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Article by DailyStocks_admin    (09-01-08 02:54 AM)

Filed with the SEC from Aug 14 to Aug 20:

Solutia (SOA)
Hedge fund Harbinger Capital Partners Master Fund I and affiliates increased their stake to 30.43 million shares (36.3%), from the 18.76 million (31.3%) reported March 28.

BUSINESS OVERVIEW

Company Overview

We are a global manufacturer and marketer of a variety of high-performance chemical and engineered materials that are used in a broad range of consumer and industrial applications. We maintain a global infrastructure consisting of 29 manufacturing facilities, 8 technical centers and over 30 sales offices globally, including 20 facilities in the United States. We employ approximately 6,000 individuals around the world.

We were formed in April 1977 by Pharmacia Corporation (“Pharmacia”), which was then known as Monsanto Company (“Old Monsanto”) to hold and operate substantially all of the assets, and assume all of the liabilities of Old Monsanto’s historical chemicals business. Pharmacia spun us off to Pharmacia’s shareholders and we became an independent company in September 1977 (the “Solutia Spinoff”). Pharmacia subsequently formed a new company, Monsanto Company, (“Monsanto”) to hold its agricultural and seed businesses and then spun Monsanto off to its shareholders as well.

Chapter 11 Proceedings

On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries (the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Chapter 11 Cases") in the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The cases were consolidated for the purpose of joint administration and were assigned case number 03-17949 (PCB). Our subsidiaries outside the United States were not included in the Chapter 11 filing. The filing was made to restructure our balance sheet, to streamline operations and to reduce costs, in order to allow us to emerge from Chapter 11 as a viable going concern. The filing also was made to obtain relief from the negative financial impact of liabilities for litigation, environmental remediation and certain post-retirement benefits (the "Legacy Liabilities") and liabilities under operating contracts, all of which were assumed at the time of the Solutia Spinoff. These factors, combined with the weakened state of the chemical manufacturing sector, general economic conditions and continuing high, volatile energy and crude oil costs were an obstacle to our financial stability and success.

Under Chapter 11, we are operating our businesses as a debtor-in-possession ("DIP") under court protection from creditors and claimants. Since the Chapter 11 filing, orders sufficient to enable us to conduct normal business activities, including the approval of our DIP financing, have been entered by the Bankruptcy Court. While we are subject to Chapter 11, all transactions not in the ordinary course of business require the prior approval of the Bankruptcy Court.

On January 16, 2004, pursuant to authorization from the Bankruptcy Court, we entered into a DIP credit facility. This DIP credit facility has subsequently been amended from time to time, with Bankruptcy Court approval. The DIP credit facility, as amended, consists of: (a) a $975 million fully-drawn term loan; and (b) a $250 million borrowing-based revolving credit facility, which includes a $150 million letter of credit subfacility. The DIP credit facility matures on March 31, 2008.

On October 15, 2007, we filed our Fifth Amended Joint Plan of Reorganization (the “Plan”) and the related Fifth Amended Disclosure Statement (the “Disclosure Statement”) with the Bankruptcy Court. The Disclosure Statement was approved by the Bankruptcy Court on October 19, 2007. The Plan is based on a comprehensive settlement reached with all of the major constituents in our bankruptcy case which includes the following parties: Monsanto, noteholders controlling at least $300 million in principal amount of the 2027/2037 notes, the Official Committee of General Unsecured Creditors, the Official Committee of Equity Security Holders and the Ad Hoc Trade Committee.

The Disclosure Statement contains a description of the events that led up to the Debtors’ bankruptcy filing, the actions the Debtors’ have taken to improve their financial situation while in bankruptcy, a current description of the Debtors’ businesses and a summary of the classification and treatment of allowed claims and equity interests under the Plan. The Disclosure Statement was sent to our creditors and equity interest holders who approved the Plan. On November 29, 2007 the Bankruptcy Court entered an order confirming the Plan. We plan to declare the Plan effective and emerge from Chapter 11 on February 28, 2008.

Set forth below is a brief description of certain terms of the Plan and are qualified in their entirety by reference to the Plan and Disclosure Statement.

Under the Plan, we will emerge from bankruptcy as an independent publicly-held company. The Plan provides for a re-allocation of our Legacy Liabilities with Monsanto, and an underlying settlement with the Official Committee of Retirees, the terms of which are set forth in the Monsanto Settlement Agreement and the Retiree Settlement Agreement, which have been filed with the Bankruptcy Court.

The Plan contemplates the completion of two rights offerings to raise new equity capital: (1) $250 million of new common stock will be sold to the noteholders and general unsecured creditors (“Creditor Rights Offering”) and (2) $175 million or 17 percent of new common stock will be sold pursuant to another rights offering to holders of at least 11 shares of common stock (“Equity Rights Offering”). A group of our creditors has committed to backstop the Creditor Rights Offering. The $250 million generated as a result of the Creditor Rights Offering will be used as follows: $175 million will be set aside in a Voluntary Employees’ Beneficiary Association (VEBA) Retiree Trust to fund the retiree welfare benefits for those pre-spin retirees who receive these benefits from us; and we will use $75 million to pay for other Legacy Liabilities being retained by the Company. The $175 million generated as a result of the Equity Rights Offering will be paid to Monsanto in connection with the settlement of its claims. Any portion of the 17 percent of the new common stock that is not purchased by current equity holders will be distributed to Monsanto.

