<PAGE>
 
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               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-Q
 
                               ----------------
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 1997
 
                                      OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
   EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM       TO
 
COMMISSION FILE NUMBER 1-10059
 
                       STERLING CHEMICALS HOLDINGS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
              DELAWARE                                 76-0185186
   (STATE OR OTHER JURISDICTION OF        (I.R.S. EMPLOYER IDENTIFICATION NO.)
   INCORPORATION OR ORGANIZATION)
 
    1200 SMITH STREET, SUITE 1900
      HOUSTON, TEXAS 77002-4312                      (713) 650-3700
   (ADDRESS OF PRINCIPAL EXECUTIVE           (REGISTRANT'S TELEPHONE NUMBER,
              OFFICES)                            INCLUDING AREA CODE)
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR
                             VALUE $.01 PER SHARE
 
COMMISSION FILE NUMBER 333-04343-01
 
                           STERLING CHEMICALS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
              DELAWARE                                 76-0502785
   (STATE OR OTHER JURISDICTION OF        (I.R.S. EMPLOYER IDENTIFICATION NO.)
   INCORPORATION OR ORGANIZATION)
 
    1200 SMITH STREET, SUITE 1900
      HOUSTON, TEXAS 77002-4312                      (713) 650-3700
   (ADDRESS OF PRINCIPAL EXECUTIVE           (REGISTRANT'S TELEPHONE NUMBER,
              OFFICES)                            INCLUDING AREA CODE)
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
       SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
 
  Sterling Chemicals, Inc. meets the conditions set forth in General
Instruction H(1)(a) and (b) of Form 10-Q, and is therefore filing this form
with the reduced disclosure format provided for by General Instruction H(2) of
Form 10-Q.
 
                               ----------------
 
  Indicate by check mark whether each of the registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes  X  No
 
  As of May 9, 1997, Sterling Chemicals Holdings, Inc. had 11,974,171 shares
of common stock outstanding. As of such date, the aggregate market value of
such common stock held by nonaffiliates, based upon the last sales price of
these shares as reported on the OTC Electronic Bulletin Board maintained by
the National Association of Securities Dealers, Inc., was approximately $141
million. As of May 9, 1997, all outstanding equity securities of Sterling
Chemicals, Inc. were owned by Sterling Chemicals Holdings, Inc.
 
 
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<PAGE>
 
  This combined Form 10-Q is separately filed by Holdings and Chemicals (each
as defined herein). Information contained herein relating to Chemicals is
filed by Holdings and separately by Chemicals on its own behalf. Certain
capitalized terms used in this Form 10-Q are defined in the Notes to Condensed
Consolidated Financial Statements, included herein.
 
PART I.--FINANCIAL INFORMATION
 
ITEM 1.--FINANCIAL STATEMENTS
 
                                       2
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS EXCEPT SHARE DATA)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                MARCH 31,  SEPTEMBER
                                  1997     30, 1996
                                ---------  ---------
<S>                             <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents.... $   6,280  $   5,609
  Accounts receivable..........   159,653    133,399
  Inventories..................    75,819     53,720
  Prepaid expenses.............    16,746     10,226
  Deferred income taxes........     6,616      6,064
                                ---------  ---------
  Total current assets.........   265,114    209,018
Property, plant and equipment,
 net...........................   439,565    365,765
Other assets...................   127,166    114,901
                                ---------  ---------
    Total assets............... $ 831,845  $ 689,684
                                =========  =========
LIABILITIES AND STOCKHOLDERS'
 EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
  Accounts payable............. $  70,372  $  66,562
  Accrued liabilities..........    63,608     53,898
  Current portion of long-term
   debt........................    22,015     11,625
                                ---------  ---------
    Total current liabilities..   155,995    132,085
Long-term debt.................   808,576    714,632
Deferred income taxes..........    47,226     46,933
Deferred credits and other
 liabilities...................    89,643     68,473
Common stock held by ESOP......     7,688      6,500
Less: unearned compensation....    (6,620)    (6,500)
Redeemable preferred stock.....    10,162         --
Commitments and contingencies
Stockholders' equity
 (deficiency in assets):
  Common stock, $.01 par value,
   20,000,000 shares
   authorized, 11,333,000
   shares issued; 11,326,000
   outstanding at March 31,
   1997; and 10,599,000 shares
   issued and outstanding at
   September 30, 1996..........       113        106
  Additional paid-in capital...  (551,271)  (560,077)
    Retained earnings..........   291,480    306,656
    Accumulated translation
     adjustment................   (21,061)   (19,124)
                                ---------  ---------
                                (280,739)   (272,439)
    Treasury stock, at cost,
     7,000 shares at March 31,
     1997......................       (86)        --
                                ---------  ---------
      Total stockholders'
       equity (deficiency in
       assets)...................(280,825)  (272,439)
                                ---------  ---------
        Total liabilities and
         stockholders' equity
         (deficiency in
         assets)............... $ 831,845  $ 689,684
                                =========  =========
</TABLE>
 
   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.
 
                                       3
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                            THREE MONTHS     SIX MONTHS ENDED
                                           ENDED MARCH 31,       MARCH 31,
                                          ------------------ ------------------
                                            1997      1996     1997      1996
                                          --------  -------- --------  --------
<S>                                       <C>       <C>      <C>       <C>
Revenues................................. $239,763  $190,879 $426,689  $382,421
Cost of goods sold.......................  222,936   161,481  394,779   323,628
                                          --------  -------- --------  --------
Gross profit.............................   16,827    29,398   31,910    58,793

Selling, general, and administrative
 expenses................................    7,223     8,298   13,349    16,108
Stock appreciation rights expense........       --     6,447       --     6,658
Other expense............................       --     3,550       --     3,550
Interest and debt related expenses, net
 of interest income......................   20,850     1,601   39,474     3,210
                                          --------  -------- --------  --------

Income (loss) before income taxes........  (11,246)    9,502  (20,913)   29,267

Provision (benefit) for income taxes.....   (3,435)    3,075   (5,904)   10,053
                                          --------  -------- --------  --------

Net income (loss)........................   (7,811)    6,427  (15,009)   19,214
Preferred stock dividend.................      162        --      162        --
                                          --------  -------- --------  --------

Net income (loss) attributable to common
 stockholders............................ $ (7,973) $  6,427 $(15,171) $ 19,214
                                          ========  ======== ========  ========
Net income (loss) per common share....... $ (0.72)  $   0.12 $  (1.40) $   0.35
                                          ========  ======== ========  ========
Weighted average shares outstanding......   11,118    55,690   10,860    55,682
</TABLE>
 
 
   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.
 
