<PAGE>
 
================================================================================

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

                                   FORM 10-Q
                          ----------------------------

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 1997

                                       OR

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

COMMISSION FILE NUMBER 1-10059

                       STERLING CHEMICALS HOLDINGS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          DELAWARE                                     76-0185186
(STATE OR OTHER JURISDICTION OF            (I.R.S. EMPLOYER IDENTIFICATION NO.) 
 INCORPORATION OR ORGANIZATION)
                                           
  1200 SMITH STREET, SUITE 1900
    HOUSTON, TEXAS 77002-4312                        (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)         (REGISTRANT'S TELEPHONE
                                                NUMBER, INCLUDING AREA CODE)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR
                              VALUE $.01 PER SHARE

COMMISSION FILE NUMBER 333-04343-01

                            STERLING CHEMICALS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


          DELAWARE                                     76-0502785
(STATE OR OTHER JURISDICTION OF            (I.R.S. EMPLOYER IDENTIFICATION NO.) 
 INCORPORATION OR ORGANIZATION)
                                           
  1200 SMITH STREET, SUITE 1900
    HOUSTON, TEXAS 77002-4312                        (713) 650-3700
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)         (REGISTRANT'S TELEPHONE
                                                NUMBER, INCLUDING AREA CODE)

        SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

  Sterling Chemicals, Inc. meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q, and is therefore filing this form with the reduced
disclosure format provided for by General Instruction H(2) of Form 10-Q.

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

  Indicate by check mark whether each of the registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]      No [ ]

  As of July 31, 1997, Sterling Chemicals Holdings, Inc. had 12,366,231 shares
of common stock outstanding. As of July 31, 1997, all outstanding equity
securities of Sterling Chemicals, Inc. were owned by Sterling Chemicals
Holdings, Inc.
<PAGE>
 
  This combined Form 10-Q is separately filed by Holdings and Chemicals (each as
defined herein). Information contained herein relating to Chemicals is filed by
Holdings and separately by Chemicals on its own behalf. Certain capitalized
terms used in this Form 10-Q are defined in the Notes to Condensed Consolidated
Financial Statements, included herein.


PART I.--FINANCIAL INFORMATION

ITEM 1.--FINANCIAL STATEMENTS

                                       2
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS EXCEPT SHARE DATA)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
 
                                           JUNE 30,   SEPTEMBER 30,
                                             1997          1996
                                          ----------  --------------
<S>                                       <C>         <C> 
ASSETS
 
Current assets:
                                                                    
   Cash and cash equivalents ...........  $   4,581       $   5,609 
   Accounts receivable .................    175,983         133,399 
   Inventories..........................     72,497          53,720 
   Prepaid expenses.....................     22,929          10,226 
   Deferred income taxes................      6,325           6,064 
                                          ---------       --------- 

   Total current assets.................    282,315         209,018 
                                                                    
Property, plant and equipment, net......    435,162         365,765
Other assets............................    115,549         114,901
                                          ---------       --------- 
                                                                    
      Total assets......................  $ 833,026       $ 689,684 
                                          =========       ========= 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 (DEFICIENCY IN ASSETS)
 
Current liabilities:
                                                                     
   Accounts payable.....................  $  63,963       $  66,562  
   Accrued liabilities..................     76,491          53,898  
   Current portion of long-term debt....      2,958          11,625  
                                          ---------       ---------  
                                                                     
      Total current liabilities.........    143,412         132,085  
                                                                     
Long-term debt..........................    839,224         714,632  
Deferred income taxes...................     47,461          46,933  
Deferred credits and other liabilities..     81,094          68,473  
Common stock held by ESOP...............      7,688           6,500  
Less: unearned compensation.............     (6,096)         (6,500) 
Redeemable preferred stock..............     10,411               -
Commitments and contingencies
Stockholders' equity (deficiency in
 assets):
 
   Common stock, $.01 par value, 
    20,000,000 shares authorized,
    11,333,000 shares issued; 
    11,323,000 outstanding at                                 
    June 30, 1997; and 10,599,000                                    
    shares issued and outstanding at                                         
      September 30, 1996................        114             106    
   Additional paid-in capital...........   (551,278)       (560,077)   
   Retained earnings....................    281,859         306,656    
   Accumulated translation adjustment...    (20,737)        (19,124)   
                                          ---------       ---------    
                                           (290,042)       (272,439)   
   Treasury stock, at cost, 10,000                                     
    shares at June 30, 1997.............       (126)              -    
                                          ---------   -------------    
        Total stockholders' equity                                     
         (deficiency in assets).........   (290,168)       (272,439)   
                                          ---------       ---------    
             Total liabilities and                                     
              stockholders' equity                                     
              (deficiency in assets)....  $ 833,026       $ 689,684    
</TABLE>                                  =========       =========    
                                                                       
                                                                       
   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.

                                       

                                       3
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS EXCEPT PER SHARE DATA)
                                  (UNAUDITED)
 
 
<TABLE> 
<CAPTION> 
                                           THREE MONTHS ENDED       NINE MONTHS ENDED
                                                JUNE 30,                JUNE 30,
                                           ------------------       ------------------
                                             1997        1996        1997        1996
                                           --------    --------    --------    --------
<S>                                        <C>         <C>         <C>         <C> 
Revenues................................   $239,244    $218,371    $665,933    $600,792

Cost of goods sold......................    210,249     185,121     605,028     508,749
                                           --------    --------    --------    --------
Gross profit............................     28,995      33,250      60,905      92,043
 
 
Selling, general, and administrative                                                    
 expenses...............................     10,959       7,724      24,308      23,832 
 
Stock appreciation rights expense                                                       
 (benefit)..............................          -        (460)          -       6,198 
 
Other expense...........................          -         156           -       3,706
 
Interest and debt related expenses, net                                                 
 of interest income.....................     23,943       1,230      63,417       4,440  
                                            -------     -------     -------     -------
Income (loss) before income taxes and                                                   
 extraordinary item.....................     (5,907)     24,600     (26,820)     53,867 
 
Provision (benefit) for income taxes....       (454)      8,180      (6,358)     18,233
                                           --------    --------    --------    --------
Net income (loss) before extraordinary                                                  
 item ..................................     (5,453)     16,420     (20,462)     35,634 
 
Extraordinary item, loss on early                       
 extinguishment of debt, net of  tax....     (3,924)          -      (3,924)          -
                                           --------    --------    --------    --------
Net income (loss)........................    (9,377)     16,420     (24,386)     35,634
 
Preferred stock dividend................        249           -         411           -
                                           --------    --------    --------    --------
Net income (loss) attributable to       
 common stockholders....................   $ (9,626)   $ 16,420    $(24,797)   $ 35,634
                                           ========    ========    ========    ======== 
Net income (loss) per common share......     $(0.84)      $0.29      $(2.24)      $0.64
                                           ========    ========    ========    ========
 
Weighted average shares outstanding....      11,420      55,690      11,047      55,685
                                           ========    ========    ========    ========
</TABLE>



   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.

                                       4
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
 
                                                          NINE MONTHS ENDED
                                                               JUNE 30,
                                                       ---------------------------
 
                                                          1997             1996
                                                       ----------        ---------
 
Cash flows from operating activities:
<S>                                                    <C>               <C>       
                                                                                  
   Cash received from customers....................... $ 670,962         $ 645,929
   Miscellaneous cash receipts........................    18,396            14,969
   Cash paid to suppliers and employees...............  (645,888)         (613,651)
   Interest paid......................................   (35,556)           (4,851)
   Interest received..................................       322               579
   Income taxes (paid) refunded.......................     3,288          ( 11,601)
                                                       ---------         --------- 
 
 
Net cash provided by operating activities.............    11,524            31,374
                                                       ---------         ---------
 
 
Cash flows from investing activities:
 
   Capital expenditures..............................    (32,640)          (73,045)
   Purchase of assets-acrylic fibers business........    (88,200)                -
   Proceeds-sale of assets...........................         16                 -
                                                       ---------         ---------


Net cash used in investing activities................   (120,824)          (73,045)
                                                       ---------         ---------


Cash flows from financing activities:

   Proceeds from long-term debt......................    321,334            60,350
   Repayment of long-term debt.......................   (216,895)          (42,742)
   Issuance of common stock..........................     12,339                 -
   Purchase of treasury stock........................       (653)                -
   Debt issue costs and other........................     (7,648)             (289)
                                                       ---------         ---------


Net cash provided by financing activities............    108,477            17,319
                                                       ---------         ---------


Effect of exchange rate on cash......................       (205)              (85)
                                                       ---------         ---------

Net decrease in cash and cash equivalents............     (1,028)          (24,437)

Cash and cash equivalents-beginning of period........      5,609            30,882
                                                       ---------         ---------

Cash and cash equivalents-end of period..............  $   4,581         $   6,445
                                                       =========         =========   
</TABLE>


   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.