Under the Plan, current equity holders that own at least 175 shares of our common stock will receive their pro rata share of 1 percent of the new common stock and current equity holders that own at least 11 shares of our common stock will receive additional rights as described above. Additionally, current equity security holders will have the following rights: i) holders who own at least 24 shares of our common stock will receive their pro rata share of five-year warrants to purchase 7.5 percent of the new common stock; and ii) holders who own at least 107 shares of our common stock will receive the right to participate in a buy out for cash of general unsecured claims of less than $100 thousand but more than $2.5 thousand for an amount equal to 52.35 percent of the allowed amount of such claims, subject to election of each general unsecured creditor to sell their claim.

Expected distributions to be provided creditors and equity holders are set forth in the Plan and Disclosure Statement which have been filed with the Securities & Exchange Commission as exhibits to Form 8-K, dated October 22, 2007.

On November 21, 2007, the Bankruptcy Court entered its Order approving our entry into the Exit Financing Facility Commitment Letter dated October 25, 2007 by and between Solutia, Citigroup Global Markets Inc., Goldman Sachs Credit Partners L.P. and Deutsche Bank Securities Inc. (collectively, “the Lenders”). Under the Exit Financing Facility Commitment Letter and subject to the conditions contained therein, the Lenders were to provide us with $2.0 billion in financing (collectively, the “Exit Financing Facility”), including (a) a $400 million senior secured asset-based revolving credit facility; (b) a $1.2 billion senior secured term loan facility and (c) if we are unable to issue $400 million senior unsecured notes by the closing of the Exit Financing Facility, a $400 million senior unsecured bridge facility.

On January 22, 2008, the Lenders informed us they were refusing to provide the exit funding, asserting that there has been an adverse change in the markets since entering into the commitment. We disagreed with their assertion and, on February 6, 2008, we filed a complaint in the Bankruptcy Court seeking a court order requiring the Lenders to meet their commitment and fund our exit from bankruptcy. Trial on this matter began, February 21, 2008. On February 25, 2008 and before the trial concluded, we reached an agreement with our Lenders on the terms of a revised exit financing package, subject to Bankruptcy Court approval. The Bankruptcy Court approved the revised exit financing package on February 26, 2008 finding that the revisions are substantially consistent with the order confirming our Plan. Accordingly, we are currently scheduled to emerge from Chapter 11 on February 28, 2008. In the event the Lenders do not fund the exit financing for any other reason, it is not certain that we can extend our DIP credit facility and, if we can extend it, at what cost.

General Development of Business

In May 2007 we purchased the 50% of Flexsys that we did not own from our joint venture partner Azko Nobel N.V. for approximately $213 million. The purchase was simultaneous with Flexsys’ purchase of Azko Nobel’s CRYSTEX ® manufacturing operations in Japan for $25 million. Flexsys manufactures more than 50 different products which are classified into two main product groups: vulcanizing agents, principally insoluble sulfur and rubber chemicals.

Also, in May 2007 we sold DEQUEST®, our water treatment phosphates business ( “ Dequest ” ) to Thermphos Trading GmbH. Thermphos purchased the assets and assumed certain of the liabilities of Dequest for $67 million, subject to a working capital adjustment. As part of the sale, we and Thermphos entered into a ten year lease and operating agreement under which we will continue to operate the Dequest production facility for Thermphos at our plant in Newport, Wales, United Kingdom.

In September 2007 we announced the opening of our new plant in Suzhou, China, a manufacturing site for our SAFLEX® business.

In November 2007, CPFilms purchased certain assets of Acquired Technology, Inc. which provides technology to help grow and develop CPFilms’ broad product portfolio while immediately adding sales volume in the aftermarket window film business.

Segments; Principal Products

Our reportable segments are:

â—Ź

Performance Products; and

â—Ź

Integrated Nylon.

The tabular and narrative information contained in Note 24 to the accompanying consolidated financial statements appearing on pages 104-106 is incorporated by reference into this section.

Performance Products

Rubber Chemicals. We purchased the 50% of Flexsys that we did not own in May 2007 from our joint venture partner, Akzo Nobel. These chemicals help cure and protect rubber, impart desirable properties to cured rubber, increase durability, and lengthen product life. Flexsys products play an important role in the manufacture of tires and other rubber products such as belts, hoses, seals and footwear.

Flexsys manufactures more than 50 different products which are classified into two main product groups: vulcanizing agents, principally insoluble sulfur, and rubber chemicals. Insoluble sulfur is a key vulcanizing agent manufactured predominantly for the tire industry. Flexsys is the world's leading supplier of insoluble sulfur and markets under the trade name of CRYSTEX®. Flexsys has three product groups within rubber chemicals: antidegradants, accelerators, and other rubber chemicals.

Flexsys products are manufactured at 15 facilities worldwide: eight in Europe, three in North America, two in South America and two in Asia. Flexsys has eight offices and a sales force of approximately 20 employees plus a worldwide network of agents and distributors.

CPFilms. CPFilms is a films business which adds functionality to glass. Our CPFilms business manufactures and sells special custom coated window films under four brands:

• LLUMAR®;

• VISTA®;

• GILA®; and

• FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS®.

CPFilms also manufactures various films for use in tapes, automotive badging, optical and colored filters, shades, packaging, computer touch screens, electroluminescent displays, and cathode ray tube and flat-panel monitors.


CPFilms operates facilities in Martinsville, Virginia; Canoga Park, California; and Runcorn, U.K.

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

PVB is a specialty resin used in the production of laminated safety glass sheet, an adhesive interlayer with high tensile strength, impact resistance, transparency and elasticity that make it particularly useful in the production of safety glass. Laminated safety glass is predominately produced with PVB sheet and is legislated in all industrialized countries for automobile windshields. Developing countries also use laminated safety glass in automotive windshields though it is not formally legislated. Approximately 45% of sales to the automotive sector are for aftermarket replacement windows. Architectural laminated safety glass is widely used in the construction of modern office buildings, airports, and residential homes. Other applications for PVB resin include non-sheet applications such as wash primers and other surface coatings, specialty adhesive formulations, and inks.

