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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2003                                                 
|  
|or
|  
|o  |  | 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 000-50132



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Sterling Chemicals, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                                         
|------------------------------------------------------------------ |  | --------------------------------------------------------
|Delaware                                                           |  | 76-0502785                                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)                
|                                                                  
|333 Clay Street, Suite 3600                                        |  | (713) 650-3700                                          
|Houston, Texas 77002-4109                                          |  | (Registrants telephone number,
    including area code)
|(Address of principal executive
    offices)                       |  |                                                         

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


(Title of class)


Indicate by check mark whether the registrant
(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 þ         No o.

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein and will not be contained, to the best of
the registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this
Form 10-K.    þ.

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).    Yes o         No þ.

The aggregate market value of the
registrants common stock, par value $.01 per share, held
by non-affiliates at June 30, 2003 (the last business day
of the registrants most recently completed second fiscal
quarter), based upon the value of the last sales price of these
shares as reported on the OTC Electronic Bulletin Board
maintained by the National Association of Securities Dealers,
Inc., was $18,738,285.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE
YEARS:

Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan
confirmed by a
court.    Yes þ         No o.

As of February 29, 2004, Sterling Chemicals,
Inc. had 2,825,000 shares of common stock outstanding.

Portions of the definitive Proxy Statement
relating to the 2004 Annual Meeting of Stockholders of Sterling
Chemicals, Inc. are incorporated by reference in Part III
of this Form 10-K.









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IMPORTANT INFORMATION REGARDING THIS FORM
10-K

Unless otherwise indicated, references to
we, us, our and
ours in this Form 10-K refer collectively to
Sterling Chemicals, Inc. and its wholly-owned subsidiaries.

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

Forward-Looking Statements

Certain written and oral statements made or
incorporated by reference from time to time by us or our
representatives are forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act).
All statements other than statements of historical fact are, or
may be deemed to be, forward-looking statements. Forward-looking
statements include, without limitation, any statement that may
project, indicate or imply future results, events, performance
or achievements, and may contain or be identified by the words
expect, intend, plan,
predict, anticipate,
estimate, believe, should,
could, may, might,
will be, will continue, will
likely result, project, forecast,
budget and similar expressions. Statements in this
report that contain forward-looking statements include, but are
not limited to, information concerning our possible or assumed
future results of operations and statements about the following
subjects:



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the cyclicality of the petrochemicals industry;                                                                                                       
|
| |  | current and future industry conditions;                                                                                                               
|
| |  | the potential effects of market and industry
    conditions and cyclicality on our business strategy, results of
    operations or financial position;
|
| |  | the adequacy of our liquidity;                                                                                                                        
|
| |  | our environmental management programs and safety
    initiatives;                                                                                     
|
| |  | our market sensitive financial instruments;                                                                                                           
|
| |  | future uses of and requirements for financial
    resources;                                                                                          
|
| |  | future contractual obligations;                                                                                                                       
|
| |  | business strategy;                                                                                                                                    
|
| |  | growth opportunities;                                                                                                                                 
|
| |  | competitive position;                                                                                                                                 
|
| |  | expected financial position;                                                                                                                          
|
| |  | future cash flows;                                                                                                                                    
|
| |  | future dividends;                                                                                                                                     
|
| |  | financing plans;                                                                                                                                      
|
| |  | budgets for capital and other expenditures;                                                                                                           
|
| |  | plans and objectives of management;                                                                                                                   
|
| |  | outcomes of legal proceedings;                                                                                                                        
|
| |  | compliance with applicable laws and                                                                                                                   
|
| |  | adequacy of insurance or indemnification.                                                                                                             

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Such statements are based upon current
information and expectations and inherently are subject to a
variety of risks and uncertainties that could cause actual
results to differ materially from those expected or expressed in
forward-looking statements. Such risks and uncertainties
include, among others, the following:



| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | the timing and extent of changes in commodity
    prices;                                                                
|
| |  | petrochemicals industry production capacity and
    operating rates;                                                     
|
| |  | market conditions in the petrochemicals industry,
    including the supply-demand balance for our products;              
|
| |  | competition, including competitive products and
    pricing pressures;                                                   
|
| |  | obsolescence of product lines;                                                                                           
|
| |  | the timing and extent of changes in global
    economic and business conditions;                                         
|
| |  | increases in raw materials and energy costs,
    including the cost of natural gas;                                      
|
| |  | our ability to obtain raw materials and energy at
    acceptable prices, in a timely manner and on acceptable terms;     
|
| |  | regulatory initiatives and compliance with
    governmental regulations;                                                 
|
| |  | compliance with environmental laws and
    regulations;                                                                  
|
| |  | customer preferences;                                                                                                    
|
| |  | our ability to attract or retain high quality
    employees;                                                             
|
| |  | operating hazards attendant to the petrochemicals
    industry;                                                          
|
| |  | casualty losses;                                                                                                         
|
| |  | changes in foreign, political, social and
    economic conditions;                                                       
|
| |  | risks of war, military operations, other armed
    hostilities, terrorist acts and embargoes;                            
|
| |  | changes in technology, which could require
    significant capital expenditures in order to maintain
    competitiveness;
|
| |  | effects of litigation;                                                                                                   
|
| |  | cost, availability and adequacy of insurance;                                                                            
|
| |  | adequacy of our sources of liquidity and                                                                                 
|
| |  | various other matters, many of which are beyond
    our control.                                                         

The risks included here are not exhaustive. Other
sections of this report, and our other filings with the
Securities and Exchange Commission, include additional factors
that could adversely affect our business, results of operations
and financial performance. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Certain Known Events, Trends,
Uncertainties and Risk Factors contained in Item 7 of
Part II of this Form 10-K. Given these risks and
uncertainties, investors should not place undue reliance on
forward-looking statements. Forward-looking statements included
in this Form 10-K speak only as of the date of this
Form 10-K and are not guarantees of future performance.
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.
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.

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Subsequent Events

All statements and information contained in this
Form 10-K, including the forward-looking statements
discussed above, are made as of March 19, 2004, unless
those statements or information are expressly made as of another
date. We disclaim any responsibility for the correctness of any
statement or information contained in this Form 10-K to the
extent such statement or information is affected or impacted by
events, circumstances or developments occurring after
March 19, 2004 or by the passage of time after such date.
Except to the extent required by applicable securities laws, we
expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any statement or
information contained in this Form 10-K, including the
forward-looking statements discussed above, to reflect any
change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any statement or
information is based.

Document Summaries

Descriptions of documents and agreements
contained in this Form 10-K 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 this Form 10-K.

Fiscal Year

In December 2002, we changed our fiscal year-end
from September 30 to December 31.

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TABLE OF CONTENTS

|                                                   |  |                                                                                               |  |      |    | 
|-------------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                   |  |                                                                                               |  | Page
|                                                   |  |                                                                                               |  |     
|PART I                                            
|Item 1.                                            |  | Business                                                                                      |  |      | 2  | 
|Item 2.                                            |  | Properties                                                                                    |  |      | 14 | 
|Item 3.                                            |  | Legal Proceedings                                                                             |  |      | 14 | 
|Item 4.                                            |  | Submission of Matters to a
    Vote of Security Holders                                       |  |      | 15 | 
|PART II                                           
|Item 5.                                            |  | Market for Registrants
    Common Equity and Related Stockholder Matters                     |  |      | 16 | 
|Item 6.                                            |  | Selected Financial Data                                                                       |  |      | 17 | 
|Item 7.                                            |  | Managements Discussion
    and Analysis of Financial Condition and
    Results of Operations |  |      | 18 | 
|Item 7A.                                           |  | Quantitative and Qualitative
    Disclosures about Market Risk                                |  |      | 39 | 
|Item 8.                                            |  | Financial Statements and
    Supplementary Data                                               |  |      | 40 | 
|Item 9.                                            |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure      |  |      | 74 | 
|Item 9A.                                           |  | Controls and Procedures                                                                       |  |      | 74 | 
|PART III                                          
|Item 10.                                           |  | Directors and Executive
    Officers of the Registrant                                        |  |      | 75 | 
|Item 11.                                           |  | Executive Compensation                                                                        |  |      | 75 | 
|Item 12.                                           |  | Security Ownership of
    Certain Beneficial Owners and Management                            |  |      | 75 | 
|Item 13.                                           |  | Certain Relationships and
    Related Transactions                                            |  |      | 75 | 
|Item 14.                                           |  | Principal Accountant Fees
    and Services                                                    |  |      | 75 | 
|PART IV                                           
|Item 15.                                           |  | Exhibits, Consolidated
    Financial Statement Schedules and Reports on Form 8-K              |  |      | 75 | 
|Restated Certificate of Designations,Preferences  
|Third Amended Severance Pay Plan                  
|Eleventh Amend.to Salaried Employees' Pension Plan
|Seventh Amend.to Hourly Paid Employees' Penson    
|Subsidiaries of the Sterling Chemicals, Inc.      
|Consent of Deloitte & Touche LLP                  
|Certification of CEO Pursuant to Section 302      
|Certification of CFO Pursuant to Section 302      
|Certification of CEO Pursuant to Section 906      
|Certification of CFO Pursuant to Section 906      
|Amended Corporate Governance Committee Charter    



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PART I




Item 1.     Business

We were formed in 1986 to acquire a
petrochemicals facility located in Texas City, Texas that was
previously owned by Monsanto Company (Monsanto). Our
Texas City facility is located approximately 45 miles south of
Houston on a 290-acre site on Galveston Bay near many other
chemical manufacturing complexes and refineries. Currently,
there are facilities to produce seven petrochemical products at
the Texas City, Texas site; styrene, acrylonitrile, acetic acid,
plasticizers, methanol, sodium cyanide and disodium
iminodiacetic acid (DSIDA). We own the styrene,
acrylonitrile, acetic acid, plasticizers and methanol
manufacturing units located at the site. The methanol unit is
currently idled and is not likely to ever be restarted. E.I. du
Pont de Nemours and Company (DuPont) and Monsanto
own the sodium cyanide and DSIDA units, respectively, located at
the site. These companies built these units on land leased from
us, and we operate these units on their behalf. Both of these
units use hydrogen cyanide created as a by-product from our
acrylonitrile operations to make other products. The DSIDA unit
is not currently in operation, but Monsanto has committed to
restart the DSIDA unit by mid-2007, and has the option to
restart the unit prior to that time. At the site, we have
facilities to load our products in trucks, railcars, barges and
ocean-going vessels for shipment to customers throughout the
world. We have also leased portions of the site to Praxair
Hydrogen Supply, Inc. (Praxair) and S&L
Cogeneration Company, a 50/50 joint venture between us and
Praxair Energy Resources, Inc., which constructed a partial
oxidation unit and a cogeneration facility, respectively, on
that land. We lease the space for our principal offices, which
are in Houston, Texas.

Bankruptcy Reorganization

On July 16, 2001 (the Petition
Date), Sterling Chemicals Holdings, Inc.
(Holdings), Sterling Chemicals, Inc. and most of
their U.S. subsidiaries (collectively, the Debtors)
filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code (the
Bankruptcy Code) in the U.S. Bankruptcy Court for
the Southern District of Texas (the Bankruptcy
Court). The Debtors filed a proposed plan of
reorganization with the Bankruptcy Court on May 14, 2002
which, after several amendments, was confirmed on
November 20, 2002 (as confirmed, the Plan of
Reorganization). On December 19, 2002, the Plan of
Reorganization became effective and the Debtors emerged from
bankruptcy pursuant to the terms of the Plan of Reorganization.
During the period from July 16, 2001 through
December 19, 2002, the Debtors operated their respective
businesses as debtors-in-possession pursuant to the Bankruptcy
Code, and the accompanying consolidated financial statements for
this period have been presented in conformity with Statement of
Position 90-7, Financial Reporting By Entities In
Reorganization Under the Bankruptcy Code (SOP
90-7) of the American Institute of Certified Public
Accountants (AICPA). SOP 90-7 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. For
financial reporting purposes, the Effective Date of
the Plan of Reorganization is considered to have been the close
of business on December 19, 2002. Due to the Debtors
emergence from bankruptcy and the implementation of fresh-start
accounting (see Note 3 of the Notes to Consolidated Financial
Statements included in Item 8 of Part II of this
Form 10-K), we refer to ourselves as, and our financial
results have been separately presented under the heading,
Predecessor Sterling for periods on or before
December 19, 2002 and Reorganized Sterling for
periods after December 19, 2002. Our financial statements
for 2003 are not comparable to those of Predecessor Sterling for
periods ended on or prior to December 19, 2002.

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 materials and energy costs. As a
result of these conditions, the Debtors incurred significant
operating losses. The reorganization, effected through the
bankruptcy filings, permitted the Debtors to preserve cash and
gave them the

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opportunity to restructure their debt. As the
market for our petrochemicals products remains highly cyclical,
the capital structure of Reorganized Sterling has been designed
with the goal of ensuring that we have sufficient liquidity
during cyclical downturns in the markets for our petrochemicals
products, although we cannot give any assurances that our new
capital structure will provide us with sufficient liquidity over
any specific period.


On December 6, 2002, Holdings was merged
with and into Predecessor Sterling. Under the terms of the
merger and the Plan of Reorganization, all equity interests in
Holdings were cancelled upon consummation of the merger and we
issued 65,000 shares of Reorganized Sterlings common stock
to the holders of Holdings 13 1/2% Senior Secured
Discount Notes in full payment of their claims. Upon the
effectiveness of the Plan of Reorganization, Resurgence Asset
Management, L.L.C., on behalf of itself and certain of its and
its affiliates managed funds and accounts (which we
collectively refer to as the Investor), paid $30 million
for certain shares of Reorganized Sterlings Series A
Convertible Preferred Stock. An additional $30 million was
contributed to Reorganized Sterling at the effectiveness of the
Plan of Reorganization in exchange for 2,175,000 shares of
Reorganized Sterlings common stock pursuant to a rights
offering made available to the Debtors unsecured creditors
(other than unsecured creditors of Holdings), which offering was
underwritten by the Investor. In addition, upon the
effectiveness of the Plan of Reorganization, the unsecured
creditors of the Debtors (other than unsecured creditors of
Holdings), which included holders of Predecessor Sterlings
11 1/4% Senior Subordinated Notes and 11 3/4% Senior
Subordinated Notes, received pro rata shares of 11.7% of
Reorganized Sterlings common stock (on a fully diluted
basis as of such date, assuming the conversion of all shares of
Reorganized Sterlings Series A Convertible Preferred
Stock into shares of Reorganized Sterlings common stock)
and warrants to acquire 949,367 shares of Reorganized
Sterlings common stock at an exercise price of $52 per
share (subject to adjustment).

Pursuant to the Plan of Reorganization, on
December 19, 2002 the Debtors pulp chemicals business
was sold to Superior Propane, Inc. (Superior
Propane) for approximately $373 million and the
Debtors acrylic fibers business was sold to local
management of that business for nominal consideration. In
accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the
Impairment and Disposal of Long Lived Assets, we have
reported the operating results of these businesses as
discontinued operations in the condensed consolidated statements
of operations and cash flows for Predecessor Sterling, and the
assets and liabilities of these businesses have been presented
separately as assets held for sale and liabilities related to
discontinued operations in Predecessor Sterlings condensed
consolidated balance sheet. Approximately $80 million of
the net proceeds from the sale of the Debtors pulp
chemicals business remained with Reorganized Sterling, which
continues to own and operate the Debtors core
petrochemicals business. The remaining net proceeds from the
sale were paid to the holders of Predecessor Sterlings
12 3/8% Senior Secured Notes (the 12 3/8%
Notes), who also received approximately $94.3 million
in principal amount of new 10% Senior Secured Notes due 2007
issued by Reorganized Sterling (the New Notes) in
satisfaction of their claims. In addition, on December 19,
2002, Reorganized Sterling established a new revolving credit
facility providing up to $100 million in revolving credit
loans (subject to borrowing base limitations) with The CIT
Group/ Business Credit, Inc., as administrative agent and a
lender, and certain other lenders (the New
Revolver). As of December 31, 2003, we had not
borrowed any money under the New Revolver, although we had
approximately $1.8 million in letters of credit outstanding.

Business Strategy

Our objectives are to produce high quality
chemicals, to maintain a strong market position, to continuously
improve our cost performance in all of our major products and to
provide superior customer service.

Industry Overview

Styrene.Current
global production capacity of styrene is approximately
54 billion pounds per year with current total North
American production capacity at approximately 15 billion
pounds per year. We

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have production capacity of approximately
1.7 billion pounds per year. As is the case with most
petrochemicals, markets for styrene from time to time experience
periods of strong demand, resulting in tight supply and higher
prices and profit margins. Inevitably, favorable market
conditions for our products prompt increases in supply. In most
cases, increases in supply are achieved through the construction
of new capacity or major expansions of existing facilities.
Typically, these types of projects result in large increases in
production capacity and supply, and cause available supply to
greatly exceed demand for an extended period.


From 1994 through 1996, strong demand growth and
high utilization rates for styrene prevailed, which prompted
several major producers to announce new capacity increases in
1997 and 1998, particularly in the Far East. At the time this
new capacity was announced, there was also a general slowdown in
the economic growth rate in the Far East and significantly
reduced demand growth for styrene, prompting many styrene
customers to begin utilizing their available inventories and
reduce purchases of additional product. During 2000, styrene
prices and margins increased significantly from levels
experienced in 1999. These improvements were driven by a
combination of stronger market demand, operating problems
experienced at several of our competitors and generally low
inventory levels worldwide. Styrene prices and margins hit their
highest level in April 2000 and then decreased over the second
half of 2000. During 2001, U.S. and world economies experienced
a general slowdown that negatively impacted demand for most
petrochemicals, including styrene. Raw material and energy costs
spiked upward during the first half of 2001, increasing
significantly from the prior year, primarily due to the sharp
increase in natural gas prices. As a result, U.S. Gulf Coast
petrochemicals producers experienced significant margin erosion
for most of their products. Due to these conditions, we and many
other U.S. Gulf Coast petrochemicals producers reduced
production levels. During the second half of fiscal 2001, raw
material and energy costs began to moderate, although demand
remained weak due to the continued economic slowdown. Demand for
styrene, relative to supply, increased late in the second
quarter of fiscal 2002 due to a variety of factors, including
economic improvements in the United States manufacturing sector,
global restocking of low inventory levels and styrene plant
shutdowns attributable to scheduled maintenance and operating
problems at several of our competitors. During the first half of
2003, styrene demand and margins were depressed due to high
energy and raw materials costs and uncertainties associated with
the war with Iraq. Energy and raw materials costs declined
during the second half of 2003 and, coupled with improved
economic conditions in the United States and the rest of the
world, resulted in improved margins for styrene sales. However,
toward the end of 2003, energy and raw materials costs began to
increase, again resulting in downward pressure on styrene
margins as the year ended. We cannot predict future increases or
decreases in styrene prices or margins with any substantial
degree of certainty.

Acrylonitrile.Current global production capacity of
acrylonitrile is approximately 13 billion pounds per year.
We have production capacity of approximately 740 million
pounds of acrylonitrile per year. Markets for acrylonitrile
exhibit similar characteristics to those of styrene in terms of
capacity utilization, selling prices and profit margins. In
addition, as more than 50% of domestic acrylonitrile production
is sold in the export market, demand is significantly impacted
by customers in China, who in 2003 purchased 840 million
pounds of acrylonitrile, 4.29 billion pounds of ABS/ SAN
resin (equivalent to approximately one billion pounds of
acrylonitrile) and slightly more than 1 billion pounds of
acrylic fiber (equivalent to approximately one billion pounds of
acrylonitrile) from producers outside of China, greatly
surpassing the aggregate amount of acrylonitrile exported
globally from the United States. Demand for acrylonitrile grew
steadily in the early 1990s in China, India, Taiwan,
Thailand and Turkey and, during 1995 to 1996, concerns about
availability of product and raw materials costs resulted in high
prices and profit margins, which in turn prompted many producers
to add incremental acrylonitrile capacity, and two Asian
acrylonitrile consumers to build acrylonitrile plants to meet
their captive demand. Increased acrylonitrile production
capacity, combined with weak demand for acrylonitrile and its
derivatives caused by the economic crisis in Asia in the late
1990s, resulted in significantly depressed acrylonitrile
prices and profit margins. Beginning in early fiscal 2000,
acrylonitrile prices increased significantly due to improved
market demand, operating problems experienced at several
producers and generally low inventory levels. Due to the startup
of new acrylonitrile plants in the United States and Taiwan and
a general slowdown of United States and world economies, along
with higher raw materials and energy costs, acrylonitrile prices
and

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profit margins weakened significantly in fiscal
2001. Acrylonitrile demand, capacity utilization and profit
margins showed improvement through 2002, although still at low
levels, then fell back slightly in the second quarter of 2003
before recovering somewhat in the second half of the year.
Demand for acrylonitrile in early 2004 has been favorable to
producers but profit margins continue to be weak, primarily due
to high propylene prices in the United States and Asia resulting
from limited propylene supply.


Acetic Acid.Current
North American production capacity of acetic acid is
approximately 6 billion pounds per year. Several capacity
additions occurred in 1998 and 1999, including an expansion of
our acetic acid unit from 800 million pounds of rated
annual production capacity to one billion pounds. In late 2000,
BP Amoco Chemical Company (BP Chemicals), successor
by merger to BP Chemicals Inc., and Celanese AG began operating
880 million-pound and 1.1 billion-pound acetic acid
production units in Malaysia and Singapore, respectively. These
capacity additions were somewhat offset by reductions of
approximately 1.6 billion pounds in global capacity from
the shutdown of various outdated acetic acid plants from 1999
through 2001. The North American acetic acid market is mature
and well developed, with demand being linked to the demand for
vinyl acetate monomer, a key intermediate in the production of a
wide array of polymers. Vinyl acetate monomer is the largest
derivative of acetic acid, representing about 50% of total
demand.

Plasticizers.Plasticizers are produced from either
linear alpha-olefins feedstocks or propylene-based technology.
Linear plasticizers typically receive a premium over competing
propylene-based products for customers that require enhanced
performance properties. However, the markets for competing
plasticizers can be affected by the cost of the underlying raw
materials, especially when the cost of one olefin rises faster
than the other, or by the introduction of new products.

Product Summary

The following table summarizes our principal
products, including our capacity, primary end uses, raw
materials and major competitors for each product.
Capacity represents rated annual production capacity
at December 31, 2003, which is calculated by estimating the
number of days in a typical year a production facility is
capable of operating after allowing for downtime for regular
maintenance, and multiplying that number by an amount equal to
the facilitys optimal daily output based on the design
feedstock mix. As the capacity of a facility is an estimated
amount, actual production may be more or less than capacity, and
the following table does not reflect actual operating rates of
any of our production facilities for any given period of time.

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|                                           |  |                                                                                            |  |                                                                                                                                                                                                                                                   |  |                                                               |  |                                                                                                                                                                                                                                                  
|------------------------------------------ |  | ------------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Sterling Product                           |  |                                                                                            |  |                                                                                                                                                                                                                                                   |  |                                                               |  |                                                                                                                                                                                                                                                  
|(Capacity)                                 |  | Intermediate Products                                                                      |  | Primary End Products                                                                                                                                                                                                                              |  | Raw Materials                                                 |  | Major Competitors                                                                                                                                                                                                                                
|                                           |  |                                                                                            |  |                                                                                                                                                                                                                                                   |  |                                                               |  |                                                                                                                                                                                                                                                  
|Styrene(1.7 billion pounds per year)       |  | Polystyrene, ABS/ SAN resins, styrene butadiene
    latex and unsaturated polyester resins |  | Building products, boat and automotive
    components, disposable cups and trays, packaging and containers,
    housewares, tires, audio and video cassettes, luggage,
    childrens toys, paper coating, appliance parts and carpet
    backing |  | Ethylene and benzene                                          |  | Lyondell Chemical Company, BP Amoco Chemical
    Company, Chevron Phillips Chemical Company, Shell Chemical
    Company, Cos-Mar (a joint venture of General Electric Company
    and FINA Inc.), Nova Corporation, SABIC, Samsung and Mitsubishi
|Acrylonitrile(740 million pounds per year) |  | Acrylic fibers, ABS/ SAN resins, NB copolymers,
    adiponitrile and acrylamide            |  | Apparel, furnishings, upholstery, household
    appliances, carpets and plastics for automotive parts using ABS
    and SAN polymers                                                                                                              |  | Ammonia and propylene                                         |  | BP Amoco Chemical Company, Cytec Industries Inc.,
    E.I. du Pont de Nemours and Company, Asahi Chemical Industry
    Company, Ltd., Solutia Inc., Tae Kwang, Formosa Plastics, CPDC
    and DSM                                                
|Acetic Acid(1 billion pounds per year)     |  | Vinyl acetate, terephthalic acid, and acetate
    solvents                                 |  | Adhesives, PET bottles, fibers and surface
    coatings                                                                                                                                                                                           |  | Methanol and carbon monoxide                                  |  | Celanese AG, Eastman Chemical Company and
    Millennium Chemicals Inc.                                                                                                                                                                          
|Plasticizers(280 million pounds per year)  |  | Flexible polyvinyl chloride (PVC)                                                          |  | Flexible plastics, such as shower curtains and
    liners, floor coverings, cable insulation, upholstery and
    plastic molding                                                                                                                  |  | Alpha-olefins, carbon monoxide, hydrogen, and
    orthoxylene |  | ExxonMobil Corporation, Eastman Chemical Company
    and BASF Corporation                                                                                                                                                                        
|DSIDA(80 million pounds per year)          |  | N/ A                                                                                       |  | Herbicide                                                                                                                                                                                                                                         |  | Caustic soda and hydrogen cyanide                             |  | Solutia, Inc.                                                                                                                                                                                                                                    
|Sodium Cyanide(85 million pounds per year) |  | N/ A                                                                                       |  | Electroplating and precious metals recovery                                                                                                                                                                                                       |  | Caustic soda and hydrogen cyanide                             |  | E.I. du Pont de Nemours and Company, Degussa-
    Huls, FMC Corporation, Tong Soh Petrochemical, Tae Kwang and DSM                                                                                                                               
|Methanol(150 million gallons per year)     |  | Acetic acid, MTBE and formaldehyde                                                         |  | Adhesives, surface coatings, gasoline oxygenate
    and octane enhancer and plywood adhesives                                                                                                                                                     |  | Natural gas and steam                                         |  | Methanex Corporation, Lyondell Methanol Company,
    L.P. and Celanese AG                                                                                                                                                                        

Products

Styrene.We have the
fourth largest production capacity for styrene in North America.
Our styrene unit is one of the largest in the world and has a
rated annual production capacity of approximately
1.7 billion pounds, which represents approximately 11% of
total North American capacity. We sold approximately 51% of our
styrene sales volumes pursuant to conversion and other long-term
agreements during 2003. Approximately 37% of our styrene sales
volumes were exported in 2003, principally to Asia and Mexico.

Acrylonitrile.We
have the third largest production capacity for acrylonitrile in
North America. Our acrylonitrile unit has a rated annual
production capacity of approximately 740 million pounds,
which represents approximately 19% of total North American
capacity. Due to the startup of new acrylonitrile plants in the
U.S. and Taiwan, a general slowdown of U.S. and world economies,
along with higher raw

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material and energy costs, acrylonitrile prices
and margins weakened significantly in fiscal 2001. As a result,
we rescheduled maintenance turnaround work on our acrylonitrile
facility, performing this work during the second quarter of
fiscal 2001 rather than later in the year. The adverse economic
conditions that led to rescheduling of the maintenance work
persisted beyond the completion of the work and we elected to
postpone restarting our acrylonitrile facilities and the sodium
cyanide and DSIDA production units, which are dependent on our
acrylonitrile facilities for feedstocks. In June 2003, we began
the process of restarting our acrylonitrile facility, which we
completed in August 2003. Also, in June 2003, we entered into an
acrylonitrile expanded relationship agreement with BP Chemicals.
Our acrylonitrile relationship with BP Chemicals is governed by
a variety of documents, including a Production Agreement, under
which BP Chemicals has the right, but not the obligation, to
purchase acrylonitrile from us up to a specified percentage of
our annual rated production capacity, and a Joint Venture
Agreement, pursuant to which we and BP Chemicals formed ANEXCO,
LLC, a 50/50 joint venture that markets all of the parties
respective sales of acrylonitrile everywhere in the world other
than the United States, Canada, Mexico, Turkey and the European
Union. Under the Production Agreement, BP Chemicals furnishes
the necessary raw materials and pays us a conversion fee for any
acrylonitrile it elects to purchase, and reimburses us for a
specified portion of our fixed costs related to acrylonitrile
production irrespective of whether BP Chemicals purchases any
acrylonitrile under the Production Agreement. Under the
acrylonitrile expanded relationship agreement,
BP Chemicals right to purchase acrylonitrile from us
under the Production Agreement was significantly increased and
the Joint Venture Agreement was modified in a manner that,
together with the modifications to the Production Agreement, is
intended to provide us with the ability to operate our
acrylonitrile facility at optimal three-reactor rates throughout
the acrylonitrile market cycles. On January 17, 2004, we
shut down our acrylonitrile plant (unrelated to our planned
styrene turnaround taken at the same time) due to a propylene
shortage and took the opportunity to perform maintenance work to
correct plant problems that were causing excessive propylene and
ammonia use. Adequate propylene supply was secured in early
March to restart the plant. The propylene market is expected to
come into balance in the second quarter of 2004, resulting in
adequate propylene availability for the remainder of 2004.


Acetic Acid.We have
the second largest production capacity for acetic acid in North
America. Our acetic acid unit has a rated annual production
capacity of approximately one billion pounds, which represents
approximately 17% of total North American capacity. All of our
acetic acid production is sold to BP Chemicals pursuant to a
long-term contract that expires in 2016.

Plasticizers.Our
rated annual production capacity of plasticizers is
approximately 280 million pounds. Under our long-term
agreement with BASF Corporation (BASF), which
expires in 2007, we sell all of our plasticizers production to
BASF. For a further explanation of this agreement, please refer
to Plasticizers-BASFunder
Contracts, in Item 1 of Part I.

Sodium Cyanide.Pursuant to a long-term arrangement,
we operate a sodium cyanide unit at our Texas City facility,
which is owned by DuPont. The rated annual production capacity
of this unit is approximately 85 million pounds. The sodium
cyanide unit uses hydrogen cyanide by-product from our
acrylonitrile facility as a raw material. During the second
quarter of fiscal 2001, the sodium cyanide unit was shut down
due to the unavailability of hydrogen cyanide resulting from the
shutdown of our acrylonitrile unit. In July 2003, we entered
into a new sodium cyanide supply agreement with DuPont and
restarted the sodium cyanide unit in August 2003.

DSIDA.In December
2001, we began operating a DSIDA plant at our Texas City
facility that is owned by Monsanto. DSIDA is an essential
intermediate in the production of Monsantos Roundup®,
a glyphosate-based herbicide. The rated annual production
capacity of the DSIDA plant is approximately 80 million
pounds. Under long-term arrangements with Monsanto, we operate
the DSIDA plant on behalf of Monsanto and supply hydrogen
cyanide by-product from our acrylonitrile facility as a raw
material. During the second quarter of fiscal 2001, the DSIDA
unit was shut down due to unavailability of hydrogen cyanide
resulting from the shutdown of our acrylonitrile unit. At the
time we emerged from bankruptcy in December 2002, we were
involved in litigation with Monsanto regarding the assumption of
the contracts governing the production of DSIDA and related cure
costs. On December 12, 2003, we settled these

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disputes with Monsanto and, under the settlement,
Monsanto agreed to extend our business relationship and restart
the DSIDA unit by mid-2007. Monsanto also has the option of
restarting the DSIDA unit prior to that time.