                                       4
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                             SIX MONTHS ENDED
                                                                 MARCH 31,
                                                             ------------------
                                                               1997      1996
                                                             --------  --------
<S>                                                          <C>       <C>
Cash flows from operating activities:
  Cash received from customers.............................. $441,473  $422,542
  Miscellaneous cash receipts...............................    9,368    11,044
  Cash paid to suppliers and employees...................... (414,540) (404,391)
  Interest paid.............................................  (28,579)   (3,280)
  Interest received.........................................      266       538
  Income taxes paid (refunded)..............................    1,433   (10,303)
                                                             --------  --------
Net cash provided by operating activities...................    9,421    16,150
                                                             --------  --------
Cash flows from investing activities:
  Capital expenditures......................................  (25,154)  (48,996)
  Purchase of assets-acrylic fibers business................  (88,200)       --
  Proceeds-sale of assets...................................       16        --
                                                             --------  --------
Cash used in investing activities........................... (113,338)  (48,996)
Cash flows from financing activities:
  Proceeds from long-term debt..............................  146,900    38,000
  Repayment of long-term debt...............................  (50,072)  (34,392)
  Issuance of common stock..................................   12,339        --
  Purchase of treasury stock................................     (613)       --
  Other.....................................................   (3,889)     (289)
                                                             --------  --------
Net cash provided by financing activities...................  104,665     3,319
                                                             --------  --------
Effect of exchange rate on cash.............................      (77)      (94)
                                                             --------  --------
Net increase (decrease) in cash and cash equivalents........      671   (29,621)
Cash and cash equivalents--beginning of period..............    5,609    30,882
                                                             --------  --------
Cash and cash equivalents--end of period.................... $  6,280  $  1,261
                                                             ========  ========
</TABLE>
 
 
   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.
 
                                       5
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.
 
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, (CONTINUED)
                                 (IN THOUSANDS)
                                  (UNAUDITED)
 
                  RECONCILIATION OF NET INCOME (LOSS) TO CASH
                        PROVIDED BY OPERATING ACTIVITIES
 
<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED
                                                               MARCH 31,
                                                            -----------------
                                                              1997     1996
                                                            --------  -------
<S>                                                         <C>       <C>
Net income (loss).......................................... $(15,009) $19,214
Adjustments to reconcile net income (loss) to net cash
 provided by operating activities:
  Depreciation and amortization............................   25,164   21,188
  Loss on disposal of assets...............................        7    3,329
  Deferred tax expense.....................................    3,124    1,600
  Accrued compensation.....................................       --    6,850
  Unearned compensation....................................    1,067       --
  Discount note amortization...............................    7,507       --
Change in:
  Accounts receivable......................................  (30,299) (15,570)
  Inventories..............................................    1,201    8,960
  Prepaid expenses.........................................   (6,241)    (912)
  Other assets.............................................   (7,317)  (5,589)
  Accounts payable.........................................    6,999  (10,727)
  Accrued liabilities......................................    7,149  (18,829)
  Interest payable.........................................    6,783      705
  Taxes payable............................................   (1,234)    (840)
  Other liabilities........................................   10,520    6,771
                                                            --------  -------
Net cash provided by operating activities.................. $  9,421  $16,150
                                                            ========  =======
</TABLE>
 
 
   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.
 
                                       6
<PAGE>
 
                            STERLING CHEMICALS, INC.
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                         MARCH    SEPTEMBER 30,
                                                        31, 1997      1996
                                                        --------  -------------
<S>                                                     <C>       <C>
ASSETS
Current assets:
  Cash and cash equivalents............................ $  6,280    $  5,581
  Accounts receivable..................................  167,209     135,635
  Inventories..........................................   75,819      53,720
  Prepaid expenses.....................................   14,739      10,226
  Deferred income taxes................................    6,616       6,064
                                                        --------    --------
    Total current assets...............................  270,663     211,226
Property, plant and equipment, net.....................  439,565     365,765
Other assets...........................................  120,972     108,460
                                                        --------    --------
      Total assets..................................... $831,200    $685,451
                                                        ========    ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN
 ASSETS)
Current liabilities:
  Accounts payable..................................... $ 70,372    $ 66,562
  Accrued liabilities..................................   63,603      55,740
  Current portion of long-term debt....................   22,015      11,625
                                                        --------    --------
    Total current liabilities..........................  155,990     133,927
Long-term debt.........................................  709,312     619,875
Deferred income taxes..................................   50,433      47,478
Deferred credits and other liabilities.................   89,643      68,473
Common stock held by ESOP..............................    7,688       6,500
Less: unearned compensation............................   (6,620)     (6,500)
Commitments and contingencies
Stockholder's equity (deficiency in assets):
  Common stock, $.01 par value.........................       --          --
  Additional paid-in capital........................... (146,538)   (165,352)
  Retained earnings (deficit)..........................   (7,647)        174
  Accumulated translation adjustment...................  (21,061)    (19,124)
                                                        --------    --------
    Total stockholder's equity (deficiency in assets).. (175,246)   (184,302)
                                                        --------    --------
      Total liabilities and stockholder's equity
       (deficiency in assets).......................... $831,200    $685,451
                                                        ========    ========
</TABLE>
 
   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.
 
                                       7
<PAGE>
 
                            STERLING CHEMICALS, INC.
 
                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                 (IN THOUSANDS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                        THREE MONTHS SIX MONTHS
                                                           ENDED       ENDED
                                                         MARCH 31,   MARCH 31,
                                                          1997(1)       1997
                                                        ------------ ----------
<S>                                                     <C>          <C>
Revenues...............................................   $239,763    $426,689
Cost of goods sold.....................................    222,936     394,779
                                                          --------    --------
Gross profit...........................................     16,827      31,910

Selling, general and administrative expenses...........      7,012      12,783
Interest and debt related expenses.....................     17,011      31,812
Interest income from parent............................         --      (1,788)
                                                          --------    --------
Loss before income taxes...............................     (7,196)    (10,897)

Benefit for income taxes...............................     (2,553)     (3,076)
                                                          --------    --------

Net Loss...............................................   $ (4,643)   $ (7,821)
                                                          ========    ========
</TABLE>
--------
(1) See Note 1 of Notes to Condensed Consolidated Financial Statements for a
    discussion of merger activities and related financing. Prior to August 21,
    1996, Chemicals had no operating activities other than those related to
    merger activities.
 
 
   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.
 
                                       8
<PAGE>
 
                            STERLING CHEMICALS, INC.
 
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                      SIX MONTHS
                                                                        ENDED
                                                                      MARCH 31,
                                                                         1997
                                                                      ----------
<S>                                                                   <C>
Cash flows from operating activities:
  Cash received from customers.......................................  $441,473
  Miscellaneous cash receipts........................................     9,412
  Cash paid to suppliers and employees...............................  (415,150)
  Interest paid......................................................   (28,579)
  Interest received..................................................       261
  Income taxes paid..................................................     1,433
                                                                       --------
Net cash provided by operating activities............................     8,850
                                                                       --------
Cash flows from investing activities:
  Capital expenditures...............................................   (25,154)
  Purchase of assets-fibers business.................................   (88,200)
  Proceeds from sale of assets.......................................        16
                                                                       --------
Net cash used in investing activities................................  (113,338)
Cash flows from financing activities:
  Proceeds from long-term debt.......................................   146,900
  Repayment of long-term debt........................................   (50,072)
  Intercompany financing.............................................     3,000
  Contributions from parent..........................................     8,604
  Other..............................................................    (3,168)
                                                                       --------
Net cash used in financing activities................................   105,264
                                                                       --------
Effect of exchange rate on cash......................................       (77)
                                                                       --------
Net change in cash and cash equivalents..............................       699
Cash and cash equivalents--beginning of period.......................     5,581
                                                                       --------
Cash and cash equivalents--end of period.............................  $  6,280
                                                                       ========
</TABLE>
 
 
   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.
 
