<PAGE>

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

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q

<Table>
<C>          <S>
    [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934



             FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002



                                   OR




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



             FOR THE TRANSITION PERIOD FROM           TO
</Table>

                         COMMISSION FILE NUMBER 1-10059

                       STERLING CHEMICALS HOLDINGS, INC.
             (Exact name of Registrant as specified in its charter)

<Table>
<S>                                            <C>
                   DELAWARE                                      76-0185186
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification No.)




        1200 SMITH STREET, SUITE 1900                          (713) 650-3700
          HOUSTON, TEXAS 77002-4312            (Registrant's telephone number, including area
   (Address of principal executive offices)                        code)
</Table>

                      COMMISSION FILE NUMBER 333-04343-01

                            STERLING CHEMICALS, INC.
             (Exact name of Registrant as specified in its charter)

<Table>
<S>                                            <C>
                   DELAWARE                                      76-0502785
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification No.)




        1200 SMITH STREET, SUITE 1900                          (713) 650-3700
          HOUSTON, TEXAS 77002-4312            (Registrant's telephone number, including area
   (Address of principal executive offices)                        code)
</Table>

     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 April 30, 2002, Sterling Chemicals Holdings, Inc. had 12,776,678
shares of common stock outstanding. As of April 30, 2002, all outstanding equity
securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals
Holdings, Inc.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>

                 IMPORTANT INFORMATION REGARDING THIS FORM 10-Q

     Readers should consider the following information as they review this Form
10-Q.

PRESENTATION OF FINANCIAL STATEMENTS

     This Form 10-Q includes two separate sets of financial statements and
related notes:

     - The first set of financial statements and related notes present both the
       consolidated financial position of Sterling Chemicals Holdings, Inc.
       (Debtor-in-Possession) ("Holdings") and its subsidiaries and the
       consolidated financial position of Sterling Chemicals, Inc.
       (Debtor-in-Possession) ("Chemicals") and its subsidiaries. Holdings
       directly or indirectly owns all of the companies whose financial results
       are included in this Form 10-Q and Chemicals is the primary operating
       subsidiary of Holdings.

     - The second set of financial statements and related notes present the
       combined financial position of the Guarantors (Debtors-in-Possession) and
       their subsidiaries (discussed below).

     Under SEC rules, specified financial information is required to be provided
with respect to subsidiaries of an issuer of debt securities that guarantee the
repayment of those debt securities. In July 1999, Chemicals issued $295 million
of its 12 3/8% Senior Secured Notes due 2006. The obligations of Chemicals
related to the 12 3/8% Notes were guaranteed by most of its subsidiaries
incorporated in the United States (the "Guarantors"). Each of the Guarantors is
a wholly-owned direct or indirect subsidiary of Chemicals and the Guarantors
have fully and unconditionally guaranteed the 12 3/8% Notes on a joint and
several basis. In order to comply with these SEC rules, the combined financial
statements and related notes of the Guarantors and their subsidiaries are
included with this Form 10-Q. Separate financial statements of, and other
disclosures concerning, each Guarantor are not presented in this Form 10-Q
because management has determined that such separate financial statements and
disclosures are not material to investors.

FORWARD-LOOKING STATEMENTS

     This Form 10-Q includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements other than statements of historical fact
included in this Form 10-Q are forward-looking statements, including without
limitation the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" regarding the cyclicality of our
industry, current and future industry conditions, the potential effects of such
matters on our business strategy, results of operations or financial position,
the adequacy of our liquidity and our market sensitive financial instruments.
The forward-looking statements are based upon current information and
expectations. Estimates, forecasts and other statements contained in or implied
by the forward-looking statements speak only as of the date on which they are
made, are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to evaluate and predict.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, no assurances can be given that such expectations
will prove to have been correct. Certain important factors that could cause
actual results to differ materially from our expectations or what is expressed,
implied or forecasted by or in the forward-looking statements include
developments in our Chapter 11 proceedings, the timing and extent of changes in
commodity prices and global economic conditions, industry production capacity
and operating rates, the supply-demand balance for our products, competitive
products and pricing pressures, increases in raw material costs, our ability to
obtain raw materials and energy at acceptable prices, in a timely manner and on
acceptable terms, federal and state regulatory developments, our high financial
leverage, petitions filed or actions taken in connection with the bankruptcy
proceedings, the availability of skilled personnel, our ability to attract or
retain high quality employees and operating hazards attendant to the industry.
Additional factors that could cause actual results to differ materially from our
expectations or what is expressed, implied or forecasted by or in the
forward-looking statements are stated herein in cautionary statements made in
conjunction with the forward-looking statements or are included elsewhere in
this Form 10-Q or Holdings' and Chemicals' combined Annual Report on Form 10-K
for the fiscal year ended September 30, 2001 (the "Annual Report"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Certain Known Events, Trends, Uncertainties and Risk Factors"
                                        1
<PAGE>

contained in the Annual Report. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements.

SUBSEQUENT EVENTS

     All statements contained in this Form 10-Q, including the forward-looking
statements discussed above, are made as of May 13, 2002, unless those statements
are expressly made as of another date. We disclaim any responsibility for the
correctness of any information contained in this Form 10-Q to the extent such
information is affected or impacted by events, circumstances or developments
occurring after May 13, 2002 or by the passage of time after such date and,
except as required by applicable securities laws, we do not intend to update
such information.

DOCUMENT SUMMARIES

     Statements contained in this Form 10-Q describing documents and agreements
are provided in summary form only and such summaries are qualified in their
entirety by reference to the actual documents and agreements filed as exhibits
to the Annual Report or this 10-Q.

FISCAL YEAR

     We keep our books of record and accounts based on annual accounting periods
ending on September 30 of each year. Accordingly, all references in this Form
10-Q to a particular fiscal year refer to the twelve-calendar-month period
ending on September 30 of that year.

     This combined Form 10-Q is separately filed by Holdings and Chemicals.
Information contained herein relating to Chemicals is filed by Holdings and
separately by Chemicals on its own behalf. Unless otherwise indicated, Holdings
and its subsidiaries, including Chemicals, are collectively referred to as "we,"
"our," "ours" and "us."

                                        2
<PAGE>

                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.

                                     INDEX

<Table>
<Caption>
                                                                        PAGE
                                                                        ----
<S>      <C>                                                            <C>
                        PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements (Unaudited)............................
         a) Sterling Chemicals Holdings, Inc.........................
         b) Sterling Chemicals, Inc..................................
         c) Report of Independent Accountants (Sterling Chemicals
         Holdings, Inc.).............................................
         d) Report of Independent Accountants (Sterling Chemicals,
         Inc.).......................................................
         e) Sterling Chemicals Guarantors............................
         f) Report of Independent Accountants (Sterling Chemicals
         Guarantors).................................................
Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................
Item 3.  Quantitative and Qualitative Disclosures About Market
         Risk........................................................

                          PART II. OTHER INFORMATION
Item 1.  Legal Proceedings...........................................
Item 4.  Submission of Matters to a Vote of Security Holders.........
Item 6.  Exhibits and Reports of Form 8-K............................
</Table>

                                        3
<PAGE>

                       STERLING CHEMICALS HOLDINGS, INC.
                             (DEBTOR-IN-POSSESSION)

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<Table>
<Caption>
                                                      THREE MONTHS ENDED       SIX MONTHS ENDED
                                                           MARCH 31,               MARCH 31,
                                                     ---------------------   ---------------------
                                                       2002        2001        2002        2001
                                                     ---------   ---------   ---------   ---------
                                                     (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                  <C>         <C>         <C>         <C>
Revenues...........................................  $122,569    $199,057    $246,532    $452,911
Cost of goods sold.................................   113,073     209,793     226,939     454,633
                                                     --------    --------    --------    --------
Gross profit (loss)................................     9,496     (10,736)     19,593      (1,722)
Selling, general and administrative expenses.......     5,745       6,611      11,843      13,827
Reorganization items...............................     4,681          --       8,314          --
Interest and debt related expenses, net of interest
  income(1)........................................    12,031      33,759      24,205      63,646
                                                     --------    --------    --------    --------
Loss before income taxes...........................   (12,961)    (51,106)    (24,769)    (79,195)
Provision for income taxes.........................     2,454       1,609       5,518       3,962
                                                     --------    --------    --------    --------
Net loss...........................................   (15,415)    (52,715)    (30,287)    (83,157)
Preferred stock dividends..........................        --         820          --       1,622
                                                     --------    --------    --------    --------
Net loss attributable to common stockholders.......   (15,415)   $(53,535)   $(30,287)   $(84,779)
                                                     ========    ========    ========    ========
Net loss per common share..........................  $  (1.21)   $  (4.19)   $  (2.37)   $  (6.63)
                                                     ========    ========    ========    ========
Weighted average shares outstanding................    12,777      12,782      12,777      12,779
                                                     ========    ========    ========    ========
</Table>

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

(1) Contractual interest for the three and six-month periods ended March 31,
    2002 totaled $30,799 and $61,741, respectively.

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        4
<PAGE>

                       STERLING CHEMICALS HOLDINGS, INC.
                             (DEBTOR-IN-POSSESSION)

                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)

<Table>
<Caption>
                                                              MARCH 31,   SEPTEMBER 30,
                                                                2002          2001
                                                              ---------   -------------
                                                               (AMOUNTS IN THOUSANDS,
                                                                 EXCEPT SHARE DATA)
<S>                                                           <C>         <C>
                                        ASSETS
Current assets:
  Cash and cash equivalents.................................  $  14,290     $  15,830
  Accounts receivable, net..................................     91,144       100,690
  Inventories...............................................     49,245        48,318
  Prepaid expenses..........................................      3,644         3,358
                                                              ---------     ---------
     Total current assets...................................    158,323       168,196
Property, plant and equipment, net..........................    273,829       284,944
Other assets................................................     54,210        57,003
                                                              ---------     ---------
     Total assets...........................................  $ 486,362     $ 510,143
                                                              =========     =========

                         LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable..........................................  $  39,495     $  27,436
  Accrued liabilities.......................................     41,445        35,725
  Current portion of long-term debt.........................      8,465        33,260
                                                              ---------     ---------
     Total current liabilities..............................     89,405        96,421
Pre-petition liabilities -- subject to compromise...........    720,017       744,857
Pre-petition liabilities -- not subject to compromise.......    339,646       325,655
Long-term debt..............................................     83,855        61,084
Deferred income tax liability...............................     14,590        14,504
Deferred credits and other liabilities......................     18,097        15,786
Common stock held by ESOP...................................        289           289
Redeemable preferred stock..................................     27,272        27,272
Commitments and contingencies (Note 5)......................
Stockholders' deficit:
  Common stock, $.01 par value, 20,000,000 shares
     authorized, 12,422,000 shares issued and 12,199,000
     outstanding at March 31, 2002 and at September 30,
     2001...................................................        123           123
  Additional paid-in capital................................   (546,056)     (546,056)
  Accumulated deficit.......................................   (219,486)     (189,199)
  Accumulated other comprehensive income....................    (38,852)      (38,053)
  Deferred compensation.....................................         (1)           (3)
                                                              ---------     ---------
                                                               (804,272)     (773,188)
  Treasury stock, at cost, 223,000 shares at March 31, 2002
     and at September 30, 2001..............................     (2,537)       (2,537)
                                                              ---------     ---------
       Total stockholders' deficit..........................   (806,809)     (775,725)
                                                              ---------     ---------
          Total liabilities and stockholders' deficit.......  $ 486,362     $ 510,143
                                                              =========     =========
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        5
<PAGE>

                       STERLING CHEMICALS HOLDINGS, INC.
                             (DEBTOR-IN-POSSESSION)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<Table>
<Caption>
                                                                 SIX MONTHS ENDED
                                                                     MARCH 31,
                                                              -----------------------
                                                                 2002         2001
                                                              ----------   ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
Cash flows from operating activities:
  Net loss..................................................   $(30,287)    $(83,157)
  Adjustments to reconcile net loss to net cash provided by
     (used in) operating activities:
     Depreciation and amortization..........................     20,208       26,796
     Interest amortization..................................      3,126        4,052
     Deferred tax expense...................................         86        1,070
     Discount notes amortization............................         --       11,929
     Other..................................................       (685)         640
  Change in assets/liabilities:
     Accounts receivable....................................      9,546       40,668
     Inventories............................................       (927)       9,115
     Prepaid expenses.......................................       (286)          16
     Other assets...........................................       (333)       2,178
     Accounts payable.......................................     12,059      (29,863)
     Accrued liabilities....................................      5,720      (13,855)
     Other liabilities......................................     (8,538)      (4,613)
                                                               --------     --------
Net cash provided by (used in) operating activities.........      9,689      (35,024)
                                                               --------     --------
Cash flows from investing activities:
  Capital expenditures......................................     (9,096)      (8,572)
                                                               --------     --------
Cash flows from financing activities:
  Payment on Saskatoon term loans...........................     (7,791)      (1,598)
  Net changes in Prior Credit Agreement.....................         --       46,780
  Net borrowings under DIP Facility.........................     14,002           --
  Net change in Canadian Financing Agreement................     (8,011)          --
  Other.....................................................       (224)         374
                                                               --------     --------
Net cash provided by (used in) financing activities.........     (2,024)      45,556
                                                               --------     --------
Effect of exchange rate on cash.............................       (109)        (367)
                                                               --------     --------
Net increase (decrease) in cash and cash equivalents........     (1,540)       1,593
Cash and cash equivalents -- beginning of year..............     15,830        7,667
                                                               --------     --------
Cash and cash equivalents -- end of period..................   $ 14,290     $  9,260
                                                               ========     ========
Supplement disclosures of cash flow information:
  Interest paid, net of interest income received............   $ (3,124)    $(46,680)
  Income taxes paid.........................................     (2,751)      (3,000)
  Cash paid for reorganization items........................     (6,437)          --
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        6
<PAGE>

                            STERLING CHEMICALS, INC.
                             (DEBTOR-IN-POSSESSION)

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<Table>
<Caption>
                                                        THREE MONTHS ENDED     SIX MONTHS ENDED
                                                             MARCH 31,             MARCH 31,
                                                        -------------------   -------------------
                                                          2002       2001       2002       2001
                                                        --------   --------   --------   --------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                     <C>        <C>        <C>        <C>
Revenues..............................................  $122,569   $199,057   $246,532   $452,911
Cost of goods sold....................................   113,073    209,793    226,939    454,633
                                                        --------   --------   --------   --------
Gross profit (loss)...................................     9,496    (10,736)    19,593     (1,722)
Selling, general and administrative expenses..........     5,693      6,267     11,729     13,047
Reorganization items..................................     4,681         --      8,314         --
Interest and debt related expenses, net of interest
  income..............................................    12,030     27,427     24,082     51,185
                                                        --------   --------   --------   --------
Loss before income taxes..............................   (12,908)   (44,430)   (24,532)   (65,954)
Provision for income taxes............................     2,454      1,609      5,518      3,962
                                                        --------   --------   --------   --------
Net loss..............................................  $(15,362)  $(46,039)  $(30,050)  $(69,916)
                                                        ========   ========   ========   ========
</Table>

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

(1) Contractual interest for the three and six-month periods ended March 31,
    2002 totaled $24,327 and $48,675, respectively.

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        7
<PAGE>

                            STERLING CHEMICALS, INC.
                             (DEBTOR-IN-POSSESSION)

                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)

<Table>
<Caption>
                                                              MARCH 31,   SEPTEMBER 30,
                                                                2002          2001
                                                              ---------   -------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>
                                        ASSETS
Current assets:
  Cash and cash equivalents.................................  $  14,119     $  14,459
  Accounts receivable, net..................................     93,308       103,933
  Inventories...............................................     49,245        48,318
  Prepaid expenses..........................................      3,610         3,349
                                                              ---------     ---------
     Total current assets...................................    160,282       170,059
Property, plant and equipment, net..........................    273,829       284,944
Other assets................................................     54,068        56,847
                                                              ---------     ---------
     Total assets...........................................  $ 488,179     $ 511,850
                                                              =========     =========

                         LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable..........................................  $  39,495     $  27,436
  Accrued liabilities.......................................     41,445        35,725
  Current portion of long-term debt.........................      8,465        33,260
                                                              ---------     ---------
  Total current liabilities.................................     89,405        96,421
Pre-petition liabilities -- subject to compromise...........    536,732       561,692
Pre-petition liabilities -- not subject to compromise.......    339,646       325,655
Long-term debt..............................................     83,855        61,084
Deferred income tax liability...............................     14,590        14,504
Deferred credits and other liabilities......................     18,097        15,787
Common stock held by ESOP...................................        289           289
Commitments and contingencies (Note 5)......................
Stockholders' deficit:
  Common stock, $.01 par value..............................         --            --
  Additional paid-in capital................................   (141,786)     (141,786)
  Accumulated deficit.......................................   (413,790)     (383,740)
  Accumulated other comprehensive income....................    (38,858)      (38,053)
  Deferred compensation.....................................         (1)           (3)
                                                              ---------     ---------
  Total stockholders' deficit...............................   (594,435)     (563,582)
                                                              ---------     ---------
  Total liabilities and stockholders' deficit...............  $ 488,179     $ 511,850
                                                              =========     =========
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        8
<PAGE>

                            STERLING CHEMICALS, INC.
                             (DEBTOR-IN-POSSESSION)

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<Table>
<Caption>
                                                                 SIX MONTHS ENDED
                                                                     MARCH 31,
                                                              -----------------------
                                                                 2002         2001
                                                              ----------   ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
Cash flows from operating activities:
Net loss....................................................   $(30,050)    $(69,916)
Adjustments to reconcile net loss to net cash provided by
  (used in) operating activities:
  Depreciation and amortization.............................     20,208       26,524
  Interest amortization.....................................      3,126        4,052
  Deferred tax expense......................................         86        1,070
  Other.....................................................       (691)         329
Change in assets/liabilities:
  Accounts receivable.......................................     10,625       40,410
  Inventories...............................................       (927)       9,115
  Prepaid expenses..........................................       (261)          16
  Other assets..............................................       (347)       2,178
  Accounts payable..........................................     12,059      (29,863)
  Accrued liabilities.......................................      5,720      (13,855)
  Other liabilities.........................................     (8,659)      (4,613)
                                                               --------     --------
Net cash provided by (used in) operating activities.........     10,889      (34,553)
                                                               --------     --------
Cash flows from investing activities:
  Capital expenditures......................................     (9,096)      (8,572)
                                                               --------     --------
Cash flows from financing activities:
  Payment on Saskatoon term loans...........................     (7,791)      (1,598)
  Net changes in Prior Credit Agreement.....................         --       46,780
  Net borrowings under DIP Facility.........................     14,002           --
  Borrowings under Canadian Financing Agreement.............     (8,011)          --
  Other.....................................................       (224)         374
                                                               --------     --------
Net cash provided by (used in) financing activities.........     (2,024)      45,556
                                                               --------     --------
Effect of United States/Canadian exchange rate on cash......       (109)        (367)
                                                               --------     --------
Net increase (decrease) in cash and cash equivalents........       (340)       2,064
Cash and cash equivalents -- beginning of period............     14,459        5,740
                                                               --------     --------
Cash and cash equivalents -- end of year....................   $ 14,119     $  7,804
                                                               ========     ========
Supplement disclosures of cash flow information:
  Interest paid, net of interest income received............   $ (3,129)    $(46,731)
  Income taxes (paid) received..............................     (2,751)      (3,000)
  Cash paid for reorganization items........................     (6,437)          --
</Table>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.
                                        9
<PAGE>

                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

1.  BASIS OF PRESENTATION

  INTERIM FINANCIAL INFORMATION

     In our opinion, the accompanying unaudited consolidated financial
statements reflect all adjustments necessary to present fairly:

     - the consolidated financial position of Sterling Chemicals Holdings, Inc.
       (Debtor-in-Possession) ("Holdings") and its subsidiaries and the
       consolidated financial position of Sterling Chemicals, Inc.
       (Debtor-in-Possession) ("Chemicals") and its subsidiaries as of March 31,
       2002, and

     - the respective consolidated results of operations and cash flows of
       Holdings and its subsidiaries and Chemicals and its subsidiaries for the
       applicable three and six-month periods ended March 31, 2002 and March 31,
       2001, respectively.