Methanol.We own a
methanol unit with a rated annual production capacity of
approximately 150 million gallons. On June 29, 2000,
we, in conjunction with BP Chemicals, announced a multi-year
contract with Methanex Corporation (Methanex) for
the purchase of our respective methanol requirements from
Methanex. At that time, we granted Methanex exclusive rights to
acquire the output of our methanol plant, which we continue to
own. Under this agreement, Methanex chose to discontinue
production at our methanol plant on July 1, 2000. The
initial term of these agreements expired on December 31,
2003, and Methanex elected not to renew these agreements. We are
currently analyzing various alternatives for our methanol plant,
but we do not believe that this unit will ever be restarted.

Sales and Marketing

We generally sell our petrochemicals products to
customers for use in the manufacture of other chemicals and
products, which in turn are used in the production of a wide
array of consumer goods and industrial products. We compete on
the basis of product price, quality and deliverability. We sell
our petrochemicals products pursuant to:



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | multi-year contracts;                                         
|
| |  | conversion agreements and                                     
|
| |  | spot transactions in both the domestic and export
    markets.

Prices for our products are determined by global
market factors that are largely beyond our control and, except
with respect to a number of our multi-year contracts, we
generally sell these products at prevailing market prices. From
time to time, we may resell raw materials we purchased from
others, purchase styrene or acrylonitrile for resale or sell
ethylbenzene that we have produced from our own purchased
benzene and ethylene or from customer supplied materials.

We have long-term agreements that provide for the
dedication of 100% of our production of acetic acid,
plasticizers, sodium cyanide and DSIDA, each to one customer.
Some of these agreements provide for cost recovery plus an
agreed profit margin based upon market prices. These agreements
are intended to:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | optimize capacity utilization rates;                                                                                          
|
| |  | lower our selling, general and administrative
    expenses;                                                                   
|
| |  | reduce our working capital requirements;                                                                                      
|
| |  | insulate our operations, to some extent, from the
    effects of declining markets and changes in raw materials prices
    and
|
| |  | in some cases, gain access to certain
    improvements in manufacturing process technology.                                   

We also market a significant portion of our
volumes of petrochemicals and generate a significant portion of
our revenues under our conversion agreements. Under our
conversion agreements, the customer furnishes raw materials that
we process into finished products. In exchange, we receive a fee
typically designed to cover our fixed and variable costs of
production and to generally provide an element of profit
depending on the existing market conditions for the product.
These conversion agreements are intended to help us maintain
lower levels of working capital and, in some cases, gain access
to certain improvements in manufacturing process technology. Our
conversion agreements are designed to insulate us to some extent
from the effects of declining markets and changes in raw
materials prices, while allowing us to share in the benefits of
favorable market conditions for most of the products sold under
these arrangements. The balance of our petrochemicals products
are sold by our direct sales force, sales agents or through
ANEXCO, LLC, our marketing joint venture with BP Chemicals.

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For information regarding our export sales, see
Note 10 of the Notes to Consolidated Financial Statements
included in Item 8 of Part II of this Form 10-K.

Contracts

Our key multi-year contracts, which collectively
accounted for 25% of our 2003 revenues, are described below. BP
Chemicals accounted for approximately 16%, 10% and 12% of our
revenues during 2003 and fiscal years 2002 and 2001,
respectively. In 2003, an additional customer, Customer
B, accounted for 12% of our total revenue. No other single
customers accounted for more than 10% of our revenues in the
last three fiscal years.



| |                           
| | --------------------------
| | Acrylonitrile-BP Chemicals

In 1988, we entered into a long-term Production
Agreement with BP Chemicals under which BP Chemicals contributed
the majority of the capital expenditures required for starting
the third acrylonitrile reactor train at our acrylonitrile
facility. Under this agreement, BP Chemicals has the right, but
not the obligation, to purchase acrylonitrile from us up to a
specified percentage of our annual rated production capacity.
Under the Production Agreement, BP Chemicals furnishes the
necessary raw materials and pays us a conversion fee for any
acrylonitrile it elects to purchase, and reimburses us for a
specified portion of our fixed costs related to acrylonitrile
production irrespective of whether BP Chemicals purchases any
acrylonitrile under the Production Agreement. To protect BP
Chemicals in the event we default under the Production
Agreement, BP Chemicals has a first priority security interest
in the third reactor and related equipment and in the first
acrylonitrile produced in our three reactor units to the extent
BP Chemicals is entitled to purchase acrylonitrile under the
Production Agreement. The Production Agreement was amended and
restated in April 1998 to, among other things, encourage
increased manufacturing and technical cooperation, and was again
amended in June 2003 as a part of our acrylonitrile expanded
relationship agreement with BP Chemicals discussed below. We
have incorporated certain technological improvements into two of
our acrylonitrile reactors under a separate license agreement
with an affiliate of BP Chemicals. We have the right to
incorporate these and any future improvements into our remaining
acrylonitrile reactor.

In order to enhance the marketing of our
acrylonitrile, in March 1998 we entered into a Joint Venture
Agreement with BP Chemicals, pursuant to which we formed ANEXCO,
LLC, a 50/50 joint venture that markets all of the parties
respective sales of acrylonitrile everywhere in the world other
than the United States, Canada, Mexico, Turkey and the European
Union.

In June 2003, we entered into an acrylonitrile
expanded relationship agreement with BP Chemicals. Under this
agreement, BP Chemicals right to purchase acrylonitrile
from us under the Production Agreement was significantly
increased and the Joint Venture Agreement was modified in a
manner that, together with the modifications to the Production
Agreement, is intended to provide us with the ability to operate
our acrylonitrile facility at optimal three-reactor rates
throughout the acrylonitrile market cycles.



| |                         
| | ------------------------
| | Acetic Acid-BP Chemicals

In 1986, we entered into a long-term acetic acid
production agreement with BP Chemicals, which has since been
amended, pursuant to which BP Chemicals has the exclusive right
to purchase all of our acetic acid production until August 2016.
Under the acetic acid production agreement, BP Chemicals is
obligated to make certain monthly payments to us until August
2006 and reimburse us for our operating costs. We are also
entitled to receive a portion of the profits earned by BP
Chemicals from the sale of the acetic acid we produce.



| |                  
| | -----------------
| | Plasticizers-BASF

Since 1986, we have sold all of our plasticizers
production to BASF pursuant to a product sales agreement that
expires at the end of 2007. Under the product sales agreement,
BASF provides us with some of the required raw materials and
markets the plasticizers we produce. BASF is obligated to make

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certain quarterly payments to us and to reimburse
us monthly for actual production costs. In addition, we share in
the profits and losses realized by BASF in connection with the
plasticizers we produce. In January 2004, BASF purchased the
plasticizers business of Sunoco conducted in Pasadena, Texas. We
are currently evaluating the impact that this acquisition will
have on our plasticizers relationship with BASF and are
exploring various alternatives that may be available to us
related to our plasticizer operations. Under certain
circumstances, the BASF-Sunoco transaction could have negative
effects under our product sales agreement with BASF. However, we
do not believe that any such negative effects would have a
material impact on our business, financial position, results of
operations or cash flows.


Raw Materials for Products and Energy
Resources

For most of our products, the cost of raw
materials and energy resources is far greater than all other
production costs combined. As a result, an adequate supply of
raw materials and utilities at reasonable prices and on
acceptable terms is critical to the success of our business.
Most of the raw materials we use are global commodities, which
are made by a large number of producers. Prices for many of
these raw materials are subject to wide fluctuations for a
variety of reasons beyond our control. Although we believe that
we will continue to be able to secure adequate supplies of our
raw materials and energy, there can be no assurance that we will
be able to do so at acceptable prices or payment terms. See
Certain Known Events, Trends, Uncertainties and Risk
Factors included in Item 7 of Part II of this Form
10-K.

Styrene.We
manufacture styrene by converting ethylene and benzene into
ethylbenzene, which we then process into styrene. Ethylene and
benzene are both commodity petrochemicals and prices for each
can fluctuate widely due to significant changes in the
availability of these products. We have multi-year arrangements
with several major ethylene and benzene suppliers that provide a
significant percentage of our estimated requirements for
purchased ethylene and benzene at generally prevailing and
competitive market prices. Our conversion agreements require
that the other parties to these agreements furnish us with the
ethylene or benzene necessary to fulfill our conversion
obligations. If various customers for whom we manufacture
styrene under conversion agreements were to cease furnishing
their own raw materials, our requirements for purchased benzene
and ethylene could significantly increase.

Acrylonitrile.We
produce acrylonitrile by reacting propylene and ammonia.
Propylene and ammonia are both commodity chemicals and prices
for each can fluctuate widely due to significant changes in the
availability of these products. Under our conversion agreement
with BP Chemicals, BP Chemicals furnishes us with the propylene
or ammonia necessary to fulfill our conversion obligations. We
purchase the rest of the propylene and ammonia we need for
acrylonitrile production. If BP Chemicals were to cease
furnishing its own raw materials, our requirements for purchased
propylene and ammonia could significantly increase. During the
extended shutdown of our acrylonitrile unit from February 2001
through June 2003, all of our propylene contracts expired and
were not renewed. We currently purchase propylene on the spot
market along with receiving propylene from BP Chemicals under
our conversion agreement. Recently, the availability of
propylene on the spot market has been limited, resulting in
operating rate reductions during the first quarter of 2004. On
January 17, 2004, we shut down our acrylonitrile plant
(unrelated to our planned styrene turnaround taken at the same
time) due to a propylene shortage and took the opportunity to
perform maintenance work to correct plant problems that were
causing excessive propylene and ammonia use. Adequate propylene
supply was secured in early March to restart the plant. The
propylene market is expected to come into balance in the second
quarter of 2004, resulting in adequate propylene availability
for the remainder of 2004.

Acetic Acid.Acetic
acid is manufactured primarily from carbon monoxide and
methanol. Praxair supplies us with all of the carbon monoxide we
require for the production of acetic acid from a partial
oxidation unit constructed by Praxair on land leased from us at
our Texas City facility. Additionally, under the previously
discussed multi-year agreements with Methanex, we purchased all
of our methanol requirements from Methanex until
December 31, 2003. At this time, we are purchasing our
methanol requirements directly from BP Chemicals.

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Plasticizers.The
primary raw materials for plasticizers are alpha-olefins and
orthoxylene, which are supplied by BASF under our long-term
conversion agreement, and carbon monoxide and hydrogen, which
are supplied by Praxair.

Sodium Cyanide.Sodium cyanide is manufactured using
hydrogen cyanide produced as a by-product of our acrylonitrile
manufacturing process.

DSIDA.DSIDA is
manufactured using hydrogen cyanide produced as a by-product of
our acrylonitrile manufacturing process.

Technology and Licensing

In 1986, Monsanto granted us a non-exclusive,
irrevocable and perpetual right and license to use
Monsantos technology and other technology Monsanto
acquired through third-party licenses in effect at the time of
the acquisition of our Texas City facility from Monsanto. We use
these licenses in the production of styrene, acrylonitrile,
methanol, acetic acid and plasticizers.

BP Chemicals Ltd. (BPCL) granted us a
non-exclusive, irrevocable and perpetual royalty-free license to
use its acrylonitrile technology at our Texas City facility as
part of the 1988 acrylonitrile expansion project. This license
automatically terminates upon the termination of our
acrylonitrile production agreement with BP Chemicals. However,
such termination does not prevent the continued use of BP
Chemicals catalyst and technology, or prevent the
continued production of acrylonitrile at our Texas City plant.
We have agreed with BPCL to cross-license any technology or
improvements relating to the manufacture of acrylonitrile at our
Texas City facility.

During 1991, BPCL purchased the acetic acid
technology from Monsanto, subject to existing licenses. Under an
Acetic Acid Technology Agreement with BP Chemicals and BPCL,
BPCL granted us a non-exclusive, irrevocable and perpetual right
and license to use acetic acid technology owned by BPCL and some
of its affiliates at our Texas City facility, including any new
acetic technology developed by BPCL at its acetic acid
facilities in England during the term of such agreement or
pursuant to the research and development program provided by
BPCL under the terms of such agreement.

Although we do not engage in alternative process
research with respect to our Texas City facility, we do monitor
new technology developments and, when we believe it is
necessary, we typically seek to obtain licenses for process
improvements.

Competition

The industries in which we operate are highly
competitive. Many of our competitors, particularly in the
petrochemicals industry, are larger and have substantially
greater financial resources than we have. Among our competitors
are some of the worlds largest chemical companies that, in
contrast to us, have their own raw materials resources. In
addition, a significant portion of our business is based upon
widely available technology. The entrance of new competitors
into the industry and the addition by existing competitors of
new capacity could have a negative impact on our ability to
maintain existing market share or maintain or increase profit
margins, even during periods of increased demand for our
products. You can find a list of our principal competitors in
the Product Summary table above.

Historically, profitability of the petrochemicals
industry has been affected by vigorous price competition, which
may intensify due to, among other things, new domestic and
foreign industry capacity. Our businesses are impacted by
changes in the world economy, including changes in currency
exchange rates. In general, weak economic conditions, either in
the United States or worldwide, tend to reduce demand and profit
margins for our products.

Export and domestic markets can be affected
significantly by import laws and regulations. During 2003, our
export sales were approximately 38% of our total revenues. It is
not possible to predict accurately how changes in raw materials
costs, market conditions or other factors will affect future
sales volumes, prices and margins for our products.

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Environmental Matters



| |        
| | -------
| | General

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 and 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
manufacture, handling, processing, distribution and use of our
chemical products and, if so affected, our business and
operations 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 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.
We continue to participate in the Responsible Care®
initiatives as a part of our membership in several trade groups,
which are partner associations in the American Chemistry Council
in the United States. Notwithstanding our efforts and beliefs, a
business risk inherent in 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 our business operations and
facilities generally are operated in compliance with all
applicable environmental and 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 and 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.

Our operating expenditures for environmental
matters, mostly waste management and compliance of our
continuing operations, were approximately $26 million in 2003
and approximately $25 million for fiscal 2002. We also
spent approximately $3 million for environmentally related
capital projects in 2003 and approximately $1 million for
these types of capital projects in fiscal 2002. In 2004, we
anticipate spending approximately $9 million for capital
projects related to waste management, incident prevention and
environmental compliance. This increase is primarily
attributable to capital projects associated with reductions of
nitrogen oxide emissions mandated by the Texas Commission for
Environmental Quality (which we refer to as the TCEQ) under the
State Implementation Plan (SIP) for compliance with
the ozone provisions of the Clean Air Act discussed below. We do
not expect to make any capital expenditures in 2004 related to
remediation of environmental conditions.

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 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

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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 or environment to
potential harm.


Air emissions from our Texas City facility are
subject to certain permit requirements and self-implementing
emission limitations and standards under state and federal laws.
Our Texas City facility is located in an area that the
Environmental Protection Agency (EPA) has classified
as not having attained the ambient air quality standards for
ozone, which is controlled by direct regulation of volatile
organic compounds and nitrogen oxide. The TCEQ has imposed
strict requirements on regulated facilities, including our Texas
City facility, to ensure that the air quality control region
will achieve the ambient air quality standards for ozone. Our
Texas City facility is subject to the federal governments
June 1997 National Ambient Air Quality Standards, which lower
the ozone and particulate matter threshold for attainment. Local
authorities also may impose new ozone and particulate matter
standards. Compliance with these stricter standards may
substantially increase our future nitrogen oxide, volatile
organic compounds and particulate matter control costs, the
amount and full impact of which cannot be determined at this
time. On December 13, 2002, the TCEQ adopted a revised SIP
for compliance with the ozone provisions of the Clean Air Act.
The SIP is currently being reviewed by the EPA, which is
expected to make further revisions to these rules. Under the
current SIP, we would be required to reduce emissions of
nitrogen oxide at our Texas City facility by approximately 80%
by the end of 2007. The current rule also requires monitoring of
emissions of highly reactive volatile organic carbons
(HRVOCs), such as ethylene and propylene, by the end
of 2005, and imposes a site-wide cap on emissions of HRVOCs in
2006. We believe that we would need to make between
$20 million and $25 million in capital improvements in
order to comply with all of these new regulations. We anticipate
that the majority of these capital expenditures and other
expenses would need to be incurred over a four-year period
beginning January 1, 2004. Under certain of our production
agreements, we would be able to recover a small portion of these
costs from them. We are currently evaluating several alternative
methods of reducing nitrogen oxide emissions at our Texas City
facility that would either require less capital expenditures or
result in energy savings that would, over a period of years,
more than offset the initial capital expenditures. However, we
cannot give any assurances that any alternative methods will be
available to us or that, even if available, these alternative
methods would reduce the net amount of capital expenditures
required to be made by a meaningful amount.

To reduce the risk of offsite consequences from
unanticipated events, we acquired a greenbelt buffer zone
adjacent to our Texas City facility in 1991. We also participate
in a regional air monitoring network to monitor ambient air
quality in the Texas City community.

Employees

As of December 31, 2003, we had
approximately 430 employees. Approximately 42% of our employees
are covered by a collective bargaining agreement with the Texas
City, Texas Metal Trades Council, AFL-CIO, of Galveston County,
Texas, which covers all hourly employees at our Texas City
facility. The collective bargaining agreement is subject to
renegotiation in April 2004. Although we believe our
relationship with our employees is generally good, a strike by
the union representing our employees could have a material
adverse effect on our business.

Insurance

We maintain full replacement value insurance
coverage for property damage to our facilities and business
interruption insurance. Nevertheless, a significant interruption
in the operation of one or more of our facilities could have a
material adverse effect on our business. We also maintain other
insurance coverage for various risks associated with our
business. There can be no assurance that we will not incur
losses beyond the limits of, or outside the coverage of, our
insurance. From time to time, various types of insurance for
companies in the chemical industry have been very expensive or,
in some cases, unavailable. There can be no assurance that in
the future we will be able to maintain our existing coverage or
that premiums will not increase substantially.

13



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##### Table of Contents



Access to Filings

Access to our annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on
Form 8-K and amendments to those reports filed with or
furnished to the Securities and Exchange Commission pursuant to
Section 13(a) of the Exchange Act, as well as reports filed
electronically pursuant to Section 16(a) of the Exchange
Act, may be obtained through our website
(http://www.sterlingchemicals.com). Our website provides a
hyperlink to a third-party website where these reports may be
viewed and printed at no cost as soon as reasonably practicable
after we have electronically filed such material with the
Securities and Exchange Commission. The contents of our website
are not, and shall not be deemed to be, incorporated into this
report.




Item 2.     Properties

Our petrochemicals facility is located in Texas
City, Texas, approximately 45 miles south of Houston, on a
290-acre site on Galveston Bay near many other chemical
manufacturing complexes and refineries. Currently, there are
facilities to produce seven petrochemicals at the Texas City,
Texas site; styrene, acrylonitrile, acetic acid, plasticizers,
methanol, sodium cyanide and DSIDA. We own all of the real
property which comprises our Texas City facility and the
styrene, acrylonitrile, acetic acid, plasticizers and methanol
manufacturing units located at the site. The methanol unit is
currently idled and is not likely to ever be restarted. DuPont
and Monsanto own the sodium cyanide and DSIDA units,
respectively, located at the site. These companies built these
units on land leased from us, and we operate these units on
their behalf. The DSIDA unit is not currently in operation, but
Monsanto has committed to restart the DSIDA unit by mid-2007 and
has the option to restart the unit prior to that time. At the
site, we have facilities to load our products in trucks,
railcars, barges and ocean-going vessels for shipment to
customers throughout the world. The site offers room for future
expansion and includes a greenbelt around the northern edge of
the plant site. We have also leased portions of the site to
Praxair and S&L Cogeneration Company, a 50/50 joint venture
between us and Praxair Energy Resources, Inc., which
constructed a partial oxidation unit and a cogeneration
facility, respectively, on that land. We also own approximately
167 rail cars in connection with our petrochemicals business.

We lease our principal executive offices, located
at 333 Clay Street, Suite 3600 in Houston, Texas.

We believe our properties and equipment are
sufficient to conduct our business.




Item 3.     Legal
Proceedings

As previously discussed, the Debtors filed
voluntary petitions for reorganization under Chapter 11 on
July 16, 2001. As a result of the commencement of the
Chapter 11 cases, an automatic stay was imposed against the
commencement or continuation of legal proceedings against the
Debtors outside of the Bankruptcy Court. Claimants with alleged
claims against the Debtors were required to assert their claims
in the Chapter 11 cases by timely filing a proof of claim,
to which the Debtors were allowed to file an objection and seek
a determination from the Bankruptcy Court as to whether such
claims were allowable. Claimants who desired to liquidate their
claims in legal proceedings outside of the Bankruptcy Court were
required to obtain relief from the automatic stay by order of
the Bankruptcy Court before doing so. If such relief was
granted, the automatic stay remained in effect with respect to
the collection of liquidated claim amounts. As a general rule,
all claims against the Debtors that sought a recovery from
assets of the Debtors estates have been addressed in the
Chapter 11 cases and have been or will be paid only
pursuant to the terms of the Plan of Reorganization or
negotiated settlements.

A few issues remain outstanding before the
Bankruptcy Court related to the allowability and classification
of certain claims. We do not believe that the outcome of any of
these issues 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.

Ethylbenzene Release.A description of this release can be
found under Legal Proceedings in Note 9 of the Notes
to Consolidated Financial Statements included in Item 8 of
Part II of this Form 10-K. The

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lawsuit listed below, which involves only one
plaintiff, is the only remaining lawsuit related to this
release. This lawsuit seeks damages for personal injury:




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

We have settled the Olivia Elliscase and
have obtained approval of the settlement from the Bankruptcy
Court. This settlement did not have a material impact on our
financial statements. A Motion to Dismiss will be filed on
behalf of the one remaining plaintiff and is expected to be
approved by the judge in that case in the near future. To the
extent that the lawsuit seeks a recovery from assets of the
Debtors estates, the claim has been addressed in the
Chapter 11 cases and will be paid only pursuant to the
terms of the Plan of Reorganization or a negotiated settlement.

Other Claims.We are
subject to various other claims and legal actions that arise in
the ordinary course of our business. Claims and legal actions
against the Debtors that existed as of the Chapter 11
filing date are subject to the discharge injunction provided for
in the Plan of Reorganization, and recoveries sought thereon
from assets of the Debtors are subject to the terms of the Plan
of Reorganization.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

There were no matters submitted to a vote of
security holders during 2003.

15



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##### Table of Contents






PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

On December 6, 2002, Holdings was merged
with and into Predecessor Sterling. See
Business  Bankruptcy Reorganization.
Under the terms of the merger and the Plan of Reorganization,
all equity interests in Holdings were cancelled upon
consummation of the merger and we issued 65,000 shares of
Reorganized Sterlings common stock to the holders of
Holdings 13 1/2% Senior Secured Discount Notes in
full payment of their claims. Upon the effectiveness of the Plan
of Reorganization, the Investor paid $30 million for
certain shares of Reorganized Sterlings Series A
Convertible Preferred Stock. An additional $30 million was
contributed to Reorganized Sterling at the effectiveness of the
Plan of Reorganization in exchange for 2,175,000 shares of
Reorganized Sterlings common stock pursuant to a rights
offering made available to the Debtors unsecured creditors
(other than unsecured creditors of Holdings), which offering was
underwritten by the Investor. In addition, upon the
effectiveness of the Plan of Reorganization, the unsecured
creditors of the Debtors (other than unsecured creditors of
Holdings) received pro rata shares of 11.7% of Reorganized
Sterlings common stock (on a fully diluted basis as of
such date, assuming the conversion of all shares of Reorganized
Sterlings Series A Convertible Preferred Stock into
shares of Reorganized Sterlings common stock) and warrants
to acquire 949,367 shares of Reorganized Sterlings common
stock at an exercise price of $52 per share (subject to
adjustment).

Our common stock, par value $.01 per share, began
trading on the Over-the-Counter (OTC) Electronic
Bulletin Board maintained by the National Association of
Securities Dealers, Inc. in January 2003 under the symbol
SCHI. There was previously no established public
trading market for our common stock. The following table sets
forth quarterly high and low sales prices of our common stock
reported on the OTC Electronic Bulletin Board for each full
quarterly period during the fiscal year ended December 31,
2003:

|     |  |         |       |         |  |         |       |         |  |   |       |  |  |   |       | 
|---- |  | ------- | ----- | ------- |  | ------- | ----- | ------- |  | - | ----- |  |  | - | ----- | 
|     |  | First   |       | Second  |  | Third   |       | Fourth 
|2003 |  | Quarter |       | Quarter |  | Quarter |       | Quarter
|     |  |         |       |         |  |         |       |        
|High |  | $       | 40.01 |         |  | $       | 23.00 |         |  | $ | 17.00 |  |  | $ | 25.50 | 
|Low  |  | $       | 22.00 |         |  | $       | 15.00 |         |  | $ | 14.00 |  |  | $ | 15.25 | 

The last reported sale price per share of our
common stock as reported on the OTC Electronic Bulletin Board on
March 5, 2004 was $26.00. As of March 5, 2004, there
were 330 holders of record of our common stock. This number does
not include stockholders for whom shares are held in a nominee
or street name.

Dividend Policy

We did not declare or pay any cash dividends with
respect to our common stock during fiscal 2003. We do not
presently intend to pay cash dividends with respect to our
common stock for the foreseeable future. In addition, we cannot
pay dividends on our shares of common stock under the Indenture
for our New Notes or the New Revolver. The payment of cash
dividends, if any, will be made only from assets legally
available for that purpose, and will depend on our financial
condition, results of operations, current and anticipated
capital requirements, general business conditions, restrictions
under then existing debt instruments and other factors deemed
relevant by our Board of Directors.

16



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following table sets forth selected financial
data with respect to our consolidated financial condition and
consolidated results of operations and should be read in
conjunction with Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations and our Consolidated Financial Statements and
related notes included in Item 8 of this Form 10-K.
Prior to December 6, 2002, all issued and outstanding
shares of Predecessor Sterlings capital stock were held by
Holdings and, accordingly, per share data prior to
December 19, 2002 is not presented.

|                                                                                     |  |                      |                                               |                |                      |   |              |   |                                 |  |      |         |      |  |      |          |   |  |   |          |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------ |  | -------------------- | --------------------------------------------- | -------------- | -------------------- | - | ------------ | - | ------------------------------- |  | ---- | ------- | ---- |  | ---- | -------- | - |  | - | -------- | - |  | - | -------- | - |  | - | -------- | -
|                                                                                     |  |                      |                                               |                |                     
|                                                                                     |  | Reorganized Sterling |                                               |                | Predecessor Sterling
|                                                                                     |  |                      |                                               |                |                     
|                                                                                     |  |                      |                                               |                |                      |   |             
|                                                                                     |  | Year ended           |                                               | December 20 to |                      |   | October 1 to |   | Fiscal Year Ended September 30,
|                                                                                     |  | December 31,         |                                               | December 31,   |                      |   | December 19, |   |                                
|                                                                                     |  | 2003                 |                                               | 2002           |                      |   | 2002         |   | 2002                            |  | 2001 |         | 2000 |  | 1999
|                                                                                     |  |                      |                                               |                |                      |   |              |   |                                 |  |      |         |      |  |     
|                                                                                     |  |                      | (Dollars
in Thousands, Except Per Share Data)
|Operating Data:                                                                      |  |                      |                                               |                |                      |   |              |   |                                 |  |      |         |      |  |      |          |   |  |   |          |   |  |   |          |   |  |   |          |  
|Revenues                                                                             |  | $                    | 590,723                                       |                |                      | $ | 12,572       |   |                                 |  | $    | 98,888  |      |  | $    | 381,801  |   |  | $ | 468,738  |   |  | $ | 797,756  |   |  | $ | 464,247  |  
|Gross profit (loss)                                                                  |  |                      | 983                                           |                |                      |   | (29          | ) |                                 |  |      | 300     |      |  |      | 27,646   |   |  |   | (52,639  | ) |  |   | 97,504   |   |  |   | (4,042   | )
|Net income (loss) from continuing operations(1)                                      |  |                      | (13,223                                       | )              |                      |   | (1,544       | ) |                                 |  |      | 223,974 |      |  |      | (52,616  | ) |  |   | (135,640 | ) |  |   | 14,891   |   |  |   | (86,593  | )
|Income (loss) from discontinued operations(2)                                        |  |                      | (976                                          | )              |                      |   |             |   |                                 |  |      | 194,637 |      |  |      | 16,630   |   |  |   | (46,070  | ) |  |   | (78,738  | ) |  |   | (8,129   | )
|Per Share Data:                                                                      |  |                      |                                               |                |                      |   |              |   |                                 |  |      |         |      |  |      |          |   |  |   |          |   |  |   |          |   |  |   |          |  
|Net income (loss) attributable to common
    stockholders                            |  |                      | (6.84                                         | )              |                      |   | (0.61        | ) |                                 |  |      |        |      |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Net income (loss) from continuing operations
    attributable to common stockholders |  |                      | (6.49                                         | )              |                      |   | (0.61        | ) |                                 |  |      |        |      |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Cash dividends                                                                       |  |                      |                                              |                |                      |   |             |   |                                 |  |      |        |      |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance Sheet Data:                                                                  |  |                      |                                               |                |                      |   |              |   |                                 |  |      |         |      |  |      |          |   |  |   |          |   |  |   |          |   |  |   |          |  
|Working capital(3)                                                                   |  | $                    | 118,165                                       |                |                      | $ | 129,413      |   |                                 |  | $    | 132,058 |      |  | $    | 122,178  |   |  | $ | 179,082  |   |  | $ | (96,760  | ) |  | $ | 6,733    |  
|Total assets                                                                         |  |                      | 550,503                                       |                |                      |   | 547,170      |   |                                 |  |      | 546,014 |      |  |      | 489,648  |   |  |   | 511,850  |   |  |   | 677,143  |   |  |   | 752,106  |  
|Long-term debt (excluding current maturities)(4)                                     |  |                      | 100,579                                       |                |                      |   | 94,275       |   |                                 |  |      | 94,275  |      |  |      |         |   |  |   | 42,270   |   |  |   | 438,910  |   |  |   | 465,084  |  
|Stockholders equity (deficiency in assets)                                          |  |                      | 189,436                                       |                |                      |   | 209,011      |   |                                 |  |      | 210,725 |      |  |      | (611,477 | ) |  |   | (563,582 | ) |  |   | (377,790 | ) |  |   | (309,590 | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The period October 1, 2002 to
    December 19, 2002 includes a net gain on disposal of
    $188.9 million. During fiscal 2002, we recorded
    $56.8 million of deferred tax expense to reflect a full
    valuation allowance on our U.S. deferred tax assets. During
    fiscal 2000, we recorded pre-tax charges of $2 million for costs
    associated with workforce reductions. During fiscal 1999, we
    recorded pre-tax charges of $4 million for costs associated
    with workforce reductions, a $6.8 million non-cash charge
    related to early retirement programs and benefit changes and a
    $26.4 million non-cash charge related to the write down of
    our methanol production assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(2) | Pursuant to the Plan of Reorganization, on
    December 19, 2002, the Debtors pulp chemicals
    business was sold to Superior Propane for approximately
    $373 million and the Debtors acrylic fibers business
    was sold to local management of that business for nominal
    consideration. In accordance with SFAS No. 144,
    Accounting for the Impairment and Disposal of Long Lived
    Assets, we have reported the operating results of these
    businesses as discontinued operations in the consolidated
    statement of operations and cash flows for Predecessor Sterling,
    and the assets and liabilities of these businesses have been
    presented separately as assets held for sale and liabilities
    related to discontinued operations in Predecessor
    Sterlings consolidated balance sheet. During fiscal 2002,
    we recorded approximately $4.4 million in pre-tax charges
    related to the write down of our acrylic fibers production
    assets. During fiscal 2001, we recorded approximately
    $7.1 million in pre-tax charges in connection with the
    withdrawal from the traditional commodity textile business of
    our acrylic fibers operations, which consisted of
    $2 million in severance payments and a write-down of
    finished goods and stores inventory

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|    |                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | to their net realizable value. During fiscal
    2000, we recorded a $60 million non-cash charge related to
    the write down of our acrylic fibers production assets.                                                                                                                    
|   
|(3) | Working capital at September 30, 2002 and
    2001 excludes pre-petition liabilities. See Note 1 of the Notes
    to Consolidated Financial Statements included in Item 8 of
    this Form 10-K.                                                                                           
|   
|(4) | Excludes long-term debt of $418.4 million
    and $295.0 million, classified as pre-petition
    liabilities  subject to compromise and pre-petition
    liabilities  not subject to compromise, respectively,
    on the Consolidated Balance Sheets at September 30, 2002
    and 2001.