                                       9
<PAGE>
 
                            STERLING CHEMICALS, INC.
 
           CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED
                                 (IN THOUSANDS)
                                  (UNAUDITED)
 
                       RECONCILIATION OF NET LOSS TO CASH
                        PROVIDED BY OPERATING ACTIVITIES
 
<TABLE>
<CAPTION>
                                                                    SIX MONTHS
                                                                      ENDED
                                                                    MARCH 31,
                                                                     1997(1)
                                                                    ----------
<S>                                                                 <C>
Net loss...........................................................  $(7,821)
Adjustments to reconcile net income (loss) to net cash provided by
 operating activities:
  Depreciation and amortization....................................   25,002
  Loss on disposal of assets.......................................        7
  Deferred tax expense.............................................    5,787
  Unearned compensation............................................    1,067
Change in:
  Accounts receivable..............................................  (34,753)
  Inventories......................................................    1,201
  Prepaid expenses.................................................   (4,234)
  Other assets.....................................................   (7,844)
  Accounts payable.................................................    7,361
  Accrued liabilities..............................................    7,063
  Interest payable.................................................    8,570
  Taxes payable....................................................   (3,076)
  Other liabilities................................................   10,520
                                                                     -------
Net cash provided by operating activities..........................  $ 8,850
                                                                     =======
</TABLE>
--------
(1) See Note 1 of Notes to Condensed Consolidated Financial Statements for a
    discussion of merger activities and related financing. Prior to August 21,
    1996, Chemicals had no operating activities other than those related to
    merger activities.
 
 
   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.
 
                                       10
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.
                           STERLING CHEMICALS, INC.
 
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
                                (IN THOUSANDS)
 
1. MERGER ACTIVITIES
 
  Sterling Chemicals, Inc. (prior to the Merger, "Sterling") and STX
Acquisition Corp. ("STX Acquisition"), a Delaware corporation formed in April
1996 by an investor group led by The Sterling Group, Inc. ("TSG") and The
Unicorn Group L.L.C. ("Unicorn"), entered into an Amended and Restated
Agreement and Plan of Merger dated April 24, 1996 (the "Merger Agreement"). On
August 20, 1996, the Merger Agreement was approved by a majority of the shares
outstanding, and on August 21, 1996, STX Acquisition merged with and into
Sterling, changing its name to Sterling Chemicals Holdings, Inc. ("Holdings"),
and continuing as the surviving corporation (the "Merger"). In connection with
the Merger, Holdings transferred all of its operating assets and liabilities
excluding its 13 1/2% Senior Secured Discount Notes Due 2008 (the "13 1/2%
Notes") to a wholly owned subsidiary, STX Chemicals Corp., which at the time
of the Merger changed its name to Sterling Chemicals, Inc. (after the Merger,
"Chemicals"). Holdings has no direct subsidiaries other than Chemicals. As
used herein, the term "Company" refers to Sterling and its subsidiaries prior
to the consummation of the Merger and, following the Merger, to Holdings and
its subsidiaries, including Chemicals.
 
  Each share of Sterling's common stock outstanding immediately prior to the
Merger was converted (at the election of the holder thereof) into either
$12.00 cash or the right to retain such shares ("Rollover Shares"), with the
aggregate number of Rollover Shares limited to 5.0 million. As a result of the
Merger, on August 21, 1996, the former STX Acquisition stockholders held
approximately 5.3 million shares (49%), stockholders with Rollover Shares held
approximately 5.0 million shares (46%), and the Company's newly formed
Employee Stock Ownership Plan (the "ESOP") held approximately 542,000 shares
(5%) of the outstanding shares of Holdings' common stock, par value $0.01 per
share ("Holdings Common Stock").
 
  The Merger was financed by the proceeds of bank term loans of $356.5
million, including an ESOP term loan of $6.5 million, amounts drawn against a
revolving credit facility of $6.4 million each pursuant to a new credit
agreement (the " Original Credit Agreement"), an offering by Chemicals of
$275.0 million of Chemicals' 11 3/4% Senior Subordinated Notes Due 2006 (the
"11 3/4% Notes"), an offering of $191.8 million (initial proceeds of $100
million) representing 191,751 Units, with each unit consisting of one 13 1/2%
Note and one Warrant to purchase three shares of Holdings Common Stock for
$0.01 per share beginning in August 1997, equity raised by STX Acquisition of
approximately $70.7 million, and cash on hand of $10.3 million. These proceeds
were used to redeem Sterling's common stock other than Rollover Shares ($608.3
million), purchase other equity interests (primarily stock appreciation rights
("SARs")) ($14.6 million), repay debt outstanding prior to the Merger ($142.7
million), loan monies to the new ESOP ($6.5 million), and pay fees and
expenses ($46.8 million).
 
  The Company has accounted for the Merger and related financing (collectively
the "1996 Recapitalization") as a series of debt and equity transactions
representing a recapitalization. Accordingly, the historical basis of the
Company's assets and liabilities have not been impacted by the 1996
Recapitalization.
 
2. BASIS OF PRESENTATION:
 
  In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the consolidated financial position of the Company and Chemicals as of
March 31, 1997 and their consolidated results of operations and cash flows for
the applicable three-month and six-month periods ended March 31, 1997 and
1996. All such adjustments are of a normal and recurring nature. The results
of operations for the periods presented are not necessarily indicative of the
results
 
                                      11
<PAGE>
 
to be expected for the full year. The accompanying unaudited condensed
consolidated financial statements should be, and are assumed to have been,
read in conjunction with the consolidated financial statements and notes
included in Holdings' and Chemicals' combined Annual Report on Form 10-K for
the fiscal year ended September 30, 1996 (the "Annual Report"). The condensed
consolidated balance sheets as of September 30, 1996 included herein have been
derived from the audited consolidated balance sheets as of September 30, 1996
included in the Annual Report. The condensed consolidated financial statements
as of and for the three-month and six-month periods ended March 31, 1997
included herein have been subjected to a review by Deloitte & Touche LLP, the
Company's independent public accountants, whose reports are included herein.
 
  Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net income or stockholders' equity.
 
3. INVENTORIES:
 
<TABLE>
<CAPTION>
                                                         MARCH 31, SEPTEMBER 30,
                                                           1997        1996
                                                         --------- -------------
<S>                                                      <C>       <C>
Inventories consisted of the following:
Finished products.......................................  $47,163     $31,868
Raw materials...........................................   13,189       9,499
Inventories under exchange agreements...................   (2,965)        722
Stores and supplies.....................................   18,432      11,631
                                                          -------     -------
                                                          $75,819     $53,720
                                                          =======     =======
</TABLE>
 
4. LONG-TERM DEBT:
 
<TABLE>
<CAPTION>
                                                          MARCH    SEPTEMBER 30,
                                                         31, 1997      1996
                                                         --------  -------------
<S>                                                      <C>       <C>
Long-term debt consisted of the following:
Revolving credit facilities............................. $ 21,640    $     --
Term Loans..............................................  426,000     350,000
ESOP term loan..........................................    5,688       6,500
11 3/4% Notes...........................................  275,000     275,000
13 1/2% Notes...........................................  102,263      94,757
                                                         --------    --------
  Total debt outstanding................................  830,591     726,257
Less:
  Current maturities....................................  (22,015)    (11,625)
                                                         --------    --------
Total long-term debt.................................... $808,576    $714,632
                                                         ========    ========
</TABLE>
 
  As part of the 1996 Recapitalization, Chemicals entered into the Original
Credit Agreement with Texas Commerce Bank National Association, as agent bank
for a syndicate of lenders, and Credit Suisse First Boston and Chase
Securities, Inc. as co-arrangers. Funding under the Original Credit Agreement
occurred August 21, 1996, upon the consummation of the Merger. The Original
Credit Agreement provides for facilities consisting of a six and one-half year
revolving credit facility providing for up to $100 million (subject to a
monthly borrowing base calculation) in revolving loans (the "Revolver"), a
term loan facility consisting of a six and one-half year $200 million Tranche
A term loan and an eight-year $150 million Tranche B term loan (the "Original
Term Loans"), and a four-year $6.5 million ESOP Term Loan (the "ESOP Loan").
 