     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 to be expected for the full year. The accompanying unaudited
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, 2001 (the "Annual Report"). The accompanying consolidated
balance sheets as of September 30, 2001 have been derived from the audited
consolidated balance sheets as of September 30, 2001 included in the Annual
Report. The accompanying consolidated financial statements as of and for the
six-month period ended March 31, 2002 have been reviewed by Deloitte & Touche
LLP, our independent public accountants, whose reports are included herein.
Unless otherwise indicated, Holdings and its subsidiaries, including Chemicals,
are collectively referred to as "we," "our," "ours" and "us."

     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 loss or stockholders' deficit.

  INDUSTRY CONDITIONS AND LIQUIDITY

     The accompanying consolidated financial statements have been prepared on
the going concern basis of accounting, which contemplates the continuation of
operations, the realization of assets and the satisfaction of liabilities in the
ordinary course of business. On July 16, 2001 (the "Petition Date"), Holdings,
Chemicals and most of their U.S. subsidiaries (collectively, the "Debtors")
filed voluntary petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas
(the "Bankruptcy Court") and began operating their business as
debtors-in-possession pursuant to the Bankruptcy Code. None of our foreign
subsidiaries, including our Canadian subsidiaries, were included in the Chapter
11 filings. The accompanying combined financial statements have been presented
in conformity with the AICPA's Statement of Position 90-7 "Financial Reporting
By Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The
statement requires a segregation of liabilities subject to compromise as of the
Petition Date and identification of all transactions and events that are
directly associated with the reorganization of the Debtors.

     The filing of the Chapter 11 petitions was driven by the Debtors' inability
to meet their funded debt obligations over the long-term, largely brought about
by weak demand for petrochemicals products caused by declines in general
worldwide economic conditions, the relative strength of the U.S. dollar (which
caused their export sales to be at a competitive disadvantage) and higher raw
material and energy costs. As a result of these conditions, the Debtors have
incurred significant operating losses. The reorganization contemplated by the
Chapter 11 filings is designed to permit the Debtors to preserve cash and to
give the Debtors the opportunity

                                        10
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

to restructure their debt. During the pendency of the Chapter 11 cases, with
approval of the Bankruptcy Court, the Debtors may assume favorable pre-petition
contracts and leases, reject unfavorable pre-petition contracts and leases and
sell or otherwise dispose of assets.

     The confirmation of a plan of reorganization is the primary objective of
the Debtors. The Debtors anticipate filing a plan of reorganization (the "Plan")
on May 14, 2002 with the Bankruptcy Court, along with an accompanying Disclosure
Statement. The Disclosure Statement must be approved by the Bankruptcy Court
before the Debtors are authorized to solicit acceptances of the Plan from voting
creditors. The Plan may be modified prior to the time that the Disclosure
Statement is approved. No assurances can be given that the Plan will be
confirmed or that any plan that is confirmed will contain the terms in the
current Plan. However, when confirmed, the Plan is expected to result in the
elimination of Holdings' classes of equity interests and the significant
dilution or elimination of some or all of the Debtors' classes of existing
public debt.

     At this time, it is not possible to predict the outcome of the bankruptcy
proceedings, in general or the effect on the business of the Debtors or the
claims of creditors of the Debtors or the stockholders of Holdings. As a result
of the bankruptcy filings, most of the Debtors' liabilities incurred prior to
the Petition Date, including certain secured debt, are likely to be subject to
compromise. However, the ultimate resolution of these liabilities is not
presently determinable.

     Reorganization items reflected in the Statement of Operations for the three
and six-month periods ended March 31, 2002 are composed primarily of
professional fees directly related to the bankruptcy cases.

     Effective July 19, 2001, the Debtors (excluding Holdings) entered into a
Revolving Credit Agreement with a group of lenders led by The CIT Group/Business
Credit, Inc. to provide up to $195 million in Debtor-In-Possession financing
(the "DIP Financing"). The DIP Financing was designed to give the Debtors the
opportunity, during the reorganization process, to develop a new capital
structure that will support them over the long-term, including during recurring
cyclical downturns in the markets for the Debtors' petrochemicals products. By
interim order dated July 18, 2001 and final order dated September 14, 2001, the
Bankruptcy Court approved up to $155 million in lending commitments under the
DIP Financing (the "Base Facility"), consisting of an $85 million "current
assets revolver" and a $70 million "fixed assets revolver." Commitments under
the current assets revolver were increased to $125 million upon entry of the
priming order discussed below. The initial draw under the DIP Financing was used
to repay all amounts outstanding under the Debtors' pre-petition revolving
credit facilities. Additional borrowings under the DIP Financing may be used to
fund the Debtors' post-petition operating expenses and supplier and employee
obligations throughout the reorganization process. The final order dated
September 14, 2001 was appealed to the U.S. District Court by the indenture
trustee for Chemicals' 12 3/8% Senior Secured Notes, but no stay of the final
order was sought or imposed, and the order remains fully effective. By order
dated February 7, 2002, the U.S. District Court denied the appeal. The indenture
trustee appealed this denial to the 5th Circuit Court of Appeals on March 1,
2002. While no assurances can be given, we do not believe the final order will
be overturned by the 5th Circuit. Borrowings under the DIP Financing are subject
to customary funding conditions, including borrowing base restrictions under the
current assets revolver. The Base Facility is secured by substantially all of
the assets of the Debtors, and has been granted super-priority administrative
expense claim status for the amount of the DIP Financing which, subject to
certain carve outs, will entitle the DIP lenders to be paid before any other
claims against the Debtors are paid.

     As a result of a priming order entered by the Bankruptcy Court on November
2, 2001 and reinstated on December 19, 2001, the lending commitments under the
current assets revolver were increased from $85 million to $125 million. The
priming order grants the lenders under the current assets revolver a priming
lien on our fixed assets located in the United States and the capital stock of
most of our domestic subsidiaries, prior in right to the existing liens in favor
of the 12 3/8% Notes. Although the priming order was entered by the
                                        11
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Bankruptcy Court on November 2, 2001, it was appealed to the U.S. District Court
by the indenture trustee for the 12 3/8% Notes. By order dated December 17,
2001, the U.S. District Court reversed the priming order and remanded the matter
to the Bankruptcy Court for a determination of a compensatory adjustment in
favor of the 12 3/8% Notes, which the U.S. District Court suggested would be
satisfied by a 4% increase of the interest rate payable on up to $40 million. On
remand, the Bankruptcy Court entered orders dated December 19, 2001 and January
10, 2002 reinstating the priming order, subject to a compensatory adjustment in
favor of the 12 3/8% Notes of the accrual during the bankruptcy proceedings of
four percentage points of additional interest on up to $40 million of borrowings
secured by the priming liens. The priming order was further appealed by the
indenture trustee to the U.S. District Court. By orders dated February 8, 2002,
the U.S. District Court denied the appeal of the priming order and the appeal of
the December 17, 2001 order. The U.S. District Court has yet to rule on the
January 10, 2002 order. On March 1, 2002, the indenture trustee for the 12 3/8%
Notes appealed to the 5th Circuit Court of Appeals both the denial of the appeal
of the priming order and the denial of the appeal of the December 17, 2001
order. On March 14, 2002, the Official Committee of Unsecured Creditors filed a
cross appeal of the December 17, 2001 order, which cross appeal is also pending
before the 5th Circuit. The priming order will remain effective pending the
outcome of any appeal unless stayed by an appellate court. While no assurances
can be given, we do not believe the priming order will be overturned by the 5th
Circuit. The Debtors will take all reasonable actions necessary, either before
the Bankruptcy Court or on appeal, to maintain the effectiveness of the priming
order and the additional liquidity provided by the priming order. If the priming
order is overturned on appeal, the Debtors would need to seek additional sources
of financing or revise their business plan and operations consistent with the
level of available financing. We can give no assurances that the priming order
will be upheld on appeal or, if not upheld on appeal, that additional sources of
financing will be available or adequate, or that our available financing will be
adequate after implementing revisions to the Debtors' business plan and
operations.

     At March 31, 2002, the total credit available under the DIP Financing was
limited to $116.9 million due to borrowing base restrictions under the current
assets revolver. At March 31, 2002, $56.2 million was drawn under the fixed
assets revolver and there were no borrowings outstanding under the current
assets revolver. In addition, approximately $4 million of letters of credit were
outstanding under the current assets revolver leaving, at March 31, 2002, unused
borrowing capacity under the DIP Financing of approximately $56.7 million.
However, during the second quarter of fiscal 2002, we conducted a two-month
maintenance turnaround, including catalyst change, of our styrene production
unit at our Texas City facility, with total cash expenditures for the turnaround
expected to be approximately $20 million. These expenditures were funded by
borrowings under the DIP Financing during the second and third quarters of
fiscal 2002.

     As of July 11, 2001, our principal Canadian subsidiary, Sterling Pulp
Chemicals, Ltd. ("Sterling Pulp"), entered into a financing agreement with CIT
Business Credit Canada, Inc. ("CIT Canada") to provide up to the Canadian dollar
equivalent of U.S. $30 million (the "Canadian Financing Agreement"). The initial
advance under this facility, approximately U.S. $20 million, was used by
Sterling Pulp to discharge a portion of an intercompany debt and was ultimately
transferred to the Debtors through an intercompany loan. The intercompany loan
was approved by the Bankruptcy Court's interim order entered on July 18, 2001
and final order entered on September 14, 2001, which is a subject of the appeal
of the final order discussed above. The initial term of the Canadian Financing
Agreement extends to July 2004. The Canadian Financing Agreement may be
terminated by CIT Canada thereafter only by giving 60 days' written notice of
termination prior to each subsequent anniversary date. Sterling Pulp may
terminate the Canadian Financing Agreement at any time but is required to give
60 days' notice and pay an early termination fee. At March 31, 2002, $11.9
million was drawn under the Canadian Financing Agreement.

                                        12
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  RECENT DEVELOPMENTS

     The primary union agreement at our Texas City facility is with the Texas
City, Texas Metal Trades Council, AFL-CIO, of Galveston County, Texas, which
covers all hourly employees at our Texas City facility. This agreement was
renegotiated as of December 28, 1998 and expired on May 1, 2002. The union is
currently working at our Texas City facility under terms of the expired union
agreement. The Company and the union have agreed to a 72-hour notification
period prior to a strike or lockout. The Company has developed contingency plans
designed to avoid undue disruption of operations in the event of a strike or
lockout.

  CERTAIN BANKRUPTCY IMPLICATIONS

     The Debtors are permitted to continue to operate their businesses and
manage their properties in the ordinary course without prior approval from the
Bankruptcy Court. Transactions outside of the ordinary course of business,
including certain types of capital expenditures, certain sales of assets and
certain requests for additional financings, will require approval by the
Bankruptcy Court. There can be no assurance that the Bankruptcy Court will grant
any requests for such approvals.

     On July 18, 2001, the Bankruptcy Court issued an order permitting the
Debtors to pay pre-petition salaries, wages and benefits to all of their
employees. The Bankruptcy Court also authorized the payment of certain other
pre-petition claims, in limited circumstances, as necessary to avoid undue
disruption to the Debtors' operations. Generally, actions to enforce or
otherwise effect repayment of pre-petition liabilities of, as well as all
pending litigation against, the Debtors are stayed while the Debtors continue to
operate their business as debtors-in-possession. The ultimate amount and
settlement terms for such liabilities will be subject to a plan of
reorganization and, accordingly, are not presently determinable. As required by
the Bankruptcy Court, the Debtors' trade creditors, including vendors, will be
paid their post-petition claims in the normal course of business. As our foreign
subsidiaries are not included in the Chapter 11 filings, all of their creditors,
including vendors, will be paid their claims in the ordinary course of business,
irrespective of whether the claims arose prior to or after the Chapter 11
filings.

     As a result of the bankruptcy filings and related events, there can be no
assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded. In addition,
confirmation of a plan of reorganization, or disapproval thereof, could change
the amounts reported in the financial statements. The ability of the Debtors to
continue as a going concern is dependent upon, among other things:

     - the Debtors' ability to comply with the terms of the DIP Financing and
       related orders entered by the Bankruptcy Court in connection with the
       Chapter 11 cases,

     - the ability of the Debtors to maintain access to the incremental $40
       million in DIP Financing that is dependent on an effective priming order,

     - the ability of the Debtors to maintain adequate cash on hand,

     - the ability of the Debtors to generate sufficient cash from operations,

     - the ability of the Debtors' subsidiaries that are not included in the
       Chapter 11 cases to obtain necessary financing,

     - confirmation of a plan or plans of reorganization under the Bankruptcy
       Code and

     - the Debtors' ability to achieve profitability following such
       confirmation.

                                        13
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As the Debtors can give no assurances that they will accomplish any of the
foregoing, there is substantial doubt about the Debtors', and therefore
Holdings' and Chemicals' ability to continue as a going concern.

     The Debtors have limited liquidity, which may prove inadequate during their
reorganization process. The Debtors are currently funding their liquidity needs
out of operating cash flow and from borrowings under the DIP Financing. The DIP
Financing is limited in amount and is also subject to numerous funding
conditions which are largely beyond the control of the Debtors, including
borrowing base requirements under the current assets revolver and compliance
with an EBITDA covenant. The ability of the Debtors to obtain additional
financing during the reorganization process is severely limited by a variety of
factors, including the debt incurrence restrictions imposed by the DIP
Financing, numerous procedural requirements and uncertainties relating to the
bankruptcy proceedings, including any continuing challenge to the priming order,
and the Debtors' current financial condition and prospects. Accordingly, no
assurances can be given that the Debtors' existing sources of liquidity will be
adequate to fund their liquidity needs throughout the reorganization process or,
if additional sources of liquidity become necessary during the reorganization
process, that they would be available to the Debtors or adequate. Any liquidity
shortages during the reorganization process would likely have a material adverse
effect on the Debtors' business and financial condition as well as their ability
to successfully restructure and emerge from bankruptcy.

     The accompanying financial statements do not include any adjustments that
may result from the resolution of these uncertainties.

  SEGMENT INFORMATION

     Our operations are divided into two reportable segments: petrochemicals and
pulp chemicals. Our petrochemicals segment manufactures commodity petrochemicals
and acrylic fibers. Our pulp chemicals segment manufactures chemicals for use
primarily in the pulp and paper industry and licenses large scale chlorine
dioxide generators to the pulp and paper industry. Operating segment information
is presented below (in thousands).

<Table>
<Caption>
                                             THREE MONTHS ENDED     SIX MONTHS ENDED
                                                  MARCH 31,             MARCH 31,
                                             -------------------   -------------------
                                               2002       2001       2002       2001
                                             --------   --------   --------   --------
<S>                                          <C>        <C>        <C>        <C>
Revenues:
  Petrochemicals...........................  $ 65,482   $140,793   $132,753   $338,056
  Pulp chemicals...........................    57,087     58,264    113,779    114,855
                                             --------   --------   --------   --------
  Total....................................  $122,569   $199,057   $246,532   $452,911
                                             ========   ========   ========   ========
Operating income (loss):
  Petrochemicals...........................  $(12,253)  $(28,582)  $(24,383)  $(38,139)
  Pulp chemicals...........................    11,323     11,235     23,819     22,590
                                             --------   --------   --------   --------
  Total....................................  $   (930)  $(17,347)  $   (564)  $(15,549)
                                             ========   ========   ========   ========
</Table>

  COMPREHENSIVE LOSS

     Our total comprehensive net loss for the three-month periods ended March
31, 2002 and March 31, 2001 was $15,598,000 and $56,919,000, respectively. Our
total comprehensive net loss for the six-month periods ended March 31, 2002 and
March 31, 2001 was $31,086,000 and $87,322,000, respectively. The total
comprehensive net loss of Chemicals and its subsidiaries for the Three-month
periods ended March 31, 2002

                                        14
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and March 31, 2001 was $15,551,000 and $50,243,000, respectively. The total
comprehensive net loss of Chemicals and its subsidiaries for the six-month
periods ended March 31, 2002 and March 31, 2001 was $30,855,000 and $74,081,000,
respectively.

2.  INVENTORIES

<Table>
<Caption>
                                                              MARCH 31,   SEPTEMBER 30,
                                                                2002          2001
                                                              ---------   -------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>
Inventories consisted of the following:
Finished products...........................................   $26,720       $25,660
Raw materials...............................................    10,281         9,006
Inventories under exchange agreements.......................      (761)          749
Stores and supplies.........................................    13,005        12,903
                                                               -------       -------
                                                               $49,245       $48,318
                                                               =======       =======
</Table>

3.  PRE-PETITION LIABILITIES

  LIABILITIES SUBJECT TO COMPROMISE

     The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below. All amounts
below may be subject to future adjustment depending on Bankruptcy Court action,
further developments with respect to disputed claims or other events, including
the reconciliation of claims filed with the Bankruptcy Court to amounts recorded
in the accompanying consolidated financial statements. Additional pre-petition
claims may arise from rejection of additional executory contracts or unexpired
leases by the Debtors. Under a confirmed plan of reorganization, all pre-
petition claims subject to compromise may be paid and discharged at amounts
substantially less than their allowed amounts.

     Pursuant to an order of the Bankruptcy Court, the Debtors mailed notices to
all known creditors that the deadline for filing proofs of claim with the
Bankruptcy Court was December 17, 2001. Differences between amounts recorded by
the Debtors and claims filed by creditors are continuing to be investigated and
resolved. Accordingly, the ultimate number and amount of allowed claims is not
presently known and, because the settlement terms of each such allowed claim is
subject to a confirmed plan of reorganization, the ultimate distribution with
respect to allowed claims is not presently ascertainable.

