon to the date of redemption.

The holder of each 2037 Debenture may elect to have such 2037 Debenture, or
any portion of the principal amount thereof that is a multiple of $1,000, repaid
on October 15, 2004 at 100% of the principal amount thereof, together with
accrued interest thereon to October 15, 2004. Such election, which is
irrevocable when made, must be made during the period commencing on August 15,
2004 and ending at the close of business on September 15, 2004. See "Description
of the Securities."

Each series of the Securities will be represented by one or more Global
Securities registered in the name of the nominee of The Depository Trust Company
or other successor depository appointed by the Company. Beneficial interests in
the Global Securities will be shown on, and transfers thereof will be effected
only through, records maintained by the depository and its participants. Except
as described herein, Securities in definitive form will not be issued. See
"Description of the Securities."

SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------

<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) DISCOUNT(2) COMPANY(1)(3)
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Per 6.50% Note due 2002................. 99.671% 0.600% 99.071%
Total................................... $149,506,500 $900,000 $148,606,500
Per 7.375% Debenture due 2027........... 99.221% 0.875% 98.346%
Total................................... $297,663,000 $2,625,000 $295,038,000
Per 6.72% Debenture due 2037............ 99.976% 0.625% 99.351%
Total................................... $149,964,000 $937,500 $149,026,500
</TABLE>

- ---------------
(1) Plus accrued interest from October 15, 1997.
(2) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of $934,000 payable by the Company.
------------------------

Each series of the Securities offered hereby is offered by the Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
Securities will be ready for delivery in book-entry form only through the
facilities of The Depository Trust Company in New York, New York on or about
October 21, 1997, against payment therefor in immediately available funds.

For the Debentures due 2027:
GOLDMAN, SACHS & CO. SALOMON BROTHERS INC

For the Notes due 2002 and the Debentures due 2037:
GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
J.P. MORGAN & CO.
NATIONSBANC MONTGOMERY SECURITIES, INC.
------------------------
The date of this Prospectus is October 16, 1997.
<PAGE> 2

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Securities being offered by this Prospectus. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information regarding the Company and the Securities set forth
in the Registration Statement and in the exhibits and schedules thereto. For
further information regarding the Company and the Securities, reference is
hereby made to the Registration Statement and to the exhibits and schedules
filed as a part thereof. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is hereby made to the
exhibit for a more complete description of the matter involved, and each
statement shall be deemed qualified in its entirety by such reference.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files periodic reports, proxy statements and other information
relating to its business, financial statements and other matters with the
Commission. The Registration Statement, including exhibits and schedules
thereto, and the reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the regional offices of the Commission located at 7 World Trade Center,
thirteenth floor, New York, New York 10048 and at the Northwestern Atrium
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of
such materials also can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission also maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission. The common stock, $.01 per share, of the Company (the "Company
Common Stock") is listed on The New York Stock Exchange, Inc. (the "NYSE") under
the symbol "SOI". Copies of the foregoing materials and other information
concerning the Company are also available for inspection at the NYSE, 20 Broad
Street, New York, New York 10005.

CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING OVERALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE> 3

PROSPECTUS SUMMARY

This summary is qualified by the more detailed information and financial
statements, including the notes thereto, set forth elsewhere in this Prospectus,
which should be read in its entirety. On September 1, 1997 (the "Distribution
Date"), Solutia became an independent public company as the result of the
distribution on that date by Monsanto Company ("Monsanto") of all of the
outstanding Company Common Stock to the stockholders of Monsanto on a
one-for-five basis (the "Spinoff"). Unless the context requires otherwise, (i)
"Solutia" or the "Company" refers to the Chemicals Business (as defined below)
of Monsanto for periods prior to the Distribution Date and to Solutia Inc. and
its consolidated subsidiaries for the periods on and after the Distribution Date
and (ii) the "Offerings" refer to the offerings of $150,000,000 aggregate
principal amount of the Company's 6.50% Notes due 2002 (the "Notes"),
$300,000,000 aggregate principal amount of the Company's 7.375% Debentures due
2027 (the "2027 Debentures"), and $150,000,000 aggregate principal amount of the
Company's 6.72% Debentures due 2037 (the "2037 Debentures" and, together with
the Notes and the 2027 Debentures, the "Securities").

THE COMPANY

Solutia manufactures and markets a broad range of chemical-based products
which are used to make or enhance the performance of consumer, household,
automotive and industrial goods. Upon the Spinoff, Solutia became an independent
public company. In the fiscal year ended December 31, 1996, the Company had net
sales of approximately $3.0 billion and operating income of approximately $33
million (approximately $281 million if the effect of $248 million of
restructuring costs and other unusual charges were excluded). At June 30, 1997,
the Company had total assets of approximately $2.5 billion. See "Selected
Historical Financial Data," "Unaudited Pro Forma Condensed Combined Financial
Statements" and "Business and Properties."

The Company's strategic focus is built on four key technology strengths:
polymer chemistry, phosphorus chemistry, fiber technology, and process
engineering expertise. These technologies are used in various combinations to
create value-added products in ten business units: Acrilan(R) Acrylic Fibers,
Carpet Fibers, Industrial Nylon Fibers, Industrial Products, Intermediates,
Nylon Plastics & Polymers, Phosphorus Derivatives, Polymer Modifiers, Resins,
and Saflex(R) Plastic Interlayer (collectively, the "Chemicals Business"). Three
business units -- Carpet Fibers, Intermediates and Saflex(R) Plastic Interlayer
- -- accounted for over 50% of the Company's total sales in 1996.

To compete effectively in its markets, the Company is implementing a
strategy which emphasizes the following key elements:

CORE PRODUCTS AND TECHNOLOGIES: The Company intends to focus on its
core products and technologies throughout its ten business units. The
Company will continue to invest in manufacturing technology, product
research and technical and marketing support in order to continually
improve its cost and quality positions as well as its applications support
and technical service.

AGGRESSIVE COST CONTROLS AND FOCUS ON PROFITABILITY: Over the past
several years, the Company has restructured its product portfolio to exit
underperforming businesses. The Company believes that additional expense
reductions can be achieved in manufacturing and administrative functions.

SELECTED GROWTH INITIATIVES: The Company intends to develop the growth
potential of its core chemistries and technologies through targeted new
product introductions, innovations in related fields and selective
expansions of its presence in international markets.

PERFORMANCE INCENTIVES: The Company plans to provide incentives for
employees to increase cash flow, earnings per share and shareholder value.

3
<PAGE> 4

The Company was incorporated in Delaware in April 1997 as a wholly owned
subsidiary of Monsanto in order to accomplish the Spinoff. Prior to the Spinoff,
Monsanto contributed the Chemicals Business to the Company. In connection with
the Spinoff, the Company assumed $1.029 billion of indebtedness from Monsanto,
primarily commercial paper, and certain other liabilities. See "Recent
Developments" and "Agreements with Monsanto -- Distribution Agreement."

All of the executive officers of the Company formerly served as officers or
other key employees of Monsanto. All of the management of the Company directly
involved in operating the businesses of the Company managed those businesses
when they were still owned by Monsanto. Currently, the Company and Monsanto have
no executive officers in common. One director of the Company is also a director
of Monsanto. See "Management."

THE OFFERINGS

Securities Offered.............. $150,000,000 aggregate principal amount of
Notes,

$300,000,000 aggregate principal amount of
2027 Debentures, and

$150,000,000 aggregate principal amount of
2037 Debentures.

Interest........................ Interest on the Notes, the 2027 Debentures
and the 2037 Debentures is payable
semiannually on April 15 and October 15 of
each year, commencing April 15, 1998, at the
rates specified on the cover page of this
Prospectus.

Repayment at Option of
Holders......................... The holder of each 2037 Debenture may elect
to have that 2037 Debenture, or any portion
of the principal amount thereof that is a
multiple of $1,000, repaid on October 15,
2004 at 100% of the principal amount thereof,
together with accrued interest to October 15,
2004. Such election, which is irrevocable
when made, must be made during the period
commencing on August 15, 2004 and ending at
the close of business on September 15, 2004.
The Notes and 2027 Debentures are not subject
to repayment at the option of the holder.

Redemption...................... The Notes are not redeemable at the option of
the Company prior to maturity. The 2027
Debentures are redeemable at any time and the
2037 Debentures are redeemable at any time
after October 15, 2004, in either case, in
whole or in part, at the option of the
Company upon not less than 30 nor more than
90 days' written notice at a redemption price
equal to the greater of (i) 100% of the
principal amount of such 2027 Debentures or
such 2037 Debentures, respectively, or (ii)
as determined by an Independent Investment
Banker (as defined herein), the sum of the
present values of the remaining scheduled
payments of principal and interest thereon
(not including the portion of any such
payments of interest accrued as of the date
of redemption) discounted to the date of
redemption on a semi-annual basis (assuming a
360-day year consisting of twelve 30-day
months) at the Adjusted Treasury Rate (as
defined herein), plus, in each case, accrued
interest thereon to the date of redemption.

4
<PAGE> 5

Ranking......................... The Securities will be unsecured senior
obligations of the Company and will rank pari
passu with each other and with all other
unsecured senior indebtedness of the Company.
The Securities are effectively subordinated
to all future indebtedness of the Company's
subsidiaries. Upon issuance of the
Securities, the Company will have no debt
outstanding which is senior to the
Securities.

Restrictive Covenants........... The Indenture (as defined herein) under which
each series of Securities is to be issued
contains a limited number of restrictive
covenants regarding, among other things, the
creation and existence of additional secured
indebtedness, sale and leaseback transactions
and mergers, consolidation and certain sales
of assets. See "Description of the
Securities."

Use of Proceeds................. The proceeds to the Company from the
Offerings will be used to refinance the
Company's commercial paper. See "Use of
Proceeds" and "Other Indebtedness of the
Company." The Company's commercial paper has
been used to refinance the approximately $1.0
billion of commercial paper issued by
Monsanto and assumed by the Company in
connection with the Spinoff (the "Assumable
Commercial Paper").

RISK FACTORS

Prospective purchasers of the Securities offered hereby should consider
carefully the information set forth under "Risk Factors," in addition to the
other information set forth in this Prospectus, before purchasing any of the
Securities.

5
<PAGE> 6

SUMMARY SELECTED HISTORICAL FINANCIAL DATA

The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Combined Financial Statements and
the related notes thereto that are included elsewhere in this Prospectus. This
selected historical financial data has been derived from the combined financial
statements of the Company for the five years ended December 31, 1996 and the six
months ended June 30, 1997 and 1996. During this time, the Chemicals Business,
now operated by the Company, was operated by Monsanto. The historical financial
information may not be indicative of the Company's future performance and does
not necessarily reflect what the financial position and results of operations of
the Company would have been had the Company operated as a separate, stand-alone
entity during the periods covered. Per share data has not been presented for the
historical information because the Company was not publicly held during the
periods presented below. In the opinion of management of the Company, the
unaudited combined financial data as of June 30, 1997 and June 30, 1996 and for
the six months ended June 30, 1997 and 1996 contain all adjustments necessary to
present fairly the financial position, results of operations and cash flows for
these interim periods, and the unaudited combined financial data for 1993 and
1992 have been prepared on a basis consistent with that of the audited financial
data. Principally because of factors related to the Spinoff, results for the
first six months of 1997 should not be annualized.

<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED FOR THE YEARS ENDED OR AS OF DECEMBER 31,
OR AS OF JUNE 30,
------------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
(UNAUDITED) (IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales(1)......................... $1,489 $1,454 $2,977 $2,964 $3,097 $3,028 $3,022
Operating income(2).................. 192 118 33 258 256 300 30
Other income (expense)............... 22 23 36 9 1 8 (11)
Income (loss) before income taxes.... 193 122 33 231 228 290 (10)
Net income (loss)(3)................. 127 83 32 147 149 192 (6)
OTHER STATISTICS:
Total assets......................... $2,529 $2,542 $2,483 $2,462 $2,435 $2,491 $2,543
Capital expenditures................. 64 92 192 179 187 179 229
Depreciation and amortization........ 67 82 166 162 219 224 262
Intercompany charges(4).............. 12 35 85 72 69 61 77
Interest expense(5).................. 21 19 36 36 29 19 29
Long-term debt(5).................... 0 0 0 0 0 0 0
</TABLE>

- ---------------
(1) Net sales for the Company included $140 million in 1995, $400 million in
1994, $407 million in 1993 and $419 million in 1992 for its rubber chemicals
business. In May 1995, this business was contributed by Monsanto to the
Flexsys, L.P. joint venture between Monsanto and Akzo Nobel N.V.
("Flexsys"). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(2) Operating income includes charges (credits) for restructuring and other
unusual items of $12 million in the six months ended June 30, 1997 and $248
million, $46 million, $34 million, $(43) million, and $150 million in the
years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The
1996 charges are associated with the closure or sale of certain facilities,
asset write-offs and workforce reductions. In addition, operating income in
1993 and 1992 includes $25 million and $12 million, respectively, for the
Company's rubber chemicals business. Operating income for this business was
not significant in 1994 and 1995.
(3) In 1992, Monsanto adopted Statement of Financial Accounting Standards
("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions", and No. 109, "Accounting for Income Taxes", and, as a
result, recorded a net aftertax charge of $540 million as a cumulative
effect of accounting changes. This net charge was not allocated to the
Company.
(4) Prior to the Spinoff, Monsanto provided certain general and administrative
services to the Company, including finance, legal, treasury, information
systems and human resources. The cost for these services was allocated to
the Company based upon the percentage relationship between the net assets
utilized in the Company's operations and Monsanto's total net assets, as
well as other methods which management believes to be reasonable. The
Company's management estimates that the cost of such general and
administrative expenses on a stand-alone basis would have been approximately
$46 million in 1996.
(5) Monsanto uses a centralized approach to cash management and the financing of
its operations. As a result, cash and cash equivalents and debt were not
allocated to the Company in the historical financial statements of Monsanto.
Interest expense has been allocated to the Company in the Company's combined
financial statements to reflect the Company's pro rata share of the
financing structure of Monsanto. See Note 1 to the Company's Combined
Financial Statements.

6
<PAGE> 7

SUMMARY SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

The following selected unaudited pro forma combined financial data of the
Company give effect to the Spinoff and the Offerings. The pro forma information
is presented for illustrative purposes only and may not be indicative of the
results that would have been obtained had the transactions actually occurred on
the dates assumed, nor is it necessarily indicative of the future combined
results of operations or financial position of the Company. The summary selected
unaudited pro forma combined financial data should be read in conjunction with
the pro forma condensed combined financial statements and the related notes
thereto of the Company included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
(IN MILLIONS)
<S> <C> <C>
STATEMENT OF INCOME DATA:(1)
Net sales................................................. $ 1,480 $ 2,962
Operating income(2)....................................... 166 37
Net income(2)............................................. 102 17
OTHER PRO FORMA DATA:
Interest expense.......................................... 34 64
Interest income........................................... -- --
</TABLE>

<TABLE>
<CAPTION>
AS OF
JUNE 30,
1997
-------------
(IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:(3)
Cash and cash equivalents................................. $ 70
Total assets.............................................. 2,718
Short-term debt........................................... --
Long-term debt............................................ 1,029
Total liabilities......................................... 2,998
Stockholders' deficit..................................... (280)
</TABLE>

- ---------------
(1) The pro forma combined statement of income data gives effect to the Spinoff
and the Offerings as if both had occurred at the beginning of the periods
presented.
(2) Operating income includes charges for restructuring and other unusual items
of $12 million in the six months ended June 30, 1997 and $248 million in the
year ended December 31, 1996.
(3) The pro forma combined balance sheet data gives effect to the Spinoff and
the Offerings as if both had occurred as of June 30, 1997.

7
<PAGE> 8

RISK FACTORS

Investors should consider the following factors, as well as the other
information set forth in this Prospectus, before making an investment in the
Securities. Investors are also cautioned that this Prospectus includes
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. All statements regarding the Company's
expected future financial position, results of operations, cash flows,
dividends, financing plans, business strategy, budgets, projected costs and
capital expenditures, competitive positions, growth opportunities for existing
products, benefits from new technology, plans and objectives of management for
future operations, and markets for stock are forward-looking statements.
Although the Company believes its expectations reflected in such forward-looking
statements are based on reasonable assumptions, no assurance can be given that
such expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the expectations reflected in the
forward-looking statements herein include, among others, those set forth below
as well as general economic and business and market conditions, customer
acceptance of new products, efficacy of new technology, changes in U.S. and
non-U.S. laws and regulations, costs or difficulties relating to the
establishment of the Company as an independent entity and increased competitive
and/or customer pressure.

LACK OF OPERATING HISTORY AS A SEPARATE ENTITY

Prior to the Spinoff, the businesses now operated by the Company were
operated by Monsanto, a larger and more diversified enterprise. The Company has
no operating history as a separate company. In addition, prior to the Spinoff
the Company was not operated as a public company, and since the Spinoff the
Company has incurred and will continue to incur additional costs and expenses
associated with the management of a public company. Monsanto is not required to
provide assistance or services to the Company except as described in the
Distribution Agreement, the Transition Services Agreement, the Operating
Agreements (as such terms are defined herein) and the other agreements entered
into between the companies in connection with the Spinoff. In addition, some of
this assistance or these services may be terminated upon certain events,
including a change of control of the Company. See "Agreements with Monsanto."

The Spinoff may also result in some temporary dislocation and
inefficiencies to the business operations, as well as the organization and
personnel structure, of the Company.

Finally, the Company does not have the right to use the Monsanto name
except during a transition period. The Company has previously had the benefit of
the Monsanto name and reputation in the marketing of its products and in
dealings with government officials. The Company is currently engaged in
developing an identity for itself independent of the Monsanto name. However, the
Company may have to make additional advertising and promotion expenditures to
position its new name in its markets and cannot predict with certainty the
extent to which the substitution of a new name may adversely affect its
retention and acquisition of customers, its relations with governmental agencies
or its financial performance.

CYCLICALITY OF BUSINESS, PRICES AND COMPETITION

The Company is affected by certain general economic conditions,
particularly as they relate to the housing industry in the United States and the
automotive industry both in the United States and internationally, which are
cyclical businesses. In addition, global competition and customer demands for
efficiency will continue to make sustained price increases difficult. There can
be no assurance that the Company will not be affected in the future by the
foregoing conditions. In addition, while raw materials and fuels are generally
sufficiently available to cover current and projected requirements, their
continuing availability and price are subject to unscheduled plant interruptions
occurring during periods of high demand, or due to domestic and world market and
political conditions, as well as to the direct or indirect effect of U.S. and
other countries' government regulations. The impact of any

8
<PAGE> 9

future raw material and energy shortages on the Company's business as a whole or
in specific world areas cannot be accurately predicted. Operations and products
may, at times, be adversely affected by legislation, shortages or international
or domestic events.

The Company competes with many United States-based and international
companies, including companies that are larger and have significantly greater
financial resources than the Company. There can be no assurance that the Company
will be able to continue to compete successfully in its markets. Because the
Company competes, in part, on the basis of product performance, innovation and
quality, as well as manufacturing technology, significant product innovation or
technical advance by competitors could reduce the Company's competitive
advantage and thereby adversely affect the Company's business and financial
results.

INCREASED LEVERAGE OF THE COMPANY

On an historical basis, the Company was not allocated any of Monsanto's
debt. Effective as of the Spinoff, the Company balance sheet included
approximately $1.029 billion of debt, primarily the Assumable Commercial Paper
which was issued by Monsanto prior to the Spinoff and assumed by the Company
effective as of the Distribution Date. See Note 1 to the Company's Combined
Financial Statements. Since the Spinoff, the Company has refinanced the
Assumable Commercial Paper with the Company's own commercial paper. The
commercial paper is backed by $1.2 billion in revolving credit facilities of the
Company. Assuming the Spinoff and the Offerings had been consummated as of June
30, 1997, the Company would have had total debt of $1.029 billion and a
stockholders' deficit of $280 million, compared with the Company's historical
debt of $0 and total stockholders' equity of $859 million at June 30, 1997. The
Company's higher debt levels after the Spinoff can be expected to result in
increased interest expense to the Company compared with the amount previously
allocated to the Company by Monsanto. On a pro forma basis, the Company's annual
interest expense would have been approximately $64 million in 1996 had the
Spinoff and the Offerings occurred on January 1, 1996. See "Unaudited Pro Forma
Condensed Combined Financial Statements," and the Company's Combined Financial
Statements included elsewhere in this Prospectus.

ENVIRONMENTAL LIABILITIES

The Company is subject to various laws and government regulations
concerning environmental matters and employee safety and health in the United
States and other countries. U.S. state and federal authorities may seek fines
and penalties for violation of these laws.

Expenditures in 1996 were approximately $9 million for the Company's
environmental capital projects, and approximately $85 million for the management
of environmental programs, including the operation and maintenance of facilities
for environmental control. The Company estimates that during 1997 and 1998
approximately $15 million to $20 million per year will be spent on additional
capital projects for environmental protection and that expenses for the
management of environmental programs in 1997 and 1998 will continue at levels
comparable to 1996.

The Company's policy is to accrue costs for remediation of contaminated
sites in the accounting period in which the responsibility is established and
the cost is estimable. The Company had an accrued liability of $51 million as of
December 31, 1996 for Superfund sites. Because of uncertainties such as the
method and extent of remediation, the percentage of material attributable to the
Company at the sites relative to that attributable to other parties, and the
financial capabilities of the other potentially responsible parties (a "PRP") at
most sites, the Company currently estimates that potential future expenses could
be as much as an additional $10 million. The Company spent approximately $20
million in 1996 for remediation of Superfund sites. Similar expenditures can be
expected in future years.

9
<PAGE> 10

The Company had environmental reserves of $58 million as of December 31,
1996 for shut-down plants and third-party sites for which the Company is
assuming responsibility pursuant to the Distribution Agreement. The Company's
estimates of its liabilities 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. Subject to these uncertainties, the Company
currently estimates that potential future expenses could be as much as an
additional $50 million for these sites. The Company spent approximately $21
million in 1996 for remediation of these sites. Similar amounts can be expected
in the future.

For solid and hazardous waste remediation at the Company's operating
locations, the Company recognizes post-closure environmental costs and
remediation costs over the estimated remaining useful life of the related
facilities, not to exceed 20 years. The Company spent $18 million in 1996 for
remediation of these facilities and had an accrued liability of $41 million as
of December 31, 1996 for these sites. The Company estimates that closure costs
for these facilities will be an additional $70 million based upon existing
technology and other currently available information.

Effective January 1, 1997, the Company adopted the American Institute of
Certified Public Accounts' Statement of Position ("SOP") 96-1, "Environmental
Remediation Liabilities." SOP 96-1 establishes authoritative guidance regarding
the recognition, measurement and disclosure of environmental remediation
liabilities. The primary change in the Company's accounting principles
associated with the adoption of this SOP was an acceleration of the recognition
of certain environmental remediation liabilities at operating facilities. As a
result, the Company recorded an aftertax charge of $6 million in the first half
of 1997. Additional aftertax charges in the range of $9 million to $14 million
are anticipated in 1997 as the criteria for recording these liabilities are met.
These charges are in addition to the 1997 and 1998 estimated capital
expenditures for environmental projects previously described.

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 change in the Company's liquidity or financial position as
reflected in the Company's historical financial statements, but they could have
a material adverse effect on profitability in a given period. The impact of any
future changes in environmental laws and regulations on the Company's liquidity,
financial position and profitability cannot be predicted with accuracy.

See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Environmental Matters."

In addition, at the time of the Spinoff, the Company assumed from Monsanto,
pursuant to the Distribution Agreement, liabilities related to specified legal
proceedings, including claims for personal injury and for property damage with
respect to alleged environmental contamination. The results of such litigation
cannot be predicted with certainty. See "Business and Properties -- Legal
Proceedings."

ABSENCE OF PUBLIC MARKET FOR THE SECURITIES

The Securities are new issues of securities for which there is currently no
market. The Company does not intend to apply for listing of the Securities on
any securities exchange or on the National Association of Securities Dealers,
Inc. automated quotation system. If the Securities are traded after their
initial issuance, they may trade at a discount from their initial offering
price, depending upon prevailing interest rates, the market for similar
securities and other factors. The Underwriters have informed the Company that,
subject to applicable laws and regulations, they currently intend to make a
market in the Securities. However, the Underwriters are not obligated to do so,
and any such market making may be discontinued at any time without notice.
Therefore, no assurance can be given as to whether an active trading market will
develop for the Securities or, if such market

10
<PAGE> 11

develops, whether it will continue. See "Underwriting." If an active public
market does not develop, the market price and liquidity of the Securities may be
adversely affected.

CERTAIN TAX RISKS OF THE SPINOFF

In connection with the Spinoff, Monsanto received a ruling from the
Internal Revenue Service (the "IRS") to the effect, among other things, that the
Spinoff qualifies as a tax-free reorganization under Sections 355 and 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). Such a ruling, while
generally binding upon the IRS, is subject to certain factual representations
and assumptions provided by Monsanto. The Company has agreed to certain
restrictions on its future actions to provide further assurances that the
Spinoff will qualify as tax-free. If the Company fails to abide by such
restrictions and, as a result, the Spinoff fails to qualify as a tax-free
reorganization, then the Company will be obligated to indemnify Monsanto for any
resulting tax liability, which would be substantial. See "Agreements with
Monsanto -- Tax Sharing and Indemnification Agreement."

RATIO OF EARNINGS TO FIXED CHARGES
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
- ---------------- -----------------
<S> <C>
4.5 --
</TABLE>

Historical computation of earnings to fixed charges is not considered
meaningful because interest expense has been allocated to the Company in the
combined financial statements to reflect the Company's pro rata share of the
financing structure of Monsanto, but no debt was allocated from Monsanto. The
pro forma ratios of earnings to fixed charges are presented as if the Spinoff
and the Offerings had occurred as of the beginning of the periods presented. The
pro forma information is presented for illustrative purposes only and may not be
indicative of the results that would have been obtained had the transactions
actually occurred on the dates assumed, nor is it necessarily indicative of
future results. For purposes of calculating the pro forma ratio of earnings to
fixed charges, "earnings" represents pro forma income before income taxes, plus
fixed charges, less equity income of affiliated companies. "Fixed charges"
consist of pro forma interest on pro forma long-term debt and estimated interest
on rentals. For the year ended December 31, 1996, pro forma earnings were
approximately $9 million lower than the amount needed to cover fixed charges in
this year, as earnings in 1996 were impacted by $256 million of restructuring
and other unusual charges (see Note 4 to the Company's Combined Financial
Statements). Excluding these charges, the pro forma ratio of earnings to fixed
charges would have been 4.3. For the six months ended June 30, 1997, excluding
net unusual charges of $12 million for the period, the pro forma ratio of
earnings to fixed charges would have been 4.8. See "Unaudited Pro Forma
Condensed Combined Financial Statements."

11
<PAGE> 12

THE COMPANY

The Company manufactures and markets a broad range of chemical-based
products which are used to make or enhance the performance of consumer,
household, automotive and industrial goods. The Company became an independent
public company upon the Spinoff on September 1, 1997. For the fiscal year ended
December 31, 1996, the Company had net sales of approximately $3.0 billion, and
operating income of approximately $33 million (approximately $281 million if the
effect of $248 million of restructuring costs and other unusual charges were
excluded). The Company's business focus is built on strengths in four key
technologies: polymer chemistry, phosphorus chemistry, synthetic fiber
technology and process engineering expertise. The Company owns a number of
established trademarks, designating its proprietary products and processes.
These trademarks include Wear-Dated(R) residential carpet, Ultron(R) VIP
commercial carpet, Saflex(R) plastic interlayer for laminated glass, Acrilan(R)
acrylic fiber for apparel, craft yarn and upholstery, Phos-Chek(R) fire
retardant and Skydrol(R) hydraulic fluids for aircraft. The Company is also a
major producer of chemical intermediates -- "building block" chemicals used in
the manufacture of a wide variety of finished goods. The Company operates 24
manufacturing sites in four countries, and has offices and distribution
facilities worldwide. The Company currently makes approximately one-third of its
annual sales into markets outside of the United States. The Company relies on
research and development activities to generate new commercial applications for
its technologies, investing approximately 2.6% of sales in research and
development work each year. See "Selected Historical Financial Data," "Unaudited
Pro Forma Condensed Combined Financial Statements" and "Business and
Properties."

The principal corporate offices of the Company are located at 10300 Olive
Boulevard, P.O. Box 66760, St. Louis, Missouri 63166-6760 and the Company's
telephone number is (314) 674-1000.

RECENT DEVELOPMENTS

On the Distribution Date, all of the outstanding Company Common Stock was
distributed to the holders of the common stock, $2.00 par value, of Monsanto
("Monsanto Common Stock") on the record date for the Spinoff on a one-for-five
basis. The Company was incorporated in Delaware in April 1997 as a wholly owned
subsidiary of Monsanto in order to accomplish the Spinoff. To effect the
Spinoff, Monsanto contributed the Chemicals Business to the Company. The Company
Common Stock is listed for trading on the NYSE under the symbol "SOI". In
connection with the Spinoff, the Company assumed $1.029 billion of indebtedness
from Monsanto, primarily commercial paper. See "Capitalization."

On September 3, 1997, the Board of Directors of the Company (the "Company
Board") authorized the purchase of up to 5 million shares of Company Common
Stock. The Company currently plans to complete these purchases over the next two
years.

USE OF PROCEEDS

The proceeds to the Company from the sale of the Securities will be used to
refinance commercial paper which, as of September 19, 1997, had a weighted
average maturity of 25 days and a weighted average interest rate of 5.77%. The
commercial paper has been used to refinance the Assumable Commercial Paper
assumed from Monsanto in connection with the Spinoff. The Company received no
proceeds from the Assumable Commercial Paper. See "Other Indebtedness of the
Company."

12
<PAGE> 13

CAPITALIZATION

The following table sets forth the capitalization of the Company at June
30, 1997 and as adjusted as provided in the notes to the pro forma condensed
combined financial statements of the Company for the six months ended June 30,
1997 to reflect (i) the Spinoff and (ii) the Spinoff and the Offerings and the
application of the proceeds therefrom. See "Use of Proceeds."