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

In December 2002, we changed our fiscal year-end
from September 30 to December 31, effective with the
calendar year beginning January 1, 2003. In this
Form 10-K, fiscal 2002 and fiscal
2001 refer to the fiscal years ended September 30,
2002 and September 30, 2001, respectively, and the
Transition Period refers to the three-month period
from October 1, 2002 through December 31, 2002, which
includes the results of Predecessor Sterling from
October 1, 2002 through December 19, 2002 and the
results of Reorganized Sterling from December 20, 2002
through December 31, 2002. Also in this Form 10-K,
2003 and fiscal 2003 refer to the
12-month period ended December 31, 2003. The following
discussion is intended to aid in understanding our historical
financial position and results of operations for fiscal 2003,
the Transition Period, fiscal 2002 and fiscal 2001, and should
be read in conjunction with our financial statements appearing
elsewhere in this report.

Overview



| |         
| | --------
| | Business

We were formed in 1986 to acquire a
petrochemicals facility located in Texas City, Texas that was
previously owned by Monsanto Company (Monsanto). Our
Texas City facility is located approximately 45 miles south of
Houston on a 290-acre site on Galveston Bay near many other
chemical manufacturing complexes and refineries. Currently,
there are facilities to produce seven petrochemical products at
the Texas City, Texas site; styrene, acrylonitrile, acetic acid,
plasticizers, methanol, sodium cyanide and disodium
iminodiacetic acid (DSIDA). We own the styrene,
acrylonitrile, acetic acid, plasticizers and methanol
manufacturing units located at the site. The methanol unit is
currently idled and is not likely to ever be restarted. E.I. du
Pont de Nemours and Company (DuPont) and Monsanto
own the sodium cyanide and DSIDA units, respectively, located at
the site. These companies built these units on land leased from
us, and we operate these units on their behalf. Both of these
units use hydrogen cyanide created as a by-product from our
acrylonitrile operations to make other products. The DSIDA unit
is not currently in operation, but Monsanto has committed to
restart the DSIDA unit by mid-2007 and has the option to restart
the unit prior to that time. At the site, we have facilities to
load our products in trucks, railcars, barges and ocean-going
vessels for shipment to customers throughout the world. We have
also leased portions of the site to Praxair Hydrogen Supply,
Inc. and S&L Cogeneration Company, a 50/50 joint venture
between us and Praxair Energy Resources, Inc., which constructed
a partial oxidation unit and a cogeneration facility,
respectively, on that land. We lease the space for our principal
offices, which are in Houston, Texas.

We generally sell our petrochemicals products to
customers for use in the manufacture of other chemicals and
products, which in turn are used in the production of a wide
array of consumer goods and industrial products. We market a
significant portion of our volumes of petrochemicals and
generate a significant portion of our revenues under our
conversion and long-term agreements. Under our conversion
agreements, the customer furnishes raw materials that we process
into finished products. In exchange, we receive a fee typically
designed to cover our fixed and variable costs of production and
to generally provide an element of profit depending on the
existing market conditions for the product. Our conversion
agreements are designed to insulate us to some extent from the
effects of declining markets and changes in raw materials
prices, while allowing us to share in the benefits of favorable
market conditions for most of

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the products sold under these arrangements. Some
of these agreements provide for cost recovery plus an agreed
profit margin based upon market prices. These conversion
agreements are intended to:




| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | optimize capacity utilization rates;                                                                                        
|
| |  | lower our selling, general and administrative
    expenses;                                                                 
|
| |  | reduce our working capital requirements;                                                                                    
|
| |  | insulate our operations to some extent from the
    effects of declining markets and changes in raw materials prices
    and
|
| |  | in some cases, gain access to certain
    improvements in manufacturing process technology.                                 

From time to time, we may resell raw materials we
purchased from others, purchase styrene or acrylonitrile for
resale or sell ethylbenzene that we have produced from our own
purchased benzene and ethylene or from customer supplied
materials.

While we manufacture a variety of petrochemicals,
our financial performance is largely dependent on the
performance of our styrene and acrylonitrile operations, with
our styrene operations having the most influence on our results.
Styrene and acrylonitrile are commodities and exhibit wide
swings in prices and profit margins based upon current and
anticipated levels of supply and demand. Our other products,
while also commodities, tend to produce fairly consistent
results over time. Although exceptions occasionally occur, as a
general rule, if styrene profit margins are favorable, our
overall financial performance is good, but our overall financial
performance suffers when styrene margins are unfavorable. The
markets for styrene and acrylonitrile roughly follow repetitive
cycles and general trends in the supply and demand balance for
these products may be observed over time. However, it is
difficult, if not impossible, to definitively predict when
market conditions will be favorable or unfavorable. Since our
inception, our business strategy has centered on an effort to
take advantage of the high margins that can be realized during
the peaks in the market cycles to generate
significant amounts of net income, which we believe will provide
us greater average returns over time. Consequently, a large
portion of our styrene capacity is uncommitted and available for
sale in the spot markets. In addition, some of our acrylonitrile
capacity is uncommitted and available for sale in the spot
markets, and additional acrylonitrile capacity is available for
sale in the spot markets through ANEXCO, LLC, our marketing
joint venture with BP Amoco Chemical Company (BP
Chemicals), successor by merger to BP Chemicals Inc. While
having available uncommitted capacity can lead to dramatically
improved financial performance during periods when the balance
of supply and demand favors producers, it also causes negative
market conditions to affect us more severely than most of our
competitors in terms of sales volumes and margins.

Peaks in the market cycles for
styrene and acrylonitrile tend to occur after periods of
moderate to high growth rates in the worlds economy, with
the growth rate of the economy in Asia becoming increasingly
more important, especially when such growth rates occur at a
time when there has not been any significant increase in
capacity for an extended period. Historically, the peaks in the
market cycles for styrene and acrylonitrile have occurred every
seven to ten years, with prolonged periods of depressed market
conditions between the peaks. The last peaks in the styrene and
acrylonitrile markets occurred in 1995, and most industry
experts expect the next peaks to occur within the next three
years, although it is impossible to predict whether a peak will
occur during that time frame. Inevitably, favorable market
conditions for our products prompt increases in supply. In most
cases, increases in supply are achieved through the construction
of new capacity or major expansions of existing facilities.
Typically, these types of projects result in large increases in
production capacity and supply and cause available supply to
greatly exceed demand for an extended period. Several of our
competitors have announced their intention to build new styrene
production units outside the United States during the late 2006
to 2008 time frame, although it is not uncommon for announced
construction to be delayed or abandoned. If and when these new
units are completed, we would anticipate more difficult market
conditions until the additional supply is absorbed in the market.

The financial performance of each of our products
is primarily a function of sales prices, the cost of raw
materials and energy and sales volumes. While changes in the
prices for our products may be tracked

19



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##### Table of Contents



through a variety of sources, a change in price
does not necessarily result in a corresponding change in our
financial performance. When the prices of our products increase
or decrease, our overall financial performance may improve,
decline or stay roughly the same depending upon the extent and
direction of changes in our costs for raw materials and energy
and our production rates. For most of our products, the combined
cost of raw materials and energy resources is far greater than
all other costs of production combined. We use significant
amounts of natural gas as fuel in the production of our
products, and the producers of most of our raw materials use
significant amounts of natural gas in their production. As a
result, our production and raw materials costs increase or
decrease based upon changes in the price for natural gas.
Natural gas and most of our raw materials are commodities and,
consequently, are subject to wide fluctuations in prices, which
can, and often do, move independently of changes in the prices
for our products. Prices for, and the availability of, natural
gas and many of our raw materials are largely based on regional
factors, which can result in wide disparities in prices in
different parts of the world or shortages or unavailability in
some regions at the same time when these products are plentiful
in other parts of the world. Prices for styrene and
acrylonitrile, on the other hand, tend to be more consistent
throughout the world, after taking into account transportation
costs. Consequently, changes in prices for natural gas and raw
materials tend to impact margin on our sales rather than the
price of our products, with margins increasing when natural gas
and raw materials costs decline and vice versa. In
addition, many producers in other parts of the world use
oil-based processes rather than natural gas-based processes.
Consequently, the relationship between the price of crude oil
and the price of natural gas can either increase or decrease our
competitiveness depending on their relative values at any
particular point in time. Sales volumes influence our overall
financial performance in a variety of ways. As a general rule,
increases in sales volumes will result in an increase in overall
revenues and vice versa, although this is not necessarily
the case since the prices for some of our products can change
dramatically from month-to-month. More importantly, changes in
production rates impact the average cost per pound of the
products produced. If more pounds are produced, our fixed costs
are spread over a greater number of pounds resulting in a lower
average cost to produce each pound. In addition, our production
rates influence the overall efficiency of our manufacturing unit
and the yields we receive from our raw materials.


From 1994 through 1996, strong demand growth and
high utilization rates for styrene prevailed, which prompted
several major producers to announce new capacity increases in
1997 and 1998, particularly in the Far East. At the time this
new capacity was announced, there was also a general slowdown in
the economic growth rate in the Far East and significantly
reduced demand growth for styrene, prompting many styrene
customers to begin utilizing their available inventories and
reduce purchases of additional product. As a result, our average
styrene prices declined from fiscal 1997 through fiscal 1999.
During 2000, styrene prices and margins increased significantly
from levels experienced in 1999. These improvements were driven
by a combination of stronger market demand, operating problems
experienced at several of our competitors and generally low
inventory levels worldwide. Styrene prices and margins hit their
highest level in April 2000 and then decreased over the second
half of 2000. During 2001, U.S. and world economies experienced
a general slowdown, which negatively impacted demand for most
petrochemicals, including styrene. Raw material and energy costs
spiked upward during the first half of 2001, increasing
significantly from the prior year, primarily due to the sharp
increase in natural gas prices. As a result, U.S. Gulf Coast
petrochemicals producers experienced significant margin erosion
for most of their products. Due to these conditions, we and many
other U.S. Gulf Coast petrochemicals producers reduced
production levels. During the second half of fiscal 2001, raw
material and energy costs began to moderate, although demand
remained weak due to the continued economic slowdown.

Demand for styrene, relative to supply, increased
late in the second quarter of fiscal 2002 due to a variety of
factors, including economic improvements in the United States
manufacturing sector, global restocking of low inventory levels
and styrene plant shutdowns attributable to scheduled
maintenance and operating problems at several of our
competitors. Margins on our spot sales of styrene turned
positive in February 2002 and continued positive during the
remainder of fiscal 2002. During the first half of 2003, styrene
demand and margins on our styrene sales were depressed due to
high energy and raw materials costs and uncertainties associated
with the war with Iraq. Energy and raw materials costs declined
during the second half of 2003 compared to the first half of
2003 and, coupled with improved economic

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conditions in the United States and the rest of
the world, resulted in improved margins on our styrene sales.
However, toward the end of 2003, energy and raw materials costs
began to increase, again resulting in downward pressure on
styrene margins as the year ended. We cannot predict future
increases or decreases in styrene prices or margins with any
substantial degree of certainty.


Markets for acrylonitrile exhibit similar
characteristics to those of styrene in terms of capacity
utilization, selling prices and profit margins. In addition, as
more than 50% of domestic acrylonitrile production is sold in
the export market, demand is significantly impacted by customers
in China, who in 2003 purchased 840 million pounds of
acrylonitrile, 4.29 billion pounds of ABS/ SAN resin
(equivalent to approximately one billion pounds of
acrylonitrile) and slightly more than 1 billion pounds of
acrylic fiber (equivalent to approximately one billion pounds of
acrylonitrile) from producers outside of China, greatly
surpassing the aggregate amount of acrylonitrile exported
globally from the United States. Demand for acrylonitrile grew
steadily in the early 1990s in China, India, Taiwan,
Thailand and Turkey and, during 1995 to 1996, concerns about
availability of product and raw materials costs resulted in high
prices and profit margins, which in turn prompted many producers
to add incremental acrylonitrile capacity, and two Asian
acrylonitrile consumers to build acrylonitrile plants to meet
their captive demand. Increased acrylonitrile production
capacity, combined with weak demand for acrylonitrile and its
derivatives caused by the economic crisis in Asia in the late
1990s, resulted in significantly depressed acrylonitrile
prices and profit margins. Beginning in early fiscal 2000,
acrylonitrile prices increased significantly due to improved
market demand, operating problems experienced at several
producers and generally low inventory levels. Due to the startup
of new acrylonitrile plants in the United States and Taiwan and
a general slowdown of United States and world economies, along
with higher raw materials and energy costs, acrylonitrile prices
and profit margins weakened significantly in fiscal 2001. As a
result, we rescheduled maintenance turnaround work on our
acrylonitrile facility, performing this work during the second
quarter of fiscal 2001 rather than later in the year. The
adverse economic conditions that led to rescheduling of the
maintenance work persisted beyond the completion of the work and
we elected to postpone restarting our acrylonitrile facilities
and the sodium cyanide and DSIDA production units, which are
dependent on our acrylonitrile facilities for feedstocks. In
June 2003, we began the process of restarting our acrylonitrile
facility and, in August 2003, we completed the restart of our
acrylonitrile facility and restarted DuPonts sodium
cyanide facility. At the time we emerged from bankruptcy in
December 2002, we were involved in litigation with Monsanto
regarding the assumption of the contracts governing the
production of DSIDA and related cure costs. On December 12,
2003, we settled these disputes with Monsanto and, under the
settlement, Monsanto agreed to extend our business relationship
and restart the DSIDA unit by mid-2007. Monsanto also has the
option of restarting the DSIDA unit prior to that time.

In June 2003, we also entered into an
acrylonitrile expanded relationship agreement with BP Chemicals.
Our acrylonitrile relationship with BP Chemicals is governed by
a variety of documents, including a Production Agreement, under
which BP Chemicals has the right, but not the obligation, to
purchase acrylonitrile from us up to a specified percentage of
our annual rated production capacity, and a Joint Venture
Agreement, pursuant to which we and BP Chemicals formed ANEXCO,
LLC, a 50/50 joint venture that markets all of the parties
respective sales of acrylonitrile everywhere in the world other
than the United States, Canada, Mexico, Turkey and the European
Union. Under the Production Agreement, BP Chemicals furnishes
the necessary raw materials and pays us a conversion fee for any
acrylonitrile it elects to purchase, and reimburses us for a
specified portion of our fixed costs related to acrylonitrile
production irrespective of whether BP Chemicals purchases any
acrylonitrile under the Production Agreement. Under the
acrylonitrile expanded relationship agreement, BP
Chemicals right to purchase acrylonitrile from us under
the Production Agreement was significantly increased and the
Joint Venture Agreement was modified in a manner that, together
with the modifications to the Production Agreement, is intended
to provide us with the ability to operate our acrylonitrile
facility at optimal three-reactor rates throughout the
acrylonitrile market cycles. On January 17, 2004, we shut
down our acrylonitrile plant (unrelated to our planned styrene
turnaround taken at the same time) due to a propylene shortage
and took the opportunity to perform maintenance work to correct
plant problems that were causing excessive propylene and ammonia
use. Adequate propylene supply was secured in early

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March to restart the plant. The propylene market
is expected to come into balance in the second quarter of 2004,
resulting in adequate propylene availability for the remainder
of 2004.




| |                          
| | -------------------------
| | Bankruptcy Reorganization

On July 16, 2001 (the Petition
Date), Sterling Chemicals Holdings, Inc.
(Holdings), Sterling Chemicals, Inc. and most of
their U.S. subsidiaries (collectively, the Debtors)
filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code (the
Bankruptcy Code) in the U.S. Bankruptcy Court for
the Southern District of Texas (the Bankruptcy
Court). The Debtors filed a proposed plan of
reorganization with the Bankruptcy Court on May 14, 2002
which, after several amendments, was confirmed on
November 20, 2002 (as confirmed, the Plan of
Reorganization). On December 19, 2002, the Plan of
Reorganization became effective and the Debtors emerged from
bankruptcy pursuant to the terms of the Plan of Reorganization.
During the period from July 16, 2001 through
December 19, 2002, the Debtors operated their respective
businesses as debtors-in-possession pursuant to the Bankruptcy
Code, and the accompanying consolidated financial statements for
this period have been presented in conformity with Statement of
Position 90-7, Financial Reporting By Entities In
Reorganization Under the Bankruptcy Code (SOP
90-7) of the American Institute of Certified Public
Accountants (AICPA). SOP 90-7 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. For financial
reporting purposes, the Effective Date of the Plan
of Reorganization is considered to have been the close of
business on December 19, 2002. Due to the Debtors
emergence from bankruptcy and the implementation of fresh-start
accounting (see Note 3 of the Notes to Consolidated Financial
Statements included in Item 8), we refer to ourselves as,
and our financial results have been separately presented under
the heading, Predecessor Sterling for periods on or
before December 19, 2002 and Reorganized
Sterling for periods after December 19, 2002. Our
financial statements for 2003 are not comparable to those of
Predecessor Sterling for periods ended prior to January 1,
2003.

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 the Debtors export sales to be at a
competitive disadvantage) and higher raw material and energy
costs. As a result of these conditions, the Debtors incurred
significant operating losses. The reorganization, effected
through the bankruptcy filings, permitted the Debtors to
preserve cash and gave them the opportunity to restructure their
debt. As the market for our petrochemicals products remains
highly cyclical, the capital structure of Reorganized Sterling
has been designed with the goal of ensuring that we have
sufficient liquidity during cyclical downturns in the markets
for our petrochemicals products, although we cannot give any
assurances that our new capital structure will provide us with
sufficient liquidity over any specific period.

On December 6, 2002, Holdings was merged
with and into Predecessor Sterling. Under the terms of the
merger and the Plan of Reorganization, all equity interests in
Holdings were cancelled upon consummation of the merger and we
issued 65,000 shares of Reorganized Sterlings common stock
to the holders of Holdings 13 1/2% Senior Secured
Discount Notes in full payment of their claims. Upon the
effectiveness of the Plan of Reorganization, Resurgence Asset
Management, L.L.C., on behalf of itself and certain of its and
its affiliates managed funds and accounts (which we
collectively refer to as the Investor), paid $30 million
for certain shares of Reorganized Sterlings Series A
Convertible Preferred Stock. An additional $30 million was
contributed to Reorganized Sterling at the effectiveness of the
Plan of Reorganization in exchange for 2,175,000 shares of
Reorganized Sterlings common stock pursuant to a rights
offering made available to the Debtors unsecured creditors
(other than unsecured creditors of Holdings), which offering was
underwritten by the Investor. In addition, upon the
effectiveness of the Plan of Reorganization, the unsecured
creditors of the Debtors (other than unsecured creditors of
Holdings) received pro rata shares of 11.7% of Reorganized
Sterlings common stock (on a fully diluted basis as of
such date, assuming the conversion of all shares of Reorganized
Sterlings Series A Convertible Preferred

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Stock into shares of Reorganized Sterlings
common stock) and warrants to acquire 949,367 shares of
Reorganized Sterlings common stock at an exercise price of
$52 per share (subject to adjustment).


Pursuant to the Plan of Reorganization, on
December 19, 2002 the Debtors pulp chemicals business
was sold to Superior Propane, Inc. (Superior
Propane) for approximately $373 million and the
Debtors acrylic fibers business was sold to local
management of that business for nominal consideration. We have
reported the operating results of these businesses as
discontinued operations in the condensed consolidated statements
of operations and cash flows for Predecessor Sterling, and the
assets and liabilities of these businesses have been presented
separately as assets held for sale and liabilities related to
discontinued operations in Predecessor Sterlings condensed
consolidated balance sheet. Approximately $80 million of
the net proceeds from the sale of the Debtors pulp
chemicals business remained with Reorganized Sterling, which
continues to own and operate the Debtors core
petrochemicals business. The remaining net proceeds from the
sale were paid to the holders of Predecessor Sterlings
12 3/8% Senior Secured Notes (the 12 3/8% Notes), who
also received approximately $94.3 million in principal
amount of new 10% Senior Secured Notes due 2007 issued by
Reorganized Sterling (the New Notes) in satisfaction
of their claims. In addition, on December 19, 2002,
Reorganized Sterling established a new revolving credit facility
providing up to $100 million in revolving credit loans
(subject to borrowing base limitations) with The CIT Group/
Business Credit, Inc., as administrative agent and a lender, and
certain other lenders (the New Revolver). As of
December 31, 2003, we had not borrowed any money under the
New Revolver, although we had approximately $1.8 million in
letters of credit outstanding.



| |                       
| | ----------------------
| | Fresh-Start Accounting

Upon our emergence from bankruptcy on
December 19, 2002, we implemented fresh-start accounting
under the provisions of SOP 90-7 and became a new reporting
entity. Under SOP 90-7, our reorganization value was allocated
to our assets and liabilities, our accumulated deficit was
eliminated and new preferred and common equity was issued
pursuant to the Plan of Reorganization. In connection with the
Plan of Reorganization, our financial advisor,
Greenhill & Co., LLC (Greenhill) prepared a
valuation of our business. In preparing its valuation, Greenhill
considered a number of factors, including valuations by other
parties and the application of various valuation methods,
including discounted cash flow analysis, comparable company
analysis and precedent transaction analysis. Based on
Greenhills valuation, the estimated reorganization value
was allocated as follows (Dollars in Thousands):

|                           |  |   |         | 
|-------------------------- |  | - | ------- | 
|Long-term debt             |  | $ | 94,275  | 
|Redeemable preferred stock |  |   | 30,000  | 
|Stockholders equity       |  |   | 210,725 | 
|                           |  |   |         | 
|Total                      |  | $ | 335,000 | 
|                           |  |   |         | 

Results of Operations

The following table sets forth revenues, gross
profit (loss), operating income (loss) from continuing
operations and net income (loss) from continuing operations
for 2003, the Transition Period, fiscal 2002 and fiscal 2001.
Information for the three months ended December 31, 2001 is
also presented for comparative purposes to the Transition Period.

|                                                        |  |                      |         |                        |  |                      |        |              |  |              |  |               |         |               |  |   |         |   |  |   |         |   |  |   |          |  
|------------------------------------------------------- |  | -------------------- | ------- | ---------------------- |  | -------------------- | ------ | ------------ |  | ------------ |  | ------------- | ------- | ------------- |  | - | ------- | - |  | - | ------- | - |  | - | -------- | -
|                                                        |  |                      |         |                        |  |                     
|                                                        |  | Reorganized Sterling |         |                        |  | Predecessor Sterling
|                                                        |  |                      |         |                        |  |                     
|                                                        |  |                      |         |                        |  |                      |        | Three Months |  | Fiscal Year  |  | Fiscal Year  
|                                                        |  | Year ended           |         | December 20 to         |  |                      |        | October 1 to |  | Ended        |  | Ended         |         | Ended        
|                                                        |  | December 31,         |         | December 31,           |  |                      |        | December 19, |  | December 31, |  | September 30, |         | September 30,
|                                                        |  | 2003                 |         | 2002                   |  |                      |        | 2002         |  | 2001         |  | 2002          |         | 2001         
|                                                        |  |                      |         |                        |  |                      |        |              |  |              |  |               |         |              
|                                                        |  |                      |         | (Dollars in Thousands)
|Revenues:                                               |  | $                    | 590,723 |                        |  | $                    | 12,572 |              |  |              |  | $             | 98,888  |               |  | $ | 63,355  |   |  | $ | 381,801 |   |  | $ | 468,738  |  
|Gross profit (loss):                                    |  |                      | 983     |                        |  |                      | (29    | )            |  |              |  |               | 300     |               |  |   | (4,210  | ) |  |   | 27,646  |   |  |   | (52,639  | )
|Operating income (loss) from continuing
    operations: |  |                      | (11,378 | )                      |  |                      | (2,017 | )            |  |              |  |               | (3,140  | )             |  |   | (12,189 | ) |  |   | 14,596  |   |  |   | (69,760  | )
|Net income (loss) from continuing operations:           |  |                      | (13,223 | )                      |  |                      | (1,544 | )            |  |              |  |               | 223,974 |               |  |   | (23,090 | ) |  |   | (52,616 | ) |  |   | (135,640 | )

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| |                                             
| | --------------------------------------------
| | Comparison of Fiscal 2003 to Fiscal
    2002



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Revenues, Gross Profit (Loss) and Net Income
    (Loss) from continuing operations

Our revenues were $591 million in 2003, an
increase of 55% from the $382 million in revenues recorded by
Predecessor Sterling in fiscal 2002. This increase in revenues
resulted primarily from an increase in styrene sales prices and
a significant increase in the amount of acrylonitrile sales
following the resumption of the production of acrylonitrile in
2003. We recorded a net loss from continuing operations of
$13 million for 2003, compared to a net loss of
$53 million recorded by Predecessor Sterling for fiscal
2002. This decrease in net loss from continuing operations was
primarily due to lower interest costs and the absence of
reorganization costs following our emergence from bankruptcy in
December 2002, partially offset by lower gross profit during
2003 compared to fiscal 2002.

Revenues from our styrene operations were
$409 million in 2003, an increase of 49% from the
$274 million in revenues recorded by Predecessor Sterling
in fiscal 2002. Direct sales prices for styrene in 2003
increased 26% from those realized during fiscal 2002. Spot
prices for styrene, a component of our direct sales prices,
ranged from $0.26 to $0.37 per pound during 2003, compared to
$0.17 to $0.35 per pound during fiscal 2002. However, our total
sales volumes for styrene in 2003 were roughly equivalent to
Predecessor Sterlings total sales volumes for styrene
during fiscal 2002. During 2003, prices for benzene, one of the
primary raw materials for styrene, were 38% higher than the
prices paid by Predecessor Sterling for benzene in fiscal 2002,
and prices for ethylene, the other primary raw material for
styrene, were 24% higher than the prices paid by Predecessor
Sterling for ethylene in fiscal 2002. Average costs for natural
gas, another major component in the cost of manufacturing
styrene, increased 79% during 2003 compared to average natural
gas costs during fiscal 2002. These factors contributed to a
reduction in gross profit from our styrene operations in 2003
compared to fiscal 2002.

We restarted our acrylonitrile unit during 2003.
Revenues from our acrylonitrile operations were $59 million
in 2003, compared to $7 million in revenues from
acrylonitrile operations recorded by Predecessor Sterling during
fiscal 2002. Direct sales prices for acrylonitrile in 2003
increased 21% from those realized in fiscal 2002.

Revenues from our other petrochemicals
operations, including acetic acid, plasticizers and methanol,
were $123 million in 2003, an increase of 22% from the
$101 million in revenues recorded by Predecessor Sterling
from these operations during fiscal 2002. This increase was
largely due to an increase in our acetic acid and methanol
revenues in 2003 compared to fiscal 2002.



| |                       
| | ----------------------
| | Other Expense (Income)

We recorded other income of $4 million in
2003 compared to $2 million of other income generated by
Predecessor Sterling in fiscal 2002. This increase was primarily
due to a $3.7 million sales tax refund we received from the
State of Texas in the first quarter of 2003.



| |                     
| | --------------------
| | Reorganization Items

As we emerged from bankruptcy in December 2002,
we did not incur any reorganization items during 2003. Items
that we previously recorded as reorganization items were
included as Selling, General and Administrative Expenses during
2003. Reorganization items incurred by Predecessor Sterling
during fiscal 2002 were $17 million. These costs were
primarily for professional fees incurred after our filing for
reorganization under Chapter 11.



| |                                                               
| | --------------------------------------------------------------
| | Interest and Debt Related Expenses, Net of
    Interest Income

We recorded total interest and debt related
expense, net of interest income, of $10 million in 2003,
which was substantially lower than the $50 million in total
interest and debt related expense recorded by Predecessor
Sterling in fiscal 2002. This substantial decrease was primarily
due to the cancellation of our pre-existing senior secured debt
of $295 million, which carried an interest rate of
12 3/8%. The senior secured debt, along with our other
pre-existing debt, was cancelled upon our emergence from
bankruptcy

24



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##### Table of Contents



in December 2002. In 2003, our interest expense
was primarily generated by the New Notes, which had an initial
principal amount of $94 million and carry an interest rate
of 10%.




| |                                     
| | ------------------------------------
| | Provision (Benefit) for Income Taxes

Our benefit for income taxes was $8 million
in 2003, compared to a provision for income taxes of
$0.1 million recorded by Predecessor Sterling in fiscal
2002. In 2003, we recorded a benefit for the net operating
losses we generated during 2003, whereas Predecessor Sterling
recorded a full valuation allowance for net operating losses
generated in fiscal 2002.



| |                                             
| | --------------------------------------------
| | Comparison of Fiscal 2002 to Fiscal
    2001



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Revenues, Gross Profit (Loss) and Net Income
    (Loss) from continuing operations

Our revenues were $382 million in fiscal
2002, a decrease of 19% from the $469 million in revenues
we recorded in fiscal 2001. This decrease in revenues resulted
primarily from lower acrylonitrile sales volumes. We recorded a
net loss from continuing operations of $53 million for
fiscal 2002, compared to a net loss of $136 million for
fiscal 2001. This decrease in net loss from continuing
operations was primarily due to improved styrene gross profit
and lower interest costs, as we did not accrue interest on our
unsecured and undersecured funded indebtedness as it is
generally disallowed by the Bankruptcy Code. This was partially
offset by an increase in reorganization items recorded during
fiscal 2002 compared to fiscal 2001.

Revenues from our styrene operations were
$274 million in fiscal 2002, an increase of 7% from the
$257 million in revenues from these operations during
fiscal 2001. Sales prices for styrene during fiscal 2002
decreased 4% from those realized during fiscal 2001. Spot prices
for styrene, a component of our direct sales prices, ranged from
$0.17 to $0.35 per pound during fiscal 2002, compared to $0.18
to $0.31 per pound during fiscal 2001. However, our total sales
volumes for styrene in fiscal 2002 increased 8% from those
realized during fiscal 2001. The increase in styrene sales
volumes, combined with decreases in raw material and energy
costs, resulted in a significant increase in gross margin
realized in fiscal 2002 compared to fiscal 2001. During fiscal
2002, prices for benzene, one of the primary raw materials for
styrene, were 4% lower than the prices we paid for benzene in
fiscal 2001 and prices for ethylene, the other primary raw
material for styrene, were 28% lower than the prices we paid for
ethylene in fiscal 2001. Average costs for natural gas, another
major component in the cost of manufacturing styrene, decreased
42% during fiscal 2002 compared to average costs during fiscal
2001.