The SAFLEX® business operates facilities in Antwerp, Belgium; Ghent, Belgium; Newport, Wales (U.K.); Santo Toribio, Mexico; Sao Jose dos Campos, Brazil; Singapore; Springfield, Massachusetts; and Trenton, Michigan.

The Specialty Products business represents a unique set of niche businesses serving a diverse set of markets and end users in the aerospace, manufacturing and industrial end markets.

The principal product lines of the Specialty Products business are as follows:

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

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

PLASTIC PRODUCTS - a variety of products including entrance matting and automotive spray suppression flaps sold under the brands ASTROTURF®, CLEAN MACHINE® and CLEAR PASS™.

Heat transfer fluids are manufactured in Anniston, Alabama; Alvin, Texas (Chocolate Bayou); Newport, Wales (U.K.); and Sao Jose dos Campos, Brazil. Aviation Fluids are manufactured in Anniston, Alabama. Plastic products are manufactured in Ghent, Belgium and St. Louis, Missouri.

Integrated Nylon

Integrated Nylon consists of nylon plastics, fiber and intermediate chemical products used in construction, automotive, consumer and industrial applications.

Integrated Nylon comprises an integrated family of nylon products, as follows:

•

Our VYDYNE ® nylon molding resins, ASCEND ® nylon polymers and nylon industrial fibers, which are sold into the automotive, engineered thermoplastic, apparel, textile, commercial and industrial markets in products such as knit clothing, dental floss, tires, airbags, molded automotive parts, conveyor belts, cooking bags, food packaging and camping gear.

•

Our nylon carpet staple and nylon bulk continuous filament which are sold under the WEAR-DATED ® brand for residential carpet and the ULTRON ® brand for commercial carpet, as well as under private labels for the residential, commercial and industrial markets.

Sale of Products

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

Our marketing and distribution practices do not result in unusual working capital requirements on a consolidated

basis. We maintain inventories of finished goods, goods in process and raw materials to meet customer requirements and our scheduled production. In general, we do not manufacture our products against a backlog of firm orders; we schedule production to meet the level of incoming orders and the projections of future demand. However, in the Performance Products segment, a large portion of sales for 2007 were pursuant to volume commitments. We do not have material contracts with the government of the United States or any state, local or foreign government. In 2007, no single customer or customer group accounted for 10 percent or more of our net sales.

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

Competition

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

Raw Materials and Energy Resources

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

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

Intellectual Property

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

MANAGEMENT DISCUSSION FROM LATEST 10K

Company Overview

We are a global manufacturer and marketer of a variety of high-performance chemical and engineered materials that are used in a broad range of consumer and industrial applications. We maintain a global infrastructure consisting of 29 manufacturing facilities, 8 technical centers and over 30 sales offices globally, including 20 facilities in the United States. We employ approximately 6,000 individuals around the world.

We were formed in April 1977 by Pharmacia Corporation (“Pharmacia”), which was then known as Monsanto Company (“Old Monsanto”) to hold and operate substantially all of the assets, and assume all of the liabilities of Old Monsanto’s historical chemicals business. Pharmacia spun us off to Pharmacia’s shareholders and we became an independent company in September 1977 (the “Solutia Spinoff”). Pharmacia subsequently formed a new company, Monsanto Company, (“Monsanto”) to hold its agricultural and seed businesses and then spun Monsanto off to its shareholders as well.

Chapter 11 Proceedings

On December 17, 2003, Solutia Inc. and its 14 U.S. subsidiaries (the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Chapter 11 Cases") in the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The cases were consolidated for the purpose of joint administration and were assigned case number 03-17949 (PCB). Our subsidiaries outside the United States were not included in the Chapter 11 filing. The filing was made to restructure our balance sheet, to streamline operations and to reduce costs, in order to allow us to emerge from Chapter 11 as a viable going concern. The filing also was made to obtain relief from the negative financial impact of liabilities for litigation, environmental remediation and certain post-retirement benefits (the "Legacy Liabilities") and liabilities under operating contracts, all of which were assumed at the time of the Solutia Spinoff. These factors, combined with the weakened state of the chemical manufacturing sector, general economic conditions and continuing high, volatile energy and crude oil costs were an obstacle to our financial stability and success.

Under Chapter 11, we are operating our businesses as a debtor-in-possession ("DIP") under court protection from creditors and claimants. Since the Chapter 11 filing, orders sufficient to enable us to conduct normal business activities, including the approval of our DIP financing, have been entered by the Bankruptcy Court. While we are subject to Chapter 11, all transactions not in the ordinary course of business require the prior approval of the Bankruptcy Court.

On January 16, 2004, pursuant to authorization from the Bankruptcy Court, we entered into a DIP credit facility. This DIP credit facility has subsequently been amended from time to time, with Bankruptcy Court approval. The DIP credit facility, as amended, consists of: (a) a $975 million fully-drawn term loan; and (b) a $250 million borrowing-based revolving credit facility, which includes a $150 million letter of credit subfacility. The DIP credit facility matures on March 31, 2008.

On October 15, 2007, we filed our Fifth Amended Joint Plan of Reorganization (the “Plan”) and the related Fifth Amended Disclosure Statement (the “Disclosure Statement”) with the Bankruptcy Court. The Disclosure Statement was approved by the Bankruptcy Court on October 19, 2007. The Plan is based on a comprehensive settlement reached with all of the major constituents in our bankruptcy case which includes the following parties: Monsanto, noteholders controlling at least $300 million in principal amount of the 2027/2037 notes, the Official Committee of General Unsecured Creditors, the Official Committee of Equity Security Holders and the Ad Hoc Trade Committee.