<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------------------------
AS ADJUSTED
AS ADJUSTED FOR THE SPINOFF
ACTUAL(1) FOR THE SPINOFF(2) AND THE OFFERINGS
--------- ------------------ -----------------
(IN MILLIONS)
<S> <C> <C> <C>
LONG-TERM DEBT:
Commercial paper..................... $ -- $ 983 $ 383
Securities offered hereby............ -- -- 600
Other debt........................... -- 46 46
----- ------ -------
Total Long-Term Debt............ -- 1,029 1,029
Monsanto Company Equity................ 859 -- --
Stockholders' Deficit.................. -- (280) (280)
----- ------ -------
TOTAL CAPITALIZATION................... $ 859 $ 749 $ 749
===== ====== =======
</TABLE>

- ---------------

(1) Monsanto uses a centralized approach to cash management and the financing of
its operations. As a result, debt was not allocated to the Company in the
historical financial statements of Monsanto. See Note 1 to the Company's
Combined Financial Statements.

(2) In connection with the Spinoff, the Company assumed $983 million of
Assumable Commercial Paper and $46 million of other debt from Monsanto.

13
<PAGE> 14

SELECTED HISTORICAL FINANCIAL DATA

The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Combined Financial Statements and
the Notes thereto included elsewhere in this Prospectus. This selected
historical financial data has been derived from the combined financial
statements of the Company for the five years ended December 31, 1996 and the six
months ended June 30, 1997 and 1996. During this time, the Chemicals Business,
now operated by the Company, was operated by Monsanto. The historical financial
information may not be indicative of the Company's future performance and does
not necessarily reflect what the financial position and results of operations of
the Company would have been had the Company operated as a separate, stand-alone
entity during the periods covered. Per share data has not been presented for the
historical information because the Company was not publicly held during the
periods presented below. In the opinion of management of the Company, the
unaudited combined financial statements at June 30, 1997 and 1996 and for the
six months ended June 30, 1997 and 1996 contain all adjustments necessary to
present fairly the financial position, results of operations and cash flows for
such interim periods, and the unaudited combined financial data for 1993 and
1992 have been prepared on a basis consistent with that of the audited financial
data. Principally because of factors related to the Spinoff, results for the
first six months of 1997 should not be annualized.

14
<PAGE> 15

<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEARS ENDED OR AS OF
ENDED OR AS OF JUNE 30, DECEMBER 31,
-------------------------- ------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
(UNAUDITED) (IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net sales(1)...................... $1,489 $1,454 $2,977 $2,964 $3,097 $3,028 $3,022
Operating income(2)............... 192 118 33 258 256 300 30
Other income (expense)............ 22 23 36 9 1 8 (11)
Income (loss) before income
taxes........................... 193 122 33 231 228 290 (10)
Net income (loss)(3).............. 127 83 32 147 149 192 (6)
OTHER STATISTICS:
Total assets...................... $2,529 $2,542 $2,483 $2,462 $2,435 $2,491 $2,543
Capital expenditures.............. 64 92 192 179 187 179 229
Depreciation and amortization..... 67 82 166 162 219 224 262
Intercompany charges(4)........... 12 35 85 72 69 61 77
Interest expense(5)............... 21 19 36 36 29 19 29
Long-term debt(5)................. 0 0 0 0 0 0 0
</TABLE>

- ------------------------

(1) Net sales for the Company included $140 million in 1995, $400 million in
1994, $407 million in 1993 and $419 million in 1992 for its rubber chemicals
business. In May 1995, this business was contributed by Monsanto to Flexsys.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

(2) Operating income includes charges (credits) for restructuring and other
unusual items of $12 million in the six months ended June 30, 1997 and $248
million, $46 million, $34 million, $(43) million and $150 million in the
years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The
1996 charges are associated with the closure or sale of certain facilities,
asset write-offs and workforce reductions. In addition, operating income in
1993 and 1992 includes $25 million and $12 million, respectively, for the
Company's rubber chemicals business. Operating income for this business was
not significant in 1994 and 1995.

(3) In 1992, Monsanto adopted SFAS No. 106, "Employers' Accounting for
Post-retirement Benefits Other Than Pensions," and No. 109, "Accounting for
Income Taxes," and, as a result, recorded a net aftertax charge of $540
million as a cumulative effect of accounting changes. This net charge was
not allocated to the Company.

(4) Prior to the Spinoff, Monsanto provided certain general and administrative
services to the Company, including finance, legal, treasury, information
systems and human resources. The cost for these services was allocated to
the Company based upon the percentage relationship between the net assets
utilized in the Company's operations and Monsanto's total net assets, as
well as other methods which management believes to be reasonable. The
Company's management estimates that the cost of such general and
administrative expenses on a stand-alone basis would have been approximately
$46 million in 1996.

(5) Monsanto uses a centralized approach to cash management and the financing of
its operations. As a result, cash and cash equivalents and debt were not
allocated to the Company in the historical financial statements of Monsanto.
Interest expense has been allocated to the Company in the Company's combined
financial statements to reflect the Company's pro rata share of the
financing structure of Monsanto. See Note 1 to the Company's Combined
Financial Statements.

15
<PAGE> 16

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined statements of income
for the six months ended June 30, 1997 and for the year ended December 31, 1996
and the unaudited pro forma condensed combined statement of financial position
as of June 30, 1997 give effect to the Spinoff and the Offerings. The pro forma
condensed combined statements of income are presented as if the Spinoff and the
Offerings had occurred as of the beginning of the periods presented and the pro
forma condensed combined statement of financial position is presented as if the
Spinoff and the Offerings had occurred on June 30, 1997. The pro forma
information is presented for illustrative purposes only and may not be
indicative of the results that would have been obtained had the transactions
actually occurred on the dates assumed, nor is it necessarily indicative of
future results.

The pro forma condensed combined financial statements should be read in
conjunction with the historical financial statements and the related notes
thereto of the Company included in this Prospectus.

16
<PAGE> 17

PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
UNAUDITED

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
<S> <C> <C> <C>
NET SALES.......................................... $1,489 $ (9)(A) $ 1,480
Cost of goods sold................................. 1,124 (1)(B) 1,121
1(C)
(3)(D)
---------- ----------- -----------
GROSS PROFIT....................................... 365 (6) 359
Marketing, administrative and technological
expenses......................................... 173 11(B) 193
(9)(D)
18(E)
---------- ----------- -----------
OPERATING INCOME(1)................................ 192 (26) 166
Interest expense................................... (21) (13)(F) (34)
Other income -- net................................ 22 22
---------- ----------- -----------
INCOME BEFORE INCOME TAXES......................... 193 (39) 154
Income taxes....................................... 66 (14)(G) 52
---------- ----------- -----------
NET INCOME......................................... $ 127 $ (25) $ 102
========= ============ ==============
EARNINGS PER SHARE................................. $ 1.05 $ 0.84
========= ==============
Shares used in the calculation of earnings per
share(2)......................................... 121.3 121.3
========= ==============
Ratio of earnings to fixed charges(3)(4)........... 4.5
==============
</TABLE>

- ---------------
(1) The Company's historical operating income for the six months ended June 30,
1997 was negatively affected by net unusual charges of $12 million. For a
description of these items, see Notes 2, 6 and 7 to the Company's Interim
Combined Financial Statements.

(2) Based on 606.5 million shares of Monsanto Common Stock, and the distribution
ratio in the Spinoff of one share of Company Common Stock for every five
shares of Monsanto Common Stock.

(3) Historical computation of earnings to fixed charges is not considered
meaningful because interest expense has been allocated to the Company in the
combined financial statements to reflect the Company's pro rata share of the
financing structure of Monsanto, but no debt was allocated from Monsanto.
Excluding the net unusual charges of $12 million indicated in Note (1)
above, the ratio of earnings to fixed charges would have been 4.8.

See Notes to Pro Forma Condensed Combined Financial Statements.

17
<PAGE> 18

PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE DATA)
UNAUDITED

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
NET SALES........................................ $2,977 $ (15)(A) $ 2,962
Cost of goods sold............................... 2,325 3 (B) 2,313
3 (C)
(18)(D)
------ ----- ------
GROSS PROFIT..................................... 652 (3) 649
Marketing, administrative and technological
expenses....................................... 427 14 (B) 420
(67)(D)
46 (E)
Restructuring expenses........................... 192 192
------ ----- ------
OPERATING INCOME(1).............................. 33 4 37
Interest expense................................. (36) (28)(F) (64)
Other income -- net.............................. 36 36
------ ----- ------
INCOME BEFORE INCOME TAXES....................... 33 (24) 9
Income taxes..................................... 1 (9)(G) (8)
------ ----- ------
NET INCOME....................................... $ 32 $ (15) $ 17
====== ===== ======
EARNINGS PER SHARE............................... $ 0.27 $ 0.14
====== ======
Shares used in the calculation of earnings per
share(2)....................................... 119.8 119.8
====== ======
Ratio of earnings to fixed charges(3)(4)......... --
======
</TABLE>

- ---------------
(1) The Company's historical operating income in 1996 was negatively affected by
restructuring and other unusual charges which totaled $248 million. For a
description of these charges, see Note 4 to the Company's Combined Financial
Statements.

(2) Based on 599 million shares of Monsanto Common Stock and the distribution
ratio in the Spinoff of one share of Company Common Stock for every five
shares of Monsanto Common Stock.

(3) Historical computation of earnings to fixed charges is not considered
meaningful because interest expense has been allotted to the Company in the
combined financial statements to reflect the Company's pro rata share of the
financing structure of Monsanto, but no debt was allocated from Monsanto.

(4) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represents pro forma income before income taxes, plus fixed
charges, less equity income of affiliated companies. "Fixed charges" consist
of pro forma interest on pro forma long-term debt and estimated interest on
rentals. Pro forma earnings were approximately $9 million lower than the
amount needed to cover fixed charges in this year, as earnings in 1996 were
impacted by $256 million of restructuring and other unusual charges (see
Note 4 to the Company's Combined Financial Statements). Excluding these
charges, the ratio of earnings to fixed charges would have been 4.3.

See Notes to Pro Forma Condensed Combined Financial Statements.

18
<PAGE> 19

PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL POSITION
AS OF JUNE 30, 1997
UNAUDITED

<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.............................. $ 75(H) $ 70
(5)(I)
Trade receivables...................................... $ 430 430
Miscellaneous receivables and prepaid expenses......... 108 108
Deferred income tax benefit............................ 110 (6)(J) 104
Inventories............................................ 288 288
------ ------- ------
TOTAL CURRENT ASSETS.............................. 936 64 1,000
------ ------- ------
Net property, plant and equipment...................... 907 907
Investment in affiliates............................... 388 25(K) 413
Other assets........................................... 298 105(L) 398
(10)(J)
5(I)
------ ------- ------
TOTAL ASSETS........................................... $2,529 $ 189 $ 2,718
====== ======= ======
LIABILITIES AND MONSANTO COMPANY EQUITY (STOCKHOLDERS' DEFICIT)
Accounts payable....................................... $ 191 $ 191
Accrued liabilities.................................... 420 $ 32(L) 460
8(J)
------ ------- ------
TOTAL CURRENT LIABILITIES......................... 611 40 651
------ ------- ------
Long-term debt......................................... 1,029(M) 1,029
Post-retirement liabilities............................ 615 303(L) 918
Other liabilities...................................... 444 (44)(L) 400
Monsanto Company equity................................ 859 75(H) --
(24)(J)
(25)(K)
(1,029)(M)
(186)(L)
280(N)
Stockholders' deficit.................................. (280)(N) (280)
------ ------- ------
TOTAL LIABILITIES AND MONSANTO COMPANY EQUITY
(STOCKHOLDERS' DEFICIT).............................. $2,529 $ 189 $ 2,718
====== ======= ======
</TABLE>

See Notes to Pro Forma Condensed Combined Financial Statements.

19
<PAGE> 20

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
UNAUDITED

(A) To record the estimated effect of new selling prices and arrangements on
former intercompany sales from the Company to Monsanto. The Company sells
certain products to Monsanto under arms-length long-term contracts with
formula-based or market-based pricing mechanisms. The Company also acts as
the agent for Monsanto in purchasing additional quantities of one of these
products. The net effect of these changes in supply arrangements and prices
is to reduce the overall net sales of the Company. See "Agreements with
Monsanto -- Raw Material Supply Agreements."

(B) To record the assumed increase in retiree medical and pension costs as a
result of the Spinoff. For the purpose of the Company's historical financial
statements, the annual costs for retiree medical and pension liabilities
have been allocated generally based upon the percentage of payroll costs to
total Company payroll costs. In connection with the Spinoff, the Company
assumed retiree medical liabilities for its active employees and former
employees who last worked at a Chemicals Business facility or certain former
chemicals facilities. In addition, in connection with the Spinoff, the
Company assumed the U.S. pension liabilities, and received related assets,
for its active employees and for certain former employees of the Company who
left Monsanto in earlier years. The amount of these liabilities assumed by
the Company is significantly greater than the amounts allocated
historically. As a result pension and post-retirement costs for the Company
have increased significantly in total following the Spinoff. See "Agreements
with Monsanto -- Employee Benefits Allocation Agreement."

(C) To record the estimated effect of transactions with the P4 Joint Venture (as
defined herein). The amounts reflect assumed payments from the Company to
Monsanto of $2 million and $5 million, for the six months ended June 30,
1997 and the year ended December 31, 1996, respectively, for premiums
related to production taken over certain specified levels. These amounts are
offset by assumed accrued income for option fee payments from Monsanto to
the Company for the six months ended June 30, 1997 and the year ended
December 31, 1996, of $1 million and $2 million, respectively. See
"Agreements with Monsanto -- P4 Joint Venture."

(D) To reverse the historical Monsanto corporate expense allocation to the
Company because the Company is no longer subject to the allocation of
corporate expenses from Monsanto following the Spinoff. The allocated
corporate expenses include, among other items, executive administration,
Monsanto's business and organizational development initiatives, and the cost
of corporate incentives. For purposes of the historical financial
statements, such expenses were allocated on the basis of the net capital
employed by the Chemicals Business. For the six months ended June 30, 1997
and the year ended December 31, 1996, $12 million and $85 million,
respectively, of such expenses were allocated to the Company.

(E) Because the Company is no longer subject to the allocation of corporate
expenses from Monsanto, a pro forma adjustment was made to record estimated
general corporate costs that the Company believes it would have incurred had
the Company been a separate public company for the periods presented.

20
<PAGE> 21

(F) To record additional interest expense as a result of the assumption of debt
by the Company from Monsanto and the borrowings under the Offerings,
detailed as follows:

<TABLE>
<S> <C>
For the year ended December 31, 1996 --
(1) Estimated interest on long-term debt at an average assumed rate of
6.17%.............................................................. $ 64
(2) Elimination of historical interest expense........................ (36)
----
Net pro forma adjustment.............................................. $ 28
=====
For the six months ended June 30, 1997 --
(1) Estimated interest on long-term debt at an average assumed rate of
6.67%.............................................................. $ 34
(2) Elimination of historical interest expense........................ (21)
----
Net pro forma adjustment.............................................. $ 13
=====
</TABLE>

An increase or decrease of 0.125% in the weighted average interest rate
would result in an increase or decrease in interest expense of $1.3 million and
$0.6 million for the year ended December 31, 1996 and the six months ended June
30, 1997, respectively.

In September 1997 the Company entered into interest rate swaps with certain
financial institutions, with a notional amount of $200 million, for the purpose
of hedging the interest rate of debt the Company anticipated issuing in 1997.
The interest rate swaps will be settled in cash in conjunction with sale of the
2027 Debentures. Any such amounts will be amortized as an adjustment in interest
expense payable on the 2027 Debentures over the expected term of the 2027
Debentures.

(G) To record the estimated provision for income tax as a result of the pro
forma adjustments referred to in Notes (A) through (F) above at an estimated
combined U.S. federal and state income tax rate of 36%.

(H) To record the contribution of $75 million in cash to the Company from
Monsanto. See "Agreements with Monsanto -- Distribution Agreement."

(I) To record the deferred financing costs associated with the Offerings.

(J) To record the reduction in deferred tax assets to an estimated combined
U.S. federal and state income tax rate of 36% for the Company and to
reflect the assumption of certain tax liabilities in accordance with the
Tax Sharing and Indemnification Agreement (as defined herein). See
"Agreements with Monsanto -- Tax Sharing and Indemnification Agreement."

(K) To record the contribution by Monsanto of a 40% interest in the P4 Joint
Venture (as defined herein) to the Company. See "Agreements with Monsanto --
P4 Joint Venture."

(L) To record the assumption and reclassification of additional post-retirement
liabilities by the Company, principally for retiree medical and pensions,
and to record the related deferred tax asset and the resulting effect on
Monsanto Company equity. See "Agreements with Monsanto -- Employee Benefits
Allocation Agreement." See Note (B) above for additional information.

(M) Reflects the following:

<TABLE>
<S> <C>
(1) Assumption in the Spinoff of debt by the Company, principally
assumable commercial paper....................................... $1,029
(2) Borrowings under the Offerings................................... 600
(3) Repayment of commercial paper.................................... (600)
------
$1,029
======
</TABLE>

(N) Reclassification from Monsanto Company equity to stockholders' deficit.

21
<PAGE> 22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The combined financial statements of the Company generally reflect the
results of operations, financial position and cash flows of the operations
transferred to the Company by Monsanto in connection with the Spinoff.
Accordingly, the Company's combined financial statements have been carved out
from the consolidated financial statements of Monsanto using the historical
results of operations and historical basis of the assets and liabilities of the
Chemicals Business and the allocation methodology described in Note 1 to the
Company's Combined Financial Statements. The historical combined financial
statements of the Company do not include certain assets and liabilities which
were transferred to the Company in connection with the Spinoff. See "Unaudited
Pro Forma Condensed Combined Financial Statements" and Note 1 to the Company's
Combined Financial Statements included in this Prospectus. Management believes
the assumptions underlying the Company's financial statements are reasonable.
The combined financial statements, however, may not necessarily reflect the
results of operations, cash flows or financial position of the Company in the
future, or what the results of operations, cash flows or financial position
would have been had the Company been a separate stand-alone public entity.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996

For the six months ended June 30, 1997, the Company's net sales of $1,489
million increased $35 million, or 2%, as compared with the same period in 1996.
Approximately $27 million of the increase can be attributed to higher sales
volumes and an improved sales mix, with the remainder of the increase
attributable to higher average selling prices. The sales increase was driven by
increased demand and was principally the result of higher sales volumes of nylon
plastics and polymers, as well as higher sales volumes of Saflex(R) plastic
interlayer. The sales increase was partially offset by lower sales volumes for
carpet fibers, principally because of lower sales into the residential carpet
market. Combined sales of the other business units for the first half of 1997
were essentially even with sales in the same period of 1996.

The Company's operating income for the first half of 1997 increased $74
million, or 63%, versus the first half of 1996. However, as further discussed in
Note 2 of the Notes to Interim Combined Financial Statements included elsewhere
in this Prospectus, operating income for the first half of 1997 includes $10
million of pretax charges associated with the adoption of the SOP 96-1 for
environmental reserves at operating locations. In addition, as further described
in Notes 6 and 7 to the Company's Interim Combined Financial Statements,
operating income in the first half of 1997 reflects a charge of $10 million for
environmental-related litigation at the Brio Superfund site, as well as $8
million in reversals of excess restructuring reserves from prior years. If the
net effect of these changes was excluded, operating income in the first six
months of 1997 would have increased 73% compared with a weak operating income
performance in the same period last year. Lower administrative expenses, the
effect of increased sales described above, and improved manufacturing
performance all contributed to the significant increase in operating income. The
decrease in administrative expenses can be attributed primarily to lower
allocations related to Monsanto's business and organizational development
initiatives. Higher capacity utilization contributed to the improved
manufacturing performance. In addition, operations benefited from cost savings
realized through the various restructuring actions taken in recent years.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
will be effective for the Company beginning January 1, 1998. SFAS No. 131
redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. The Company has not yet completed its analysis of how it will apply
this new standard.

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The Company is affected by certain general economic conditions,
particularly as they relate to the housing industry in the United States and the
automotive industry both in the United States and internationally, which are
cyclical businesses. In addition, global competition and customer demands for
efficiency will continue to make sustained price increases difficult. The prices
of purchased raw materials used by the Company fluctuate in the short term and
are affected by factors such as plant outages, oil prices and supply and demand.
However, in the long term, the Company believes that the addition of new
worldwide capacity should exert downward pressure on raw material costs.

1996 COMPARED WITH 1995

The Company's net sales increased $13 million in 1996. However, as further
discussed in the Notes to the Company's Combined Financial Statements, prior
year operations reflect four month sales and operating income from the rubber
chemicals business that was contributed to the formation in May 1995 of the
Flexsys joint venture between Monsanto and Akzo Nobel N.V. ("Akzo Nobel") which
is described below. Sales and operating results for the rubber chemicals
business are no longer included in the Company's combined totals. If the sales
from this business were excluded in 1995, the Company's sales would have
increased $153 million, or 5%, in 1996. Approximately $204 million of the
increase can be attributed to higher sales volumes and an improved sales mix.
This increase was partially offset by the effect of lower average selling prices
which totaled approximately $51 million.

Most of the sales growth was driven by increased sales for fibers products,
primarily because of higher sales volumes of nylon and acrylic fibers. Nylon
fiber sales were considerably higher than sales in 1995 because of higher demand
in the carpet industry. Increased demand in U.S. markets and higher export
sales, particularly into China, drove the sales volume growth for acrylic
fibers. A decline in average selling prices partially offset the increase in
nylon and acrylic fiber sales. Nylon polymer sales also contributed to the sales
increase on the strength of higher sales volumes. Sales of intermediates and
phosphorus and derivative products were essentially even with the prior year.
Sales of industrial products in 1996 were up moderately from those in 1995,
principally because of higher sales volumes, led by higher sales volumes for
Therminol(R) heat transfer fluids. Higher sales volumes, partially offset by
lower average selling prices, resulted in a modest increase in the net sales of
Saflex(R) plastic interlayer in 1996. Polymer modifier sales declined slightly
in 1996, primarily due to lower sales volumes.

In 1996, operating income for the Company decreased $225 million from
operating income in 1995. However, profitability in both years was affected by
unusual items. Operating income in 1996 included a net charge of $248 million
for restructuring and other actions, primarily for the costs of work force
reductions, asset write-offs and facility rationalizations. Operating income in
1995 was reduced by $46 million, principally as a result of restructuring
charges for employment reductions and the costs to close several facilities. If
the unusual items in 1996 and 1995 and the results of the rubber chemicals
business were excluded, 1996 operating income for the Company would have
decreased $20 million from the comparable amount in 1995.

The positive effect of higher sales volumes and lower raw material costs on
operating income was offset by lower average selling prices, by significantly
higher administrative expenses and by higher manufacturing costs. The
manufacturing cost increase was principally associated with maintenance downtime
and capacity expansion projects. Customer demands and worldwide competitive
pressures limited the Company's pricing flexibility on most of its products.
Future reductions or increases in average selling prices will continue to be
contingent upon these demands and pressures.

The 1996 increase in administrative expenses was primarily due to higher
costs associated with various employee incentive programs, as well as to
increased allocations related to Monsanto's business and organizational
development initiatives.

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The increase in "Other income (expense) -- net" was primarily the result of
higher earnings from equity affiliates, principally associated with the Flexsys
and the Advanced Elastomer Systems 50/50 joint venture ("Advanced Elastomer
Systems") between Monsanto and Exxon Corporation ("Exxon").

The 1996 effective income tax rate of 3% compared to the U.S. federal
statutory rate of 35% can be attributed primarily to the joint venture after tax
earnings included in "Other income (expense) -- net" and benefits from the
foreign sales corporation. It is expected that the effective income tax rate in
future periods will be significantly higher and will slightly exceed the U.S.
federal statutory rate.

1995 COMPARED WITH 1994

The Company's net sales decreased $133 million in 1995. However, net sales
and operating results for the first four months of 1995 and for all of 1994
include the results from the Company's rubber chemicals business. As further
discussed in Note 4 to the Company's Combined Financial Statements, on May 1,
1995, Monsanto contributed the rubber chemicals business to the Flexsys joint
venture. Operations for the Flexsys joint venture commenced on May 1, 1995. As a
result, sales and operating results for the rubber chemicals business are no
longer included in the Company's results. If the sales from this business were
excluded in both 1995 and 1994, the Company's sales in 1995 would have increased
$127 million, or 5%. Approximately $105 million of this increase can be
attributed to the effects of higher average selling prices, with the remainder
of the increase attributable to higher sales volumes.

Nylon intermediate sales in 1995 increased significantly from sales in
1994, primarily on the strength of higher selling prices. In addition, the
Company's 1995 sales increase benefited from higher sales of polymer modifiers
and nylon polymers as a result of higher average selling prices. Net sales of
Saflex(R) plastic interlayer increased modestly from sales in 1994, principally
because of favorable exchange rates. Sales volumes were essentially even with
those in 1994 as expected growth in the global automotive markets failed to
materialize in 1995. The 1995 increase in net sales was partially offset by
lower nylon and carpet fiber sales, as the carpet industry experienced lower
consumer demand in 1995. Demand for acrylic fibers in U.S. markets was soft
during 1995 and negatively affected sales volumes. This decline was partially
offset by higher export sales, particularly in China.

Operating income for the Company increased slightly in 1995 from operating
income in 1994. However, unusual items affected profitability in both years.
Operating income in 1995 was reduced by $46 million, principally the result of
restructuring charges for employment reductions and the costs to close several
facilities. Operating income in 1994 was reduced by $34 million in restructuring
charges, principally related to work force reductions and costs to close several
facilities. If these unusual items and the results of the rubber chemicals
business were excluded, operating income for the Company would have increased by
3% from operating income in 1994.

Operating income was positively affected by higher selling prices, the
effect of continued cost-reduction efforts, and manufacturing efficiencies, but
was hurt by higher raw material costs. Competitive pressures worldwide limited
the Company's ability to recover the increased raw material costs fully through
increased selling prices.

The decrease in marketing expenses was principally due to the inclusion of
only four months of marketing expenses associated with the rubber chemicals
business in 1995 operating results.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has generated sufficient cash from its operations
to fund its capital needs, including working capital. Capital expenditures
averaged $186 million per year for the past three years and were used to fund
various maintenance and capacity expansion projects. The

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Company expects that its capital requirements for 1997 will be approximately
$175 million and could increase to between approximately $275 million and $450
million annually over the following few years, principally as a result of
capacity expansion and cost reduction projects. In addition, environmental
remediation expenditures have averaged $62 million per year over the past three
years, and the Company expects to incur similar amounts per year over the next
several years.

The Company's working capital at June 30, 1997 increased to $325 million
from $121 million at December 31, 1996, primarily because of an increase in
trade receivables and lower accrued liabilities. The decrease in accrued
liabilities, principally wages and benefits, was primarily the result of
significantly higher payouts associated with employee incentive programs. The
increased incentive payouts included the final payment of certain deferred
amounts related to a three-year incentive plan.

On September 3, 1997, the Company Board authorized the purchase of up to 5
million shares of Company Common Stock. The Company currently plans to complete
these purchases over the next two years.

The Company's pro forma balance sheet includes approximately $1.029 billion
of debt, consisting primarily of the Securities and commercial paper. The
commercial paper is backed by $1.2 billion in revolving credit facilities of the
Company. See "Other Indebtedness of the Company."

The Company believes that its cash flow from operations, supplemented by
periodic additional borrowings, provides it with sufficient resources to finance
operations and planned capital needs.

ENVIRONMENTAL MATTERS

The Company continues to make a strong commitment to comply with various
laws and government regulations concerning environmental matters and employee
safety and health in the United States and other countries. U.S. federal
environmental legislation having particular effect on the Company includes the
Toxic Substances Control Act; the Resource Conservation and Recovery Act
("RCRA"); 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"), as amended by the Superfund Amendments and
Reauthorization Act. 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 Environmental
Protection Agency ("EPA"), OSHA and other federal agencies have the authority to
promulgate regulations which have an effect on the Company's operations. In
addition to these federal activities, various states have been delegated certain
authority under the aforementioned federal statutes. Many state and local
governments have adopted environmental and employee safety and health laws and
regulations, some of which are similar to federal requirements. State and
federal authorities may seek fines and penalties for violation of these laws and
regulations.

The Company 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. The Company is among the leaders in the chemical
industry's Responsible Care performance enhancement program.

Expenditures in 1996 were approximately $9 million for environmental
capital projects and approximately $85 million for the management of
environmental programs, including the operation and maintenance of facilities
for environmental control. The Company estimates that during 1997 and 1998
approximately $15 million to $20 million per year will be spent on additional
capital projects for environmental protection and that expenses for the
management of environmental programs in 1997 and 1998 will continue at levels
comparable to 1996.

Monsanto intermittently received notices from the EPA alleging that it is a
PRP under Superfund with respect to Company sites. In 1996, two such notices
were received for the Company. With respect to many of these notices, Monsanto
has resolved disputes, entered partial and complete

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consent decrees, and executed administrative orders with the EPA settling a
portion or all of the Company's liability. Remediation pursuant to such
settlements is ongoing.

The Company's policy is to accrue costs for remediation of contaminated
sites in the accounting period in which the responsibility is established and
the cost is estimable. The Company'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. The Company
had an accrued liability of $51 million as of December 31, 1996 for Superfund
sites. Major Superfund sites in this category include the noncompany-owned sites
at Brio and MOTCO in Texas, Fike/Artel in West Virginia and Woburn in
Massachusetts, which account for $34 million of the accrued amount. Because of
uncertainties primarily related to the method and extent of remediation,
potential future expenses could be as much as an additional $10 million for
these sites based upon existing technology and other currently available
information. These potential future expenses may be incurred over the next
decade. The Company spent approximately $20 million in 1996 for remediation of
Superfund sites. Similar amounts can be expected in future years.

The Company had environmental reserves of $58 million as of December 31,
1996 for shut-down plants and third-party sites for which the Company assumed
responsibility pursuant to the Distribution Agreement. The Company's estimates
of its liabilities 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. Subject to these uncertainties, the Company currently
estimates that potential future expenses could be as much as an additional $50
million for these sites. The Company spent $21 million in 1996 for remediation
of these sites. Similar amounts can be expected in the future.