                                       5
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.

         CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, (CONTINUED)
                                (IN THOUSANDS)
                                  (UNAUDITED)

                RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
                       PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
                                                                   NINE MONTHS ENDED
                                                                        JUNE 30,
                                                                 ---------------------
                                                                   1997         1996
                                                                ----------   ---------
<S>                                                             <C>          <C>
Net income (loss)..............................................  $ (24,386)   $  35,634
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
   Depreciation and amortization...............................     36,192       31,859
   Debt fee amortization.......................................      3,072          566
   Loss on disposal of assets..................................         36        3,080
   Deferred tax expense........................................      4,205        2,974
   Accrued compensation........................................          -        6,406
   Unearned compensation.......................................      1,592            -
   Discount note amortization..................................     11,486            -
   Extraordinary item, net of taxes............................      3,924            -
                                                                             
                                                                             
Change in:                                                                   
                                                                             
   Accounts receivable.........................................    (23,604)     (38,671)
   Inventories.................................................      4,537       20,174
   Prepaid expenses............................................     (8,917)      (4,048)
   Other assets................................................     (4,171)      (7,119)
   Accounts payable............................................    (15,292)     (12,571)
   Accrued liabilities.........................................      6,514      (20,588)
   Interest payable............................................     12,147          (56)
   Taxes payable...............................................     (3,367)       5,846 
   Other liabilities...........................................      7,556        7,888
                                                                  --------      -------

Net cash provided by operating activities......................   $ 11,524      $31,374
                                                                  ========      ======= 
 </TABLE>


   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.

                                       6
<PAGE>
 
                           STERLING CHEMICALS, INC.
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS EXCEPT SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION> 
                                                       JUNE 30,      SEPTEMBER 30,
                                                        1997            1996
                                                     -----------     -------------
ASSETS
<S>                                                  <C>             <C>
Current assets:
 
    Cash and cash equivalents....................... $    3,347      $    5,581
    Accounts receivable.............................    183,567         135,635
    Inventories.....................................     72,497          53,720
    Prepaid expenses................................     21,799          10,226
    Deferred income taxes...........................      6,325           6,064
                                                     ----------      ----------
      Total current assets..........................    287,535         211,226

Property, plant and equipment, net..................    435,162         365,765
Other assets........................................    109,480         108,460
                                                     ----------      ----------
        Total assets................................ $  832,177      $  685,451
                                                     ==========      ==========

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
   Accounts payable................................. $   63,963      $   66,562
   Accrued liabilities..............................     75,261          55,740
   Current portion of long-term debt................      2,958          11,625
                                                     ----------      ----------
      Total current liabilities.....................    142,182         133,927
                                                                   
Long-term debt......................................    735,980         619,875
Deferred income taxes...............................     52,061          47,478
Deferred credits and other liabilities..............     81,094          68,473
Common stock held by ESOP...........................      7,688           6,500
Less: unearned compensation.........................     (6,096)         (6,500)
                                                                   
Commitments and contingencies                                      
Stockholder's equity (deficiency in assets):                                                          
                                                                   
   Common stock, $.01 par value.....................          -               -
   Additional paid-in capital.......................   (146,544)       (165,352)
   Retained earnings (deficit)......................    (13,451)            174
   Accumulated translation adjustment...............    (20,737)        (19,124)
                                                     ----------       ---------
      Total stockholder's equity (deficiency in                                  
         assets)....................................   (180,732)       (184,302)
                                                     ----------       ---------                               
        Total liabilities and stockholder's                            
           equity (deficiency in assets)............ $  832,177       $ 685,451
                                                     ==========       ========= 
</TABLE>

   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.

                                       7
<PAGE>
 
                           STERLING CHEMICALS, INC.
 
              CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (1)
                                (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>


                                                    THREE MONTHS         NINE MONTHS
                                                       ENDED                ENDED
                                                      JUNE 30,             JUNE 30,
                                                        1997                 1997
                                                    ------------         -----------
<S>                                                 <C>                  <C>
Revenues........................................... $  239,244           $  665,933
Cost of goods sold.................................    210,249              605,028
                                                    ----------           ----------
Gross profit.......................................     28,995               60,905
Selling, general and administrative expenses.......     10,931               23,714
Interest and debt related expenses.................     19,882               51,694
Interest income from parent........................          -               (1,788)
                                                    ----------           ----------
Loss before income taxes and extraordinary item....     (1,818)             (12,715)

Provision (Benefit) for income taxes...............         62               (3,014)
                                                    ----------           ----------
Net loss before extraordinary item.................     (1,880)              (9,701) 

Extraordinary item, loss on early                                                   
 extinguishment of debt, net of tax................      3,924                3,924 
                                                    ----------           ---------- 
Net Loss........................................... $   (5,804)          $  (13,625)
                                                    ==========           ========== 
 </TABLE>
-----------
(1)   See Note 1 of Notes to Condensed Consolidated Financial Statements for a
      discussion of merger activities and related financing. Prior to August 21,
      1996, Chemicals had no operating activities other than those related to
      merger activities.



   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.

                                       8
<PAGE>
 
                           STERLING CHEMICALS, INC.

              CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (1)
                                (IN THOUSANDS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
 
                                                                           NINE MONTHS
                                                                              ENDED
                                                                             JUNE 30,
                                                                              1997
                                                                         ------------
 
Cash flows from operating activities:
  <S>                                                                   <C>
    Cash received from customers......................................  $     670,962
    Miscellaneous cash receipts.......................................         18,524
    Cash paid to suppliers and employees..............................       (646,624)
    Interest paid.....................................................        (35,556)
    Interest received.................................................            313
    Income taxes refunded.............................................          3,288
                                                                        -------------

Net cash provided by operating activities.............................         10,907
                                                                        -------------

Cash flows from investing activities:
   Capital expenditures...............................................        (32,640)
   Purchase of assets-fibers business.................................        (88,200)
   Proceeds from sale of assets.......................................             16
                                                                        -------------

Net cash used in investing activities.................................       (120,824)

Cash flows from financing activities:
   Proceeds from long-term debt.......................................        321,334
   Repayment of long-term debt........................................       (216,895)
   Intercompany financing.............................................          3,000
   Contributions from parent..........................................          8,604
   Debt issue costs and other.........................................         (8,155)
                                                                        -------------

Net cash provided by financing activities.............................        107,888
                                                                        -------------


Effect of exchange rate on cash.......................................           (205)
                                                                        -------------

Net decrease in cash and cash equivalents.............................         (2,234)


Cash and cash equivalents-beginning of period.........................          5,581
                                                                        -------------

Cash and cash equivalents-end of period...............................  $       3,347
                                                                        =============
 
 
</TABLE>


   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.

                                       9
<PAGE>
 
                           STERLING CHEMICALS, INC.

        CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS, CONTINUED, (1)
                                (IN THOUSANDS)
                                  (UNAUDITED)

                    RECONCILIATION OF NET LOSS TO NET CASH
                       PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
 
 
                                                                                NINE MONTHS 
                                                                                   ENDED   
                                                                                  JUNE 30, 
                                                                                    1997   
                                                                                ------------
<S>                                                                             <C>        
Net loss......................................................................  $(13,625)

Adjustments to reconcile net loss to net cash provided by operating 
 activities:

   Depreciation and amortization..............................................    36,192
   Debt fee amortization......................................................     2,825
   Loss on disposal of assets.................................................        36
   Deferred tax expense.......................................................     8,261
   Unearned compensation......................................................     1,592
   Extraordinary item, net of taxes...........................................     3,924


Change in:
   Accounts receivable........................................................   (28,129)
   Inventories................................................................     4,537
   Prepaid expenses...........................................................    (7,788)
   Other assets...............................................................    (4,698)
   Accounts payable...........................................................   (14,930)
   Accrued liabilities........................................................     6,427
   Interest payable...........................................................    13,935
   Taxes payable..............................................................    (5,209)
   Other liabilities..........................................................     7,557
                                                                                --------


Net cash provided by operating activities.....................................  $ 10,907
                                                                                ========
</TABLE>
------------------
(1) See Note 1 of Notes to Condensed Consolidated Financial Statements for a
    discussion of merger activities and related financing. Prior to August 21,
    1996, Chemicals had no operating activities other than those related to
    merger activities.


   The accompanying notes are an integral part of the condensed consolidated
                             financial statements.

                                       10
<PAGE>
 
                       STERLING CHEMICALS HOLDINGS, INC.
                           STERLING CHEMICALS, INC.

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)

1. MERGER ACTIVITIES:

     Sterling Chemicals, Inc. (prior to the Merger, "Sterling") and STX
Acquisition Corp. ("STX Acquisition"), a Delaware corporation formed in April
1996 by an investor group led by The Sterling Group, Inc. ("TSG") and The
Unicorn Group L.L.C. ("Unicorn"), entered into an Amended and Restated Agreement
and Plan of Merger dated April 24, 1996 (the "Merger Agreement"). On August 20,
1996, the Merger Agreement was approved by a majority of the shares outstanding,
and on August 21, 1996, STX Acquisition merged with and into Sterling, changing
its name to Sterling Chemicals Holdings, Inc. ("Holdings"), and continuing as
the surviving corporation (the "Merger"). In connection with the Merger,
Holdings transferred all of its operating assets and liabilities excluding its
13 1/2% Senior Secured Discount Notes Due 2008 (the "13 1/2% Notes") to a wholly
owned subsidiary, STX Chemicals Corp., which at the time of the Merger changed
its name to Sterling Chemicals, Inc. (after the Merger, "Chemicals"). Holdings
has no direct subsidiaries other than Chemicals. As used herein, the term
"Company" refers to Sterling and its subsidiaries prior to the consummation of
the Merger and, following the Merger, to Holdings and its subsidiaries,
including Chemicals.

     Each share of Sterling's common stock outstanding immediately prior to the
Merger was converted (at the election of the holder thereof) into either $12.00
cash or the right to retain such shares ("Rollover Shares"), with the aggregate
number of Rollover Shares limited to 5.0 million. As a result of the Merger, on
August 21, 1996, the former STX Acquisition stockholders held approximately 5.3
million shares (49%), stockholders with Rollover Shares held approximately 5.0
million shares (46%), and the Company's newly formed Employee Stock Ownership
Plan (the "ESOP") held approximately 542,000 shares (5%) of the outstanding
shares of Holdings' common stock, par value $0.01 per share ("Holdings Common
Stock").

     The Merger was financed by the proceeds of bank term loans of $356.5
million, including an ESOP term loan of $6.5 million, amounts drawn against a
revolving credit facility of $6.4 million each pursuant to a new credit
agreement (the "Original Credit Agreement"), an offering by Chemicals of $275.0
million of Chemicals' 11 3/4% Senior Subordinated Notes Due 2006 (the "11 3/4%
Notes"), an offering of $191.8 million (initial proceeds of $100 million)
representing 191,751 Units, with each unit consisting of one 13 1/2% Note and
one Warrant to purchase three shares of Holdings Common Stock for $0.01 per
share beginning in August 1997, equity raised by STX Acquisition of
approximately $70.7 million, and cash on hand of $10.3 million. These proceeds
were used to redeem Sterling's common stock other than Rollover Shares ($608.3
million), purchase other equity interests (primarily stock appreciation rights
("SARs")) ($14.6 million), repay debt outstanding prior to the Merger ($142.7
million), loan monies to the new ESOP ($6.5 million), and pay fees and expenses
($46.8 million).

     The Company has accounted for the Merger and related financing
(collectively the "1996 Recapitalization") as a series of debt and equity
transactions representing a recapitalization. Accordingly, the historical basis
of the Company's assets and liabilities have not been impacted by the 1996
Recapitalization.


2. BASIS OF PRESENTATION:

     In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments necessary to present
fairly the consolidated financial position of the Company and Chemicals as of
June 30, 1997 and their consolidated results of operations and cash flows for
the applicable three month and nine month periods ended June 30, 1997 and 1996.
All such adjustments are of a normal and recurring nature. The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year. The accompanying unaudited condensed
consolidated financial statements should be, and are assumed to have been, read
in conjunction with the consolidated financial statements and notes included in
Holdings' and Chemicals' combined Annual Report on Form 10-K for the fiscal year
ended September 30, 1996 (the "Annual Report"). The condensed consolidated
balance sheets as of September 30, 1996 included herein have been derived from
the audited consolidated balance sheets as of September 30, 1996 included in the
Annual Report. The condensed consolidated 

                                       11
<PAGE>
 
financial statements as of and for the three month and nine month periods ended
June 30, 1997 included herein have been subjected to a review by Deloitte &
Touche LLP, the Company's independent public accountants, whose reports are
included herein.

     Certain amounts reported in the financial statements for the prior periods
have been reclassified to conform with the current financial statement
presentation with no effect on net income or stockholders' equity.

3. INVENTORIES:

<TABLE> 
<CAPTION> 
                                                              JUNE 30,         SEPTEMBER 30,
                                                                1997                1996
                                                             ---------         -------------   
<S>                                                          <C>               <C> 
Inventories consisted of the following (in thousands):

Finished products..........................................  $  42,201          $   31,868
Raw materials..............................................     12,635               9,499
Inventories under exchange agreements......................     (1,986)                722
Stores and supplies........................................     19,647              11,631
                                                             ---------          ----------
                                                             $  72,497          $   53,720
                                                             =========          ==========

4. LONG-TERM DEBT:

                                                              JUNE 30,         SEPTEMBER 30,
                                                                1997                1996
                                                             ---------         -------------

Long-term debt consisted of the following (in thousands):
Revolving credit facilities................................  $  26,760          $         __
Term loans.................................................    275,667               350,000
ESOP term loan.............................................      5,281                 6,500
11 1/4% Notes..............................................    153,231                    __
11 3/4% Notes..............................................    275,000               275,000
13 1/2%  Notes.............................................    106,243                94,757
                                                             ---------          ------------
  Total debt outstanding...................................    842,182               726,257

Less:

   Current maturities......................................     (2,958)              (11,625)
                                                              --------          ------------

Total long-term debt.......................................  $ 839,224          $    714,632
                                                             =========          ============

</TABLE>

     As part of the 1996 Recapitalization, Chemicals entered into the Original
Credit Agreement with Texas Commerce Bank National Association, as agent bank
for a syndicate of lenders, and Credit Suisse First Boston and Chase Securities,
Inc. as co-arrangers. Funding under the Original Credit Agreement occurred
August 21, 1996, upon the consummation of the Merger. The Original Credit
Agreement provides for facilities consisting of a six and one-half year
revolving credit facility providing for up to $100 million (subject to a monthly
borrowing base calculation) in revolving loans (the "Revolver"), a term loan
facility consisting of a six and one-half year $200 million Tranche A term loan
and an eight-year $150 million Tranche B term loan (the "Original Term Loans"),
and a four-year $6.5 million ESOP Term Loan (the "ESOP Loan").