                                        15
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     On a consolidated basis, recorded liabilities subject to compromise under
Chapter 11 proceedings as of March 31, 2002 and September 30, 2001, consisted of
the following:

<Table>
<Caption>
                                                              MARCH 31,   SEPTEMBER 30,
                                                                2002          2001
                                                              ---------   -------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>
Accrued litigation..........................................  $  3,454      $  3,454
Trade accounts payable......................................    28,129        34,486
Accrued interest............................................    18,521        19,201
Debt:(1)
  11 1/4% Notes.............................................   149,500       149,500
  11 3/4% Notes.............................................   268,885       268,885
  13 1/2% Notes.............................................   185,436       185,436
Employee benefits...........................................    61,777        64,853
Accrued taxes...............................................     1,373         4,811
Other.......................................................     2,942        14,231
                                                              --------      --------
Total liabilities subject to compromise.....................  $720,017      $744,857
                                                              ========      ========
</Table>

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

(1) Debt liabilities are presented net of unamortized debt issue costs of $12.9
    million.

     As a result of the bankruptcy filing, principal and interest payments may
not be made on pre-petition debt without Bankruptcy Court approval or until a
plan of reorganization defining the repayment terms has been confirmed. The
total interest on the pre-petition debt described above that was not paid or
charged to earnings for the period from July 16, 2001 to September 30, 2001 was
$15.3 million and for the three and six-month periods ended March 31, 2002 was
$18.7 million and $37.5 million, respectively. Such interest is not being
accrued since management believes it is not probable that it will be treated as
an allowed claim. The Bankruptcy Code generally disallows the payment of
post-petition interest that accrues with respect to unsecured or undersecured
claims.

  LIABILITIES NOT SUBJECT TO COMPROMISE

     The principal categories of claims classified as liabilities not subject to
compromise under reorganization proceedings are identified below. The Debtors
believe all amounts below are fully secured liabilities or have been approved by
the Bankruptcy Court and are not expected to be compromised.

     On a consolidated basis, recorded liabilities not subject to compromise
under Chapter 11 proceedings as of March 31, 2002 and September 30, 2001,
consisted of the following:

<Table>
<Caption>
                                                              MARCH 31,   SEPTEMBER 30,
                                                                2002          2001
                                                              ---------   -------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>
12 3/8% Senior Secured Notes................................  $295,000      $295,000
Accrued interest on 12 3/8% Senior Secured Notes............    44,236        25,983
Employee benefits...........................................       410         4,672
                                                              --------      --------
Total liabilities not subject to compromise.................  $339,646      $325,655
                                                              ========      ========
</Table>

                                        16
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4.  LONG-TERM DEBT

     This note contains information regarding our short-term borrowings and
long-term debt as of March 31, 2002 and September 30, 2001. As a result of the
Debtors' bankruptcy filing, principal and interest payments may not be made on
pre-petition debt except as approved by the Bankruptcy Court.

     Upon the filing of the Chapter 11 cases by the Debtors, an Event of Default
occurred under the Debtors' pre-petition revolving credit facilities (the "Prior
Credit Agreement") and each of the indentures governing our outstanding notes,
and all of this indebtedness was accelerated and became immediately due and
payable. The indebtedness under the Prior Credit Agreement was completely paid
off with the proceeds of the initial draw under the DIP Financing. The Debtors
may not, however, pay the indebtedness under the indentures other than pursuant
to a confirmed plan of reorganization or an order of the Bankruptcy Court.
During the pendency of the Chapter 11 cases, the Debtors will not, for the most
part, be subject to the restrictions contained in the Prior Credit Agreement or
any of the indentures. However, the Debtors will be subject to the restrictions
contained in the DIP Financing, Sterling Pulp will be subject to restrictions
contained in both the DIP Financing and the Canadian Financing Agreement and our
Saskatoon subsidiary will be subject to the restrictions contained in its credit
facility.

     In July 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), our
Canadian subsidiary that operates our Saskatoon facility, entered into a credit
agreement with The Chase Manhattan Bank of Canada, individually and as
administrative agent, and certain other financial institutions (the "Saskatoon
Credit Agreement"). The indebtedness under the Saskatoon Credit Agreement is
secured by substantially all of the assets of Sterling Sask, including the
Saskatoon facility. The Saskatoon Credit Agreement requires that certain amounts
of "Excess Cash Flow" be used to prepay amounts outstanding under the term
portion of the credit facility. In addition, the Saskatoon Credit Agreement
contains provisions which prohibit the payment of advances, loans and dividends
from Sterling Sask to Chemicals or Holdings. The Saskatoon Credit Agreement
originally included a revolving credit facility of Cdn. $8 million to be used by
Sterling Sask solely for its general corporate purposes. No borrowings were
outstanding under the Saskatoon revolving credit facility as of March 31, 2002.

     The Saskatoon Credit Agreement contains provisions which restrict the
payment of advances, loans and dividends from Sterling Sask to us or Chemicals.
The most restrictive of these covenants limited such payments during fiscal 2001
to approximately $1 million, plus any amounts due to us from Sterling Sask under
our intercompany tax sharing agreement. In addition, because of its designation
as an "Unrestricted Subsidiary" under the DIP Financing and the indentures for
the 13 1/2% Notes, the 12 3/8% Notes, the 11 3/4% Notes and the 11 1/4% Notes,
Sterling Sask's results are not considered in determining compliance with the
covenants contained therein.

     An Event of Default occurred under the Saskatoon Credit Agreement as a
result of the Chapter 11 filings by the Debtors. However, the lenders under the
Saskatoon Credit Agreement executed a forbearance agreement under which they
agreed to not exercise their remedies prior to December 31, 2001 in exchange for
the elimination of the exceptions to the provisions restricting the payment of
advances, loans and dividends from Sterling Sask to us or Chemicals and the
inclusion of a prohibition on draws under the revolving credit portion of the
facility during the remainder of calendar year 2001. On January 2, 2002,
Sterling Sask entered into a waiver and amending agreement (the "Waiver
Agreement"), effective December 18, 2001, with its lenders. The Waiver Agreement
waived the existing defaults, rescinded the acceleration of the amounts
outstanding under the Saskatoon Credit Agreement and reinstated the commitments
thereunder. The Waiver Agreement provides for a reduction of the revolving
credit facility commitment to Cdn $4.0 million and changes the expiration date
on the Tranche A term loan from June 30, 2003 to December 31, 2002 and on the
Tranche B term loan from June 30, 2005 to June 30, 2003. During the first six
months of fiscal 2002, payments
                                        17
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of approximately $7.8 million were made pursuant to this obligation.
Accordingly, $3.5 million of the remaining debt will mature during the remainder
of fiscal 2002 and $20.8 million will mature during fiscal 2003. The Waiver
Agreement also set a minimum discount rate and Eurodollar rate margin of 2.50%
over the Base Rate or LIBOR, respectively, for the remaining term of the
facility. Sterling Sask has not drawn on the revolving credit facility since its
inception in 1997 and, as of March 31, 2002, had approximately $11.4 million in
cash and cash equivalents on hand.

     Borrowings consisted of the following:

<Table>
<Caption>
                                                              MARCH 31,    SEPTEMBER 30,
                                                                 2002          2001
                                                              ----------   -------------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                           <C>          <C>
DOMESTIC BORROWINGS
DIP Financing...............................................  $   56,272    $   42,270
Other Domestic Borrowings:
  11 1/4% Notes.............................................     150,000       150,000
  11 3/4% Notes.............................................     275,000       275,000
  12 3/8% Notes.............................................     295,000       295,000
                                                              ----------    ----------
Chemicals' domestic borrowings..............................     776,272       762,270
Holdings' 13 1/2% Notes.....................................     191,750       191,750
                                                              ----------    ----------
  Total domestic borrowings.................................     968,022       954,020
                                                              ----------    ----------
CANADIAN BORROWINGS
Canadian Financing Agreement................................      11,992        20,003
Saskatoon term loans........................................      24,263        32,054
                                                              ----------    ----------
  Total Canadian borrowings.................................      36,255        52,057
                                                              ----------    ----------
  Total borrowings..........................................   1,004,277     1,006,077
Less: Current portion not subject to compromise.............      (8,465)      (33,260)
Less: Borrowings subject to compromise (see Note 3).........    (616,957)     (616,733)
Less: Borrowings not subject to compromise (see Note 3).....    (295,000)     (295,000)
                                                              ----------    ----------
  Long-term debt............................................  $   83,855    $   61,084
                                                              ==========    ==========
</Table>

5. COMMITMENTS AND CONTINGENCIES

  PRODUCT CONTRACTS

     We have certain long-term agreements that provide for the dedication of
100% of our production of acetic acid, plasticizers, sodium cyanide, DSIDA and
methanol, each to one customer. We also have various sales and conversion
agreements that dedicate significant portions of our production of styrene and
acrylonitrile to certain customers. Some of these agreements provide for cost
recovery plus an agreed profit margin based upon market prices.

     All of the Debtors' contracts and agreements continue in effect in
accordance with their terms notwithstanding our Chapter 11 filings, unless
otherwise ordered by the Bankruptcy Court. The Bankruptcy Code provides the
Debtors with the opportunity at any time prior to emergence from bankruptcy to
reject any contracts or agreements that are burdensome or to assume any
contracts or agreements that are favorable or

                                        18
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

otherwise necessary to their business operations. The Debtors are currently
evaluating all of their contracts to determine whether those contracts should be
rejected or assumed.

  ENVIRONMENTAL REGULATIONS

     Our operations involve the handling, production, transportation, treatment
and disposal of materials that are classified as hazardous or toxic waste and
that are extensively regulated by environmental, health and safety laws,
regulations and permit requirements. Environmental permits required for our
operations are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental requirements are implemented.
Changing and increasingly strict environmental requirements can affect the
manufacturing, handling, processing, distribution and use of our products and
the raw materials used to produce our products and, if so affected, our
business, financial position, results of operations and cash flows may be
materially and adversely affected. In addition, changes in environmental
requirements can cause us to incur substantial costs in upgrading or redesigning
our facilities and processes, including our emission producing practices and
equipment and our waste treatment, storage, disposal and other waste handling
practices and equipment.

     We conduct environmental management programs designed to maintain
compliance with applicable environmental requirements at all of our facilities.
We routinely conduct inspection and surveillance programs designed to detect and
respond to leaks or spills of regulated hazardous substances and to correct
identified regulatory deficiencies. We believe that our procedures for waste
handling are consistent with industry standards and applicable requirements. In
addition, we believe that our operations are consistent with good industry
practice. However, a business risk inherent with chemical operations is the
potential for personal injury and property damage claims from employees,
contractors and their employees and nearby landowners and occupants. While we
believe that our business operations and facilities generally are operated in
compliance with all applicable environmental, health and safety requirements in
all material respects, we cannot be sure that past practices or future
operations will not result in material claims or regulatory action, require
material environmental expenditures or result in exposure or injury claims by
employees, contractors and their employees or the public. Some risk of
environmental costs and liabilities is inherent in our operations and products,
as it is with other companies engaged in similar businesses. In addition, a
catastrophic event at any of our facilities could result in the incurrence of
liabilities substantially in excess of our insurance coverages.

     A significant ban on all chlorine containing compounds could have a
materially adverse effect on our financial condition and results of operations.
British Columbia has a regulation in place requiring elimination of the use of
all chlorine products, including chlorine dioxide, in the bleaching process by
December 31, 2002. The pulp and paper industry believes that a ban of chlorine
dioxide in the bleaching process will yield no measurable environmental or
public health benefit and is working to change this regulation. In April 2001, a
new government came into power in British Columbia. This new administration is
aware of the issues surrounding this regulation and commissioned a study by the
BC AOX Scientific Advisory Panel. The panel concluded that there was no evidence
available to it at this time to indicate that further reductions of effluent AOX
beyond that already achieved would result in any demonstrable environmental
benefit. We are working through the Alliance for Environmental Technology and
the Canadian Chemical Producers' Association to provide information to the
British Columbia Ministry of Environment to assist with the resolution of this
issue.

     In light of our historical expenditures and expected future results of
operations and sources of liquidity, we believe we will have adequate resources
to conduct our operations in compliance with applicable environmental and health
and safety requirements. Nevertheless, we may be required to make significant
site and operational modifications that are not currently contemplated in order
to comply with changing facility

                                        19
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

permitting requirements and regulatory standards. Additionally, we have incurred
and may continue to incur liability for investigation and cleanup of waste or
contamination at our own facilities or at facilities operated by third parties
where we have disposed of waste. We continually review all estimates of
potential environmental liabilities but can give no assurances that all
potential liabilities arising out of our past or present operations have been
identified or fully assessed or that the amount necessary to investigate and
remediate such conditions will not be significant to us. It is our policy to
make safety, environmental and replacement capital expenditures a priority in
order to ensure adequate safety and compliance at all times. In the event we
should not have available to us, at any time, liquidity sources sufficient to
fund any of these expenditures, prudent business practice might require that we
cease operations at the affected facility to avoid exposing our employees and
contract workers, the surrounding community and the environment to potential
harm.

     We believe that we would be able to recover certain losses that may arise
out of claims related to environmental conditions at each of our facilities that
existed prior to their acquisition by us through contractual indemnities and/or
statutory law and common law principles, although there can be no assurance that
we would prevail against any prior owner of any of our facilities with respect
to any such claim.

     Claims for environmental liabilities arising prior to our Chapter 11
filings will be addressed in the Chapter 11 cases. In general, monetary claims
relating to remedial actions at off-site locations used for disposal prior to
the Chapter 11 filings and penalties resulting from violations of environmental
requirements before that time will be treated as general unsecured claims.
Actions by governmental authorities to determine liability for and the amount of
such penalties will generally not be subject to the automatic stay. We will be
required to comply with environmental requirements in the conduct of our
business as a debtor-in-possession, including the potential obligation to
conduct remedial actions at facilities we own or operate, regardless of when the
contamination at those facilities occurred.

     On June 11, 2001, we received a notice from the U.S. Department of Justice,
Environment and Natural Resources Division, in which the Department alleged that
the April 1, 1998 ethylbenzene release at our Texas City facility violated the
general duty clause of the Clean Air Act and invited us to engage in settlement
discussion with respect to the matter. Although we believe that the April 1,
1998 ethylbenzene release did not constitute a violation of the general duty
clause of the Clean Air Act, we have engaged in discussions with the Department
in an attempt to settle the matter on a consensual basis. However, any alleged
liability would constitute a pre-petition claim and any settlement would require
approval by the Bankruptcy Court. We do not believe that this matter will have a
material adverse effect on our business, financial position, results of
operations or cash flow, although we cannot give any assurances to that effect.

     We are presently investigating allegations by the Florida Department of
Environmental Protection that past or present waste handling practices at our
acrylic fibers facility in Santa Rosa, Florida have adversely affected the water
quality of streams on the property. At this stage, we are not able to determine
the validity of those allegations or the nature of remedial actions, if any,
that may ultimately be required.

  LEGAL PROCEEDINGS

     As previously discussed, the Debtors filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code on July 16, 2001. As a
result of the commencement of the Chapter 11 cases, an automatic stay has been
imposed against the commencement or continuation of legal proceedings against
the Debtors outside of the Bankruptcy Court. The automatic stay will not apply,
however, to governmental authorities exercising their police or regulatory
powers, including the application of environmental laws. Claimants against the
Debtors must have asserted their claims in the Chapter 11 cases by filing a
timely proof of claim, to which the Debtors may object and seek a determination
from the Bankruptcy Court as to the allowability of the claim. Claimants who
desire to liquidate their claims in legal proceedings outside of the Bankruptcy
Court
                                        20
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

will be required to obtain relief from the automatic stay by order of the
Bankruptcy Court. If such relief is granted, the automatic stay will remain in
effect with respect to the collection of liquidated claim amounts. As a general
rule, all claims against the Debtors that seek a recovery from assets of the
Debtors' estates will be addressed in the Chapter 11 cases and paid only
pursuant to the terms of a confirmed plan of reorganization.

     Ethylbenzene Release.  A description of this release is found under "Legal
Proceedings" in Note 8 of the "Notes to Consolidated Financial Statements" of
the Annual Report and is incorporated herein by reference. The six lawsuits
listed below and three interventions, involving a total of approximately 718
plaintiffs, have been filed based on this release alleging personal injury,
property damage and nuisance claims:

     - Zabrina Alexander, et al. v. Sterling Chemicals Holdings, Inc., et al.;
       Case No. 00-CV0217; In the 10th Judicial District Court of Galveston
       County, Texas

     - Nettie Allen, et al. v. Sterling Chemicals, Inc., et al.; Case No.
       00-CV0304; In the 10th Judicial District Court of Galveston County, Texas

     - Bobbie Adams, et al. v. Sterling Chemicals International, Inc., et al.;
       Case No. 00-CV0311; In the 212th Judicial District Court of Galveston
       County, Texas

     - James C. Allen, et al. v. Sterling Chemicals, Inc., et al.; Case No.
       2000-15823; In the 152nd Judicial District Court of Harris County, Texas

     - Ida Goldman, et al. v. Sterling Chemicals, Inc., et al.; Case No.
       00-CV0338; In the 56th Judicial District Court of Galveston County, Texas

     - Olivia Ellis v. Sterling Chemicals, Inc.; Case No. JC5000305; In Justice
       Court No. 5 of Galveston County, Texas

     We believe that all or substantially all of our future out-of-pocket costs
and expenses relating to these lawsuits, including settlement payments and
judgments, will be covered by our liability insurance policies or
indemnification from third parties. We do not believe that the claims and
litigation arising out of this incident will have a material adverse effect on
our business, financial position, results of operations or cash flows, although
we cannot give any assurances to that effect. All of these claims and litigation
are subject to the automatic stay, and recoveries, if any, sought thereon from
assets of the Debtors will be addressed in the Chapter 11 cases.

     To date, the Bankruptcy Court has lifted the automatic stay in the cases of
Bobbie Adams, et al., James C. Allen, et al. and Nettie Allen, et al., allowing
the plaintiffs to proceed against our liability insurance policies. As a
condition to the lifting of the automatic stay, these plaintiffs waived their
right to seek any recoveries against us directly and look solely to insurance
proceeds to satisfy their claims. Motions to lift the stay on behalf of
additional plaintiffs are currently pending before the Bankruptcy Court. Small
cash settlements, to be funded by our liability insurance policies, have been
negotiated with the plaintiffs in one of the interventions and in the Ida
Goldman, et al. case, and have been approved by the Bankruptcy Court.

     Other.  We are subject to various other claims and legal actions that arise
in the ordinary course of our business. Claims and legal actions existing as of
the Chapter 11 filing date are subject to the automatic stay, and recoveries
sought thereon from assets of the Company will be required to be dealt with in
the Chapter 11 case.

     On December 19, 2001, we announced that Frank P. Diassi had elected to
terminate his employment as Co-Chief Executive Officer and executive Chairman of
the Board. Mr. Diassi has asserted that he had "good reason" to terminate his
employment and is claiming that he is entitled to receive payments under our

                                        21
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

employee retention and severance plans. Our Compensation Committee is continuing
to evaluate the merits of Mr. Diassi's claim. On January 25, 2002, Mr. Diassi
resigned from our Board of Directors.