For solid and hazardous waste remediation at the Company's operating
locations, the Company recognizes post-closure environmental costs and
remediation costs over the estimated remaining useful life of the related
facilities, not to exceed 20 years. The Company spent $18 million in 1996 for
remediation of these facilities and had an accrued liability of $41 million as
of December 31, 1996 for these sites. Uncertainties related to these costs are
evolving government regulations, the methods and extent of remediation and
future changes in technology. The Company estimates that closure costs for these
facilities will be an additional $70 million, based upon existing technology and
other currently available information.

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 change in the Company's liquidity or financial position as
reflected in the Company's historical financial statements, but they could have
a material adverse effect on profitability in a given period. The impact of any
future changes in environmental law and regulation on the Company's liquidity,
financial position and profitability cannot be predicted with accuracy.

Effective January 1, 1997, the Company adopted SOP 96-1, "Environmental
Remediation Liabilities." SOP 96-1 establishes authoritative guidance regarding
the recognition, measurement and disclosure of environmental remediation
liabilities. The primary change in the Company's accounting principles
associated with the adoption of this SOP was an acceleration of the recognition
of certain environmental remediation liabilities at operating facilities. As a
result, the Company recorded an aftertax charge of $6 million in the first half
of 1997. Additional aftertax charges in the range of $9 million to $14 million
are anticipated in 1997 as the criteria for recording these liabilities are met.
These charges are in addition to the 1997 and 1998 estimated capital
expenditures for environmental projects previously described.

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BUSINESS AND PROPERTIES

The Company produces and markets a range of high performance chemical-based
materials, including nylon and acrylic fibers and fiber intermediates, Saflex(R)
plastic interlayer, phosphorus derivatives, and specialty chemicals. These
materials are used by customers to make consumer, household, automotive and
industrial products.

The Company's strategic focus is built on four key technology strengths:
polymer chemistry, phosphorus chemistry, fiber technology, and process
engineering expertise. These technologies are used in various combinations to
create value-added products in ten business units: Acrilan(R) Acrylic Fibers,
Carpet Fibers, Industrial Nylon Fibers, Industrial Products, Intermediates,
Nylon Plastics & Polymers, Phosphorus Derivatives, Polymer Modifiers, Resins,
and Saflex(R)Plastic Interlayer. Three business units -- Carpet Fibers,
Intermediates and Saflex(R) Plastic Interlayer -- accounted for over 50% of the
Company's total sales in 1996.

To compete effectively in its markets, the Company is implementing a
strategy which emphasizes the following key elements:

PERFORMANCE INCENTIVES: The Company plans to provide incentives for
employees to increase cash flow, earnings per share and shareholder value.

In 1996, the Company had revenues of approximately $3.0 billion and
operating income of approximately $33 million (approximately $281 million if the
effect of $248 million of restructuring costs and unusual charges were
excluded). Approximately one-third of the Company's sales in 1996 were made into
markets outside the United States. See the Company's Combined Financial
Statements.

DESCRIPTION OF PRINCIPAL PRODUCTS AND COMPETITIVE SITUATION

Set forth below are descriptions of the Company's ten business units, in
alphabetical order.

ACRILAN(R) ACRYLIC FIBER

The Company is the largest producer of acrylic fiber in North America. It
manufactures and markets a full line of commodity and specialty grades of this
fiber, which is used to make apparel, craft yarns, cloth for home furnishings,
and brake fibers, among other uses.

The Company's Acrilan(R) trademark is widely recognized in the industry, as
are the following brand names which are used to identify products made with
Acrilan(R): Wear-Dated(R) upholstery; DuraSpun(R) fibers; the Smart Yarns fibers
(for socks); and Wintuk(R), Sayelle(R) and Bounce Back(R) (fibers for craft
yarn).

The principal competitor for acrylic fiber in North America is Sterling
Chemicals, Inc. Worldwide, competitors include MonteFibre S.p.A. (Italy), AKSA
Akrilik Kimya Sanayii A.S. (Turkey), Courtalds

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plc (United Kingdom) and Mitsubishi Chemicals Corporation (Japan). Acrylic fiber
also competes against other fibers such as cotton and polyester.

The primary raw material for acrylic fiber is acrylonitrile, which is
produced internally by Intermediates and supplemented with external purchases.

There are a variety of differentiated Acrilan(R) brand products, including
producer-colored fiber, pigmented UV resistant fibers, bi-component Bounce
Back(R) fibers, DuraSpun(R) abrasion-resistant fibers and technical fibers used
in friction applications, as well as precursor chemicals for carbon fibers.
These products -- and the opportunity to develop sales in other parts of the
Western Hemisphere -- represent the business unit's best opportunity for growth.
In addition, the Company generates significant income from the licensing of its
proprietary wet spinning acrylic technology, primarily in Asian markets.

CARPET FIBERS

The Company is the largest supplier of nylon staple to the North American
carpet industry, for the residential market (new construction and replacement),
the contract market (offices, hotels, restaurants, retail and institutions) and
the rug market. Its product portfolio includes nylon 6,6 staple, bulk continuous
filament ("BCF") and acrylic staple fibers -- offering carpet mills a wide range
of performance and styling characteristics.

The Company's products are marketed under two of the industry's most
respected brand names: Wear-Dated(R) carpets (residential) and Ultron(R) VIP
nylon (contract). The Wear-Dated(R) name is widely recognized by consumers in
North America for its guarantee of the finished carpet's outstanding quality and
exceptional performance.

Competitive success is determined by different factors in different
segments of the market. Overall, Carpet Fibers benefits from vertical
integration with Intermediates. In the residential segment, branded products
compete based on technical advances and marketing programs, such as the
Company's warranty offered on Wear-Dated(R) carpets, retailer sales incentives
and similar activities.

In contract markets, the basis for competition is product performance and
downstream marketing programs. The Ultron(R) VIP nylon brand offers carpet
makers an innovative mix of fiber shapes and sizes that are specifically
engineered for features such as soil-hiding ability and extra bulk and cover.
Carpet Fibers works closely with the building design community to develop new
products which address the contract market's needs. It also sells Ultron(R) SD
Solution-Dyed nylon 6,6, which offers superior colorfastness and protection
against harsh chemicals, bacterial growth and stains.

The Company is introducing DyeNAMIX(R) technology, a substantially improved
fiber system which permits rich, deep colors and enhances the print clarity of
carpets. This proprietary technology is environmentally friendly, while also
allowing carpet mills to achieve higher efficiencies and lower dye costs.

The principal competitors for nylon carpet fiber in the United States are
E.I. DuPont De Nemours and Company ("DuPont"), AlliedSignal Inc.
("AlliedSignal") and BASF AG ("BASF"). The Company and AlliedSignal offer both
nylon staple and BCF products, while DuPont and BASF are primarily BCF
suppliers. The Company owns and operates the world's largest integrated nylon
manufacturing plant in Pensacola, Florida.

A majority of Carpet Fibers' sales are generated by a few major customers
in the carpet mill industry.

Carpet Fibers receives almost all of its major raw materials from
Intermediates.

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INDUSTRIAL NYLON FIBERS

The Company makes and supplies a line of industrial-strength nylon fibers
to a variety of manufacturing customers. Industrial Nylon Fibers' product line
features continuous filament nylon 6,6 yarns in thickness ranging from 60 to
2000 deniers. Heavier yarns are used for applications such as bias tires for
earth movers, NASA space shuttles, aircraft and trucks; mining conveyor belts;
and cargo slings. Lighter weight yarns are used to make backpacks, ribbons,
sewing threads and dental floss. Cost per unit of performance, service
(including the ability to tailor the properties of yarns for use in specific
applications) and breadth of product line are the major drivers of success in
the industrial fibers market. The Company has built a strong presence in the
bias tire and other heavy-denier segments and in industrial sewing threads.
Sales to five major tire companies account for about 50% of total Industrial
Nylon Fibers volume.

The Company is currently investing capital to increase spinning capacity
and to enhance spinning technology at its Greenwood, South Carolina plant. This
project will use proprietary technology (licensed from Toray Industries Inc.) to
improve product quality, enhance yarn performance and tenacity and enable the
Company to achieve a low-cost position in key segments of the market, including
automotive airbags and high performance tires.

Industrial Nylon Fibers receives almost all of its major raw materials from
Intermediates. Competitors in the United States include DuPont (the market
leader) and AlliedSignal.

INDUSTRIAL PRODUCTS

The Company is a leading producer of specialty industrial fluids and
lubricants. Its products are widely recognized in their market segments for
specific performance characteristics which result from proprietary formulations.
Substantially all of the products in this business unit are trademarked, and
include the following brands: Skydrol(R) aviation fluids; Therminol(R) heat
transfer fluids; Dequest(R) water treatment chemicals; and Glacier(R)
metalworking fluids.

The Skydrol(R) product line includes fire-resistant hydraulic fluids which
are used in more than half of the world's commercial aircraft. A new product,
Skydrol(R) 5, was introduced in 1996. It offers a range of enhanced performance
characteristics, such as improved thermal stability, improved corrosion
protection and reduced weight. The Skydrol(R) brand's major competitor is
manufactured by Exxon.

Therminol(R) heat transfer fluids are leaders in the worldwide high
temperature liquid phase market. These products, used in various types of
capital equipment, are known for remaining thermally stable at high temperatures
and for their low temperature pumping characteristics. Competitors include The
Dow Chemical Company and Nippon Steel Chemical Co., Ltd.

Dequest(R) water treatment chemicals are used to solve problems in a number
of heavy and light industrial applications. These products offer functional
properties such as sequestration, scale inhibition and corrosion control.
Competing products are marketed by Albright & Wilson plc ("Albright & Wilson")
and Bayer Corporation ("Bayer").

Launched in 1996, Glacier(R) metalworking fluids are the industry's first
environmentally safe lubricants designed for machining operations such as
grinding, drilling and threading. The fluids are biodegradable and practically
non-toxic.

The Company's specialty industrial fluids are sold throughout the world,
with no single customer accounting for a significant level of sales.

Industrial Products expects to develop new opportunities in its niche
markets by continuing to develop and introduce new products such as Glacier(R)
and by pursuing sales in additional geographic areas such as Asia and Latin
America. The Company recently formed a joint venture in Suzhou, China, to
manufacture Therminol(R) heat transfer fluids.

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Industrial Products relies on a number of raw materials such as benzene,
phenol and phosphorus trichloride, most of which are processed internally by
Intermediates.

INTERMEDIATES

Intermediates manufactures more than three dozen "building block" chemicals
which are used by the Company and by other companies to make a wide variety of
finished products. Intermediates' product lines include nylon intermediates,
sold to a number of fibers and plastics manufacturers worldwide; chlorobenzenes,
used in applications such as rubber chemicals, pigments, antioxidants,
herbicides, solvents and resins; and other intermediates which are used to
produce fertilizers, detergents and animal feed supplements.

Intermediates relies on aggressive cost control, exceptional product
quality, world-class manufacturing scale and proprietary manufacturing
technology to drive its competitive success. Its strategy is to support the
competitiveness of other Company products by achieving the low-cost position on
their critical "building block" chemicals and to pursue profitable external
sales of these products. Intermediates has achieved a leading position in nylon
intermediates through a combination of proprietary technology and scale.

Intermediates obtains its key raw materials, including natural gas,
cyclohexane, propylene, benzene and chlorine, from a number of suppliers.

To meet internal demand and address external sales opportunities,
Intermediates is planning an expansion of its acrylonitrile manufacturing
capacity, which will also reduce its manufacturing costs.

The majority of the production of Intermediates is used internally, with
most of the external sales made to a limited number of customers. In some
product lines, external sales are dependent on a major customer. However, in
each of these cases, sales to internal customers account for the majority of the
business unit's production capacity.

Competitors vary by product line and by world region and include DuPont,
Rhone-Poulenc S.A. ("Rhone-Poulenc") and BASF.

NYLON PLASTICS & POLYMERS

The Company manufactures and markets a line of Vydyne(R) nylon 6,6 molding
resins and extrusion polymers and nylon 6,6 polymers for fiber applications.
Vydyne(R) nylon gives plastics manufacturers the ability to provide their
products with enhanced performance characteristics, such as heat resistance,
chemical resistance and toughness. Vydyne(R) nylon molding resins are used in
under-the-hood automotive components, electrical connectors for telephone
systems and computers, medical devices and similar applications.

Product performance, technical service, vertical integration and breadth of
product line are the major drivers of success in this market. Nylon Plastics &
Polymers relies on nylon 6,6 salt as its primary raw material. This material is
produced internally by Intermediates. The business unit's primary competitor is
DuPont.

PHOSPHORUS DERIVATIVES

The Company has developed an extensive franchise in phosphorus chemistry.
The Company is a low-cost producer of phosphorus-based chemicals, and most of
its product technologies are proprietary. It also has a joint venture in Brazil
using purified wet acid technology to produce many of these products. The
Company manufactures products for a wide range of industries:

FOOD AND BEVERAGE. Its phosphates are used in many food products to
improve texture, appearance and flavor. Branded products include
Levn-Lite(R), Pan-O-Lite(R) and Leverage(R) brand leavening agents, used in
baking; Nutrifos(R) sodium tripolyphosphate, used in meat and poultry
processing; and Katch Fish(R) phosphate, used to extend the shelf life of
fish products.

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PERSONAL CARE PRODUCTS. Major toothpaste manufacturers around the
world rely on the Company's oral care phosphates to improve the performance
of their products. The Company has been a leader in the development of
dentifrice agents which are used to control tartar and to polish and whiten
teeth.

SPECIALTY CHEMICALS. The Company manufactures a number of
phosphorus-based intermediates which serve as key ingredients in oil
additives, pesticides and mining chemicals. The Company also offers
high-purity phosphoric acid, used as a building block in the manufacture of
high-purity phosphate salts.

INDUSTRIAL CLEANERS AND FIRE RETARDANTS. The Company provides
specialized cleaning ingredients for commercial laundries, restaurant and
hospital dishwashing systems and vehicle wash facilities. The Company also
makes and sells Phos-Chek(R) fire fighting agent, used in aerial spraying
to control forest fires and wildfires.

ELEMENTAL PHOSPHORUS. The Company may also offer for sale elemental
phosphorus sourced from the P4 Joint Venture.

The primary competitors for Phosphorus Derivatives are FMC Corporation, Albright
& Wilson and Rhone-Poulenc. The business unit's primary raw material is
elemental phosphorus, which is mined and processed in Soda Springs, Idaho, at
facilities which are jointly owned by the Company and Monsanto through the P4
Joint Venture. See "Agreements with Monsanto -- P4 Joint Venture."

POLYMER MODIFIERS

The Company manufactures and markets a line of polymer modifiers and
specialty plasticizers which are used to improve the performance of flooring
products, sealants, caulks, adhesives and other goods. Unit brands include
Santicizer(R) polymer modifiers and plasticizers, and Santotac MRS(R), a
flooring additive.

Polymer Modifiers is focused on specialty applications, where technical
expertise and processing knowledge can be used to help customers obtain valuable
performance attributes in their products (e.g., mar/scratch resistance, stain
resistance, enhanced gloss and flame retardance). Competitors vary by product
line and include Bayer and Akzo Nobel.

Polymer Modifiers obtains its key raw materials from U.S. and European
markets. New products (such as Santotac MRS(R)) and geographic expansion
(particularly into central Europe and Asia) are expected to be the primary
drivers of growth.

RESINS

This business unit manufactures and markets a line of specialty resins
which are used in the manufacture of thermoset paints and coatings, pressure
sensitive adhesives, paper coatings, plastic products and other applications.
Brands include Resimene(R) amino crosslinkers, Gelva(R) pressure sensitive
adhesives, Santosol(R) solvents which have certain environmentally friendly
characteristics, Scripset(R) resins for paper sizing, Butvar(R) specialty
binders, Modaflow(R) flow and leveling agents, ClearPass(R) spray control
systems and other fabricated products.

Resins provides technical expertise to help customers obtain value-added
performance characteristics. Major competitors vary by product line and include
Cytec Industries, Inc. (coatings and surface size); National Starch and Chemical
Co. and Ashland Inc. (solution acrylic adhesives); Rohm and Haas Company and Air
Products and Chemicals, Inc. (emulsion water-based adhesives); and DuPont
(solvents which have certain environmentally friendly characteristics).

Resins relies on a number of commodity chemicals as raw materials, all of
which are readily available. New products (such as di-methyl esters, a solvent
with certain environmentally-friendly characteristics) and geographic expansion
(particularly into Europe, Latin America and Asia) are expected to be the
primary drivers of growth.

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<PAGE> 32

SAFLEX(R) PLASTIC INTERLAYER

The Company is the world's largest producer of polyvinyl butyral ("PVB"), a
plastic interlayer used in the manufacture of laminated glass for automotive and
architectural applications. The business unit's product is marketed under the
Saflex(R), Saflex SV(R) (superior value) and KeepSafe(TM) (for residential
security windows) trademarks. In 1997, Saflex(R) Plastic Interlayer will
commercialize a patented, reformulated product which is designed to provide
superior processing and application performance. Continued business development
will be driven by the introduction of the reformulated PVB product, by increased
penetration of geographic markets (especially Asia) and by the creation of new
primary demand for PVB in laminated glass worldwide. A Saflex(R) finishing plant
is scheduled to start up in Singapore in late 1997.

Six customers account for 65% to 70% of total sales of Saflex(R) products
worldwide. Saflex(R) Plastic Interlayer relies on vinyl acetate monomer,
polyvinyl alcohol and butanol as raw materials, all of which are readily
available in the U.S. and European markets. Sales volumes are influenced by
shifts in automotive production and commercial building construction, which are
cyclical businesses. The principal competitor in the manufacture of PVB is
DuPont.

* * *

In 1997, the Company reorganized its businesses into the ten business units
described above. While sales information for prior years was not collected on
the basis of these ten units, sales information for four groups of the Company's
businesses was collected and each accounted for more than 10% of the Company's
annual sales during the fiscal years 1994, 1995 and 1996. Each of these four
groups included the business activity of one or more of the current ten units.
The Company believes that the sales data for these groups is generally
comparable to what would have been recorded had the Company's current ten units
been reported as part of these four groups. The table below shows the percentage
of sales derived from each of these four groups along with the identity of the
current units whose business activities were primarily included within those
groups, as well as sales associated with other businesses which have either been
divested or contributed to joint ventures:

<TABLE>
<CAPTION>
PERCENT OF
SALES
--------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fibers & Intermediates.................................... 51% 47% 44%
(generally comparable with the Acrilan Acrylic Fibers,
Carpet Fibers, Industrial Nylon Fibers, Intermediates,
Nylon Plastics & Polymers units)
Phosphorus Products....................................... 11% 11% 11%
(generally comparable with the Phosphorus Derivatives
unit)
Resins.................................................... 21% 20% 19%
(generally comparable with Saflex(R) Plastic Interlayer
and Resins units)
Specialty Chemicals....................................... 17% 17% 15%
(generally comparable with the Industrial Products and
Polymer Modifiers units)
Divested/Joint Ventures................................... -- 5% 11%
</TABLE>

PRINCIPAL EQUITY AFFILIATES

The Company participates in a number of joint ventures in which it shares
management control with other companies. Principal joint ventures include the
Flexsys joint venture, Advanced Elastomer Systems and the P4 Joint Venture. The
Company's share of the unconsolidated net sales of the Company's joint ventures
was $445 million in 1996.

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<PAGE> 33

The Flexsys joint venture, headquartered in Belgium, is the world's leading
supplier of process chemicals to the rubber industry. Its product line includes
a number of branded accelerators (Santocure(R), Thiofide(R), Thiotax(R)),
pre-vulcanization inhibitors (Santogard(R)), antidegradants and antioxidants
(Flectol(R), Santowhite(R)), and insoluble sulphur (Crystex(R)). Flexsys is a
50/50 joint venture between the Company and Akzo Nobel.

Advanced Elastomer Systems, headquartered in the United States, produces
and sells thermoplastic elastomers -- materials which combine the processability
of thermoplastic and the functional performance of thermoset rubber products.
The joint venture's product lines include Santoprene(R) thermoplastic rubber and
Vistaflex(R) thermoplastic elastomer. Advanced Elastomer Systems is a 50/50
joint venture between the Company and Exxon Corporation ("Exxon").

See "Agreements with Monsanto -- P4 Joint Venture" for information about
the P4 Joint Venture with Monsanto.

SALE OF PRODUCTS

The Company's products are sold directly to end users in various
industries, and to wholesalers, principally by the Company's own sales force.
The Company's marketing and distribution practices do not result in unusual
working capital requirements on a consolidated basis. Inventories of finished
goods, goods in process and raw materials are maintained to meet customer
requirements and the Company's scheduled production. In general, the Company
does not manufacture its products against a backlog of firm orders; production
is geared to the level of incoming orders and to projections of future demand.
The Company generally is not dependent upon one or a group of customers, and it
has no material contracts with the government of the United States, or any U.S.
state or local, or foreign government. In general, the Company's sales are not
subject to seasonality.

RAW MATERIALS AND ENERGY RESOURCES

The Company is a significant purchaser of basic, commodity raw materials,
including propylene, cyclohexane, benzene and natural gas. Major requirements
for key raw materials and fuels are typically purchased pursuant to long-term
contracts. The Company is not dependent on any one supplier for a material
amount of its raw materials or fuel requirements, but certain important raw
materials are obtained from a few major suppliers. In general, where the Company
has limited sources of raw materials, it has developed contingency plans to
minimize the effect of any interruption or reduction in supply. Information
regarding specific raw materials is provided under "-- Description of Principal
Products and Competitive Situation."

While temporary shortages of raw materials and fuels may occasionally
occur, these items are generally sufficiently available to cover current and
projected requirements. However, their continuing availability and price are
subject to unscheduled plant interruptions occurring during periods of high
demand, or due to domestic and world market and political conditions, as well as
to the direct or indirect effect of U.S. and other countries' government
regulations. The impact of any future raw material and energy shortages on the
Company's business as a whole or in specific world areas cannot be accurately
predicted. Operations and products may, at times, be adversely affected by
legislation, shortages or international or domestic events.

PATENTS AND TRADEMARKS

The Company owns a large number of patents which relate to a wide variety
of products and processes, has pending a substantial number of patent
applications, and is licensed under a small number of patents owned by others.
Also, the Company owns a considerable number of established trademarks in many
countries under which it markets its products. Such patents and trademarks in
the aggregate are of material importance in the operations of the Company.

33
<PAGE> 34

COMPETITION

The Company encounters substantial competition with respect to each of its
product lines. This competition, from other manufacturers of the same products
and from manufacturers of different products designed for the same uses, is
expected to continue in both U.S. and ex-U.S. markets. Depending on the product
involved, various types of competition are encountered, including price,
delivery, service, performance, product innovation, product recognition and
quality. Overall, the Company regards its principal product groups to be
competitive with many other products of other producers, and believes that it is
an important producer of many such product groups. For information regarding
competition in specific markets, see "-- Description of Principal Products and
Competitive Situation."

RESEARCH AND DEVELOPMENT

Research and development constitute an important part of the Company's
activities. In recent years, the Company's research and development expenses
amounted to approximately 2.6% of sales on average, or $76 million, $77 million
and $81 million in 1994, 1995 and 1996, respectively. The Company focuses its
research and development expenditures on process improvements and select product
development.

The Company actively pursues technologies from around the world that are
expected to bring value to its business. Recent examples include new technology
for converting benzene to phenol, which was licensed from Boreskov Institute of
Catalysis in Russia, and which the Company is actively seeking to license to
third parties; and nylon industrial spinning technology, licensed from Toray
Industries Inc. in Japan. The Company also licenses technologies to other firms.

ENVIRONMENTAL MATTERS

For a discussion of environmental matters, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Environmental
Matters."

EMPLOYEE RELATIONS

As of September 1, 1997, the Company had approximately 8,800 employees
worldwide. Satisfactory relations have prevailed between the Company and its
employees. The Company uses self-directed work teams, incentive programs, and
other initiatives to keep employees actively involved in the success of the
business. Substantially all of the Company employees have options to purchase
Company Common Stock ("Company Options"). Approximately 20% of the Company
workforce is represented by various labor unions.

INTERNATIONAL OPERATIONS

The Company and affiliated companies are engaged in manufacturing, sales
and research and development in areas outside the United States, including
Europe, Canada, Latin America and Asia. Approximately one-third of the Company's
1996 sales were made into markets outside the United States. Operations outside
the United States are potentially subject to a number of risks and limitations
which are not present in domestic operations, including fluctuations in currency
values, trade restrictions, investment regulations, governmental instability and
other potentially detrimental governmental practices or policies affecting U.S.
companies doing business abroad.

PROPERTIES

The general offices of the Company are located in St. Louis County,
Missouri in premises leased from Monsanto. The Company also has research
laboratories, research centers and

34
<PAGE> 35

manufacturing locations worldwide. In addition to the general offices, the
Company has the following principal facilities, all of which are owned:

<TABLE>
<CAPTION>
PLANT SITE BUSINESS UNITS SERVED
- --------------------------------- ----------------------------------------------------------
<S> <C>
Anniston, Alabama................ Industrial Products
Augusta, Georgia................. Phosphorus Derivatives
Carondelet
(St. Louis, Missouri).......... Phosphorus Derivatives
Chocolate Bayou
(Alvin, Texas)................. Industrial Products, Intermediates
Decatur, Alabama................. Acrilan Acrylic Fiber, Intermediates, Research Center
Delaware River
(Bridgeport, New Jersey)....... Industrial Products, Intermediates, Polymer Modifiers
Foley, Alabama................... Carpet Fibers, Nylon Plastics & Polymers
Ghent, Belgium................... Resins, Saflex(R) Plastic Interlayer
Greenwood, South Carolina........ Carpet Fibers, Industrial Nylon Fibers, Intermediates,
Nylon Plastics & Polymers
Indian Orchard
(Springfield, Massachusetts)... Research Center, Resins, Saflex(R) Plastic Interlayer
Krummrich
(Sauget, Illinois)............. Intermediates, Phosphorus Derivatives
LaSalle, Canada.................. Polymer Modifiers, Resins
Newport, Wales (U.K.)............ Industrial Products, Polymer Modifiers, Resins
Pensacola, Florida............... Carpet Fibers, Industrial Nylon Fibers, Intermediates,
Nylon Plastics & Polymers, Research Center
Queeny
(St. Louis, Missouri).......... Industrial Products, Polymer Modifiers, Resins
Trenton, Michigan................ Phosphorus Derivatives, Resins, Saflex(R) Plastic
Interlayer
Westport
(St. Louis, Missouri).......... Resins
</TABLE>

The Company also owns certain buildings and production equipment, and
leases the underlying real estate, used to produce products for the indicated
business units at the following Monsanto sites:

<TABLE>
<CAPTION>
PLANT SITE BUSINESS UNITS SERVED
- --------------------------------- ----------------------------------------------------------
<S> <C>
Antwerp, Belgium................. Industrial Products, Polymer Modifiers, Saflex(R) Plastic
Interlayer
Luling, Louisiana................ Intermediates
Sao Jose dos Campos, Brazil...... Industrial Products, Phosphorus Derivatives, Saflex(R)
Plastic Interlayer
</TABLE>

The Company operates these facilities pursuant to arrangements described
under "Agreements with Monsanto -- Operating Agreements."

The Company's principal plants are suitable and adequate for their use.
Utilization of these facilities may vary with seasonal, economic and other
business conditions, but none of the principal plants is substantially idle. The
facilities generally have sufficient capacity for existing needs and expected
near-term growth. The Company operates several facilities for third parties,
principally within the Chocolate Bayou and Pensacola sites, under long-term
lease and operating agreements. In connection with the Spinoff, the Company
entered into an Operating Agreement with Monsanto

35
<PAGE> 36

relating to a portion of the Chocolate Bayou site. See "Agreements with Monsanto
- -- Operating Agreements."

The Company is an active participant in the VPP Star program, a voluntary
safety and health program administered by OSHA. Currently ten of the Company's
sites have qualified for the VPP Star and one site for the Merit designation. In
addition, 17 of the Company's locations have been certified wholly or in part
under the ISO 9000 quality program.

LEGAL PROCEEDINGS

At the time of the Spinoff, the Company assumed from Monsanto, pursuant to
the Distribution Agreement, liabilities related to specified legal proceedings.
As a result, although Monsanto remains the named defendant, the Company will
manage the litigation and indemnify Monsanto for costs, expenses and judgments
arising from such litigation. Most of these proceedings have arisen in the
ordinary course of business and involve claims for money damages. While the
results of litigation cannot be predicted with certainty, the Company does not
believe these matters or their ultimate disposition will have a material adverse
effect on the Company's combined financial position, profitability or liquidity
in any one year, as applicable. The following describes certain proceedings to
which Monsanto is a party and for which the Company assumed any liabilities
pursuant to the Distribution Agreement as of the Distribution Date.

On April 12, 1985, Monsanto was named as a defendant in Alanis et al. v.
Farm & Home Savings, et al., filed in the District Court in Harris County,
Texas, the first of a number of lawsuits in which plaintiffs claim injuries
resulting from alleged exposure to substances present at or emanating from the
Brio Superfund site near Houston, Texas. Monsanto is one of a number of
companies that has sold materials to the chemical reprocessor at that site.
Currently pending are the following matters. (1) Monsanto is one of a number of
defendants in 11 cases brought in Harris County District Court or the United
States District Court for the Southern District of Texas on behalf of 960
plaintiffs who owned homes or lived in subdivisions near the Brio site or along
Clear Creek downstream from the site, attended school near the site or used
nearby recreational baseball fields. Plaintiffs claim to have suffered various
personal injuries and fear future disease; they assert the need for medical
monitoring, and, in the case of the homeowners, claim property damage. In
addition to their claims of personal injury, four plaintiffs in one of these
cases allege business losses. Plaintiffs seek compensatory and punitive damages
in an unspecified amount. Monsanto has settled the claims of 811 plaintiffs in
six of the cases described in this subparagraph for $10 million. The Court has
approved the settlements for 190 of these plaintiffs who are minors. (2)
Monsanto is one of a number of defendants in two actions brought in Harris
County District Court and one action brought in Galveston County District Court
on behalf of 409 plaintiffs, who are former employees of the owners/operators of
the Brio site, and members of the employees' families or persons who worked near
the Brio site. Plaintiffs in one of these actions also owned homes or lived in
subdivisions near the site, attended schools near the site or used nearby
recreational ball fields. Plaintiffs claim physical and emotional injury and
seek compensatory and punitive damages in an unspecified amount. The Company
believes that there are meritorious defenses to all of these lawsuits including
lack of proximate cause, lack of negligent or other improper conduct on the part
of Monsanto, and negligence of plaintiffs (or their parents) and/or of builders
and developers of the Southbend subdivision. These actions are being vigorously
defended.