The Disclosure Statement contains a description of the events that led up to the Debtors’ bankruptcy filing, the actions the Debtors’ have taken to improve their financial situation while in bankruptcy, a current description of the Debtors’ businesses and a summary of the classification and treatment of allowed claims and equity interests under the Plan. The Disclosure Statement was sent to our creditors and equity interest holders who approved the Plan. On November 29, 2007 the Bankruptcy Court entered an order confirming the Plan. We plan to declare the Plan effective and emerge from Chapter 11 on February 28, 2008.

Set forth below is a brief description of certain terms of the Plan and are qualified in their entirety by reference to the Plan and Disclosure Statement.

Under the Plan, we will emerge from bankruptcy as an independent publicly-held company. The Plan provides for a re-allocation of our Legacy Liabilities with Monsanto, and an underlying settlement with the Official Committee of Retirees, the terms of which are set forth in the Monsanto Settlement Agreement and the Retiree Settlement Agreement, which have been filed with the Bankruptcy Court.

The Plan contemplates the completion of two rights offerings to raise new equity capital: (1) $250 million of new common stock will be sold to the noteholders and general unsecured creditors (“Creditor Rights Offering”) and (2) $175 million or 17 percent of new common stock will be sold pursuant to another rights offering to holders of at least 11 shares of common stock (“Equity Rights Offering”). A group of our creditors has committed to backstop the Creditor Rights Offering. The $250 million generated as a result of the Creditor Rights Offering will be used as follows: $175 million will be set aside in a Voluntary Employees’ Beneficiary Association (VEBA) Retiree Trust to fund the retiree welfare benefits for those pre-spin retirees who receive these benefits from us; and we will use $75 million to pay for other Legacy Liabilities being retained by the Company. The $175 million generated as a result of the Equity Rights Offering will be paid to Monsanto in connection with the settlement of its claims. Any portion of the 17 percent of the new common stock that is not purchased by current equity holders will be distributed to Monsanto.

Under the Plan, current equity holders that own at least 175 shares of our common stock will receive their pro rata share of 1 percent of the new common stock and current equity holders that own at least 11 shares of our common stock will receive additional rights as described above. Additionally, current equity security holders will have the following rights: i) holders who own at least 24 shares of our common stock will receive their pro rata share of five-year warrants to purchase 7.5 percent of the new common stock; and ii) holders who own at least 107 shares of our common stock will receive the right to participate in a buy out for cash of general unsecured claims of less than $100 thousand but more than $2.5 thousand for an amount equal to 52.35 percent of the allowed amount of such claims, subject to election of each general unsecured creditor to sell their claim.

Expected distributions to be provided creditors and equity holders are set forth in the Plan and Disclosure Statement which have been filed with the Securities & Exchange Commission as exhibits to Form 8-K, dated October 22, 2007.

On November 21, 2007, the Bankruptcy Court entered its Order approving our entry into the Exit Financing Facility Commitment Letter dated October 25, 2007 by and between Solutia, Citigroup Global Markets Inc., Goldman Sachs Credit Partners L.P. and Deutsche Bank Securities Inc. (collectively, “the Lenders”). Under the Exit Financing Facility Commitment Letter and subject to the conditions contained therein, the Lenders were to provide us with $2.0 billion in financing (collectively, the “Exit Financing Facility”), including (a) a $400 million senior secured asset-based revolving credit facility; (b) a $1.2 billion senior secured term loan facility and (c) if we are unable to issue $400 million senior unsecured notes by the closing of the Exit Financing Facility, a $400 million senior unsecured bridge facility.

On January 22, 2008, the Lenders informed us they were refusing to provide the exit funding, asserting that there has been an adverse change in the markets since entering into the commitment. We disagreed with their assertion and, on February 6, 2008, we filed a complaint in the Bankruptcy Court seeking a court order requiring the Lenders to meet their commitment and fund our exit from bankruptcy. Trial on this matter began, February 21, 2008. On February 25, 2008 and before the trial concluded, we reached an agreement with our Lenders on the terms of a revised exit financing package, subject to Bankruptcy Court approval. The Bankruptcy Court approved the revised exit financing package on February 26, 2008 finding that the revisions are substantially consistent with the order confirming our Plan. Accordingly, we are currently scheduled to emerge from Chapter 11 on February 28, 2008. In the event the Lenders do not fund the exit financing for any other reason, it is not certain that we can extend our DIP credit facility and, if we can extend it, at what cost.

General Development of Business

In May 2007 we purchased the 50% of Flexsys that we did not own from our joint venture partner Azko Nobel N.V. for approximately $213 million. The purchase was simultaneous with Flexsys’ purchase of Azko Nobel’s CRYSTEX ® manufacturing operations in Japan for $25 million. Flexsys manufactures more than 50 different products which are classified into two main product groups: vulcanizing agents, principally insoluble sulfur and rubber chemicals.

Also, in May 2007 we sold DEQUEST®, our water treatment phosphates business ( “ Dequest ” ) to Thermphos Trading GmbH. Thermphos purchased the assets and assumed certain of the liabilities of Dequest for $67 million, subject to a working capital adjustment. As part of the sale, we and Thermphos entered into a ten year lease and operating agreement under which we will continue to operate the Dequest production facility for Thermphos at our plant in Newport, Wales, United Kingdom.

In September 2007 we announced the opening of our new plant in Suzhou, China, a manufacturing site for our SAFLEX® business.