  LITIGATION CONTINGENCY

     We have made estimates of the reasonably possible range of liability with
regard to our outstanding litigation for which we may incur any liability. These
estimates are based on our judgment using currently available information, as
well as consultation with our insurance carriers and outside legal counsel. A
number of the claims in these litigation matters are covered by our insurance
policies or by third party indemnification. Therefore, we have also made
estimates of our probable recoveries under insurance policies or from third-
party indemnitors based on our judgment, our understanding of our insurance
policies and indemnification arrangements, discussions with our insurers and
indemnitors and consultation with outside legal counsel. Based on the foregoing,
as of March 31, 2002, we had approximately $3.5 million accrued as our estimate
of our contingent liability for these matters and have also recorded aggregate
receivables from our insurers and third-party indemnitors of approximately $2.5
million. At March 31, 2002, we estimate that the aggregate reasonably possible
range of loss for all litigation combined, in addition to the amount accrued, is
between zero and $21 million. The timing of probable insurance and indemnity
recoveries and payment of liabilities, if any, are not expected to have a
material adverse effect on our business, financial position, results of
operations or cash flows, although we cannot give any assurances to that effect.
While we have based our estimates on our evaluation of available information and
the other matters described above, much of the litigation remains in the
discovery stage and it is impossible to predict with certainty the ultimate
outcome. We will adjust our estimates as necessary as additional information is
developed and evaluated. However, we believe that the final resolution of these
contingencies will not have a material adverse effect on our business, financial
position, results of operations or cash flows, although we cannot give any
assurances to that effect. Moreover, such contingencies represent pre-petition
claims and, unless otherwise ordered by the Bankruptcy Court, all of these
claims are subject to the automatic stay and recoveries, if any, sought thereon
from the Debtors will be addressed in the Chapter 11 cases.

                                        22
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6.  CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY

     The following condensed combined financial statements are presented in
accordance with SOP 90-7:

                       STERLING CHEMICALS HOLDINGS, INC.
                             (DEBTOR-IN-POSSESSION)
                  CONDENSED COMBINED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<Table>
<Caption>
                                                             THREE MONTHS ENDED MARCH 31, 2002
                                                 ----------------------------------------------------------
                                                  ENTITIES IN     ENTITIES NOT IN
                                                 REORGANIZATION   REORGANIZATION                   COMBINED
                                                  PROCEEDINGS       PROCEEDINGS     ELIMINATIONS    TOTALS
                                                 --------------   ---------------   ------------   --------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                              <C>              <C>               <C>            <C>
Revenues.......................................     $ 79,995          $44,181         $(1,607)     $122,569
Cost of goods sold.............................       80,484           34,230          (1,641)      113,073
                                                    --------          -------         -------      --------
Gross profit (loss)............................         (489)           9,951              34         9,496
Selling, general and administrative expenses...        4,240            1,505              --         5,745
Reorganization items...........................        4,681               --              --         4,681
Interest and debt related expenses, net........       11,221              810              --        12,031
                                                    --------          -------         -------      --------
Income (loss) before income taxes..............      (20,631)           7,636              34       (12,961)
Income tax expense.............................           24            2,430              --         2,454
                                                    --------          -------         -------      --------
Net income (loss)..............................     $(20,655)         $ 5,206         $    34      $(15,415)
                                                    ========          =======         =======      ========
</Table>

<Table>
<Caption>
                                                              SIX MONTHS ENDED MARCH 31, 2002
                                                 ----------------------------------------------------------
                                                  ENTITIES IN     ENTITIES NOT IN
                                                 REORGANIZATION   REORGANIZATION                   COMBINED
                                                  PROCEEDINGS       PROCEEDINGS     ELIMINATIONS    TOTALS
                                                 --------------   ---------------   ------------   --------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                              <C>              <C>               <C>            <C>
Revenues.......................................     $161,094          $88,235         $(2,797)     $246,532
Cost of goods sold.............................      162,593           67,061          (2,715)      226,939
                                                    --------          -------         -------      --------
Gross profit (loss)............................       (1,499)          21,174             (82)       19,593
Selling, general and administrative expenses...        9,335            2,508              --        11,843
Reorganization items...........................        8,314               --              --         8,314
Interest and debt related expenses, net........       22,164            2,041              --        24,205
                                                    --------          -------         -------      --------
Income (loss) before income taxes..............      (41,312)          16,625             (82)      (24,769)
Income tax expense.............................          112            5,406              --         5,518
                                                    --------          -------         -------      --------
Net income (loss)..............................     $(41,424)         $11,219         $   (82)     $(30,287)
                                                    ========          =======         =======      ========
</Table>

                                        23
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                       STERLING CHEMICALS HOLDINGS, INC.
                             (DEBTOR-IN-POSSESSION)
                       CONDENSED COMBINED BALANCE SHEETS
                                  (UNAUDITED)

<Table>
<Caption>
                                                                             MARCH 31, 2002
                                                       -----------------------------------------------------------
                                                        ENTITIES IN     ENTITIES NOT IN
                                                       REORGANIZATION   REORGANIZATION        31,        COMBINED
                                                        PROCEEDINGS       PROCEEDINGS     ELIMINATIONS    TOTALS
                                                       --------------   ---------------   ------------   ---------
                                                                         (DOLLARS IN THOUSANDS)
<S>                                                    <C>              <C>               <C>            <C>
                                                      ASSETS
Cash and cash equivalents............................    $     988         $ 13,302         $     --     $  14,290
Accounts receivable, net.............................       63,049           30,696           (2,601)       91,144
Inventories..........................................       37,876           11,511             (142)       49,245
Prepaid expenses.....................................        3,109              535               --         3,644
Property, plant and equipment, net...................      175,167           98,662               --       273,829
Other assets.........................................       82,292           23,097          (51,179)       54,210
                                                         ---------         --------         --------     ---------
  Total Assets.......................................    $ 362,481         $177,803         $(53,922)    $ 486,362
                                                         =========         ========         ========     =========

                                       LIABILITIES AND STOCKHOLDERS' EQUITY
                                              (DEFICIENCY IN ASSETS)
Current liabilities..................................    $  80,892         $ 30,540         $(22,027)    $  89,405
Liabilities subject to compromise....................      720,017               --               --       720,017
Liabilities not subject to compromise................      339,646               --               --       339,646
Long-term debt.......................................       56,066           27,789               --        83,855
Non-current liabilities..............................       12,301           20,675               --        32,976
Redeemable preferred stock...........................       27,272               --               --        27,272
Stockholders' equity (deficiency in assets)..........     (873,713)          98,799          (31,895)     (806,809)
                                                         ---------         --------         --------     ---------
Total Liabilities and Stockholders' Equity
  (Deficiency in Assets).............................    $ 362,481         $177,803         $(53,922)    $ 486,362
                                                         =========         ========         ========     =========
</Table>

<Table>
<Caption>
                                                                           SEPTEMBER 30, 2001
                                                       -----------------------------------------------------------
                                                        ENTITIES IN     ENTITIES NOT IN
                                                       REORGANIZATION   REORGANIZATION                   COMBINED
                                                        PROCEEDINGS       PROCEEDINGS     ELIMINATIONS    TOTALS
                                                       --------------   ---------------   ------------   ---------
                                                                         (DOLLARS IN THOUSANDS)
<S>                                                    <C>              <C>               <C>            <C>
                                                      ASSETS
Cash and cash equivalents............................    $   3,975         $ 11,855         $     --     $  15,830
Accounts receivable, net.............................       74,080           26,018              592       100,690
Inventories..........................................       37,535           10,844              (61)       48,318
Prepaid expenses.....................................        2,327            1,031               --         3,358
Property, plant and equipment, net...................      181,446          103,498               --       284,944
Other assets.........................................       91,262           26,620          (60,879)       57,003
                                                         ---------         --------         --------     ---------
  Total Assets.......................................    $ 390,625         $179,866         $(60,348)    $ 510,143
                                                         =========         ========         ========     =========

                                       LIABILITIES AND STOCKHOLDERS' EQUITY
                                              (DEFICIENCY IN ASSETS)
Current liabilities..................................    $  73,144         $ 51,780         $(28,503)    $  96,421
Liabilities subject to compromise....................      744,857               --               --       744,857
Liabilities not subject to compromise................      325,655               --               --       325,655
Long-term debt.......................................       42,287           18,797               --        61,084
Non-current liabilities..............................        9,670           20,909               --        30,579
Redeemable preferred stock...........................       27,272               --               --        27,272
Stockholders' equity (deficiency in assets)..........     (832,260)          88,380          (31,845)     (775,725)
                                                         ---------         --------         --------     ---------
Total Liabilities and Stockholders' Equity
  (Deficiency in Assets).............................    $ 390,625         $179,866         $(60,348)    $ 510,143
                                                         =========         ========         ========     =========
</Table>

                                        24
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                       STERLING CHEMICALS HOLDINGS, INC.
                             (DEBTOR-IN-POSSESSION)
                  CONDENSED COMBINED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<Table>
<Caption>
                                                              SIX MONTHS ENDED MARCH 31, 2002
                                                     --------------------------------------------------
                                                      ENTITIES IN     ENTITIES NOT IN
                                                     REORGANIZATION   REORGANIZATION
                                                      PROCEEDINGS       PROCEEDINGS     COMBINED TOTALS
                                                     --------------   ---------------   ---------------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                  <C>              <C>               <C>
Net cash provided by (used in) operating
  activities.......................................     $(10,451)        $ 20,140           $ 9,689
Cash flows used in investing activities:
  Capital expenditures.............................       (6,492)          (2,604)           (9,096)
Cash flows from financing activities:
  Proceeds from financing..........................       14,002           (8,011)            5,991
  Repayments of long-term debt.....................           --           (7,791)           (7,791)
  Other............................................          (46)            (178)             (224)
                                                        --------         --------           -------
Net cash provided by (used in) financing
  activities.......................................       13,956          (15,980)           (2,024)
Effect of exchange rate changes on cash............           --             (109)             (109)
                                                        --------         --------           -------
Net change in cash and cash equivalents............       (2,987)           1,447            (1,540)
Cash and cash equivalents at:
  Beginning of year................................        3,975           11,855            15,830
                                                        --------         --------           -------
  End of period....................................     $    988         $ 13,302           $14,290
                                                        ========         ========           =======
</Table>

7.  INCOME TAXES

     As of September 30, 2001, we had approximately $318 million in United
States net operating losses ("NOLs") which will expire during the period from
fiscal 2018 to 2021. In assessing the value of our deferred tax assets,
management considers whether it is more likely than not that all of the deferred
tax assets will be realized. Projected future income tax planning strategies and
the expected reversal of deferred tax liabilities are considered in making this
assessment and determining the valuation allowance. Based on the uncertainty as
to the effect of the Chapter 11 filings on the utilization of the NOLs and the
future realization of other net deferred tax assets, we are not able to conclude
that it is more likely than not that we will be able to realize the future
benefit of our U.S. deferred tax assets and, consequently, our valuation
allowance reflects U.S. deferred tax assets as zero. Certain reductions to our
NOLs may result from confirmation of a plan of reorganization. Further, at such
time as we emerge from bankruptcy, we will likely undergo an ownership change
for federal income tax purposes which may cause our utilization of our remaining
NOLs, if any, to become subject to limitations. Since numerous variables could
affect the bankruptcy proceedings, it is not currently possible to determine
whether our NOLs will produce tax benefits in the future. Benefit was not
provided for these loss carryforwards at March 31, 2002.

8.  NEW ACCOUNTING STANDARDS

     In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted for
under the purchase method and requires separate identification and recognition

                                        25
<PAGE>
                       STERLING CHEMICALS HOLDINGS, INC.
                            STERLING CHEMICALS, INC.
                            (DEBTORS-IN-POSSESSION)

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of intangible assets, other than goodwill. The statement applies to all business
combinations initiated after June 30, 2001. SFAS No. 142 requires that an
intangible asset that is acquired shall be initially recognized and measured
based on its fair value. The statement also provides that goodwill should not be
amortized, but shall be tested for impairment annually, or more frequently if
circumstances indicate potential impairment, through a comparison of fair value
to its carrying amount. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001. We do not believe that the adoption of SFAS No. 141 or
SFAS No. 142 will have a significant impact on our financial statements.

     In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be
applied to fiscal years beginning after June 15, 2002, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. We are in
the process of evaluating the impact of SFAS No. 143 on our financial
statements.

     In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001. We are currently evaluating
the provisions of SFAS No. 144.

                                        26
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of Sterling Chemicals Holdings, Inc.

     We have reviewed the accompanying consolidated balance sheet of Sterling
Chemicals Holdings, Inc. ("Holdings") and subsidiaries (Debtors-in-Possession)
(the "Company") as of March 31, 2002, and the related consolidated statements of
operations and cash flows for the three and six-month periods ended March 31,
2002 and 2001. 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 auditing standards generally accepted in the United States of
America, 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 such consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.

     As discussed in Note 1, on July 16, 2001, the Debtors (as defined in Note
1) filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The
accompanying financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such financial
statements do not purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
pre-petition liabilities, the amounts that may be allowed for claims or
contingencies or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be made
in the Company's business.

     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
accompanying financial statements, the Company's recurring losses from
operations raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also discussed in Note
1 to the respective financial statements. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

     We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of September 30, 2001, and the related consolidated statements of
operations, stockholders' equity (deficiency in assets), and cash flows for the
year then ended (not presented herein); and in our report dated December 20,
2001, we expressed an unqualified opinion on those consolidated financial
statements and included an explanatory paragraph concerning matters that raise
substantial doubt about the Company's ability to continue as a going concern. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of September 30, 2001 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, 2002

                                        27
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholder of Sterling Chemicals, Inc.

     We have reviewed the accompanying consolidated balance sheet of Sterling
Chemicals, Inc. and subsidiaries (Debtors-in-Possession) ("Chemicals") as of
March 31, 2002, and the related consolidated statements of operations and cash
flows for the three and six-month periods ended March 31, 2002 and 2001. 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 auditing standards generally accepted in the United States of
America, 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 such consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.

     As discussed in Note 1, on July 16, 2001, the Debtors (as defined in Note
1) filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The
accompanying financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such financial
statements do not purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
pre-petition liabilities, the amounts that may be allowed for claims or
contingencies or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
Chemicals; or (d) as to operations, the effect of any changes that may be made
in Chemicals' business.

     The accompanying financial statements have been prepared assuming that
Chemicals will continue as a going concern. As discussed in Note 1 to the
accompanying financial statements, Chemicals' recurring losses from operations
raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also discussed in Note 1 to the
respective financial statements. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

     We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Chemicals as of September 30, 2001, and the related consolidated statements of
operations, stockholder's equity (deficiency in assets), and cash flows for the
year then ended (not presented herein); and in our report dated December 20,
2001, we expressed an unqualified opinion on those consolidated financial
statements and included an explanatory paragraph concerning matters that raise
substantial doubt about Chemicals' ability to continue as a going concern. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of September 30, 2001 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, 2002

                                        28
<PAGE>

                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

                       COMBINED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<Table>
<Caption>
                                                       THREE MONTHS ENDED      SIX MONTHS ENDED
                                                           MARCH 31,               MARCH 31,
                                                      --------------------   ---------------------
                                                       2002        2001         2002        2001
                                                      -------   ----------   ----------   --------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                   <C>       <C>          <C>          <C>
Revenues............................................  $50,748    $ 60,972     $103,200    $120,653
Cost of goods sold..................................   41,242      59,739       82,830     110,003
                                                      -------    --------     --------    --------
Gross profit........................................    9,506       1,233       20,370      10,650
Selling, general and administrative expenses........    2,601       3,541        4,924       7,336
Reorganization items................................    1,722          --        2,985          --
Interest and debt related expenses..................    4,128      11,184       10,721      21,517
                                                      -------    --------     --------    --------
Net income (loss) before income taxes...............    1,055     (13,492)       1,740     (18,203)
Equity in earnings (losses) of joint venture........      672         (99)       2,417        (150)
Provision for income taxes..........................    1,565       1,147        3,689       2,767
                                                      -------    --------     --------    --------
Net income (loss)...................................  $   162    $(14,738)    $    468    $(21,120)
                                                      =======    ========     ========    ========
</Table>

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

(1) Contractual interest for the three and six-month periods ended March 31,
    2002 totaled $12,564 and $27,772, respectively.

     The accompanying notes are an integral part of the combined financial
                                  statements.
                                        29
<PAGE>

                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

                            COMBINED BALANCE SHEETS
                                  (UNAUDITED)

<Table>
<Caption>
                                                              MARCH 31,   SEPTEMBER 31,
                                                                2002          2001
                                                              ---------   -------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>
                                        ASSETS
Current assets:
  Cash and cash equivalents.................................  $   2,051     $   1,396
  Accounts receivable, net..................................     33,779        36,372
  Inventories...............................................     18,052        18,009
  Prepaid expenses..........................................        541           604
                                                              ---------     ---------
     Total current assets...................................     54,423        56,381
Property, plant and equipment, net..........................    111,468       116,728
Due from affiliates.........................................    192,141       183,398
Other assets................................................     16,213        19,121
                                                              ---------     ---------
     Total assets...........................................  $ 374,245     $ 375,628
                                                              =========     =========

                         LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable..........................................  $  16,112     $  16,835
  Accrued liabilities.......................................      6,775         5,944
  Current portion of long-term debt.........................      1,792         1,206
                                                              ---------     ---------
     Total current liabilities..............................     24,679        23,985
Pre-petition liabilities -- subject to compromise...........    232,870       233,572
Pre-petition liabilities -- not subject to compromise.......    147,257       139,572
Long-term debt..............................................     10,200        18,797
Deferred income taxes.......................................      8,864         9,171
Deferred credits and other liabilities......................     12,265        12,326
Commitments and contingencies (Note 5)......................
Stockholders' deficit:
  Common stock..............................................         --            --
  Additional paid-in capital................................     92,735        92,735
  Accumulated deficit.......................................   (122,042)     (122,510)
  Accumulated other comprehensive income....................    (32,583)      (32,020)
                                                              ---------     ---------
     Total stockholders' deficit............................    (61,890)      (61,795)
                                                              ---------     ---------
       Total liabilities and stockholders' deficit..........  $ 374,245     $ 375,628
                                                              =========     =========
</Table>

     The accompanying notes are an integral part of the combined financial
                                  statements.
                                        30
<PAGE>

                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

                       COMBINED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<Table>
<Caption>
                                                                 SIX MONTHS ENDED
                                                                    MARCH 31,
                                                              ----------------------
                                                                2002         2001
                                                              ---------   ----------
                                                              (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>
Cash flows from operating activities:
Net income (loss)...........................................   $   468     $(21,120)
Adjustments to reconcile net loss to net cash provided by
  operating activities:
  Depreciation and amortization.............................    10,005       10,060
  Deferred tax expense......................................      (307)       1,054
  Other.....................................................        12          (20)
Change in assets/liabilities:
  Accounts receivable.......................................     2,343        1,260
  Inventories...............................................       (43)       7,687
  Prepaid expenses..........................................       313          200
  Due from affiliates.......................................    (9,306)       4,917
  Other assets..............................................       465        4,787
  Accounts payable..........................................      (723)         910
  Accrued liabilities.......................................       831       (7,416)
  Other liabilities.........................................     6,923          477
                                                               -------     --------
Net cash flows provided by operating activities.............    10,981        2,796
                                                               -------     --------
Cash flows from investing activities:
  Capital expenditures......................................    (2,302)      (3,314)
                                                               -------     --------
Cash flows from financing activities:
  Payments on Canadian Financing Agreement..................    (8,011)          --
                                                               -------     --------
Effect of United States/Canadian exchange rate on cash......       (13)          20
                                                               -------     --------
Net increase in cash and cash equivalents...................       655         (498)
Cash and cash equivalents -- beginning of year..............     1,396          499
                                                               -------     --------
Cash and cash equivalents -- end of year....................   $ 2,051     $      1
                                                               =======     ========
Supplemental disclosures of cash flow information:
  Income taxes paid.........................................   $(2,417)    $     --
</Table>

     The accompanying notes are an integral part of the combined financial
                                  statements.
                                        31
<PAGE>

                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

                     NOTES TO COMBINED FINANCIAL STATEMENTS
                                  (UNAUDITED)

1.  BASIS OF PRESENTATION

  INTERIM FINANCIAL INFORMATION

     On July 23, 1999, Sterling Chemicals, Inc. ("Chemicals"), a wholly-owned
subsidiary of Sterling Chemicals Holdings, Inc. ("Holdings"), completed a
private offering of $295,000,000 of its 12 3/8% Senior Secured Notes due 2006.
On November 5, 1999, Chemicals completed a registered exchange offer, pursuant
to which all of these 12 3/8% Notes were exchanged for publicly registered
12 3/8% Notes with substantially similar terms. The 12 3/8% Notes are guaranteed
by most of Chemicals' direct and indirect United States subsidiaries (the
"Guarantors") on a joint and several basis and are secured by, among other
things, a second priority pledge of 100% of the stock of the Guarantors. As a
result of the priming order discussed below, these second priority liens became
third priority liens. The Guarantors consist of Sterling Canada, Inc., Sterling
Pulp Chemicals US, Inc., Sterling Pulp Chemicals, Inc., Sterling Chemicals
Energy, Inc., Sterling Chemicals International, Inc. and Sterling Fibers, Inc.,
each of which is a wholly-owned direct or indirect subsidiary of Chemicals. In
addition, Sterling Canada, Inc. owns 100% of the stock of two Canadian
subsidiaries that are collectively referred to as the "Canadian Subs." The
consolidated financial statements of each of the Guarantors have been combined
to produce the accompanying financial statements.