Revenues from our acrylonitrile and derivatives
operations were $7 million in fiscal 2002, a decrease of
92% from the $87 million in revenues from these operations
in fiscal 2001. Total sales volumes of our acrylonitrile
decreased 90% in fiscal 2002 compared to fiscal 2001 due to our
continued shutdown of our acrylonitrile facility during fiscal
2002 due to unfavorable market conditions. We did not purchase
propylene and ammonia, the primary raw materials for
acrylonitrile, in fiscal 2002 due to the continued shutdown.

Revenues from our other petrochemicals
operations, including acetic acid, plasticizers and methanol,
were $101 million in fiscal 2002, a decrease of 19% from
the $124 million in revenues from these operations during
fiscal 2001. Our other petrochemicals operations reported an
increase in operating earnings for fiscal 2002 compared to those
realized during fiscal 2001.



| |                       
| | ----------------------
| | Other Expense (Income)

We generated other income of $2 million in
fiscal 2002 due to an adjustment of a liability related to
certain employee retirement benefit obligations, compared to the
$3 million of other expense incurred in fiscal 2001 which
was primarily for professional fees incurred in preparation of
our filing for reorganization under Chapter 11.

25



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##### Table of Contents





| |                     
| | --------------------
| | Reorganization Items

Reorganization items incurred during fiscal 2002
were $17 million compared to $5 million incurred
during fiscal 2001. These costs were primarily for professional
fees incurred after our filing for reorganization under
Chapter 11.



| |                                                               
| | --------------------------------------------------------------
| | Interest and Debt Related Expenses, Net of
    Interest Income

Interest and debt related expenses, net of
interest income, were $50 million in fiscal 2002 compared
to $61 million in fiscal 2001. This reduction was due to
the fact that, after our Chapter 11 filings, interest on
liabilities subject to compromise was not accrued. The
contractual interest expense not accrued during fiscal 2002 and
fiscal 2001, due to our Chapter 11 filings, was
$26 million and $6 million, respectively.



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | Comparison of the Three Months Ended
    December 31, 2002 to the Three Months Ended
    December 31, 2001

For the three months ended December 31,
2002, the financial data presented below combines the period
from December 20, 2002 to December 31, 2002,
representing Reorganized Sterling, with the period
October 1, 2002 to December 19, 2002, representing
Predecessor Sterling.



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Revenues, Operating Income (Loss) and Net
    Income (Loss) from continuing operations

Our revenues were $112 million for the three
months ended December 31, 2002 (the 2002
Quarter), compared to Predecessor Sterlings
$63 million in revenues during the three months ended
December 31, 2001 (the 2001 Quarter). This
increase in revenues resulted primarily from an increase in
styrene sales prices and sales volumes due to improved market
conditions. We recorded net income attributable to common
stockholders of $417 million for the 2002 Quarter, compared
to the net loss attributable to common stockholders of $15
million that Predecessor Sterling recorded for the 2001 Quarter.
This increase in net income was primarily due to transactions
related to the Plan of Reorganization, which included a gain on
debt restructuring of $458 million and fresh-start
adjustments of $203 million.

Revenues from our styrene operations were
$83 million for the 2002 Quarter, an increase of 118% from
Predecessor Sterlings $38 million in revenues from
those operations in the 2001 Quarter. Our total sales volumes
for styrene for the 2002 Quarter increased 34% from those
realized by Predecessor Sterling during the 2001 Quarter. Direct
sales prices for styrene in the 2002 Quarter increased 37% from
those realized during the 2001 Quarter. Spot prices for styrene,
a component of our direct sales prices, ranged from $0.25 to
$0.35 per pound during the 2002 Quarter, compared to $0.17 to
$0.19 per pound during the 2001 Quarter. During the 2002
Quarter, prices for benzene and ethylene, the two primary raw
materials for styrene, increased 50% and 13%, respectively, from
the prices paid for these products in the 2001 Quarter. The
average price for natural gas increased 63% during the 2002
Quarter compared to the average price for natural gas during the
2001 Quarter. Due to the factors discussed above, margins on our
styrene sales for the 2002 Quarter increased somewhat from those
realized by Predecessor Sterling during the 2001 Quarter.

Revenues for acrylonitrile remained essentially
the same during the 2002 Quarter compared to the 2001 Quarter.
Our acrylonitrile unit was shut down during both periods.

Revenues from our other petrochemicals
operations, including acetic acid, plasticizers and methanol,
were $29 million for the 2002 Quarter, an increase of 21%
from the $24 million in revenues received by Predecessor
Sterling from these operations during the 2001 Quarter. Our
other petrochemicals operations reported an increase of
$3 million in operating earnings for the 2002 Quarter,
compared to that realized by Predecessor Sterling during the
2001 Quarter. These increases in revenues and operating earnings
were largely due to improved sales margins.

26



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| |                     
| | --------------------
| | Reorganization Items

Reorganization items incurred during the 2002
Quarter were $15 million compared to $4 million for
the 2001 Quarter, primarily due to an increase in professional
fees incurred in connection with the Debtors emergence
from Chapter 11.

Liquidity and Capital Resources

Pursuant to the Plan of Reorganization, on
December 19, 2002, we issued approximately
$94.3 million in principal amount of New Notes to the
holders of Predecessor Sterlings 12 3/8% Notes. The
New Notes are senior secured obligations and rank equally in
right of payment with all of our other existing and future
senior indebtedness and senior in right of payment to all of our
existing and future subordinated indebtedness. The New Notes are
guaranteed by Sterling Chemicals Energy, Inc. (Sterling
Energy), one of our wholly owned subsidiaries. Sterling
Energys guaranty ranks equally in right of payment with
all its existing and future senior indebtedness, and senior in
right of payment to all of its existing and future subordinated
indebtedness. The New Notes and Sterling Energys guaranty
are secured by a first priority lien on all of our production
facilities and related assets.

The New Notes bear interest at an annual rate of
10%, payable semi-annually on June 15 and December 15
of each year. Under certain circumstances, for any interest
period ending on or before December 19, 2004, we may elect
to pay interest on the New Notes through the issuance of
additional New Notes rather than the payment of cash. However,
if we pay interest through the issuance of additional New Notes
rather than the payment of cash, the interest rate for the
relevant period is increased to 13 3/8%. We made our first
interest payment on the New Notes, in cash, during June 2003. In
December 2003, we made our second interest payment on the New
Notes at the higher interest rate through the issuance of
$6.3 million in principal amount of additional New Notes,
increasing the aggregate principal amount of outstanding New
Notes to $100.6 million as of December 31, 2003.
Subject to compliance with the terms of the New Revolver, we may
redeem the New Notes at any time at a redemption price of 100%
of the outstanding principal amount thereof plus accrued and
unpaid interest. In addition, in the event of a specified change
of control or the sale of our facility in Texas City, Texas, we
are required to offer to repurchase the New Notes at 101% of the
outstanding principal amount thereof plus accrued and unpaid
interest. We are also required to offer to repurchase the New
Notes at 100% of the outstanding principal amount thereof plus
accrued and unpaid interest in the event of certain other sales
of assets.

The indenture governing the New Notes contains
numerous covenants and conditions, including, but not limited
to, restrictions on our ability to incur indebtedness, create
liens, sell assets, make investments, make capital expenditures,
engage in mergers and acquisitions and pay dividends. The
indenture also includes various circumstances and conditions
that would, upon their occurrence and subject in certain cases
to notice and grace periods, create an event of default
thereunder. However, the indenture does not require us to
satisfy any financial ratios or maintenance tests.

On December 19, 2002, we established the New
Revolver with The CIT Group/ Business Credit, Inc., as
administrative agent and a lender, and certain other lenders,
which provides up to $100 million in revolving credit
loans. The New Revolver has an initial term ending on
September 19, 2007. Under the New Revolver, Reorganized
Sterling and Sterling Energy are co-borrowers and are jointly
and severally liable for any indebtedness thereunder. The New
Revolver is secured by first priority liens on all accounts
receivable, inventory and other specified assets owned by
Reorganized Sterling or Sterling Energy, as well as all of the
issued and outstanding capital stock of Sterling Energy.

Borrowings under the New Revolver bear interest,
at our option, at an annual rate of either the Alternate Base
Rate plus 0.75% or the LIBO Rate (as defined in the
New Revolver) plus 2.75%. The Alternate Base Rate is
equal to the greater of the Base Rate as announced
from time to time by JPMorgan Chase Bank in New York, New York
or 0.50% per annum above the latest Federal Funds
Rate (as defined in the New Revolver). Under the New
Revolver, we are also required to pay an aggregate commitment
fee of 0.50% per year (payable monthly) on any unused portion of
the New

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Revolver. Available credit under the New Revolver
is subject to a monthly borrowing base of 85% of eligible
accounts receivable plus the lesser of $50 million and 65%
of eligible inventory. In addition, the borrowing base for the
New Revolver must exceed outstanding borrowings thereunder by
$8 million at all times. As of December 31, 2003, the
total credit available under the New Revolver was
$75.2 million due to borrowing base limitations. As of
December 31, 2003, we had not borrowed any money under the
New Revolver, although we had $1.8 million in letters of
credit outstanding, leaving unused borrowing capacity under the
New Revolver of $73.4 million.


The New Revolver contains numerous covenants and
conditions, including, but not limited to, restrictions on our
ability to incur indebtedness, create liens, sell assets, make
investments, make capital expenditures, engage in mergers and
acquisitions and pay dividends. The New Revolver also contains a
covenant that requires us to earn a specified amount of earnings
before interest, income taxes, depreciation and amortization on
a monthly basis if, for 15 consecutive days, unused availability
under the New Revolver plus cash on hand is less than
$20 million. The New Revolver includes various
circumstances and conditions that would, upon their occurrence
and subject in certain cases to notice and grace periods, create
an event of default thereunder.

Our liquidity (i.e., cash and cash
equivalents plus total credit available under the New Revolver,
subject to the conditions to borrowings under the New Revolver)
was $116 million at December 31, 2003, a decrease of
$20 million compared to our liquidity at December 31,
2002. This decrease consisted of a large decrease in cash and
cash equivalents during the year, most of which was expected,
offset by an increase in availability under the New Revolver
resulting from the accounts receivable and inventory generated
after our resumption of acrylonitrile production. We expect that
our liquidity will decrease further during the first quarter of
2004 as we complete maintenance turnarounds of our styrene and
acrylonitrile unit. The total cost of these turnarounds,
including maintenance expense, catalyst installation and capital
projects, is expected to be approximately $25 million. As a
part of normal recurring operations, each of our manufacturing
units is completely shut down from time to time, for a period
typically lasting two to four weeks, to replace catalysts and
perform major maintenance work required to sustain long-term
production. These periods are commonly referred to as
turnarounds or shutdowns. While actual
timing is subject to a number of variables, turnarounds of our
styrene unit typically occur every two to three years and
turnarounds of our acrylonitrile unit typically occur
every 12 to 18 months. We currently expense the costs
of turnarounds as the associated expenses are incurred. Prior to
our adoption of fresh-start accounting, we had accrued these
costs over the expected period between turnarounds. As expenses
for turnarounds, especially for our styrene and acrylonitrile
units, can be significant, the impact of this change in
accounting for turnarounds can be material for financial
reporting periods during which the turnarounds actually occur.
During the first quarter of 2004, we performed turnarounds of
both our styrene and acrylonitrile units and, consequently, our
operating income for the quarter will be reduced by
approximately $15 million due to the maintenance costs
associated with these turnarounds.

We believe that our cash on hand, together with
credit available under the New Revolver and internally generated
funds, will be sufficient to meet our liquidity needs for the
reasonably foreseeable future, although we cannot give any
assurances to that effect.



| |                
| | ---------------
| | Working Capital

Working capital at December 31, 2003 was
$118 million, a decrease of $11 million from
December 31, 2002. This decrease was primarily due to an
increase in accounts payable and a reduction in cash, offset by
an increase in accounts receivable and inventories. The
increases in accounts receivable and inventory and the reduction
in cash resulted primarily from the resumption of acrylonitrile
operations and costs associated with restarting the
acrylonitrile facility.



| |          
| | ---------
| | Cash Flow

Net cash used in our operations was
$41 million in 2003, whereas $1 million in net cash
was provided by continuing operations in fiscal 2002. This
increase in cash requirements in 2003, compared to fiscal

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2002, was primarily due to costs associated with
the resumption of acrylonitrile operations. During the
three-month period ended December 31, 2002, $3 million
in net cash was provided by continuing operations.


Net cash flow used in our investing activities
was $16 million in 2003 and $7 million in fiscal 2002.
For the three months ended December 31, 2002,
$357 million in net cash flow was provided by continuing
operations investing activities. The $357 million provided
by investing activities in the three months ended
December 31, 2002 was primarily from the sale of our pulp
chemicals business.

There were no cash flows from financing
activities in 2003 and $14 million in fiscal 2002. For the
three months ended December 31, 2002, $260 million was
used by financing activities, which was primarily for the
partial repayment of our 12 3/8% Notes and the repayment of
the outstanding balance under our debtor-in-possession credit
facility at the time we emerged from bankruptcy.



| |                     
| | --------------------
| | Capital Expenditures

Our capital expenditures for continuing
operations were $16 million in 2003 and $7 million in
fiscal 2002. This increase in 2003 was primarily due to the
completion of discretionary capital projects that were deferred
during our bankruptcy proceedings.

Capital expenditures are expected to be between
$20 million and $30 million in 2004. These capital
expenditures will primarily be for routine safety, environmental
and replacement capital and the commencement of capital projects
related to the 80% reduction of nitrogen oxide emissions
required under the SIP to achieve compliance with ozone
provisions of the Clean Air Act.

Our capital expenditures for environmentally
related prevention, containment and process improvements were
$3 million in 2003 and $1 million in fiscal 2002. We
anticipate spending approximately $9.5 million on these
types of expenditures during 2004. This increase in expected
spending is largely attributable to the commencement of capital
projects related to the 80% reduction of nitrogen oxide
emissions required under the SIP to achieve compliance with
ozone provisions of the Clean Air Act. During 2003 and fiscal
2002, we did not incur any other infrequent or non-recurring
material environmental expenditures which were required under
existing environmental regulations. See Certain Known
Events, Trends, Uncertainties and Risk Factors included in
this Item 7.

Contractual Cash Obligations

The following table summarizes our significant
contractual obligations at December 31, 2003, and the
effect such obligations are expected to have on our liquidity
and cash flows in future periods. This table excludes amounts
already recorded on our balance sheet as current liabilities at
December 31, 2003.

|                                          |  |                        |         |           |  |           |         |           |  |       |         |  |  |   |         |  |  |   |         | 
|----------------------------------------- |  | ---------------------- | ------- | --------- |  | --------- | ------- | --------- |  | ----- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                          |  | Less than              |         |           |  |           |         | More than |  |      
|                                          |  | 1 year                 |         | 1-3 years |  | 4-5 years |         | 5 years   |  | Total
|                                          |  |                        |         |           |  |           |         |           |  |      
|                                          |  |                       
|                                          |  | (Dollars in Thousands)
|Long-term debt                            |  | $                      |        |           |  | $         |        |           |  | $     | 100,579 |  |  | $ |        |  |  | $ | 100,579 | 
|Capital leases                            |  |                        |        |           |  |           |        |           |  |       |        |  |  |   |        |  |  |   |        | 
|Operating leases                          |  |                        | 293     |           |  |           | 879     |           |  |       | 586     |  |  |   | 1,098   |  |  |   | 2,856   | 
|Purchase obligations(1)                   |  |                        | 209,000 |           |  |           | 166,000 |           |  |       | 55,000  |  |  |   | 192,000 |  |  |   | 622,000 | 
|Pension and other postretirement benefits |  |                        | 8,861   |           |  |           | 37,979  |           |  |       | 11,725  |  |  |   | 34,863  |  |  |   | 93,428  | 
|                                          |  |                        |         |           |  |           |         |           |  |       |         |  |  |   |         |  |  |   |         | 
|Total                                     |  | $                      | 218,154 |           |  | $         | 204,858 |           |  | $     | 167,890 |  |  | $ | 227,961 |  |  | $ | 818,863 | 
|                                          |  |                        |         |           |  |           |         |           |  |       |         |  |  |   |         |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the purposes of this table, contractual
    obligations for purchase of goods or services are defined as
    agreements, involving more than $1 million, that are
    enforceable and legally binding and that specify all significant
    terms, including: fixed or minimum quantities to be purchased;
    fixed, minimum or variable price provisions; and the approximate
    timing of the transaction. Most of the purchase obligations
    identified include variable pricing provisions. We have
    estimated the future prices of these

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| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | items, utilizing forward curves where available.
    The pricing estimated for use in this table is subject to market
    risk.

Critical Accounting Policies, Use of Estimates
and Assumptions

A summary of our significant accounting policies
is included in Note 1 of the Notes to Consolidated
Financial Statements included in Item 8 of this
Form 10-K. Management believes that the consistent
application of these policies enables us to provide readers of
the financial statements with useful and reliable information
about our operating results and financial condition. The
following are the accounting policies that management believes
are most important to the portrayal of our financial condition
and results and require managements most difficult,
subjective or complex judgments.



| |                    
| | -------------------
| | Revenue Recognition

We generally recognize revenue from sales in the
open market, raw material conversion agreements and long-term
supply contracts at the time the products are shipped. Some of
our contractual arrangements include a profit sharing component,
and we estimate and accrue our expected revenues from these
profit sharing arrangements on a monthly basis. Any deferred
credits that arise are amortized over the life of the underlying
contract. Shipping and handling costs associated with the
delivery of our products to customers are included in cost of
goods sold.



| |            
| | -----------
| | Inventories

Inventories are carried at the lower of cost or
market value. Cost is primarily determined on the first-in,
first-out basis, except for stores and supplies, which are
valued at average cost. The comparison of cost to market value
involves estimation of the market value of our products. We
enter into agreements with other companies to exchange chemical
inventories in order to minimize working capital requirements
and to facilitate distribution logistics. Balances related to
quantities due to or payable by us in connection with these
exchange agreements are included in inventory.



| |                                   
| | ----------------------------------
| | Goodwill and Long-Lived
    Assets

Management reviews the recorded value of our
goodwill annually at the end of the fourth quarter of each year,
or sooner if events or changes in circumstances indicate that
the carrying amount may exceed fair value. Recoverability is
determined by comparing the estimated fair value, utilizing the
present value of expected net cash flows, to the carrying value.
This present value model requires management to estimate future
net cash flows, the timing of these cash flows and a discount
rate (or weighted average cost of capital) representing the time
value of money and the inherent risk and uncertainty of the
future cash flows. The discount rate, adjusted for inflation, is
based on independently calculated risks for a composite group of
commodity chemical companies, our target capital mix and an
estimated market risk premium. The assumptions used in
estimating future cash flows are consistent with our internal
planning. If the estimated fair value exceeds the carrying
amount, goodwill is not impaired. If the carrying amount exceeds
estimated fair value, the implied fair value goodwill is
compared to the carrying amount of that goodwill. If the
carrying amount goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to
that excess. Goodwill totaled $49 million at
December 31, 2003 and represented 9% of our total assets.

We assess our long-lived assets other than
goodwill for impairment whenever facts and circumstances
indicate that the carrying amount may not be fully recoverable.
To analyze recoverability, we project undiscounted net future
cash flows over the remaining life of the assets. If these
projected cash flows are less than the carrying amount, an
impairment would be recognized, resulting in a write-down of
assets with a corresponding charge to earnings. Any impairment
loss is measured based upon the difference between the carrying
amount and the fair value of the relevant assets.

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| |             
| | ------------
| | Income Taxes

Deferred income taxes are provided for revenue
and expenses which are recognized in different periods for
income tax and financial statement purposes. Deferred tax assets
are regularly assessed for recoverability based on both
historical and anticipated earnings levels, and a valuation
allowance is recorded when it is more likely than not that these
amounts will not be recovered.



| |                       
| | ----------------------
| | Employee Benefit Plans

We sponsor domestic defined benefit pension and
other postretirement plans. Major assumptions used in the
accounting for these employee benefit plans include the discount
rate, expected return on plan assets, rate of increase in
employee compensation levels and health care cost increase
projections. Assumptions are determined based on our historical
data and appropriate market indicators, and are evaluated each
year as of the plans measurement date. A change in any of
these assumptions would have an effect on net periodic pension
and postretirement benefit costs reported in our financial
statements.



| |                       
| | ----------------------
| | Plant Turnaround Costs

As a part of normal recurring operations, each of
our manufacturing units is completely shut down from time to
time, for a period typically lasting two to four weeks, to
replace catalysts and perform major maintenance work required to
sustain long-term production. These periods are commonly
referred to as turnarounds or shutdowns.
While actual timing is subject to a number of variables,
turnarounds of our styrene unit typically occur every two to
three years and turnarounds of our acrylonitrile unit typically
occur every 12 to 18 months. We currently expense the costs
of turnarounds as the associated expenses are incurred. Prior to
our adoption of fresh-start accounting, we had accrued these
costs over the expected period between turnarounds. As expenses
for turnarounds, especially for our styrene and acrylonitrile
units, can be significant, the impact of this change in
accounting for turnarounds can be material for financial
reporting periods during which the turnarounds actually occur.

New Accounting Standards

In July 2001, the Financial Accounting Standards
Board (the FASB) 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 and also applies to entities
emerging from bankruptcy. SFAS No. 142, which was effective
for fiscal periods beginning after December 15, 2001,
requires that an intangible asset that is acquired 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 141 was applied through the implementation of
fresh-start accounting under the provisions of SOP 90-7. The
adoption of SFAS No. 142 did not have a significant impact
on our financial statements.

In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143, which we applied beginning
on October 1, 2002, addresses financial accounting and reporting
for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs.
There was not a material impact on our financial statements upon
the adoption of SFAS No. 143.

In August 2001, the FASB 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 was effective for us
October 1, 2002. Accordingly, we reported the sale of our
pulp chemicals and acrylic fibers businesses that occurred on
December 19, 2002 as discontinued operations in our
consolidated financial statements.

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In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. One of the major changes under this statement
impacts the accounting for the classification of gains and
losses from the extinguishment of debt. We adopted SFAS
No. 145 as part of our fresh-start accounting (see
Note 3 of the Notes to Consolidated Financial Statements
included in Item 8) upon our emergence from bankruptcy on
December 19, 2002. As a result, we have classified gains
and losses from our debt restructuring as a component of income
(loss) from continuing operations in the accompanying
consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146,
Accounting For Costs Associated with Exit or Disposal
Activities. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. We
adopted SFAS No. 146 through the implementation of
fresh-start accounting under the provisions of SOP 90-7 and it
did not have an impact on our financial statements.

In January 2003, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS
No. 148 amends FASB SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements of the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS No. 148 is
effective for fiscal years beginning after December 15,
2002. We adopted SFAS No. 148 through the implementation of
fresh-start accounting under the provisions of SOP 90-7 and it
did not have an impact on our financial statements. The
disclosure requirements of SFAS No. 148 have been applied in the
accompanying consolidated financial statements.

In January 2003, the FASB released Interpretation
No. 46, Consolidation of Variable Interest
Entities (FIN 46), which was subsequently
revised in December 2003. FIN 46 addresses whether equity
investments should be consolidated based on guidelines
associated with what party has financial risks and controlling
financial interest. We adopted FIN 46 for our fiscal year ended
December 31, 2003 and it did not have an impact on our
financial statements.

In May 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 is intended to
result in more consistent reporting of contracts as either
freestanding derivative instruments subject to
Statement 133 in its entirely, or as hybrid instruments
with debt host contracts and embedded derivative features. SFAS
No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did
not have an impact on our financial statements.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS
No. 150 requires certain financial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity to be classified as liabilities. SFAS
No. 150 is effective for all financial instruments created
or modified after May 31, 2003 and to other instruments at
the beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS No. 150 did not
have an impact on our financial statements.

In December 2003, the FASB revised SFAS
No. 132, Employers Disclosures about Pensions
and other Postretirement Benefits. The revised statement
retains the disclosures required by the original SFAS
No. 132 and requires additional disclosures describing the
types of plan assets, investment strategy, measurement date,
plan obligations, cash flows and components of net periodic
benefit cost recognized during interim periods. The revised
statement is effective for financial statements with fiscal
years ending after December 15, 2003. On December 8,
2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the Act) was passed. The
Act introduces a prescription drug benefit under Medicare
(Medicare Part D), as well as a federal subsidy to sponsors of
retiree health care benefit plans that provide a benefit that is
at least actuarially equivalent to Medicare Part D. In January
2004, the FASB issued FASB Staff Position No. FAS 106-1,
Accounting and Disclosure Requirements Related to

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the Medicare Prescription Drug Improvement and
Modernization Act of 2003, which is effective for interim
or annual financial statements of fiscal years ending after
December 7, 2003 and permits a one-time election to defer
accounting for the effects of the Act. In accordance with the
FAS 106-1, we have elected to defer accounting for the effects
of the Act and, as such, any measures of the postretirement
benefit obligation or net periodic postretirement benefit cost
in the financial statements or accompanying notes do not reflect
the effects of the Act. Specific authoritative guidance on the
accounting for the federal subsidy is pending and that guidance,
when issued, could require us to change previously reported
information. However, we do not believe that the effect of the
Act will be material to our consolidated financial statements.
The disclosure requirements of SFAS No. 132 have been
applied in the accompanying consolidated financial statements.


Certain Known Events, Trends, Uncertainties
and Risk Factors

Our
primary products are commodities and the markets for these
products are highly cyclical and subject to prolonged periods of
unfavorable conditions. Our financial condition and results of
operations are negatively impacted during periods of depressed
conditions.

Our two primary products, styrene and
acrylonitrile, are commodities and exhibit wide swings in
consumption, prices and margins based upon current and
anticipated levels of supply and demand. Demand for our products
is largely influenced by the rate of growth in the worlds
economy, with the growth rate of the economy in Asia becoming
increasingly more important. Periods of low growth rates
generally lead to lower sales volumes and margins and negatively
impact our financial condition and results of operations. As is
the case with other petrochemicals, the markets for styrene and
acrylonitrile from time to time experience periods where the
balance of supply and demand for these products favors
producers, resulting in higher sales volumes and profit margins.
These periods can occur when the worlds economy is growing
at moderate to high rates, and are more likely to occur if there
have not been any significant increases in capacity for an
extended period. Inevitably, favorable market conditions for our
products prompt increases in supply. In most cases, increases in
supply are achieved through the construction of new capacity or
major expansions of existing facilities. Typically, these types
of projects result in large increases in production capacity and
supply, and cause available supply to greatly exceed demand for
an extended period. Decreases in supply generally are short
lived, primarily resulting from operating difficulties,
temporary closures of production facilities for maintenance
turnarounds or, occasionally, the closure of high cost
production facilities.

While the markets for styrene and acrylonitrile
roughly follow a repetitive cycle and general trends in the
supply and demand balance for these products may be observed
over time, it is difficult, if not impossible, to definitively
predict when market conditions will be favorable or unfavorable.
Historically, the peaks in the market cycles for
styrene and acrylonitrile tend to occur every seven to ten
years, with prolonged periods of depressed market conditions
between the peaks. Since our inception, our business strategy
has centered on an effort to take advantage of the high margins
that can be realized during periods when the balance of supply
and demand for styrene and acrylonitrile favors producers.
Consequently, a large portion of our capacity for these products
is uncommitted and available for sale in the spot markets. While
having available uncommitted capacity can lead to dramatically
improved financial performance during periods when the balance
of supply and demand favors producers, it also causes negative
market conditions to affect us more severely than most of our
competitors in terms of sales volumes and margins.



| |                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Natural gas prices have a significant
    impact on our competitiveness. High natural gas prices can have
    the effect of closing markets to our products where we are not
    competitive.

Our production costs are impacted by the price of
natural gas in a variety of ways. We use significant amounts of
natural gas as fuel in the production of our products, so any
increase in the price for natural gas leads to a direct increase
in our production costs. In addition, most of our suppliers use
significant amounts of natural gas in the production of the raw
materials we need to produce our products, which causes our raw
materials costs to also increase when the price for natural gas
increases. Prices for natural

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gas are largely based on regional factors, which
can result in wide disparities in natural gas prices in
different parts of the world. Prices for styrene and
acrylonitrile, on the other hand, tend to be more consistent
throughout the world, after taking into account transportation
costs. Consequently, when prices for natural gas rise in the
United States but not in other parts of the world, we may not be
able to recover these increased costs through higher sales
prices, and our ability to compete with producers elsewhere in
the world is diminished. In addition, many producers in other
parts of the world use oil-based processes rather than natural
gas based processes. Consequently, the relationship between the
price of crude oil and the price of natural gas can also affect
our competitiveness and our ability to recover increases in the
price of natural gas through higher sales prices. Over the last
few years, we have experienced periods when prices for natural
gas were at levels that resulted in our being unable to sell
styrene and acrylonitrile in Europe or Asia at prices above our
variable costs of production, essentially closing those markets
to sales of our styrene and acrylonitrile. We cannot predict
natural gas or crude oil prices with any substantial degree of
certainty and, consequently, we can give no assurances with
respect to whether natural gas will be available to us at prices
that do not adversely impact our competitiveness.




| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Our financial performance may be adversely
    affected by our inability to obtain raw materials at reasonable
    prices or on acceptable terms.

For most of our products, the combined cost of
raw materials and energy resources is far greater than all other
costs of production combined. As a result, an adequate supply of
raw materials at reasonable prices and on acceptable terms is
critical to the success of our business. If we are unable to
obtain raw materials at reasonable prices and on acceptable
terms, our results of operations are negatively affected. All of
our primary raw materials are supplied by others pursuant to
long-term contracts or spot market purchases. Most of these raw
materials are commodities and, consequently, are subject to wide
fluctuations in prices for a variety of reasons beyond our
control. While the markets for our products are generally
global, prices and availability for some of our raw materials
are influenced by regional factors. As a result, we may pay
higher prices for raw materials than our competitors in other
parts of the world or be unable to obtain raw materials at times
when they are available to our competitors, both of which
negatively impact our competitiveness and our financial
performance. We can give no assurances that we will be able to
secure adequate supplies of any of our raw materials or energy
resources at reasonable prices or on acceptable terms.



| |                                                                        
| | -----------------------------------------------------------------------
| | We are not integrated and are smaller than
    most of our competitors.

We compete with some of the worlds largest
chemical companies, most of whom are engaged in much broader
businesses and either supply significant portions of the raw
materials they need to produce styrene or acrylonitrile, or
internally use significant amounts of the styrene or
acrylonitrile they produce to make derivative products. We do
not make any of the primary raw materials required for styrene
or acrylonitrile production or convert any of our styrene or
acrylonitrile into other products. Consequently, our production
costs can be higher than those of our competitors during periods
when demand for these raw materials exceeds supply and, in more
extreme cases, we may not be able to obtain these raw materials
in the market at times when our competitors are supplying their
own raw materials. In addition, as production costs are highly
influenced by production rates, the absence of internal uses for
our styrene and acrylonitrile typically results in lower
production rates, and consequently higher production costs, at
our facilities during periods when the balance of supply and
demand for styrene or acrylonitrile favors consumers, while
production rates and costs at our competitors, who internally
consume significant amounts of styrene or acrylonitrile, are
less volatile.



| |                                                                       
| | ----------------------------------------------------------------------
| | We depend upon the continued operation of
    our Texas City facility.

All of the petrochemicals we manufacture,
including all of our styrene, acrylonitrile and acetic acid, are
produced at our Texas City, Texas facility. Significant
unscheduled downtime at our Texas City facility could have a
material adverse effect on our results. Unanticipated downtime
can occur for a variety of reasons, including equipment
breakdowns, interruptions in the supply of raw materials, power
failures,

34



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##### Table of Contents



sabotage, natural forces or other normal hazards
associated with the production of petrochemicals. Although we
maintain business interruption insurance, this insurance does
not provide coverage for business interruptions of less than
45 days. We cannot provide any assurances as to whether any
significant interruption in the operation of our Texas City
facility would be covered by insurance or would not otherwise
have a material adverse effect on us.




| |                                                                      
| | ---------------------------------------------------------------------
| | We depend upon our long-term contracts and
    significant customers.