In November 2007, CPFilms purchased certain assets of Acquired Technology, Inc. which provides technology to help grow and develop CPFilms’ broad product portfolio while immediately adding sales volume in the aftermarket window film business.

Segments; Principal Products

Our reportable segments are:

â—Ź

Performance Products; and

â—Ź

Integrated Nylon.

The tabular and narrative information contained in Note 24 to the accompanying consolidated financial statements appearing on pages 104-106 is incorporated by reference into this section.

Performance Products

Rubber Chemicals. We purchased the 50% of Flexsys that we did not own in May 2007 from our joint venture partner, Akzo Nobel. These chemicals help cure and protect rubber, impart desirable properties to cured rubber, increase durability, and lengthen product life. Flexsys products play an important role in the manufacture of tires and other rubber products such as belts, hoses, seals and footwear.

Flexsys manufactures more than 50 different products which are classified into two main product groups: vulcanizing agents, principally insoluble sulfur, and rubber chemicals. Insoluble sulfur is a key vulcanizing agent manufactured predominantly for the tire industry. Flexsys is the world's leading supplier of insoluble sulfur and markets under the trade name of CRYSTEX®. Flexsys has three product groups within rubber chemicals: antidegradants, accelerators, and other rubber chemicals.

Flexsys products are manufactured at 15 facilities worldwide: eight in Europe, three in North America, two in South America and two in Asia. Flexsys has eight offices and a sales force of approximately 20 employees plus a worldwide network of agents and distributors.

CPFilms. CPFilms is a films business which adds functionality to glass. Our CPFilms business manufactures and sells special custom coated window films under four brands:

• LLUMAR®;

• VISTA®;

• GILA®; and

• FORMULA ONE PERFORMANCE AUTOMOTIVE FILMS®.

CPFilms also manufactures various films for use in tapes, automotive badging, optical and colored filters, shades, packaging, computer touch screens, electroluminescent displays, and cathode ray tube and flat-panel monitors.


CPFilms operates facilities in Martinsville, Virginia; Canoga Park, California; and Runcorn, U.K.

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

PVB is a specialty resin used in the production of laminated safety glass sheet, an adhesive interlayer with high tensile strength, impact resistance, transparency and elasticity that make it particularly useful in the production of safety glass. Laminated safety glass is predominately produced with PVB sheet and is legislated in all industrialized countries for automobile windshields. Developing countries also use laminated safety glass in automotive windshields though it is not formally legislated. Approximately 45% of sales to the automotive sector are for aftermarket replacement windows. Architectural laminated safety glass is widely used in the construction of modern office buildings, airports, and residential homes. Other applications for PVB resin include non-sheet applications such as wash primers and other surface coatings, specialty adhesive formulations, and inks.

The SAFLEX® business operates facilities in Antwerp, Belgium; Ghent, Belgium; Newport, Wales (U.K.); Santo Toribio, Mexico; Sao Jose dos Campos, Brazil; Singapore; Springfield, Massachusetts; and Trenton, Michigan.

The Specialty Products business represents a unique set of niche businesses serving a diverse set of markets and end users in the aerospace, manufacturing and industrial end markets.

The principal product lines of the Specialty Products business are as follows:

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

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

PLASTIC PRODUCTS - a variety of products including entrance matting and automotive spray suppression flaps sold under the brands ASTROTURF®, CLEAN MACHINE® and CLEAR PASS™.

Heat transfer fluids are manufactured in Anniston, Alabama; Alvin, Texas (Chocolate Bayou); Newport, Wales (U.K.); and Sao Jose dos Campos, Brazil. Aviation Fluids are manufactured in Anniston, Alabama. Plastic products are manufactured in Ghent, Belgium and St. Louis, Missouri.

Integrated Nylon

Integrated Nylon consists of nylon plastics, fiber and intermediate chemical products used in construction, automotive, consumer and industrial applications.

Integrated Nylon comprises an integrated family of nylon products, as follows:

•

Our VYDYNE ® nylon molding resins, ASCEND ® nylon polymers and nylon industrial fibers, which are sold into the automotive, engineered thermoplastic, apparel, textile, commercial and industrial markets in products such as knit clothing, dental floss, tires, airbags, molded automotive parts, conveyor belts, cooking bags, food packaging and camping gear.

•

Our nylon carpet staple and nylon bulk continuous filament which are sold under the WEAR-DATED ® brand for residential carpet and the ULTRON ® brand for commercial carpet, as well as under private labels for the residential, commercial and industrial markets.

Sale of Products

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

Our marketing and distribution practices do not result in unusual working capital requirements on a consolidated

basis. We maintain inventories of finished goods, goods in process and raw materials to meet customer requirements and our scheduled production. In general, we do not manufacture our products against a backlog of firm orders; we schedule production to meet the level of incoming orders and the projections of future demand. However, in the Performance Products segment, a large portion of sales for 2007 were pursuant to volume commitments. We do not have material contracts with the government of the United States or any state, local or foreign government. In 2007, no single customer or customer group accounted for 10 percent or more of our net sales.

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

Competition

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

Raw Materials and Energy Resources

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

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

Intellectual Property

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

Research and Development

Research and development constitute an important part of our activities. Our expenses for research and development amounted to $37 million in both 2007 and 2006 and $40 million in 2005, or about 1.3 percent of sales on average. We focus our expenditures for research and development on process improvements and selected product

development.