On November 15, 1993, Monsanto was named as a defendant in Dyer et al. v.
Monsanto Company, et al., filed in the Circuit Court in St. Clair County,
Alabama, the first of a number of lawsuits in which plaintiffs claim to have
sustained personal injuries or property damage as a result of the discharge of
hazardous substances, including polychlorinated biphenyls ("PCBs"), from its
Anniston, Alabama, plant site. The following matters are currently pending. (1)
Monsanto is a defendant in a case pending in Circuit Court in St. Clair County,
Alabama which has been certified as a class action on behalf of all property
owners in a specified area along waterways near the plant. Monsanto is a
defendant in an additional action filed in Circuit Court in Shelby County,
Alabama on

36
<PAGE> 37

behalf of a purported class of property owners along a different waterway near
the plant. Plaintiffs in both actions claim loss in the value of their property
and seek compensatory and punitive damages in an unspecified amount. (2)
Monsanto is a defendant in nine additional cases brought in Circuit Court in
Calhoun County, Circuit Court in St. Clair County, Circuit Court in Taladega
County or in U.S. District Court in the Northern District of Alabama on behalf
of 2,057 individual plaintiffs who own or rent homes or own or operate
businesses along waterways near the plant or who live or attend churches near
the plant. An additional case has been filed in Circuit Court in Calhoun County
by one of the churches near the plant. The individual plaintiffs claim to have
suffered various personal injuries and fear future disease; they assert the need
for medical monitoring and claim to have suffered loss in the value of their
property or commercial injury. They seek compensatory and punitive damages of $3
million or in unspecified amounts for each individual, and $20 million for the
church. (3) Monsanto is a defendant in an action brought in U.S. District Court
in the Northern District of Alabama pursuant to RCRA Section 7002(a)(1)(B) on
behalf of four individuals who are plaintiffs in one of the suits pending in
Circuit Court in Calhoun County. Plaintiffs seek an order enjoining Monsanto
from continuing to handle improperly hazardous waste from the Anniston plant,
directing Monsanto immediately to remove all PCBs released from the plant and
granting plaintiffs their costs of suit, including attorney and expert witness
fees. The Company believes that there are meritorious defenses to all these
matters, including lack of any physical injury or property damage to plaintiffs,
lack of any imminent or substantial endangerment to health or the environment
and lack of negligence or improper conduct on Monsanto's part. These actions are
being vigorously defended.

RISK MANAGEMENT

The Company has evaluated risk retention and insurance levels for product
liability, property damage and other potential areas of risk. The Company will
continue to devote significant effort to maintaining and improving safety and
internal control programs, which reduce its exposure to certain risks.
Management decides the amount of insurance coverage to purchase from
unaffiliated companies and the appropriate amount of risk to retain based on the
cost and availability of insurance and the likelihood of a loss. Management
believes that the levels of risk retention which it has implemented are
consistent with those of other companies in the chemical industry. There can be
no assurance that the Company will not incur losses beyond the limits, or
outside the coverage, of its insurance. The Company's combined financial
position, profitability and liquidity are not expected to be affected materially
by the levels of risk retention that it accepts. For treatment of the Company's
coverage under Monsanto insurance policies in connection with the Spinoff, see
"Agreements with Monsanto -- Distribution Agreement."

AGREEMENTS WITH MONSANTO

For the purpose of governing certain of the ongoing relationships between
Monsanto and the Company and to provide mechanisms for an orderly transition
following the Spinoff, Monsanto and the Company or their respective
subsidiaries, as applicable, have entered into the various agreements described
in this section. Certain of the agreements summarized in this section are
included as exhibits to the Registration Statement and incorporated herein by
reference, and the following summaries are qualified in their entirety by
reference to the agreements as filed.

DISTRIBUTION AGREEMENT

In connection with the Spinoff, Monsanto and the Company entered into the
Distribution Agreement (the "Distribution Agreement"). The Distribution
Agreement provides for, among other things, the principal corporate transactions
which were required to effect the Spinoff and certain other matters governing
the relationship between the Company and Monsanto with respect to or in
consequence of the Spinoff.

Subject to certain exceptions described below, the Distribution Agreement
contains provisions designed principally to place with the Company the assets
and personnel involved in the Chemicals

37
<PAGE> 38

Business and financial responsibility for known and contingent or unknown
liabilities of the Chemicals Business. In addition, certain other assets and
liabilities of Monsanto described in the Distribution Agreement were contributed
to, or assumed by, the Company. These additional assets include, among others:
(1) a joint venture interest in the elemental phosphorus mining and operations
of the P4 Joint Venture (see "-- P4 Joint Venture"); (2) Monsanto's interests in
certain other joint ventures, including the Flexsys joint venture between
Monsanto and Akzo Nobel and the Advanced Elastomer Systems joint venture between
Monsanto and Exxon (see "Business and Properties -- Principal Equity
Affiliates"); and (3) $75 million of cash. These additional liabilities include,
among others: (1) most of the remaining liabilities of sold or discontinued
businesses conducted by former chemicals units or divisions of Monsanto; (2)
environmental remediation liabilities of certain other specified sold or
discontinued businesses of Monsanto; and (3) liabilities associated with the
Assumable Commercial Paper.

Under the Distribution Agreement, the Company is entitled to the benefit of
liability insurance coverage under certain Monsanto policies, to the extent such
coverage existed and coverage limits are not exhausted, for claims for which it
is assuming responsibility. Such insurance coverage generally will be shared
with Monsanto for other liabilities existing prior to the Distribution Date
which Monsanto has retained, on an as available basis, without allocation.

EMPLOYEE BENEFITS ALLOCATION AGREEMENT

Monsanto and the Company have entered into an employee benefits and
compensation allocation agreement (the "Employee Benefits Allocation Agreement")
setting forth the manner in which assets and liabilities under employee benefit
plans and other employment-related liabilities are divided between them. In
general, the Company is responsible for compensation and employee benefits
relating to its employees and former employees who last worked at a Chemicals
Business facility. The Company has received or will receive corresponding assets
under these employee benefit plans qualified under the Code, but will receive no
assets with respect to liabilities under non-qualified plans. Certain
liabilities relating to some former employees of the Chemicals Business have
been retained by Monsanto (along with any corresponding assets), including
liabilities and assets for defined benefit pension plan benefits accrued by
certain retired employees of the Chemicals Business, liabilities and assets
under Monsanto Savings and Investment Plan and the corresponding supplemental
executive plan for such retired salaried employees and unfunded deferred
compensation liabilities.

The Employee Benefits Allocation Agreement also provides for the treatment
of outstanding options to purchase Monsanto Common Stock ("Monsanto Options").
At the time of the Spinoff, Monsanto Options were converted into either Company
Options, adjusted Monsanto Options ("New Monsanto Options") or a combination of
both (collectively, "Substituted Options"), in each case, with adjustments to
preserve their value notwithstanding the Spinoff. These adjustments were based
upon the relative trading values of Monsanto Common Stock, and the when-issued
trading value of Company Common Stock prior to the Spinoff. The Company will be
responsible for delivering shares of the Company Common Stock upon exercise of
the Company Options, and Monsanto will be responsible for the delivery of shares
of Monsanto Common Stock upon exercise of New Monsanto Options. The holders of
restricted shares of Monsanto Common Stock ("Monsanto Restricted Stock")
(whether employed by Monsanto or the Company after the Spinoff) received the
distribution of shares of Company Restricted Stock in the Spinoff with respect
to their Monsanto Restricted Stock, and such shares of the Company Restricted
Stock are generally subject to the same restrictions as Monsanto Restricted
Stock. (Restricted shares of the Company Common Stock are referred to in this
Prospectus as "Company Restricted Stock".)

TAX SHARING AND INDEMNIFICATION AGREEMENT

The Company and Monsanto have also entered into the Tax Sharing and
Indemnification Agreement (the "Tax Sharing and Indemnification Agreement"),
which sets forth each party's

38
<PAGE> 39

rights and obligations with respect to payment and refunds, if any, with respect
to taxes for periods before and after the Distribution Date and related matters
such as the filing of tax returns and the conduct of audits or other proceedings
involving claims made by taxing authorities.

In general, Monsanto is responsible for filing consolidated U.S. federal
and consolidated, combined or unified state income tax returns for periods
through the Distribution Date, and for paying the taxes relating to such returns
(including any subsequent adjustments resulting from the redetermination of such
tax liability by the applicable taxing authorities). The Tax Sharing and
Indemnification Agreement also allocates liability between Monsanto and the
Company for property taxes and for any taxes which may arise in connection with
separating the Chemicals Business from the business remaining with Monsanto.

Pursuant to the Tax Sharing and Indemnification Agreement, the Company has
agreed to refrain from engaging in certain transactions for two years following
the Distribution Date without Monsanto's written consent unless it shall first
provide Monsanto with a ruling from the IRS, or in the case of certain
intragroup transfers of assets, an opinion of counsel in a form reasonably
acceptable to Monsanto, that the transaction will not adversely affect the tax
consequences of the Spinoff. Transactions subject to these restrictions include,
among other things, liquidation or merger with another corporation, certain
repurchase or issuance of Company Common Stock, sale, distribution or other
disposition of certain assets and the discontinuance of certain businesses.
Monsanto and the Company have agreed that, in general, they will indemnify each
other, on an aftertax basis, against any tax liability resulting from either
Monsanto's or the Company's breach of any covenant or representations contained
in the Tax Sharing and Indemnification Agreement.

The Tax Sharing and Indemnification Agreement further provides for
cooperation with respect to certain tax matters, the method of reporting of
non-qualified stock options, indemnification in connection with the income of
certain partnerships, the exchange of information and the retention of records
which may affect the income tax liability of either party.

Though valid as between the parties thereto, the Tax Sharing and
Indemnification Agreement is not binding on the IRS and does not affect the
several liability of Monsanto, the Company and their respective subsidiaries to
the IRS for all U.S. federal taxes of the consolidated group relating to periods
prior to the Distribution Date.

INTELLECTUAL PROPERTY AGREEMENTS

Monsanto and the Company have entered into a series of agreements (the
"Intellectual Property Agreements") relating to the transfer of intellectual
property, including patents, trademarks, copyrights, know-how and trade secrets.
The Intellectual Property Agreements include: (1) an assignment of intellectual
property rights to the Company which relate solely to the Chemicals Business,
(2) an assignment of intellectual property rights to the Company which relate
primarily, but not entirely, to the Chemicals Business, in which case a license
will be granted to Monsanto for use in its current businesses (the "Life
Sciences Business") and in certain specified areas outside the Chemicals
Business, and (3) a license to the Company of certain of Monsanto's intellectual
property rights which relate primarily, but not entirely, to the Life Sciences
Business for use by the Company in the Chemicals Business and in certain
specified areas which are outside the Life Sciences Business.

TRANSITION SERVICES AGREEMENT

Monsanto and the Company have entered into a transitional services
agreement (the "Transition Services Agreement"), pursuant to which Monsanto and
the Company will provide each other with transitional administrative and support
services (the "Transition Services") for a period of time not to exceed 18
months from the Distribution Date. The Transition Services Agreement provides
that, in consideration for the performance of a Transition Service, the user of
such Transition

39
<PAGE> 40

Service (the "Service User") will pay to the provider of such Transition Service
(the "Service Provider") the cost incurred by the Service Provider in rendering
such Transition Service.

The Transition Services Agreement provides that the Service Provider has
the right to terminate the provision of certain Transition Services under
certain circumstances, including the occurrence of certain changes in the
ownership or beneficial control of the Service User, and also contains
provisions whereby the Service User generally agrees to indemnify the Service
Provider for all claims, losses, damages, liabilities and other costs incurred
by the Service Provider to a third party which arise in connection with the
provision of a Transition Service, other than those costs resulting from the
Service Provider's own willful misconduct or fraud. In general, the Service User
can terminate a Transition Service after an agreed notice period.

P4 JOINT VENTURE

In conjunction with the Spinoff, Monsanto formed a venture for the mining
of phosphate rock and the production of elemental phosphorus (the "P4 Joint
Venture") and contributed a 40% interest in such P4 Joint Venture to the
Company, retaining the remaining 60% interest. The elemental phosphorus
production facilities are located at Soda Springs, Idaho and are operated by the
Company under an operating agreement with the P4 Joint Venture. The elemental
phosphorus produced by the P4 Joint Venture is either sold to Monsanto or the
Company generally at cost with certain adjustments to reflect ownership.
Monsanto has priority for a certain percentage of the production volume. The
phosphorus material acquired by Monsanto is either used as a raw material for
the manufacture of herbicides (including Monsanto's Roundup(R) brand). The
phosphorus material acquired by the Company is used by the Company as a new raw
material for the manufacture of phosphorus derivatives which are then sold by
the Company or are resold (as elemental phosphorus) by the Company. In the event
of a change of control of the Company, Monsanto has an option to acquire the
Company's interest in the P4 Joint Venture at the then book value. Monsanto is
paying the Company an annual fee in consideration of this option.

OPERATING AGREEMENTS

Monsanto and the Company have entered into certain operating agreements,
including master operating agreements (the "Operating Agreements") with respect
to each of four production facilities located at Chocolate Bayou in Alvin,
Texas; Luling, Louisiana; Antwerp, Belgium; and Sao Jose dos Campos, Brazil.
Monsanto is the operator (the "Operator") and the Company is the guest (the
"Guest") at all of the facilities except the Chocolate Bayou facility, at which
Monsanto is the Guest and the Company is the Operator.

Pursuant to each of the Operating Agreements, the Operator, as an
independent contractor, provides, or arranges for the provision of, such
production, utility and certain ancillary services as are reasonably necessary
or required for the Guest's production operations at the facility, and the
Operator leases to the Guest the real property at the facility that is used in
connection with the Guest's production operations. The Guest is required to pay
all direct and indirect costs incurred by the Operator in the performance or
supply of such services, plus an agreed upon return on the net capital employed
in connection with the respective Operating Agreement. The Guest owns the
production assets related to its operations at the facility.

Unless terminated earlier by either party thereto in accordance with the
terms of the Operating Agreements, the initial term of each of the Operating
Agreements is 20 years. After the initial term, the Operating Agreements
continue indefinitely unless and until terminated by either party upon at least
24 months' prior written notice. Each of the Operating Agreements also provides
that, under certain circumstances, either the Operator or the Guest may
terminate the Operating Agreement prior to the expiration of its initial term.

The Operating Agreements contain provisions requiring the Guest to
indemnify the Operator for all losses (other than environmental liabilities)
arising out of the operation of the facility or the

40
<PAGE> 41

provision of services, except to the extent that such losses are caused by the
Operator's willful misconduct or fraud. The Operating Agreements also apportion
certain environmental liabilities.

RAW MATERIAL SUPPLY AGREEMENTS

Monsanto and the Company entered into a series of raw material supply
agreements pursuant to which the Company provides materials to Monsanto for the
continued manufacture of certain of Monsanto's products, including herbicides
(such as Roundup(R)) and aspartame. The raw materials provided by the Company
are as follows: formalin (formaldehyde), monochlorobenzene (MCB),
hexamethylenediamine (HMD), hexamethylenetetramine (HMTA), hydrogen cyanide
(HCN) and L-aspartic acid (L-Asp).

The raw material supply agreements have a term of 10 years and provide that
Monsanto will obtain its requirements of the materials for the facility to which
the agreement relates from the Company. The Company sells these materials under
formula-based or market-based pricing mechanisms. The Company also acts as the
agent for Monsanto in purchasing additional quantities of one of these
materials.

Monsanto and the Company entered into a supply agreement pursuant to which
Monsanto provides phosphorus trichloride (PCl(3)) to the Company for a term of
approximately seven years. Monsanto sells this material under a formula-based
pricing mechanism.

41
<PAGE> 42

MANAGEMENT

EXECUTIVE OFFICERS

Set forth below are the names, ages, titles, and past positions of the
executive officers of the Company. Each such individual serves at the pleasure
of the Company Board.

<TABLE>
<CAPTION>
NAME AND AGE CURRENT TITLE POSITIONS SINCE JANUARY 1, 1992
- ------------------------- --------------------------- --------------------------------------
<S> <C> <C>
Robert G. Potter, 58..... Chairman, Chief Executive Prior to the Spinoff, chief executive
Officer and Director of Monsanto's chemical businesses,
since 1986. Executive Vice President
of Monsanto, since 1990. Advisory
Director of Monsanto, since 1986.
Karl R. Barnickol, 56.... Senior Vice President, Prior to the Spinoff, General Counsel
General Counsel and of the Monsanto Chemicals Business,
Secretary since 1997. Associate General Counsel
and Assistant Secretary of Monsanto,
since 1985.
Rodney L. Bishop, 57..... Vice President and Prior to the Spinoff, Treasurer of the
Treasurer Monsanto Chemicals Business, since
1997. General Auditor of Monsanto,
since 1993. Assistant Controller of
Monsanto, 1982-1993.
Dennis L. Cavner, 43..... Vice President, Operational Prior to the Spinoff, Vice President,
Excellence Operational Excellence of the Monsanto
Chemicals Business, since 1997.
Director, Manufacturing, Saflex(R)
Plastic Interlayer, of Monsanto,
1996-1997. Director, Manufacturing,
Phosphorus and Derivatives, of
Monsanto, 1995-1996. Plant Manager of
Monsanto's Muscatine, Iowa facility,
1992-1995.
Robert A. Clausen, 52.... Senior Vice President and Prior to the Spinoff, Chief Financial
Chief Financial Officer Officer of the Monsanto Chemicals
Business, since 1997. President,
Monsanto Business Services, 1994-1997.
Vice President, Asset Management of
Monsanto, 1992-1994.
Sheila Feldman, 42....... Vice President, Human Prior to the Spinoff, Vice President,
Resources Human Resources, of the Monsanto
Chemicals Business, since 1997.
Director, Human Resources, Monsanto
Business Services and Stewardship,
1995-1997. Director, Human Resources,
The Chemical Group of Monsanto,
1993-1995. Manager, Human Resources
Planning, The Chemical Group of
Monsanto, 1991-1993.
</TABLE>

42
<PAGE> 43

<TABLE>
<CAPTION>
NAME AND AGE CURRENT TITLE POSITIONS SINCE JANUARY 1, 1992
- ------------------------- --------------------------- --------------------------------------
<S> <C> <C>
G. Bruce Greer, 37....... Vice President, Growth and Prior to the Spinoff, Vice President,
Commercial Development Growth and Commercial Development of
the Monsanto Chemicals Business, since
1997. Senior Director, Strategic
Change, of Monsanto, 1996-1997.
Associate Manager and Principal of
Gemini Consulting, a management
consulting firm, 1992-1996.
Roger S. Hoard, 52....... Vice President and Prior to the Spinoff, Controller of
Controller the Monsanto Chemicals Business, since
1997. Senior Director, Finance,
Monsanto Business Services, 1995-1997.
Controller, Fibers Division, The
Chemical Group of Monsanto, 1990-1995.
John C. Hunter III, 50... President, Chief Operating Prior to the Spinoff, Chief Operating
Officer and Director Officer of the Monsanto Chemicals
Business, since 1997. President,
Fibers Business Unit of Monsanto,
1995-1997. Vice President and General
Manager, Fibers Division and
Asia-Pacific, The Chemical Group of
Monsanto 1993-1995. Vice President and
General Manager, Asia-Pacific,
Monsanto Chemical Company, 1989-1993.
Michael E. Miller, 56.... Senior Vice President Prior to the Spinoff, Vice President,
and Chief Administrative Shared Services and Supply Chain of
Officer the Monsanto Chemicals Business, since
1997. President, Specialty Products
Business Unit Vice President,
Industrial Products of Monsanto, 1993-
1995. Senior Vice President,
Operations, The Chemical Group of
Monsanto, 1993-1995. Corporate Vice
President, Administration of Monsanto,
1989-1993.
O. Jerry Mullis, 55...... Vice President, Growth and Prior to the Spinoff, Vice President,
Commercial Development and Growth and Commercial Development and
Chief Technical Officer Chief Technical Officer of the
Monsanto Chemicals Business, since
1997. Director of Technology and MTS
for Specialty Products Division, The
Chemical Group of Monsanto, 1993-1997.
Director of Technology, Fibers
Division, The Chemical Group of
Monsanto, 1991-1993.
</TABLE>

DIRECTORS

Information with respect to the directors of the Company is set forth
below. The Company Board is divided into three classes. Directors for each class
are elected at the annual meeting of

43
<PAGE> 44

stockholders held in the year in which the term for such class expires and serve
thereafter for three years.

<TABLE>
<CAPTION>
INITIAL
TERM
NAME AND AGE PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS EXPIRES
- ------------------------------ --------------------------------------------------- -------
<S> <C> <C>
Robert T. Blakely, 55......... Executive Vice President and Chief Financial 2000
Officer, Tenneco Inc., since 1981. Director: New
York City Ballet; Manhattan and Bronx Council of
the Boy Scouts of America.

Joan T. Bok, 67............... Chairman of the Board, New England Electric System, 1999
since 1984. Director: Avery Dennison Corporation;
John Hancock Mutual Life Insurance Company; New
England Electric System and its subsidiaries
Massachusetts Electric Company, The Narragansett
Electric Company, and New England Power Company.
Trustee: National Osteoporosis Foundation; Woods
Hole Oceanographic Institution; Worcester
Foundation for Biomedical Research.

Paul H. Hatfield, 61.......... Chairman of the Board, President and Chief 2000
Executive Officer, Petrolite Corporation,
1995-1997. Vice President, Ralston Purina Co. and
Chief Executive Officer, Protein Technologies
International, Inc., a subsidiary of Ralston Purina
Co., 1977-1995. Director: DeKalb Genetics
Corporation; Penwest, Ltd.

John C. Hunter III, 50........ President and Chief Operating Officer of the 1998
Company. Director: Missouri Baptist Hospital. See
also "-- Executive Officers."

Robert H. Jenkins, 54......... Chairman of the Board and Chief Executive Officer, 2000
Sundstrand Corporation, since 1997; President and
Chief Executive Officer. Sundstrand Corporation,
1995-1997. Executive Vice President, Illinois Tool
Works, Inc., 1990-1995. Director: AK Steel Holdings
Corporation; Sundstrand Corporation.

Howard M. Love, 67............ Chief Executive Officer, National Intergroup, Inc., 1999
1981-91; Honorary Chairman, National Steel
Corporation, formerly a subsidiary of National
Intergroup, Inc., since 1990; Chairman and Chief
Executive Officer, 1984-90. Director: AEA
Investors; COMSAT Corp. Member: The Business
Council.

Frank A. Metz, Jr., 63........ Senior Vice President, Finance and Planning, and 2000
Chief Financial Officer, International Business
Machines Corporation, 1986-93; Director, 1991-93.
Director: Allegheny Power System, Inc.; Norrell
Corporation.

Robert G. Potter, 58.......... Chairman and Chief Executive Officer of the 1999
Company. Director: Southdown Inc.; Stepan Company.
See also "-- Executive Officers."
</TABLE>

<PAGE> 45

<TABLE>
<CAPTION>
INITIAL
TERM
NAME AND AGE PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS EXPIRES
- ------------------------------ --------------------------------------------------- -------
<S> <C> <C>
William D. Ruckelshaus, 65.... Chairman, Browning-Ferris Industries, Inc., since 1998
1995; Principal, Madrona Investment Group L.L.C.,
since 1996; Chairman and Chief Executive Officer,
Browning-Ferris Industries, Inc., 1988-95. Of
Counsel, Perkins Coie since 1985. Administrator,
Environmental Protection Agency, 1983-85. Director:
Browning-Ferris Industries, Inc.; Cummins Engine
Co., Inc.; Gargoyles Inc.; Monsanto; Nordstrom,
Inc.; Weyerhaeuser Company.
John B. Slaughter, 63......... President, Occidental College since 1988. Director, 1998
National Science Foundation, 1980-82. Director:
Atlantic Richfield Company; Avery Dennison
Corporation; International Business Machines
Corporation; Northrop Grumman Corp. Member:
American Academy of Arts and Sciences; National
Academy of Engineering. Fellow: American
Association for the Advancement of Science;
Institute of Electrical and Electronic Engineers.
</TABLE>

Prior to the Spinoff, Mrs. Bok, Messrs. Love and Metz and Dr. Slaughter
were directors of Monsanto. Mr. Ruckelshaus is a director of both Monsanto and
the Company.

COMMITTEES OF THE COMPANY BOARD

The Company Board has established several committees, including an Audit
and Finance Committee, an Executive Compensation and Development Committee, and
a Governance Committee.

COMPENSATION OF DIRECTORS

Employee directors of the Company do not receive a retainer or other
compensation for attendance at the Board or Board committee meetings.
Non-employee directors receive an annual retainer of $50,000. At least half is
credited in deferred stock units ("DSUs") which will be paid out in Company
Common Stock in two installments following termination of the director's Board
service. Each non-employee director may elect to receive the remainder in cash
or defer all or a part into DSUs, a cash deferral account, or both. In addition,
non-employee directors receive a non-qualified stock option to purchase 8,000
shares of Company Common Stock upon their initial election to the Board and an
annual non-qualified stock option to purchase 2,000 shares of Company Common
Stock in either case at an exercise price equal to the fair market value of the
Company Common Stock on the date of grant. The annual grant is prorated if a
director is elected at a time other than the Annual Meeting of Shareholders. The
stock options become exercisable in three equal installments on the first three
anniversaries of the option grant date. The stock options have a term of ten
years, but terminate two years after the cessation of a director's Board service
for any reason, if earlier. Committee chairs are paid an annual retainer of
$5,000. Each non-employee director receives a fee of $1,000 for each Board
committee meeting attended. The Company does not have a retirement program for
its non-employee directors.

45
<PAGE> 46

EXECUTIVE COMPENSATION

HISTORICAL COMPENSATION

The following table sets forth compensation paid by Monsanto in 1996 to the
Chief Executive Officer of the Company and, based on such compensation, the most
highly compensated executive officers for the fiscal year ended December 31,
1996 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ------------------------------------------------------------------------------ ----------------------- -------
(a) (b) (c) (d) (e) (f) (g) (h)
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP OTHER
SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($)(3) (#)(4) ($)(4) ($)(5)
- ------------------------------------- ---- ------- ------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
R.G. Potter.......................... 1996 500,000 940,000 -0- -0- 800,000 -0- 54,138
Chairman, Chief
Executive Officer and Director
K.R. Barnickol....................... 1996 197,925 207,789 -0- 491,500 -0- -0- 19,022
Senior Vice President,
General Counsel and Secretary
R.A. Clausen......................... 1996 230,000 307,150 -0- -0- 250,000 -0- 21,762
Senior Vice President and
Chief Financial Officer
J.C. Hunter III...................... 1996 250,000 340,000 -0- -0- 250,000 -0- 28,077
President, Chief Operating
Officer and Director
M.E. Miller.......................... 1996 260,000 362,000 -0- -0- 250,000 -0- 24,337
Senior Vice President
and Chief Administrative Officer
</TABLE>

- ---------------
(1) 30% of the 1996 bonus amounts shown above (excluding the portion
attributable to achievement of Monsanto's return on equity ("ROE") goal for
each of the Named Executive Officers) was adjusted to recognize sustained
long-term performance and paid in March 1997 as described in footnote 1 to
the Long Term Incentive Plan Award table below.

(2) Applicable regulations set reporting levels for certain non-cash
compensation.

(3) On December 31, 1996, Mr. Barnickol held 20,000 shares of Monsanto
Restricted Stock having a value on that date of $788,760. These shares were
received on January 24, 1996, when they had the value shown in the table
above. The restrictions on these shares are scheduled to lapse as to
one-fourth of the shares on the first business day following each of the
first four anniversaries of the date of grant. In accordance with this
schedule, 5,000 shares vested on January 27, 1997. Dividends are paid on
these shares of Monsanto Restricted Stock at the same rate as paid to all
stockholders.

(4) These columns reflect grants of Monsanto Options and payouts made under
various option programs and long-term incentive plans ("LTIPs"),
respectively. No LTIP payments were made in 1996.

(5) Amounts shown for 1996 include contributions to thrift/savings plans of
Monsanto as follows: Mr. Potter, $21,000; Mr. Barnickol, $8,313; Mr.
Clausen, $9,660; Mr. Hunter, $10,500; and Mr. Miller, $10,920; split dollar
life insurance premiums paid as follows: Mr. Potter, $32,468; Mr. Barnickol,
$10,563; Mr. Clausen, $11,618; Mr. Hunter, $17,577; and Mr. Miller, $13,417;
costs for supplemental medical plans of Monsanto as follows: Mr. Potter,
$524 and Mr. Clausen, $338; and costs for executive travel accident plans of
Monsanto, as follows: Mr. Potter, $146; Mr. Barnickol, $146; and Mr.
Clausen, $146.

The following table shows grants of Monsanto Options under the Monsanto
Management Incentive Plan of 1996 to the Named Executive Officers during the
1996 fiscal year. In accordance with Commission rules, the Black-Scholes option
pricing model was chosen to estimate the grant date present value of the options
set forth in this table. The Company's use of this model should not be construed
as an endorsement of its accuracy at valuing options. Accordingly, there is no
assurance that the value realized by an executive, if any, will be at or near
the value estimated by the Black-Scholes model. The following assumptions were
made for purposes of calculating the original grant date present value of
Monsanto Options: an option term of 4.5 years, volatility of 25%, dividend yield
of 1.5%, and a risk-free interest rate of 6.28%. As a result of the Spinoff,
each Monsanto Option granted to the Named Executive Officers listed below was
replaced with a

46
<PAGE> 47

combination of a New Monsanto Option and a Company Option pursuant to
adjustments provided in the Employee Benefits Allocation Agreement, and, as a
result, their value will depend, in part, on the future value of Company Common
Stock as well as on the future value of Monsanto Common Stock. See "Adjustments
to Outstanding Monsanto Stock Awards as a result of the Spinoff."