     The Guarantors and the Canadian Subs manufacture chemicals for use
primarily in the pulp and paper industry at four plants in Canada and a plant in
Valdosta, Georgia. Sodium chlorate is produced at the four plants in Canada and
the Valdosta plant and sodium chlorite is produced at one of the Canadian
locations. The Guarantors also license, engineer and oversee construction of
large-scale chlorine dioxide generators, which convert sodium chlorate into
chlorine dioxide, for the pulp and paper industry. The Guarantors produce
specialty textiles and technical fibers at their Santa Rosa plant, and license
their acrylic fibers manufacturing technology to producers worldwide.

     In the opinion of management, the accompanying unaudited combined financial
statements reflect all adjustments necessary to present fairly the combined
financial position of the Guarantors as of March 31, 2002, and their combined
results of operations and cash flows for the three and six-month periods ended
March 31, 2002 and March 31, 2001. 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 to be expected for the full year. The
accompanying unaudited combined financial statements should be, and are assumed
to have been, read in conjunction with the audited combined financial statements
of the Guarantors included in Holdings' and Chemicals' combined Annual Report on
Form 10-K for the fiscal year ended September 30, 2001 (the "Annual Report").
The accompanying combined balance sheet as of September 30, 2001 has been
derived from the Guarantors' audited combined balance sheet as of September 30,
2001 included in the Annual Report. The accompanying combined financial
statements as of and for the three and six-month periods ended March 31, 2002
have been reviewed by Deloitte & Touche LLP, our independent accountants, whose
report is included herein.

  INDUSTRY CONDITIONS AND LIQUIDITY

     The accompanying combined financial statements have been prepared on the
going concern basis of accounting, which contemplates the continuation of
operations, the realization of assets and the satisfaction of liabilities in the
ordinary course of business. On July 16, 2001 (the "Petition Date"), Holdings,
Chemicals and all of the Guarantors (collectively the "Debtors") filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the
"Bankruptcy Code") in the U.S. Bankruptcy Court for the Southern District of
Texas (the "Bankruptcy Court") and began operating their business as
debtors-in-possession pursuant to the Bankruptcy Code. None of our foreign
subsidiaries, including our Canadian subsidiaries, were included in the Chapter
11 filings. The accompanying combined financial statements have been presented
in
                                        32
<PAGE>
                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

conformity with the AICPA's Statement of Position 90-7 "Financial Reporting By
Entities In Reorganization Under the Bankruptcy Code" ("SOP 90-7"). The
statement requires a segregation of liabilities subject to compromise as of the
Petition Date and identification of all transactions and events that are
directly associated with the reorganization of the Debtors.

     The filing of the Chapter 11 petitions was driven by the Debtors' inability
to meet their funded debt obligations over the long-term, largely brought about
by weak demand for petrochemicals products caused by declines in general
worldwide economic conditions, the relative strength of the U.S. dollar (which
caused their export sales to be at a competitive disadvantage) and higher raw
material and energy costs. As a result of these conditions, the Debtors have
incurred significant operating losses. The reorganization contemplated by the
Chapter 11 filings is designed to permit the Debtors to preserve cash and to
give the Debtors the opportunity to restructure their debt. During the pendency
of the Chapter 11 cases, with approval of the Bankruptcy Court, the Debtors may
assume favorable pre-petition contracts and leases, reject unfavorable
pre-petition contracts and leases and sell or otherwise dispose of assets.

     The confirmation of a plan of reorganization is the primary objective of
the Debtors. The Debtors anticipate filing a plan of reorganization (the "Plan")
on May 14, 2002 with the Bankruptcy Court, along with an accompanying Disclosure
Statement. The Disclosure Statement must be approved by the Bankruptcy Court
before the Debtors are authorized to solicit acceptances of the Plan from voting
creditors. The Plan may be modified prior to the time that the Disclosure
Statement is approved. No assurances can be given that the Plan will be
confirmed or that any plan that is confirmed will contain the terms in the
current Plan. However, when confirmed, the Plan is expected to result in the
elimination of Holdings' classes of equity interests and the significant
dilution or elimination of some or all of the Debtors' classes of existing
public debt.

     At this time, it is not possible to predict the outcome of the bankruptcy
cases in general, or the effect on the business of the Debtors or the claims of
creditors of the Debtors. As a result of the bankruptcy filings, most of the
Debtors' liabilities incurred prior to the Petition Date, including certain
secured debt, are likely to be subject to compromise. However, the ultimate
resolution of these liabilities is not presently determinable.

     Reorganization items reflected in the Statement of Operations for the three
and six-month periods ended March 31, 2002 are composed primarily of
professional fees directly related to the bankruptcy cases and allocated to the
Guarantors by Chemicals.

     As a result of the bankruptcy filings and related events, there can be no
assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded. In addition,
confirmation of a plan of reorganization, or disapproval thereof, could change
the amounts reported in the financial statements. The ability of the Debtors to
continue as a going concern is dependent upon, among other things:

     - the Debtors' ability to comply with the terms of their
       debtor-in-possession revolving credit agreement (the "DIP Financing") and
       related orders entered by the Bankruptcy Court in connection with the
       Chapter 11 cases,

     - the ability of the Debtors to maintain access to the incremental $40
       million in availability under the DIP Financing that is dependent on an
       effective priming order,

     - the ability of the Debtors to maintain adequate cash on hand,

     - the ability of the Debtors to generate sufficient cash from operations,

     - the ability of the Debtors' subsidiaries that are not included in the
       Chapter 11 cases to obtain necessary financing,

                                        33
<PAGE>
                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

     - confirmation of a plan or plans of reorganization under the Bankruptcy
       Code and

     - the Debtors' ability to achieve profitability following such
       confirmation.

     As the Debtors can give no assurances that they will accomplish any of the
foregoing, there is substantial doubt about the Debtors', and therefore the
Guarantors', ability to continue as a going concern.

     The Debtors have limited liquidity, which may prove inadequate during their
reorganization process. The Debtors are currently funding their liquidity needs
out of operating cash flow and from borrowings under the DIP Financing. The DIP
Financing is limited in amount and is also subject to numerous funding
conditions which are largely beyond the control of the Debtors, including
borrowing base requirements under the current assets revolver and compliance
with an EBITDA covenant. The ability of the Debtors to obtain additional
financing during the reorganization process is severely limited by a variety of
factors, including the debt incurrence restrictions imposed by the DIP
Financing, numerous procedural requirements and uncertainties relating to the
bankruptcy proceedings, including any continuing challenge to the priming order,
and the Debtors' current financial condition and prospects. Accordingly, no
assurances can be given that the Debtors' existing sources of liquidity will be
adequate to fund their liquidity needs throughout the reorganization process or,
if additional sources of liquidity become necessary during the reorganization
process, that they would be available to the Debtors or adequate. Any liquidity
shortages during the reorganization process would likely have a material adverse
effect on the Debtors' business and financial condition as well as their ability
to successfully restructure and emerge from bankruptcy.

     The accompanying financial statements do not include any adjustments that
may result from the resolution of these uncertainties.

  COMPREHENSIVE LOSS

     The Guarantors' total comprehensive net income (loss) for the three-month
periods ended March 31, 2002 and March 31, 2001 was $33,000 and $(17,960,000),
respectively. The Guarantors' total comprehensive net loss for the six-month
periods ended March 31, 2002 and March 31, 2001 was $95,000 and $24,317,000,
respectively.

2.  INVENTORIES

<Table>
<Caption>
                                                              MARCH 31,   SEPTEMBER 30,
                                                                2002          2001
                                                              ---------   -------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>
Inventories consisted of the following:
Finished products...........................................   $11,741       $11,308
Raw materials...............................................     1,078         1,634
Inventories under exchange agreements.......................        57            80
Stores and supplies.........................................     5,176         4,987
                                                               -------       -------
                                                               $18,052       $18,009
                                                               =======       =======
</Table>

3.  PRE-PETITION LIABILITIES

  LIABILITIES SUBJECT TO COMPROMISE

     The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below. All amounts
below may be subject to future adjustment depending on Bankruptcy Court action,
further developments with respect to disputed claims or other events, including
the

                                        34
<PAGE>
                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

reconciliation of claims filed with the Bankruptcy Court to amounts recorded in
the accompanying consolidated financial statements. Additional pre-petition
claims may arise from rejection of additional executory contracts or unexpired
leases by the Debtors. Under a confirmed plan of reorganization, all pre-
petition claims subject to compromise may be paid and discharged at amounts
substantially less than their allowed amounts.

     Pursuant to an order of the Bankruptcy Court, the Debtors mailed notices to
all known creditors that the deadline for filing proofs of claim with the
Bankruptcy Court was December 17, 2001. Differences between amounts recorded by
the Debtors and claims filed by creditors are continuing to be investigated and
resolved. Accordingly, the ultimate number and amount of allowed claims is not
presently known and, because the settlement terms of each such allowed claim is
subject to a confirmed plan of reorganization, the ultimate distribution with
respect to allowed claims is not presently ascertainable.

     On a combined basis, recorded liabilities subject to compromise under
Chapter 11 proceedings as of March 31, 2002 and September 30, 2001, consisted of
the following:

<Table>
<Caption>
                                                            MARCH 31,     SEPTEMBER 30,
                                                              2002             2001
                                                            ---------   ------------------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                         <C>         <C>
Trade accounts payable....................................  $  3,324         $  5,015
Accrued interest..........................................     7,858            8,538
Allocated debt from Chemicals(1)
  11 1/4% Notes...........................................    72,415           72,415
  11 3/4% Notes...........................................   146,932          146,932
Other.....................................................     2,341              672
                                                            --------         --------
Total liabilities subject to compromise...................  $232,870         $233,572
                                                            ========         ========
</Table>

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

(1) Debt liabilities are presented net of allocated unamortized debt issue costs
    of $4.0 million.

     As a result of the bankruptcy filing, principal and interest payments may
not be made on pre-petition debt without Bankruptcy Court approval or until a
plan of reorganization defining the repayment terms has been confirmed. The
total interest on the pre-petition debt described above that was not paid or
charged to earnings for the period from July 16, 2001 to September 30, 2001 was
$7 million and for the three and six-month periods ended March 31, 2002 was $8.5
million and $17 million, respectively. Such interest is not being accrued since
management believes it is not probable that it will be treated as an allowed
claim. The Bankruptcy Code generally disallows the payment of interest that
accrues postpetition with respect to unsecured or undersecured claims.

  LIABILITIES NOT SUBJECT TO COMPROMISE

     The principal categories of claims classified as liabilities not subject to
compromise under reorganization proceedings are identified below. The Guarantors
believe all amounts below are fully secured liabilities or have been approved by
the Bankruptcy Court and are not expected to be compromised.

                                        35
<PAGE>
                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

     On a combined basis, recorded liabilities not subject to compromise under
Chapter 11 proceedings as of March 31, 2002 and September 30, 2001, consisted of
the following:

<Table>
<Caption>
                                                              MARCH 31,   SEPTEMBER 30,
                                                                2002          2001
                                                              ---------   -------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                           <C>         <C>
Allocated 12 3/8% Senior Secured Notes from Chemicals.......  $128,025      $128,025
Accrued interest on 12 3/8% Senior Secured Notes............    19,232        11,310
Employee benefits...........................................        --           237
                                                              --------      --------
Total liabilities not subject to compromise.................  $147,257      $139,572
                                                              ========      ========
</Table>

4.  LONG-TERM DEBT

     As of each of March 31, 2002 and September 30, 2001, debt allocated to the
Guarantors by Chemicals was $351.3 million. At March 31, 2002, interest rates on
this debt ranged from 11.25% to 12.375%. As a result of the filing of the
Chapter 11 cases described in Note 1, no payments will be made by the Debtors on
the pre-petition debt except as approved by the Bankruptcy Court.

5.  COMMITMENTS AND CONTINGENCIES

  ENVIRONMENTAL REGULATIONS

     The operations of the Guarantors and the Canadian Subs involve the
handling, production, transportation, treatment and disposal of materials that
are classified as hazardous or toxic waste and that are extensively regulated by
environmental, health and safety laws, regulations and permit requirements.
Environmental permits required for the operations of the Guarantors and the
Canadian Subs are subject to periodic renewal and can be revoked or modified for
cause or when new or revised environmental requirements are implemented.
Changing and increasingly strict environmental requirements can affect the
manufacturing, handling, processing, distribution and use of the chemical
products made by the Guarantors and the Canadian Subs and the raw materials used
to produce such products and, if so affected, the business of the Guarantors and
the Canadian Subs may be materially and adversely affected. In addition, changes
in environmental requirements can cause the Guarantors and the Canadian Subs to
incur substantial costs in upgrading or redesigning their facilities and
processes, including emission producing practices and equipment and waste
treatment, storage, disposal and other waste handling practices and equipment.

     The Guarantors and the Canadian Subs conduct environmental management
programs designed to maintain compliance with applicable environmental
requirements at all of their facilities. The Guarantors and the Canadian Subs
routinely conduct inspection and surveillance programs designed to detect and
respond to leaks or spills of regulated hazardous substances and to correct
identified regulatory deficiencies. The Guarantors believe that the procedures
of the Guarantors and the Canadian Subs for waste handling are consistent with
industry standards and applicable requirements. In addition, the Guarantors
believe that the operations of the Guarantors and the Canadian Subs are
consistent with good industry practice. However, a business risk inherent with
chemical operations is the potential for personal injury and property damage
claims from employees, contractors and their employees and nearby landowners and
occupants. While the Guarantors believe that the business operations and
facilities of the Guarantors and the Canadian Subs generally are operated in
compliance with all applicable environmental, health and safety requirements in
all material respects, they cannot be sure that past practices or future
operations will not result in material claims or regulatory action, require
material environmental expenditures or result in exposure or injury claims by
employees, contractors and their employees or the public. Some risk of
environmental costs and liabilities is inherent in the operations and products
of the Guarantors and the Canadian Subs, as it is with other

                                        36
<PAGE>
                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

companies engaged in similar businesses. In addition, a catastrophic event at
any of the facilities of the Guarantors or the Canadian Subs could result in the
incurrence of liabilities substantially in excess of their insurance coverages.

     A significant ban on all chlorine containing compounds could have a
materially adverse effect on our financial condition and results of operations.
British Columbia has a regulation in place requiring elimination of the use of
all chlorine products, including chlorine dioxide, in the bleaching process by
December 31, 2002. The pulp and paper industry believes that a ban of chlorine
dioxide in the bleaching process will yield no measurable environmental or
public health benefit and is working to change this regulation. In April 2001, a
new government came into power in British Columbia. This new administration is
aware of the issues surrounding this regulation and commissioned a study by the
BC AOX Scientific Advisory Panel. The panel concluded that there was no evidence
available to it at this time to indicate that further reductions of effluent AOX
beyond that already achieved would result in any demonstrable environmental
benefit. We are working through the Alliance for Environmental Technology and
the Canadian Chemical Producers' Association to provide information to the
British Columbia Ministry of Environment to assist with the resolution of this
issue.

     In light of the historical expenditures and expected future results of
operations and sources of liquidity of the Guarantors and the Canadian Subs, the
Guarantors believe that the Guarantors and the Canadian Subs will have adequate
resources to conduct their operations in compliance with applicable
environmental and health and safety requirements. Nevertheless, the Guarantors
and the Canadian Subs may be required to make significant site and operational
modifications that are not currently contemplated in order to comply with
changing facility permitting requirements and regulatory standards.
Additionally, the Guarantors and the Canadian Subs have incurred and may
continue to incur liability for investigation and cleanup of waste or
contamination at their own facilities or at facilities operated by third parties
where they have disposed of waste. The Guarantors and the Canadian Subs
continually review all estimates of potential environmental liabilities but can
give no assurances that all potential liabilities arising out of their past or
present operations have been identified or fully assessed or that the amount
necessary to investigate and remediate such conditions will not be significant
to them. It is the policy of the Guarantors and the Canadian Subs to make
safety, environmental and replacement capital expenditures a priority in order
to ensure adequate safety and compliance at all times. In the event that the
Guarantors and the Canadian Subs should not have available to them, at any time,
liquidity sources sufficient to fund any of these expenditures, prudent business
practice might require that they cease operations at the affected facility to
avoid exposing their employees and contract workers, the surrounding community
and the environment to potential harm.

     The Guarantors believe that the Guarantors and the Canadian Subs would be
able to recover certain losses that may arise out of claims related to
environmental conditions at each of their facilities that existed prior to their
acquisition through contractual indemnities and/or statutory law and common law
principles, although there can be no assurance that the Guarantors or the
Canadian Subs would prevail against any prior owner of any of their facilities
with respect to any such claim.

     Claims for environmental liabilities arising prior to the Debtors' Chapter
11 filings will be addressed in the Chapter 11 cases. In general, monetary
claims relating to remedial actions at off-site locations used for disposal
prior to the Chapter 11 filings and penalties resulting from violations of
environmental requirements before that time will be treated as general unsecured
claims. Actions by governmental authorities to determine liability for and the
amount of such penalties will generally not be subject to the automatic stay.
The Guarantors will be required to comply with environmental requirements in the
conduct of their business as a debtor-in-possession, including the potential
obligation to conduct remedial actions at facilities they own or operate,
regardless of when the contamination at those facilities occurred.