Our research and development programs in the Performance Products segment include new products and processes for the window glazing and specialty chemicals markets. A new acoustic safety interlayer and a new heat transfer fluid have been commercialized. A new aviation fluid is in flight service evaluation. Several process technologies developed to support the construction of SAFLEX® plants have been started up. Significant progress was achieved in developing a solar safety interlayer and a new interlayer for thin film photovoltaic cell lamination. Window films that mitigate or enhance the reception of electronic signals through windows continue to be developed. New products using advances in exterior coatings, adhesive formulations, and nanoparticle technologies are being commercialized.

Our research and development programs in our Flexsys business emphasize the balance between manufacturing cost reduction and capacity expansion. We have made significant progress in process optimization, capacity expansion and energy reduction across most of our Flexsys product lines.

Our Integrated Nylon segment continues to focus on internal process improvements to mitigate increasing raw material prices and to commercialize new products to address customer needs and improve product mix.

Environmental Matters

The narrative appearing under “Environmental Matters” beginning on page 45 below is incorporated by reference.

Employee Relations

On December 31, 2007, we had approximately 6,000 employees worldwide: with U.S. employees constituting 69 percent of the total number of employees. Approximately 450 of the European employees are represented by the union delegation. Approximately 15 percent of our U.S. workforce is currently represented by various labor unions with local agreements that expire between July 2009 and February 2013, at our following sites: Anniston, Alabama; Sauget, Illinois; Springfield, Massachusetts; and Trenton, Michigan. In the U.S., local agreements cover wages and working conditions. Each of our U.S. labor unions ratified new five-year collective bargaining agreements in 2005 which set pension and health and welfare benefits for our employees who are represented by the labor unions at the above sites.

International Operations

We are engaged in manufacturing, sales and research and development in areas outside the United States. Approximately 55 percent of our consolidated sales from continuing operations for the year ended December 31, 2007 were made into markets outside the United States, including Europe, Canada, Latin America and Asia.

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

Summary Results of Operations

The discussion below and accompanying consolidated financial statements have been prepared in accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”), and on a going concern basis, which assumes the continuity of operations and reflects the realization of assets and satisfaction of liabilities in the ordinary course of business. However, as a result of the Chapter 11 bankruptcy proceedings, such realization of assets and liquidation of liabilities are subject to a significant number of uncertainties.

The $740 million, or 26 percent, increase in net sales in 2007 resulted from the Flexsys Acquisition, which was completed on May 1, 2007, higher sales volumes, increased selling prices, the effect of favorable exchange rate fluctuation and higher gains (see the Results of Operations and Summary of Events Affecting Comparability sections below for a more detailed discussion of charges and gains affecting operating income). Prior to May 1, 2007, the results of Flexsys were accounted for using the equity method and recorded as Equity Earnings from Affiliates on the Consolidated Statement of Operations. The 2007 effect of the Flexsys Acquisition was an increase in net sales of 17 percent. The remaining 9 percent increase in net sales was a result of higher average selling prices of 4 percent, higher sales volumes of 4 percent, and favorable exchange rate fluctuations of 1 percent. Our net sales for 2006 increased by $150 million, or 6 percent, as compared to 2005 due to higher average selling prices.

Operating income improved by $103 million in 2007 as compared to 2006 due to the Flexsys Acquisition, increases in net sales by the other businesses, partially offset by higher charges, higher raw material costs of $73 million and higher adjustments to the LIFO reserve of $27 million. Operating income improved by $50 million in 2006 as compared to 2005 primarily as a result of higher net sales, controlled spending, and lower adjustments to our LIFO reserve, as are more fully discussed below, partially offset by higher overall raw material and energy costs of approximately $91 million. Our policy of utilizing a LIFO inventory methodology for the majority of our domestic inventories results in the full recognition of increases in raw material costs in the immediate period. The considerable increases in raw material costs noted above resulted in substantial adjustments to our LIFO reserve in 2007, 2005, and, to a lesser extent, 2006. As indicated in the preceding table, operating results for each year were affected by various gains (charges) which are described in greater detail in the “Results of Operations” section below.

Financial Information

Critical Accounting Policies and Estimates

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

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

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Environmental Remediation
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Self-Insurance
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Income Taxes
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Impairment of Long-Lived Assets
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Impairment of Goodwill and Indefinite-Lived Intangible Assets
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Pension and Other Postretirement Benefits

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

Environmental Remediation

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

These estimates are critical because we must forecast environmental remediation activity into the future, which is highly uncertain and requires a large degree of judgment. Therefore, the environmental reserves may materially differ from the actual liabilities if our estimates prove to be inaccurate, which could materially affect results of operations in a given period. Uncertainties related to recorded environmental liabilities include changing governmental policy and regulations, judicial proceedings, the number and financial viability of other potentially responsible parties, the method and extent of remediation and future changes in technology. Because of these uncertainties, the potential liability for existing environmental remediation reserves not subject to compromise may range up to two times the amounts recorded. The estimate for environmental liabilities is a critical accounting estimate for both reportable segments.

See “Environmental Matters” on page 45 for discussion of the liability for existing environmental remediation reserves classified as subject to compromise, which were retained by us as part of the Plan.

Self-Insurance

We maintain self-insurance reserves to cover our estimated future legal costs, settlements and judgments related to workers’ compensation, product, general, automobile and operations liability claims that are less than policy deductible amounts or not covered by insurance. Self-insured losses are accrued based upon estimates of the aggregate liability for claims incurred using certain actuarial assumptions followed in the insurance industry, our historical experience and certain case-specific reserves as required, including estimated legal costs. The maximum extent of the self-insurance provided by us and related insurance recoveries are dependent upon a number of factors including the facts and circumstances of individual cases and the terms and conditions of the commercial policies. We have purchased commercial insurance in order to reduce our exposure to workers’ compensation, product, general, automobile and property liability claims. Policies for periods prior to the Solutia Spinoff are shared with Pharmacia. This insurance has varying policy limits and deductibles. When recovery from an insurance policy is considered probable, a receivable is recorded. Self-insurance reserve estimates are critical because changes to the actuarial assumptions used in the development of these reserves can materially affect earnings in a given period and we must forecast loss activity into the distant future which is highly uncertain and requires a large degree of judgment.