We sell significant portions of our acrylonitrile
and styrene production, and all of our acetic acid, plasticizers
and DSIDA production, under long-term contracts. The loss of one
or more of these contracts, or a material reduction in the
amount of product purchased under one or more of these
contracts, could have a material adverse effect on us. Our
acrylonitrile business is largely dependent on our contractual
relationships with BP Chemicals. A termination of our
acrylonitrile relationships with BP Chemicals would have severe
negative implications for our acrylonitrile business, which
could have a material adverse effect on our overall business,
results of operations, cash flows and financial condition. Our
approach in entering into styrene contracts is to secure
commitments for the purchase of styrene over extended periods at
levels that will enable us to produce our products at adequate
operating rates throughout the styrene market cycle, with the
pricing formulae in these contracts providing us with a portion
of the higher prices available in the spot market during
favorable market conditions. At the same time, we also leave a
large portion of our styrene production capacity uncommitted for
sales in the spot market. We cannot give any assurances that we
will be able to secure or maintain adequate commitments to
purchase styrene over any period or that the balance between our
contract sales and spot sales will be at any particular level or
result in favorable or unfavorable financial performance for any
period.



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The petrochemicals industry in general has
    experienced several years of depressed conditions and many of
    our customers are in troubled financial condition.

The petrochemicals industry is highly volatile
and has experienced several years of depressed conditions. As a
result, many of our customers have suffered prolonged losses and
seen their liquidity diminish. While we attempt to manage our
credit exposure to our customers on a case-by-case basis through
a variety of methods, including requiring letters of credit,
establishing credit limits or, in extreme cases, requiring
cash-on-delivery for our products, we cannot give any assurances
as to whether any of our customers will default on their
obligations to us. A default by one or more of our customers on
their payment obligations to us would have a negative effect on
our financial condition, cash flows and results of operations,
which effect could be material.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Our industry is highly competitive and some
    of our products may become obsolete.

We compete with some of the worlds largest
chemical companies on the basis of product price, quality and
deliverability. However, prices for our petrochemicals products
are determined by global market factors that are largely beyond
our control and, except with respect to a number of our
multi-year contracts, we generally sell our products at
prevailing market prices. As a result, our financial performance
relative to our competitors is greatly influenced by our
manufacturing costs. Currently, our acrylonitrile production
costs are higher than the industry average due to our failure to
receive chemical value for a large portion of our by-product
hydrogen cyanide. In our recent settlement with Monsanto,
Monsanto agreed to restart their DSIDA facility at our Texas
City site, which will greatly improve our hydrogen cyanide
utilization. However, Monsanto is not required to restart the
DSIDA plant until 2007 and, even after restarting the DSIDA
plant, we will still have substantial quantities of
under-utilized hydrogen cyanide. While we continue to explore
alternatives for upgrading our hydrogen cyanide utilization, we
cannot give any assurances as to whether our efforts will be
successful.

Most of our competitors have significantly
greater financial resources than us and engage in substantial
research and development activities. In addition, a significant
portion of our business is based upon widely available
technology. The entrance of new competitors into the industry,
or the addition by existing competitors of additional capacity,
could have a negative impact on our ability to maintain existing

35



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##### Table of Contents



market share or maintain or increase profit
margins, even during periods of increased demand for our
products. Certain of our products, especially our plasticizers
products, may become obsolete through the introduction of
competing products that are lower in cost or that exhibit
enhanced performance characteristics.




| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | We face risks related to our export sales
    of products that may negatively affect our
    business.

Approximately 38% of our revenues in 2003 were
generated from export sales of our products. Our exports to
foreign markets make us subject to a number of special risks
such as:



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | unavailability of ships for transporting product;                                
|
| |  | unfavorable legal climate for the collection of
    unpaid accounts;             
|
| |  | currency exchange rate fluctuations;                                             
|
| |  | foreign economic conditions;                                                     
|
| |  | trade barriers;                                                                  
|
| |  | exchange controls;                                                               
|
| |  | national and regional labor strikes;                                             
|
| |  | political risks and risks of increases in duties;                                
|
| |  | taxes;                                                                           
|
| |  | governmental royalties and                                                       
|
| |  | changes in laws and policies governing operations
    of foreign-based companies.

The occurrence of any one or a combination of
these factors may make it impossible for us to sell or ship
products overseas, make our products uncompetitive with local
production, increase our costs or have other negative effects,
which could be material, on our business, financial condition,
cash flows or results of operations.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | We have substantial debt obligations, which
    may result in negative consequences and otherwise limit our
    flexibility.

We currently believe that our level of debt is
reasonable and can be effectively serviced. At some point in the
future, however, we may find that we are over-leveraged, which
could have significant negative consequences. For example:



| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may have difficulty satisfying our obligations
    with respect to all of our indebtedness;                                                                                          
|
| |  | we may become more vulnerable to downturns in the
    markets for our products or the economy in general;                                                                               
|
| |  | we may be required to dedicate a substantial
    portion of our cash flows to fund working capital, capital
    expenditures, acquisitions and other general corporate
    requirements;
|
| |  | our flexibility to plan for, or react to, changes
    in our businesses and the industry in which we operate may be
    limited;                                                        
|
| |  | raw materials and financial terms with suppliers
    may become limited or unavailable;                                                                                                 
|
| |  | we may be at a competitive disadvantage compared
    to competitors that have less debt and                                                                                             
|
| |  | our ability to borrow additional funds may be
    limited.                                                                                                                              

The covenants in the Indenture for our New Notes
and in the New Revolver also limit our flexibility by
restricting our ability to incur indebtedness, pay dividends and
make other restricted payments or

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##### Table of Contents



investments, sell assets, make capital
expenditures, engage in certain mergers and acquisitions and
refinance existing indebtedness.


Our ability to meet debt service requirements
depends on our future performance, which, in turn, depends on
conditions in the global markets for our products, the global
economy generally and other factors that are beyond our control.
We cannot provide any assurances that our businesses will
generate sufficient cash flow from operations or that future
borrowings will be available in amounts sufficient to enable us
to pay our indebtedness or to fund our other liquidity needs.
Moreover, we may need to refinance all or a portion of our
indebtedness on or before maturity. We cannot provide any
assurances that we will be able to refinance any of our
indebtedness on commercially reasonable terms or at all. If we
are unable to make scheduled debt payments or comply with the
other provisions of our debt instruments, our various lenders
will be permitted under certain circumstances to accelerate the
maturity of the indebtedness owing to them and exercise other
remedies provided for in those instruments and under applicable
law.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | We are subject to many liability risks,
    some of which may not be covered by insurance.

A business risk inherent in all 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 strive to operate
our facilities responsibly and in compliance in all material
respects with all environmental and health and safety
requirements, we may face expenses and liabilities as a result
of our past or future operations. Some risk of environmental
costs and liabilities is inherent in our operations and
products, as it is with other companies engaged in similar
businesses. We maintain insurance at levels that we believe are
reasonable and that are typical for our industrys
insurance coverages, a portion of which are provided by a
captive insurance company maintained by us and a few other
chemical companies. However, we cannot give any assurances that
our insurance coverages will be adequate for any given risk or
liability or that our insurance companies would be capable of
honoring their commitments if an unusually high number of claims
were made against their policies.



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our industry is subject to extensive
    environmental regulation, which creates uncertainty regarding
    future environmental expenditures and liabilities.

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 and health and safety laws,
regulations and permit requirements. These regulations, and the
potential for further expanded regulations, may increase our
costs and thereby negatively affect our business. 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 and the potential
for further expanded regulation may increase our costs and can
affect the manufacturing, handling, processing, distribution and
use of our products. If so affected, our business and operations
may be materially and adversely affected. In addition, changes
in these requirements may cause us to incur substantial costs in
upgrading or redesigning our facilities and processes, including
our waste treatment, storage, disposal and other waste handling
practices and equipment. For these reasons, we are uncertain as
to the amount of our future environmental expenditures and
liabilities. The Texas Commission for Environmental Quality
(which we refer to as the TCEQ) enacted new regulations
requiring significant reductions of nitrogen oxide, which apply
to our Texas City facility. The TCEQ also proposed similar
regulations requiring the reduction of particulate matter, which
apply to our Texas City facility. Under these regulations, we
are required to reduce emissions of nitrogen oxide at our Texas
City facility by up to approximately 80%, which we estimate
would require us to make between $20 million and
$25 million in capital improvements at our Texas City
facilities. The nitrogen oxide regulations covering the Houston/
Galveston Area State Implementation Plan have not yet been
approved by the Environmental Protection Agency. The majority of
these capital expenditures are expected to be incurred over the
period 2004 through 2007.

37



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##### Table of Contents





| |                                                                        
| | -----------------------------------------------------------------------
| | Current and future legal proceedings may
    have unfavorable outcomes.

We are currently a party to several legal
proceedings and additional legal proceedings could be filed
against us in the future. We are not able to predict the final
outcome of the current proceedings and we cannot guarantee that
the ultimate resolution of current or future proceedings will
not have a material adverse effect on us. For more information,
see Note 9 of the Notes to Consolidated Financial Statements
included in Item 8.



| |                                                                             
| | ----------------------------------------------------------------------------
| | Future problems with labor relations may
    negatively affect our business.

Approximately 42% of our employees at our Texas
City, Texas facility are represented by the Texas City, Texas
Metal Trades Council, AFL-CIO and are covered by a collective
bargaining agreement which is subject to renegotiation in April
2004. Although we believe our relationship with our employees is
generally good, a strike by the union representing our employees
could have a material adverse effect on our financial condition,
results of operations or cash flows.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Our securities are thinly traded and
    control of our equity is concentrated in a few
    holders.

Our preferred stock and warrants are not
registered under the Exchange Act and our common stock is not
listed on any national or regional securities exchange.
Quotations for shares of our common stock are listed by certain
members of the National Association of Securities Dealers, Inc.
on the OTC Electronic Bulletin Board. However, our common stock
has been traded infrequently, in transactions arranged through
brokers or otherwise and reliable market quotations for shares
of our common stock may or may not be available. As a result, we
cannot give any assurances that an active trading market will
exist for any of our equity securities, and a holder of any of
these securities may find it difficult to dispose of, or to
obtain accurate quotations as to the market value of, such
securities.

Ownership of our equity is significantly
concentrated. Resurgence Asset Management, L.L.C. and its and
its affiliates managed funds and accounts own in excess of
98% of our preferred stock and over 63% of our common stock,
representing ownership of almost 79% of the total voting power
of our equity. Each share of our preferred stock is convertible
at the option of the holder thereof at any time into 1,000
shares of our common stock, subject to adjustments. The holders
of our preferred stock are entitled to designate a number of our
Directors roughly proportionate to their overall equity
ownership, but in any event not less than a majority of our
Directors as long as they hold in the aggregate at least 35% of
the total voting power of our equity. As a result, these holders
have the ability to control our management, policies and
financing decisions, elect a majority of our Board and control
the vote on all matters presented to a vote of our stockholders.
In addition, our shares of preferred stock carry a cumulative
dividend rate of 4% per quarter, payable in additional shares of
preferred stock. Consequently, each dividend paid in additional
shares of our preferred stock has a dilutive effect on our
shares of common stock and increases the percentage of the total
voting power of our equity owned by Resurgence Asset Management,
L.L.C. and its and its affiliates managed funds and
accounts. Since the initial issuance of our preferred stock, we
have issued an additional 383.826 shares of our preferred stock
(convertible into 383,826 shares of our common stock) in
dividends, which represents in excess of 7% of the current total
voting power of our equity securities. The concentration of
ownership of our equity may depress the market value of our
equity securities and the dilutive effect of dividends on our
shares of preferred stock may further depress the market value
of our shares of common stock.

Our New Notes are not registered under the
Exchange Act and are not listed on any national or regional
securities exchange. Our New Notes are traded infrequently, in
transactions arranged through brokers or otherwise and reliable
market quotations for our New Notes may or may not be available.
A debt security with a small outstanding principal amount
available for trading (commonly referred to as a small
float), such as our New Notes, may command a lower
price than would a comparable debt security with a greater
float. We cannot give any assurances that an active trading
market in our Notes will exist or as to the prices at which our
Notes may trade.

38



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##### Table of Contents





| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | Transactions consummated pursuant to our
    Plan of Reorganization could result in the imposition of
    material tax liabilities.

Prior to our emergence from bankruptcy, we
eliminated our holding company structure by merging Holdings
with and into Sterling Chemicals, Inc. We believe that this
merger qualifies as a tax-free reorganization pursuant to
Section 368(a)(1)(G) of the Internal Revenue Code (commonly
referred to as a G Reorganization) for United States
federal income tax purposes. However, if the Internal Revenue
Service determines that the merger does not so qualify, we could
incur additional federal income taxes of a material amount
either as a result of the merger or the consummation of the Plan
of Reorganization. If the Internal Revenue Service successfully
challenged our position, the additional tax liability would have
a material adverse effect on our business, cash flows and
financial condition. We cannot give any assurances as to whether
the Internal Revenue Service will agree with or challenge our
position.




Item 7A.Quantitative
and Qualitative Disclosures about Market Risk

The table below provides information about our
market sensitive financial instruments and constitutes a
forward-looking statement.

|                        |  |                        |   |      |  |      |   |      |  |      |   |            |  |       |         |              |  |   |   |  |  |   |   |  |  |   |         |  |  |   |        | 
|----------------------- |  | ---------------------- | - | ---- |  | ---- | - | ---- |  | ---- | - | ---------- |  | ----- | ------- | ------------ |  | - | - |  |  | - | - |  |  | - | ------- |  |  | - | ------ | 
|                        |  |                        |   |      |  |      |   |      |  |      |   |            |  |       |         | Fair Value  
|                        |  |                        |   |      |  |      |   |      |  |      |   |            |  |       |         | December 31,
|Expected Maturity Dates |  | 2004                   |   | 2005 |  | 2006 |   | 2007 |  | 2008 |   | Thereafter |  | Total |         | 2003        
|                        |  |                        |   |      |  |      |   |      |  |      |   |            |  |       |         |             
|                        |  |                       
|                        |  | (Dollars in Thousands)
|DEBT:                   |  |                        |   |      |  |      |   |      |  |      |   |            |  |       |         |              |  |   |   |  |  |   |   |  |  |   |         |  |  |   |        | 
|New Notes               |  | $                      |  |      |  | $    |  |      |  | $    |  |            |  | $     | 100,579 |              |  | $ |  |  |  | $ |  |  |  | $ | 100,579 |  |  | $ | 90,521 | 

The New Notes bear interest at an annual rate of
10%, payable semi-annually on June 15 and December 15
of each year. Under certain circumstances, for any interest
period ending on or before December 19, 2004, we may elect
to pay interest on the New Notes through the issuance of
additional New Notes rather than the payment of cash. However,
if we pay interest through the issuance of additional New Notes
rather than the payment of cash, the interest rate for the
relevant period is increased to 13 3/8%. The fair value of
the New Notes is based on their quoted price.

39



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##### Table of Contents






Item 8.     Financial
Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

Sterling Chemicals, Inc.

|                                                                                                                                                                                                                                |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                                                                                                                |  | Page
|                                                                                                                                                                                                                                |  |     
|Consolidated Statements of Operations for the
    year ended December 31, 2003, the three months ended
    December 31, 2002 and fiscal years ended September 30,
    2002 and 2001                                             |  |      | 41 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                                                                                                                                |  |      | 42 | 
|Consolidated Statements of Changes in
    Stockholders Equity (Deficiency in Assets) for the year
    ended December 31, 2003, the three months ended December
    31, 2002 and fiscal years ended September 30, 2002 and 2001 |  |      | 43 | 
|Consolidated Statements of Cash Flows for the
    year ended December 31, 2003, the three months ended
    December 31, 2002 and fiscal years ended September 30,
    2002 and 2001                                             |  |      | 44 | 
|Notes to Consolidated Financial Statements                                                                                                                                                                                      |  |      | 45 | 
|Independent Auditors Report                                                                                                                                                                                                    |  |      | 73 | 

40



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##### Table of Contents



STERLING CHEMICALS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                  |                   |                                           |         |                |                      |   |              |           |               |  |               |          |   |  |   |         |   |  |   |          |   | 
|----------------------------------------------------------------- | ----------------- | ----------------------------------------- | ------- | -------------- | -------------------- | - | ------------ | --------- | ------------- |  | ------------- | -------- | - |  | - | ------- | - |  | - | -------- | - | 
|                                                                  |                   |                                           |         |                |                     
|                                                                  |                   | Reorganized Sterling                      |         |                | Predecessor Sterling
|                                                                  |                   |                                           |         |                |                     
|                                                                  |                   |                                           |         |                |                      |   | Fiscal Year  |           | Fiscal Year  
|                                                                  |                   | Year ended                                |         | December 20 to |                      |   | October 1 to |           | Ended         |  | Ended        
|                                                                  |                   | December 31,                              |         | December 31,   |                      |   | December 19, |           | September 30, |  | September 30,
|                                                                  |                   | 2003                                      |         | 2002           |                      |   | 2002         |           | 2002          |  | 2001         
|                                                                  |                   |                                           |         |                |                      |   |              |           |               |  |              
|                                                                  |                   | (Dollars in Thousands, Except Share Data)
|Revenues                                                          |                   | $                                         | 590,723 |                |                      | $ | 12,572       |           |               |  | $             | 99,888   |   |  | $ | 381,801 |   |  | $ | 468,738  |  
|Cost of goods sold                                                |                   |                                           | 589,740 |                |                      |   | 12,601       |           |               |  |               | 99,588   |   |  |   | 354,155 |   |  |   | 521,377  |  
|                                                                  |                   |                                           |         |                |                      |   |              |           |               |  |               |          |   |  |   |         |   |  |   |          |  
|Gross profit (loss)                                               |                   |                                           | 983     |                |                      |   | (29          | )         |               |  |               | 300      |   |  |   | 27,646  |   |  |   | (52,639  | )
|Selling, general and administrative expenses                      |                   |                                           | 15,881  |                |                      |   | 1,988        |           |               |  |               | 3,072    |   |  |   | 14,975  |   |  |   | 14,213   |  
|Other expense (income)                                            |                   |                                           | (3,520  | )              |                      |   |             |           |               |  |               | 368      |   |  |   | (1,925  | ) |  |   | 2,908    |  
|Reorganization items                                              |                   |                                           |        |                |                      |   |             |           |               |  |               | 15,214   |   |  |   | 17,022  |   |  |   | 5,422    |  
|Fresh-start adjustments                                           |                   |                                           |        |                |                      |   |             |           |               |  |               | 203,344  |   |  |   |        |   |  |   |         |  
|Gain on debt restructuring                                        |                   |                                           |        |                |                      |   |             |           |               |  |               | (457,824 | ) |  |   |        |   |  |   |         |  
|Interest and debt related expenses, net of
    interest income(1) |                   |                                           | 9,729   |                |                      |   | 355          |           |               |  |               | 12,144   |   |  |   | 50,065  |   |  |   | 60,961   |  
|                                                                  |                   |                                           |         |                |                      |   |              |           |               |  |               |          |   |  |   |         |   |  |   |          |  
|Income (loss) from continuing operations
    before income tax    |                   |                                           | (21,107 | )              |                      |   | (2,372       | )         |               |  |               | 223,982  |   |  |   | (52,491 | ) |  |   | (136,143 | )
|Provision (benefit) for income taxes                              |                   |                                           | (7,884  | )              |                      |   | (828         | )         |               |  |               | 8        |   |  |   | 125     |   |  |   | (503     | )
|                                                                  |                   |                                           |         |                |                      |   |              |           |               |  |               |          |   |  |   |         |   |  |   |          |  
|Income (loss) from continuing operations                          |                   |                                           | (13,223 | )              |                      |   | (1,544       | )         |               |  |               | 223,974  |   |  |   | (52,616 | ) |  |   | (135,640 | )
|Income (loss) from discontinued operations(2)                     |                   |                                           | (976    | )              |                      |   |             |           |               |  |               | 194,637  |   |  |   | 16,630  |   |  |   | (46,070  | )
|                                                                  |                   |                                           |         |                |                      |   |              |           |               |  |               |          |   |  |   |         |   |  |   |          |  
|Net income (loss)                                                 |                   |                                           | (14,199 | )              |                      |   | (1,544       | )         |               |  |               | 418,611  |   |  |   | (35,986 | ) |  |   | (181,710 | )
|Preferred stock dividends                                         |                   |                                           | 5,125   |                |                      |   | 170          |           |               |  |               |         |   |  |   |        |   |  |   |         |  
|                                                                  |                   |                                           |         |                |                      |   |              |           |               |  |               |          |   |  |   |         |   |  |   |          |  
|Net income (loss) attributable to common
    stockholders         |                   | $                                         | (19,324 | )              |                      | $ | (1,714       | )         |               |  | $             | 418,611  |   |  | $ | (35,986 | ) |  | $ | (181,710 | )
|                                                                  |                   |                                           |         |                |                      |   |              |           |               |  |               |          |   |  |   |         |   |  |   |          |  
|Net loss per share of common stock, basic and
    diluted         |                   | $                                         | (6.84   | )              |                      | $ | (0.61        | )         |               |  | $             |         |   |  | $ |        |   |  | $ |         |  
|                                                                  |                   |                                           |         |                |                      |   |              |           |               |  |               |          |   |  |   |         |   |  |   |          |  
|Weighted average shares outstanding:                              |                   |                                           |         |                |                      |   |              |           |               |  |               |          |   |  |   |         |   |  |   |          |  
|                                                                  | Basic and diluted |                                           |         | 2,825,000      |                      |   |              | 2,825,000 |               |  |               |          |  |  |   |         |  |  |   |          |  | 



---



|    |                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Contractual interest for the October 1 to
    December 19, 2002 period and the fiscal years ended
    September 30, 2002 and 2001 totaled $18,003, $76,429 and
    $66,957, respectively.                                                                        
|   
|(2) | Includes a net gain on disposal of $188,891 for
    the period October 1, 2002 to December 19, 2002. The
    tax expense associated with discontinued operations for the
    listed periods presented is zero, zero, $342, $14,743 and
    $43,190, respectively.

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

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##### Table of Contents



STERLING CHEMICALS, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                               |                                            |         |         |         |  |         |         |         | 
|---------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                                         |                                                                               |                                           
|                                         |                                                                               | Reorganized Sterling                      
|                                         |                                                                               |                                           
|                                         |                                                                               |                                           
|                                         |                                                                               | December 31,                              
|                                         |                                                                               |                                           
|                                         |                                                                               | 2003                                       |         | 2002   
|                                         |                                                                               |                                            |         |        
|                                         |                                                                               |                                           
|                                         |                                                                               | (Dollars in Thousands)                    
|ASSETS                                  
|Current assets:                          |                                                                               |                                            |         |         |         |  |         |        
|                                         | Cash and cash equivalents                                                     |                                            | $       | 42,384  |         |  | $       | 99,818  |        
|                                         | Accounts receivable, net of allowance of $6,860
    and $13,624, respectively |                                            |         | 87,565  |         |  |         | 41,815  |        
|                                         | Inventories, net                                                              |                                            |         | 61,583  |         |  |         | 31,011  |        
|                                         | Prepaid expenses                                                              |                                            |         | 6,430   |         |  |         | 4,561   |        
|                                         | Deferred tax asset                                                            |                                            |         | 9,081   |         |  |         | 11,988  |        
|                                         |                                                                               |                                            |         |         |         |  |         |        
|                                         |                                                                               | Total current assets                       |         |         | 207,043 |  |         |         | 189,193 | 
|Property, plant and equipment, net       |                                                                               |                                            | 277,613 |         |         |  | 286,517 |        
|Goodwill                                 |                                                                               |                                            | 48,463  |         |         |  | 48,463  |        
|Other assets, net                        |                                                                               |                                            | 17,384  |         |         |  | 22,997  |        
|                                         |                                                                               |                                            |         |         |         |  |         |        
|                                         |                                                                               | Total assets                               |         | $       | 550,503 |  |         | $       | 547,170 | 
|                                         |                                                                               |                                            |         |         |         |  |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                               |                                            |         |         |         |  |         |        
|                                         | Accounts payable                                                              |                                            | $       | 64,833  |         |  | $       | 33,145  |        
|                                         | Accrued liabilities                                                           |                                            |         | 24,045  |         |  |         | 26,635  |        
|                                         |                                                                               |                                            |         |         |         |  |         |        
|                                         |                                                                               | Total current liabilities                  |         |         | 88,878  |  |         |         | 59,780  | 
|Long-term debt                           |                                                                               |                                            | 100,579 |         |         |  | 94,275  |        
|Deferred income tax liability            |                                                                               |                                            | 49,909  |         |         |  | 60,802  |        
|Deferred credits and other liabilities   |                                                                               |                                            | 86,407  |         |         |  | 93,132  |        
|Redeemable preferred stock               |                                                                               |                                            | 35,294  |         |         |  | 30,170  |        
|Commitments and contingencies (Note 9)   |                                                                               |                                            |         |         |         |  |         |        
|Stockholders equity:                    |                                                                               |                                            |         |         |         |  |         |        
|                                         | Common stock, $.01 par value                                                  |                                            |         | 28      |         |  |         | 28      |        
|                                         | Additional paid-in capital                                                    |                                            |         | 205,402 |         |  |         | 210,527 |        
|                                         | Accumulated deficit                                                           |                                            |         | (15,743 | )       |  |         | (1,544  | )      
|                                         | Accumulated other comprehensive loss                                          |                                            |         | (251    | )       |  |         |        |        
|                                         |                                                                               |                                            |         |         |         |  |         |        
|                                         |                                                                               | Total stockholders equity                 |         |         | 189,436 |  |         |         | 209,011 | 
|                                         |                                                                               |                                            |         |         |         |  |         |        
|                                         |                                                                               | Total liabilities and stockholders equity |         | $       | 550,503 |  |         | $       | 547,170 | 
|                                         |                                                                               |                                            |         |         |         |  |         |        

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

42



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##### Table of Contents



STERLING CHEMICALS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF

CHANGES IN STOCKHOLDERS EQUITY
(DEFICIENCY IN ASSETS)


|                                                                       |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |   |          |  
|---------------------------------------------------------------------- | ---------------------- | ---------------------- | ----- | ---------- |  | ----------- | -- | ------------- |  | -------- | -------- | ------------ |  | ----- | -------- | - |  | - | ------- | ------- | - | - | --- | - |  | - | -------- | - | -------- | -
|                                                                       |                        |                        |       |            |  |             |    | Accumulated   |  |          |          |             
|                                                                       |                        | Common Stock           |       | Additional |  |             |    | Other         |  |          |          |             
|                                                                       |                        |                        |       | Paid-In    |  | Accumulated |    | Comprehensive |  | Deferred |          |             
|                                                                       |                        | Shares                 |       | Amount     |  | Capital     |    | Deficit       |  | Loss     |          | Compensation |  | Total
|                                                                       |                        |                        |       |            |  |             |    |               |  |          |          |              |  |      
|                                                                       |                        |                       
|                                                                       |                        | (Amounts in Thousands)
|Predecessor Sterling:                                                  |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|                                                                       |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|Balance, September 30, 2000                                            |                        |                        | 1     |            |  | $           |   |               |  | $        | (141,786 | )            |  | $     | (205,256 | ) |  | $ | (30,736 | )       |   | $ | (12 | ) |  | $ | (377,790 | )
|Comprehensive loss:                                                    |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|Net loss                                                               |                        |                        |      |            |  |             |   |               |  |          |         |              |  |       | (181,710 | ) |  |   |        |         |   |   |    |   |  |   |          |  
|Other comprehensive loss:                                              |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|                                                                       | Translation adjustment |                        |       |           |  |             |    |              |  |          |          |             |  |       |          |  |  |   |         | (4,053  | ) |   |     |  |  |   |          |   |         
|                                                                       | Pension adjustment     |                        |       |           |  |             |    |              |  |          |          |             |  |       |          |  |  |   |         | (3,264  | ) |   |     |  |  |   |          |   |         
|                                                                       |                        | Comprehensive loss     |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |   | (189,027 | )
|Revaluation of ESOP shares to independently
    appraised market value |                        |                        |      |            |  |             |   |               |  |          |         |              |  |       | 3,226    |   |  |   |        |         |   |   |    |   |  |   | 3,226    |  
|Amortization of deferred compensation                                  |                        |                        |      |            |  |             |   |               |  |          |         |              |  |       |         |   |  |   |        |         |   |   | 9   |   |  |   | 9        |  
|                                                                       |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|Balance, September 30, 2001                                            |                        |                        | 1     |            |  |             |   |               |  |          | (141,786 | )            |  |       | (383,740 | ) |  |   | (38,053 | )       |   |   | (3  | ) |  |   | (563,582 | )
|Comprehensive loss:                                                    |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|Net loss                                                               |                        |                        |      |            |  |             |   |               |  |          |         |              |  |       | (35,986  | ) |  |   |        |         |   |   |    |   |  |   |          |  
|Other comprehensive loss:                                              |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|                                                                       | Translation adjustment |                        |       |           |  |             |    |              |  |          |          |             |  |       |          |  |  |   |         | (516    | ) |   |     |  |  |   |          |   |         
|                                                                       | Pension adjustment     |                        |       |           |  |             |    |              |  |          |          |             |  |       |          |  |  |   |         | (11,685 | ) |   |     |  |  |   |          |   |         
|                                                                       |                        | Comprehensive loss     |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |   | (48,187  | )
|Revaluation of ESOP shares to independently
    appraised market value |                        |                        |      |            |  |             |   |               |  |          |         |              |  |       | 289      |   |  |   |        |         |   |   |    |   |  |   | 289      |  
|Amortization of deferred compensation                                  |                        |                        |      |            |  |             |   |               |  |          |         |              |  |       |         |   |  |   |        |         |   |   | 3   |   |  |   | 3        |  
|                                                                       |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|Balance, September 30, 2002                                            |                        |                        | 1     |            |  |             |   |               |  |          | (141,786 | )            |  |       | (419,437 | ) |  |   | (50,254 | )       |   |   |    |   |  |   | (611,477 | )
|Net income                                                             |                        |                        |      |            |  |             |   |               |  |          |         |              |  |       | 418,611  |   |  |   |        |         |   |   |    |   |  |   | 418,611  |  
|Fresh-start adjustments                                                |                        |                        | 2,824 |            |  |             | 28 |               |  |          | 352,483  |              |  |       | 826      |   |  |   | 50,254  |         |   |   |    |   |  |   | 403,591  |  
|                                                                       |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|Reorganized Sterling:                                                  |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|                                                                       |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|Balance, December 19, 2002                                             |                        |                        | 2,825 |            |  |             | 28 |               |  |          | 210,697  |              |  |       |         |   |  |   |        |         |   |   |    |   |  |   | 210,725  |  
|Net loss                                                               |                        |                        |      |            |  |             |   |               |  |          |         |              |  |       | (1,544   | ) |  |   |        |         |   |   |    |   |  |   | (1,544   | )
|Preferred stock dividends                                              |                        |                        |      |            |  |             |   |               |  |          | (170     | )            |  |       |         |   |  |   |        |         |   |   |    |   |  |   | (170     | )
|                                                                       |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|Balance, December 31, 2002                                             |                        |                        | 2,825 |            |  |             | 28 |               |  |          | 210,527  |              |  |       | (1,544   | ) |  |   |        |         |   |   |    |   |  |   | 209,011  |  
|Comprehensive loss:                                                    |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|Net loss                                                               |                        |                        |      |            |  |             |   |               |  |          |         |              |  |       | (14,199  | ) |  |   |        |         |   |   |    |   |  |   |          |  
|Other comprehensive loss:                                              |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|                                                                       | Pension adjustment     |                        |       |           |  |             |    |              |  |          |          |             |  |       |          |  |  |   |         | (251    | ) |   |     |  |  |   |          |   |         
|                                                                       |                        | Comprehensive loss     |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |   | (14,450  | )
|Preferred stock dividends                                              |                        |                        |      |            |  |             |   |               |  |          | (5,125   | )            |  |       |         |   |  |   |        |         |   |   |    |   |  |   | (5,125   | )
|                                                                       |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  
|Balance, December 31, 2003                                             |                        |                        | 2,825 |            |  | $           | 28 |               |  | $        | 205,402  |              |  | $     | (15,743  | ) |  | $ | (251    | )       |   | $ |    |   |  | $ | 189,436  |  
|                                                                       |                        |                        |       |            |  |             |    |               |  |          |          |              |  |       |          |   |  |   |         |         |   |   |     |   |  |   |          |  