     The Guarantors are presently investigating allegations by the Florida
Department of Environmental Protection that past or present waste handling
practices at the Guarantors' acrylic fibers facility in Santa Rosa,
                                        37
<PAGE>
                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Florida have adversely affected the water quality of streams on the property. At
this stage, the Guarantors are not able to determine the validity of those
allegations or the nature of remedial actions, if any, that may ultimately be
required.

  LEGAL PROCEEDINGS

     As previously discussed, the Debtors filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code on July 16, 2001. As a
result of the commencement of the Chapter 11 cases, an automatic stay has been
imposed against the commencement or continuation of legal proceedings against
the Debtors, including the Guarantors, outside of the Bankruptcy Court. The
automatic stay will not apply, however, to governmental authorities exercising
their police or regulatory powers, including the application of environmental
laws. Claimants against the Debtors may assert their claims in the Chapter 11
cases by filing a timely proof of claim, to which the Debtors may object and
seek a determination from the Bankruptcy Court as to the allowability of the
claim. Claimants who desire to liquidate their claims in legal proceedings
outside of the Bankruptcy Court will be required to obtain relief from the
automatic stay by order of the Bankruptcy Court. If such relief is granted, the
automatic stay will remain in effect with respect to the collection of
liquidated claim amounts. As a general rule, all claims against the Debtors that
seek a recovery from assets of the Debtors' estates will be addressed in the
Chapter 11 cases and paid only pursuant to the terms of a confirmed plan of
reorganization.

  OTHER CLAIMS

     The Guarantors and the Canadian Subs are subject to various other claims
and legal actions that arise in the ordinary course of their business. The
Guarantors believe that the ultimate liability, if any, with respect to these
claims and legal actions will not have a material effect on the financial
position, results of operations or cash flows of the Guarantors and the Canadian
Subs, although the Guarantors cannot give any assurances to that effect. Claims
and legal actions against the Debtors that existed as of the Chapter 11 filing
date are subject to the automatic stay, and recoveries, if any, sought thereon
from assets of the Debtors will be required to be dealt with in the Chapter 11
cases.

                                        38
<PAGE>
                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

6.  CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN BANKRUPTCY

     The following condensed combined financial statements are presented in
accordance with SOP 90-7:

                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)
                  CONDENSED COMBINED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<Table>
<Caption>
                                                          THREE MONTHS ENDED MARCH 31, 2002
                                              ----------------------------------------------------------
                                               ENTITIES IN     ENTITIES NOT IN
                                              REORGANIZATION   REORGANIZATION                   COMBINED
                                               PROCEEDINGS       PROCEEDINGS     ELIMINATIONS    TOTALS
                                              --------------   ---------------   ------------   --------
                                                                (DOLLARS IN THOUSANDS)
<S>                                           <C>              <C>               <C>            <C>
Revenues....................................     $18,732           $32,842         $  (826)     $ 50,748
Cost of goods sold..........................      16,019            26,049            (826)       41,242
                                                 -------           -------         -------      --------
Gross profit................................       2,713             6,793              --         9,506
Selling, general and administrative
  expenses..................................       1,173             1,428              --         2,601
Reorganization items........................       1,722                --              --         1,722
Interest and debt related expenses, net.....       3,814               314              --         4,128
                                                 -------           -------         -------      --------
Income (loss) before income taxes...........      (3,996)            5,051              --         1,055
Equity in earnings of joint venture, net of
  tax.......................................         672                --              --           672
Income tax expense..........................          --             1,565              --         1,565
                                                 -------           -------         -------      --------
Net income (loss)...........................     $(3,324)          $ 3,486         $    --      $    162
                                                 =======           =======         =======      ========
</Table>

<Table>
<Caption>
                                                           SIX MONTHS ENDED MARCH 31, 2002
                                              ----------------------------------------------------------
                                               ENTITIES IN     ENTITIES NOT IN
                                              REORGANIZATION   REORGANIZATION                   COMBINED
                                               PROCEEDINGS       PROCEEDINGS     ELIMINATIONS    TOTALS
                                              --------------   ---------------   ------------   --------
<S>                                           <C>              <C>               <C>            <C>
Revenues....................................     $37,916           $67,142         $(1,858)     $103,200
Cost of goods sold..........................      32,118            52,570          (1,858)       82,830
                                                 -------           -------         -------      --------
Gross profit................................       5,798            14,572              --        20,370
Selling, general and administrative
  expenses..................................       2,465             2,459              --         4,924
Reorganization items........................       2,985                --              --         2,985
Interest and debt related expenses, net.....      10,176               545              --        10,721
                                                 -------           -------         -------      --------
Income (loss) before income taxes...........      (9,828)           11,568              --         1,740
Equity in earnings of joint venture, net of
  tax.......................................       2,417                --              --         2,417
Income tax expense..........................          --             3,689              --         3,689
                                                 -------           -------         -------      --------
Net income (loss)...........................     $(7,411)          $ 7,879         $    --      $    468
                                                 =======           =======         =======      ========
</Table>

                                        39
<PAGE>
                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)
                       CONDENSED COMBINED BALANCE SHEETS
                                  (UNAUDITED)

<Table>
<Caption>
                                                                          MARCH 31, 2002
                                                    ----------------------------------------------------------
                                                     ENTITIES IN     ENTITIES NOT IN
                                                    REORGANIZATION   REORGANIZATION                   COMBINED
                                                     PROCEEDINGS       PROCEEDINGS     ELIMINATIONS    TOTALS
                                                    --------------   ---------------   ------------   --------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                                 <C>              <C>               <C>            <C>
                                                    ASSETS
Cash and cash equivalents.........................    $     181         $  1,870         $     --     $  2,051
Accounts receivable, net..........................       15,351           22,050           (3,622)      33,779
Inventories.......................................       10,477            7,575               --       18,052
Prepaid expenses..................................           --              541               --          541
Property, plant and equipment, net................       51,506           59,962               --      111,468
Other assets......................................      202,304           25,459          (19,409)     208,354
                                                      ---------         --------         --------     --------
  Total Assets....................................    $ 279,819         $117,457         $(23,031)    $374,245
                                                      =========         ========         ========     ========

                                     LIABILITIES AND STOCKHOLDERS' EQUITY
                                            (DEFICIENCY IN ASSETS)

Current liabilities...............................    $   6,974         $ 21,327         $ (3,622)    $ 24,679
Liabilities subject to compromise.................      232,870               --               --      232,870
Liabilities not subject to compromise.............      147,257               --               --      147,257
Long-term debt....................................       19,409           10,200          (19,409)      10,200
Non-current liabilities...........................        7,915           13,214               --       21,129
Stockholders' equity (deficiency in assets).......     (134,606)          72,716               --      (61,890)
                                                      ---------         --------         --------     --------
Total Liabilities and Stockholders' Equity
  (Deficiency in Assets)..........................    $ 279,819         $117,457         $(23,031)    $374,245
                                                      =========         ========         ========     ========
</Table>

<Table>
<Caption>
                                                                        SEPTEMBER 30, 2001
                                                    ----------------------------------------------------------
                                                     ENTITIES IN     ENTITIES NOT IN
                                                    REORGANIZATION   REORGANIZATION                   COMBINED
                                                     PROCEEDINGS       PROCEEDINGS     ELIMINATIONS    TOTALS
                                                    --------------   ---------------   ------------   --------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                                 <C>              <C>               <C>            <C>
                                                    ASSETS
Cash and cash equivalents.........................    $   1,382         $     14         $     --     $  1,396
Accounts receivable, net..........................       17,092           22,359           (3,079)      36,372
Inventories.......................................       10,575            7,434               --       18,009
Prepaid expenses..................................           --              604               --          604
Property, plant and equipment, net................       53,967           62,761               --      116,728
Other assets......................................      199,717           22,211          (19,409)     202,519
                                                      ---------         --------         --------     --------
  Total Assets....................................    $ 282,733         $115,383         $(22,488)    $375,628
                                                      =========         ========         ========     ========

                                     LIABILITIES AND STOCKHOLDERS' EQUITY
                                            (DEFICIENCY IN ASSETS)
Current liabilities...............................    $   9,422         $ 17,642         $ (3,079)    $ 23,985
Liabilities subject to compromise.................      233,572               --               --      233,572
Liabilities not subject to compromise.............      139,572               --               --      139,572
Long-term debt....................................       19,409           18,797          (19,409)      18,797
Non-current liabilities...........................        8,144           13,353               --       21,497
Stockholders' equity (deficiency in assets).......     (127,386)          65,591               --      (61,795)
                                                      ---------         --------         --------     --------
Total Liabilities and Stockholders' Equity
  (Deficiency in Assets)..........................    $ 282,733         $115,383         $(22,488)    $375,628
                                                      =========         ========         ========     ========
</Table>

                                        40
<PAGE>
                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)

<Table>
<Caption>
                                                                SIX MONTHS ENDED MARCH 31, 2002
                                                          -------------------------------------------
                                                           ENTITIES IN     ENTITIES NOT IN
                                                          REORGANIZATION   REORGANIZATION    COMBINED
                                                           PROCEEDINGS       PROCEEDINGS      TOTALS
                                                          --------------   ---------------   --------
                                                                    (DOLLARS IN THOUSANDS)
<S>                                                       <C>              <C>               <C>
Net cash provided by (used in) operating activities.....     $  (725)          $11,706       $10,981
Cash flows used in investing activities:
  Capital expenditures..................................        (476)           (1,826)       (2,302)
Cash flows from financing activities:
  Payments on Canadian Credit Agreement.................          --            (8,011)       (8,011)
Effect of exchange rate changes on cash.................          --               (13)          (13)
                                                             -------           -------       -------
Net increase (decrease) in cash and cash equivalents....      (1,201)            1,856           655
Cash and cash equivalents at:
  Beginning of year.....................................       1,382                14         1,396
                                                             -------           -------       -------
  End of period.........................................     $   181           $ 1,870       $ 2,051
                                                             =======           =======       =======
</Table>

                                        41
<PAGE>
                         STERLING CHEMICALS GUARANTORS
                            (DEBTORS-IN-POSSESSION)

             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

7.  INCOME TAXES

     The Guarantors are included in the consolidated federal United States tax
return filed by Holdings. The Canadian Subsidiaries file separate federal tax
returns in Canada. The Guarantors' provision for United States income taxes has
been allocated as if the Guarantors filed their annual federal United States tax
returns on a separate return basis. The provision for income taxes during the
first six months of fiscal 2002 amounted to $1.6 million compared to $3.7
million during the first six months of fiscal 2001. The amount of deferred
income tax assets included in Due from Affiliates for the three and six-month
periods was zero and zero, respectively.

8.  NEW ACCOUNTING STANDARDS

     In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted for
under the purchase method and requires separate identification and recognition
of intangible assets, other than goodwill. The statement applies to all business
combinations initiated after June 30, 2001. SFAS No. 142 requires that an
intangible asset that is acquired shall be initially recognized and measured
based on its fair value. The statement also provides that goodwill should not be
amortized, but shall be tested for impairment annually, or more frequently if
circumstances indicate potential impairment, through a comparison of fair value
to its carrying amount. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001. The Guarantors do not believe that the adoption of SFAS
No. 141 or SFAS No. 142 will have a significant impact on their financial
statements.

     In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be
applied to fiscal years beginning after June 15, 2002, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
Guarantors are in the process of evaluating the impact of SFAS No. 143 on their
financial statements.

     In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. SFAS No. 144 is effective
for fiscal years beginning after December 15, 2001. The Guarantors are currently
evaluating the provisions of SFAS No. 144.

                                        42
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of

Sterling Canada, Inc.
Sterling Chemicals Energy, Inc.
Sterling Chemicals International, Inc.
Sterling Fibers, Inc.
Sterling Pulp Chemicals, Inc.
Sterling Pulp Chemicals US, Inc.

     We have reviewed the accompanying combined balance sheet of the Guarantors
(Debtors-in-Possession) (as defined in Note 1) as of March 31, 2002, and the
related combined statements of operations and cash flows for the three and
six-month periods ended March 31, 2002 and 2001. These financial statements are
the responsibility of the Guarantors' 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 auditing standards generally accepted in the United States of
America, 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 such combined financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.

     As discussed in Note 1, on July 16, 2001, the Debtors (as defined in Note
1) filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The
accompanying financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such financial
statements do not purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
pre-petition liabilities, the amounts that may be allowed for claims or
contingencies or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Guarantors; or (d) as to operations, the effect of any changes that may be
made in the Guarantors' business.

     The accompanying financial statements have been prepared assuming that the
Guarantors will continue as a going concern. As discussed in Note 1 to the
accompanying financial, the Debtors' recurring losses from operations raise
substantial doubt about the Debtors' and, therefore, about the Guarantors'
ability to continue as a going concern. Management's plans concerning these
matters are also discussed in Note 1 to the respective financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

     We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the combined balance sheet of the
Guarantors as of September 30, 2001, and the related combined statements of
operations, stockholder's equity (deficiency in assets), and cash flows for the
year then ended (not presented herein); and in our report dated December 20,
2001, we expressed an unqualified opinion on those combined financial statements
and included an explanatory paragraph concerning matters that raise substantial
doubt about the Guarantors' ability to continue as a going concern. In our
opinion, the information set forth in the accompanying combined balance sheet as
of September 30, 2001 is fairly stated, in all material respects, in relation to
the combined balance sheet from which it has been derived.

                                          DELOITTE & TOUCHE LLP

Houston, Texas
May 13, 2002

                                        43
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

     Holdings is a holding company whose only material asset is its investment
in Chemicals, its primary operating subsidiary. Chemicals and its subsidiaries
own substantially all of our consolidated operating assets. Other than
additional interest expense associated with its 13 1/2% Senior Secured Discount
Notes due 2008, Holdings' results of operations are essentially the same as
those of Chemicals.

RECENT DEVELOPMENTS

     On July 16, 2001 (the "Petition Date"), Holdings, Chemicals and most of
their U.S. subsidiaries (collectively, the "Debtors") filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy
Code") in the U.S. Bankruptcy Court for the Southern District of Texas (the
"Bankruptcy Court") and began operating their business as debtors-in-possession
pursuant to the Bankruptcy Code. None of our foreign subsidiaries, including our
Canadian subsidiaries, were included in the Chapter 11 filings. The Debtors are
permitted to continue to operate their businesses and manage their properties in
the ordinary course without prior approval from the Bankruptcy Court.
Transactions outside of the ordinary course of business, including certain types
of capital expenditures, certain sales of assets and certain requests for
additional financings, will require approval by the Bankruptcy Court. There can
be no assurance that the Bankruptcy Court will grant any requests for such
approvals.

     The filing of the Chapter 11 petitions was driven by the Debtors' inability
to meet their funded debt obligations over the long-term, largely brought about
by weak demand for petrochemicals products caused by declines in general
worldwide economic conditions, the relative strength of the U.S. dollar (which
caused their export sales to be at a competitive disadvantage) and higher raw
material and energy costs. As a result of these conditions, the Debtors have
incurred significant operating losses. The reorganization contemplated by the
Chapter 11 filings is designed to permit the Debtors to preserve cash and to
give the Debtors the opportunity to restructure their debt. During the pendency
of the Chapter 11 cases, with approval of the Bankruptcy Court, the Debtors may
assume favorable pre-petition contracts and leases, reject unfavorable
pre-petition contracts and leases and sell or otherwise dispose of assets.

     The confirmation of a plan of reorganization is the primary objective of
the Debtors. The Debtors anticipate filing a plan of reorganization (the "Plan")
on May 14, 2002 with the Bankruptcy Court, along with an accompanying Disclosure
Statement. The Disclosure Statement must be approved by the Bankruptcy Court
before the Debtors are authorized to solicit acceptances of the Plan from voting
creditors. The Plan may be modified prior to the time that the Disclosure
Statement is approved. No assurances can be given that the Plan will be
confirmed or that any plan that is confirmed will contain the terms in the
current Plan. However, when confirmed, the Plan is expected to result in the
elimination of Holdings' classes of equity interests and the significant
dilution or elimination of some or all of the Debtors' classes of existing
public debt.

     At this time, it is not possible to predict the outcome of the bankruptcy
cases in general, or the effect on the business of the Debtors or the claims of
creditors of the Debtors. As a result of the bankruptcy filings, most of the
Debtors' liabilities incurred prior to the Petition Date, including certain
secured debt, are likely to be subject to compromise. However, the ultimate
resolution of these liabilities is not presently determinable.

     Effective July 19, 2001, the Debtors (excluding Holdings) entered into a
Revolving Credit Agreement with a group of lenders led by The CIT Group/Business
Credit, Inc. to provide up to $195 million in Debtor-In-Possession financing
(the "DIP Financing"). The DIP Financing is designed to give the Debtors the
opportunity, during the reorganization process, to develop a new capital
structure that will support them over the long-term, including during recurring
cyclical downturns in the markets for the Debtors' petrochemicals products. By
interim order dated July 18, 2001 and final order dated September 14, 2001, the
Bankruptcy Court approved up to $155 million in lending commitments under the
DIP Financing (the "Base Facility"), consisting of an $85 million "current
assets revolver" and a $70 million "fixed assets revolver." Commitments under
the current assets revolver were increased to $125 million upon entry of the
priming order discussed below. The initial draw under the DIP Financing was used
to repay all amounts outstanding under the

                                        44
<PAGE>

Debtors' pre-petition revolving credit facilities. Additional borrowings under
the DIP Financing may be used to fund the Debtors' post-petition operating
expenses and supplier and employee obligations throughout the reorganization
process. The final order dated September 14, 2001 was appealed to the U.S.
District Court by the indenture trustee for Chemicals' 123/8% Senior Secured
Notes, but no stay of the final order was sought or imposed, and the order
remains fully effective. By order dated February 7, 2002, the U.S. District
Court denied the appeal. The indenture trustee appealed this denial to the 5th
Circuit Court of Appeals on March 1, 2002. While no assurances can be given, we
do not believe the final order will be overturned by the 5th Circuit. Borrowings
under the DIP Financing are subject to customary funding conditions, including
borrowing base restrictions under the current assets revolver. The Base Facility
is secured by substantially all of the assets of the Debtors, and has been
granted super-priority administrative expense claim status for the amount of the
DIP Financing which, subject to certain carve outs, will entitle the DIP lenders
to be paid before any other claims against the Debtors are paid.