Actuarial reserve indications are projections of the remaining future payments for workers’ compensation, product, general, automobile and operations liability claims for which we are legally responsible. These projections are made in the context of an uncertain future where variations between estimated and actual amounts are attributable to many factors, including changes in operations, changes in judicial environments, shifts in the types or timing of the reporting of claims, changes in the frequency or severity of losses and random chance. The actuarial estimates of the reserve requirements fall within a range. Our best estimate of the liability is generally near the middle of the actuary’s range; accordingly, we have recorded the liability at this level. The range of outcomes is not material to the consolidated financial statements for losses that are not stayed by the Chapter 11 proceedings. These valuations of future self-insurance costs do not contemplate the uncertainties inherent in our bankruptcy proceedings, as the potential impact of the Chapter 11 proceedings upon future self-insurance costs cannot be reasonably determined at this time. Due to these uncertainties, certain of the self-insurance liabilities have been classified as subject to compromise in the Consolidated Statement of Financial Position as of December 31, 2007, and have been excluded from the range of possible outcomes of existing self-insurance reserves. The potential liability for existing self-insurance liabilities subject to compromise, if ultimately retained by us upon emergence from Chapter 11, could be materially different than amounts recorded. The estimate for self-insurance liabilities is a critical accounting estimate for both reportable segments.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Summary Results of Operations

In the second quarter of 2008, we reported sales of $1,095 million, a 20 percent increase over $911 million reported in the second quarter of 2007. The increase was driven by acquisitions, higher selling prices, higher demand, and favorable currency exchange rate fluctuations. Our second quarter of 2008 gross profit of $109 million, a 12 percent decrease versus the same period in 2007, and our gross profit margin of 10.0 percent, a decrease from 13.6 percent versus the same period in 2007, were both significantly impacted by the recognition into cost of goods sold the step-up in basis of our inventory of $49 million recorded in accordance with fresh-start accounting. Excluding this charge, higher raw material, energy and freight costs, were offset by the Flexsys acquisition and the combination of higher selling prices, increased demand, and favorable currencies. Selling, general and administrative expenses remained at approximately 7 percent of sales, consistent with 2007. In total, this quarter’s operating income results include $52 million of negative impacts from non-operational or non-recurring items.

In the six months ended June 30, 2008, we reported sales of $2,080 million, a 29 percent increase over $1,613 million reported in the same period in 2007. The increase was driven by acquisitions, higher selling prices, higher demand, and favorable currency exchange rate fluctuations. Gross profit of $223 million in the six months ended June 30, 2008 was 2 percent lower than the same period in 2007. Higher raw material, energy and freight costs and the impacts of fresh-start accounting were partially offset by the Flexsys acquisition and the combination of higher selling prices, increased demand, and favorable currencies. Gross profit margin in the six months ended June 30, 2008 decreased to 10.7 percent from 14.1 percent in the prior year period, due to the factors previously noted. Selling, general and administrative expenses remained at approximately 8 percent of sales, consistent with 2007. The six months ended June 30, 2008 operating income results also include $75 million of negative impacts from the adoption of fresh-start accounting as of the Effective Date and other non-operational or non-recurring items.

We used $437 million of cash from operations in the six months ended June 30, 2008, due to outflows required to facilitate emergence from bankruptcy, the seasonal build of working capital and funding into our domestic pension plan. This compares to a usage of $115 million in the same period in 2007, which was primarily due to seasonal working capital build and domestic pension funding. Our liquidity at the end of the second quarter was $242 million in the form of $195 million of availability under the Revolver and $47 million of cash on-hand.

Critical Accounting Policies and Estimates

As a result of our emergence from bankruptcy and the discharge of many of our legal proceedings in accordance with the Plan (as described in Note 10 to the accompanying consolidated financial statements), we no longer consider Self-Insurance to be a critical accounting policy as we believe it is less likely to have a material impact on our reported results of operations in future periods. There have been no other changes in 2008 with respect to our critical accounting policies, as presented in our 2007 Form 10-K, as re-casted and filed with the Securities and Exchange Commission (“SEC”) in a Form 8-K on July 25, 2008, to reflect our segment reporting change as described in Note 13 to the accompanying consolidated financial statements.

Results of Operations—Second Quarter 2008 Compared with Second Quarter 2007

The increase in net sales as compared to the second quarter 2007 resulted from our acquisition of Akzo Nobel’s 50 percent interest in the Flexsys joint venture, which was completed on May 1, 2007 (the “Flexsys Acquisition”), higher sales volumes, increased selling prices and the effect of favorable exchange rate fluctuations. Prior to May 1, 2007, the results of Flexsys were accounted for using the equity method and recorded as Equity Earnings from Affiliates on the Consolidated Statement of Operations. Net sales increased $78 million or 8 percent in the second quarter 2008 as a result of the Flexsys Acquisition. The remaining $106 million or 12 percent increase in net sales was a result of higher average selling prices of $78 million or 9 percent and favorable currency exchange rate fluctuations of $28 million or 3 percent. Higher average selling prices were experienced across all reporting segments given the generally favorable supply/demand profile in these markets, new product introductions in certain of our growth segments and in response to an escalating raw material profile. The favorable currency benefit was driven most notably by the continued strengthening of the Euro versus the U.S. dollar, in comparison to the prior year. Other currency movements against the U.S. dollar also benefited our net sales, however, given the strong market positions in Europe within SAFLEX® and Technical Specialties, movements in the Euro versus the U.S. dollar had the most significant impact on our revenues. Higher sales volumes were experienced in our SAFLEX®, Technical Specialties and CPFilms reporting segments, given the continued growing global demand for these products. However, overall sales volumes were flat as decreases in Integrated Nylon offset the volume increases in the other segments. Within Integrated Nylon, we experienced increased volumes for nylon plastics and polymers which were more than offset by volume declines in carpet fibers and intermediate chemicals.