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

43



---



##### Table of Contents



STERLING CHEMICALS, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                       |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |         |  
|------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------- | -------------------- | ---------------------- | -------------- | -------------------- | - | ------------ | ------ | ------------- |  | ------------- | -------- | -------- | - | - | ------- | ------- | - | - | -------- | ------- | -
|                                                                                                       |                                                               |                      |                        |                |                     
|                                                                                                       |                                                               | Reorganized Sterling |                        |                | Predecessor Sterling
|                                                                                                       |                                                               |                      |                        |                |                     
|                                                                                                       |                                                               |                      |                        |                |                      |   | Fiscal Year  |        | Fiscal Year  
|                                                                                                       |                                                               | Year ended           |                        | December 20 to |                      |   | October 1 to |        | Ended         |  | Ended        
|                                                                                                       |                                                               | December 31,         |                        | December 31,   |                      |   | December 19, |        | September 30, |  | September 30,
|                                                                                                       |                                                               | 2003                 |                        | 2002           |                      |   | 2002         |        | 2002          |  | 2001         
|                                                                                                       |                                                               |                      |                        |                |                      |   |              |        |               |  |              
|                                                                                                       |                                                               |                      | (Dollars in Thousands)
|Cash flows from operating activities:                                                                  |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|Net income (loss) from continuing operations                                                           |                                                               | $                    | (13,223                | )              |                      | $ | (1,544       | )      |               |  | $             | 223,974  |          |   | $ | (52,616 | )       |   | $ | (135,640 | )      
|Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|                                                                                                       | Depreciation and amortization                                 |                      |                        | 27,656         |                      |   |              | 858    |               |  |               |          | 4,857    |   |   |         | 22,912  |   |   |          | 28,345  |  
|                                                                                                       | Interest amortization                                         |                      |                        | 383            |                      |   |              | 12     |               |  |               |          | 887      |   |   |         | 4,805   |   |   |          | 6,909   |  
|                                                                                                       | Fresh-start adjustments                                       |                      |                        |               |                      |   |              |       |               |  |               |          | 203,344  |   |   |         |        |   |   |          |        |  
|                                                                                                       | Gain on cancellation of debt                                  |                      |                        |               |                      |   |              |       |               |  |               |          | (457,824 | ) |   |         |        |   |   |          |        |  
|                                                                                                       | Deferred tax expense (benefit)                                |                      |                        | (7,986         | )                    |   |              | (854   | )             |  |               |          |         |   |   |         |        |   |   |          | 12,747  |  
|                                                                                                       | Other                                                         |                      |                        | (252           | )                    |   |              |       |               |  |               |          | (594     | ) |   |         | 9,432   |   |   |          | 142,153 |  
|Change in assets/liabilities:                                                                          |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|                                                                                                       | Accounts receivable                                           |                      |                        | (45,750        | )                    |   |              | 12,075 |               |  |               |          | 18,382   |   |   |         | (11,552 | ) |   |          | 53,433  |  
|                                                                                                       | Inventories                                                   |                      |                        | (30,572        | )                    |   |              | (3,940 | )             |  |               |          | 5,856    |   |   |         | (5,937  | ) |   |          | 21,952  |  
|                                                                                                       | Prepaid expenses                                              |                      |                        | (1,869         | )                    |   |              | 789    |               |  |               |          | (1,592   | ) |   |         | (1,093  | ) |   |          | (2,102  | )
|                                                                                                       | Other assets                                                  |                      |                        | 2,127          |                      |   |              | 11     |               |  |               |          | (208     | ) |   |         | (6,228  | ) |   |          | (9,058  | )
|                                                                                                       | Accounts payable                                              |                      |                        | 31,688         |                      |   |              | 2,298  |               |  |               |          | (1,299   | ) |   |         | 18,197  |   |   |          | (50,041 | )
|                                                                                                       | Accrued liabilities                                           |                      |                        | 3,714          |                      |   |              | 2,268  |               |  |               |          | (7,100   | ) |   |         | 3,472   |   |   |          | (36,569 | )
|                                                                                                       | Other liabilities                                             |                      |                        | (6,725         | )                    |   |              | (1,866 | )             |  |               |          | 4,447    |   |   |         | 18,761  |   |   |          | (28,949 | )
|                                                                                                       |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|Net cash provided by (used in) operating
    activities                                                |                                                               |                      | (40,809                | )              |                      |   | 10,107       |        |               |  |               | (6,870   | )        |   |   | 153     |         |   |   | 3,180    |        
|                                                                                                       |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|Cash flows from investing activities:                                                                  |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|                                                                                                       | Capital expenditures                                          |                      |                        | (15,649        | )                    |   |              | (116   | )             |  |               |          | (837     | ) |   |         | (6,700  | ) |   |          | (8,138  | )
|                                                                                                       | Net proceeds from the sale of the pulp chemicals
    business |                      |                        |               |                      |   |              |       |               |  |               |          | 357,641  |   |   |         |        |   |   |          |        |  
|                                                                                                       |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|Net cash provided by (used in) investing
    activities                                                |                                                               |                      | (15,649                | )              |                      |   | (116         | )      |               |  |               | 356,804  |          |   |   | (6,700  | )       |   |   | (8,138   | )      
|Cash flows from financing activities:                                                                  |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|                                                                                                       | Proceeds from issuance of New Notes                           |                      |                        |               |                      |   |              |       |               |  |               |          | 94,275   |   |   |         |        |   |   |          |        |  
|                                                                                                       | Proceeds from issuance of new common stock                    |                      |                        |               |                      |   |              |       |               |  |               |          | 30,000   |   |   |         |        |   |   |          |        |  
|                                                                                                       | Proceeds from issuance of new preferred stock                 |                      |                        |               |                      |   |              |       |               |  |               |          | 30,000   |   |   |         |        |   |   |          |        |  
|                                                                                                       | Net change in Prior Revolvers                                 |                      |                        |               |                      |   |              |       |               |  |               |          |         |   |   |         |        |   |   |          | (37,206 | )
|                                                                                                       | Net borrowings under DIP Facility                             |                      |                        |               |                      |   |              |       |               |  |               |          | (42,200  | ) |   |         | 14,972  |   |   |          | 42,270  |  
|                                                                                                       | Debt issuance costs                                           |                      |                        |               |                      |   |              |       |               |  |               |          |         |   |   |         |        |   |   |          | (4,901  | )
|                                                                                                       | Repayment of the 12 3/8% Notes                                |                      |                        |               |                      |   |              |       |               |  |               |          | (371,916 | ) |   |         |        |   |   |          |        |  
|                                                                                                       |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|Net cash provided by (used in) financing
    activities                                                |                                                               |                      |                       |                |                      |   |             |        |               |  |               | (259,841 | )        |   |   | 14,972  |         |   |   | 163      |        
|                                                                                                       |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|Net increase (decrease) in cash from
    continuing operations                                         |                                                               |                      | (56,458                | )              |                      |   | 9,991        |        |               |  |               | 90,093   |          |   |   | 8,425   |         |   |   | (4,795   | )      
|Net increase (decrease) in cash from
    discontinued operations                                       |                                                               |                      | (976                   | )              |                      |   |             |        |               |  |               | (10,109  | )        |   |   | 196     |         |   |   | 6,757    |        
|Cash and cash equivalents beginning of period                                                          |                                                               |                      | 99,818                 |                |                      |   | 89,827       |        |               |  |               | 9,843    |          |   |   | 1,222   |         |   |   | (740     | )      
|                                                                                                       |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|Cash and cash equivalents end of year                                                                  |                                                               | $                    | 42,384                 |                |                      | $ | 99,818       |        |               |  | $             | 89,827   |          |   | $ | 9,843   |         |   | $ | 1,222    |        
|                                                                                                       |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|Supplement disclosures of cash flow information:                                                       |                                                               |                      |                        |                |                      |   |              |        |               |  |               |          |          |   |   |         |         |   |   |          |        
|                                                                                                       | Interest paid, net of interest income received                |                      | $                      | (3,575         | )                    |   | $            |       |               |  |               | $        | (934     | ) |   | $       | (5,200  | ) |   | $        | (7,595  | )
|                                                                                                       | Cash paid for reorganization items                            |                      |                        | (13,115        | )                    |   |              | (1,140 | )             |  |               |          | (931     | ) |   |         | (11,729 | ) |   |          | (11     | )

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

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Sterling Chemicals, Inc. (Chemicals)
owns or operates facilities for the production of seven
petrochemical products at its Texas City, Texas plant; styrene,
acrylonitrile, acetic acid, plasticizers, methanol, sodium
cyanide and disodium iminodiacetic acid (DSIDA).
Unless otherwise indicated, references to we,
us, our and ours refer
collectively to Chemicals and its wholly-owned subsidiaries. We
own the styrene, acrylonitrile, acetic acid, plasticizers and
methanol manufacturing units located at the site. The methanol
unit is currently idled and is not likely to ever be restarted.
E.I. du Pont de Nemours and Company (DuPont) and
Monsanto own the sodium cyanide and DSIDA units, respectively.
These companies built these units on land leased from us, and we
operate these units on their behalf. Both of these units use
hydrogen cyanide created as a by-product from our acrylonitrile
operations to make other products. The DSIDA unit is not
currently in operation, but Monsanto has committed to restart
the DSIDA unit by mid-2007 and has the option to restart the
unit prior to that time. We have also leased portions of the
site to Praxair Hydrogen Supply, Inc. and S&L Cogeneration
Company, a 50/50 joint venture between us and Praxair Energy
Resources, Inc., which constructed a partial oxidation unit and
a cogeneration facility, respectively, on that land. We
generally sell our petrochemicals products to customers for use
in the manufacture of other chemicals and products, which in
turn are used in the production of a wide array of consumer
goods and industrial products.

Fiscal
Year

In December 2002, we changed our fiscal year-end
from September 30 to December 31.

Bankruptcy
Reorganization

On July 16, 2001 (the Petition
Date), Sterling Chemicals Holdings, Inc.
(Holdings), Chemicals and most of their
U.S. subsidiaries (collectively, the Debtors)
filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code (the
Bankruptcy Code) in the U.S. Bankruptcy Court
for the Southern District of Texas (the Bankruptcy
Court). The Debtors filed a plan of reorganization with
the Bankruptcy Court on May 14, 2002 which, after several
amendments, was confirmed on November 20, 2002 (as
confirmed, the Plan of Reorganization). On
December 19, 2002, the Plan of Reorganization became
effective and the Debtors emerged from bankruptcy pursuant to
the terms of the Plan of Reorganization. During the period from
July 16, 2001 through December 19, 2002, the Debtors
operated their respective businesses as debtors-in-possession
pursuant to the Bankruptcy Code, and the accompanying
consolidated financial statements for this period have been
presented in conformity with Statement of Position 90-7,
Financial Reporting By Entities In Reorganization Under
the Bankruptcy Code (SOP 90-7) of the
American Institute of Certified Public Accountants
(AICPA). SOP 90-7 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. For financial
reporting purposes, the Effective Date of the Plan
of Reorganization is considered to have been the close of
business on December 19, 2002. Due to the Debtors
emergence from bankruptcy and the implementation of fresh-start
accounting (see Note 3), we refer to ourselves as, and our
financial results have been separately presented under the
heading, Predecessor Sterling for periods on or
before December 19, 2002 and Reorganized
Sterling for periods after December 19, 2002. In this
Form 10-K, fiscal 2002 and fiscal
2001 refer to the fiscal years ended September 30,
2002 and September 30, 2001, respectively, and the
Transition Period refers to the three-month period
from October 1, 2002 through December 31, 2002, which
includes the results of Predecessor Sterling from
October 1, 2002 through December 19, 2002 and the
results of Reorganized Sterling from December 20, 2002
through December 31, 2002. Also in this Form 10-K,
2003 and fiscal 2003 refer to the
12-month period ended December 31, 2003. Our consolidated
financial statements for 2003 are not comparable to those of
Predecessor Sterling for periods ended on or prior to
December 19, 2002.

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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 the Debtors export sales to
be at a competitive disadvantage) and higher raw material and
energy costs. As a result of these conditions, the Debtors
incurred significant operating losses. The reorganization,
effected through the bankruptcy filings, permitted the Debtors
to preserve cash and gave them the opportunity to restructure
their debt. As the market for our petrochemicals products
remains highly cyclical, the capital structure of Reorganized
Sterling has been designed with the goal of ensuring that we
have sufficient liquidity during cyclical downturns in the
markets for our petrochemicals products, although we cannot give
any assurances that our new capital structure will provide us
with sufficient liquidity over any specific period.

On December 6, 2002, Holdings was merged
with and into Predecessor Sterling. Under the terms of the
merger and the Plan of Reorganization, all equity interests in
Holdings were cancelled upon consummation of the merger and we
issued 65,000 shares of Reorganized Sterlings common stock
to the holders of Holdings 13 1/2% Senior Secured
Discount Notes in full payment of their claims. Upon the
effectiveness of the Plan of Reorganization, Resurgence Asset
Management, L.L.C., on behalf of itself and certain of its and
its affiliates managed funds and accounts (which we refer
to collectively as the Investor), paid $30 million for
certain shares of Reorganized Sterlings Series A
Convertible Preferred Stock. An additional $30 million was
contributed to Reorganized Sterling at the effectiveness of the
Plan of Reorganization in exchange for 2,175,000 shares of
Reorganized Sterlings common stock pursuant to a rights
offering made available to the Debtors unsecured creditors
(other than unsecured creditors of Holdings), which offering was
underwritten by the Investor. In addition, upon the
effectiveness of the Plan of Reorganization, the unsecured
creditors of the Debtors (other than unsecured creditors of
Holdings), which included holders of Predecessor Sterlings
11 1/4% Senior Subordinated Notes and 11 3/4% Senior
Subordinated Notes, received pro rata shares of 11.7% of
Reorganized Sterlings common stock (on a fully diluted
basis assuming the conversion of all shares of Reorganized
Sterlings Series A Convertible Preferred Stock into
shares of Reorganized Sterlings common stock) and warrants
to acquire 949,367 shares of Reorganized Sterlings common
stock at an exercise price of $52 per share (subject to
adjustment).

Pursuant to the Plan of Reorganization, on
December 19, 2002 the Debtors pulp chemicals business
was sold to Superior Propane, Inc. (Superior
Propane) for $373 million and the Debtors
acrylic fibers business was sold to local management of that
business for nominal consideration. In accordance with Statement
of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment and Disposal
of Long Lived Assets, we have reported the operating
results of these businesses as discontinued operations in the
condensed consolidated statements of operations and cash flows
for Predecessor Sterling. $80 million of the net proceeds
from the sale of the Debtors pulp chemicals business
remained with Reorganized Sterling, which continues to own and
operate the Debtors core petrochemicals business. The
remaining net proceeds from the sale were paid to the holders of
Predecessor Sterlings 12 3/8% Senior Secured Notes
(the 12 3/8% Notes), who also received $94.3
million in principal amount of new 10% Senior Secured Notes due
2007 issued by Reorganized Sterling (the New Notes)
in satisfaction of their claims. In addition, on
December 19, 2002, Reorganized Sterling established a new
revolving credit facility providing up to $100 million in
revolving credit loans (subject to borrowing base limitations)
with The CIT Group/ Business Credit, Inc., as administrative
agent and a lender, and certain other lenders (the New
Revolver). As of December 31, 2003, we had not
borrowed any money under the New Revolver, although we had
$1.8 million in letters of credit outstanding.

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
accounts of all of our wholly-owned and majority-owned
subsidiaries, with all significant intercompany accounts and
transactions having been eliminated. Our 50% equity investments
in a cogeneration joint venture is not material to our financial
position or results of operations. Our 50% equity investment in
an acrylonitrile marketing joint venture is accounted for under
the equity method, with our share of the operating results of
the joint ventures recorded as Revenues in the Statements of
Operations.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

We consider all investments having an initial
maturity of three months or less to be cash equivalents.



| |            
| | -----------
| | Inventories

Inventories are stated at the lower of cost or
market. Cost is primarily determined on the first-in, first-out
basis, except for stores and supplies, which are valued at
average cost.

We enter into agreements with other companies to
exchange chemical inventories in order to minimize working
capital requirements and to facilitate distribution logistics.
Balances related to quantities due to or payable by us are
included in inventory.



| |                              
| | -----------------------------
| | Property, Plant and Equipment

Property, plant and equipment are recorded at
cost. Major renewals and improvements, which extend the useful
lives of equipment, are capitalized. Disposals are removed at
carrying cost less accumulated depreciation with any resulting
gain or loss reflected in operations. Depreciation is provided
using the straight-line method over estimated useful lives
ranging from five to 25 years, with the predominant life of
plant and equipment being 15 years. We capitalize interest
costs, which are incurred as part of the cost of constructing
major facilities and equipment. The amount of interest
capitalized for the year ended 2003, fiscal 2002 and fiscal 2001
was $0.6 million, $0.3 million and $0.5 million,
respectively.



| |                       
| | ----------------------
| | Plant Turnaround Costs

As a part of normal recurring operations, each of
our manufacturing units is completely shut down from time to
time, for a period typically lasting two to four weeks, to
replace catalysts and perform major maintenance work required to
sustain long-term production. These periods are commonly
referred to as turnarounds or shutdowns.
While actual timing is subject to a number of variables,
turnarounds of the styrene unit typically occur every two to
three years and turnarounds of the acrylonitrile unit
typically occur every 12 to 18 months. Costs of turnarounds
are expensed are incurred. Prior to the application of
fresh-start accounting, such costs were accrued in advance over
the expected period between turnarounds. As expenses for
turnarounds, especially for the styrene and acrylonitrile units,
can be significant, the impact of this change in accounting for
turnarounds can be material for financial reporting periods
during which the turnarounds actually occur.



| |                                   
| | ----------------------------------
| | Goodwill and Long-Lived
    Assets

Management reviews the recorded value of our
goodwill annually at the end of the fourth quarter of each year,
or sooner if events or changes in circumstances indicate that
the carrying amount may exceed fair value. Recoverability is
determined by comparing the estimated fair value, utilizing the
present value of expected net cash flows, to the carrying value.
This present value model requires management to estimate future
net cash flows, the timing of these cash flows, and a discount
rate (or weighted average cost of capital) representing the time
value of money and the inherent risk and uncertainty of the
future

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


cash flows. The discount rate, adjusted for
inflation, is based on independently calculated risks for a
composite group of commodity chemical companies, our target
capital mix and an estimated market risk premium. The
assumptions used in estimating future cash flows were consistent
with our internal planning. If the estimated fair value exceeds
the carrying amount, goodwill is not impaired. If the carrying
amount exceeds estimated fair value, the implied fair value
goodwill is compared to the carrying amount of that goodwill. If
the carrying amount goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized in an amount
equal to that excess. Goodwill totaled $48.5 million at
December 31, 2003 and represented 9% of our total assets.

We assess our long-lived assets other than
goodwill for impairment whenever facts and circumstances
indicate that the carrying amount may not be fully recoverable.
To analyze recoverability, we project undiscounted net future
cash flows over the remaining life of the assets. If these
projected cash flows are less than the carrying amount, an
impairment would be recognized, resulting in a write-down of
assets with a corresponding charge to earnings. The impairment
loss is measured based upon the difference between the carrying
amount and the fair value of the relevant assets.



| |                 
| | ----------------
| | Debt Issue Costs

Debt issue costs relating to long-term debt are
amortized over the term of the related debt instrument using the
straight-line method, which is materially consistent with the
effective interest method, and are included in other assets.
Debt issue cost amortization, which is included in interest and
debt-related expenses, was $0.3 million, $4.8 million
and $6.9 million, respectively for the year ended 2003,
fiscal year 2002 and fiscal 2001.



| |             
| | ------------
| | Income Taxes

Deferred income taxes are provided for revenue
and expenses which are recognized in different periods for
income tax and financial statement purposes. Deferred tax assets
are regularly assessed for recoverability based on both
historical and anticipated earnings levels, and a valuation
allowance is recorded when it is more likely than not that these
amounts will not be recovered.



| |                    
| | -------------------
| | Environmental Costs

Environmental costs are expensed as incurred
unless the expenditures extend the economic useful life of the
relevant assets. Costs that extend the economic life of assets
are capitalized and depreciated over the remaining life of those
assets. Liabilities are recorded when environmental assessments
or remedial efforts are probable and the cost can be reasonably
estimated.



| |                    
| | -------------------
| | Revenue Recognition

We generate revenues through sales in the open
market, raw material conversion agreements and long-term supply
contracts. In addition, we have entered into profit sharing
arrangements with respect to some of our petrochemicals
products. We recognize revenue from sales in the open market,
raw material conversion agreements and long-term supply
contracts when the products are shipped. Revenues from profit
sharing arrangements are estimated and accrued monthly. Deferred
credits are amortized over the life of the contracts, which gave
rise to them.



| |               
| | --------------
| | Loss Per Share

Basic Earnings per Share (EPS) is
computed using the weighted-average number of shares outstanding
during the year. Diluted EPS includes common stock equivalents,
which are dilutive to earnings per share. For the year ended
December 31, 2003, there were no dilutive common stock

48



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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


equivalents and we had a $19.3 million net
loss attributable to common stockholders and recorded $6.84 net
loss per share attributable to common stockholders for both
Basic EPS and Diluted EPS.

For the fiscal years ended September 30,
2002 and September 30, 2001, all issued and outstanding
shares of Predecessor Sterlings capital stock were held by
Holdings and, accordingly, loss per share is not presented.



| |                                                   
| | --------------------------------------------------
| | Accumulated Other Comprehensive Income
    (Loss):

|                            |  |                        |         |                    |  |       |         |   |  |   |         |  
|--------------------------- |  | ---------------------- | ------- | ------------------ |  | ----- | ------- | - |  | - | ------- | -
|                            |  | Cumulative             |         |                    |  |      
|                            |  | Translation            |         |                    |  |      
|                            |  | Adjustment             |         | Pension Adjustment |  | Total
|                            |  |                        |         |                    |  |      
|                            |  |                       
|                            |  | (Dollars in Thousands)
|Predecessor Sterling:       |  |                        |         |                    |  |       |         |   |  |   |         |  
|                            |  |                        |         |                    |  |       |         |   |  |   |         |  
|Balance, September 30, 2001 |  | $                      | (34,655 | )                  |  | $     | (3,398  | ) |  | $ | (38,053 | )
|Changes                     |  |                        | (516    | )                  |  |       | (11,685 | ) |  |   | (12,201 | )
|                            |  |                        |         |                    |  |       |         |   |  |   |         |  
|Balance, September 30, 2002 |  |                        | (35,171 | )                  |  |       | (15,083 | ) |  |   | (50,254 | )
|Fresh-start adjustments     |  |                        | 35,171  |                    |  |       | 15,083  |   |  |   | 50,254  |  
|                            |  |                        |         |                    |  |       |         |   |  |   |         |  
|Reorganized Sterling:       |  |                        |         |                    |  |       |         |   |  |   |         |  
|                            |  |                        |         |                    |  |       |         |   |  |   |         |  
|Balance, December 19, 2002. |  |                        |        |                    |  |       |        |   |  |   |        |  
|Changes                     |  |                        |        |                    |  |       |        |   |  |   |        |  
|Balance, December 31, 2002. |  |                        |        |                    |  |       |        |   |  |   |        |  
|Changes                     |  |                        |        |                    |  |       | (251    | ) |  |   | (251    | )
|                            |  |                        |         |                    |  |       |         |   |  |   |         |  
|Balance, December 31, 2003. |  | $                      |        |                    |  | $     | (251    | ) |  | $ | (251    | )
|                            |  |                        |         |                    |  |       |         |   |  |   |         |  

There is no tax expense or benefit associated
with the cumulative translation adjustment and pension
adjustment amounts above.



| |                                                          
| | ---------------------------------------------------------
| | Disclosures about Fair Value of Financial
    Instruments

In preparing disclosures about the fair value of
financial instruments, we have assumed that the carrying amount
approximates fair value for cash and cash equivalents, accounts
receivable, accounts payable and certain accrued liabilities due
to the short maturities of these instruments. The fair values of
long-term debt instruments are estimated based upon quoted
market values (if applicable) or on the current interest rates
available to us for debt with similar terms and remaining
maturities. Considerable judgment is required in developing
these estimates.



| |                     
| | --------------------
| | Accounting Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reported periods.
Significant estimates include impairment of long-lived assets,
allowance for doubtful accounts, inventories, revenue
recognition, environmental reserves, provision for income taxes
and litigation reserves.

49



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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                 
| | ----------------
| | Reclassification

Certain amounts reported in the consolidated
financial statements for the prior periods have been
reclassified to conform with the current consolidated financial
statement presentation with no effect on net loss or
stockholders equity (deficiency in assets).

2.     STOCK-BASED
COMPENSATION PLAN

In connection with the implementation of the Plan
of Reorganization, we adopted our 2002 Stock Plan. Under our
2002 Stock Plan, officers and key employees, as designated by
our Board of Directors, may be issued stock options, stock
awards, stock appreciation rights or stock units. Our 2002 Stock
Plan may be amended or modified from time to time by our Board
of Directors in accordance with its terms. We have reserved
379,747 shares of our common stock for issuance under our 2002
Stock Plan (subject to adjustment). On February 11, 2003, we
granted options to purchase 348,500 shares of our common stock
under our 2002 Stock Plan at an exercise price of $31.60 per
share.

We account for our stock-based compensation
arrangements using the intrinsic value method in accordance with
the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25), and related
interpretations. Under APB 25, if the exercise price of employee
stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized. All
stock options issued under our 2002 Stock Plan were granted with
exercise prices at estimated fair value at the time of grant.
Therefore, no compensation expense has been recognized under APB
25.

The following table illustrates the effect on net
loss and earnings per share attributable to common stockholders
assuming that compensation costs for stock options issued under
our 2002 Stock Plan had been determined using the estimated
market value at the grant dates amortized on a pro rata basis
over the vesting period if calculated pursuant to SFAS
No. 123, Accounting for Stock-Based
Compensation, for the year ended December 31, 2003.
There were no options outstanding under our 2002 Stock Plan
prior to February 11, 2003.

|                                                                                                                                                    |  |                   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | -
|                                                                                                                                                    |  | Year ended       
|                                                                                                                                                    |  | December 31, 2003
|                                                                                                                                                    |  |                  
|                                                                                                                                                    |  | (Dollars in      
|                                                                                                                                                    |  | Thousands, Except
|                                                                                                                                                    |  | Share Data)      
|Net loss attributable to common stockholders, as
    reported                                                                                       |  | $                 | (19,324 | )
|Add: Stock-based employee compensation expense
    included in reported net loss, net of related tax effects                                        |  |                   |        |  
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |  |                   | 2,078   |  
|                                                                                                                                                    |  |                   |         |  
|Pro forma net loss                                                                                                                                  |  | $                 | (21,402 | )
|                                                                                                                                                    |  |                   |         |  
|Loss per share attributable to common
    stockholders: As reported                                                                                 |  | $                 | (6.84   | )
|Pro forma                                                                                                                                           |  |                   | (7.58   | )

3.     FRESH-START
ACCOUNTING

Upon our emergence from bankruptcy on
December 19, 2002, we implemented fresh-start accounting
under the provisions of SOP 90-7 and became a new reporting
entity. Under SOP 90-7, our reorganization value was allocated
to our assets and liabilities, our accumulated deficit was
eliminated and new preferred and common equity was issued
pursuant to the Plan of Reorganization. In connection with our
Plan of Reorganization, our financial advisor, Greenhill &
Co., LLC (Greenhill) prepared a valuation of our

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


business. In preparing its valuation, Greenhill
considered a number of factors, including valuations by other
parties and the application of various valuation methods,
including discounted cash flow analysis, comparable company
analysis and precedent transaction analysis. Based on
Greenhills valuation, the estimated reorganization value
was allocated as follows (Dollars in Thousands):

|                           |  |   |         | 
|-------------------------- |  | - | ------- | 
|Long-term debt             |  | $ | 94,275  | 
|Redeemable preferred stock |  |   | 30,000  | 
|Stockholders equity       |  |   | 210,725 | 
|                           |  |   |         | 
|Total                      |  | $ | 335,000 | 
|                           |  |   |         | 

In connection with the cancellation of certain
debt of Holdings and Predecessor Sterling pursuant to the Plan
of Reorganization, on December 19, 2002 we recorded a
$457.8 million gain related to the cancellation of that
debt. Also in connection with fresh-start accounting, we changed
our method of accounting for periodic turnaround maintenance for
our manufacturing units. We previously accrued the cost of these
turnarounds in advance, but we now expense all costs for
turnarounds as they are incurred. A one-time credit to reverse a
$5.2 million existing accrual for turnaround expenses was
recorded as part of our fresh-start accounting transactions. A
reconciliation of the adjustments recorded in connection with
our debt restructuring, the adoption of fresh-start accounting
and the accounting for discontinued operations at
December 19, 2002 is presented below:

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                                      |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|--------------------------------------------------------------------- |  | ---------------------- | -------- | ------------ |  | -------------- | -------- | ----------- |  | ------------ | -------- | - |  | - | -------- | - |  | - | ------- | 
|                                                                      |  | Predecessor            |          |              |  |                |          |             |  | Reorganized 
|                                                                      |  | Sterling               |          |              |  |                |          |             |  | Sterling    
|                                                                      |  | December 19,           |          | Discontinued |  | Reorganization |          | Fresh-Start |  | December 19,
|                                                                      |  | 2002                   |          | Operations   |  | Adjustments    |          | Adjustments |  | 2002        
|                                                                      |  |                        |          |              |  |                |          |             |  |             
|                                                                      |  |                       
|                                                                      |  | (Dollars in Thousands)
|ASSETS                                                                |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|Current assets:                                                       |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|Cash and cash equivalents                                             |  | $                      | 5,839    |              |  | $              | 358,108  |             |  | $            | (274,120 | ) |  | $ |         |   |  | $ | 89,827  | 
|Accounts receivable, net                                              |  |                        | 87,435   |              |  |                | (35,771  | )           |  |              | 2,226    |   |  |   |         |   |  |   | 53,890  | 
|Inventories                                                           |  |                        | 44,832   |              |  |                | (17,852  | )           |  |              | 91       |   |  |   |         |   |  |   | 27,071  | 
|Prepaid expenses                                                      |  |                        | 6,658    |              |  |                | (1,388   | )           |  |              |         |   |  |   | 80       |   |  |   | 5,350   | 
|Deferred tax asset                                                    |  |                        |         |              |  |                |         |             |  |              |         |   |  |   | 11,134   |   |  |   | 11,134  | 
|                                                                      |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|Total current assets                                                  |  |                        | 144,764  |              |  |                | 303,097  |             |  |              | (271,803 | ) |  |   | 11,214   |   |  |   | 187,272 | 
|Property, plant and equipment, net                                    |  |                        | 253,875  |              |  |                | (139,940 | )           |  |              |         |   |  |   | 173,257  |   |  |   | 287,192 | 
|Goodwill                                                              |  |                        |         |              |  |                |         |             |  |              |         |   |  |   | 48,463   |   |  |   | 48,463  | 
|Other assets                                                          |  |                        | 45,212   |              |  |                | (6,039   | )           |  |              | (3,027   | ) |  |   | (13,059  | ) |  |   | 23,087  | 
|                                                                      |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|Total assets                                                          |  | $                      | 443,851  |              |  | $              | 157,118  |             |  | $            | (274,830 | ) |  | $ | 219,875  |   |  | $ | 546,014 | 
|                                                                      |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|                                                                     
|LIABILITIES AND STOCKHOLDERS
    EQUITY                              |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|Current liabilities:                                                  |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|Accounts payable                                                      |  | $                      | 45,976   |              |  | $              | (16,684  | )           |  | $            | 343      |   |  | $ | 1,212    |   |  | $ | 30,847  | 
|Accrued liabilities                                                   |  |                        | 31,860   |              |  |                | (7,240   | )           |  |              | 791      |   |  |   | (1,044   | ) |  |   | 24,367  | 
|Current portion of long-term debt                                     |  |                        | 52,327   |              |  |                | (10,127  | )           |  |              | (42,200  | ) |  |   |         |   |  |   |        | 
|                                                                      |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|Total current liabilities                                             |  |                        | 130,163  |              |  |                | (34,051  | )           |  |              | (41,066  | ) |  |   | 168      |   |  |   | 55,214  | 
|Pre-petition liabilities subject to compromise                        |  |                        | 512,760  |              |  |                | (2,159   | )           |  |              | (510,601 | ) |  |   |         |   |  |   |        | 
|Pre-petition liabilities not subject to compromise                    |  |                        | 372,326  |              |  |                |         |             |  |              | (372,326 | ) |  |   |         |   |  |   |        | 
|Long-term debt                                                        |  |                        |         |              |  |                |         |             |  |              | 94,275   |   |  |   |         |   |  |   | 94,275  | 
|Deferred tax liability                                                |  |                        | 13,835   |              |  |                | (13,835  | )           |  |              |         |   |  |   | 60,802   |   |  |   | 60,802  | 
|Deferred credits and other liabilities                                |  |                        | 39,189   |              |  |                | (15,011  | )           |  |              | 45,970   |   |  |   | 24,850   |   |  |   | 94,998  | 
|Commitments and contingencies                                         |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|Redeemable preferred stock                                            |  |                        |         |              |  |                |         |             |  |              | 30,000   |   |  |   |         |   |  |   | 30,000  | 
|Stockholders equity (deficiency in assets):                          |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|Common stock, $.01 par value                                          |  |                        |         |              |  |                |         |             |  |              |         |   |  |   | 28       |   |  |   | 28      | 
|Additional paid-in capital                                            |  |                        | (141,786 | )            |  |                |         |             |  |              | 30,000   |   |  |   | 322,483  |   |  |   | 210,697 | 
|Retained earnings (accumulated deficit)                               |  |                        | (434,465 | )            |  |                | 188,891  |             |  |              | 448,918  |   |  |   | (203,344 | ) |  |   |        | 
|Accumulated other comprehensive income                                |  |                        | (48,171  | )            |  |                | 33,283   |             |  |              |         |   |  |   | 14,888   |   |  |   |        | 
|                                                                      |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|Total stockholders equity (deficiency in
    assets)                 |  |                        | (624,422 | )            |  |                | 222,174  |             |  |              | 478,918  |   |  |   | 134,055  |   |  |   | 210,725 | 
|                                                                      |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 
|Total liabilities and stockholders equity
    (deficiency in assets) |  | $                      | 443,851  |              |  | $              | 157,118  |             |  | $            | (274,830 | ) |  | $ | 219,875  |   |  | $ | 546,014 | 
|                                                                      |  |                        |          |              |  |                |          |             |  |              |          |   |  |   |          |   |  |   |         | 

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Reorganization adjustments reflect the
forgiveness of debt, including related accrued interest and
certain pre-petition liabilities, in consideration for new debt
and new common stock, resulting in a gain from debt
restructuring of $457.8 million, partially offset by an
expense of $8.9 million for professional fees incurred in
connection with the reorganization. Fresh-start adjustments
primarily reflect the recording of property, plant and equipment
at fair market value, the recording of a net deferred tax
liability arising out of the difference between the book and tax
basis of certain assets and liabilities (along with the
resulting amount of goodwill recorded) and the recognition of
previously unrecognized pension and other post-employment
benefits liabilities.

4.     DISCONTINUED
OPERATIONS

Pursuant to the Plan of Reorganization, on
December 19, 2002, the Debtors pulp chemicals
business was sold to Superior Propane for approximately $373
million and the Debtors acrylic fibers business was sold
to local management of that business for nominal consideration.
In accordance with SFAS No. 144, Accounting for the
Impairment and Disposal of Long Lived Assets, we have
reported the operating results of these businesses as
discontinued operations in the consolidated statement of
operations and cash flows for Predecessor Sterling.

For the period from October 1, 2002 through
December 19, 2002 and for the fiscal years ended
September 30, 2002 and 2001, the amount of revenue and net
income (loss) (including gains or losses recorded on the sales)
attributable to the discontinued operations were as follows:

|                   |                         |                        |   |                    |         |                    |   |         |         |  |   |         |         |  
|------------------ | ----------------------- | ---------------------- | - | ------------------ | ------- | ------------------ | - | ------- | ------- |  | - | ------- | ------- | -
|                   |                         |                       
|                   |                         | Predecessor Sterling  
|                   |                         |                       
|                   |                         | October 1 to           |   | Fiscal Year Ended  |         | Fiscal Year Ended 
|                   |                         | December 19, 2002      |   | September 30, 2002 |         | September 30, 2001
|                   |                         |                        |   |                    |         |                   
|                   |                         |                       
|                   |                         | (Dollars in Thousands)
|Revenues:          |                         |                        |   |                    |         |                    |   |         |         |  |   |        
|                   | Pulp chemicals business |                        | $ | 50,282             |         |                    | $ | 227,962 |         |  | $ | 228,346 |        
|                   | Acrylic fibers business |                        |   | 4,075              |         |                    |   | 18,964  |         |  |   | 46,481  |        
|                   |                         |                        |   |                    |         |                    |   |         |         |  |   |        
|                   |                         | Total                  |   | $                  | 54,357  |                    |   | $       | 246,926 |  |   | $       | 274,827 |  
|                   |                         |                        |   |                    |         |                    |   |         |         |  |   |        
|Net income (loss): |                         |                        |   |                    |         |                    |   |         |         |  |   |        
|                   | Pulp chemicals business |                        | $ | 201,404            |         |                    | $ | 25,652  |         |  | $ | (18,635 | )      
|                   | Acrylic fibers business |                        |   | (6,767             | )       |                    |   | (9,022  | )       |  |   | (27,435 | )      
|                   |                         |                        |   |                    |         |                    |   |         |         |  |   |        
|                   |                         | Total                  |   | $                  | 194,637 |                    |   | $       | 16,630  |  |   | $       | (46,070 | )
|                   |                         |                        |   |                    |         |                    |   |         |         |  |   |        

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


5.     DETAIL OF
CERTAIN BALANCE SHEET ACCOUNTS

|                                        |                                                                  |                        |         |         |   |   |         |         |  
|--------------------------------------- | ---------------------------------------------------------------- | ---------------------- | ------- | ------- | - | - | ------- | ------- | -
|                                        |                                                                  |                       
|                                        |                                                                  | Reorganized Sterling  
|                                        |                                                                  |                       
|                                        |                                                                  |                       
|                                        |                                                                  | December 31,          
|                                        |                                                                  |                       
|                                        |                                                                  | 2003                   |         | 2002   
|                                        |                                                                  |                        |         |        
|                                        |                                                                  |                       
|                                        |                                                                  | (Dollars in Thousands)
|Inventories:                            |                                                                  |                        |         |         |   |   |         |        
|                                        | Finished products                                                |                        | $       | 37,944  |   |   | $       | 12,228  |  
|                                        | Raw materials                                                    |                        |         | 16,480  |   |   |         | 12,259  |  
|                                        |                                                                  |                        |         |         |   |   |         |        
|Inventories at cost                     |                                                                  |                        | 54,424  |         |   |   | 24,487  |        
|                                        | Inventories under exchange agreements                            |                        |         | 1,325   |   |   |         | 550     |  
|                                        | Stores and supplies                                              |                        |         | 5,834   |   |   |         | 5,974   |  
|                                        |                                                                  |                        |         |         |   |   |         |        
|                                        |                                                                  | $                      | 61,583  |         |   | $ | 31,011  |        
|                                        |                                                                  |                        |         |         |   |   |         |        
|Property, plant and equipment, net:     |                                                                  |                        |         |         |   |   |         |        
|                                        | Land                                                             |                        | $       | 7,149   |   |   | $       | 7,149   |  
|                                        | Buildings                                                        |                        |         | 3,543   |   |   |         | 3,168   |  
|                                        | Plant and equipment                                              |                        |         | 283,031 |   |   |         | 271,185 |  
|                                        | Construction in progress                                         |                        |         | 9,714   |   |   |         | 5,806   |  
|                                        | Less: accumulated depreciation                                   |                        |         | (25,824 | ) |   |         | (791    | )
|                                        |                                                                  |                        |         |         |   |   |         |        
|                                        |                                                                  | $                      | 277,613 |         |   | $ | 286,517 |        
|                                        |                                                                  |                        |         |         |   |   |         |        
|Accrued liabilities:                    |                                                                  |                        |         |         |   |   |         |        
|                                        | Employee compensation and benefits                               |                        | $       | 20,643  |   |   | $       | 17,700  |  
|                                        | Property taxes                                                   |                        |         |        |   |   |         | 4,710   |  
|                                        | Other                                                            |                        |         | 3,402   |   |   |         | 4,225   |  
|                                        |                                                                  |                        |         |         |   |   |         |        
|                                        |                                                                  | $                      | 24,045  |         |   | $ | 26,635  |        
|                                        |                                                                  |                        |         |         |   |   |         |        
|Deferred credits and other liabilities: |                                                                  |                        |         |         |   |   |         |        
|                                        | Accrued postretirement, pension and post
    employment benefits |                        | $       | 82,433  |   |   | $       | 87,909  |  
|                                        | Other                                                            |                        |         | 3,974   |   |   |         | 5,223   |  
|                                        |                                                                  |                        |         |         |   |   |         |        
|                                        |                                                                  | $                      | 86,407  |         |   | $ | 93,132  |        
|                                        |                                                                  |                        |         |         |   |   |         |        

6.     LONG-TERM
DEBT

Pursuant to the Plan of Reorganization, on
December 19, 2002, we issued $94.3 million in
principal amount of New Notes to the holders of Predecessor
Sterlings 12 3/8% Notes. The New Notes are senior
secured obligations and rank equally in right of payment with
all of our other existing and future senior indebtedness, and
senior in right of payment to all of our existing and future
subordinated indebtedness. The New Notes are guaranteed by
Sterling Chemicals Energy, Inc. (Sterling Energy),
one of our wholly owned subsidiaries. Sterling Energys
guaranty ranks equally in right of payment with all of its
existing and future senior indebtedness, and senior in right of
payment to all of its existing and future subordinated
indebtedness. The New Notes and Sterling Energys guaranty
are secured by a first priority lien on all of our production
facilities and related assets.

The New Notes bear interest at an annual rate of
10%, payable semi-annually on June 15 and December 15
of each year. Under certain circumstances, for any interest
period ending on or before December 19, 2004, we may elect
to pay interest on the New Notes through the issuance of
additional

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


New Notes rather than the payment of cash.
However, if we pay interest through the issuance of additional
New Notes rather than the payment of cash, the interest rate for
the relevant period is increased to 13 3/8%. We made our
first interest payment on the New Notes, in cash, during June
2003. In December 2003, we made our second interest payment on
the New Notes at the higher interest rate through the issuance
of $6.3 million in principal amount of additional New
Notes, increasing the aggregate principal amount of outstanding
New Notes to $100.6 million as of December 31, 2003.
Subject to compliance with the terms of the New Revolver, we may
redeem the New Notes at any time at a redemption price of 100%
of the outstanding principal amount thereof plus accrued and
unpaid interest. In addition, in the event of a specified change
of control or the sale of our facility in Texas City, Texas, we
are required to offer to repurchase the New Notes at 101% of the
outstanding principal amount thereof plus accrued and unpaid
interest. We are also required to offer to repurchase the New
Notes at 100% of the outstanding principal amount thereof plus
accrued and unpaid interest in the event of certain other sales
of assets.

The indenture governing the New Notes contains
numerous covenants and conditions, including, but not limited
to, restrictions on our ability to incur indebtedness, create
liens, sell assets, make investments, make capital expenditures,
engage in mergers and acquisitions and pay dividends. The
indenture also includes various circumstances and conditions
that would, upon their occurrence and subject in certain cases
to notice and grace periods, create an event of default
thereunder. However, the indenture does not require us to
satisfy any financial ratios or maintenance tests.

On December 19, 2002, we established the New
Revolver with The CIT Group/ Business Credit, Inc., as
administrative agent and a lender, and certain other lenders,
which provides up to $100 million in revolving credit
loans. The New Revolver has an initial term ending on
September 19, 2007. Under the New Revolver, Reorganized
Sterling and Sterling Energy are co-borrowers and are jointly
and severally liable for any indebtedness thereunder. The New
Revolver is secured by first priority liens on all accounts
receivable, inventory and other specified assets owned by
Reorganized Sterling or Sterling Energy, as well as all of the
issued and outstanding capital stock of Sterling Energy.

Borrowings under the New Revolver bear interest,
at our option, at an annual rate of either the Alternate Base
Rate plus 0.75% or the LIBO Rate (as defined in the
New Revolver) plus 2.75%. The Alternate Base Rate is
equal to the greater of the Base Rate as announced
from time to time by JPMorgan Chase Bank in New York, New York
or 0.50% per annum above the latest Federal Funds
Rate (as defined in the New Revolver). Under the New
Revolver, we are also required to pay an aggregate commitment
fee of 0.50% per year (payable monthly) on any unused portion of
the New Revolver. Available credit under the New Revolver is
subject to a monthly borrowing base of 85% of eligible accounts
receivable plus the lesser of $50 million and 65% of
eligible inventory. In addition, the borrowing base for the New
Revolver must exceed outstanding borrowings thereunder by
$8 million at all times. As of December 31, 2003,
total credit available under the New Revolver was limited to
$75.2 million due to these borrowing base limitations. As
of December 31, 2003, we had not borrowed any money under
the New Revolver, although we had $1.8 million in letters
of credit outstanding, leaving unused borrowing capacity under
the New Revolver of $73.4 million.

The New Revolver contains numerous covenants and
conditions, including, but not limited to, restrictions on our
ability to incur indebtedness, create liens, sell assets, make
investments, make capital expenditures, engage in mergers and
acquisitions and pay dividends. The New Revolver also contains a
covenant that requires us to earn a specified amount of earnings
before interest, income taxes, depreciation and amortization on
a monthly basis if, for 15 consecutive days, unused availability
under the New Revolver plus cash on hand is less than
$20 million. The New Revolver includes various
circumstances and conditions that would, upon their occurrence
and subject in certain cases to notice and grace periods, create
an event of default thereunder.

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                
| | ---------------
| | Debt Maturities

The New Notes, which had an aggregate principal
balance of $100.6 million outstanding as of
December 31, 2003, are due on December 19, 2007.

7.     INCOME
TAXES

A reconciliation of federal statutory income
taxes to our effective tax provision (benefit) is as
follows:

|                                                            |  |                      |                        |                |                      |   |              |   |               |  |               |          |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | -------------------- | ---------------------- | -------------- | -------------------- | - | ------------ | - | ------------- |  | ------------- | -------- | - |  | - | ------- | - |  | - | ------- | -
|                                                            |  |                      |                        |                |                     
|                                                            |  | Reorganized Sterling |                        |                | Predecessor Sterling
|                                                            |  |                      |                        |                |                     
|                                                            |  |                      |                        |                |                      |   | Fiscal Year  |   | Fiscal Year  
|                                                            |  |                      |                        | December 20 to |                      |   | October 1 to |   | Ended         |  | Ended        
|                                                            |  | December 31,         |                        | December 31,   |                      |   | December 19, |   | September 30, |  | September 30,
|                                                            |  | 2003                 |                        | 2002           |                      |   | 2002         |   | 2002          |  | 2001         
|                                                            |  |                      |                        |                |                      |   |              |   |               |  |              
|                                                            |  |                      | (Dollars in Thousands)
|Provision (benefit) for income taxes at
    statutory rates |  | $                    | (7,387                 | )              |                      | $ | (831         | ) |               |  | $             | 78,391   |   |  | $ | (18,372 | ) |  | $ | (47,650 | )
|Change in valuation allowance                               |  |                      |                       |                |                      |   |             |   |               |  |               | (148,464 | ) |  |   | 18,371  |   |  |   | 47,106  |  
|Non-deductible expenses                                     |  |                      | 65                     |                |                      |   |             |   |               |  |               |         |   |  |   | 1       |   |  |   | 41      |  
|Non-deductible fresh-start adjustments                      |  |                      |                       |                |                      |   |             |   |               |  |               | 70,073   |   |  |   |        |   |  |   |        |  
|State income taxes                                          |  |                      | (361                   | )              |                      |   | 26           |   |               |  |               | 8        |   |  |   | 125     |   |  |   |        |  
|Other                                                       |  |                      | (201                   | )              |                      |   | (23          | ) |               |  |               |         |   |  |   |        |   |  |   |        |  
|                                                            |  |                      |                        |                |                      |   |              |   |               |  |               |          |   |  |   |         |   |  |   |         |  
|Effective tax provision                                     |  | $                    | (7,884                 | )              |                      | $ | (828         | ) |               |  | $             | 8        |   |  | $ | 125     |   |  | $ | (503    | )
|                                                            |  |                      |                        |                |                      |   |              |   |               |  |               |          |   |  |   |         |   |  |   |         |  

The provision (benefit) for income taxes is
composed of the following:

|                                  |  |                      |                        |                |                      |   |              |   |               |  |               |   |  |  |   |     |  |  |   |      |  
|--------------------------------- |  | -------------------- | ---------------------- | -------------- | -------------------- | - | ------------ | - | ------------- |  | ------------- | - |  |  | - | --- |  |  | - | ---- | -
|                                  |  |                      |                        |                |                     
|                                  |  | Reorganized Sterling |                        |                | Predecessor Sterling
|                                  |  |                      |                        |                |                     
|                                  |  |                      |                        |                |                      |   | Fiscal Year  |   | Fiscal Year  
|                                  |  | Year ended           |                        | December 20 to |                      |   | October 1 to |   | Ended         |  | Ended        
|                                  |  | December 31,         |                        | December 31,   |                      |   | December 19, |   | September 30, |  | September 30,
|                                  |  | 2003                 |                        | 2002           |                      |   | 2002         |   | 2002          |  | 2001         
|                                  |  |                      |                        |                |                      |   |              |   |               |  |              
|                                  |  |                      | (Dollars in Thousands)
|Current federal                   |  | $                    |                       |                |                      | $ |             |   |               |  | $             |  |  |  | $ |    |  |  | $ |     |  
|Deferred federal                  |  |                      | (7,323                 | )              |                      |   | (854         | ) |               |  |               |  |  |  |   |    |  |  |   | (503 | )
|Provincial and state income taxes |  |                      | (561                   | )              |                      |   | 26           |   |               |  |               | 8 |  |  |   | 125 |  |  |   |     |  
|                                  |  |                      |                        |                |                      |   |              |   |               |  |               |   |  |  |   |     |  |  |   |      |  
|Total tax provision (benefit)     |  | $                    | (7,884                 | )              |                      | $ | (828         | ) |               |  | $             | 8 |  |  | $ | 125 |  |  | $ | (503 | )
|                                  |  |                      |                        |                |                      |   |              |   |               |  |               |   |  |  |   |     |  |  |   |      |  

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The components of our deferred income tax assets
and liabilities are summarized below:

|                                   |  |                        |         |      |  |   |         |  
|---------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | -
|                                   |  |                       
|                                   |  | Reorganized Sterling  
|                                   |  |                       
|                                   |  |                       
|                                   |  | December 31,          
|                                   |  |                       
|                                   |  | 2003                   |         | 2002
|                                   |  |                        |         |     
|                                   |  |                       
|                                   |  | (Dollars in Thousands)
|Deferred tax assets:               |  |                        |         |      |  |   |         |  
|Accrued liabilities                |  | $                      | 7,434   |      |  | $ | 5,901   |  
|Accrued postretirement cost        |  |                        | 15,004  |      |  |   | 15,099  |  
|Accrued pension cost               |  |                        | 11,163  |      |  |   | 14,425  |  
|Tax loss and credit carry forwards |  |                        | 13,612  |      |  |   | 5,704   |  
|Allowance for doubtful accounts    |  |                        | 2,401   |      |  |   | 5,279   |  
|                                   |  |                        |         |      |  |   |         |  
|Total deferred tax assets          |  | $                      | 49,614  |      |  | $ | 46,408  |  
|                                   |  |                        |         |      |  |   |         |  
|Deferred tax liabilities:          |  |                        |         |      |  |   |         |  
|Property, plant and equipment      |  | $                      | (81,764 | )    |  | $ | (86,091 | )
|State deferred taxes               |  |                        | (2,291  | )    |  |   | (2,507  | )
|Other                              |  |                        | (683    | )    |  |   | (409    | )
|                                   |  |                        |         |      |  |   |         |  
|Total deferred tax liabilities     |  |                        | (84,738 | )    |  |   | (89,007 | )
|Valuation allowance                |  |                        | (5,704  | )    |  |   | (5,704  | )
|                                   |  |                        |         |      |  |   |         |  
|Net deferred tax liabilities       |  |                        | (90,442 | )    |  |   | (94,711 | )
|Less: current deferred tax assets  |  |                        | 49,614  |      |  |   | 45,897  |  
|                                   |  |                        |         |      |  |   |         |  
|Long-term deferred tax liabilities |  | $                      | (40,828 | )    |  | $ | (48,814 | )
|                                   |  |                        |         |      |  |   |         |  

As of December 31, 2003, we had an available
U.S. operating loss carryforward of approximately
$25 million, which expires during 2024.

8.     EMPLOYEE
BENEFITS

We have established the following benefit plans:



| |                         
| | ------------------------
| | Retirement Benefit Plans

We have non-contributory pension plans, which
cover all salaried and wage employees. The benefits under these
plans are based primarily on years of service and
employees pay near retirement. For previous employees who
were employed as of September 30, 1986, and who were
previously employed by Monsanto, we recognize their Monsanto
pension years of service for purposes of determining benefits
under our plans. For our employees who were employed as of
January 31, 1997, and who (i) were previously employed
by Cytec Industries Inc. and (ii) elected to retire on or
before January 31, 1999, we supplement the standard pension
payable such that the employees total combined pension
from us and from the Cytec Nonbargaining Employees
Retirement Plan equals the amount the employee would have
received had he or she remained an employee of Cytec until
retirement. The estimated liability for such supplements is not
material. Our funding policy is consistent with the funding
requirements of federal law and regulations. Plan assets are
held in a collective trust which consists principally of common
stocks, mutual funds and government and corporate securities.

The expected long-term rate of return on pension
plan assets is a market-related value currently equal to 8%.
Sterlings actual annualized return for the past
9 years (the period we have been with our current
investment manager) is 10.5%.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Pension plan assets are invested in a global
balanced fund managed by an outside investment manager. Within
this global balanced fund, assets are invested 60% in equities
and 40% in bonds, with rebalancing on a continual basis. Our
investment policy is to generate a total return that, over the
long term, provides sufficient assets to fund its liabilities,
reduces risk through diversification of investments within asset
classes and complies with the Employee Retirement Income
Security Act of 1974 (ERISA) by investing in a
manner consistent with ERISAs fiduciary standards.

Information concerning the pension obligation,
plan assets, amounts recognized in our financial statements and
underlying actuarial assumptions is stated below:

|                                                               |                                                  |                        |   |         |   |  |   |         |  
|-------------------------------------------------------------- | ------------------------------------------------ | ---------------------- | - | ------- | - |  | - | ------- | -
|                                                               |                                                  |                       
|                                                               |                                                  | December 31,          
|                                                               |                                                  |                       
|                                                               |                                                  | 2003                   |   | 2002   
|                                                               |                                                  |                        |   |        
|                                                               |                                                  |                       
|                                                               |                                                  | (Dollars in Thousands)
|Change in benefit obligation:                                  |                                                  |                        |   |         |   |  |   |        
|                                                               | Benefit obligation at beginning of year          |                        | $ | 116,818 |   |  | $ | 136,312 |  
|                                                               | Service cost                                     |                        |   | 3,312   |   |  |   | 1,081   |  
|                                                               | Interest cost                                    |                        |   | 7,634   |   |  |   | 2,258   |  
|                                                               | Discontinued operations (see Note 4)             |                        |   |        |   |  |   | (22,878 | )
|                                                               | Actuarial loss                                   |                        |   | 4,179   |   |  |   | 2,107   |  
|                                                               | Benefits paid                                    |                        |   | (7,239  | ) |  |   | (2,062  | )
|                                                               |                                                  |                        |   |         |   |  |   |        
|                                                               | Benefit obligation at end of year                |                        | $ | 124,704 |   |  | $ | 116,818 |  
|                                                               |                                                  |                        |   |         |   |  |   |        
|Change in plan assets:                                         |                                                  |                        |   |         |   |  |   |        
|                                                               | Fair value at beginning of year                  |                        | $ | 66,496  |   |  | $ | 81,882  |  
|                                                               | Discontinued operations (see Note 4)             |                        |   |        |   |  |   | (15,633 | )
|                                                               | Actual return on plan assets                     |                        |   | 9,253   |   |  |   | 1,080   |  
|                                                               | Employer contributions                           |                        |   | 9,199   |   |  |   | 1,229   |  
|                                                               | Benefits paid                                    |                        |   | (7,239  | ) |  |   | (2,062  | )
|                                                               |                                                  |                        |   |         |   |  |   |        
|                                                               | Fair value at end of year                        |                        | $ | 77,709  |   |  | $ | 66,496  |  
|                                                               |                                                  |                        |   |         |   |  |   |        
|Development of net amount recognized:                          |                                                  |                        |   |         |   |  |   |        
|                                                               | Funded status                                    |                        | $ | (46,995 | ) |  | $ | (50,322 | )
|                                                               | Actuarial loss                                   |                        |   | 130     |   |  |   |        |  
|                                                               |                                                  |                        |   |         |   |  |   |        
|                                                               | Net amount recognized                            |                        | $ | (46,865 | ) |  | $ | (50,322 | )
|                                                               |                                                  |                        |   |         |   |  |   |        
|Amounts recognized in the statement of financial
    position: |                                                  |                        |   |         |   |  |   |        
|                                                               | Accrued pension cost                             |                        | $ | (47,116 | ) |  | $ | (50,322 | )
|                                                               | Intangible asset                                 |                        |   |        |   |  |   |        |  
|                                                               | Accumulated other comprehensive income (pre-tax) |                        |   | 251     |   |  |   |        |  
|                                                               |                                                  |                        |   |         |   |  |   |        
|                                                               | Net amount recognized                            |                        | $ | (46,865 | ) |  | $ | (50,322 | )
|                                                               |                                                  |                        |   |         |   |  |   |        
|Weighted-average assumptions:                                  |                                                  |                        |   |         |   |  |   |        
|                                                               | Discount Rate                                    |                        |   | 6.25    | % |  |   | 6.75    | %
|                                                               | Rates of increase in salary compensation level   |                        |   | 5.00    | % |  |   | 5.00    | %

All plans have projected benefit obligations and
accumulated benefit obligation in excess of plan assets at
December 31, 2003. The total accumulated benefit
obligations was $108.1 million as of November 30,

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SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


2003. Estimated contributions for 2004 are
expected to be between $10 million and $15 million, a
portion of which are above the minimum funding requirements.

Net periodic pension costs consist of the
following components:

|                                 |                                                           |                        |   |              |   |                      |   |               |     |               |  |  |   |        |     |  |   |        |      |  
|-------------------------------- | --------------------------------------------------------- | ---------------------- | - | ------------ | - | -------------------- | - | ------------- | --- | ------------- |  |  | - | ------ | --- |  | - | ------ | ---- | -
|                                 |                                                           |                        |   |              |   |                     
|                                 |                                                           | Reorganized Sterling   |   |              |   | Predecessor Sterling
|                                 |                                                           |                        |   |              |   |                     
|                                 |                                                           |                        |   |              |   | Fiscal Year          |   | Fiscal Year  
|                                 |                                                           | Year ended             |   | October 1 to |   |                      |   | Ended         |     | Ended        
|                                 |                                                           | December 31,           |   | December 31, |   |                      |   | September 30, |     | September 30,
|                                 |                                                           | 2003                   |   | 2002         |   |                      |   | 2002          |     | 2001         
|                                 |                                                           |                        |   |              |   |                      |   |               |     |              
|                                 |                                                           | (Dollars in Thousands)
|Components of net pension costs: |                                                           |                        |   |              |   |                      |   |               |     |               |  |  |   |        |     |  |   |       
|                                 | Service cost-benefits earned during the year              |                        | $ | 3,312        |   |                      | $ | 1,081         |     |               |  |  | $ | 3,826  |     |  | $ | 3,596  |     
|                                 | Interest on prior years projected benefit
    obligation |                        |   | 7,634        |   |                      |   | 2,258         |     |               |  |  |   | 7,317  |     |  |   | 7,210  |     
|                                 | Expected return on plan assets                            |                        |   | (5,205       | ) |                      |   | (1,602        | )   |               |  |  |   | (6,536 | )   |  |   | (8,092 | )   
|                                 | Net amortization:                                         |                        |   |              |   |                      |   |               |     |               |  |  |   |        |     |  |   |        |     
|                                 |                                                           | Actuarial loss (gain)  |   |              |  |                      |   |               |    |               |  |  |   |        | 152 |  |   |        | (117 | )
|                                 |                                                           | Prior service cost     |   |              |  |                      |   |               | 203 |               |  |  |   |        | 777 |  |   |        | 778  |  
|                                 |                                                           | Transition liability   |   |              |  |                      |   |               | 425 |               |  |  |   |        | 354 |  |   |        | 373  |  
|                                 | Discontinued operations (see Note 4)                      |                        |   |             |   |                      |   |              |     |               |  |  |   | 1,255  |     |  |   | 662    |     
|                                 | Settlement/curtailment loss                               |                        |   |             |   |                      |   | 63            |     |               |  |  |   | 22     |     |  |   | (862   | )   
|                                 |                                                           |                        |   |              |   |                      |   |               |     |               |  |  |   |        |     |  |   |       
|                                 | Net pension costs                                         |                        | $ | 5,741        |   |                      | $ | 2,428         |     |               |  |  | $ | 7,167  |     |  | $ | 3,548  |     
|                                 |                                                           |                        |   |              |   |                      |   |               |     |               |  |  |   |        |     |  |   |       
|Weighted-average assumptions:    |                                                           |                        |   |              |   |                      |   |               |     |               |  |  |   |        |     |  |   |       
|                                 | Discount Rate                                             |                        |   | 6.75         | % |                      |   | 6.79          | %   |               |  |  |   | 6.79   | %   |  |   | 7.25   | %   
|                                 | Rates of increase in salary compensation level            |                        |   | 5.00         | % |                      |   | 4.92          | %   |               |  |  |   | 4.92   | %   |  |   | 5.37   | %   
|                                 | Expected long-term rate of return on plan assets          |                        |   | 8.00         | % |                      |   | 8.72          | %   |               |  |  |   | 8.72   | %   |  |   | 8.52   | %   

The Transition Period is not presented separately
for Predecessor Sterling and Reorganized Sterling due to
immateriality.



| |                                                
| | -----------------------------------------------
| | Postretirement Benefits Other than
    Pensions

We provide certain health care benefits and life
insurance benefits for retired employees. Substantially all of
our employees become eligible for these benefits at early
retirement age. We accrue the cost of these benefits during the
period in which the employee renders the necessary service.