     On January 31, 1997, the Company acquired (the "AFB Acquisition") the
acrylic fibers business (the "AFB") of Cytec Industries Inc. ("Cytec") (See Note
7). In connection with the AFB Acquisition, Chemicals entered into a credit
agreement (the "New Credit Agreement" and together with the Original Credit
Agreement, the "Senior Credit Agreements") with Texas Commerce Bank National
Association, as agent bank for a syndicate of lenders, and Credit Suisse First
Boston and Chase Securities Inc. as co-arrangers. Funding under the New Credit
Agreement occurred January 31, 1997, upon consummation of the AFB Acquisition.
The New Credit Agreement provides for a term loan facility consisting of a $31
million Tranche A term loan due June 30, 2003, and a $50 million Tranche B term
loan due September 30, 2004 (the "New Term Loans" and together with the Original
Term Loans, the "Term Loans").

     The Term Loans, the ESOP Loan and the Revolver borrowings bear interest, at
Chemicals' option, at an annual rate of either the Eurodollar Rate or the Base
Rate plus an Applicable Margin ranging from 0% to 3% depending 

                                       12
<PAGE>
 
upon the Company's Leverage Ratio (as defined in the Original Credit Agreement).
The "Base Rate" is equal to the greater of the Prime Rate as announced from time
to time by the agent bank, the "Federal Funds Effective Rate" plus 1/2% or the
"Base CD Rate" plus 1% (as such terms are defined in the Senior Credit
Agreements). The Original Credit Agreement also requires Chemicals to pay a
commitment fee in the amounts of 3/8% or 1/2% of the unused commitment under the
Revolver depending on the Company's Leverage Ratio.

     On April 7, 1997, Chemicals completed a private offering (the "11 1/4%
Notes Offering") of $150,000,000 of 11 1/4% Senior Subordinated Notes Due 2007
(the "11 1/4% Notes"). The 11 1/4% Notes are unsecured senior subordinated
obligations of Chemicals, ranking subordinate in right of payment to all
existing and future senior debt of Chemicals, but pari passu with the 11 3/4%
Notes and all future senior subordinated indebtedness. On July 7, 1997,
Chemicals completed a registered exchange offer, pursuant to which all of the 
11 1/4% Notes were exchanged for publicly registered 11 1/4% Notes with
substantially similar terms.

     The proceeds of the 11 1/4% Notes Offering were used to prepay outstanding
indebtedness under the Term Loans. In connection with such prepayments,
Chemicals and the requisite lenders under the Senior Credit Agreements effected
amendments to the Senior Credit Agreements ("the Amendments"). Among other
things, the Amendments (i) permitted and provided for the issuance of the 
11 1/4% Notes, (ii) adjusted the method of the application of voluntary
prepayments to allow the proceeds of the 11 1/4% Notes Offering to be applied in
a manner that significantly reduced required principal payments, particularly
over the next three years, (iii) amended certain financial covenants to make
them somewhat less restrictive, including amendments to ratios specified in the
Amendments, (iv) increased the commitment under the Revolver by $25 million to
$125 million and (v) included a new financial covenant with respect to the
maintenance of a specified Senior Debt Leverage Ratio (as defined in the
Amendments). Unamortized debt issue costs related to the Term Loans of
approximately $6.0 million pre-tax, $3.9 million after-tax, were expensed in
April 1997 and recorded as an extraordinary loss from early extinguishment of
debt.


5. COMMITMENTS AND CONTINGENCIES:

Product Contracts

     The Company has certain long-term agreements that provide for the
dedication of 100% of the Company's production of acetic acid, plasticizers,
tertiary butylamine, and sodium cyanide, each to one customer. The Company also
has various sales and conversion agreements that dedicate significant portions
of the Company's production of styrene monomer, acrylonitrile, and methanol, the
Company's major petrochemical products, to various customers. These agreements
generally provide for cost recovery plus an agreed margin or element of profit
based upon market price.

Environmental Regulations

     The Company's operations involve the handling, production, transportation
and disposal of materials classified as hazardous or toxic and are extensively
regulated under environmental and health and safety laws. Operating permits
which are required for the Company's operations are subject to periodic renewal
and may be revoked or modified for cause. New laws or permit requirements and
conditions may affect the Company's operations, products, or waste disposal.
Past or future operations may result in claims or liabilities. Expenditures
could be required to upgrade waste water collection, pretreatment, or disposal
systems or for other matters related to production, transportation and disposal
of materials classified as hazardous or toxic.

Legal Proceedings

     Ammonia Release Lawsuits. A description of the ammonia release lawsuit is
found under "Legal Proceedings" in Note 7 of the "Notes To Consolidated
Financial Statements" of the Annual Report and is incorporated herein by
reference. As discussed therein, approximately 2,600 of the plaintiffs agreed to
submit their damage claims to binding arbitration. Each of the plaintiffs who
agreed to participate in the arbitration waived any right of recovery for
punitive or exemplary damages. Pursuant to the agreement to arbitrate, a two-
week evidentiary proceeding was conducted in July 1996 before a three-judge
panel to determine the amount of damages. On May 1, 1997, the three-judge panel
awarded the plaintiffs an amount of damages which was well within the limits of
the Company's 

                                       13
<PAGE>
 
insurance coverages and will not have a material adverse impact on the financial
position, results of operations, or cash flows of the Company.

     The Company continues to vigorously defend against the claims of the
plaintiffs who did not participate in the July 1996 arbitration.

     Other Lawsuits. The Company is subject to various other claims and legal
actions that arise in the ordinary course of its business.

Litigation Contingency

     In accordance with Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies," and Financial Accounting Standards Board
Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts," the
Company has made estimates of the reasonably possible range of its liability
with regard to outstanding litigation for which it may incur liability. In
addition, liabilities have been accrued based on the estimated probable loss
from such litigation. These estimates are based on management's judgments using
currently available information as well as consultation with the Company's
insurance carriers and outside legal counsel. A number of the claims in these
litigation matters are covered by the Company's insurance policies. The Company
therefore has also made estimates of its probable recoveries under these
insurance policies based on its understanding of these policies, discussions
with its insurers and consultation with outside legal counsel, in addition to
management's judgments. Based on the foregoing, as of June 30, 1997, the Company
has accrued approximately $15.6 million as its estimate of aggregate contingent
liability for these matters, and has also recorded aggregate receivables from
its insurers of approximately $15.0 million. At June 30, 1997, management
estimates that the aggregate reasonably possible range of loss for all
litigation combined, in addition to the amount accrued, is from $0 to $20
million. The Company believes that this additional reasonably possible loss is
substantially covered by insurance.

     While the Company has based its estimates on its evaluation of available
information to date and the other matters described above, much of the
litigation is in its early stages and it is impossible to predict with certainty
the ultimate outcome. The Company will adjust its estimates as necessary as
additional information is developed and evaluated. However, the Company believes
that the final resolution of these contingencies will not have a material
adverse impact on the financial position, results of operations, or cash flows
of the Company. The timing of probable insurance recoveries, and additional
accruals or payment of liabilities, if any, are not expected to have a material
adverse effect on the financial position, results of operations, or cash flows
of the Company.


6. NEW ACCOUNTING STANDARDS:

     The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement
establishes new accounting standards for measuring the impairment of long-lived
assets. The Company adopted this Statement in the first quarter of fiscal 1997.
The adoption of this Statement did not have a material adverse effect on the
Company's financial position, results of operations, or cash flows.

     The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation" in October 1995. Under SFAS No. 123, companies are
permitted to either adopt this new standard and record expenses for stock
options and other stock-based employee compensation plans based on their fair
value at date of grant, or continue to apply its current accounting policy under
Accounting Principles Board ("APB") Opinion No. 25 and increase its footnote
disclosure. In the first quarter of fiscal 1997, the Company elected to continue
to apply APB Opinion No. 25, and will increase its footnote disclosure to
include the pro forma impact on net income and earnings per share of the
application of the fair value based method of accounting.