The decrease in operating income as compared to the second quarter 2007 resulted from higher charges of $56 million. Factors that improved operating income over the prior year were the impact of the Flexsys Acquisition, increased net sales, higher asset utilization in our SAFLEX® and Technical Specialties reporting segments and lower LIFO expense. Partially offsetting these factors were higher raw material and energy costs of approximately $100 million and higher logistic costs in Integrated Nylon. As indicated in the preceding table, operating results were affected by various charges which are described in greater detail within this section below. The raw material impacts were most significant within the Integrated Nylon segment, with material increases experienced in the cost of natural gas along with key feedstocks of propylene and ammonia. The increases in these raw materials are primarily driven by continued tight supply of these materials, as well as the substantial increases in oil prices when compared with the prior year, second quarter. We have and will continue to increase selling prices in response to these material movements although we do experience a lag in the selling price movements versus raw material movements.

The increase in net sales as compared to the second quarter 2007 was a result of higher sales volumes of $9 million or 5 percent, higher average selling prices of $7 million or 3 percent and favorable currency exchange rate fluctuations of $15 million or 8 percent. The favorable exchange rate fluctuations occurred primarily as a result of the weakening U.S. dollar in relation to the Euro in comparison to the second quarter 2007. Higher sales volumes experienced in targeted growth markets of Europe and Asia Pacific more than offset lower sales volumes into the domestic market. The increased sales in Asia Pacific were a result of the continued expanding demand for laminated glass in that market, which was partially supported by our new SAFLEX® plant in Suzhou, China which opened in the third quarter 2007.

The decrease in segment profit in comparison to the second quarter 2007 resulted primarily from the $24 million charge in the second quarter 2008 associated with the amortization of the step-up in basis of our inventory in accordance with fresh-start accounting. Offsetting this charge was overall improvement in segment profit due to the higher net sales as described above, improved asset utilization and lower manufacturing costs. Improved asset utilization in the second quarter of 2008 was predominantly attributable to our Antwerp, Belgium manufacturing facility, which experienced a scheduled maintenance shutdown in the second quarter 2007. Second quarter 2007 start up expenses for new lines at the Santo Toribio, Mexico and Suzhou, China manufacturing plants were not recurring in the current year which resulted in lower manufacturing costs. The segment also experienced approximately $7 million of higher raw material costs in comparison to the prior year, which was recovered through increased selling prices.

The increase in net sales as compared to the second quarter 2008 resulted primarily from higher sales volumes of $4 million or 6 percent and higher average selling prices of $1 million or 2 percent. The increase in sales volumes primarily resulted from strong growth in CPFilms’ international window film markets, most notably South Africa and the Middle East, continued growth of the industrial business, and moderate growth in North America despite the challenging macro-economic conditions specific to this market.

The decrease in segment results in comparison to the second quarter 2007 resulted primarily from the $6 million charge in the second quarter 2008 associated with the amortization of the step-up in basis of our inventory in accordance with fresh-start accounting. Offsetting this charge was improvement in segment profit due to higher net sales as described above, partially offset by continued increased investment in sales and marketing infrastructure and in market development programs globally. We believe continued investment in the sales and marketing infrastructure for this segment will expand the overall global window film market along with our participation.

The increase in net sales as compared to the second quarter 2007 resulted primarily from the Flexsys Acquisition. Prior to May 1, 2007, the results of Flexsys were accounted for using the equity method and were not recorded within the Technical Specialties reportable segment. The Flexsys Acquisition resulted in an increase in net sales of $78 million or 50 percent. The remaining increase in net sales was a result of higher average selling prices of $19 million or 12 percent, higher sales volumes of $13 million or 8 percent and favorable currency exchange rate fluctuations of $8 million or 5 percent. Higher sales volumes and average selling prices were experienced primarily in CRYSTEX® insoluble sulphur, SANTOFLEX® antidegradants and THERMINOL ® heat transfer fluids. The higher sales volumes were experienced predominantly in targeted growth markets in Asia Pacific and Europe with modest increases in North America. The favorable exchange rate fluctuations occurred primarily as a result of the weakening U.S. dollar in relation to the Euro in comparison to the second quarter 2007.

The increase in segment profit in comparison to the second quarter 2007 resulted primarily from the Flexsys Acquisition, increased net sales as described above and improved manufacturing performance, partially offset by the higher charges and increased raw material costs. The higher charges include a $13 million charge in the second quarter 2008 associated with the amortization of the step-up in basis of our inventory in accordance with fresh-start accounting. The increased selling prices more than offset the increase in raw material costs of approximately $15 million, which was predominantly related to sulphur. Improved manufacturing performance was a result of higher asset utilization due to the increased volumes in this segment. In addition to the inventory step-up, segment profit included charges related to the announced closure of the Ruabon Facility, which resulted in charges of $6 million. Segment profit in the second quarter 2007 was negatively impacted by $2 million of charges resulting from the step-up in basis of Flexsys’ inventory related to the acquisition.

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