OPTION GRANTS IN 1996

<TABLE>
<CAPTION>
GRANT
DATE
INDIVIDUAL GRANTS VALUE
-------------------------- ---------
(a) (b) (c) (d) (e) (f)
NUMBER OF % OF TOTAL GRANT
SECURITIES OPTIONS EXERCISE DATE
UNDERLYING GRANTED TO OR BASE PRESENT
OPTIONS EMPLOYEES IN PRICE EXPIRATION VALUE
GRANTED(#) FISCAL YEAR ($/SHARE) DATE ($)
---------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
R. G. Potter......................... 160,000(1) 0.6 30.338 04/25/06 1,459,200
240,000 1.0 35.000 04/25/06 1,735,200
240,000 1.0 40.000 04/25/06 1,351,200
160,000 0.6 45.000 04/25/06 985,600(2)
K. R. Barnickol...................... -0- -0- -- -- --
R. A. Clausen........................ 50,000(1) 0.2 30.338 04/25/06 456,080
75,000 0.3 35.000 04/25/06 542,250
75,000 0.3 40.000 04/25/06 422,250
50,000 0.2 45.000 04/25/06 308,000(2)
J.C. Hunter III...................... 50,000(1) 0.2 30.338 04/25/06 456,080
75,000 0.3 35.000 04/25/06 542,250
75,000 0.3 40.000 04/25/06 422,250
50,000 0.2 45.000 04/25/06 308,000(2)
M.E. Miller.......................... 50,000(1) 0.2 30.338 04/25/06 456,080
75,000 0.3 38.000 04/25/06 542,250
75,000 0.3 40.000 04/25/06 422,260
50,000 0.2 45.000 04/25/06 308,000(2)
</TABLE>

- ---------------
(1) The exercise price of $30.338 for this tranche of Monsanto Options was the
fair market value per underlying share on April 26, 1996, the date of grant.
The three succeeding tranches have pre-established "premium" exercise prices
(prices higher than the fair market value per underlying share on the date
of grant) which must be attained within four, five, and six years,
respectively, from the date of grant and maintained for ten consecutive
trading days in order to avoid forfeiture of Monsanto Options in the
tranche. All of the preestablished exercise prices have now been met. All
Monsanto Options must be held for a minimum of one year from the date of
grant before they may be exercised. These Monsanto Options expire on the
tenth anniversary of the grant date unless forfeited earlier. The Monsanto
Options carry stock tax withholding rights.

(2) Two of the assumptions used to calculate the grant date present value of
these Monsanto Options varied from the assumptions set forth above because
the pre-established exercise price of these Monsanto Options had not yet
been attained when the calculation was made. The option term was assumed to
be six years, and the risk-free interest rate 6.37%.

As adjusted in connection with the Spinoff, the above grants to Mr. Potter
were converted into (a) Company Options on 86,523 shares of Company Common Stock
at an exercise price of $13.46 per share, 129,784 shares at $15.53 per share,
129,784 shares at $17.75 per share and 86,523 shares at $19.97 per share and (b)
New Monsanto Options on 133,444 shares of Monsanto Common Stock at an exercise
price of $27.64 per share, 200,166 shares at $31.89 per share, 200,166 at $36.44
per share and 133,444 at $41.00 per share. For each of Messrs. Clausen, Hunter
and Miller, the above grants were converted into (a) Company Options on 27,038
shares of Company Common Stock at an exercise price of $13.46 per share, 40,558
shares at $15.53 per share, 40,558 shares at $17.75 per share and 27,038 shares
at $19.97 per share and (b) New Monsanto Options on 41,701 shares of

47
<PAGE> 48

Monsanto Common Stock at an exercise price of $27.64 per share, on 62,552 shares
at $31.89 per share, 62,552 shares at $36.44 per share and 41,701 shares at
$41.00 per share.

The following table provides information with respect to Monsanto Options
exercised by the Named Executive Officers during the 1996 fiscal year and the
value of unexercised Monsanto Options held by the Named Executive Officers at
fiscal year end. As a result of the Spinoff, each Monsanto Option granted to the
Named Executive Officers listed below was replaced with a combination of a New
Monsanto Option and a Company Option, pursuant to adjustments provided in the
Employee Benefits Allocation Agreement and, as a result, their value will depend
on the future value of Company Common Stock as well as on the future value of
Monsanto Common Stock. See "Adjustments to Outstanding Monsanto Stock Awards as
a result of the Spinoff." The amounts set forth in the two columns relating to
unexercised Monsanto Options, unlike the amounts set forth in the column headed
"Value Realized," have not been, and might never be, realized. The underlying
options might not be exercised; and actual gains on exercise, if any, would
depend on the value of Monsanto Common Stock or Company Common Stock, as
applicable, on the date of exercise, and there can be no assurance that these
values would be realized.

AGGREGATED OPTION EXERCISES IN 1996 AND
OPTION VALUES ON DECEMBER 31, 1996

<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
- ---------------------------- ----------- --------- ---------------------- --------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED VALUE FY-END(#)(2) AT FY-END($)(2)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($)(1) UNEXERCISABLE UNEXERCISABLE
- ---------------------------- ----------- --------- ---------------------- --------------------
<S> <C> <C> <C> <C>
R. G. Potter................ -0- -0- 947,390/800,000 25,961,331/2,521,120
K. R. Barnickol............. 22,000 503,800 434,000/0 12,017,131/0
R. A. Clausen............... -0- -0- 229,305/250,000 5,735,595/787,850
J. C. Hunter III............ 60,000 1,272,000 114,500/250,000 3,133,914/787,850
M. E. Miller................ 115,000 1,542,449 318,000/250,000 8,941,810/787,850
</TABLE>

- ---------------
(1) The amounts in column (c) reflect the value of shares received on the
exercises of Monsanto Options granted up to ten years earlier at fair market
values ranging from $6.90 to $11.50.

(2) Unexercised Monsanto Options shown in columns (d) and (e) reflect grants
received over an extended period of time.

ADJUSTMENTS TO OUTSTANDING MONSANTO STOCK AWARDS AS A RESULT OF THE SPINOFF

Pursuant to the Employee Benefits Allocation Agreement, at the time of the
Spinoff, certain Monsanto Options granted to Company employees in 1997 were
converted into Company Options with adjustments to preserve their value. These
adjustments were based upon the pre-Spinoff trading value of Monsanto Common
Stock and the when-issued trading value of Company Common Stock. In addition,
Monsanto Options granted to Company employees prior to 1997 were converted into
two awards, one based on Monsanto Common Stock and one based on Company Common
Stock, with the same overall value at the time of the Spinoff as the old award.
The Company will be responsible for delivering shares of the Company Common
Stock upon exercise of the Company Options, and Monsanto will be responsible for
the delivery of shares of Monsanto Common Stock upon exercise of New Monsanto
Options. See "Agreements with Monsanto -- Employee Benefits Allocation
Agreement." The holders of Monsanto Restricted Stock (whether employed by
Monsanto or the Company after the Spinoff) received the distribution of shares
of the Company Restricted Stock with respect to their Monsanto Restricted Stock,
and such shares of the Company Restricted Stock are generally subject to the
same restrictions as Monsanto Restricted Stock.

48
<PAGE> 49

The following table includes information with respect to awards made
pursuant to the Monsanto Executive Stock Purchase Incentive Plan (the "Monsanto
Executive Stock Purchase Incentive Plan") to the Named Executive Officers in
1996.

LONG-TERM INCENTIVE PLANS -- AWARDS IN 1996

<TABLE>
<CAPTION>
PERFORMANCE
OR OTHER
NUMBER OF PERIOD ESTIMATED FUTURE PAYOUTS UNDER NON-
SHARES, UNTIL STOCK PRICE-BASED PLANS
UNITS OR MATURATION -------------------------------------
NAME OTHER RIGHTS OR PAYOUT THRESHOLD TARGET MAXIMUM
(a) (a)(b) (c) ($)(d) ($)(e) ($)(f)
- --------------------- ------------ ----------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
R. G. Potter......... N/A (1) N/A N/A 242,813 N/A
65,000 units(2) N/A N/A N/A N/A
K. R. Barnickol...... N/A (1) N/A N/A 47,715 N/A
R. A. Clausen........ N/A (1) N/A N/A 72,750 N/A
20,000 units(2) N/A N/A N/A N/A
J. C. Hunter III..... N/A (3) N/A N/A 468,313 N/A
20,000 units(2) N/A N/A N/A N/A
M. E. Miller......... N/A (3) N/A N/A 498,620 N/A
20,000 units(2) N/A N/A N/A N/A
</TABLE>

- ---------------
(1) The amount shown in this line represents the sustained performance
adjustment applied this year to both the portion of the 1996 bonus described
in footnote 1 to the Summary Compensation Table and the portion of the
annual bonus withheld for 1995 because net income and capital employed
objectives were met for all three performance years under Monsanto's annual
incentive program for the years 1994-1996. The total of all adjustments for
sustained performance relative to an individual's cumulative incentive
awards over the 1994-1996 performance period paid in March 1997 ranged from
20% to 25% of the awards paid for the three-year period.

(2) The units represent shares of Monsanto Common Stock purchased under the
Monsanto Executive Stock Purchase Incentive Plan. Pursuant to this plan,
each Named Executive Officer purchased with a full-recourse interest-bearing
loan from Monsanto the number of shares of Monsanto Common Stock equal to
the number of units next to his name and became entitled to receive certain
payouts at the end of the five-year performance period based upon continued
service with Monsanto and the total stockholder return to Monsanto's
stockholders during such performance period as compared with the total
shareholder return for companies in the Standard & Poor's Industrials. The
interest rate on the loan was 6.36%, the applicable U.S. federal rate (as
determined by Section 1274(d) of the Code) in effect at the time of
purchase. As a result of the Spinoff and the executive's consequent
termination of employment with Monsanto, the executive will receive a
prorated service award under the plan based on the number of months of
service with Monsanto during the performance period and be eligible to
receive a prorated performance award under the plan based upon Monsanto's
relative stock price performance through the date of termination. The awards
will be applied to the outstanding loan balances, and any remaining loan
balance must be repaid by the executive.

(3) The amount shown in this line represents the sum of (a) the award for
recognition of performance in 1996 under the 1994-1996 long-term incentive
program applicable to the executive and (b) the sustained performance
adjustment applied this year to the total of the long-term incentive award
for 1996 and the portion of the annual bonuses withheld for 1995 and 1996
because net income and capital employed objectives were met for all three
performance years under both the annual and the long-term incentive programs
for the years 1994-1996. The total of all adjustments for sustained
performance relative to an individual's cumulative incentive awards over the
1994-1996 performance period paid in March 1997 ranged from 20% to 25% of
the awards paid for the three-year period.

49
<PAGE> 50

PENSION PLANS

Prior to the Spinoff, the Named Executive Officers were eligible to receive
benefits payable under Monsanto's defined benefit pension plans. In connection
with the Spinoff, Solutia assumed the liability to provide the benefits accrued
by the Named Executive Officers under the Monsanto defined benefit pension plans
prior to the Spinoff. The Named Executive Officers will be eligible for benefits
payable under Solutia's defined benefit pension plans based on their service
with Monsanto before the Spinoff and their service with Solutia after the
Spinoff.

The following table illustrates the annual normal retirement benefits
payable under Monsanto's defined benefit pension plans in effect in 1996 and
applicable to the Named Executive Officers. The benefit levels in the table
assume retirement at age 65 and payment in the form of a single life annuity.

<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30 35 40
- ------------ -------- -------- -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 400,000 $ 28,000 $ 56,000 $ 84,000 $112,512 $142,512 $172,512 $ 202,512 $ 252,512
600,000 42,000 84,000 127,512 172,512 217,512 262,512 307,512 352,512
800,000 56,000 112,512 172,512 232,512 292,512 352,512 412,512 472,512
1,000,000 70,000 142,512 217,512 292,512 367,512 442,512 517,512 592,512
1,200,000 84,000 172,512 262,512 352,512 442,512 532,512 622,512 712,512
1,400,000 98,000 202,512 307,512 412,512 517,512 622,512 727,512 832,512
1,600,000 112,512 232,512 352,512 472,512 592,512 712,512 832,512 952,512
</TABLE>

Generally, compensation utilized for pension formula purposes includes
salary and annual bonus reported in columns (c) and (d) of the Summary
Compensation Table. However, the portion of the annual bonus attributable to
achievement of 20% ROE is not included in the pension formula.

The annual normal retirement benefits payable under Monsanto's pension
plans in effect in 1996 to the Named Executive Officers are the greater of 1.4%
of average final compensation multiplied by years of service, without reduction
for Social Security or other offset amounts, or 1.5% of average final
compensation multiplied by years of service, less a 50% Social Security offset.
Average final compensation for purposes of these plans is the greater of (1)
average compensation received during the final 36 months of employment or (2)
average compensation received during the highest three of the final five
calendar years of employment.

Average final compensation and the respective years of service at Monsanto
as of December 31, 1996 for the Named Executive Officers are as follows: Mr.
Potter, $1,073,223 (31.1 years); Mr. Barnickol, $333,120 (26.4 years); Mr.
Clausen, $368,244 (27.8 years); Mr. Hunter, $423,408 (27.3 years); and Mr.
Miller, $530,604 (31.4 years).

The Solutia defined benefit pension plans consist of two accounts: a "Prior
Plan Account" and a "Cash Balance Account." The opening balance of the Prior
Plan Account was the lump sum value of the executive's December 31, 1996 monthly
retirement benefit earned prior to January 1, 1997 under the Monsanto defined
benefit pension plans described above, calculated using the assumption that the
monthly benefit would be payable at age 55 with no reduction for early payment.
For each year of the executive's continued employment with Solutia (including
all of 1997), the executive's Prior Plan Account will be increased by 4% to
recognize that prior plan benefits would have grown as a result of pay
increases. For each year during which the executive is employed by Solutia
(including all of 1997), 3% of annual compensation in excess of the Social
Security wage base and a percentage (based on age) of annual compensation
(salary and annual bonus) will be credited to the Cash Balance Account. The
applicable percentages and age ranges are: 3% before age 30, 4% for ages 30 to
39, 5% for ages 40 to 44, 6% for ages 45 to 49, and 7% for age 50 and over. In
addition, the Cash Balance Account of executives who earned benefits under
Monsanto's defined benefit pension plans before 1997 will be credited each year
(for up to 10 years based on prior years of service with Monsanto before 1997)
during which the executive is employed by Solutia (including all of 1997) with
an amount equal to a percentage (based on age) of annual compensa-

50
<PAGE> 51

tion. The applicable percentages and age ranges are: 2% before age 30, 3% for
ages 30 to 39, 4% for ages 40 to 44, 5% for ages 45 to 49, and 6% for age 50 and
over.

EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS

Each of the Named Executive Officers and certain other key executives of
the Company is a party to a change of control employment agreement (a "Change of
Control Employment Agreement"). Each such Change of Control Employment Agreement
becomes effective upon a "change of control" of the Company (as defined in the
Change of Control Employment Agreement). Each Change of Control Employment
Agreement provides for the continuing employment of the executive after the
change of control on terms and conditions no less favorable than those in effect
before the change of control. If the executive's employment is terminated by the
Company without "cause" or if the executive terminates his or her own employment
for "good reason" (each as defined in the Change of Control Employment
Agreement), the executive is entitled to severance benefits equal to a
"multiple" of his or her annual compensation (including bonus) and continuation
of certain benefits for a number of years equal to the multiple. The multiple is
three for Named Executive Officers and two or three for the other executives
(or, in either case, the shorter number of years until the executive's normal
retirement date). In addition, each of the Named Executive Officers and the
other executives who are entitled to a severance multiple of three is entitled
to receive the severance benefits if he or she voluntarily terminates his or her
own employment during the 30-day period beginning on the first anniversary of
certain changes of control. Finally, the executives are entitled to an
additional payment, if necessary, to make them whole as a result of any excise
tax imposed by the Code on certain change of control payments (unless the safe
harbor below which the excise tax is imposed is not exceeded by more than 10%,
in which event the payments will be reduced to avoid the excise tax). These
Change of Control Agreements with the Company executives were assumed by the
Company from Monsanto at the time of the Spinoff, and each will terminate six
months after the Spinoff unless before that time there is either a change of
control of the Company or the Company Board ratifies such Change of Control
Agreement.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

INDEBTEDNESS

During 1996, Mr. Potter, Mr. Clausen, Mr. Hunter and Mr. Miller all
received full-recourse, interest-bearing loans for the purchase price of
Monsanto Common Stock they purchased pursuant to the terms of the Monsanto
Executive Stock Purchase Incentive Plan. The loans initially had an eight-year
term and accrue interest at the applicable U.S. federal rate (as determined by
Section 1274(d) of the Code) on the purchase date for loans of such maturity,
compounded annually. The applicable U.S. federal rate in effect on the purchase
date was 6.36%. In addition, the loans were secured by a pledge of the shares of
Monsanto Common Stock acquired under the Monsanto Executive Stock Purchase
Incentive Plan. Interest is payable prior to maturity to the extent of dividends
paid on the shares purchased, with the balance due at the maturity of the loan.
As a result of the Spinoff and the executive's consequent termination of
employment with Monsanto, the executive will receive, pursuant to the Monsanto
Executive Stock Purchase Incentive Plan, a prorated service award under the plan
based on the number of months of service with Monsanto during the performance
period and will be eligible to receive a prorated performance award under the
plan based upon Monsanto's relative stock price performance through the date of
termination, which will be applied to prepay a portion of the outstanding loans.
The executives will be required to pay any remaining balances on the loans.

On May 10, 1996, Mr. Potter and the other three Named Executive Officers
who received loans were given loans in the following amounts: Mr. Potter,
$1,962,194; Mr. Clausen, $603,752; Mr. Hunter, $603,752; and Mr. Miller,
$603,752. The largest amounts outstanding during 1996, which were also the
amounts outstanding as of December 31, 1996, were as follows: Mr. Potter,
$2,012,729; Mr. Clausen, $619,301; Mr. Hunter, $619,301; and Mr. Miller,
$619,301.

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<PAGE> 52

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
OF COMPANY COMMON STOCK

BY MANAGEMENT

The following table sets forth the number of shares of Company Common Stock
beneficially owned, directly or indirectly, by each director of the Company,
each Named Executive Officer and all directors and executive officers of the
Company as a group, as of September 1, 1997. Except as otherwise indicated, each
individual named has sole investment and voting power with respect to the
securities shown.

<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK SHARES UNDERLYING
OWNED DIRECTLY OR OPTIONS EXERCISABLE
NAME INDIRECTLY(a)(b) WITHIN 60 DAYS(c) TOTAL
- -------------------------------------- ----------------- ------------------- ---------
<S> <C> <C> <C>
Karl R. Barnickol..................... 21,024(d) 207,657 228,681
Robert T. Blakely..................... 0 0
Joan T. Bok........................... 2,689 2,689
Robert A. Clausen..................... 8,463 205,492 213,955
Paul H. Hatfield...................... 400 400
John C. Hunter III.................... 17,749(e) 192,783 210,532
Robert H. Jenkins..................... 0 0
Howard M. Love........................ 3,957(f) 3,957
Frank A. Metz, Jr..................... 2,037 2,037
Michael E. Miller..................... 17,237 280,119 297,356
Robert G. Potter...................... 73,276(g) 944,930 1,018,206
William D. Ruckelshaus................ 2,922(h) 2,922
John B. Slaughter..................... 1,930(i) 1,930
All directors and executive officers
(19 persons)........................ 168,570(j) 2,006,009 2,174,579
</TABLE>

- ---------------
(a) Includes shares held under the Company Savings and Investment Plan ("SIP")
based on a preliminary calculation of adjustments being made as a result of
the Spinoff: Mr. Potter, 29,458; Mr. Barnickol, 13,122; Mr. Clausen, 1,083;
Mr. Hunter, 9,948; Mr. Miller, 12,380; and directors and executive officers
as a group, 80,129. With respect to shares held under the Company SIP,
employee directors and officers have sole discretion as to voting and,
within limitations provided by the Company SIP, investment of shares. Shares
are voted by the trustees of the Company SIP in accordance with instructions
from participants. If instructions are not received by the trustees as to
the voting of particular shares, shares are to be voted in proportion to
instructions actually received from other participants in the Company SIP.
Also includes Company Restricted Stock received in the Spinoff as a dividend
on Monsanto Restricted Stock held under a Monsanto incentive plan: Mr.
Barnickol, 3,000 shares. With respect to these shares, Mr. Barnickol has
sole voting power and no current investment power.

(b) Includes Company Restricted Stock received in the Spinoff by Mrs. Bok,
Messrs. Love and Metz, and Dr. Slaughter, who were directors of Monsanto, as
a dividend on the stock-based portion of the non-employee director annual
retainer from Monsanto that has since been forfeited as a result of their
resignation from Monsanto's Board of Directors at the Spinoff: Mrs. Bok, 99;
Mr. Love, 130; Mr. Metz, 262; and Dr. Slaughter, 130. Also includes 300
shares of Company Restricted Stock received in the distribution by Mr.
Ruckelshaus, who is continuing as a director of Monsanto. With respect to
these shares, Mr. Ruckelshaus has sole voting power and no current
investment power.

(c) The Commission deems a person to have beneficial ownership of all shares
which that person has the right to purchase within 60 days. The shares
indicated represent Company Options received in the conversion of Monsanto
Options.

(d) Includes 1,778 shares owned jointly by Mr. Barnickol and his wife.

(e) Includes 33 shares owned by Mr. Hunter's son.

52
<PAGE> 53

(f) Includes 1,200 shares held in trust in which Mr. Love has an income interest
as to which he expressly disclaims beneficial ownership.

(g) Includes 6,520 shares owned by Mr. Potter's wife as to which he expressly
disclaims beneficial ownership and 99 shares owned jointly by Mr. Potter and
his wife.

(h) Includes 200 shares owned jointly by Mr. Ruckelshaus and his wife.

(i) Includes 137 shares owned by Dr. Slaughter's wife as to which he expressly
disclaims beneficial ownership.

(j) Includes 90 shares beneficially owned by a member of the household of an
executive officer not named above and 2,466 shares as to which an executive
officer not named above shares investment and voting power.

The percentage of shares of outstanding Company Common Stock, including
Company Options exercisable within 60 days of September 1, 1997, beneficially
owned by all directors and executive officers of the Company as a group is
approximately 1.83%. The percentage of such shares beneficially owned by any one
director or Named Executive Officer does not exceed 1%.

BY OTHERS

The following table sets forth each person or entity that, to the knowledge
of the Company, beneficially owned more than 5% of the outstanding Company
Common Stock on September 1, 1997.

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP
OF COMPANY PERCENT OF
NAME OF BENEFICIAL OWNER COMMON STOCK CLASS
- ---------------------------------------------------- ----------------------- ----------
<S> <C> <C>
Oppenheimer Group, Inc.............................. 6,246,465(a) 5.31%
Oppenheimer Tower
World Financial Center
New York, New York 10281

FMR Corp............................................ 5,987,029(b) 5.09%
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>

- ---------------
(a) The ownership information disclosed above is based on a Schedule 13G with
respect to Monsanto Common Stock filed with the Commission on February 4,
1997 by Oppenheimer Group, Inc., on behalf of itself and related companies
and certain investment advisory clients. Such 13G reports the beneficial
ownership of 31,232,321 shares of Monsanto Common Stock. Power to vote and
dispose of all 31,232,321 shares, including 30,923,115 shares held by
Oppenheimer Capital, is shared. Oppenheimer Group, Inc. and the related
companies and investment advisory clients disclaim beneficial ownership and
shared voting and dispositive power with respect to all 31,232,321 shares.
According to a Schedule 13F filed with respect to the first quarter of 1997
by Oppenheimer Group, Inc., the 31,232,321 shares of Monsanto Common Stock
has been decreased to 31,116,110. Based on the Schedule 13G and the one-
for-five distribution ratio in the Spinoff, Oppenheimer Group, Inc. would
beneficially own 6,246,465 shares of Company Common Stock as a result of the
Spinoff.

(b) The ownership information disclosed above is based on a Schedule 13G with
respect to Monsanto Common Stock filed on February 12, 1997 with the
Commission by FMR Corp. ("FMR") on behalf of itself, certain related
companies, and certain shareholders. Such 13G reports beneficial ownership
of 29,935,145 shares of Monsanto Common Stock. FMR, through its
subsidiaries, Fidelity Management & Research Company and Fidelity Management
Trust Company, and through Fidelity International Limited, had sole
dispositive power over all 29,935,145 shares, shared voting power as to none
of these shares, and sole voting power as to 4,483,385 of these shares.
According to a Schedule 13F filed with respect to the first quarter of 1997
by FMR, the 29,935,145 has increased to 32,441,650. Based on the Schedule
13G and the one-for-five distribution ratio in the Spinoff, FMR would
beneficially own 5,987,029 shares of Company Common Stock as a result of the
Spinoff.

53
<PAGE> 54

OTHER INDEBTEDNESS OF THE COMPANY

COMMERCIAL PAPER

The proceeds of the Offerings will be used to refinance commercial paper
issued by the Company which, at September 19, 1997, had a weighted average
maturity of 25 days and a weighted average interest rate of 5.77%. The
commercial paper issued by the Company has been used to refinance the
approximately $1.0 billion of Assumable Commercial Paper assumed by the Company
from Monsanto in connection with the Spinoff. See "Use of Proceeds."

THE CREDIT FACILITIES

The Company has entered into a total of $1.2 billion in revolving credit
facilities (the "Credit Facilities") to support its commercial paper borrowings.
The Credit Facilities are also available for working capital and other general
corporate purposes. As of September 22, 1997, there were no borrowings
outstanding under the Credit Facilities. The Credit Facilities consist of an
unsecured five-year revolving credit facility under which the Company may borrow
from time to time on a revolving credit basis an aggregate principal amount of
up to $800 million and an unsecured 364-day revolving credit facility under
which the Company may borrow on a revolving credit basis an aggregate principal
amount of up to $400 million. The interest rates under the Credit Facilities are
based upon, at the option of the Company, (i) the London interbank offered rate
("LIBOR") or (ii) the Base Rate. The Base Rate shall at all times be equal to
the highest of (a) the prime rate of Citibank, N.A. ("Citibank"),(b) the federal
funds rate plus 0.5% or (c) the sum (adjusted to the nearest 1/16 of 1% or, if
there is no nearest 1/16 of 1%, to the next higher 1/16 of 1%) of (i) 0.5% plus
(ii) the rate obtained by dividing (A) the latest three-week moving average of
secondary market morning offering rates in the United States for three-month
certificates of deposit of major United States money market banks, by (B) a
percentage equal to 100% minus the average of the daily percentages specified
during such three-week period by the Board of Governors of the Federal Reserve
System for determining the maximum reserve requirement for Citibank with respect
to liabilities consisting of or including (among other liabilities) three-month
U.S. dollar non-personal time deposits in the United States, plus (iii) the
average during such three-week period of the annual assessment rates estimated
by Citibank for determining the then current annual assessment payable by
Citibank to the Federal Deposit Insurance Corporation (or any successor) for
insuring U.S. dollar deposits of Citibank in the United States.

Interest rates based on LIBOR will be increased by a spread of between 13.5
and 22.5 basis points for the five-year revolving credit facility and 20.0 and
40.0 basis points for the 364-day revolving credit facility depending upon the
actual ratings (the "ratings") by two credit rating agencies of senior unsecured
long-term debt issued by the Company or, if there is no such debt, the
indicative rating of the Company by such rating agencies. Based on the current
ratings, the spread over LIBOR is presently 22.0 basis points for the five-year
revolving credit facility and 24.5 basis points for the 364-day revolving credit
facility. If the Company elects to borrow under either Credit Facility, the
total spread (including facilities fees) over LIBOR would be 32.5 basis points
for each Credit Facility.

The Credit Facilities contain a number of covenants that, among other
things, restrict the Company's ability to dispose of its assets, incur
additional indebtedness, create liens on assets, engage in mergers or
consolidations or change the businesses conducted by the Company, and otherwise
restrict certain corporate activities by the Company. In addition, under the
Credit Facilities, the Company is required to comply with and maintain specified
financial ratios and tests, including, without limitation, an interest expense
coverage ratio.

The Credit Facilities specify certain customary events of default,
including, without limitation, non-payment of principal, interest or fees,
violation of covenants, inaccuracy of representations and warranties in any
material respect, cross default to certain other indebtedness and agreements,
bankruptcy and insolvency events, material judgments and liabilities.

54
<PAGE> 55

DESCRIPTION OF THE SECURITIES

The Notes, the 2027 Debentures and the 2037 Debentures will each constitute
a series of unsecured senior debt securities of the Company, and will rank pari
passu with each other and with all other unsecured senior indebtedness of the
Company. The Securities of each series will be issued pursuant to an Indenture,
dated as of October 1, 1997 (the "Indenture"), between the Company and The Chase
Manhattan Bank, as Trustee (the "Trustee"). The terms of the Indenture are also
governed by certain provisions contained in the Trust Indenture Act of 1939, as
amended (the "TIA"). The Indenture provides for the issuance from time to time
in one or more series of unsecured debentures, notes or other evidences of
indebtedness and does not limit the aggregate principal amount of securities
that may be issued thereunder.

The following summary of the provisions of the Indenture and the Securities
does not purport to be complete and where reference is made to particular
provisions of the Indenture and the Securities, such provisions, including the
definitions of certain terms, are qualified in their entirety by reference to
all of the provisions of the Indenture and the forms of Securities, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. As used in this "Description of the Securities," the term
"the Company" refers to Solutia Inc. and not to any of its subsidiaries.

All terms capitalized and not otherwise defined in this Prospectus have the
meanings ascribed thereto in the Indenture and the section references used
herein are references to the Indenture.

NOTES

The Notes will be unsecured senior obligations of the Company, will be
limited to $150,000,000 aggregate principal amount and will mature on October
15, 2002. The Notes will bear interest at the rate per annum shown on the cover
page of this Prospectus from October 15, 1997 or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, payable semi-
annually on April 15 and October 15 of each year, commencing April 15, 1998, to
the Persons in whose names the Notes (or any predecessor Notes) are registered
at the close of business on the preceding April 1 or October 1, as the case may
be. The Notes will not be redeemable at the option of the Company prior to
maturity and do not have the benefit of any sinking fund.