  On January 31, 1997, the Company acquired (the "AFB Acquisition") the
acrylic fibers business (the "AFB") of Cytec Industries Inc. ("Cytec") (See
Note 7). In connection with the AFB Acquisition, Chemicals entered into a
credit agreement (the "New Credit Agreement" and together with the Original
Credit Agreement, the "Senior Credit Agreements") with Texas Commerce Bank
National Association, as agent bank for a
 
                                      12
<PAGE>
 
syndicate of lenders, and Credit Suisse First Boston and Chase Securities Inc.
as co-arrangers. Funding under the New Credit Agreement occurred January 31,
1997, upon consummation of the AFB Acquisition. The New Credit Agreement
provides for a term loan facility consisting of a $31 million Tranche A term
loan due March 31, 2003 and a $50 million Tranche B term loan due September
30, 2004 (the "New Term Loans" and together with the Original Term Loans, the
"Term Loans").
 
  The Term Loans, the ESOP Loan and the Revolver borrowings bear interest, at
Chemicals' option, at an annual rate of either the Eurodollar Rate or the Base
Rate plus an Applicable Margin ranging from 0% to 3% depending upon the
Company's Leverage Ratio (as defined in the Original Credit Agreement). The
"Base Rate" is equal to the greater of the Prime Rate as announced from time
to time by the agent bank, the "Federal Funds Effective Rate" plus 1/2% or the
"Base CD Rate" plus 1% (as such terms are defined in the Senior Credit
Agreements). The Original Credit Agreement also requires Chemicals to pay a
commitment fee in the amounts of 3/8% or 1/2% of the unused commitment under
the Revolver depending on the Company's Leverage Ratio.
 
  On April 7, 1997, Chemicals completed a private offering (the "11 1/4% Notes
Offering") of $150,000,000 of 11 1/4% Senior Subordinated Notes Due 2007 (the
"11 1/4% Notes"). The 11 1/4% Notes are unsecured senior subordinated
obligations of Chemicals, ranking subordinate in right of payment to all
existing and future senior debt of Chemicals, but pari passu with the 11 3/4%
Notes and all future senior subordinated indebtedness.
 
  The proceeds of the 11 1/4% Notes Offering were used to prepay outstanding
indebtedness under the Term Loans. In connection with such prepayments,
Chemicals and the requisite lenders under the Senior Credit Agreements
effected amendments to the Senior Credit Agreements ("the Amendments"). Among
other things, the Amendments (i) permitted and provided for the issuance of
the 11 1/4% Notes, (ii) adjusted the method of the application of voluntary
prepayments to allow the proceeds of the 11 1/4% Notes Offering to be applied
in a manner that significantly reduced required principal payments,
particularly over the next three years, (iii) amended certain financial
covenants to make them somewhat less restrictive, including amendments to
ratios specified in the Amendments, (iv) increased the commitment under the
Revolver by $25 million to $125 million and (v) included a new financial
covenant with respect to the maintenance of a specified Senior Debt Leverage
Ratio.
 
5. COMMITMENTS AND CONTINGENCIES:
 
Product Contracts
 
  The Company has certain long-term agreements that provide for the dedication
of 100% of the Company's production of acetic acid, plasticizers, tertiary
butylamine, and sodium cyanide, each to one customer. The Company also has
various sales and conversion agreements that dedicate significant portions of
the Company's production of styrene monomer, acrylonitrile, and methanol, the
Company's major petrochemical products, to various customers. These agreements
generally provide for cost recovery plus an agreed margin or element of profit
based upon market price.
 
Environmental Regulations
 
  The Company's operations involve the handling, production, transportation
and disposal of materials classified as hazardous or toxic and are extensively
regulated under environmental and health and safety laws. Operating permits
which are required for the Company's operations are subject to periodic
renewal and may be revoked or modified for cause. New laws or permit
requirements and conditions may affect the Company's operations, products, or
waste disposal. Past or future operations may result in claims or liabilities.
Expenditures could be required to upgrade waste water collection,
pretreatment, or disposal systems or for other matters related to production,
transportation and disposal of materials classified as hazardous or toxic.
 
                                      13
<PAGE>
 
Legal Proceedings
 
  Ammonia Release Lawsuits. A description of the ammonia release lawsuit is
found under "Legal Proceedings" in Note 7 of the "Notes To Consolidated
Financial Statements" of the Annual Report and is incorporated herein by
reference. As discussed therein, approximately 2,600 of the plaintiffs agreed
to submit their damage claims to binding arbitration. Each of the plaintiffs
who agreed to participate in the arbitration waived any right of recovery for
punitive or exemplary damages. Pursuant to the agreement to arbitrate, a two-
week evidentiary proceeding was conducted in July 1996 before a three-judge
panel to determine the amount of damages. On May 1, 1997, the three-judge
panel awarded the plaintiffs an amount of damages which was well within the
limits of the Company's insurance coverages and will not have a material
adverse impact on the financial position, results of operations, or cash flows
of the Company.
 
  The Company continues to vigorously defend against the claims of the
plaintiffs who did not participate in the July 1996 arbitration.
 
  Other Lawsuits. The Company is subject to various other claims and legal
actions that arise in the ordinary course of its business.
 
Litigation Contingency
 
  In accordance with Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies," and Financial Accounting Standards Board
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts,"
the Company has made estimates of the reasonably possible range of its
liability with regard to outstanding litigation for which it may incur
liability. In addition, liabilities have been accrued based on the estimated
probable loss from such litigation. These estimates are based on management's
judgments using currently available information as well as consultation with
the Company's insurance carriers and outside legal counsel. A number of the
claims in these litigation matters are covered by the Company's insurance
policies. The Company therefore has also made estimates of its probable
recoveries under these insurance policies based on its understanding of these
policies, discussions with its insurers and consultation with outside legal
counsel, in addition to management's judgments. Based on the foregoing, as of
March 31, 1997, the Company has accrued approximately $21.3 million as its
estimate of aggregate contingent liability for these matters, and has also
recorded aggregate receivables from its insurers of approximately $20.6
million. At March 31, 1997, management estimates that the aggregate reasonably
possible range of loss for all litigation combined, in addition to the amount
accrued, is from $0 to $20 million. The Company believes that this additional
reasonably possible loss is substantially covered by insurance.
 