     The Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per
Share," in February 1997. SFAS No. 128, which is effective for periods ending
after December 15, 1997, establishes standards for computing and presenting
earnings per share ("EPS"). SFAS No. 128 replaces the presentation of primary
EPS previously prescribed by APB No. 15 with a presentation of basic EPS, which
is computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. The statement also
requires dual presentation of basic and diluted EPS. Diluted EPS is computed
similarly to fully diluted EPS 

                                       14
<PAGE>
 
pursuant to APB No. 15. Pro forma basic and diluted EPS for all historical
periods presented, assuming that SFAS No. 128 was effective at the beginning of
each such historical period, would not be materially different from what has
been presented using APB No. 15.

     In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," ("SFAS No. 130") and Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information," ("SFAS
No. 131"). SFAS No. 130 and SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for
reporting and displaying of comprehensive income and its components. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in interim and annual financial statements.
These two statements will have no effect on the Company's 1997 financial
statements, but management is currently evaluating what, if any, additional
disclosures may be required when these two statements are adopted in the first
quarter of fiscal 1999.


7. BUSINESS ACQUISITIONS:

     On January 31, 1997, the Company acquired the AFB from Cytec. The AFB, now
owned by two wholly owned subsidiaries of the Company (collectively "Sterling
Fibers"), recorded sales of approximately $139 million in calendar year 1996 and
consists of an acrylic fibers plant located near Pensacola, Florida, and several
associated marketing and research offices. Sterling Fibers is one of two acrylic
fibers manufacturers in the United States. Cytec will supply acrylonitrile to
Sterling Fibers through the continuation of a five-year supply agreement ending
in 2002. The acquisition was financed through the incurrence of $81 million of
term debt under the New Credit Agreement with substantially the same lenders as
those under the Original Credit Agreement, the issuance of $10 million
(liquidation value) of Series A "pay in kind" mandatory redeemable preferred
stock ("Series A Preferred") to Cytec, and the sale of $10 million of Holdings
Common Stock in a private placement. The Company used the purchase method to
account for the acquisition, and operating results of Sterling Fibers beginning
February 1, 1997 are included with those of the Company.

  The following table presents the unaudited pro forma results of operations of
the Company as if the AFB Acquisition had occurred on October 1, 1995. The pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the AFB Acquisition
been made at the beginning of fiscal year 1996 or of results which may occur in
the future (in thousands, except per share amounts).
<TABLE>
<CAPTION>
 
                                                       PRO FORMA                 PRO FORMA  
                                                      NINE MONTHS               NINE MONTHS
                                                         ENDED                     ENDED   
                                                        JUNE 30,                 JUNE 30,  
                                                          1997                     1996    
                                                      ------------              ----------- 
 
<S>                                                   <C>                       <C>
Revenues............................................  $   710,403               $    699,792
Net income (loss) attributable to
 common stockholders................................  $   (26,288)              $     39,289
Net income (loss) per common share..................  $     (2.30)              $       0.70
Weighted average shares.............................       11,420                     56,518
 
</TABLE>

     On July 10, 1997, Sterling Pulp Chemicals (Sask) Ltd. ("Sterling Sask"), an
indirect wholly owned subsidiary of Holdings and Chemicals, acquired
substantially all of the assets of Saskatoon Chemicals Ltd. ("Saskatoon
Chemicals"), a subsidiary of Weyerhaeuser Canada Ltd. (the "Saskatoon
Acquisition"). The acquired assets include a manufacturing plant near Saskatoon,
Saskatchewan, and were used by Saskatoon Chemicals to manufacture sodium
chlorate, caustic soda, calcium hypochlorite, chlorine, and hydrochloric acid.
Total consideration of $69.2 million was financed with (i) approximately $54.6
million under a new credit facility established by Sterling Sask with a group of
lenders, (ii) approximately $7.3 million pursuant to a private placement of
Holdings Common Stock, and (iii) approximately $7.3 million pursuant to a
private placement of Units, each Unit consisting of shares of Holdings' newly
authorized Cumulative Redeemable Preferred Stock, Series B ("Series B
Preferred") and Warrants to purchase shares of Holdings Common Stock. The
Saskatoon Acquisition will be accounted for under the purchase method of
accounting for financial reporting purposes during the fourth quarter of fiscal
1997.

                                       15
<PAGE>
 
8. EMPLOYEE BENEFITS:

Omnibus Stock Awards and Incentive Plan

     In April 1997, the Board of Directors, upon recommendation of the
Compensation Committee, but subject to shareholder approval at the next
stockholders meeting, approved the establishment of the Omnibus Stock Awards and
Incentive Plan (the "Omnibus Plan"). Under the Omnibus Plan, the Company may
grant to key employees, incentive and nonqualified stock options, stock
appreciation rights, restricted stock awards, performance awards, and phantom
stock awards. The terms and amounts of the awards will be determined by the
Compensation Committee of the Board of Directors. One million shares of the
Company's stock are reserved for issuance under the Omnibus Plan. In the event
of a change of control of the Company or a qualified public offering of Holdings
Common Stock, all awards will immediately vest and become exercisable.

     In July 1997, the Company granted approximately 260,000 stock options to
key employees of the Company with an exercise price of $12.00 per share. The
options vest 20% per year beginning on January 1, 1998, and are exercisable
through January 1, 2007.


Nonqualified Stock Option Plan for Non-Employee Directors

     Also in April 1997, the Board of Directors, upon recommendation of the
Compensation Committee, approved the establishment of the Nonqualified Stock
Option Plan for Non-Employee Directors (the "Nonqualified Plan"). Each non-
employee director of the Company is eligible to participate in the Nonqualified
Plan. Each eligible director on the date of adoption of the Nonqualified Plan
will be granted an option to acquire 2,000 shares of Holdings Common Stock
(4,000 shares for the Vice-Chairman), and each eligible director who is serving
on the Board of Directors on each subsequent October 1st will automatically be
granted an option to acquire 1,000 shares of Holdings Common Stock (2,000 shares
for the Vice-Chairman). All options will expire ten years from date of grant.
All options will be granted at the fair market value on the date of grant. A
total of 160,000 shares of Holdings Common Stock are reserved for issuance under
the Nonqualified Plan.
                                                                                
     Effective April 1997, the Company granted 14,000 stock options to non-
employee directors of the Company with an exercise price of $12.00 per share.
The options are exercisable immediately and expire on the tenth anniversary of
the date of grant.


Profit Sharing and Bonus Plan

     In January 1997, the Board of Directors, upon recommendation of the
Compensation Committee, approved the establishment of a Profit Sharing Plan that
is designed to benefit all qualified employees, and a Bonus Plan that is
expected to provide for bonuses to certain key employees based on the Company's
annual financial performance.

                                       16
<PAGE>
 
9. WEIGHTED AVERAGE SHARES(1):

     The weighted average shares outstanding used in the calculation of earnings
per share for the three and nine months ended June 30, 1997, is calculated
below:


<TABLE>
<CAPTION>
 
<S>                                                     <C>              <C>
 
Total shares outstanding as of June 30, 1997........... 11,964,000
Unallocated shares held by ESOP as of June 30, 1997....    524,000
                                                        ----------

Total shares outstanding
 Less: unallocated shares held by ESOP                  
  as of June 30, 1997.................................. 11,440,000
                                                        ==========



                                                         THREE              NINE
     WEIGHTED AVERAGE EFFECT OF:                         MONTHS            MONTHS
     ---------------------------                        ----------       ----------

Total shares outstanding at June 30, 1997.............. 11,440,000       11,440,000

44,000 shares acquired by ESOP.........................          -           14,000
10,000 treasury shares acquired........................      2,000            7,000
117,000 allocated shares held by ESOP..................    (22,000)         (67,000)
778,000 newly issued shares............................          -         (347,000)
                                                        ----------       ----------
Weighted average shares outstanding for the three and
 nine month periods ended June 30, 1997................ 11,420,000       11,047,000
                                                        ==========       ==========

</TABLE>                                                           

(1)   Weighted average shares outstanding excludes warrants equal to 575,000
      shares and 274,000 outstanding common stock options which were
      antidilutive for the three and nine month periods ending June 30, 1997.