2027 DEBENTURES AND 2037 DEBENTURES

The 2027 Debentures and the 2037 Debentures will each be unsecured senior
obligations of the Company, will be limited to $300,000,000 aggregate principal
amount and $150,000,000 aggregate principal amount, respectively, and will
mature on October 15, 2027 and October 15, 2037, respectively. The 2027
Debentures and the 2037 Debentures will bear interest at the respective rates
per annum shown on the cover page of this Prospectus from October 15, 1997 or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, payable semi-annually on April 15 and October 15 of each
year, commencing April 15, 1998, to the Persons in whose names such Debentures
(or any predecessor Debentures) are registered at the close of business on the
preceding April 1 or October 1, as the case may be.

REPAYMENT AT OPTION OF HOLDERS OF 2037 DEBENTURES

The 2037 Debentures may be repaid on October 15, 2004, at the option of the
registered Holders of the 2037 Debentures, at 100% of their principal amount,
together with accrued interest to October 15, 2004. In order for a Holder to
exercise this option, the Company must receive at its office or agency in New
York, New York, during the period beginning on August 15, 2004 and ending at
5:00 p.m. (New York City time) on September 15, 2004 (or, if September 15, 2004
is not a Business Day, the next succeeding Business Day), the certificate
representing the 2037 Debenture subject to repayment with the form "Option to
Elect Repayment on October 15, 2004" on such

55
<PAGE> 56

certificate duly completed. Any such notice received by the Company during the
period beginning on August 15, 2004 and ending at 5:00 p.m. (New York City time)
on September 15, 2004 (or, if September 15, 2004 is not a Business Day, the next
succeeding Business Day) shall be irrevocable. See "-- Book Entry, Delivery and
Form." The repayment option may be exercised by the Holder of a 2037 Debenture
for less than the entire principal amount of the 2037 Debenture held by such
Holder, so long as the principal amount with respect to which such right is
exercised is equal to $1,000 or an integral multiple of $1,000. All questions as
to the validity, form, eligibility (including time of receipt) and acceptance of
any 2037 Debenture for repayment will be determined by the Company, whose
determination will be final and binding.

Failure by the Company to repay the 2037 Debentures when required as
described in the preceding paragraph will result in an Event of Default under
the Indenture.

As long as the 2037 Debentures are represented by a Global Security, the
Depositary or the Depositary's nominee will be the registered Holder of the 2037
Debentures and therefore will be the only entity that can exercise a right to
repayment. See "-- Book Entry, Delivery and Form."

No similar right of repayment is available to Holders of the Notes or the
2027 Debentures.

OPTIONAL REDEMPTION

The 2027 Debentures will be redeemable at any time and the 2037 Debentures
will be redeemable at any time after October 15, 2004, in either case, in whole
or in part, at the option of the Company at a Redemption Price equal to the
greater of (i) 100% of the principal amount of such 2027 Debentures or 2037
Debentures, as the case may be, or (ii) as determined by an Independent
Investment Banker (as defined herein), the sum of the present values of the
remaining scheduled payments of principal and interest thereon (not including
any portion of such payments of interest accrued as of the Redemption Date)
discounted to the Redemption Date on a semiannual basis (assuming a 360-day year
consisting of twelve 30-day months) at the Adjusted Treasury Rate, plus, in each
case, accrued interest thereon to the Redemption Date. The 2027 Debentures and
the 2037 Debentures do not have the benefit of any sinking fund.

"Adjusted Treasury Rate" means, with respect to any Redemption Date, the
rate per annum equal to the semiannual equivalent yield to maturity of the
Comparable Treasury Issue, assuming a price of the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such Redemption Date, plus 0.10%.

"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the 2027 Debentures or the 2037 Debentures to be redeemed
that would be utilized, at the time of selection and in accordance with
customary financial practice, in pricing new issues of corporate debt securities
of comparable maturity to the remaining term of such 2027 Debentures or 2037
Debentures, respectively. "Independent Investment Banker" means one of the
Reference Treasury Dealers appointed by the Company.

"Comparable Treasury Price" means, with respect to any Redemption Date (A)
the average of the Reference Treasury Dealer Quotations for such Redemption
Date, after excluding the highest and lowest such Reference Treasury Dealer
Quotations, or (B) if the Trustee obtains fewer than three such Reference
Treasury Dealer Quotations, the average of all such Reference Treasury Dealer
Quotations. "Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any Redemption Date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. (New York
City time) on the third Business Day preceding such Redemption Date.

"Reference Treasury Dealer" means each of Goldman, Sachs & Co., Chase
Securities Inc., J.P. Morgan Securities Inc., NationsBanc Montgomery Securities,
Inc. and Salomon Brothers Inc

56
<PAGE> 57

and their respective successors; provided, however, that if any of the foregoing
shall cease to be a primary U.S. Government securities dealer in New York City
(a "Primary Treasury Dealer"), the Company shall substitute therefor another
Primary Treasury Dealer.

Notice of any redemption will be mailed at least 30 days but not more than
90 days before the Redemption Date to each Holder of the 2027 Debentures or the
2037 Debentures to be redeemed.

Unless the Company defaults in payment of the Redemption Price, on and
after the Redemption Date, interest will cease to accrue on the 2027 Debentures
or the 2037 Debentures (as applicable) or portions thereof called for
redemption.

RESTRICTIONS ON LIENS

The Indenture provides that the Company will not, nor will it permit any
Restricted Subsidiary to, secure indebtedness for money borrowed by placing a
Lien on any Principal Property now or hereafter owned or leased by the Company
or any Restricted Subsidiary or on any shares of stock or Debt of any Restricted
Subsidiary without equally and ratably securing the Securities, unless (i) the
principal amount of such indebtedness plus (ii) the Attributable Debt in respect
of sale and leaseback transactions described below covering Principal Properties
(other than sale and leaseback transactions the proceeds of which are applied to
reduce indebtedness under (b) of the following paragraph) does not exceed 15% of
the Consolidated Net Tangible Assets of the Company and its consolidated
subsidiaries. This restriction will not apply to, and there shall be excluded in
computing secured indebtedness for purposes of this restriction, certain
permitted liens, including (a) liens existing as of the date of the Indenture,
(b) liens existing at the time any corporation becomes a Restricted Subsidiary,
(c) liens on property existing at the time of acquisition and certain purchase
money or similar liens, (d) liens to secure certain exploration, drilling,
development, operation, construction, alteration, repair or improvement costs,
(e) liens securing indebtedness owing to the Company or another Restricted
Subsidiary by a Restricted Subsidiary, (f) liens in connection with government
contracts, including the assignment of moneys due or to become due thereon, (g)
certain liens pertaining to the performance of bids and contracts or to the
maintaining of benefits under various government regulations, (h) certain liens
in connection with legal proceedings or arising in the ordinary course of
business and not in connection with the borrowing of money, and (i) extensions,
substitutions, replacements or renewals of the foregoing. Production payments
and certain other financial arrangements with regard to oil, gas and mineral
properties are not deemed to involve liens securing indebtedness for money
borrowed. (Section 1008)

RESTRICTION ON SALE AND LEASEBACK TRANSACTIONS

The Indenture further provides that the Company will not, nor will it
permit any Restricted Subsidiary to, enter into any sale and leaseback
transaction (except a lease for a temporary period not exceeding three years)
after the date of the Indenture covering any Principal Property, which was or is
owned or leased by the Company or a Restricted Subsidiary and which has been or
is to be sold or transferred more than 120 days after the acquisition or
completion of construction and commencement of full operation thereof, unless
(a) the Attributable Debt in respect thereto and all other sale and leaseback
transactions entered into after the date of the Indenture (other than those the
proceeds of which are applied to reduce indebtedness under (b) below), plus the
aggregate amount of then outstanding secured indebtedness not otherwise
permitted or excepted without equally and ratably securing the Securities, does
not exceed 15% of the Consolidated Net Tangible Assets of the Company and its
consolidated subsidiaries, or (b) an amount equal to the fair value of the
Principal Property leased is applied within 120 days to the voluntary retirement
of the Securities or other indebtedness maturing more than one year thereafter.
(Section 1009)

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<PAGE> 58

CERTAIN DEFINITIONS

"Attributable Debt", in respect of the sale and leaseback transactions
described above, means the amount determined by multiplying the greater, at the
time such arrangement is entered into, of (i) the fair value of the real
property subject to such arrangement (as determined by the Company) or (ii) the
net proceeds of the sale of such real property to the lender or investor, by a
fraction of which the numerator is the unexpired initial term of the lease of
such real property as of the date of determination and of which the denominator
is the full initial term of such lease. Sale and leasebacks with respect to
facilities financed with Industrial Development Bonds (whether or not tax
exempt) are excepted from the definition. (Section 101)

"Consolidated Net Tangible Assets" is the aggregate amount of assets (less
applicable reserves and other properly deductible items) after deducting
therefrom (a) all current liabilities (excluding certain renewable or extendible
indebtedness) and (b) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all the
foregoing as shown on the latest balance sheet of the Company and its
consolidated subsidiaries and computed in accordance with generally accepted
accounting principles. (Section 101)

A "Principal Property" is any manufacturing plant or facility located
within the United States (excluding its territories and possessions, but
including Puerto Rico), the gross book value of which exceeds 3% of Consolidated
Net Tangible Assets, other than any such plant, facility or portion thereof (a)
which is financed by Industrial Development Bonds (whether or not tax exempt) or
(b) which, in the opinion of the Board of Directors of the Company, is not of
material importance to the total business conducted by the Company and its
Restricted Subsidiaries taken as a whole. (Section 101)

A "Restricted Subsidiary" is any subsidiary (a) more than 50% of whose net
sales and operating revenues during the preceding four calendar quarters were
derived in, or more than 50% of whose operating properties are located in, the
United States (excluding its territories and possessions, but including Puerto
Rico) or (b) more than 50% of whose assets consist of securities of other
Restricted Subsidiaries or (c) which owns a Principal Property, except that
certain export sales, banking, insurance, finance, real estate, construction and
unconsolidated subsidiaries do not constitute Restricted Subsidiaries so long as
they shall not own any Principal Property. (Section 101)

EVENTS OF DEFAULT

An Event of Default with respect to any series of the Securities is defined
in the Indenture as: default in payment of principal of or premium, if any, on
any Security of that series at Maturity; default for 30 days in payment of
interest on any Security of that series; failure by the Company in the
performance of any other of the covenants or warranties in the Indenture (other
than a covenant or warranty included in the Indenture solely for the benefit of
a series of Securities other than that series) continued for 90 days after due
notice, as specified in the Indenture, by the Trustee or by Holders of at least
25% in principal amount of the Outstanding Securities of that series; the
occurrence of an Event of Default with respect to securities of any other series
issued pursuant to the Indenture; and certain events of bankruptcy, insolvency
or reorganization of the Company. In addition, the Indenture provides that, with
respect to a security of any series issued under the Indenture to which a
sinking fund applies, there shall be an Event of Default with respect to such
security upon the failure for 30 days to deposit any sinking fund payment when
due by the terms of that security or upon default for 30 days in payment when
due of securities called for redemption with respect to a sinking fund payment.
The Indenture also defines Event of Default with respect to a series of
securities to include any other Event of Default provided with respect to the
securities of that series. (Section 501). The terms of the Securities provide
that the definition of Event of Default shall include the occurrence of an Event
of Default with respect to securities of any other series issued pursuant to the
Indenture.

The Indenture provides that, if any Event of Default with respect to
Securities of any series at the time Outstanding occurs and is continuing,
either the Trustee or the Holders of not less than 25%

58
<PAGE> 59

in principal amount of the Outstanding Securities of that series may declare the
principal amount of all Securities of that series to be due and payable
immediately, but upon certain conditions such declaration may be annulled and
past defaults (except, unless theretofore cured, a default in payment of
principal of or premium, if any, or interest, if any, on the Securities of that
series and certain other specified defaults) may be waived by the Holders of a
majority in principal amount of the Outstanding Securities of that series on
behalf of the Holders of all Securities of that series. (Sections 502 and 513)

The Indenture provides that, with respect to most defaults under the
Indenture, the Trustee shall give to the Holders of Securities notice of such
default to the extent and in the manner provided in the TIA as then in effect.
Under the TIA as of the date of this Prospectus, the Trustee is required to give
to the Holders of the Securities notice of a default known to it within 90 days
of the occurrence of such default, provided that, except in the case of a
default in the payment of principal of, or premium (if any) or interest on, any
Security, the Trustee will be protected in withholding such notice if and so
long as the Trustee in good faith determines that the withholding of such notice
is in the interest of the Holders of the Securities. With respect to defaults
under most covenants not pertaining to the payment of principal of, or premium
(if any) or interest on, any Security, the Trustee shall give similar notice,
except that no such notice to Holders shall be given until at least 30 days
after the occurrence of such default. The term default with respect to any
series of Outstanding Securities for the purpose only of this provision means
the happening of any of the Events of Default specified in the Indenture and
relating to such series of Outstanding Securities, excluding any grace periods
and irrespective of any notice requirements. (Section 602)

The Indenture contains a provision entitling the Trustee, subject to the
duty of the Trustee during default to act with the required standard of care, to
be indemnified by the Holders of any series of Outstanding Securities before
proceeding to exercise any right or power under the Indenture at the request of
the Holders of such series of Securities. (Section 603) The Indenture provides
that the Holders of a majority in principal amount of Outstanding Securities of
any series may direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or other power
conferred on the Trustee, with respect to the Securities of such series provided
that the Trustee may decline to act if such direction is contrary to law or the
Indenture. With respect to the Securities, as Book-Entry Securities, the
Indenture requires the Trustee to establish a record date for purposes of
determining which Holders are entitled to join in such direction. (Section 512)

The Indenture includes a covenant that the Company will file annually with
the Trustee a certificate of no default. (Section 1006)

MODIFICATION OF THE INDENTURE AND WAIVER OF COVENANTS

The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the Holders of not less than 66 2/3% in principal amount of
Outstanding Securities of each series affected thereby, to execute supplemental
indentures adding any provisions to or changing or eliminating any of the
provisions of the Indenture or modifying the rights of the Holders of
Outstanding Securities of such series, except that no such supplemental
indenture may, without the consent of the Holder of each Outstanding Security
affected thereby, (a) change the Stated Maturity, or reduce the principal
amount, the premium, if any, thereon or the rate of payment of interest thereon,
of any Security of any series, (b) reduce the aforesaid percentage of
Outstanding Securities of any series, the consent of the Holders of which is
required for any supplemental indenture or for waiver of compliance with certain
provisions of the Indenture or certain defaults thereunder or (c) effect certain
other changes. (Section 902) The Indenture also permits the Company to omit
compliance with certain covenants in the Indenture with respect to Securities of
any series upon waiver by the Holders of 66 2/3% in principal amount of
Outstanding Securities of such series. (Section 1011)

59
<PAGE> 60

CONSOLIDATION, MERGER AND SALE OF ASSETS

The Indenture contains a provision permitting the Company, without the
consent of the Holders of any of the Outstanding Securities under the Indenture,
to consolidate with or merge into any other corporation or transfer or lease its
assets substantially as an entirety to any person provided that: (i) the
successor is a Person organized under the laws of any domestic jurisdiction;
(ii) the successor Person assumes the Company's obligations on the Securities
and under the Indenture; (iii) after giving effect to the transaction no Event
of Default, and no event which, after notice or lapse of time, would become an
Event of Default, shall have happened and be continuing; and (iv) certain other
conditions are met. (Section 801)

DEFEASANCE AND COVENANT DEFEASANCE

DEFEASANCE AND DISCHARGE

The terms of the Securities provide that, pursuant to Section 403 of the
Indenture, the Company will, at its option, be discharged from any and all
obligations in respect of the respective series of Securities (except for
certain obligations to register the transfer or exchange of Securities of such
series, to replace stolen, lost or mutilated Securities of such series, to
maintain paying agencies and hold moneys for payment in trust) on the 91st day
after the date of the deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations which, through the payment of interest and principal
thereof in accordance with their terms, will provide money in an amount
sufficient to pay any installment of principal (and premium, if any) and
interest on the Securities of such series on the stated maturity of such
payments in accordance with the terms of the Indenture and such Securities. Such
discharge may only occur if, among other things, the Company has delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel to the effect
that the Company has received from, or there has been published by, the Internal
Revenue Service a ruling, or that since the date of this Indenture there has
been a change in tax law, in either case to the effect that Holders of the
Securities of such series will not recognize income, gain or loss for Federal
income tax purposes as a result of such deposits, defeasance and discharge and
will be subject to Federal income tax on the same amount and in the same manner
and at the same times, as would have been the case if such deposit, defeasance
and discharge had not occurred; and such discharge will not be applicable to any
Securities of such series then listed on the New York Stock Exchange or any
other securities exchange if the provision would cause said Securities to be
delisted as a result thereof.

DEFEASANCE OF CERTAIN COVENANTS

The terms of the Securities provide, pursuant to Section 1010 of the
Indenture, the Company with the option to omit to comply with certain
restrictive covenants described in Sections 1008 and 1009 of the Indenture.
Among other requirements, the Company, in order to exercise such option, will be
required to deposit with the Trustee money and/or U.S. Government Obligations
which, through the payment of interest and principal thereof in accordance with
their terms, will provide money in an amount sufficient to pay principal (and
premium, if any) and interest on, the Securities of such series on the stated
maturity of such payments in accordance with the terms of the Indenture and such
Securities. The Company will also be required to deliver to the Trustee an
Officers' Certificate and an Opinion of Counsel to the effect that Holders of
the Securities of such series will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance of
certain obligations and will be subject to Federal income tax on the same amount
and in the same manner and at the same times, as would have been the case if
such deposit and defeasance had not occurred. In the event the Company exercises
this option and the Securities of such series are declared due and payable
because of the occurrence of any Event of Default, the amount of money and U.S.
Government Obligations, as the case may be, on deposit with the Trustee will be
sufficient to pay amounts due on the Securities of such series at the time of
their Stated Maturity but may not be sufficient to pay amounts due on the
Securities of such series at the

60
<PAGE> 61

time of the acceleration resulting from such Event of Default. However, the
Company shall remain liable for such payments.

BOOK-ENTRY, DELIVERY AND FORM

DTC has advised the Company and the Underwriters as follows: DTC is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. DTC was created to hold
securities of its participants and to facilitate the clearance and settlement of
securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. DTC's
participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations, some of which (and/or their representatives) own DTC. Access to
DTC's book-entry system is also available to others, such as banks, brokers,
dealers and trust companies, that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.

Upon the issuance by the Company of Securities represented by the Global
Securities, the Depository will credit, on its book-entry registration and
transfer system, the respective principal amounts of the Securities represented
by such Global Securities to the accounts of participants. The accounts to be
credited shall be designated by the Underwriters. Ownership of beneficial
interests in the Global Securities will be limited to participants or persons
that hold interests through participants. Ownership of beneficial interests in
Securities represented by the Global Securities will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
the Depository (with respect to interests of participants in the Depository), or
by participants in the Depository or persons that may hold interests through
such participants (with respect to persons other than participants in the
Depository). The laws of some states require that certain purchases of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
the Global Securities.

Neither the Company, the Trustee, any Payment Agent, nor the Security
Registrar will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Global Securities or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.

Principal and interest payments on the Securities represented by the Global
Securities will be made by the Company through the Paying Agent to the
Depository's nominee as the Holder of the certificates relating to the Global
Securities. The Indenture provides that the Company and the Trustee will treat
the persons in whose names the Global Securities are registered (the Depository
or its nominee) as the Holders of the Global Securities for the purpose of
receiving payment of principal and interest on the Global Securities and for all
other purposes whatsoever. Therefore, neither the Company, the Trustee, nor any
Paying Agent has any direct responsibility or liability for the payment of
principal or interest on the Global Securities to owners of beneficial interests
in the Global Securities. The Depository has advised the Company and the Trustee
that its present practice is, upon receipt of any payment of principal or
interest, to immediately credit the accounts of the participants with such
payment in amounts proportionate to their respective holdings in principal
amount of beneficial interests in the Global Securities, as shown on the records
of the Depository. Payments by participants and indirect participants to owners
of beneficial interests in the Global Securities will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name," and
will be the responsibility of the participants or indirect participants.

61
<PAGE> 62

So long as the 2037 Debentures are represented by a Global Security, the
Depository's nominee will be the only entity that can exercise a right to
repayment pursuant to the Holder's option to elect repayment of its 2037
Debentures. Notice by participants or by owners of beneficial interests in a
Global Security held through such participants of the exercise of the option to
elect repayment of beneficial interests in 2037 Debentures represented by a
Global Security must be transmitted to the Depository in accordance with its
procedures on a form required by the Depository and provided to participants. In
order to ensure that the Depository or the Depository's nominee will timely
exercise a right to repayment with respect to a particular 2037 Debenture, the
beneficial owner of such 2037 Debenture must instruct the broker or other
participant through which it holds an interest in such 2037 Debenture to notify
the Depository of its desire to exercise a right to repayment. Different firms
have different cut-off times for accepting instructions from their customers
and, accordingly, each beneficial owner should consult the broker or other
participant through which it holds an interest in a 2037 Debenture in order to
ascertain the cut-off time by which such an instruction must be given in order
for timely notice to be delivered to the Depository. The Company will not be
liable for any delay in delivery of such notice to the Depository.

Owners of beneficial interests in a Global Security are not entitled to
receive physical delivery of Securities of such series in definitive form unless
(a) the Depository with respect to such Security notifies the Company that it is
unwilling or unable to continue as Depository for such Global Security or if
such Depository ceases to be a clearing agency registered under the Exchange
Act, (b) the Company determines that such Global Security shall be exchangeable
for Securities in definitive form or (c) there shall have occurred and be
continuing an Event of Default under the Indenture with respect to the
Securities of such series. Physical delivery of Securities of such series in
definitive form pursuant to the preceding sentence shall be registered in such
names as the Depositary holding such Global Security shall direct.

SAME-DAY SETTLEMENT AND PAYMENT

Settlement for the Securities will be made by the Underwriters in
immediately available funds. All applicable payments of principal and interest
on the Securities will be made by the Company in immediately available funds.
Secondary market trading activity in the Securities will settle in immediately
available funds.

NOTICES TO HOLDERS

Notices to Holders of Securities will be given in writing and mailed,
first-class postage prepaid, to the addresses of such Holders as they may appear
in the Security Register. (Section 106)

TITLE

Prior to due presentment of a Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name such Security is registered as the owner thereof, whether
or not such Security may be overdue, for the purpose of making payment and for
all other purposes. (Section 308)

GOVERNING LAW

The Indenture and the Securities will be governed by and construed in
accordance with the laws of the State of New York. (Section 112)

CONCERNING THE TRUSTEE

The Chase Manhattan Bank is the Trustee under the Indenture. The Company
maintains banking relationships in the ordinary course of business with the
Trustee. Among other things, the Trustee is a lending bank under the Credit
Facilities and acts as the issuing and paying agent for the Company's commercial
paper programs.

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<PAGE> 63

VALIDITY OF SECURITIES

The validity of the Securities offered hereby will be passed upon for the
Company by Karl R. Barnickol, Senior Vice President, General Counsel and
Secretary of the Company and for the Underwriters by Sullivan & Cromwell, New
York, New York. Mr. Barnickol owns 21,024 shares of Company Common Stock and
holds Company Options to purchase an additional 331,269 of such shares. Certain
legal matters will be passed upon for the Company by Wachtell, Lipton, Rosen &
Katz, New York, New York.

EXPERTS

The statements of combined financial position at December 31, 1996 and 1995
and the related statements of combined income and cash flow for each of the
three years in the period ended December 31, 1996 included in this Prospectus
and the related financial statement schedule included elsewhere in the
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and elsewhere in the
Registration Statement, and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.

63
<PAGE> 64

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SOLUTIA INC. (formerly identified as Chemicals SpinCo)
Report of Independent Auditors..................................................... F-2
Statement of Combined Income for the three years ended December 31, 1996........... F-3
Statement of Combined Financial Position at December 31, 1996 and December 31,
1995............................................................................ F-4
Statement of Combined Cash Flow for the three years ended December 31, 1996........ F-5
Notes to Combined Financial Statements............................................. F-6

Interim Combined Financial Statements (Unaudited):
Statement of Combined Income for the six months ended June 30, 1997 and 1996....... F-22
Statement of Combined Financial Position at June 30, 1997 and December 31, 1996.... F-23
Statement of Combined Cash Flow for the six months ended June 30, 1997 and 1996.... F-24
Notes to Interim Combined Financial Statements..................................... F-25
</TABLE>

F-1
<PAGE> 65

REPORT OF INDEPENDENT AUDITORS

To the stockholders of Solutia Inc.:

We have audited the accompanying statements of combined financial position
of Solutia Inc., previously referred to as "Chemicals SpinCo" (as described in
Note 1 to the combined financial statements), as of December 31, 1996 and 1995,
and the related statements of combined income and cash flow for each of the
three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. 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 combined financial statements referred to above
present fairly, in all material respects, the financial position of Solutia Inc.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.

Deloitte & Touche LLP Signature

Deloitte & Touche LLP
St. Louis, Missouri

May 1, 1997, except for the first and
second paragraphs and the Subsequent
Event section of Note 1, as to which
the date is September 1, 1997

F-2
<PAGE> 66

SOLUTIA INC.

STATEMENT OF COMBINED INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
NET SALES....................................................... $2,977 $2,964 $3,097
Cost of goods sold.............................................. 2,325 2,243 2,368
------ ------ ------
GROSS PROFIT.................................................... 652 721 729
Marketing expenses.............................................. 172 179 202
Administrative expenses......................................... 167 136 138
Technological expenses.......................................... 88 95 99
Restructuring expenses -- net................................... 192 53 34
------ ------ ------
OPERATING INCOME................................................ 33 258 256
Interest expense................................................ (36) (36) (29)
Other income (expense) -- net................................... 36 9 1
------ ------ ------
INCOME BEFORE INCOME TAXES...................................... 33 231 228
Income taxes.................................................... 1 84 79
------ ------ ------
NET INCOME...................................................... $ 32 $ 147 $ 149
====== ====== ======
</TABLE>

See Notes to Combined Financial Statements.

F-3
<PAGE> 67

SOLUTIA INC.

STATEMENT OF COMBINED FINANCIAL POSITION

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Trade receivables, net of allowances of $7 in 1996 and $6 in 1995.......... $ 412 $ 369
Miscellaneous receivables and prepaid expenses............................. 80 113
Deferred income tax benefit................................................ 108 92
Inventories................................................................ 291 311
------ ------
TOTAL CURRENT ASSETS....................................................... 891 885
PROPERTY, PLANT AND EQUIPMENT:
Land....................................................................... 18 15
Buildings.................................................................. 367 368
Machinery and equipment.................................................... 2,622 2,581
Construction in progress................................................... 121 88
------ ------
Total property, plant and equipment........................................ 3,128 3,052
Less accumulated depreciation.............................................. 2,217 2,140
------ ------
NET PROPERTY, PLANT AND EQUIPMENT.......................................... 911 912
INVESTMENTS IN AFFILIATES.................................................. 366 344
LONG-TERM DEFERRED INCOME TAX BENEFIT...................................... 194 172
OTHER ASSETS............................................................... 121 149
------ ------
TOTAL ASSETS............................................................... $2,483 $2,462
====== ======

LIABILITIES AND MONSANTO COMPANY EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 223 $ 230
Wages and benefits......................................................... 156 114
Restructuring reserves..................................................... 79 39
Miscellaneous accruals..................................................... 312 271
------ ------
TOTAL CURRENT LIABILITIES.................................................. 770 654
POST-RETIREMENT LIABILITIES................................................ 634 632
OTHER LIABILITIES.......................................................... 423 421
MONSANTO COMPANY EQUITY.................................................... 656 755
------ ------
TOTAL LIABILITIES AND MONSANTO COMPANY EQUITY.............................. $2,483 $2,462
====== ======
</TABLE>

See Notes to Combined Financial Statements.

F-4
<PAGE> 68

SOLUTIA INC.

STATEMENT OF COMBINED CASH FLOW

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1996 1995 1994
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income....................................................... $ 32 $ 147 $ 149
Adjustments to reconcile to Cash Provided by Operations:
Items that did not use (provide) cash:
Deferred income taxes....................................... (45) 25 (23)
Depreciation and amortization............................... 166 162 219
Restructuring expenses...................................... 192 53 34
Other....................................................... 43 1 (7)
Working capital changes that provided (used) cash:
Accounts receivable......................................... (43) 64 (27)
Inventories................................................. 20 (78) 48
Accounts payable and accrued liabilities.................... (33) (61) (59)
Other....................................................... 24 (13) 12
Other items.................................................... (20) 20 8
----- ----- -----
TOTAL CASH PROVIDED BY OPERATIONS................................ 336 320 354
----- ----- -----
INVESTING ACTIVITIES:
Property, plant and equipment purchases.......................... (192) (179) (187)
Acquisition and investment payments.............................. (17) (51) (4)
Investment and property disposal proceeds........................ 4 51 73
----- ----- -----
CASH USED IN INVESTING ACTIVITIES................................ (205) (179) (118)
----- ----- -----
FINANCING ACTIVITIES:
Net transactions with Monsanto Company........................... (131) (141) (236)
----- ----- -----
CASH USED IN FINANCING ACTIVITIES................................ (131) (141) (236)
----- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. -- -- --
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR................................................ -- -- --
----- ----- -----
END OF YEAR...................................................... $ -- $ -- $ --
====== ====== ======
</TABLE>

See Notes to Combined Financial Statements.

F-5
<PAGE> 69

SOLUTIA INC.

NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)

1. BASIS OF PRESENTATION

Solutia Inc., previously referred to as Chemicals SpinCo (the "Company" or
"Solutia"), is an international producer and marketer of a range of high
performance chemical-based materials which are used by its customers to make
consumer, household, automotive and industrial products. Prior to September 1,
1997, the businesses contributed to form the Company were wholly owned by
Monsanto Company ("Monsanto"). On September 1, 1997, Monsanto distributed all of
the outstanding shares of common stock of the Company as a dividend to Monsanto
shareowners (the "Spinoff"). The distribution resulted in the issuance of one
share of the Company's common stock for every five shares of Monsanto common
stock held of record as of August 20, 1997. As a result of the Spinoff, the
Company became an independent publicly held company listed on the New York Stock
Exchange and its operations ceased to be owned by Monsanto.