  While the Company has based its estimates on its evaluation of available
information to date and the other matters described above, much of the
litigation is in its early stages and it is impossible to predict with
certainty the ultimate outcome. The Company will adjust its estimates as
necessary as additional information is developed and evaluated. However, the
Company believes that the final resolution of these contingencies will not
have a material adverse impact on the financial position, results of
operations, or cash flows of the Company. The timing of probable insurance
recoveries, and additional accruals or payment of liabilities, if any, are not
expected to have a material adverse effect on the financial position, results
of operations, or cash flows of the Company.
 
6. NEW ACCOUNTING STANDARDS:
 
  The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
establishes new accounting standards for measuring the impairment of long-
lived assets. The Company adopted this Statement in the first quarter of
fiscal 1997. The adoption of this Statement did not have a material adverse
effect on the Company's financial position, results of operations, or cash
flows.
 
 
                                      14
<PAGE>
 
  The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation" in October 1995. Under SFAS No. 123, companies
are permitted to either adopt this new standard and record expenses for stock
options and other stock-based employee compensation plans based on their fair
value at date of grant, or continue to apply its current accounting policy
under Accounting Principles Board ("APB") Opinion No. 25 and increase its
footnote disclosure. In the first quarter of fiscal 1997, the Company elected
to continue to apply APB Opinion No. 25, and will increase its footnote
disclosure to include the pro forma impact on net income and earnings per
share of the application of the fair value based method of accounting.
 
  The Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per
Share," in February 1997. SFAS No. 128, which is effective for periods ending
after December 15, 1997, establishes standards for computing and presenting
earnings per share ("EPS"). SFAS No. 128 replaces the presentation of primary
EPS previously prescribed by APB No. 15 with a presentation of basic EPS,
which is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. The
statement also requires dual presentation of basic and diluted EPS. Diluted
EPS is computed similarly to fully diluted EPS pursuant to APB No. 15. Pro
forma basic and diluted EPS for all historical periods presented, assuming
that SFAS No. 128 was effective at the beginning of each such historical
period, would not be materially different from what has been presented using
APB No. 15.
 
7. BUSINESS ACQUISITIONS:
 
  On January 31, 1997, the Company acquired the AFB from Cytec. The AFB, now
owned by two wholly owned subsidiaries of the Company (collectively "Sterling
Fibers"), recorded sales of approximately $139 million in calendar year 1996
and consists of an acrylic fibers plant located near Pensacola, Florida and
several associated marketing and research offices. Sterling Fibers is one of
two acrylic fibers manufacturers in the United States. Cytec will supply
acrylonitrile to Sterling Fibers through the continuation of a five-year
supply agreement ending in 2002. The acquisition was financed through the
incurrence of $81 million of term debt under the New Credit Agreement with
substantially the same lenders as those under the Original Credit Agreement,
the issuance of $10 million (liquidation value) of Series A "pay in kind"
mandatory redeemable preferred stock ("Series A Preferred") to Cytec, and the
sale of $10 million of Holdings Common Stock in a private placement. The
Company used the purchase method to account for the acquisition, and operating
results of Sterling Fibers beginning February 1, 1997 are included with those
of the Company.
 
  The following table presents the unaudited pro forma results of operations
of the Company as if the AFB Acquisition had occurred on October 1, 1995. The
pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the AFB Acquisition
been made at the beginning of fiscal year 1996 or of results which may occur
in the future.
 
<TABLE>
<CAPTION>
                                                           PRO FORMA  PRO FORMA
                                                           SIX MONTHS SIX MONTHS
                                                             ENDED      ENDED
                                                           MARCH 31,  MARCH 31,
                                                              1997       1996
                                                           ---------- ----------
                                                            IN THOUSANDS EXCEPT
                                                             PER SHARE AMOUNTS
<S>                                                        <C>        <C>
Revenues..................................................  $471,159   $446,121
Net Income (loss) attributable to common stockholders.....   (16,662)    20,680
Net income (loss) per common share........................  $  (1.46)  $   0.37
Weighted average shares...................................    11,381     56,515
</TABLE>
 
                                      15
<PAGE>
 
8. EMPLOYEE BENEFITS:
 
Omnibus Stock Awards and Incentive Plan
 
  In April 1997, the Board of Directors, upon recommendation of the
Compensation Committee, but subject to shareholder approval at the next
stockholders meeting, approved the establishment of the Omnibus Stock Awards
and Incentive Plan (the "Omnibus Plan"). Under the Omnibus Plan, the Company
may grant to key employees, incentive and nonqualified stock options, stock
appreciation rights, restricted stock awards, performance awards, and phantom
stock awards. The terms and amounts of the awards will be determined by the
Compensation Committee of the Board of Directors. One million shares of the
Company's stock are reserved for issuance under the Omnibus Plan. In the event
of a change of control of the Company or an initial public offering of
Holdings Common Stock, all awards will immediately vest and become
exercisable.
 
Nonqualified Stock Option Plan for Non-Employee Directors
 
  Also in April 1997, the Board of Directors, upon recommendation of the
Compensation Committee, approved the establishment of the Nonqualified Stock
Option Plan for Non-Employee Directors (the "Nonqualified Plan"). Each non-
employee director of the Company will participate in the Nonqualified Plan.
Each eligible director on the date of adoption of the Nonqualified Plan will
be granted an option to acquire 2,000 shares of Holdings Common Stock (4,000
shares for the Vice-Chairman), and each eligible director who is serving on
the Board of Directors on each subsequent October 1st will automatically be
granted an option to acquire 1,000 shares of Holdings Common Stock (2,000
shares for the Vice-Chairman). All options will expire ten years from date of
grant. All options will be granted at the fair market value on the date of
grant. A total of 160,000 shares of Holdings Common Stock are reserved for
issuance under the Nonqualified Plan.
 
Profit Sharing and Bonus Plan
 
  In January 1997, the Board of Directors, upon recommendation of the
Compensation Committee, approved the establishment of a Profit Sharing Plan
that is designed to benefit all qualified employees, and a Bonus Plan that is
expected to provide for bonuses to certain key employees based on the
Company's annual financial performance.
 
9. WEIGHTED AVERAGE SHARES(1):
 
  The weighted average shares outstanding used in the calculation of earnings
per share is calculated below:
 
<TABLE>
<S>                                                     <C>       
Total Shares outstanding as of 3/31/97................. 11,967,000
Unallocated shares held by ESOP........................    557,000
Total shares outstanding
 Less: unallocated shares held by ESOP at 3/31/97...... 11,410,000
                                                        ----------
<CAPTION>
                                                          THREE        SIX
              WEIGHTED AVERAGE EFFECT OF:                 MONTHS      MONTHS
              ---------------------------               ----------  ----------
<S>                                                     <C>         <C>
44,000 shares acquired by ESOP.........................         --          21
7,000 treasury shares acquired.........................          6           3
84,000 allocated shares held by ESOP...................        (38)        (53)
778,000 newly issued shares............................       (260)       (521)
Weighted average shares outstanding for the three and
 six-month periods ended March 31, 1997................ 11,118,000  10,860,000
</TABLE>
--------
(1) Weighted average shares outstanding excludes warrants equal to 575,000
    shares which were antidilutive for the three and six-month period ending
    March 31, 1997.
 