     As a result of a priming order entered by the Bankruptcy Court on November
2, 2001 and reinstated on December 19, 2001, the lending commitments under the
current assets revolver were increased from $85 million to $125 million. The
priming order grants the lenders under the current assets revolver a priming
lien on our fixed assets located in the United States and the capital stock of
most of our domestic subsidiaries, prior in right to the existing liens in favor
of the 12 3/8% Notes. Although the priming order was entered by the Bankruptcy
Court on November 2, 2001, it was appealed to the U.S. District Court by the
indenture trustee for the 12 3/8% Notes. By order dated December 17, 2001, the
U.S. District Court reversed the priming order and remanded the matter to the
Bankruptcy Court for a determination of a compensatory adjustment in favor of
the 12 3/8% Notes, which the U.S. District Court suggested would be satisfied by
a 4% increase of the interest rate payable on up to $40 million. On remand, the
Bankruptcy Court entered orders dated December 19, 2001 and January 10, 2002,
reinstating the priming order, subject to a compensatory adjustment in favor of
the 12 3/8% Notes of the accrual during the bankruptcy proceedings of four
percentage points of additional interest on up to $40 million of borrowings
secured by the priming liens. The priming order was further appealed by the
indenture trustee to the U.S. District Court. By orders dated February 8, 2002,
the U.S. District Court denied the appeal of the priming order and the appeal of
the December 17, 2001 order. The U.S. District Court has yet to rule on the
January 10, 2002 order. On March 1, 2002, the indenture trustee for the 12 3/8%
Notes appealed to the 5th Circuit Court of Appeals both the denial of the appeal
of the priming order and the denial of the appeal of the December 17, 2001
order. On March 14, 2002, the Official Committee of Unsecured Creditors filed a
cross appeal of the December 17, 2001 order, which cross appeal is also pending
before the 5th Circuit. The priming order will remain effective pending the
outcome of any appeal unless stayed by an appellate court. While no assurances
can be given, we do not believe the priming order will be overturned by the 5th
Circuit. The Debtors will take all reasonable actions necessary, either before
the Bankruptcy Court or on appeal, to maintain the effectiveness of the priming
order and the additional liquidity provided by the priming order. If the priming
order is overturned on appeal, the Debtors would need to seek additional sources
of financing or revise their business plan and operations consistent with the
level of available financing. We can give no assurances that the priming order
will not be stayed or will be upheld on appeal or, if stayed or not upheld on
appeal, that additional sources of financing will be available or adequate, or
that our available financing will be adequate after implementing revisions to
the Debtors' business plan and operations. See "Liquidity and Capital
Resources."

     At March 31, 2002, the total credit available under the DIP Financing was
limited to $116.9 million due to borrowing base restrictions under the current
assets revolver. At March 31, 2002, $56.2 million was drawn under the fixed
assets revolver and there were no borrowings outstanding under the current
assets revolver. In addition, approximately $4 million of letters of credit were
outstanding under the current assets revolver leaving at March 31, 2002, unused
borrowing capacity under the DIP Financing of approximately $56.7 million.
However, during the second quarter of fiscal 2002, we conducted a two-month
maintenance turnaround, including catalyst change, of our styrene production
unit at our Texas City facility, with total cash expenditures for the turnaround
expected to be approximately $20 million. These expenditures were funded by
borrowings under the DIP Financing during the second and third quarters of
fiscal 2002.

                                        45
<PAGE>

     As of July 11, 2001, our principal Canadian subsidiary, Sterling Pulp
Chemicals, Ltd. ("Sterling Pulp"), entered into a financing agreement with CIT
Business Credit Canada, Inc. ("CIT Canada") to provide up to the Canadian dollar
equivalent of U.S. $30 million (the "Canadian Financing Agreement"). The initial
advance under this facility, approximately U.S. $20 million, was used by
Sterling Pulp to discharge a portion of an intercompany debt and was ultimately
transferred to the Debtors through an intercompany loan. The intercompany loan
was approved by the Bankruptcy Court's interim order entered on July 18, 2001
and final order entered on September 14, 2001, which is a subject of the appeal
of the final order discussed above. The initial term of the Canadian Financing
Agreement extends to July 2004. The Canadian Financing Agreement may be
terminated by CIT Canada thereafter only by giving 60 days' written notice of
termination prior to each subsequent anniversary date. Sterling Pulp may
terminate the Canadian Financing Agreement at any time but is required to give
60 days' notice and pay an early termination fee. At March 31, 2002, $11.9
million was drawn under the Canadian Financing Agreement.

     On July 18, 2001, the Bankruptcy Court issued an order permitting the
Debtors to pay pre-petition salaries, wages and benefits to all of their
employees. The Bankruptcy Court also authorized the payment of certain other
pre-petition claims, in limited circumstances, as necessary to avoid undue
disruption to the Debtors' operations. Generally, actions to enforce or
otherwise effect repayment of pre-petition liabilities of, as well as all
pending litigation against, the Debtors are stayed while the Debtors continue to
operate their business as debtors-in-possession. The ultimate amount and
settlement terms for such liabilities will be subject to a plan of
reorganization and, accordingly, are not presently determinable. As required by
the Bankruptcy Court, the Debtors' trade creditors, including vendors, will be
paid their post-petition claims in the normal course of business. As our foreign
subsidiaries are not included in the Chapter 11 filings, all of their creditors,
including vendors, will be paid their claims in the ordinary course of business,
irrespective of whether the claims arose prior to or after the Chapter 11
filings.

     As a result of the bankruptcy filings and related events, there can be no
assurance that the carrying amounts of assets will be realized or that
liabilities will be liquidated or settled for the amounts recorded. In addition,
confirmation of a plan of reorganization, or disapproval thereof, could change
the amounts reported in the financial statements. The ability of the Debtors to
continue as a going concern is dependent upon, among other things:

     - the Debtors' ability to comply with the terms of the DIP Financing and
       any related orders entered by the Bankruptcy Court in connection with the
       Chapter 11 cases,

     - the ability of the Debtors to maintain access to the incremental $40
       million in DIP Financing that is dependent on an effective priming order,

     - the ability of the Debtors to maintain adequate cash on hand,

     - the ability of the Debtors to generate sufficient cash from operations,

     - the ability of the Debtors' subsidiaries that are not included in the
       Chapter 11 cases to obtain necessary financing,

     - confirmation of a plan or plans of reorganization under the Bankruptcy
       Code and

     - the Debtors' ability to achieve profitability following such
       confirmation.

As the Debtors can give no assurances that they will achieve any of the
forgoing, there is substantial doubt about the Debtors', and therefore the
Company's, ability to continue as a going concern.

     On December 19, 2001, we announced that Frank P. Diassi had elected to
terminate his employment as Co-Chief Executive Officer and executive Chairman of
the Board. Mr. Diassi has asserted that he had "good reason" to terminate his
employment and is claiming that he is entitled to receive payments under our
employee retention and severance plans. Our Compensation Committee is continuing
to evaluate the merits of Mr. Diassi's claim. On January 25, 2002, Mr. Diassi
resigned from our Board of Directors.

     The primary union agreement at our Texas City facility is with the Texas
City, Texas Metal Trades Council, AFL-CIO, of Galveston County, Texas, which
covers all hourly employees at our Texas City facility.
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<PAGE>

This agreement was renegotiated as of December 28, 1998 and expired on May 1,
2002. The union is currently working at our Texas City facility under terms of
the expired union agreement. The Company and the union have agreed to a 72-hour
notification period prior to a strike or lockout. The Company has developed
contingency plans designed to avoid undue disruption of operations in the event
of a strike or lockout.

LIQUIDITY AND CAPITAL RESOURCES

  DIP FINANCING AND CANADIAN FINANCING AGREEMENT

     Effective July 19, 2001, the Debtors (excluding Holdings) entered into the
DIP Financing. The DIP Financing is designed to give the Debtors the
opportunity, during the reorganization process, to develop a new capital
structure that will support them over the long-term, including during recurring
cyclical downturns in the markets for the Debtors' petrochemicals products. By
interim order dated July 18, 2001 and final order dated September 14, 2001, the
Bankruptcy Court approved the $155 million Base Facility consisting of an $85
million "current assets revolver" and a $70 million "fixed assets revolver."
Commitments under the current assets revolver were increased to $125 million
upon entry of the priming order discussed above. The initial draw under the DIP
Financing was used to repay all amounts outstanding under the Debtors' pre-
petition revolving credit facilities. Additional borrowings under the DIP
Financing may be used to fund the Debtors' post-petition operating expenses and
supplier and employee obligations throughout the reorganization process. The
final order dated September 14, 2001 was appealed to the U.S. District Court by
the indenture trustee for Chemicals' 12 3/8% Senior Secured Notes, but no stay
of the final order was sought or imposed, and the order remains fully effective.
By order dated February 7, 2002, the U.S. District Court denied the appeal. The
indenture trustee appealed this denial to the 5th Circuit Court of Appeals on
March 1, 2002. While no assurances can be given, we do not believe the final
order will be overturned by the 5th Circuit. Borrowings under the DIP Financing
are subject to customary funding conditions, including borrowing base
restrictions under the current assets revolver. The Base Facility is secured by
substantially all of the assets of the Debtors, and has been granted
super-priority administrative expense claim status for the amount of the DIP
Financing which, subject to certain carve outs, will entitle the DIP lenders to
be paid before any other claims against the Debtors are paid.

     As a result of a priming order entered by the Bankruptcy Court on November
2, 2001 and reinstated on December 19, 2001, the lending commitments under the
current assets revolver were increased from $85 million to $125 million. The
priming order grants the lenders under the current assets revolver a priming
lien on our fixed assets located in the United States and the capital stock of
most of our domestic subsidiaries, prior in right to the existing liens in favor
of the 12 3/8% Notes. Although the priming order was entered by the Bankruptcy
Court on November 2, 2001, it was appealed to the U.S. District Court by the
indenture trustee for the 12 3/8% Notes. By order dated December 17, 2001, the
U.S. District Court reversed the priming order and remanded the matter to the
Bankruptcy Court for a determination of a compensatory adjustment in favor of
the 12 3/8% Notes, which the U.S. District Court suggested would be satisfied by
a 4% increase of the interest rate payable on up to $40 million. On remand, the
Bankruptcy Court entered orders dated December 19, 2001 and January 10, 2002
reinstating the priming order, subject to a compensatory adjustment in favor of
the 12 3/8% Notes of the accrual during the bankruptcy proceedings of four
percentage points of additional interest on up to $40 million of borrowings
secured by the priming liens. The priming order was further appealed by the
indenture trustee to the U.S. District Court. By orders dated February 8, 2002,
the U.S. District Court denied the appeal of the December 17, 2001 order. The
U.S. District Court has yet to rule on the January 10, 2002 order. On March 1,
2002, the indenture trustee for the 12 3/8% Notes appealed to the 5th Circuit
Court of Appeals both the denial of the appeal of the priming order and the
denial of the appeal of the December 17, 2001 order. On March 14, 2002, the
Official Committee of Unsecured Creditors filed a cross appeal of the December
17, 2001 order, which cross appeal is also pending before the 5th Circuit. The
priming order will remain effective pending the outcome of any appeal unless
stayed by an appellate court. While no assurances can be given, we do not
believe the priming order will be overturned by the 5th Circuit. The Debtors
will take all reasonable actions necessary, either before the Bankruptcy Court
or on appeal, to maintain the effectiveness of the priming order and the
additional liquidity provided by the priming order. If the priming order is
overturned on appeal, the Debtors would need to seek additional sources of
financing or revise their

                                        47
<PAGE>

business plan and operations consistent with the level of available financing.
We can give no assurances that the priming order will be upheld on appeal or, if
not upheld on appeal, that additional sources of financing will be available or
adequate, or that our available financing will be adequate after implementing
revisions to the Debtors' business plan and operations.

     The Debtors have limited liquidity, which may prove inadequate during their
reorganization process. The Debtors are currently funding their liquidity needs
out of operating cash flow and from borrowings under the DIP Financing. The DIP
Financing is limited in amount and is also subject to numerous funding
conditions which are largely beyond the control of the Debtors, including
borrowing base requirements under the current assets revolver and compliance
with an EBITDA covenant. The ability of the Debtors to obtain additional
financing during the reorganization process is severely limited by a variety of
factors, including the debt incurrence restrictions imposed by the DIP
Financing, numerous procedural requirements and uncertainties relating to the
bankruptcy proceedings, including any continuing challenge to the priming order,
and the Debtors' current financial condition and prospects. Accordingly, no
assurances can be given that the Debtors' existing sources of liquidity will be
adequate to fund their liquidity needs throughout the reorganization process or,
if additional sources of liquidity become necessary during the reorganization
process, that they would be available to the Debtors or adequate. Any liquidity
shortages during the reorganization process would likely have a material adverse
effect on the Debtors' business and financial condition as well as their ability
to successfully restructure and emerge from bankruptcy.

     The Base Facility is secured by substantially all of the assets of the
Debtors, but some of the liens have been granted super-priority administrative
expense claim status for the amount of the DIP Financing which, subject to
certain carve outs, will entitle the DIP lenders to be paid before any other
claims against the Debtors are paid. At March 31, 2002, the total credit
available under the DIP Financing was limited to $116.9 million due to borrowing
base restrictions under the current assets revolver. At March 31, 2002, $56.2
million was drawn under the fixed assets revolver and there were no borrowings
outstanding under the current assets revolver. In addition, approximately $4
million of letters of credit were outstanding under the current assets revolver
leaving, at March 31, 2002, unused borrowing capacity under the DIP Financing of
approximately $56.7 million. However, during the second quarter of fiscal 2002,
we conducted a two-month maintenance turnaround, including catalyst change, of
our styrene production unit at our Texas City facility, with total cash
expenditures for the turnaround expected to be approximately $20 million. These
expenditures were funded by borrowings under the DIP Financing during the second
and third quarters of fiscal 2002.

     Under the DIP Financing, the Debtors (excluding Holdings) are co-borrowers
and are jointly and severally liable for any indebtedness thereunder. The Base
Facility consists of:

     - a $70 million fixed assets revolving credit facility secured by:

      - first priority liens on all of the capital stock of Chemicals and the
        other co-borrowers, all of our United States production facilities and
        related assets and 35% of the capital stock of certain of our
        subsidiaries incorporated outside the United States (the "Foreign
        Subs"); and

      - second priority liens on all accounts receivable, inventory and other
        specified assets of Chemicals and the other co-borrowers and the
        remaining 65% of the capital stock of the Foreign Subs; and

     - an $85 million current assets revolving credit facility secured by:

      - a first priority lien on all accounts receivable, inventory and other
        specified assets of Chemicals and the other co-borrowers;

      - a second priority lien on 35% of the capital stock of the Foreign Subs;
        and

      - third priority liens on the remaining 65% of the stock of the Foreign
        Subs, all of the capital stock of Chemicals and the other co-borrowers
        and all of our United States production facilities and related assets.

Available credit under the fixed assets revolving credit facility is not subject
to a borrowing base. At September 30, 2001, available credit under the current
assets revolving credit facility was subject to a monthly

                                        48
<PAGE>

borrowing base consisting of 85% of eligible accounts receivable and 65% of
eligible inventory, with an inventory cap of $42.5 million. In addition, the
borrowing base for the current assets revolver was required to exceed
outstanding borrowings thereunder by $12 million at all times, with a maximum of
$85 million available under the current asset revolving credit facility.

     As a result of the priming order, (i) maximum availability under the
current assets revolving credit facility is now $125 million, (ii) the monthly
borrowing base now consists of 85% of eligible accounts receivable, the lesser
of $10 million or 33% of specified estimated future royalty payments related to
the Debtors' chlorine dioxide generator technology and 65% of eligible
inventory, with an inventory cap of $62.5 million, and (iii) the borrowing base
for the current assets revolver is now required to exceed outstanding borrowings
by only $6 million at all times.

     If the priming order remains effective and the total commitments under the
current assets revolver remain at $125 million, the incremental $40 million is
secured by first priority liens on all of our United States production
facilities and related assets and all of the capital stock of the co-borrowers
(excluding Chemicals), as well as all of the same collateral securing the
initial $85 million current assets revolver. Consequently, after giving effect
to the priming order, the DIP Financing consists of:

     - a $70 million fixed assets revolving credit facility secured by:

      - a first priority lien on all of the capital stock of Chemicals;

      - second priority liens on all of our United States production facilities
        and related assets, all of the capital stock of the co-borrowers
        (excluding Chemicals), all accounts receivable, inventory and other
        specified assets of Chemicals and the other co-borrowers and 35% of the
        capital stock of the Foreign Subs; and

      - a third priority lien on the remaining 65% of the stock of the Foreign
        Subs; and

     - a $125 million current assets revolving credit facility:

      - $40 million of which is secured by first priority liens on all of our
        United States production facilities and related assets, all of the
        capital stock of the co-borrowers (excluding Chemicals) and 35% of the
        capital stock of the Foreign Subs and a second priority lien on the
        remaining 65% of the stock of the Foreign Subs; and

      - all of which is secured by a first priority lien on all accounts
        receivable, inventory and other specified assets of Chemicals and the
        other co-borrowers, third priority liens on all of the capital stock of
        Chemicals and 35% of the capital stock of the Foreign Subs and fourth
        priority liens on the remaining 65% of the stock of the Foreign Subs,
        all of the capital stock of the co-borrowers (excluding Chemicals) and
        all of our United States production facilities and related assets.

  KEY EMPLOYEES

     We believe that our success will depend to a significant extent upon the
efforts and abilities of our executive officers and senior management. In
addition, we will continue to depend upon the retention of our key sales and
purchasing personnel to maintain customer and supplier relationships. However,
due to uncertainty about our financial condition, it may be difficult to retain
our key employees or attract qualified replacements. On October 31, 2001, an
order was entered by the Bankruptcy Court approving the continuation of our
existing, and implementation of additional, retention and severance plans to
ameliorate the effects of the Chapter 11 filings on our key employees. Benefits
totaling approximately $4.7 million are estimated to be paid during and at the
conclusion of the reorganization process.

  SASKATOON FACILITY

     In July 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), our
Canadian subsidiary that operates our Saskatoon facility, entered into a credit
agreement with The Chase Manhattan Bank of Canada, individually and as
administrative agent, and certain other financial institutions (the "Saskatoon
Credit

                                        49
<PAGE>

Agreement"). The indebtedness under the Saskatoon Credit Agreement is secured by
substantially all of the assets of Sterling Sask, including the Saskatoon
facility. The Saskatoon Credit Agreement requires that certain amounts of
"Excess Cash Flow" be used to prepay amounts outstanding under the term portion
of the credit facility. In addition, the Saskatoon Credit Agreement contains
provisions which prohibit the payment of advances, loans and dividends from
Sterling Sask to Chemicals or Holdings. The Saskatoon Credit Agreement
originally included a revolving credit facility of Cdn. $8 million to be used by
Sterling Sask solely for its general corporate purposes. No borrowings were
outstanding under the Saskatoon revolving credit facility as of March 31, 2002.

     The Saskatoon Credit Agreement contains provisions which restrict the
payment of advances, loans and dividends from Sterling Sask to us or Chemicals.
The most restrictive of these covenants limited such payments during fiscal 2001
to approximately $1 million, plus any amounts due to us from Sterling Sask under
our intercompany tax sharing agreement. In addition, because of its designation
as an "Unrestricted Subsidiary" under the DIP Financing and the indentures for
the 13 1/2% Notes, the 12 3/8% Notes, the 11 3/4% Notes and the 11 1/4% Notes,
Sterling Sask's results are not considered in determining compliance with the
covenants contained therein.