Effective with the Spinoff on September 1, 1997, Solutia assumed
approximately $1,029 million of debt from Monsanto, primarily assumable
commercial paper. The assumable commercial paper is guaranteed by Monsanto until
repaid or refinanced by Solutia at maturity, which is up to 30 days following
the Spinoff. On August 14, 1997, Solutia entered into a total of $1.2 billion in
revolving credit facilities with a syndicate of banks to support its commercial
paper. These credit facilities are also available for working capital and other
general corporate purposes. These credit facilities consist of (i) an $800
million five-year revolving credit facility, and (ii) a $400 million 364-day
credit agreement. The interest rates under the Credit Facilities are based upon,
at the option of the Company, (i) the London interbank offered rate ("LIBOR") or
(ii) the Base Rate. The Base Rate shall at all times be equal to the highest of
(a) the prime rate of Citibank, N.A., ("Citibank"), (b) the federal funds rate
plus 0.5% or (c) the sum (adjusted to the nearest 1/16 of 1% or, if there is no
nearest 1/16 of 1%, to the next higher 1/16 of 1%) of (i) 0.5%, plus (ii) the
rate obtained by dividing (A) the latest three-week moving average of secondary
market morning offering rates in the United States for three-month certificates
of deposit of major United States money market banks, by (B) a percentage equal
to 100% minus the average of the daily percentages specified during such three-
week period by the Board of Governors of the Federal Reserve System for
determining the maximum reserve requirement for Citibank with respect to
liabilities consisting of or including (among other liabilities) three-month
U.S. dollar non-personal time deposits in the United States, plus (iii) the
average during such three-week period of the annual assessment rates estimated
by Citibank for determining the then current annual assessment payable by
Citibank to the Federal Deposit Insurance Corporation (or any successor) for
insuring U.S. dollar deposits of Citibank in the United States. Interest rates
based on LIBOR will be increased by a spread of between 13.5 and 22.5 basis
points for the five-year revolving credit facility and 20.0 and 40.0 basis
points for the 364-day revolving credit facility depending upon the actual
ratings (the "ratings") by two credit rating agencies of senior unsecured
long-term debt issued by the Company or, if there is no such debt, the
indicative rating of the Company by such rating agencies. Currently, if the
Company elects to borrow under either credit facility, the total spread
(including facilities fees) over LIBOR would be 32.5 basis points for each
credit facility. The credit agreements contain various covenants, which among
other things, restrict the ability of Solutia to merge with another entity, to
create liens against assets, or to amend, cancel or terminate agreements entered
into with Monsanto to effect the Spinoff. These credit agreements also require
Solutia to meet certain leverage and interest coverage ratios. The Company
expects to have the ability to refinance the $1,029 million of, primarily,
assumable commercial paper on a long-term basis through the issuance of
additional commercial paper and long-term debt securities, although these
financing arrangements are not finalized. Solutia plans to conduct a public
offering of debt securities in the amount of $600 million having maturities of 5
to 40 years. The proceeds of the offering will be used to refinance a portion of
the Company's outstanding commercial paper as it becomes due. The interest
payable on such publicly offered securities will be fixed and is expected to
range generally from 6.5% to 7.5%. Subject to the

F-6
<PAGE> 70

level of future cash flows, the Company intends to refinance the approximately
$429 million of remaining debt on a long-term basis.

The Spinoff was accomplished through a distribution agreement that provides
for, among other things, the assets to be contributed to Solutia and the
liabilities to be assumed by Solutia, certain of which assets and liabilities
have not been included in the accompanying Statement of Combined Financial
Position. Those assets and liabilities include, among other things: a joint
venture interest in Monsanto's elemental phosphorus business and a defined
amount of cash and debt.

Monsanto and Solutia also entered into an employee benefits and
compensation allocation agreement which sets forth the manner in which assets
and liabilities under employee benefit plans and other employment-related
liabilities were divided between them. Certain assets and liabilities related to
the plans have not been included in the accompanying Statement of Combined
Financial Position. These include, among other things, assets and liabilities
for: the U.S. defined benefit pension plans, workers' compensation and
additional obligations for health care and other postretirement benefits that
Solutia retained for substantially all retired U.S. employees.

The final determination of the assets contributed to Solutia and the
liabilities assumed by Solutia was made pursuant to the agreements entered into
between Monsanto and Solutia in connection with the Spinoff. As of the date of
the Spinoff, the effect of the final transfer will be treated as a direct
increase or decrease in "Monsanto Company Equity" in the Statement of Combined
Financial Position.

Regardless of the allocation of the assets and liabilities described in the
preceding paragraphs, Solutia's Statement of Combined Income includes all of the
related costs of doing business including an allocation of certain general
corporate expenses from Monsanto which were not directly related to Solutia.

Combined Financial Statements

The accompanying combined financial statements have been prepared on a
basis which reflects the historical financial statements of Solutia assuming
that the operations of Monsanto contributed to Solutia in connection with the
Spinoff of Solutia to Monsanto's stockholders were organized as a separate legal
entity, owning certain net assets of Monsanto. Generally, only those assets and
liabilities of the ongoing chemicals businesses expected to be transferred to
Solutia prior to the Spinoff were included in the Statement of Combined
Financial Position.

Monsanto provided certain general and administrative services to Solutia,
including finance, legal, treasury, information systems and human resources. The
cost for these services was allocated to Solutia based upon the percentage
relationship between the net assets utilized in Solutia's operations and
Monsanto's total net assets, as well as other methods which management believes
to be reasonable. These allocations were $85 million, $72 million and $69
million in 1996, 1995 and 1994, respectively. As a result of the Spinoff,
Solutia is required to perform these general and administrative services using
its own resources or purchased services and is responsible for the costs and
expenses associated with the management of a public company. Solutia management
estimates that the cost of such general and administrative expenses on a
stand-alone basis would have been approximately $46 million in 1996.

As described in Notes 9, 10 and 11, Solutia employees and retirees
participated in various Monsanto pension, health care, savings and other benefit
plans. The costs and certain obligations related to these plans are included in
Solutia's combined financial statements generally based on the percentage of
Solutia payroll costs to total Monsanto payroll cost.

Certain assets and liabilities related to Solutia's operation have been
managed and controlled by Monsanto on a centralized basis. Such assets and
liabilities have been allocated to Solutia in the manner described in preceding
paragraphs for allocated general and administrative expenses and benefit plans.
A portion of the following assets and liabilities have been determined in this
manner: other assets, accounts payable, post-retirement liabilities,
miscellaneous accruals and other liabilities.

F-7
<PAGE> 71

Monsanto uses a centralized approach to cash management and the financing
of its operations. As a result, cash and cash equivalents and debt were not
allocated to Solutia in the historical financial statements. Solutia generally
has not had borrowings except amounts due to Monsanto. Interest expense has been
allocated to Solutia in the combined financial statements to reflect Solutia's
pro rata share of the financing structure of Monsanto. This allocation in the
combined financial statements is based on the percentage relationship between
the net assets utilized in Solutia's operations and Monsanto's net assets.

The allocation methodology followed in preparing the combined financial
statements may not necessarily reflect the results of operations, cash flows, or
financial position of Solutia in the future, or what the results of operations,
cash flows, or financial position would have been had Solutia been a separate
stand-alone public entity.

Subsequent Event

On July 10, 1997, management approved the asset and liability allocation
which set forth the assets contributed to Solutia and the liabilities assumed by
Solutia in connection with the Spinoff. Included in those assets and liabilities
are the following material items which have not been included in the
accompanying Statement of Combined Financial Position: a joint venture interest
in Monsanto's elemental phosphorus business, cash of $75 million, debt of $1,029
million, accrued net pension liability for the U.S. defined benefit pension
plans, and additional obligations for healthcare and other postretirement
benefits. The following unaudited pro forma amounts give effect to those items,
as well as certain other items, as set forth in the unaudited pro forma
condensed financial statements included in the Prospectus. The following
unaudited pro forma amounts are presented as if the Spinoff has occurred on June
30, 1997 and December 31, 1996, with respect to the unaudited pro forma
condensed Statements of Combined Financial Position amounts, and as of the
beginning of the earliest period presented with respect to the unaudited pro
forma condensed Statement of Combined Income amounts for the six months ended
June 30, 1997 and for the year ended December 31, 1996, respectively.

Unaudited pro forma condensed Statements of Combined Financial Position as
of June 30, 1997 and December 31, 1996:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Total Assets........................................................... $2,718 $2,660
Long-term debt......................................................... 1,029 1,029
Post-retirement liabilities............................................ 918 876
Stockholders' Deficit.................................................. (280) (439)
Total Liabilities and Stockholders' Deficit............................ 2,718 2,660
</TABLE>

Unaudited pro forma Statements of Combined Income for the six months ended
June 30, 1997 and the year ended December 31, 1996:

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
---------------- ------------
<S> <C> <C>
Income Before Income Taxes..................................... $ 154 $ 9
Net Income..................................................... 102 17
Earnings per Share............................................. $ 0.84 $ 0.14
</TABLE>

The effect of the employee benefits and compensation allocation is an
increase in the retiree medical and pensions cost allocation of $17 million for
the year ended December 31, 1996 in excess of the amounts allocated to Solutia
in Solutia's historical financial statements.

The pro forma information is presented for illustrative purposes only and
may not be indicative of the results that would have been obtained had the
transactions actually occurred on the dates assumed, nor is it necessarily
indicative of the future combined results of operations.

F-8
<PAGE> 72

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Combination

The combined financial statements include the accounts of Solutia as
described in Note 1. Other companies in which Solutia has a significant interest
(20 to 50 percent) are included in "Investments in Affiliates" in the Statement
of Combined Financial Position. Solutia's share of these companies' net earnings
or losses is included in "Other income (expense) -- net" in the Statement of
Combined 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 are used when accounting for the allocation of financial statement
amounts between Monsanto and Solutia, restructuring reserves, environmental
reserves, self-insurance reserves, employee benefit plans, asset impairments,
and contingencies.

Currency Translation

The financial statements for most of Solutia's ex-U.S. operations are
translated into U.S. dollars at current exchange rates. Unrealized currency
adjustments in the Statement of Combined Financial Position are accumulated in
equity. The financial statements of ex-U.S. operations in hyperinflationary
economies, principally Brazil, are translated at either current or historical
exchange rates, as appropriate. These currency adjustments are included in net
income.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost. The cost of plant and
equipment is depreciated over weighted average periods of 18 years for buildings
and 10 years for machinery and equipment, by the straight-line method.

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 discounted cash
value, using an appropriate discount rate.

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 (76 percent as of December
31, 1996) is determined by using 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 using the first-in, first-out "FIFO" method.

Income Taxes

Solutia does not file separate tax returns. It is included in the
consolidated returns filed by Monsanto and its subsidiaries in various U.S. and
ex-U.S. jurisdictions. The tax provisions reflected in the Statement of Combined
Income have been computed as if Solutia was a separate company. The accompanying
Statement of Combined Financial Position includes deferred tax amounts

F-9
<PAGE> 73

applicable to Solutia. Taxes currently payable and income tax payments are
recorded directly by Monsanto and, as a result, amounts related to Solutia are
included in "Net transactions with Monsanto Company" in the Statement of
Combined Cash Flow.

Earnings per Share

Historical earnings per share have not been presented as Solutia was wholly
owned by Monsanto.

Environmental Remediation

Costs for remediation of waste disposal sites are accrued in the accounting
period in which the responsibility is established and when the cost is
estimable. Post-closure and remediation 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 combined financial statements.

3. TRANSACTIONS WITH MONSANTO

Solutia participated in Monsanto's centralized cash management system.
Under this system, cash received from Solutia's operations was transferred to
Monsanto's centralized cash accounts and cash disbursements are funded from the
centralized cash accounts.

Included in the Statement of Combined Income are sales to Monsanto of $63
million, $75 million, and $80 million in 1996, 1995, and 1994, respectively.
Such sales were made at Monsanto's established transfer prices.

As specified in Note 1, Monsanto provided certain general and
administrative services to Solutia. The cost of these services, also included in
such statement, are $85 million, $72 million, and $69 million in 1996, 1995, and
1994, respectively. Interest expense charged to Solutia represents an allocation
from Monsanto of its total interest expense. The allocated interest expense to
Solutia was $36 million, $36 million, and $29 million in 1996, 1995, and 1994,
respectively.

4. RESTRUCTURING AND OTHER ACTIONS

In December 1996, Solutia recorded pretax restructuring and other special
charges totaling $256 million ($164 million aftertax) to cover the costs
associated with the closure or sale of certain facilities, asset write-offs, and
workforce reductions. Approximately 900 positions are expected to be eliminated
by these actions. Included in these charges were pretax amounts for asset
impairments totaling $56 million. These write-offs were necessary primarily
because of excess production capacity, coupled with insufficient demand for
certain products. Asset values were written down to their discounted cash
values, using appropriate discount rates.

In December 1995, Monsanto's board of directors approved a restructuring
plan. The pretax charge associated with these actions was $66 million ($57
million aftertax) and covered the costs of work force reductions, business
consolidations, facility closures and the exit from nonstrategic businesses and
facilities. This plan was substantially completed by the end of 1996 and reduced
employment by approximately 100 people.

In December 1994, Monsanto and Akzo Nobel N.V. agreed to form a 50-50 joint
venture by combining their respective rubber chemicals businesses. The venture
partners agreed to bear the one-time costs required to integrate their
respective rubber chemicals businesses into the joint venture. For Solutia,
these integration costs, which totaled $40 million pretax ($25 million
aftertax), were primarily for the cost of reducing the work force by
approximately 120 people and for special

F-10
<PAGE> 74

termination benefits for approximately 300 people transferring from Solutia to
the joint venture. The charge for these actions was recorded in the first
quarter of 1995. On May 1, 1995, the joint venture, known as Flexsys, L.P.
("Flexsys"), began operations and is accounted for as an equity affiliate.
Accordingly, Solutia's share of the earnings of Flexsys after that date has been
reflected in "Other income (expense) -- net" in the Statement of Combined
Income. Solutia's results of operations for 1995 and 1994 included net sales of
$140 million and $400 million, respectively, from the rubber chemicals business.
Operating income for this business during these periods was not significant.

Other items that affected Solutia's results of operations in 1995 included
the receipt in the first and third quarters of settlement payments from various
insurers related to environmental and other insurance litigation. The combined
effect of these settlements totaled $88 million pretax ($55 million aftertax).
In addition, Monsanto settled a lawsuit related to a Comprehensive Environmental
Response, Compensation and Liability site, commonly known as "Superfund," in La
Marque, Texas. The suit was brought by IT Corporation ("IT"), a subsidiary of
International Technology Corp., and claimed, among other things, breach of a
contract calling for IT to perform incineration and remediation work at the
site. Monsanto settled the suit by paying $41 million pretax ($25 million
aftertax), and Solutia recorded the payment in the third quarter of 1995.

In December 1994, Monsanto's board of directors approved a plan to
eliminate redundant staff activities and to consolidate certain staff and
administrative business functions. The plan, which was substantially completed
by the end of 1995, reduced worldwide employment by approximately 140 people. In
addition, Solutia closed certain facilities and terminated certain programs. The
pretax expense related to these actions was $34 million ($21 million aftertax).

The components of the pretax expense (income) related to the restructuring
programs and the other actions included in the accompanying Statement of
Combined Income were:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cost of employee reductions.............................. $157 $ 22 $27
Shutdown and consolidation of various facilities and
departments............................................ 33 44 7
Asset impairments........................................ 56
Insurance-related settlement (income).................... (88)
Litigation settlement.................................... 41
Joint venture integration costs.......................... 40
Other costs.............................................. 10
---- ---- ----
Total............................................. $256 $ 59 $34
===== ===== =====
</TABLE>

Restructuring expenses are recorded based on estimates prepared at the time
the restructuring actions are approved by the board of directors. The balance in
restructuring reserves as of December 31, 1996, was $265 million. It is
earmarked primarily for work force reduction costs, asset impairments, and the
costs associated with shutdowns and consolidation of various facilities and
departments. Management believes that the balance of these reserves as of
December 31, 1996, is adequate for completion of those activities. Restructuring
actions during the last three years have reduced these liabilities by
approximately $300 million. Approximately two-thirds of these reductions were
recorded for write-offs and expenditures related to the termination or sale of
nonstrategic products and facilities. The remaining reductions were primarily
related to the cost of work force reduction programs, most of which have been
completed.

F-11
<PAGE> 75

The pretax expenses (income) related to the restructuring programs and the
other unusual items were recorded in the Statement of Combined Income in the
following categories:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cost of goods sold....................................... $ 56 $(7)
Restructuring expenses -- net............................ 192 53 $34
---- ---- ----
Decrease in operating income........................... 248 46 34
Other expense(1)......................................... 8 13
---- ---- ----
Total decrease in income before income taxes........... $256 $59 $34
===== ===== =====
</TABLE>

- -------------------------
(1) In 1996 and 1995, other expense includes Solutia's share of restructuring
actions undertaken by Flexsys.

Net income decreased by $164 million, $52 million and $21 million, in 1996,
1995 and 1994, respectively, because of these restructurings and unusual items.

5. INVESTMENTS IN AFFILIATES

At December 31, 1996, Solutia's investments in affiliates consisted
principally of its 50 percent interests in Flexsys, the rubber chemicals joint
venture, and the Advanced Elastomer Systems, L.P. ("AES") joint venture for
which Solutia uses the equity method of accounting. Summarized combined
financial information for the Flexsys and AES joint ventures follows (results of
operations for 1995 reflects eight months of operations for Flexsys):

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Results of operations

Net sales...................................... $ 779 $ 628 $ 200
Net income..................................... 64 3 21

Financial position
Total assets................................... $ 853 $ 854
Total liabilities.............................. $ 237 $ 290
</TABLE>

6. INVENTORY VALUATION

The components of inventories were:

<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Finished goods............................................... $ 258 $ 266
Goods in process............................................. 47 53
Raw materials and supplies................................... 126 145
----- -----
Inventories, at FIFO cost.................................... 431 464
Excess of FIFO over LIFO cost................................ (140) (153)
----- -----
TOTAL........................................................ $ 291 $ 311
====== ======
</TABLE>

Inventories at FIFO approximate current cost. The effect of LIFO inventory
liquidations increased pretax income by $5 million in 1996 and was not material
in 1995.

F-12
<PAGE> 76

7. INCOME TAXES

The components of income before income taxes were:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
United States............................................ $11 $221 $138
Outside United States.................................... 22 10 90
---- ---- ----
TOTAL.................................................... $33 $231 $228
===== ===== =====
</TABLE>

The components of income tax expense charged to operations were:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:

U.S. federal........................................... $ 13 $ 39 $ 72
U.S. state............................................. 2 7 5
Outside United States.................................. 31 13 25
---- ---- ----
46 59 102
---- ---- ----
Deferred:
U.S. federal........................................... (21) 23 (28)
U.S. state............................................. (1) 3 1
Outside United States.................................. (23) (1) 4
---- ---- ----
(45) 25 (23)
---- ---- ----
TOTAL.................................................... $ 1 $ 84 $ 79
===== ===== =====
</TABLE>

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

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate.............................. 35% 35% 35%
U.S. state income taxes.................................. 1 3 2
Assumed tax benefit of foreign sales corporation......... (23) (4) (2)
Taxes related to foreign income, net of credits.......... 3 4 --
Income from equity affiliates recorded net of tax........ (13) (1) (1)
Other.................................................... -- (1) 1
---- ---- ----
EFFECTIVE INCOME TAX RATE................................ 3 % 36% 35%
===== ===== =====
</TABLE>

Deferred income tax balances were related to:

<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Property.............................................. $(176) $(181)
Post-retirement benefits.............................. 248 260
Restructuring reserves................................ 92 18
Environmental liabilities............................. 57 64
Inventory............................................. 4 5
Other................................................. 77 98
----- -----
NET ASSET............................................. $ 302 $ 264
====== ======
</TABLE>

F-13
<PAGE> 77

8. MONSANTO COMPANY EQUITY

The following is an analysis of Monsanto's investment in Solutia:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year............................. $755 $741 $809
Net income............................................... 32 147 149
Foreign currency translation adjustment.................. -- 8 19
Net transactions with the Company........................ (131) (141) (236)
---- ---- ----
Balance at end of year................................... $656 $755 $741
===== ===== =====
</TABLE>

9. POST-RETIREMENT BENEFITS -- PENSIONS

Solutia's employees participate in Monsanto's noncontributory pension
plans. No detailed information regarding the funded status of the plans and
components of net periodic pension cost, as it relates to Solutia is available.
The information that follows relates to all of Monsanto's pension plans. The
components of pension cost for these plans were:

<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Service cost for benefits earned during the year...... $ 83 $ 70 $ 75
Interest cost on benefit obligation................... 287 291 269
Assumed return on plan assets(1)...................... (322) (326) (317)
Amortization of unrecognized net (gain) loss.......... 9 (25) (12)
----- ----- -----
Total................................................. $ 57 $ 10 $ 15
====== ====== ======
</TABLE>

--------------------------------
(1) Actual returns (losses) on plan assets were $558 million, $671
million and $(142) million in 1996, 1995 and 1994, respectively.

Pension cost allocated to Solutia in 1996, 1995 and 1994 was $18 million,
$1 million, and $4 million, respectively.

Solutia is expected to retain costs related to its active employees and
certain former employees who last worked at a Solutia facility following the
proposed Spinoff. Consequently, future pension costs for Solutia after the
Spinoff are likely to be different when compared to historical amounts. Separate
actuarial calculations will be performed as of the date of the Spinoff.

Pension benefits are based on the employee's years of service and/or
compensation level. Pension plans are funded in accordance with Monsanto's
long-range projections of the plans' 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.

Pension costs are determined through the use of the preceding year-end rate
assumptions. Assumptions used as of December 31 for the principal plans were:

<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Discount rate......................................... 7.50% 7.25% 8.50%
Assumed long-term rate of return on plan assets....... 9.50% 9.50% 9.50%
Annual rates of salary increase (for plans that base
benefits on final compensation level)............... 4.50% 4.50% 5.00%
</TABLE>

F-14
<PAGE> 78

The funded status of Monsanto's pension plans at year-end was:

<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
PLAN ASSETS AT FAIR VALUE................................... $3,817 $3,690
------ ------
Actuarial present value of plan benefits:
Vested.................................................... $3,495 $3,457
Nonvested................................................. 154 145
------ ------
Accumulated benefit obligation.............................. 3,649 3,602
Effect of projected future salary increases................. 377 385
------ ------
PROJECTED BENEFIT OBLIGATION(1)............................. $4,026 $3,987
------ ------
Deficiency of plan assets over projected benefit
obligation................................................ $ (209) $ (297)
Less:
Unrecognized initial net gain............................. 94 119
Unrecognized prior service costs.......................... (264) (192)
Unrecognized subsequent net gain (loss)................... 241 (5)
------ ------
ACCRUED NET PENSION LIABILITY(2)............................ $ 280 $ 219
====== ======
</TABLE>

--------------------------------
(1) Included $228 million in 1996 and $204 million in 1995 for unfunded
plans.
(2) Included $138 million in 1996 and $152 million in 1995 for unfunded
plans.

Included in the preceding table are plan assets and projected benefit
obligations for the principal U.S. plans of approximately $3.327 billion and
$3.264 billion, respectively, as of December 31, 1996. Plan assets consist
principally of common stocks and U.S. government and corporate obligations.
Contributions to these plans were neither required nor made in 1996, 1995 and
1994 because Monsanto's principal pension plans are adequately funded, using
assumed returns.

A final determination of the assets to be contributed and the liabilities
to be assumed by Solutia with respect to the U.S. plans has not been finalized.
Accordingly, the corresponding net pension asset or liability has not been
included in the accompanying Statement of Combined Financial Position.

10. POST-RETIREMENT BENEFITS -- HEALTH CARE AND OTHER

Solutia's employees participate in Monsanto benefit programs which provide
certain health care and life insurance benefits for retired employees. No
detailed information regarding the components of the total cost and obligations
of these post-retirement benefits, as it relates to Solutia is available.
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 Monsanto or Solutia. These post-retirement benefits are
unfunded and are generally based on the employee's years of service and/or
compensation level. The costs of post-retirement benefits are accrued by the
date the employees become eligible for the benefits.

The components of the total cost of Monsanto's post-retirement benefits,
principally health care and life insurance, were:

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost for benefits earned during the year....... $ 25 $ 21 $ 23
Interest cost on benefit obligation.................... 88 94 87
Amortization of unrecognized net (gain) loss........... 2 (2) 7
---- ---- ----
TOTAL.................................................. $115 $113 $117
===== ===== =====
</TABLE>

Post-retirement benefit costs allocated to Solutia in 1996, 1995 and 1994
were $50 million, $54 million, and $55 million, respectively.

F-15
<PAGE> 79

Post-retirement costs are determined by using the preceding year-end rate
assumptions. Assumptions used as of December 31 for the principal plans were:

<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Discount rate...................................... 7.50% 7.25% 8.50%
Initial trend rate for health care costs(1)........ 8.00% 9.00% 11.50%
Ultimate trend rate for health care costs.......... 5.00% 5.00% 5.50%
</TABLE>

--------------------------------
(1) The initial trend rate for health care costs declines by 1 percent per
year to 5 percent for years after the year 2001.

A 1 percent increase in the assumed trend rate for health care costs would
have increased the cost of 1996 post-retirement health care benefits by $4
million and the accumulated benefit obligation by $48 million as of December 31,
1996.

As of December 31, the status of Monsanto's obligations for post-retirement
health care and life insurance benefit plans, and employee disability benefit
plans was:

<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
ACCUMULATED BENEFIT OBLIGATION:
Retirees.................................................. $ 938 $1,006
Eligible active employees................................. 60 52
Other active employees.................................... 251 213
------ ------
TOTAL....................................................... $1,249 $1,271
Unrecognized benefits from prior service.................. 27 34
Unrecognized subsequent net loss.......................... (28) (81)
------ ------
ACCRUED LIABILITY........................................... $1,248 $1,224
====== ======
</TABLE>

The assumptions used to compute the accumulated benefit obligation of the
principal plans were changed as of December 31, 1996. That resulted in a
decrease of approximately $28 million in the obligation.

Solutia's portion of this liability was approximately $671 million and $696
million, as of December 31, 1996 and 1995, respectively.

Following the Spinoff, Solutia is expected to retain the obligations for
post-retirement benefits for approximately two-thirds of retired U.S. employees
of Monsanto. Consequently, future post-retirement costs for Solutia after the
Spinoff are likely to be different and are likely to increase when compared to
historical amounts. Separate actuarial calculations will be performed as of the
date of the Spinoff.

11. EMPLOYEE SAVINGS PLANS

For some employee savings plans, employee contributions are matched in part
by Monsanto. Solutia's employees participate in these plans. The value of these
contributions for Solutia in each of 1996, 1995 and 1994 was approximately $11
million.

The information that follows relates to Monsanto's Employee Stock Ownership
Plan (the "ESOP"). The ESOP held 18.6 million shares of Monsanto's common stock
as of December 31, 1996. The ESOP acquired shares by using proceeds from the
issuance of long-term notes and debentures that are guaranteed by Monsanto and
from a $50 million loan from Monsanto. A portion of the ESOP shares is allocated
each year to employee savings accounts as matching contributions. In 1996,
752,515 shares were allocated to participants under the plan, leaving 12,623,080
unallocated shares as of December 31, 1996. Compensation expense is equal to the
cost of the shares allocated to participants, less dividends paid on the shares
held by the ESOP. Dividends on the

F-16
<PAGE> 80

common stock owned by the ESOP are being used to repay the ESOP borrowings,
which totaled $180 million as of December 31, 1996.

<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total ESOP expense....................................... $17 $26 $29
Interest portion of total ESOP expense................... 14 16 17
Cash contribution........................................ 16 18 19
Dividends paid on ESOP shares held....................... 11 10 9
</TABLE>

12. STOCK OPTION PLANS

Monsanto has two fixed option plans in which Solutia's employees
participated. Under the Management Incentive Plan of 1996, Monsanto may grant
options to key officers and management employees for up to 46,250,000 shares of
common stock. Under this plan, the exercise price of each option equals not less
than the fair market value of Monsanto's stock on the date of grant, and an
option's maximum term is 10 years. Options are granted at the discretion of
Monsanto's board of directors' Executive Compensation and Development Committee
or its delegate. Options generally vest upon the earlier of the achievement of
business performance targets or upon the ninth anniversary of the option grant
date. Options granted to senior management vest upon the attainment of
pre-established prices within specified time periods. Under Monsanto's Shared
Success Stock Option Plan, the majority of regular full-time and regular
part-time employees of Monsanto have been granted options on 200 shares of
common stock. The maximum number of shares for which stock options may be
granted under this plan totals 13,500,000. Approximately 5,246,200 options,
which vest in April 1999, were outstanding under this plan as of December 31,
1996. Under this plan, the exercise price of each option is determined by the
committee administering the plan and generally equals the market price of
Monsanto's stock on the date of grant. An option's maximum term is 10 years.

Effective January 1, 1996, Monsanto adopted Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
As permitted by the standard, Monsanto has elected to continue following the
guidance of Accounting Principles Board ("APB") 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 Monsanto'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:

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income:
As reported................................................... $32 $147
Pro forma..................................................... 18 144
</TABLE>

The resulting compensation expense 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
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for grants in 1996 and 1995:

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected dividend yield......................................... 1.5 % 3.0 %
Expected volatility............................................. 25.0% 20.0%
Risk-free interest rates........................................ 6.0 % 7.1 %
Expected option lives (years)................................... 4.0 4.5
</TABLE>

F-17
<PAGE> 81

The weighted-average fair values of options granted during 1996 and 1995
were $6.43 and $3.99, respectively.

Options to purchase Monsanto common stock under the above plans will be
converted into either options to purchase Solutia common stock, adjusted options
to purchase Monsanto common stock or a combination of both. The total value of
the options prior to the conversion will be equal to the combined value of the
resulting options at the date of the Spinoff.