 
                                      16
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Stockholders
of Sterling Chemicals Holdings, Inc.
 
  We have reviewed the accompanying condensed consolidated balance sheet of
Sterling Chemicals Holdings, Inc. and subsidiaries (the "Company") as of March
31, 1997, and the related condensed consolidated statements of operations and
cash flows for the three-month and six-month periods then ended. These
financial statements are the responsibility of the Company's management.
 
  We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
 
  Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
 
  We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of September 30,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended (not presented herein); and in
our report dated December 6, 1996, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of September 30, 1996
is fairly stated in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
 
DELOITTE & TOUCHE LLP
 
Houston, Texas
May 13, 1997
 
                                       17
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Stockholder of Sterling Chemicals, Inc.
 
  We have reviewed the accompanying condensed consolidated balance sheet of
Sterling Chemicals, Inc. and subsidiaries ("Chemicals") as of March 31, 1997,
and the related condensed consolidated statements of operations and cash flows
for the three-month and six-month periods then ended. These financial
statements are the responsibility of Chemicals' management.
 
  We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
 
  Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
 
  We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Chemicals as of September 30,
1996, and the related consolidated statement of operations, stockholder's
equity, and cash flows for the year then ended (not presented herein); and in
our report dated December 6, 1996, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of September 30, 1996
is fairly stated in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
 
DELOITTE & TOUCHE LLP
 
Houston, Texas
May 13, 1997
 
                                       18
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
Certain capitalized terms used herein have the meanings assigned to them in
the Notes To Condensed Consolidated Financial Statements.
 
OVERVIEW
 
  Holdings is a holding company whose only material asset is its investment in
Chemicals. Holdings' only material liability is its obligation to repay the 13
1/2% Notes issued in connection with the Merger. Chemicals and its
subsidiaries own substantially all of the consolidated operating assets and
are obligated for substantially all liabilities of the Company other than the
13 1/2% Notes. The Merger that occurred on August 21, 1996 and related
financings were accounted for as a recapitalization, with no change in the
basis of the assets and liabilities of Chemicals. Other than the additional
interest expense associated with the 13 1/2% Notes and the preferred stock
dividend associated with the Series A Preferred issued to Cytec, the results
of operations for the Company are essentially the same as those for Chemicals.
Accordingly, the discussion that follows is applicable to both entities,
except as specifically noted. A separate discussion of the results of
operations for Chemicals for the three-month and six-month periods ended March
31, 1997 would not, in the opinion of the Company, provide any additional
meaningful information.
 
RECENT DEVELOPMENTS
 
  On April 7, 1997, Chemicals completed its private offering of $150,000,000
of 11 1/4% Notes. The 11 1/4% Notes are unsecured senior subordinated
obligations of Chemicals, ranking subordinate in right of payment to all
existing and future senior debt of Chemicals, but pari passu with the 11 3/4%
Notes and all future senior subordinated indebtedness.
 
  The proceeds of the 11 1/4% Notes Offering were used to prepay outstanding
indebtedness under the Term Loans. In connection with such prepayments,
Chemicals and the requisite lenders under the Senior Credit Agreements
effected the Amendments. Among other things, the Amendments (i) permitted and
provided for the issuance of the 11 1/4% Notes, (ii) adjusted the method of
the application of voluntary prepayments to allow the proceeds of the 11 1/4%
Notes Offering to be applied in a manner that significantly reduced required
principal payments, particularly over the next three years, (iii) amended
certain financial covenants to make them somewhat less restrictive, including
amendments to specific ratios specified in the Amendments, (iv) increased the
commitment under the Revolver by $25 million to $125 million, and (v) included
a new financial covenant with respect to the maintenance of a specified Senior
Debt Leverage Ratio (as defined in the Amendments).
 
  On January 31, 1997, the Company acquired the AFB from Cytec. The AFB, now
owned and operated by Sterling Fibers, recorded sales of approximately $139
million in calendar year 1996 and consists of an acrylic fibers plant located
near Pensacola, Florida and several associated marketing and research offices.
Sterling Fibers is one of two acrylic fibers manufacturers in the United
States. Cytec will supply acrylonitrile to Sterling Fibers through the
continuation of a five-year supply agreement ending in 2002. The total
consideration paid for the acquisition was $101 million, which was financed
through the incurrence of $81 million of New Term Loans, the issuance to Cytec
of 100,000 shares of Series A Preferred with an aggregate $10 million
liquidation value, and the sale of 833,334 shares of Holdings Common Stock for
a total of $10 million. The Company used the purchase method of accounting to
account for the acquisition, and operating results of Sterling Fibers
beginning February 1, 1997 are included with those of the Company.
 
RESULTS OF OPERATIONS
 
  Consolidated revenues increased for the three and six month periods ending
March 31, 1997 compared to the same period in fiscal 1996. The primary reasons
for these increased revenues were increased volumes for
 
                                      19
<PAGE>
 
sodium chlorate, due in part to the startup of the Company's new sodium
chlorate plant in Valdosta, Georgia, revenues from the Company's new methanol
unit at the Texas City, Texas plant, two months of operations from the
recently acquired AFB and increased sales volumes of acrylonitrile.
Consolidated net income (loss) was lower due to lower petrochemical margins
(primarily styrene), along with an increase of interest expense to $20.9
million and $39.5 million for the three and six month periods of 1997,
respectively, compared to $1.6 million and $3.2 million for the same periods
last year.
 
  Revenues for the second quarter of fiscal 1997 were approximately $240
million compared to revenues of approximately $191 million for the second
quarter of fiscal 1996, an increase of nearly 26%. A net loss of $7.8 million
or $0.72 per share was recorded for the second quarter of fiscal 1997 compared
to net income of $6.4 million or $0.12 per share for the second quarter of
fiscal 1996.
 
  Revenues for the first six months of fiscal 1997 were approximately $427
million compared to revenues of approximately $382 million for the first six
months of fiscal 1996, an increase of nearly 12%. A net loss of $15.0 million
or $1.40 per share was recorded for the first six months of fiscal 1997
compared to net income of $19.2 million or $0.35 per share for the first six
months of fiscal 1996.
 
Petrochemicals
 
  The new methanol unit and higher acrylonitrile sales volumes were
principally responsible for the revenue increase in the three-month period of
1997 compared to 1996. Methanol was also a significant contributor to the
increased six-month revenues. The Company's petrochemical business recorded
operating losses of $4.1 million and $6.6 million, respectively, for the three
and six month periods of 1997 compared to earnings of $4.0 million and $14.7
million, respectively, for the same periods of fiscal 1996. The decrease in
operating earnings for the second quarter was primarily due to significantly
lower styrene margins, and the decrease in the six month period was primarily
due to both significantly lower styrene margins and lower acrylonitrile
margins.
 
  Styrene. Styrene revenues increased nearly 1% to approximately $89 million
in the second quarter of fiscal 1997 and approximately 2% to about $165
million for the first six months of fiscal 1997 compared to the same periods
in fiscal 1996. Styrene sales prices decreased moderately from the same fiscal
1996 periods because of weaker market conditions, particularly in the export
market. Average sales prices for both the second quarter and first six months
of fiscal 1997 decreased by approximately 1% from the same periods a year ago.
Sales volumes for both the three-month and six-month periods showed only
marginal changes when compared to the same period last year.
 