                                       17
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

     We have reviewed the accompanying condensed consolidated balance sheet of
Sterling Chemicals Holdings, Inc. and subsidiaries (the "Company") as of June
30, 1997, and the related condensed consolidated statements of operations and
cash flows for the three-month and nine-month periods then ended. These
financial statements are the responsibility of the Company's management.

     We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.

     Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.

     We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of September 30,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended (not presented herein); and in
our report dated December 6, 1996, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of September 30, 1996
is fairly stated in all material respects, in relation to the consolidated
balance sheet from which it has been derived.


DELOITTE & TOUCHE LLP

Houston, Texas
August 12, 1997

                                       18
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholder of Sterling Chemicals, Inc.

     We have reviewed the accompanying condensed consolidated balance sheet of
Sterling Chemicals, Inc. and subsidiaries ("Chemicals") as of June 30, 1997, and
the related condensed consolidated statements of operations and cash flows for
the three-month and nine-month periods then ended. These financial statements
are the responsibility of Chemicals' management.

     We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.

     Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.

     We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Chemicals as of September 30, 1996,
and the related consolidated statement of operations, stockholder's equity, and
cash flows for the year then ended (not presented herein); and in our report
dated December 6, 1996, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of September 30, 1996
is fairly stated in all material respects, in relation to the consolidated
balance sheet from which it has been derived.

DELOITTE & TOUCHE LLP

Houston, Texas
August 12, 1997

                                       19
<PAGE>
 
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

Certain capitalized terms used herein have the meanings assigned to them in the
Notes To Condensed Consolidated Financial Statements.


OVERVIEW

     Holdings is a holding company whose only material asset is its investment
in Chemicals. Chemicals and its subsidiaries own substantially all of the
consolidated operating assets and are obligated for substantially all
liabilities of the Company other than the 13 1/2% Notes which are an obligation
of Holdings. The Merger that occurred on August 21, 1996, and related financings
were accounted for as a recapitalization, with no change in the basis of the
assets and liabilities of Chemicals. Other than the additional interest expense
associated with the 13 1/2% Notes and the preferred stock dividend associated
with the Series A Preferred issued to Cytec, the results of operations for the
Company are essentially the same as those for Chemicals. Accordingly, the
discussion that follows is applicable to both entities, except as specifically
noted. A separate discussion of the results of operations for Chemicals for the
three month and nine month periods ended June 30, 1997 would not, in the opinion
of the Company, provide any additional meaningful information.


RECENT DEVELOPMENTS

     On July 29, 1997, the methanol production facility at the Texas City Plant
was shut down due to operating problems. Repairs are ongoing, and production at
the facility is expected to resume in September 1997. Financial results for the
fourth fiscal quarter ending September 30, 1997 will be negatively impacted by
the shut down; however, the shut down is not expected to have a material adverse
effect on the Company's results of operations for the fiscal year ended
September 30, 1997. No assurance can be given that the shut down, should it
continue longer than expected, will not have a material adverse effect on the
Company. The shut down does not materially affect the operation of any other
facilities at the Texas City Plant.

     On July 23, 1997, the Company announced the signing of a non-binding letter
of intent with W.K. Croxton (Pty) Ltd. to form a joint venture that would
construct a sodium chlorate plant in South Africa. Formation of the venture and
construction of the plant are subject to numerous conditions, and no assurances
can be given that either will occur.

     On July 10, 1997, Sterling Sask, an indirect wholly owned subsidiary of
Holdings and Chemicals, acquired substantially all of the assets of Saskatoon
Chemicals, a subsidiary of Weyerhaeuser Canada Ltd. Sterling Sask was
established in connection with the Saskatoon Acquisition and was designated as
an Unrestricted Subsidiary under the indentures governing the 13 1/2% Notes, the
11 3/4% Notes, and the 11 1/4% Notes (the "Indentures"). The acquired assets
include a manufacturing plant near Saskatoon, Saskatchewan, and were used by
Saskatoon Chemicals to manufacture sodium chlorate, caustic soda, calcium
hypochlorite, chlorine, and hydrochloric acid. Total consideration of $69.2
million was financed with (i) approximately $54.6 million under a new credit
facility established by Sterling Sask with a group of lenders, (ii)
approximately $7.3 million pursuant to a private placement of Holdings Common
Stock, and (iii) approximately $7.3 million pursuant to a private placement of
Units, each Unit consisting of shares of Series B Preferred Stock and Warrants
to purchase shares of Holdings Common Stock. The Saskatoon Acquisition will be
accounted for under the purchase method of accounting for financial reporting
purposes during the fourth quarter of fiscal 1997.

     On April 7, 1997, Chemicals completed its private offering of $150,000,000
of 11 1/4% Notes. The 11 1/4% Notes are unsecured senior subordinated
obligations of Chemicals, ranking subordinate in right of payment to all
existing and future senior debt of Chemicals, but pari passu with the 11 3/4%
Notes and all future senior subordinated indebtedness. On July 7, 1997,
Chemicals completed a registered exchange offer, pursuant to which all of the 11
1/4% Notes were exchanged for publicly registered 11 1/4% Notes with
substantially similar terms.

     The proceeds of the 11 1/4% Notes Offering were used to prepay outstanding
indebtedness under the Term Loans. In connection with such prepayments,
Chemicals and the requisite lenders under the Senior Credit Agreements effected
the Amendments. Among other things, the Amendments (i) permitted and provided
for the issuance of the 11 1/4% Notes, (ii) adjusted the method of the
application of voluntary prepayments to allow the proceeds of the 11 1/4% Notes
Offering to be applied in a manner that significantly reduced required principal
payments, particularly over the next three years, (iii) amended certain
financial covenants to make them somewhat less restrictive, including amendments
to specific ratios specified in the Amendments, (iv) increased the commitment
under the Revolver by $25 million to $125 million, and (v) included a new
financial covenant with respect to the maintenance of a specified Senior Debt
Leverage Ratio (as defined in the Amendments).  Unamortized debt issue costs
related to the Term Loans of approximately $6.0 million pre-tax, $3.9 million
after-tax, were expensed in April 1997 and recorded as an extraordinary loss
from early extinguishment of debt.

                                       20
<PAGE>
 
RESULTS OF OPERATIONS

     Consolidated revenues increased for the three and nine month periods ending
June 30, 1997, compared to the same periods in fiscal 1996. The primary reasons
for these increased revenues were five months of operations from the recently
acquired AFB, increased volumes for sodium chlorate, due in part to the startup
of the Company's new sodium chlorate plant in Valdosta, Georgia (the "Valdosta
Plant"), and revenues from the Company's new methanol unit at the Texas City,
Texas plant (the "Texas City Plant"). Consolidated net income (loss) was lower
due to lower petrochemical margins (primarily styrene), along with an increase
of interest expense to $23.9 million and $63.4 million for the three and nine
month periods of 1997, respectively, compared to $1.2 million and $4.4 million,
respectively, for the same periods last year.

     Revenues for the third quarter of fiscal 1997 were $239.2 million compared
to revenues of $218.4 million for the third quarter of fiscal 1996, an increase
of 10%. A net loss of $9.6 million, or $0.84 per share, was recorded for the
third quarter of fiscal 1997 compared to net income of $16.4 million, or $0.29
per share, for the third quarter of fiscal 1996. Included in the third quarter
of 1997 net loss was an extraordinary pre-tax charge of $6.0 million, or $3.9
million after-tax, related to the write-off of unamortized debt issue costs as a
result of the partial prepayment of the Term Loans with proceeds of the 11 1/4%
Notes Offering.