13. COMMITMENTS AND CONTINGENCIES

Commitments, principally in connection with uncompleted additions to
property, were approximately $37 million as of December 31, 1996. Monsanto was
contingently liable as a guarantor for bank loans and for discounted customers'
receivables relating to Solutia totaling approximately $16 million and $7
million as of December 31, 1996 and 1995, respectively. Future minimum payments
under noncancelable operating leases and unconditional purchase obligations are
$23 million for 1997, $48 million for 1998, $15 million for 1999, $5 million for
2000, $3 million for 2001, and $3 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. At December 31, 1996, the unamortized deferred
credits were approximately $68 million.

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

<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
U.S. chemical industry.......................................... $129 $182
U.S. carpet industry............................................ 79 74
European chemical industry...................................... 36 55
</TABLE>

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

Solutia's Statement of Combined Financial Position included accrued
liabilities of $150 million and $184 million as of December 31, 1996 and 1995,
respectively, for the remediation of identified waste disposal sites.
Expenditures related to remediation activities were $59 million in 1996, $68
million in 1995, and $58 million in 1994.

Solutia's future remediation expenses for waste disposal sites are affected
by a number of uncertainties, including, but not limited to, the method and
extent of remediation, the percentage of material attributable to Solutia at the
sites relative to that attributable to other parties, and the financial
capabilities of the other potentially responsible parties. Because of the
uncertainties associated with remediation activities, Solutia's potential future
expenses to remediate these sites could approximate an additional $60 million
beyond amounts already accrued.

Post-closure and remediation costs for hazardous and other waste facilities
are accrued over the estimated life of the facility as part of its anticipated
closure cost. Solutia's estimated closure costs for these facilities could reach
approximately $70 million (beyond amounts already accrued) based upon existing
technology and currently available information. Uncertainties related to these
costs include evolving government standards, the method and extent of
remediation, and future changes in technology.

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 change in Solutia's

F-18
<PAGE> 82

liquidity or financial position as reflected in Solutia's historical financial
statements, but they could have a material adverse effect on profitability in a
given period.

In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 96-1, "Environmental Remediation
Liabilities," which is effective for Solutia in 1997. SOP 96-1 establishes
authoritative guidance regarding the recognition, measurement and disclosure of
environmental remediation liabilities. The preliminary estimate of the 1997
charges resulting from the adoption of this statement is in the range of $15
million to $20 million after tax.

Monsanto is a party to a number of lawsuits and claims relating to Solutia,
for which Solutia will assume responsibility in the Spinoff and which Solutia
intends to defend vigorously. Such matters arise out of the normal course of
business and relate to product liability, government regulation, including
environmental issues, 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, based upon the advice of
Solutia's counsel, is that the final outcome of such litigation will not have a
material adverse effect on Solutia's combined financial position, profitability
or liquidity in any one year, as applicable.

14. SUPPLEMENTAL DATA

Supplemental income statement data were:

<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Raw material and energy costs....................... $1,059 $ 929 $1,196
Employee compensation and benefits.................. 715 794 831
Current income and other taxes...................... 134 152 207
Rent expense........................................ 29 31 34
Technological expenses:
Research and development.......................... 81 77 76
Engineering, commercial development and patent.... 7 18 23
------ ------ ------
Total technological expenses........................ 88 95 99
Interest expense:
Total interest cost............................... 41 42 35
Less capitalized interest......................... (5) (6) (6)
------ ------ ------
NET INTEREST EXPENSE................................ 36 36 29
Currency losses including equity in affiliates'
currency gains and losses......................... 2 3 6
</TABLE>

15. SEGMENT AND GEOGRAPHIC DATA

Solutia is engaged in one industry segment - the production and marketing
of a range of high-performance chemical-based materials. Its products include a
range of performance materials, including nylon and acrylic fibers, Saflex(R)
plastic interlayer, phosphorus derivatives, and other specialty chemicals. The
markets served include automotive, housing, electronics and food. Solutia

F-19
<PAGE> 83

is a 50-50 partner in two key joint ventures, Flexsys, the rubber chemicals
joint venture, and the AES joint venture. Geographic data for Solutia follows:

<TABLE>
<CAPTION>
EUROPE- ASIA- LATIN ELIMINATIONS- COMBINED
US AFRICA PACIFIC CANADA AMERICA CORPORATE TOTAL
------ ------- ------- ------ ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES
1996.............. $2,355 $ 415 $ 67 $ 74 $ 66 -- $2,977
1995.............. 2,238 477 96 88 65 -- 2,964
1994.............. 2,288 515 121 96 77 -- 3,097
OPERATING INCOME
1996.............. $ 19 $ 28 $ 2 $ (2) (15) $ 1 $ 33
1995.............. 237 40 (26) 2 6 (1) 258
1994.............. 173 76 (5) 6 7 (1) 256
IDENTIFIABLE ASSETS
1996.............. $1,697 $ 303 $ 33 $ 27 $ 65 $ 358 $2,483
1995.............. 1,542 383 59 49 93 336 2,462
1994.............. 1,389 671 128 52 83 112 2,435
</TABLE>

The data above are prepared on an "entity basis," which means that net
sales, operating income and identifiable assets of each legal entity are
assigned to the geographic area where that legal entity is located. For example,
a sale from the United States to Latin America is reported as a U.S. export
sale. Interarea sales, which are sales between Solutia locations in different
world areas, were made on a market price basis.

Interarea sales have been excluded from the above table based upon the
world area shipped from and were:

<TABLE>
<CAPTION>
EUROPE- ASIA- LATIN ELIMINATIONS-
US AFRICA PACIFIC CANADA AMERICA CORPORATE TOTAL
------ ------- ------- ------ ------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
1996................. $ 204 $ 31 $ 8 $ 20 $ 2 $(265) $ --
1995................. 218 44 21 19 2 (304) --
1994................. 209 86 5 20 1 (321) --
</TABLE>

The operating income reported for the individual geographic areas does not
include the income recognized in other areas, principally the United States, on
the interarea sales. Direct export sales from the United States to third-party
customers outside the United States were $345 million for 1996, $331 million for
1995 and $274 million for 1994.

Sales and operating income for the geographic segments do not include
financial results from joint venture companies in which Solutia does not have
management control. Solutia's share of the income or loss of these companies is
reflected in "Other income (expense) -- net" in the Statement of Combined
Income. Solutia's share of the unconsolidated net sales and income or loss of
these companies for 1996 follows:

<TABLE>
<CAPTION>
CHEMICALS' SHARE
-----------------
NET INCOME
SALES (LOSS)
----- ------
<S> <C> <C>
United States............................................. $126 $ 14
Europe-Africa............................................. 268 (1)
Asia-Pacific.............................................. 25 --
Latin America............................................. 26 --
</TABLE>

F-20
<PAGE> 84

Geographic area operating income was affected by the 1996, 1995 and 1994
restructuring and other unusual items as follows -- income (expense):

<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
United States........................................... $(187) $(13) $(50)
Europe-Africa........................................... (36) -- 15
Asia-Pacific............................................ (2) (33) (2)
Canada.................................................. (4) -- --
Latin America........................................... (19) -- 3
----- ---- ----
Total................................................. $(248) $(46) $(34)
====== ===== =====
</TABLE>

16. QUARTERLY DATA -- UNAUDITED

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Sales............................. 1996 $ 705 $ 749 $ 753 $ 770 $2,977
1995 802 756 705 701 2,964
Gross Profit.......................... 1996 160 175 200 117 652
1995 189 183 165 184 721
Operating Income (Loss)............... 1996 56 62 96 (181) 33
1995 85 71 73 29 258
Net Income (Loss)..................... 1996 36 47 61 (112) 32
1995 53 41 41 12 147
</TABLE>

Net income for the fourth quarter of 1996 included an aftertax charge of
$164 million for restructuring actions.

Net income in the first quarter of 1995 included an aftertax gain of $23
million for insurance-related settlement payments and an aftertax charge of $25
million for integration costs related to the formation of the Flexsys joint
venture.

In the third quarter of 1995, net income included an aftertax gain of $32
million for the receipt of settlement payments related to environmental
insurance litigation, and an aftertax charge of $25 million for the settlement
of a lawsuit related to a Superfund site in La Marque, Texas.

Net income for the fourth quarter of 1995 included an aftertax charge of
$57 million for restructuring actions.

F-21
<PAGE> 85

SOLUTIA, INC.

STATEMENT OF COMBINED INCOME
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
NET SALES.............................................................. $1,489 $1,454
Cost of goods sold..................................................... 1,124 1,119
------ ------
GROSS PROFIT........................................................... 365 335
Marketing expenses..................................................... 71 85
Administrative expenses................................................ 63 86
Technological expenses................................................. 39 46
------ ------
OPERATING INCOME....................................................... 192 118
Interest expense....................................................... (21) (19)
Other income (expense) -- net.......................................... 22 23
------ ------
INCOME BEFORE INCOME TAXES............................................. 193 122
Income taxes........................................................... 66 39
------ ------
NET INCOME............................................................. $ 127 $ 83
====== ======
</TABLE>

See Notes to Interim Combined Financial Statements.

F-22
<PAGE> 86

SOLUTIA INC.

STATEMENT OF COMBINED FINANCIAL POSITION

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Trade receivables, net of allowances of $8 in 1997 and $7 in
1996..................................................... $ 430 $ 412
Miscellaneous receivables and prepaid expenses.............. 108 80
Deferred income tax benefit................................. 110 108
Inventories................................................. 288 291
----------- ------------
TOTAL CURRENT ASSETS.......................................... 936 891
PROPERTY, PLANT AND EQUIPMENT:
Land.......................................................... 18 18
Buildings..................................................... 345 367
Machinery and equipment....................................... 2,654 2,622
Construction in progress...................................... 139 121
----------- ------------
Total property, plant and equipment...................... 3,156 3,128
Less accumulated depreciation ................................ 2,249 2,217
----------- ------------
NET PROPERTY, PLANT AND EQUIPMENT............................. 907 911
INVESTMENTS IN AFFILIATES..................................... 388 366
LONG-TERM DEFERRED INCOME TAX BENEFIT......................... 181 194
OTHER ASSETS.................................................. 117 121
----------- ------------
TOTAL ASSETS............................................. $ 2,529 $2,483
============ ==============
LIABILITIES AND MONSANTO COMPANY EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 191 $ 223
Wages and benefits.......................................... 63 156
Restructuring reserves...................................... 56 79
Miscellaneous accruals...................................... 301 312
----------- ------------
TOTAL CURRENT LIABILITIES..................................... 611 770
POSTRETIREMENT LIABILITIES.................................... 615 634
OTHER LIABILITIES............................................. 444 423
MONSANTO COMPANY EQUITY....................................... 859 656
----------- ------------
TOTAL LIABILITIES AND MONSANTO COMPANY EQUITY............ $ 2,529 $2,483
============ ==============
</TABLE>

See Notes to Interim Combined Financial Statements.

F-23
<PAGE> 87

SOLUTIA INC.

STATEMENT OF COMBINED CASH FLOW
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1997 1996
----- -----
(IN MILLIONS)
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income.............................................................. $ 127 $ 83
Adjustments to reconcile to Cash Provided by Operations:
Items that did not use (provide) cash:
Deferred income taxes.............................................. 11 34
Depreciation and amortization...................................... 67 82
Other.............................................................. (22) (15)
Working capital changes that provided (used) cash:
Accounts receivable................................................ (18) (61)
Inventories........................................................ 3 (8)
Accounts payable and accrued liabilities........................... (159) (76)
Other.............................................................. (28) 6
Other items........................................................... 41 (38)
----- -----
TOTAL CASH PROVIDED BY OPERATIONS....................................... 22 7
----- -----
INVESTING ACTIVITIES:
Property, plant and equipment purchases................................. (64) (92)
Acquisition and investment payments..................................... -- (15)
----- -----
CASH USED IN INVESTING ACTIVITIES....................................... (64) (107)
----- -----
FINANCING ACTIVITIES:
Net transactions with Monsanto Company.................................. 42 100
----- -----
CASH PROVIDED BY FINANCING ACTIVITIES................................... 42 100
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ -- --
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR....................................................... -- --
----- -----
END OF PERIOD........................................................... $ -- $ --
====== ======
</TABLE>

See Notes to Interim Combined Financial Statements.

F-24
<PAGE> 88

SOLUTIA INC.

NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)

1. BASIS OF PRESENTATION AND SUBSEQUENT EVENT

BASIS OF PRESENTATION

Solutia Inc., previously referred to as Chemicals SpinCo (the "Company" or
"Solutia"), is an international producer and marketer of a range of high
performance chemical-based materials which are used by its customers to make
consumer, household, automotive and industrial products. Prior to September 1,
1997, the businesses contributed to form the Company were wholly owned by
Monsanto Company ("Monsanto"). On September 1, 1997, Monsanto distributed all of
the outstanding shares of common stock of the Company as a dividend to Monsanto
shareowners (the "Spinoff"). The distribution resulted in the issuance of one
share of the Company's common stock for every five shares of Monsanto common
stock held of record as of August 20,1997. As a result of the Spinoff, the
Company became an independent publicly held company listed on the New York Stock
Exchange and its operations ceased to be owned by Monsanto. Monsanto and Solutia
have entered into a number of agreements with respect to the separation of the
companies and to provide mechanisms for an orderly transition following the
Spinoff. Descriptions of the various agreements are set forth under the caption
"Agreements with Monsanto."

The accompanying unaudited financial statements have been prepared on a
basis which reflects the historical financial statements of Solutia assuming
that the operations of Monsanto contributed to Solutia in the Spinoff were
organized as a separate legal entity, owning certain net assets of Monsanto.

These financial statements should be read in conjunction with the Basis of
Presentation and Significant Accounting Policies as set forth in Notes 1 and 2,
respectively, to the Combined Financial Statements of Solutia as of December 31,
1996 and 1995 and for each of the three years in the period ended December 31,
1996. As indicated in Note 1 to the Combined Financial Statements of Solutia,
Monsanto provided certain general and administrative services to Solutia. The
cost for these services was allocated to Solutia based upon the net capital
employed in Solutia's operations, as well as other methods which management
believed to be reasonable. In preparation for the Spinoff, Monsanto began a
transition plan of separation. As part of this plan, Monsanto discontinued its
allocation of corporate expenses for those general and administrative services
on April 1, 1997 as these expenses were specifically identified and segregated
as part of Solutia's ongoing cost infrastructure.

The accompanying unaudited interim combined financial statements reflect
all adjustments which in the opinion of management are necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods reported. Such adjustments, other than the adjustment described
in Notes 2, 6 and 7 below, are of a normal, recurring nature. The results of
operations for the six-month period ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year.

Historical earnings per share have not been presented as Solutia was wholly
owned by Monsanto for the periods presented.

SUBSEQUENT EVENT

On July 10, 1997, management approved the asset and liability allocation
which set forth the assets to be contributed to Solutia and the liabilities to
be assumed by Solutia in connection with the Spinoff. Included in those assets
and liabilities are the following material items which have not been included in
the accompanying Statement of Combined Financial Position: a joint venture
interest in

F-25
<PAGE> 89

SOLUTIA INC.

NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)

Monsanto's elemental phosphorus business, cash of $75 million, debt of $1,029
million, accrued net pension liability for the U.S. defined benefit pension
plans, and additional obligations for healthcare and other post-retirement
benefits. The following unaudited pro forma amounts give effect to those items,
as well as certain other items, as set forth in the unaudited pro forma
condensed financial statements included in this Prospectus. The following
unaudited pro forma amounts are presented as if the Spinoff had occurred on June
30, 1997 and December 31, 1996, with respect to the unaudited pro forma
condensed Statements of Combined Financial Position amounts and as of January 1,
1997 and 1996 with respect to the unaudited pro forma condensed Statement of
Combined Income amounts for the six months ended June 30, 1997 and for the year
ended December 31, 1996, respectively.

Unaudited pro forma condensed Statements of Financial Position as of June
30, 1997 and December 31, 1996:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -----------------
<S> <C> <C>
Total Assets........................................... $ 2,718 $ 2,660
Long-term debt......................................... 1,029 1,029
Post-retirement liabilities............................ 918 876
Stockholders' Deficit.................................. (280) (439)
Total Liabilities and Stockholders' Deficit............ 2,718 2,660
</TABLE>

Unaudited pro forma Statements of Combined Income for the six months ended
June 30, 1997 and the year ended December 31, 1996:

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
Income Before Income Taxes........... $ 154 $ 9
Net Income........................... 102 17
Earnings per Share................... $ 0.84 $0.14
</TABLE>

The effect of the employee benefits and compensation allocation agreement,
is an increase in the retiree medical and pensions costs allocation of $17 for
1996 in excess of the amounts allocated to Solutia in Solutia's historical
financial statements.

2. ACCOUNTING CHANGES

Effective January 1, 1997, Solutia adopted the American Institute of
Certified Public Accountants' Statement of Position ("SOP") 96-1, "Environmental
Remediation Liabilities." SOP 96-1 establishes authoritative guidance regarding
the recognition, measurement and disclosure of environmental remediation
liabilities. The primary change in Solutia's accounting principles associated
with the adoption of this SOP was an acceleration of the recognition of certain
environmental remediation liabilities at operating facilities. As a result,
Solutia recorded an aftertax charge of $6 million in the first quarter of 1997.
Additional aftertax charges in the range of $9 million to $14 million are
anticipated in 1997 as the criteria for recording these liabilities are met.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related

F-26
<PAGE> 90

SOLUTIA INC.

NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)

Information," which will be effective for the Company beginning January 1, 1998.
SFAS No. 131 redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information about a company's
operating segments. The Company has not yet completed its analysis of how it
will apply this new standard.

3. INVENTORIES

The components of inventories as of June 30, 1997 and December 31, 1996
were as follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Finished goods..................................... $ 257 $ 258
Goods in process................................... 45 47
Raw materials and supplies......................... 136 126
-------- ------------
Inventories, at FIFO cost.......................... 438 431
Excess of FIFO over LIFO cost...................... (150) (140)
-------- ------------
Total.............................................. $ 288 $ 291
======== ==============
</TABLE>

4. INTERCOMPANY TRANSACTIONS

Included in the Statement of Combined Income are sales to Monsanto of $33
million and $30 million in 1997 and 1996, respectively. Such sales are made at
Monsanto's established transfer prices. In addition, Monsanto provided certain
general and administrative services to Solutia. The cost of these services, also
included in such statement are $12 million and $35 million in 1997 and 1996,
respectively. As further discussed in Note 1, Monsanto discontinued its
allocation of the cost of general and administrative expenses to Solutia,
effective April 1, 1997 as part of its transition plan of separation. Such
expenses were specifically identified and segregated as part of Solutia's on-
going cost infrastructure. Interest expense charged to Solutia represents an
allocation from Monsanto of its total interest expense. The allocated interest
expense to Solutia was $21 million and $19 million in 1997 and 1996,
respectively.

5. MONSANTO COMPANY EQUITY

The following is an analysis of Monsanto's investment in Solutia:

<TABLE>
<CAPTION>
1997
----
<S> <C>
Balance at beginning of period........................................ $656
Net income............................................................ 127
Foreign currency translation adjustment............................... 34
Net transactions with Monsanto Company................................ 42
----
Balance at end of period.............................................. $859
=====
</TABLE>

6. COMMITMENTS AND CONTINGENCIES

Solutia's Statement of Combined Financial Position included accrued
liabilities of $156 million and $150 million as of June 30, 1997 and December
31, 1996, respectively, for the remediation of identified waste disposal sites.
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

F-27
<PAGE> 91

SOLUTIA INC.

NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)

change in Solutia's liquidity or financial position as reflected in Solutia's
historical financial statements, but they could have a material adverse effect
on profitability in a given period.

In June 1997, Monsanto reached a settlement with 811 plaintiffs in six
lawsuits related to the Brio Superfund site near Houston, Texas. The suits were
brought in Harris County District Court or the United States District Court for
the Southern District of Texas on behalf of 960 plaintiffs that claimed injuries
resulting from alleged exposure to substances present at or emanating from the
Brio site. As a result of this settlement, Solutia recorded a pretax charge of
$10 million ($6 million aftertax) in cost of goods sold in the Statement of
Combined Income during the second quarter of 1997. The settlement payment is
expected in the third quarter of 1997.

Monsanto is a party to a number of lawsuits and claims relating to Solutia,
for which Solutia assumed responsibility in the Spinoff and which Solutia
intends to defend vigorously. Such matters arise out of the normal course of
business and relate to product liability, government regulation, including
environmental issues, 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, based upon the advice of
Solutia's counsel, is that the final outcome of such litigation will not have a
material adverse effect on Solutia's combined financial position, profitability
or liquidity in any one year, as applicable.

7. RESTRUCTURING RESERVES

During the second quarter of 1997, Solutia reversed approximately $8
million ($5 million aftertax) of excess restructuring reserves from prior years.
The excess was primarily due to lower exit costs associated with the sale and
closure of nonstrategic facilities included in 1995 restructuring actions.

8. FINANCING ARRANGEMENTS

Effective with the Spinoff on September 1, 1997, Solutia assumed
approximately $1.029 billion of debt from Monsanto, primarily assumable
commercial paper. The assumable commercial paper is guaranteed by Monsanto until
repaid or refinanced by Solutia at maturity, which is up to 30 days following
the Spinoff.

On August 14, 1997, Solutia entered into a total of $1.2 billion in
revolving credit facilities with a syndicate of banks to support its commercial
paper. The Credit Facilities are also available for working capital and other
general corporate purposes. These credit facilities consist of (i) an $800
million five-year revolving credit facility, and (ii) a $400 million 364-day
credit agreement. The interest rates under the Credit Facilities are based upon,
at the option of the Company, (i) the London interbank offered rate ("LIBOR") or
(ii) the Base Rate. The Base Rate shall at all times be equal to the highest of
(a) the prime rate of Citibank, N.A. ("Citibank"), (b) the federal funds rate
plus 0.5% or (c) the sum (adjusted to the nearest 1/16 of 1% or, if there is no
nearest 1/16 of 1%, to the next higher 1/16 of 1%) of (i) 0.5%, plus (ii) the
rate obtained by dividing (A) the latest three-week moving average of secondary
market morning offering rates in the United States for three-month certificates
of deposit of major United States money market banks, by (B) a percentage equal
to 100% minus the average of the daily percentages specified during such
three-week period by the Board of Governors of the Federal Reserve System for
determining the maximum reserve requirement for Citibank with respect to
liabilities consisting of or including (among other liabilities) three-month
U.S. dollar non-personal time deposits in the United States, plus (iii) the
average during such three-week period of the annual assessment rates estimated
by Citibank for determining the then current annual assessment payable by
Citibank to the Federal Deposit Insurance Corporation (or any successor) for
insuring U.S. dollar deposits of Citibank in the United States.

F-28
<PAGE> 92

SOLUTIA INC.

NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (CONTINUED)

Currently, if the Company elects to borrow under either credit facility,
the total spread (including facilities fees) over LIBOR would be 32.5 basis
points for each credit facility.

The credit agreements contain various covenants, which among other things,
restrict the ability of Solutia to merge with another entity, to create liens
against assets, or to amend, cancel or terminate agreements entered into with
Monsanto to effect the Spinoff. These credit agreements also require Solutia to
meet certain leverage and interest coverage ratios.

Solutia plans to conduct a public offering of debt securities in the amount
of $600 million having maturities of 5 to 40 years. The proceeds of the offering
will be used to refinance a portion of its outstanding commercial paper as it
becomes due. The interest payable on such publicly offered securities will be
fixed and is expected to range from 6.5 percent to 7.5 percent. Subject to the
level of future cash flows, the Company intends to refinance the approximately
$429 million of remaining debt on a long-term basis.

F-29
<PAGE> 93

UNDERWRITING

Subject to the terms and conditions set forth in the Underwriting
Agreements, the Company has agreed to sell to each of the Underwriters named
below, and each of such Underwriters has severally agreed to purchase, the
principal amount of Securities set forth opposite its name below:

<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF NOTES
UNDERWRITERS DUE 2002
----------------------------------------------------------------- ----------------
<S> <C>
Goldman, Sachs & Co.............................................. $ 60,000,000
Chase Securities Inc. ........................................... 30,000,000
J.P. Morgan Securities Inc. ..................................... 30,000,000
NationsBanc Montgomery Securities, Inc. ......................... 30,000,000
---------------
$150,000,000
===============
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF DEBENTURES
UNDERWRITERS DUE 2027
----------------------------------------------------------------- ----------------
<S> <C>
Goldman, Sachs & Co. ............................................ $150,000,000
Salomon Brothers Inc............................................. 150,000,000
---------------
$300,000,000
===============
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF DEBENTURES
UNDERWRITERS DUE 2037
----------------------------------------------------------------- ----------------
<S> <C>
Goldman, Sachs & Co.............................................. $ 60,000,000
Chase Securities Inc. ........................................... 30,000,000
J.P. Morgan Securities Inc. ..................................... 30,000,000
NationsBanc Montgomery Securities, Inc. ......................... 30,000,000
---------------
$150,000,000
===============
</TABLE>

Under the terms and conditions of the relevant Underwriting Agreement, the
underwriters with respect to the Notes (the "Notes Underwriters") are committed
to take and pay for the Notes if any of the Notes are taken; the underwriters
with respect to the 2027 Debentures (the "2027 Debentures Underwriters") are
committed to take and pay for the 2027 Debentures if any of the 2027 Debentures
are taken; and the underwriters with respect to the 2037 Debentures (the "2037
Debentures Underwriters" and, together with the Notes Underwriters and the 2027
Debentures Underwriters, the "Underwriters") are committed to take and pay for
the 2037 Debentures if any of the 2037 Debentures are taken.

The Notes Underwriters propose to offer and sell the Notes in part directly
to the public at the initial public offering price set forth on the cover page
of this Prospectus and in part to certain securities dealers at such price less
a concession of 0.350% of the principal amount of the Notes. The Notes
Underwriters may allow, and such dealers may reallow, a concession not to exceed
0.250% of the principal amount of the Notes to certain brokers and dealers.
After the Notes are released for sale to the public, the offering price and
other selling terms may from time to time be varied by the Notes Underwriters.

The 2027 Debentures Underwriters propose to offer and sell the 2027
Debentures in part directly to the public at the initial public offering price
set forth on the cover page of this Prospectus and in part to certain securities
dealers at such price less a concession of 0.500% of the principal amount of the
2027 Debentures. The 2027 Debentures Underwriters may allow, and such dealers
may reallow, a concession not to exceed 0.250% of the principal amount of the
2027 Debentures to certain brokers and dealers. After the 2027 Debentures are
released for sale to the public, the

U-1
<PAGE> 94

offering price and other selling terms may from time to time be varied by the
2027 Debentures Underwriters.

The 2037 Debentures Underwriters propose to offer and sell the 2037
Debentures in part directly to the public at the initial public offering price
set forth on the cover page of this Prospectus and in part to certain securities
dealers at such price less a concession of 0.375% of the principal amount of the
2037 Debentures. The 2037 Debentures Underwriters may allow, and such dealers
may reallow, a concession not to exceed 0.250% of the principal amount of the
2037 Debentures to certain brokers and dealers. After the 2037 Debentures are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the 2037 Debentures Underwriters.

The Securities are new issues with no established trading market. The
Company has been advised by each of the Underwriters that each such Underwriter
intends to make a market in the Securities but is not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Securities. The Securities
will not be listed on any securities exchange.

In connection with the Offerings, the Underwriters may purchase and sell
the Securities in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the Underwriters in connection with the Offerings. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or retarding
a decline in the market price of the Securities. Short positions created by the
Underwriters involve the sale by the Underwriters of a greater amount of the
Securities than they are required to purchase from the Company in the Offerings.
The Underwriters also may impose a penalty bid, whereby selling concessions
allowed to broker-dealers in respect of the Securities sold in the Offerings may
be reclaimed by the Underwriters if such Securities are repurchased by the
Underwriters in stabilizing or covering transactions. These activities may
stabilize, maintain or otherwise affect the market price of the Securities,
which may be higher than the price that might otherwise prevail in the open
market; and these activities, if commenced, may be discontinued at any time.
These transactions may be affected in the over-the-counter market or otherwise.

The Company maintains bank accounts, borrows money and has customary
banking relationships with affiliates of Chase Securities Inc., J.P. Morgan
Securities Inc. and NationsBanc Montgomery Securities, Inc. in the ordinary
course of business. An affiliate of each of Chase Securities Inc., J.P. Morgan
Securities Inc. and NationsBanc Montgomery Securities, Inc. is a party to the
Company's Credit Facilities.

Certain of the Underwriters have provided from time to time, and expect to
provide in the future, investment or commercial banking services to Monsanto
and/or the Company and their respective affiliates, for which such Underwriters
have received and will receive customary fees and commissions. In September 1997
the Company entered into interest rate swaps with certain financial
institutions, including Goldman Sachs & Co. See Note F to the Company's Pro
Forma Condensed Combined Financial Statements.

In addition, The Chase Manhattan Bank, an affiliate of Chase Securities
Inc., will serve as Trustee under the Indenture.

The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.

U-2
<PAGE> 95

======================================================

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
DESCRIBED IN THIS PROSPECTUS OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................. 2
Prospectus Summary..................... 3
Risk Factors........................... 8
Ratio of Earnings to Fixed Charges..... 11
The Company............................ 12
Recent Developments.................... 12
Use of Proceeds........................ 12
Capitalization......................... 13
Selected Historical Financial Data..... 14
Unaudited Pro Forma Condensed Combined
Financial Statements................. 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 22
Business and Properties................ 27
Agreements with Monsanto............... 37
Management............................. 42
Security Ownership of Management and
Certain Beneficial Owners of Company
Common Stock......................... 52
Other Indebtedness of the Company...... 54
Description of the Securities.......... 55
Validity of Securities................. 63
Experts................................ 63
Index to Financial Statements.......... F-1
Underwriting........................... U-1
</TABLE>

======================================================

$600,000,000

SOLUTIA INC.
------------------

[SOLUTIA LOGO]
------------------

$150,000,000 6.50% NOTES
DUE 2002
$150,000,000 6.72% DEBENTURES
DUE 2037

GOLDMAN, SACHS & CO.
CHASE SECURITIES INC.
J.P. MORGAN & CO.
NATIONSBANC MONTGOMERY
SECURITIES, INC.

$300,000,000 7.375% DEBENTURES
DUE 2027

GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC

======================================================