  The prices of styrene's major raw materials, benzene and ethylene, were
substantially higher during the second quarter and first six months of fiscal
1997 compared to the same periods in fiscal 1996. Benzene prices were
approximately 21% and 26% higher, and ethylene prices were approximately 41%
and 30% higher, for the respective 1997 periods compared to 1996. These price
escalations contributed significantly to the decline in styrene margins as
market conditions did not allow for sufficient styrene price increases to
compensate for these rising costs.
 
  Acrylonitrile. Acrylonitrile revenues for the three month period ended March
31, 1997 increased approximately 40% to $42 million compared to the
corresponding period in fiscal 1996. This increase was partly due to a 53%
rise in sales volumes for the period, and partly due to the fact that the
acrylonitrile unit was shut down for most of March 1996 for scheduled
maintenance and the upgrade of its distributive control system. Acrylonitrile
revenue for the first six months of fiscal 1997, however, decreased by nearly
10%, the result of a 20% decrease in the average acrylonitrile sales price
realized by the Company. Sales volumes for the six month period showed a 12%
increase when compared to the same period last year.
 
 
                                      20
<PAGE>
 
  The prices of acrylonitrile's major raw materials, propylene and ammonia,
were approximately 36% and 11% higher, respectively, in the second fiscal
quarter and approximately 20% and 17% higher, respectively, for the first six
months of fiscal 1997 than in the corresponding periods in fiscal 1996. These
increases contributed to the decline in acrylonitrile margins.
 
  Methanol. In August 1996, the Company completed construction of its methanol
unit at its Texas City, Texas plant as part of its capital program. During the
demonstration period, problems in the unit's reformer burners developed. The
burners were replaced during a three week shutdown in October 1996 and the
methanol unit resumed production at projected capacities in late October 1996.
 
  Methanol revenues in the second fiscal quarter of 1997 were negatively
impacted by a two week shutdown for compressor repairs. Methanol revenues for
the period was $17.6 million, bringing the total revenues for the first six
months of fiscal 1997 to approximately $32 million. Sales volumes for the
three and six month periods of fiscal 1997 were approximately 34 million and
64 million gallons, respectively. Margins improved significantly late in the
second quarter as the price of natural gas (the primary raw material for
methanol) declined significantly from January and February levels without a
corresponding drop in the price of methanol. The methanol unit was under
construction during the corresponding periods of 1996.
 
  Other Petrochemical Products. Revenues from the Company's other
petrochemical products (including acetic acid, plasticizers, tertiary
butylamine, and sodium cyanide) in the second quarter of fiscal 1997 were
approximately $26 million, a decrease of about 20% when compared to the same
period last year. Revenues for the six-month period ended March 31, 1997 were
down approximately 22% to about $54 million when compared to the same 1996
period. The decrease in revenues reflects a reduction in sodium cyanide
revenues resulting from lower demand, and a decline in acetic acid revenues
resulting from a procedural change in the billings to BP Chemicals Inc.
("BP"). Methanol used in the production of acetic acid was billed to BP as
part of the total cost of production prior to the startup of the Company's
methanol unit and included in acetic acid revenues. These methanol sales are
now being billed separately.
 
Pulp Chemicals
 
  Revenues from the Company's pulp chemical business increased 12% to $42
million and 11% to $85 million for the second quarter and first six months of
fiscal 1997, respectively, when compared to the same periods last year. The
increase in revenues was primarily due to an increase in sales volumes of
sodium chlorate of approximately 19% and 9%, respectively, when compared to
the corresponding three and six month periods of 1996. The increase in sales
volumes in the second quarter was aided by the startup of the new sodium
chlorate facility in Valdosta, Georgia in December 1996. Average sales prices
for sodium chlorate declined approximately 5% in the second quarter of fiscal
1997 compared to the corresponding period in 1996. Average sodium chlorate
sales prices for the first six months of 1997 were approximately the same as
the corresponding period in 1996. Royalty revenues from installed generator
technology increased 8% in the second fiscal quarter and 4% in the first six
months of fiscal 1997 compared to the corresponding periods of 1996. Operating
earnings for the pulp chemicals business were $13.3 million for the second
quarter of fiscal 1997 compared to $7.1 million during the corresponding
period of 1996. Operating earnings for the pulp chemicals business were $24.4
million for the first six months of fiscal 1997 compared to $17.8 million for
the corresponding period in 1996. The increase for the three month and six
month periods was primarily due to increased sales volumes of sodium chlorate
and higher royalty revenues. In addition, the Company recorded $3.1 million of
expenses associated with stock appreciation rights for its pulp chemicals
employees during the corresponding six months of fiscal 1996.
 
Fibers
 
  For the two-month period from February 1, 1997 to March 31, 1997, Sterling
Fibers recorded revenues and operating earnings of $23.4 million and $0.8
million, respectively. Because the Company did not acquire the assets
constituting the AFB prior to January 31, 1997, there are no corresponding
results for prior periods.
 
 
                                      21
<PAGE>
 
Selling, General, and Administrative Expenses
 
  Selling, general, and administrative expenses for the first six months of
fiscal 1997 were approximately $13 million compared to approximately $16
million in the first six months of fiscal 1996. The improvement is due
primarily to a sales tax refund accrual of $1 million plus lower employee
profit sharing and other overheads totaling approximately $2 million.
 
Interest and Debt Related Expense
 
  Interest and debt related expenses for the three and six month periods
ending March 31, 1997 were $20.9 million and $39.5 million, respectively,
compared to $1.6 million and $3.2 million, respectively, for the corresponding
periods in 1996. This increase is primarily due to the additional debt
incurred in the 1996 Recapitalization and the AFB Acquisition.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Debt Structure
 
  On August 21, 1996, the Company completed the 1996 Recapitalization,
significantly increasing the Company's leverage and cash requirements for debt
service related to the Original Credit Agreement, the 13 1/2% Notes and the 11
3/4% Notes.
 
  In connection with the AFB Acquisition, Chemicals entered into the New
Credit Agreement with Texas Commerce Bank National Association, as agent bank
for a syndicate of lenders, and Credit Suisse First Boston and Chase
Securities Inc. as co-arrangers. Funding under the New Credit Agreement
occurred January 31, 1997, upon consummation of the AFB Acquisition. The New
Credit Agreement provides for a term loan facility consisting of a $31 million
Tranche A term loan due March 31, 2003 and a $50 million Tranche B term loan
due September 30, 2004. At March 31, 1997, the Company's long-term debt
(including current maturities) was $831 million.
 
  On April 7, 1997, Chemicals completed the 11 1/4% Notes Offering. The 11
1/4% Notes are unsecured senior subordinated obligations of Chemicals, ranking
subordinate in right of payment to all existing and future senior debt of
Chemicals, but pari passu with the 11 3/4% Notes and all future senior
subordinated indebtedness.
 