     An Event of Default occurred under the Saskatoon Credit Agreement as a
result of the Chapter 11 filings by the Debtors. However, the lenders under the
Saskatoon Credit Agreement executed a forbearance agreement under which they
agreed to not exercise their remedies under that agreement prior to December 31,
2001 in exchange for the elimination of the exceptions to the provisions
restricting the payment of advances, loans and dividends from Sterling Sask to
us or Chemicals and the inclusion of a prohibition on draws under the revolving
credit portion of the facility during the remainder of calendar year 2001. On
January 2, 2002 Sterling Sask entered into a waiver and amending agreement (the
"Waiver Agreement"), effective December 18, 2001, with its lenders. The Waiver
Agreement waived the existing defaults, rescinded the acceleration of the
amounts outstanding under the Saskatoon Credit Agreement and reinstated the
commitments thereunder. The Waiver Agreement provides for a reduction of the
revolving credit facility commitment to Cdn $4.0 million and changes the
expiration date on the Tranche A term loan from June 30, 2003 to December 31,
2002 and on the Tranche B term loan from June 30, 2005 to June 30, 2003. During
the first six months of fiscal 2002, payments of approximately $7.8 million were
made pursuant to this obligation. Accordingly, $3.5 million of the remaining
debt will mature during the remainder of fiscal 2002 and $20.8 million will
mature during fiscal 2003. The Waiver Agreement also set a minimum discount rate
and Eurodollar rate margin of 2.50% over the Base Rate or LIBOR, respectively,
for the remaining term of the facility. Sterling Sask has not drawn on the
revolving credit facility since its inception in 1997 and as of March 31, 2002,
had approximately $11.4 million in cash and cash equivalents on hand.

     We believe the credit available under the Saskatoon revolving credit
facility, when added to internally generated funds and other sources of capital,
will be sufficient to meet Sterling Sask's liquidity needs for the reasonably
foreseeable future, although we can give no assurances to that effect.

  WORKING CAPITAL

     Working capital at March 31, 2002 was approximately $68.9 million, a
decrease of approximately $3 million from our working capital on September 30,
2001. Working capital at March 31, 2002 excludes pre-petition liabilities
subject to compromise. This change in working capital consisted of a reduction
in the current portion of long-term debt of $24.8 million, primarily due to the
reclassification of debt under the Saskatoon Credit Agreement to long-term due
to the rescission of the acceleration of that debt provided in the Waiver
Agreement, which was substantially offset by increases in accounts payable and
accrued liabilities and a decrease in accounts receivable.

  CASH FLOW

     Net cash provided by our operations was $9.7 million for the first six
months of fiscal 2002, compared to net cash used in our operations of
approximately $35 million during the first six months of fiscal 2001. This
increase in net cash provided by operations resulted primarily from a reduction
in net losses between the first

                                        50
<PAGE>

six months of fiscal 2002 and the first six months of fiscal 2001. Net cash flow
used in our investing activities was $9.0 million for the first six months of
fiscal 2002 compared to $8.6 million during the first six months of fiscal 2001.
Net cash used in our financing activities was $2.0 million for the first six
months of fiscal 2002 compared to cash provided by financing activities of $45.6
million during the first six months of fiscal 2001. This change was primarily
due to borrowings on our prior credit agreement during the first six months of
fiscal 2001.

  CAPITAL EXPENDITURES

     Our capital expenditures were $9.0 million during the first six months of
fiscal 2002, consistent with the first six months of fiscal 2001. The majority
of capital expenditures in the first six months of fiscal 2002 were primarily in
our petrochemicals operations due to the styrene turnaround. During the
remainder of fiscal 2002, capital expenditures are anticipated to be
approximately $10-15 million for routine safety, environmental and equipment
replacement matters. We expect to fund our remaining fiscal 2002 capital
expenditures from operating cash flow, plus borrowings under the DIP Financing
and the Canadian Financing Agreement, if needed.

RESULTS OF OPERATIONS

  THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31,
  2001

     Our revenues were approximately $123 million in the second quarter of
fiscal 2002, compared to approximately $199 million in revenues during the
second quarter of fiscal 2001. This decrease in revenues resulted primarily from
lower styrene sales prices and lower acrylonitrile sales volumes due to the
continued shutdown of our acrylonitrile facility since February 2001. We
recorded a net loss attributable to common stockholders of approximately $15.4
million, or $1.21 per share, for the second quarter of fiscal 2002, compared to
the net loss attributable to common stockholders of approximately $53.5 million,
or $4.19 per share, we recorded for the second quarter of fiscal 2001.
Chemicals' recorded a net loss of approximately $15.3 million for the second
quarter of fiscal 2002, compared to a net loss of approximately $46.0 million in
the second quarter of fiscal 2001. These decreases in our net losses were
primarily due to lower interest costs, as we did not accrue interest on our
unsecured or undersecured funded indebtedness during the second quarter of
fiscal 2002 as it is generally disallowed per the Bankruptcy Code. This was
partially offset by reorganization items recorded during this same period.

  Revenues, Cost of Goods Sold and Gross Profit

     Petrochemicals.  Revenues from our petrochemicals operations were
approximately $65 million in the second quarter of fiscal 2002, compared to $141
million for the second quarter of fiscal 2001. This decrease in revenues
resulted primarily from decreases in styrene sales prices and lower
acrylonitrile sales volumes in the second quarter of fiscal 2002 compared to the
prior period due to the continued shutdown of our acrylonitrile facility since
February 2001. Our petrochemicals operations recorded an operating loss of
approximately $12 million for the second quarter of fiscal 2002, whereas these
operations recorded an operating loss of approximately $29 million for the
second quarter of fiscal 2001, as reduced revenues from these operations were
substantially offset by a reduction in cost of sales.

     Revenues from our styrene operations were approximately $35 million in the
second quarter of fiscal 2002, a decrease of approximately 36% from the
approximately $55 million in revenues from those operations in the second
quarter of fiscal 2001. Our total sales volumes for styrene in the second
quarter of fiscal 2002 decreased approximately 2% from those realized during the
second quarter of fiscal 2001. This decrease resulted primarily from a two-month
maintenance turnaround of our styrene production unit at our Texas City facility
conducted in the second quarter of fiscal 2002. Direct sales prices for styrene
in the second quarter of fiscal 2002 decreased approximately 33% from those
realized during the second quarter of fiscal 2001. Spot prices for styrene, a
component of our direct sales prices, increased during the second quarter of
fiscal 2002 from $0.19 per pound peaking at $0.35 per pound at the end of March
2002 compared to approximately $0.23-$0.25 per pound during the second quarter
of fiscal 2001. While direct sales prices decreased in the second

                                        51
<PAGE>

quarter of fiscal 2002 from the year-ago period, gross margins for styrene
improved during the second quarter of fiscal 2002 compared to the second quarter
of fiscal 2001 due to a decrease in raw material and energy costs. During the
second quarter of fiscal 2002, prices for benzene and ethylene, the two primary
raw materials for styrene, decreased approximately 28% and 49%, respectively,
from the prices we paid for these products in the second quarter of fiscal 2001.
Prices for natural gas also decreased 63% during the second quarter of fiscal
2002 compared to the second quarter of fiscal 2001.

     Total sales volumes of our acrylonitrile and derivatives operations
decreased approximately 91% in the second quarter of fiscal 2002 compared to the
second quarter of fiscal 2001. This was primarily due to the continued shutdown
of our acrylonitrile facility which commenced in February 2001 which was
partially offset by sales of third party acrylonitrile. Revenue decreased 93% in
the second quarter of fiscal 2002 compared to the second quarter of 2001, also
as a result of the continued shutdown.

     Revenues from our acrylic fibers operations were approximately $4 million
in the second quarter of fiscal 2002, a decrease of approximately 72% from the
$15 million in revenues we received from these operations in the second quarter
of fiscal 2001. Sales volumes of our acrylic fibers in the second quarter of
fiscal 2002 decreased approximately 85% from those experienced during the second
quarter of fiscal 2001. These decreases in revenues and sales volumes resulted
primarily from our withdrawal from the traditional commodity textile business in
the third quarter of fiscal 2001 and the resulting significant reduction in our
operations at our acrylic fibers plant.

     Revenues from our other petrochemicals operations, including acetic acid,
plasticizers, and methanol, were $26 million in the second quarter of fiscal
2002, a decrease from the $39 million in revenues from these operations during
the second quarter of fiscal 2001. Our other petrochemicals operations reported
a decrease of 4% in operating earnings for the second quarter of fiscal 2002
compared to that realized during the second quarter of fiscal 2002. These
decreases in revenues and operating earnings were mostly due to decreases in
sales volumes and prices, primarily with respect to our acetic acid and
plasticizers operations. In addition, operating income during the second quarter
of fiscal 2001 was favorably impacted due to net proceeds of $3 million recorded
in connection with a settlement of a dispute related to the construction of our
methanol facility.

     Pulp Chemicals.  Revenues from our pulp chemicals operations were
approximately $57 million in the second quarter of fiscal 2002, a slight
decrease compared to revenues from these operations in the second quarter of
fiscal 2001. Sales prices of our sodium chlorate increased approximately 6% in
the second quarter of fiscal 2002 compared to the first quarter of fiscal 2001,
while sodium chlorate sales volumes decreased approximately 7% during this
period. There was also a reduction in chlorine dioxide generator royalties, a
decrease of 24% compared to the second quarter of 2001. Our pulp chemicals
operations recorded operating earnings of approximately $11 million in the
second quarter of fiscal 2002, consistent with operating earnings from these
operations during the second quarter of fiscal 2001.

  Selling, General, and Administrative ("SG&A") Expenses

     Our SG&A expenses in the second quarter of fiscal 2002 were approximately
$6 million compared to approximately $7 million for the same period of fiscal
2001. This decrease was primarily the result of cost reductions in our acrylic
fibers business and general cost containment efforts.

  Reorganization Items

     Reorganization items incurred during the second quarter of fiscal 2002 were
approximately $4.7 million, which was primarily for professional fees incurred
in connection with the Debtors' Chapter 11 filings.

  SIX MONTHS ENDED MARCH 31, 2002 COMPARED TO SIX MONTHS ENDED MARCH 31, 2001

     Our revenues were approximately $247 million during the first six months of
fiscal 2002, compared to approximately $453 million in revenues during the first
six months of fiscal 2001. This decrease in revenues resulted primarily from
lower styrene sales prices and sales volumes and lower acrylonitrile sales
volumes. We

                                        52
<PAGE>

recorded a net loss attributable to common stockholders of approximately $30.3
million, or $2.37 per share, for the first six months of fiscal 2002, compared
to the net loss attributable to common stockholders of approximately $84.8
million, or $6.63 per share, we recorded for the first six months of fiscal
2001. Chemicals recorded a net loss of approximately $30 million for the first
six months of fiscal 2002, compared to a net loss of approximately $70 million
for the first six months of fiscal 2001. These decreases in net losses were
primarily due to lower interest costs as we did not accrue interest on our
unsecured or undersecured funded indebtedness during the first six months of
fiscal 2002 as it is generally disallowed per the Bankruptcy Code. This was
partially offset by reorganization items recorded during the first six months of
fiscal 2002.

  Revenues, Cost of Goods Sold and Gross Profit

     Petrochemicals.  Revenues from our petrochemicals operations were
approximately $133 million during the first six months of fiscal 2002, compared
to $338 million for the first six months of fiscal 2001. This reduction was
caused primarily by decreases in styrene sales prices and sales volumes and
lower acrylonitrile sales volumes in the first six months of fiscal 2002,
compared to the first six months of fiscal 2001. Our petrochemicals operations
recorded an operating loss of approximately $24 million for the first six months
of fiscal 2002, compared to operating loss of approximately $38 million for the
first six months of fiscal 2001. This difference resulted primarily from our
withdrawal from the traditional commodity textile business which accounted for a
significant portion of the loss in the first six months of 2001.

     Revenues from our styrene operations were approximately $73 million during
the first six months of fiscal 2002, a decrease of approximately 51% from the
approximately $150 million in revenues from those operations during the first
six months of fiscal 2001. Our total sales volumes for styrene in the first six
months of fiscal 2002 decreased approximately 24% from those experienced during
the first six months of fiscal 2001. Direct sales prices for styrene during the
first six months of fiscal 2002 decreased approximately 31% from those realized
during the first six months of fiscal 2001. However, gross margins for styrene
improved during the first six months of fiscal 2002 compared to the year-ago
period due to decreases in raw material and energy costs. During the first six
months of fiscal 2002, prices for benzene, one of the primary raw materials for
styrene, decreased approximately 34% from the prices we paid for benzene in the
first six months of fiscal 2001, and prices for ethylene, the other primary raw
material for styrene, decreased approximately 40% compared to the prices we paid
for ethylene in the first six months of fiscal 2001. Prices for natural gas also
decreased 60% during the first six months of fiscal 2002 compared to the first
six months of fiscal 2001. Due to the factors discussed above, margins on our
styrene sales in the first six months of fiscal 2002 increased slightly from
those realized during the first six months of fiscal 2001.

     Total sales volumes of our acrylonitrile and derivatives operations
decreased approximately 94% in the first six months of fiscal 2002 compared to
the first six months of fiscal 2001. This was primarily due to the continued
shutdown of our acrylonitrile facility which commenced in February 2001 which
was partially offset by sales of third party acrylonitrile. Revenue decreased
95% in the first six months of fiscal 2002 compared to the first six months of
2001, also as a result of the continued shutdown.

     Revenues from our acrylic fibers operations were approximately $9 million
for the first six months of fiscal 2002, a decrease of approximately 69% from
the approximately $30 million in revenues from these operations during the first
six months of fiscal 2001. Sales volumes of our acrylic fibers during the first
six months of fiscal 2002 decreased approximately 84% from those experienced
during the first six months of fiscal 2001.

     Revenues from our other petrochemicals operations, including acetic acid,
plasticizers, and methanol, were approximately $49 million during the first six
months of fiscal 2002, a decrease of approximately 35% from the approximately
$75 million in revenues from these operations during the first six months of
fiscal 2001. The decrease in revenues during the first six months of fiscal 2002
compared to the year-ago period resulted primarily from lower energy costs which
reduced sales prices for our acetic acid and plasticizers sales. Our other
petrochemicals operations reported a decrease of 4.5% in operating earnings for
the first six months of fiscal 2002 compared to that realized during the first
six months of fiscal 2001, primarily due to the decrease in sales volumes. In
addition, operating income during the second quarter of fiscal 2001 was
favorably

                                        53
<PAGE>

impacted due to net proceeds of $3 million recorded in connection with a
settlement of a dispute related to the construction of our methanol facility.

     Pulp Chemicals.  Revenues from our pulp chemicals operations were
approximately $114 million during the first six months of fiscal 2002,
comparable to the approximately $115 million in revenues from these operations
during the first six months of fiscal 2001. Sales prices of our sodium chlorate
increased approximately 7% during the first six months of fiscal 2002 compared
to the first six months of fiscal 2001, although sodium chlorate sales volumes
decreased approximately 5% during this period. This increase in revenue was
partially offset by a reduction in chlorine dioxide generator royalties. Our
pulp chemicals operations recorded operating earnings of approximately $24
million during the first six months of fiscal 2002 consistent with operating
earnings of approximately $23 million during the first six months of fiscal
2001.

  Selling, General, and Administrative ("SG&A") Expenses

     Our SG&A expenses for the first six months of fiscal 2002 were
approximately $12 million compared to approximately $14 million for the same
period of fiscal 2001. This decrease was primarily the result of cost reductions
in our acrylic fibers business and general cost containment efforts.

NEW ACCOUNTING STANDARDS

     In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations be accounted for
under the purchase method. The statement further requires separate recognition
of intangible assets that meet one of two criteria. The statement applies to all
business combinations initiated after June 30, 2001. SFAS No. 142 requires that
an intangible asset that is acquired shall be initially recognized and measured
based on its fair value. The statement also provides that goodwill should not be
amortized, but shall be tested for impairment annually, or more frequently if
circumstances indicate potential impairment, through a comparison of fair value
to its carrying amount. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001. We do not believe that the adoption of SFAS No. 141 or
SFAS No. 142 will have a significant impact on our financial statements.

     In August 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which must be
applied to fiscal years beginning after June 15, 2002, addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. We are in
the process of evaluating the impact of SFAS No. 143 on our financial
statements.

     In August 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
addresses financial accounting and reporting for the impairment of long-lived
assets and for long-lived assets to be disposed of. SFAS 144 is effective for
fiscal years beginning after December 15, 2001, with early adoption permitted.
We are currently evaluating the provisions of SFAS No. 144.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Through the first six months of fiscal 2002, there were no significant
changes in our market risk disclosures as set forth in the Annual Report.

                                        54
<PAGE>

                                    PART II

                               OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     The information under "Legal Proceedings" in Note 5 of the Notes to
Consolidated Financial Statements included herein is hereby incorporated by
reference. See also "Item 3. Legal Proceedings" in the Annual Report.

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

     None.

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
-------                           ----------------------
<S>       <C>  <C>
 11.1     --   Earning Per Share Computation.
 15.1     --   Letter of Deloitte & Touche LLP regarding unaudited interim
               financial information.
</Table>

     (b) Reports on Form 8-K

          1. On January 7, 2002, the Company filed a Current Report on Form 8-K
     reporting Items 3 and 7 of such Form related to the filing of the Debtors'
     Monthly Operating Reports with the Bankruptcy Court.

          2. On February 4, 2002, the Company filed a Current Report on Form 8-K
     reporting Items 3 and 7 of such Form related to the filing of the Debtors'
     Monthly Operating Reports with the Bankruptcy Court.

          3. On February 27, 2002, the Company filed a Current Report on Form
     8-K reporting Items 3 and 7 of such Form related to the filing of the
     Debtors' Monthly Operating Reports with the Bankruptcy Court.

          4. On April 1, 2002, the Company filed a Current Report on Form 8-K
     reporting Items 3 and 7 of such Form related to the filing of the Debtors'
     Monthly Operating Reports with the Bankruptcy Court.

          5. On April 29, 2002, the Company filed a Current Report on Form 8-K
     reporting Items 3 and 7 of such Form related to the filing of the Debtors'
     Monthly Operating Reports with the Bankruptcy Court.

                                        55
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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)

                                                  /s/ DAVID G. ELKINS
                                          --------------------------------------
                                                     David G. Elkins
                                             President and Co-Chief Executive
                                                         Officer

Date: May 13, 2002

                                                 /s/ RICHARD K. CRUMP
                                          --------------------------------------
                                                     Richard K. Crump
                                                Co-Chief Executive Officer

Date: May 13, 2002

                                                /s/ PAUL G. VANDERHOVEN
                                          --------------------------------------
                                                   Paul G. Vanderhoven
                                           Vice President -- Finance and Chief
                                          Financial Officer (Principal Financial
                                                         Officer)

Date: May 13, 2002

                                        56
<PAGE>

                                 EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION OF EXHIBIT
-------                           ----------------------
<S>       <C>  <C>
 11.1     --   Earning Per Share Computation.
 15.1     --   Letter of Deloitte & Touche LLP regarding unaudited interim
               financial information.
</Table>