     Revenues for the first nine months of fiscal 1997 were $665.9 million
compared to revenues of $600.8 million for the first nine months of fiscal 1996,
an increase of nearly 11%. A net loss of $24.8 million or $2.24 per share was
recorded for the first nine months of fiscal 1997 compared to net income of
$35.6 million or $0.64 per share for the first nine months of fiscal 1996.
Included in the nine months of fiscal 1997 net loss was an extraordinary pre-tax
charge of $6.0 million, or $3.9 million after-tax, related to the write-off of
unamortized debt issue costs as a result of the partial prepayment of the Term
Loans.

Petrochemicals

     Petrochemical business revenues for the three months ending June 30, 1997,
were $163.8 million as compared to $180.5 million in the prior year period.  The
9% decrease in revenues was primarily due to reduced acrylonitrile and styrene
volumes, partially offset by the positive impact of the new methanol unit.  The
nine months ending June 30, 1997, revenues were $482.6 million as compared to
$487.3 million in the same period of 1996.  The 1% decrease in revenues was
primarily due to reduced acrylonitrile and styrene volumes, mostly offset by the
positive impact of the new methanol unit.  The Company's petrochemical business
recorded operating income of $5.1 million and an operating loss of $1.5 million,
respectively, for the three and nine month periods of 1997 compared to operating
income of $15.4 million and $30.0 million, respectively, for the same periods of
fiscal 1996.  The decrease in operating earnings for the third quarter was
primarily due to lower styrene and acrylonitrile volumes and lower styrene
margins.  The decrease in operating earnings for the nine month period was
primarily due to lower styrene and acrylonitrile margins.

     Styrene.   Styrene revenues decreased 9% to  $79.1 million in the third
quarter of fiscal 1997 and 2% to $244.1 million for the first nine months of
fiscal 1997 compared to the same periods in fiscal 1996. Styrene sales prices
decreased moderately from the same fiscal 1996 periods because of weaker market
conditions, particularly in the export market. Average sales prices for both the
third quarter and first nine months of fiscal 1997 decreased by approximately 1%
from the same periods a year ago. Sales volumes for both the three and nine
month periods decreased 10% and 4%, respectively, when compared to the same
periods last year.

     The prices of styrene's major raw materials, benzene and ethylene, were
higher during the third quarter and first nine months of fiscal 1997 compared to
the same periods in fiscal 1996. Benzene prices were approximately 6% and 19%
higher, and ethylene prices were approximately 12% and 24% higher, for the
respective 1997 periods compared to 1996. These price escalations contributed
significantly to the decline in styrene margins as market conditions did not
allow for sufficient styrene price increases to compensate for these rising
costs.

     Acrylonitrile. Acrylonitrile revenues decreased 26% to $35.9 million in the
third quarter of fiscal 1997 and 16% to $103.8 million for the first nine months
of fiscal 1997 compared to the same periods in fiscal 1996. The decreased
revenues in both periods were primarily due to reduced volumes of 27% and 5%,
respectively, for the three and nine months of 1997 as compared to the same
periods of 1996. The 27% reduction in volumes in the third quarter of 1997 were
primarily due to the partial shutdown of production as a result of operating
difficulties 

                                       21
<PAGE>
 
following the completion of a capital project. In addition, the reduced revenues
in the nine month period of fiscal 1997 were impacted by a 12% decrease in the
average acrylonitrile sales price realized by the Company.

     The prices of acrylonitrile's major raw materials, propylene and ammonia,
were approximately 16% and (1)% higher (lower), respectively, in the third
quarter and 17% and 12% higher, respectively, for the first nine months of
fiscal 1997 than for the corresponding periods in fiscal 1996. These increases
contributed to the decline in acrylonitrile margins.

     Methanol. Methanol revenues for the third quarter of 1997 were $20.6
million, bringing the total revenues for the first nine months of fiscal 1997 to
$52.5 million. Margins improved significantly in the third quarter as the price
of natural gas (the primary raw material for methanol) declined significantly
without a corresponding drop in the price of methanol. In addition, the methanol
unit benefited from operating at 112% of capacity. The methanol unit was under
construction during the corresponding periods of 1996. 

     Other Petrochemical Products. Revenues from the Company's other
petrochemical products (including acetic acid, plasticizers, tertiary
butylamine, and sodium cyanide) in the third quarter of fiscal 1997 were $28.2
million, a decrease of 37% when compared to the same period last year. Revenues
for the nine month period ended June 30, 1997 were down 28% to $82.2 million
when compared to the same 1996 period. The decrease in revenues in both periods
was primarily due to a decline in acetic acid revenues resulting from a
procedural change in the billings under the Company's production contract with
BP Chemicals Inc. ("BP") and the recording of related revenues. Prior to the
startup of the Company's methanol unit, the Company purchased the methanol used
in the production of acetic acid. Under the BP contract, such purchases were
ultimately re-billed to BP and included in acetic acid revenues. Methanol for
acetic acid production is now supplied by the Company's methanol facility and is
included in methanol revenues.

Pulp Chemicals

     Revenues from the Company's pulp chemical business increased 9% to $41.0
million and 11% to $125.5 million for the third quarter and first nine months of
fiscal 1997, respectively, when compared to the same periods last year. The
increase in revenues was primarily due to an increase in sales volumes of sodium
chlorate of 22% and 14%, respectively, when compared to the corresponding three
and nine month periods of 1996. The increase in sales volumes in the third
quarter was aided by the startup of the Valdosta Plant in December 1996. Average
sales prices for sodium chlorate declined 7% in the third quarter of fiscal 1997
compared to the corresponding period in 1996. Average sodium chlorate sales
prices for the first nine months of 1997 were 2% lower than the corresponding
period in 1996.  Revenues from the sale of generators and royalty income
decreased 27% in the third quarter and increased 3% in the first nine months of
fiscal 1997 compared to the corresponding periods of 1996. This 27% decrease in
revenues in the third quarter of 1997 was primarily due to reduced project work
related to generators.  Operating earnings for the pulp chemicals business were
$10.9 million for the third quarter of fiscal 1997 compared to $10.4 million
during the corresponding period of 1996. Operating earnings for the pulp
chemicals business were $35.2 million for the first nine months of fiscal 1997
compared to $28.3 million for the corresponding period in 1996. The increase for
the three and nine month periods were primarily due to increased sales volumes
of sodium chlorate. In addition, the Company recorded $2.9 million of expenses
associated with stock appreciation rights for its pulp chemicals employees
during the nine months of fiscal 1996.

Fibers

     For the five-month period from February 1, 1997, to June 30, 1997, Sterling
Fibers recorded revenues and operating earnings of $57.8 million and $2.9
million, respectively. For the three months ended June 30, 1997, Sterling Fibers
recorded revenues and operating earnings of $34.4 million and $2.1 million,
respectively.  Because the Company did not acquire the assets constituting the
AFB prior to January 31, 1997, there are no corresponding results for prior
periods.


Selling, General, and Administrative Expenses

     Selling, general, and administrative ("SG&A") expense increased to $11.0
million during the third quarter of fiscal 1997 as compared to $7.7 million in
the comparable period of fiscal 1996.  The $3.3 million increase was primarily
due to AFB SG&A expense recorded since the acquisition in January 1997. SG&A
expenses for the first nine months of fiscal 1997 were $24.3 million compared to
$23.8 million in the first nine months of fiscal 1996. The 

                                       22
<PAGE>
 
$0.5 million increase was primarily due to AFB SG&A expense recorded since the
acquisition in January 1997, mostly offset by a sales tax refund in 1997 and
lower employee profit sharing and other overheads.

Interest and Debt Related Expense

     Interest and debt related expenses for the three and nine month periods
ending June 30, 1997, were $23.9 million and $63.4 million, respectively,
compared to $1.2 million and $4.4 million, respectively, for the corresponding
periods in 1996. This increase is primarily due to the additional debt incurred
in the 1996 Recapitalization and the AFB Acquisition.