  The Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions and general corporate
purposes, should it need to do so, will be affected by the covenants in its
various debt agreements and by cash requirements for debt service. The Senior
Credit Agreements and the indentures governing the 11 1/4% Notes, the 11 3/4%
Notes and the 13 1/2% Notes (the "Indentures") contain numerous financial and
operational covenants, including, without limitation, restrictions on the
Company's ability to incur indebtedness, pay dividends, create liens, sell
assets, engage in mergers and acquisitions, and refinance existing
indebtedness, as well as the obligation of the Company to maintain certain
financial ratios. The 11 1/4% Notes Offering was permitted under the
Indentures as a Refinancing of Debt outstanding under the Senior Credit
Agreements. At the time of the AFB Acquisition, the Company negotiated an
amendment to the Original Credit Agreement to permit the AFB Acquisition and
to make certain financial covenants, including the Leverage Ratio covenant
applicable through the end of fiscal 1997, somewhat less restrictive. The
Amendments to the Senior Credit Agreements, which became effective upon
consummation of the 11 1/4% Notes Offering and the partial repayment of the
Term Loans with the proceeds thereof and were made retroactive to March 31,
1997, further made certain of the financial covenants therein less
restrictive, including the Leverage Ratio covenant, among other things. Such
modifications did not, however, lessen the restrictions under the Indentures
on the Company's ability to incur additional debt. The Company may, however,
consummate additional acquisitions under the Indentures if the pro forma
effect of such an acquisition has sufficient positive impact on certain
financial ratios. The Senior Credit Agreements also require that certain
amounts of Excess Cash Flow (as defined therein) be used to prepay amounts
outstanding under the Term Loans. The first such mandatory prepayment is not
required to be made until January 1998.
 
                                      22
<PAGE>
 
  The Company's ability to comply with the terms of its various debt
agreements (including its ability to comply with such covenants) and to meet
its debt service obligations will depend on its future performance. The
Company was in compliance with its financial covenants (as amended) in effect
as of March 31, 1997.
 
  The Company intends to meet its liquidity needs for operating activities and
capital expenditures (other than acquisitions) through internally generated
funds and, to the extent necessary, borrowings under the Revolver. As of March
31, 1997, Chemicals had drawn approximately $21.6 million under the Revolver
and issued approximately $1 million in letters of credit under the Revolver,
thereby reducing the available commitment under the Revolver at such time to
approximately $77.4 million (compared to an available commitment thereunder as
of December 31, 1996 of $96 million). As part of the Amendments, on April 7,
1997, the total commitment under the Revolver was increased by $25 million to
$125 million. The Company believes that such sources of funds will be
sufficient to permit the Company to meet its liquidity needs during fiscal
1997.
 
  The Senior Credit Agreements and the indentures for the 11 3/4% Notes and
the 11 1/4% Notes contain provisions which restrict the payment of advances,
loans, and dividends from Chemicals to Holdings. The most restrictive of those
covenants limit such payments during fiscal 1997 to approximately $1.6 million
plus any amounts due to Holdings from Chemicals under an intercompany tax
sharing agreement. Such restriction is not expected to limit Holdings' ability
to meet its obligations in fiscal 1997.
 
Working Capital
 
  Working capital of the Company was $109 million at March 31, 1997, up from
$77 million atSeptember 30, 1996. The addition of the AFB contributed
approximately $29 million to total working capital for the period and was the
primary contributor to the overall increase of $32 million.
 
Cash Flow
 
  Net cash provided by operations was $9.4 million during the first six months
of fiscal 1997 compared to $16.2 million for the corresponding period in
fiscal 1996. The decrease was primarily attributable to higher payments for
interest and lower operating earnings.
 
Capital Expenditures
 
  The Company's capital expenditures for the first six months of fiscal 1997
were $25.1 million compared to $49.0 million in the same period last year. The
capital expenditures in the first six months of fiscal 1997 were primarily
related to the construction of the Valdosta, Georgia sodium chlorate plant,
along with the distributive control system upgrade at the Company's
acrylonitrile unit. During the remainder of fiscal 1997, the Company expects
to make an additional $10 to 15 million of capital expenditures primarily for
process modernization in styrene and acrylonitrile and routine safety,
environmental, and replacement capital in the Company's petrochemical, pulp
chemical, and fibers businesses. The Company expects to fund its remaining
fiscal 1997 capital expenditures from operating cash flow, plus borrowings
under the Revolver, if needed.
 
LEGAL PROCEEDINGS
 
  The information under "Legal Proceedings" in the Notes to Condensed
Consolidated Financial Statements herein is hereby incorporated by reference.
 
                                      23
<PAGE>
 
PART II--OTHER INFORMATION
 
ITEM 2. CHANGES IN SECURITIES
 
  In connection with the acquisition of the AFB from Cytec on January 31,
1997, Holdings issued to Cytec 100,000 shares of Series A "pay in kind"
mandatory redeemable preferred stock with an aggregate liquidation value of
$10 million and sold 833,334 shares of Holdings Common Stock for a total of
$10 million. Of such shares of Holdings Common Stock, 1,698 were sold pursuant
to Regulation S to employees of the Company who are not residents of the
United States and the remaining shares were sold pursuant to a private
placement.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  The Company's Annual Meeting of Stockholders was held on January 22, 1997,
at which time the Company's nine nominees for directors were elected and the
appointment of Deloitte & Touche LLP as the independent auditors of the
financial statements of the Company for the fiscal year ended September 30,
1997 was ratified.
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
  (a) Exhibits: The following exhibits are filed as part of this Form 10-Q.
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                          DESCRIPTION OF EXHIBIT
 -------                         ----------------------
 <C>     <S>
   4.1   --Indenture among Sterling Chemicals, Inc. and Fleet National Bank,
          Trustee, dated as of April 1, 1997.
   4.2   --Registration Rights Agreement, dated as of April 1, 1997, among
          Sterling Chemicals, Inc., as issuer, and Credit Suisse First Boston
          Corporation and Chase Securities Inc.
   4.3   --Credit Agreement among Sterling Chemicals, Inc. and Texas Commerce
          Bank, individually and as Administrative Agent, Credit Suisse First
          Boston, individually and as Documentation Agent, and the other
          lenders named therein, dated January 31, 1997.
   4.4   --Second Amendment to Credit Agreement, dated as of March 31, 1997,
          amending the Credit Agreement of Sterling Chemicals, Inc. dated June
          21, 1996.
   4.5   --First Amendment to Credit Agreement, dated as of March 31, 1997,
          amending the Credit Agreement of Sterling Chemicals, Inc. dated
          January 31, 1997.
  11.1   --Earnings Per Share Calculation.
  27.1   --Financial Data Schedule of Sterling Chemicals Holdings, Inc.
  27.2   --Financial Data Schedule of Sterling Chemicals, Inc.
</TABLE>
 
  (b) Reports on Form 8-K:
 
  On March 24, 1997, the Company filed a current Report on Form 8-K, reporting
under Items 5 and 7.
 
                                      24
<PAGE>
 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
 
                                          STERLING CHEMICALS HOLDINGS, INC.
                                          STERLING CHEMICALS, INC.
                                          (Registrants)
 
Date: May 15, 1997                        /s/ Robert W. Roten
                                          -------------------------------------
                                          Robert W. Roten
                                          President and Chief Executive
                                           Officer
                                          (Principal Executive Officer)
 
Date: May 15, 1997                        /s/ Jim P. Wise
                                          -------------------------------------
                                          Jim P. Wise
                                          Vice President--Finance and Chief
                                           Financial Officer
                                          (Principal Financial Officer)
 
 
                                       25