Extraordinary Item

     The $3.9 million after-tax ($6.0 million pre-tax) extraordinary item
relates to unamortized debt issue costs which were expensed in April 1997 as a
result of the partial prepayment of the Term Loans.


LIQUIDITY AND CAPITAL RESOURCES

Debt Structure

     On August 21, 1996, the Company completed the 1996 Recapitalization,
significantly increasing the Company's leverage and cash requirements for debt
service related to the Original Credit Agreement, the 13 1/2% Notes and the 11
3/4% Notes.  In connection with the AFB Acquisition, Chemicals entered into the
New Credit Agreement, which was funded on January 31, 1997, upon consummation of
the AFB Acquisition.  On April 7, 1997, Chemicals completed the 11 1/4% Notes
Offering, the proceeds of which were used to partially repay the Term Loans.  At
June 30, 1997, the Company's long-term debt (including current maturities) was
$842.2 million.

     The Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions and general corporate
purposes, should it need to do so, will be affected by the covenants in its
various debt agreements and by cash requirements for debt service. The Senior
Credit Agreements and the Indentures contain numerous financial and operational
covenants, including, without limitation, restrictions on the Company's ability
to incur indebtedness, pay dividends, create liens, sell assets, engage in
mergers and acquisitions, and refinance existing indebtedness, as well as the
obligation of the Company to maintain certain financial ratios. As of June 30,
1997, these restrictions currently operate to prevent the Company from incurring
any additional debt other than debt incurred under the Revolver or pursuant to
certain limited "baskets" and other exceptions. The 11 1/4% Notes Offering was
permitted under the Indentures as a Refinancing of Debt outstanding under the
Senior Credit Agreements. The Indentures will also permit the Company to
consummate acquisitions if the pro forma effect of such an acquisition has
sufficient positive impact on certain financial ratios. In addition, under
limited circumstances the Company may make acquisitions through the incurrence
of debt in Unrestricted Subsidiaries (as defined in the Indentures). The
financing for the Saskatoon Acquisition was structured in this manner. The
Senior Credit Agreements also require that certain amounts of Excess Cash Flow
(as defined therein) be used to prepay amounts outstanding under the Term Loans.
The first such mandatory prepayment, if any, is not required to be made until
January 1998. The Company's ability to comply with the terms of its various debt
agreements (including its ability to comply with such covenants) and to meet its
debt service obligations will depend on its future performance. The Company was
in compliance with its financial covenants (as amended) in effect as of June 30,
1997.

     The Company intends to meet its liquidity needs for operating activities
and capital expenditures (other than acquisitions) through internally generated
funds and, to the extent necessary, borrowings under the Revolver. As part of
the Amendments, on April 7, 1997, the total commitment under the Revolver was
increased by $25 million to $125 million. The Company believes that such sources
of funds will be sufficient to permit the Company to meet its liquidity needs
during fiscal 1997. As of June 30, 1997, Chemicals had drawn approximately $26.8
million under the Revolver and issued approximately $2.0 million in letters of
credit under the Revolver, thereby reducing the available commitment under the
Revolver at such time to approximately $96.2 million (compared to an available
commitment thereunder as of March 31, 1997 of $77.4 million).

     The Senior Credit Agreements and the indentures for the 11 3/4% Notes and
the 11 1/4% Notes contain provisions which restrict the payment of advances,
loans, and dividends from Chemicals to Holdings. The most restrictive of those
covenants limit such payments during fiscal 1997 to approximately $1.6 million
plus any amounts due to 

                                       23
<PAGE>
 
Holdings from Chemicals under an intercompany tax sharing agreement. Such
restriction is not expected to limit Holdings' ability to meet its obligations
in fiscal 1997.

Working Capital

     Working capital of the Company was $138.9 million at June 30, 1997, up from
$76.9 million at September 30, 1996. The $62.0 million increase in working
capital was primarily due to the addition of the AFB which contributed
approximately $29 million to total working capital and an increase in pulp and
petrochemicals accounts receivables partially due to the Valdosta Plant, the new
methanol plant, profit sharing accruals under the plasticizers sales agreement
with BASF and business terms and timing of collections.

Cash Flow

     Net cash provided by operations was $11.5 million during the first nine
months of fiscal 1997 compared to $31.4 million for the corresponding period in
fiscal 1996. The decrease was primarily attributable to higher payments for
interest and lower operating earnings.

Capital Expenditures

     The Company's capital expenditures for the first nine months of fiscal 1997
were $32.6 million compared to $73.0 million in the same period last year. The
capital expenditures in the first nine months of fiscal 1997 were primarily
related to the construction of the Valdosta Plant of $13.0 million, along with
the distributive control system upgrade at the Company's acrylonitrile unit.
During the remainder of fiscal 1997, the Company expects to make an additional
$6 million to $8 million of capital expenditures primarily for process
modernization in styrene and acrylonitrile and routine safety, environmental,
and replacement capital in the Company's petrochemical, pulp chemical, and
fibers businesses. The Company expects to fund its remaining fiscal 1997 capital
expenditures from operating cash flow, plus borrowings under the Revolver, if
needed.

                                       24
<PAGE>
 
PART II--OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     The information under "Legal Proceedings" in the Notes to Condensed
Consolidated Financial Statements herein is hereby incorporated by reference.

ITEM 2.  CHANGES IN SECURITIES.

  (b) In connection with the acquisition of the AFB, Holdings authorized 350,000
shares of the Series A Preferred with a liquidation value of $100 per share, and
issued 100,000 shares ($10 million liquidation value) of Series A Preferred.  In
connection with the Saskatoon Acquisition, Holdings authorized 58,000 shares of
the Series B Preferred with a liquidation value of $1,000 per share, and on July
10, 1997 issued 7,300 shares ($7.3 million liquidation value) of Series B
Preferred.  The Series A Preferred and Series B Preferred each include a
liquidation preference over the Holdings Common Stock, as well as restrictions
on the ability of Holdings to declare or pay dividends on, or to redeem,
Holdings Common Stock.  The Certificates of Designation for the Series A
Preferred and Series B Preferred are filed as Exhibits to this Form 10-Q.


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>
 
  3.1              --Restated Certificate of Incorporation of Sterling Chemicals Holdings, Inc.
 
  4.1              --Warrant Agreement, dated as of  July 10, 1997, between Sterling Chemicals Holdings, Inc. and
                     Harris Trust and Savings Bank, as Warrant Agent.
 
  4.2              --Form of Warrant (included in Exhibit 4.1).
 
  4.3              --Certificate of Designation for Series A Preferred Stock (included in Exhibit 3.1).
 
  4.4              --Certificate of Designation for Cumulative Redeemable Preferred Stock, Series B (included in Exhibit
                     (3.1). 

  4.5              --Amended and Restated Voting Agreement, dated as of January 22, 1997, by and among Sterling Chemicals
                     Holdings, Inc., and the other parties listed therein.
 
  11.1             --Earnings Per Share Calculation.

  27.1             --Financial Data Schedule of Sterling Chemicals Holdings, Inc.

  27.2             --Financial Data Schedule of Sterling Chemicals, Inc.
</TABLE> 
     (b) Reports on Form 8-K:

     On April 8, 1997, the Company filed a current Report on Form 8-K, reporting
     under Items 5 and 7.

     On May 21, 1997, the Company filed a current Report on Form 8-K, reporting
     under Items 5 and 7.

                                       25
<PAGE>
 
                                  SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.


                                     STERLING CHEMICALS HOLDINGS, INC.
                                     STERLING CHEMICALS, INC.
                                     (Registrants)



Date: August 12, 1997                /s/   Robert W. Roten
                                     ---------------------
                                     Robert W. Roten
                                     President and Chief Executive Officer
                                     (Principal Executive Officer)



Date: August 12, 1997                /s/   Jim P. Wise
                                     -----------------
                                     Jim P. Wise
                                     Vice President-Finance and Chief Financial
                                      Officer
                                     (Principal Financial Officer)

                                       26