Health care benefits are currently provided to
employees who retire from us with ten or more years of credited
service. Some of our employees are eligible for postretirement
life insurance. Postretirement health care benefits plans are
contributory. Benefit provisions for most hourly employees are
subject to collective bargaining. In general, retiree health
care benefits are paid as covered expenses are incurred.
Postretirement medical plan deductibles are assumed to increase
at the same rate as long-term health care costs.

Effective April 1, 2003, we amended our
postretirement medical plan to increase the contribution rates
required for coverage. The effect of the amendment as of that
date was a reduction in APBO totaling $13 million. Because
the participants affected by the amendment were all retired, the
negative change to

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


APBO is amortizable into expense over the average
remaining life expectancy of these retirees which is
20.56 years.

On December 8, 2003, the Medicare
Prescription Drug Improvement and Modernization Act of 2003 (the
Act) was passed. The Act introduces a prescription
drug benefit under Medicare (Medicare Part D), as well as a
federal subsidy to sponsors of retiree health care benefit plans
that provide a benefit that is at least actuarially equivalent
to Medicare Part D. In January 2004, the Financial Accounting
Standards Board (the FASB) issued FASB Staff
Position No. FAS 106-1, Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug Improvement and Modernization Act of 2003, which is
effective for interim or annual financial statements of fiscal
years ending after December 7, 2003 and permits a one-time
election to defer accounting for the effects of the Act. In
accordance with the FAS 106-1, we have elected to defer
accounting for the effects of the Act and, as such, any measures
of the postretirement benefit obligation or net periodic
postretirement benefit cost in the financial statements or
accompanying notes do not reflect the effects of the Act.
Specific authoritative guidance on the accounting for the
federal subsidy is pending and that guidance, when issued, could
require us to change previously reported information. However,
we do not believe that the effect of the Act will be material to
our consolidated financial statements.

Information concerning the plan obligation, the
funded status, amounts recognized in our financial statements
and underlying actuarial assumptions are stated below:

|                                                               |                                         |                        |   |         |         |   |       |         |       | 
|-------------------------------------------------------------- | --------------------------------------- | ---------------------- | - | ------- | ------- | - | ----- | ------- | ----- | 
|                                                               |                                         |                       
|                                                               |                                         | December 31,          
|                                                               |                                         |                       
|                                                               |                                         | 2003                   |   | 2002   
|                                                               |                                         |                        |   |        
|                                                               |                                         |                       
|                                                               |                                         | (Dollars in Thousands)
|Change in benefit obligation:                                  |                                         |                        |   |         |         |   |       |        
|                                                               | Benefit obligation at beginning of year |                        | $ | 46,141  |         |   | $     | 45,504  |      
|                                                               | Service cost                            |                        |   | 460     |         |   |       | 115     |      
|                                                               | Interest cost                           |                        |   | 2,336   |         |   |       | 749     |      
|                                                               | Plan amendment                          |                        |   | (13,070 | )       |   |       |        |      
|                                                               | Actuarial loss (gain)                   |                        |   | (220    | )       |   |       | 666     |      
|                                                               | Benefits paid                           |                        |   | (777    | )       |   |       | (893    | )    
|                                                               |                                         |                        |   |         |         |   |       |        
|                                                               | Benefit obligation at end of year       |                        | $ | 34,870  |         |   | $     | 46,141  |      
|                                                               |                                         |                        |   |         |         |   |       |        
|Funded plan assets                                             |                                         | $                      |  |         |         | $ | 3,000 |        
|                                                               |                                         |                        |   |         |         |   |       |        
|Development of net amount recognized:                          |                                         |                        |   |         |         |   |       |        
|                                                               | Funded status                           |                        | $ | (34,870 | )       |   | $     | (43,141 | )    
|                                                               | Unrecognized cost:                      |                        |   |         |         |   |       |         |      
|                                                               |                                         | Actuarial loss         |   |         | 1,151   |   |       |         | 1,371 | 
|                                                               |                                         | Plan amendment         |   |         | (12,593 | ) |       |         |      | 
|                                                               |                                         |                        |   |         |         |   |       |        
|                                                               | Net amount recognized                   |                        | $ | (46,312 | )       |   | $     | (41,770 | )    
|                                                               |                                         |                        |   |         |         |   |       |        
|Amounts recognized in the statement of financial
    position: |                                         |                        |   |         |         |   |       |        
|                                                               | Prepaid OPEB cost                       |                        | $ |        |         |   | $     | 3,000   |      
|                                                               | Accrued OPEB liability                  |                        |   | (46,312 | )       |   |       | (44,770 | )    
|                                                               |                                         |                        |   |         |         |   |       |        
|                                                               | Net amount recognized                   |                        | $ | (46,312 | )       |   | $     | (41,770 | )    
|                                                               |                                         |                        |   |         |         |   |       |        

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Net periodic plan costs consist of the following
components:

|                              |                                              |                        |   |              |                      |   |               |      |               |   |  |   |       |      |   |   |       |      |  
|----------------------------- | -------------------------------------------- | ---------------------- | - | ------------ | -------------------- | - | ------------- | ---- | ------------- | - |  | - | ----- | ---- | - | - | ----- | ---- | -
|                              |                                              |                        |   |              |                     
|                              |                                              | Reorganized Sterling   |   |              | Predecessor Sterling
|                              |                                              |                        |   |              |                     
|                              |                                              |                        |   |              | Fiscal Year          |   | Fiscal Year  
|                              |                                              | Year ended             |   | October 1 to |                      |   | Ended         |      | Ended        
|                              |                                              | December 31,           |   | December 31, |                      |   | September 30, |      | September 30,
|                              |                                              | 2003                   |   | 2002         |                      |   | 2002          |      | 2001         
|                              |                                              |                        |   |              |                      |   |               |      |              
|                              |                                              | (Dollars in Thousands)
|Components of net plan costs: |                                              |                        |   |              |                      |   |               |      |               |   |  |   |       |      |   |   |      
|                              | Service cost                                 |                        | $ | 460          |                      |   | $             | 115  |               |   |  | $ | 480   |      |   | $ | 337   |     
|                              | Interest cost                                |                        |   | 2,336        |                      |   |               | 749  |               |   |  |   | 3,132 |      |   |   | 2,753 |     
|                              | Net amortization:                            |                        |   |              |                      |   |               |      |               |   |  |   |       |      |   |   |       |     
|                              |                                              | Actuarial loss         |   |              |                     |   |               |      | 121           |   |  |   |       | 642  |   |   |       | 619  |  
|                              |                                              | Prior service cost     |   |              |                     |   |               |      | (116          | ) |  |   |       | (463 | ) |   |       | (486 | )
|                              |                                              | Plan amendment         |   |              | (477                 | ) |               |      |              |   |  |   |       |     |   |   |       |     |  
|                              | Discontinued operations (see Note 4)         |                        |   |             |                      |   |               |     |               |   |  |   | 151   |      |   |   | 600   |     
|                              | Curtailment and special termination benefits |                        |   |             |                      |   |               |      |               |   |  |   |      |      |   |   | (457  | )   
|                              |                                              |                        |   |              |                      |   |               |      |               |   |  |   |       |      |   |   |      
|                              | Net plan costs                               |                        | $ | 2,319        |                      |   | $             | 869  |               |   |  | $ | 3,942 |      |   | $ | 3,366 |     
|                              |                                              |                        |   |              |                      |   |               |      |               |   |  |   |       |      |   |   |      
|Weighted-average assumptions: |                                              |                        |   |              |                      |   |               |      |               |   |  |   |       |      |   |   |      
|                              | Discount rate                                |                        |   | 6.25         | %                    |   |               | 6.75 | %             |   |  |   | 6.75  | %    |   |   | 7.25  | %   

The Transition Period is not presented separately
for Predecessor Sterling and Reorganized Sterling due to
immateriality.

The weighted-average annual assumed health care
trend rate is assumed to be 7.5% for 2003. The rate is assumed
to decrease gradually to 5.8% in 2027 and remain level
thereafter. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care
plans. A one percentage point change in assumed health care
trend rates would have the following effects:

|                                                            |  |                        |       |             |  |   |        |  
|----------------------------------------------------------- |  | ---------------------- | ----- | ----------- |  | - | ------ | -
|                                                            |  | 1% Increase            |       | 1% Decrease
|                                                            |  |                        |       |            
|                                                            |  |                       
|                                                            |  | (Dollars in Thousands)
|Effect on total of service and interest cost
    components |  | $                      | 149   |             |  | $ | (141   | )
|Effect on post-retirement benefit obligation                |  |                        | 1,461 |             |  |   | (1,400 | )



| |                            
| | ---------------------------
| | Savings and Investment Plan

Our Sixth Amended and Restated Savings and
Investment Plan covers substantially all employees, including
executive officers. This Plan is qualified under
Section 401(k) of the Internal Revenue Code. Each
participant has the option to defer taxation of a portion of his
or her earnings by directing us to contribute a percentage of
such earnings to the Plan. A participant may direct up to a
maximum of 20% of eligible earnings to this Plan, subject to
certain limitations set forth in the Internal Revenue Code. A
participants contributions become distributable upon the
termination of his or her employment. Beginning October 1,
2000, we began matching 50% of a participants
contributions, to the extent such contributions do not exceed 7%
of such participants base compensation (excluding bonuses,
profit sharing and similar types of compensation). Such
contributions amounted to $0.8 million in 2003,
$0.9 million in fiscal 2002 and $1.1 million in fiscal
2001.



| |                                     
| | ------------------------------------
| | Bonus Plan and Gain Sharing
    Plan

In February 2002, our Board of Directors, upon
recommendation of its Compensation Committee, approved the
establishment of a Bonus Plan and a Gain Sharing Plan. The Bonus
Plan is designed to

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


benefit all qualified salaried employees, while
the Gain Sharing Plan is designed to benefit all qualified
hourly employees. Both plans provide our qualified employees the
opportunity to earn bonuses depending, among other things, our
annual financial performance. No expenses under either of these
plans were incurred in 2003. No expenses for our prior Profit
Sharing Plan were incurred in fiscal 2002 or 2001.



| |                             
| | ----------------------------
| | Key Employee Protection Plan

On January 26, 2000, we instituted our Key
Employee Protection Plan, which has subsequently been amended
several times. We established this Plan to help us retain
certain of our employees and motivate them to continue to exert
their best efforts on our behalf during periods when we may be
susceptible to a change of control, and to assure their
continued dedication and objectivity during those periods. Our
Compensation Committee has designated a select group of
management or highly compensated employees as participants under
our Key Employee Protection Plan, and has established their
respective applicable multipliers and other variables for
determining benefits. Our Compensation Committee is also
authorized to designate additional management or highly
compensated employees as participants under our Key Employee
Protection Plan and set their applicable multipliers. Our
Compensation Committee may also terminate any participants
participation under this Plan on 60 days notice if it
determines that the participant is no longer one of our key
employees.

Under our Key Employee Protection Plan, any
participant under the Plan that terminates his or her employment
for Good Reason or is terminated by us for any
reason other than Misconduct or
Disability within his or her Protection
Period is entitled to benefits under the Plan. A
participants Protection Period commences 180 days
prior to the date on which a specified change of control occurs
and ends either two years or 18 months after the date of
that change of control, depending on the size of the
participants applicable multiplier. A participant may also
be entitled to receive payments under this Plan in the absence
of a change of control if he or she terminates his or her
employment for Good Reason or is terminated by us
for any reason other than Misconduct or
Disability, but in these circumstances his or her
applicable multiplier is reduced by 50%. If a participant
becomes entitled to benefits under our Key Employee Protection
Plan, we are required to provide the participant with a lump sum
cash payment that is determined by multiplying the
participants applicable multiplier by the sum of the
participants highest annual base compensation during the
last three years plus the participants targeted bonus for
the year of termination, and then deducting the sum of any other
separation, severance or termination payments made by us to the
participant under any other plan or agreement or pursuant to
law. A portion of any severance payment under our Key Employee
Protection Plan paid to one of our most highly compensated
employees in connection with a change of control is conditioned
on compliance by the recipient with a non-competition agreement.

In addition to the lump sum payment, the
participant is entitled to receive any accrued but unpaid
compensation, compensation for unused vacation time and any
unpaid vested benefits earned or accrued under any of our
benefit plans (other than qualified plans). Also, for a period
of 24 months (including 18 months of COBRA coverage),
the participant will continue to be covered by all of our life,
health care, medical and dental insurance plans and programs
(other than disability), as long as the participant makes a
timely COBRA election and pays the regular employee premiums
required under our plans and programs and by COBRA. In addition,
our obligation to continue to provide coverage under our plans
and programs to any participant ends if and when the participant
becomes employed on a full-time basis by a third party which
provides the participant with substantially similar benefits.

If any payment or distribution under our Key
Employee Protection Plan to any participant is subject to excise
tax pursuant to Section 4999 of the Internal Revenue Code,
the participant is entitled to receive a gross-up payment from
us in an amount such that, after payment by the participant of
all taxes on the gross-up payment, the amount of the gross-up
payment remaining is equal to the excise tax imposed under

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Section 4999 of the Internal Revenue Code.
However, the maximum amount of any gross-up payment is 25% of
the sum of the participants highest annual base
compensation during the last three years plus the
participants targeted bonus for the year of payment.

We may terminate our Key Employee Protection Plan
at any time and for any reason but any termination does not
become effective as to any participant until 90 days after
we give the participant notice of the termination of the Plan.
In addition, we may amend our Key Employee Protection Plan at
any time and for any reason, but any amendment that reduces,
alters, suspends, impairs or prejudices the rights or benefits
of any participant in any material respect does not become
effective as to that participant until 90 days after we
give him or her notice of the amendment of the Plan. No
termination of our Key Employee Protection Plan, or any of these
types of amendments to the Plan, can be effective with respect
to any participant if the termination or amendment is related
to, in anticipation of or during the pendency of a change of
control, is for the purpose of encouraging or facilitating a
change of control or is made within 180 days prior to any
change of control. Finally, no termination or amendment of our
Key Employee Protection Plan can affect the rights or benefits
of any participant that are accrued under the Plan at the time
of termination or amendment or that accrue thereafter on account
of a change of control that occurred prior to the termination or
amendment or within 180 days after such termination or
amendment.



| |                     
| | --------------------
| | Retention Bonus Plan

On July 13, 2001, our Board of Directors
approved our Retention Bonus Plan, which was subsequently
amended. This Plan was established to help us retain our
employees whose resignations would cause significant disruption
to our operations and whose skills would be particularly
difficult and costly to replace, to improve their morale during
the pendency of our bankruptcy proceedings and to help provide
incentive to these employees to work diligently toward the
resolution of our bankruptcy proceedings. A select group of
management or highly compensated employees were designated as
participants under the plan and their respective benefits were
established. Each participant in the plan was entitled to
payments under the plan on specified dates, unless the
participants employment with us terminated prior to that
payment date for any reason other than a termination by the
participant for Good Reason or a termination by us
for any reason other than Misconduct or
Disability. Payments under the plan were based on
specified percentages of the participants annual
compensation, including payments under our Supplemental Pay
Plan. Each participant who became entitled to payments under the
plan was paid 25% of the total amount payable to that
participant on April 15, 2002, an additional 25% on
October 15, 2002 and the final 50% was paid on
November 20, 2002. We expensed $3 million,
$2 million and $1 million, respectively, during the
period from October 1, 2002 to December 19, 2002,
fiscal 2002 and fiscal 2001, respectively, in connection with
this Plan.



| |                   
| | ------------------
| | Severance Pay Plan

On March 8, 2001, our Board of Directors
approved our Severance Pay Plan, which has subsequently been
amended. This Plan covers all of our non-unionized employees and
was established to help us retain these employees by assuring
them that they will receive some compensation in the event that
their employment is adversely affected in specified ways. Under
our Severance Pay Plan, any participant that terminates his or
her employment for Good Reason or is terminated by
us for any reason other than Misconduct or
Disability is entitled to benefits under the plan.
If a participant becomes entitled to benefits under the plan, we
are required to provide the participant with a lump sum cash
payment in an amount equivalent to two weeks of such
participants base salary for each credited year of
service, with a maximum payment of one years base salary.
The amount of this lump sum payment is reduced, however, by the
amount of any other separation, severance or termination
payments made by us to the participant under any other plan or
agreement, including our Key Employee Protection Plan, or
pursuant to law.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


In addition to the lump sum payment, for a period
of six months after the participants termination date, the
COBRA premium required to be paid by such participant for
coverage under our medical and dental plans may not be increased
beyond that required to be paid by active employees for similar
coverage under those plans, as long as the participant makes a
timely COBRA election and pays the regular employee premiums
required under those plans and otherwise continues to be
eligible for coverage under those plans.

We may terminate or amend our Severance Pay Plan
at any time and for any reason but no termination or amendment
of our Severance Pay Plan can affect the rights or benefits of
any participant that are accrued under the plan at the time of
termination or amendment.



| |                        
| | -----------------------
| | Supplemental Bonus Plan

On July 13, 2001, our Board of Directors
approved our Supplemental Bonus Plan, which was subsequently
amended. This Plan was designed to help us retain certain of our
employees during the pendency of our bankruptcy proceedings and
provide us with the ability to reward our employees who made
extraordinary contributions and personal sacrifices in
connection with our bankruptcy proceedings. Under our
Supplemental Bonus Plan, our Board had the ability to designate
employees as participants under the plan and determine the
amount payable to those participants, subject to an overall
limit of $1.4 million in payments. Approximately
$0.8 million was expensed during fiscal 2002 and paid on
November 20, 2002.



| |                      
| | ---------------------
| | Supplemental Pay Plan

On March 8, 2001, our Board of Directors
approved our Supplemental Pay Plan. Historically, we have paid
our senior level employees below-market salaries with the
opportunity to earn above-market compensation through stock
based incentives and significant bonuses in years when we
achieve targeted levels of financial performance. Due to our
financial difficulties at that time, the opportunity to earn
additional compensation through these programs was significantly
reduced, if not entirely eliminated. As a result, we established
this plan to address the concern that the overall compensation
provided to our senior level employees would always be
below-market and, consequently, not adequate to retain these
employees or attract new highly-qualified employees. A select
group of management or highly compensated employees was
designated as participants under this Plan and their respective
benefits were established. Each payment under this Plan was a
specified percentage of the participants annual base
salary for fiscal 2001, and payments were made on or before
the tenth day after the last day of each calendar quarter.
Payments of $2 million were made pursuant to this Plan
before the Plan was terminated effective June 30, 2003.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                          
| | -------------------------
| | Outstanding Stock Options

A summary of our stock option activity as of and
for the year ended December 31, 2003 is presented below:

|                                 |                                    |        |         |           |  |   |       |  | 
|-------------------------------- | ---------------------------------- | ------ | ------- | --------- |  | - | ----- |  | 
|                                 |                                    |        |         | Weighted-
|                                 |                                    |        |         | average  
|                                 |                                    |        |         | exercise 
|                                 |                                    | Shares |         | price    
|                                 |                                    |        |         |          
|Outstanding at beginning of year |                                    |        |        |           |  | $ |      | 
|Granted                          |                                    |        | 348,500 |           |  |   | 31.60 | 
|Forfeited                        |                                    |        |        |           |  |   |      | 
|                                 |                                    |        |         |           |  |   |       | 
|Outstanding at end of year       |                                    |        | 348,500 |           |  | $ | 31.60 | 
|                                 |                                    |        |         |           |  |   |       | 
|                                 | Options exercisable at end of year |        |         |          |  |   |       |  | 
|                                 |                                    |        |         |           |  |   |       | 

All outstanding options at December 31, 2003
have an exercise price of $31.60.

The fair value of each grant is estimated on the
date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions:

|                                                                   |  |      |        | 
|------------------------------------------------------------------ |  | ---- | ------ | 
|                                                                   |  | 2003
|                                                                   |  |     
|Expected life (years)                                              |  |      | 10.0   | 
|Expected volatility                                                |  |      | 42.0%  | 
|Expected dividend yield                                            |  |      |       | 
|Risk-free interest rate                                            |  |      | 3.85%  | 
|Weighted-average fair value of options
    granted during the year |  |      | $18.58 | 

We account for our stock-based compensation
arrangements using the intrinsic value method in accordance with
the provisions of APB 25, and related interpretations. All stock
options issued under our 2002 Stock Plan were granted with
exercise prices at estimated fair value at the time of the
grant. Therefore no compensation expense has been recognized
under APB 25.

Prior to December 6, 2002, all issued and
outstanding shares of Predecessor Sterlings capital stock
were held by Holdings and, accordingly, prior periods are not
presented.

9.     COMMITMENTS
AND CONTINGENCIES



| |                  
| | -----------------
| | Product Contracts

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



| |                  
| | -----------------
| | Lease Commitments

We have entered into various non-cancelable
long-term operating leases. Future minimum lease commitments at
December 31, 2003, are as follows: 2004 
$0.3 million; 2005  $0.3 million;
2006  $0.3 million, 2007 
$0.3 million; 2008  $0.3 million and
thereafter  $1.4 million.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                         
| | ------------------------
| | Environmental and Safety

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 and 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
manufacture, handling, processing, distribution and use of our
chemical products and, if so affected, our business and
operations 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 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.
We continue to participate in Responsible Care® initiatives
as a part of our membership in several trade groups, which are
partner associations in the American Chemistry Council in the
United States. Notwithstanding our efforts and beliefs, a
business risk inherent in 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 our business operations and
facilities generally are operated in compliance with all
applicable environmental and 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 and 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.

Our operating expenditures for environmental
matters, mostly waste management and compliance of our
continuing operations, were approximately $26 million in
2003 and approximately $25 million for fiscal 2002. We also
spent approximately $3 million for environmentally related
capital projects in 2003 and $1 million for these types of
capital projects in fiscal 2002. In 2004, we anticipate spending
approximately $9 million for capital projects related to
waste management, incident prevention and environmental
compliance. This increase is primarily attributable to capital
projects associated with reductions of nitrogen oxide emissions
mandated by the Texas Commission for Environmental Quality
(which we refer to as the TCEQ) under the State Implementation
Plan (the SIP) for compliance with the ozone
provisions of the Clean Air Act discussed below. We do not
expect to make any capital expenditures in 2004 related to
remediation of environmental conditions

Air emissions from our Texas City facility are
subject to certain permit requirements and self-implementing
emission limitations and standards under state and federal laws.
Our Texas City facility is located in an area that the
Environmental Protection Agency (EPA) has classified
as not having attained the ambient air quality standards for
ozone, which is controlled by direct regulation of volatile
organic compounds and nitrogen oxide. The TCEQ has imposed
strict requirements on regulated facilities, including our Texas
City facility, to ensure that the air quality control region
will achieve the ambient air quality standards for ozone. Our
Texas City facility is subject to the federal governments
June 1997 National Ambient Air Quality Standards, which lower
the ozone and particulate matter threshold for attainment. Local
authorities also may impose new ozone and particulate matter
standards. Compliance with these stricter standards may
substantially increase our future nitrogen oxide, volatile
organic

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


compounds and particulate matter control costs,
the amount and full impact of which cannot be determined at this
time. On December 13, 2002, the TCEQ adopted a revised SIP
for compliance with the ozone provisions of the Clean Air Act.
The SIP is currently being reviewed by the EPA, which is
expected to make further revisions to these rules. Under the
current SIP, we would be required to reduce emissions of
nitrogen oxide at our Texas City facility by approximately 80%
by the end of 2007. The current rule also requires monitoring of
emissions of highly reactive volatile organic carbons
(HRVOCs), such as ethylene and propylene, by the end
of 2005, and imposes a site-wide cap on emissions of HRVOCs in
2006. We believe that we would need to make between
$20 million and $25 million in capital improvements in
order to comply with all of these new regulations. We anticipate
that the majority of these capital expenditures and other
expenses would need to be incurred over a four-year period
beginning January 1, 2004. Under certain of our production
agreements, we would be able to recover a small portion of these
costs from them. We are currently evaluating several alternative
methods of reducing nitrogen oxide emissions at our Texas City
facility that would either require less capital expenditures or
result in energy savings that would, over a period of years,
more than offset the initial capital expenditures. However, we
cannot give any assurances that any alternative methods will be
available to us or that, even if available, these alternative
methods would reduce the amount of capital expenditures required
to be made by a meaningful amount.

To reduce the risk of offsite consequences from
unanticipated events, we acquired a greenbelt buffer zone
adjacent to our Texas City facility in 1991. We also participate
in a regional air monitoring network to monitor ambient air
quality in the Texas City community.



| |                  
| | -----------------
| | Legal Proceedings

As previously discussed, the Debtors filed
voluntary petitions for reorganization under Chapter 11 on
July 16, 2001. As a result of the commencement of the
Chapter 11 cases, an automatic stay was imposed against the
commencement or continuation of legal proceedings against the
Debtors outside of the Bankruptcy Court. Claimants with alleged
claims against the Debtors were required to assert their claims
in the Chapter 11 cases by timely filing a proof of claim,
to which the Debtors were allowed to file an objection and seek
a determination from the Bankruptcy Court as to whether such
claims were allowable. Claimants who desired to liquidate their
claims in legal proceedings outside of the Bankruptcy Court were
required to obtain relief from the automatic stay by order of
the Bankruptcy Court before doing so. If such relief was
granted, the automatic stay remained in effect with respect to
the collection of liquidated claim amounts. As a general rule,
all claims against the Debtors that sought a recovery from
assets of the Debtors estates have been addressed in the
Chapter 11 cases and have been or will be paid only
pursuant to the terms of the Plan of Reorganization or
negotiated settlements.

A few issues remain outstanding before the
Bankruptcy Court related to the allowability and classification
of certain claims. We do not believe that the outcome of any of
these issues 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.



| |  |                      
| |  | ---------------------
| |  | Ethylbenzene Release.

On April 1, 1998, a chemical leak occurred
when a line failed in the ethylbenzene unit at our Texas City
facility. The released chemicals included ethylbenzene, benzene,
polyethylbenzene and hydrochloric acid. We do not believe that
any serious injuries were sustained, although a number of people
sought medical examinations at local hospitals after a
precautionary alert was given to neighboring communities. Five
lawsuits and two additional interventions were filed against the
Debtors involving approximately 571 plaintiffs and intervenors
who sought unspecified amounts of damages. The lawsuit listed
below, which involves only one remaining plaintiff and which
seeks damages for personal injury, is the only remaining lawsuit
related to this release.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

We have settled the Olivia Elliscase and
have obtained approval of the settlement from the Bankruptcy
Court. This settlement did not have a material impact on our
financial statements. A Motion to Dismiss will be filed on
behalf of the one remaining plaintiff and is expected to be
approved by the judge in that case in the near future. To the
extent that the lawsuit seeks a recovery from assets of the
Debtors estates, the claim has been addressed in the
Chapter 11 cases and will be paid only pursuant to the
terms of the Plan of Reorganization or a negotiated settlement.

Other Claims.We are
subject to various other claims and legal actions that arise in
the ordinary course of our business. Claims and legal actions
against the Debtors that existed as of the Chapter 11
filing date are subject to the discharge injunction provided for
in the Plan of Reorganization, and recoveries sought thereon
from assets of the Debtors are subject to the terms of the Plan
of Reorganization.

10.     SALES
INFORMATION

Sales to major customers constituting 10% or more
of total revenues and export sales from continuing operations
were as follows:

|                 |                              |                      |   |                |                        |                      |   |              |   |               |  |               |   |        |   |  |   |         |   |  |   |         |  
|---------------- | ---------------------------- | -------------------- | - | -------------- | ---------------------- | -------------------- | - | ------------ | - | ------------- |  | ------------- | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                 |                              |                      |   |                |                        |                     
|                 |                              | Reorganized Sterling |   |                |                        | Predecessor Sterling
|                 |                              |                      |   |                |                        |                     
|                 |                              |                      |   |                |                        |                      |   | Fiscal Year  |   | Fiscal Year  
|                 |                              |                      |   | December 20 to |                        |                      |   | October 1 to |   | Ended         |  | Ended        
|                 |                              | December 31,         |   | December 31,   |                        |                      |   | December 19, |   | September 30, |  | September 30,
|                 |                              | 2003                 |   | 2002           |                        |                      |   | 2002         |   | 2002          |  | 2001         
|                 |                              |                      |   |                |                        |                      |   |              |   |               |  |              
|                 |                              |                      |   |                | (Dollars in Thousands)
|Major Customers: |                              |                      |   |                |                        |                      |   |              |   |               |  |               |   |        |   |  |   |         |   |  |   |        
|                 | BP p.l.c. and subsidiaries   |                      | $ | 93,061         |                        |                      | $ | 3,595        |   |               |  |               | $ | 14,049 |   |  | $ | 60,095  |   |  | $ | 86,360  |  
|                 | Customer B                   |                      |   | 69,533         |                        |                      |   | *            |   |               |  |               |   | *      |   |  |   | *       |   |  |   | *       |  
|Export Sales:    |                              |                      |   |                |                        |                      |   |              |   |               |  |               |   |        |   |  |   |         |   |  |   |        
|                 | Export revenues              |                      | $ | 224,595        |                        |                      | $ | 3,715        |   |               |  |               | $ | 15,996 |   |  | $ | 131,701 |   |  | $ | 181,925 |  
|                 | Percentage of total revenues |                      |   | 38             | %                      |                      |   | 30           | % |               |  |               |   | 16     | % |  |   | 34      | % |  |   | 24      | %



---



|  |                                                                                                         
|- | --------------------------------------------------------------------------------------------------------
|* | Does not comprise more than 10% of total revenue
    for the periods indicated, therefore not presented.

11.     FINANCIAL
INSTRUMENTS



| |                       
| | ----------------------
| | Concentrations of Risk

We sell our products primarily to companies
involved in the petrochemicals industry. We perform ongoing
credit evaluations of our customers and generally do not require
collateral for accounts receivable. However, letters of credit
are required by us on many of our export sales. Historically,
our credit losses have been minimal.

We maintain cash deposits with major banks, which
from time to time may exceed federally insured limits. We
periodically assess the financial condition of these
institutions and believe that the likelihood of any possible
loss is minimal.



| |            
| | -----------
| | Investments

It is our policy to invest our excess cash in
investment instruments or securities whose value is not subject
to market fluctuations, such as certificates of deposit,
repurchase agreements or Eurodollar deposits with domestic or
foreign banks or other financial institutions. Other permitted
investments include

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


commercial paper of major United States
corporations with ratings of A1 by Standard & Poors
Ratings Group or P1 by Moodys Investor Services, Inc.,
loan participations of major United States corporations with a
short term credit rating of A1/ P1 and direct obligations of the
United States Government or its agencies.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The carrying amounts reflected in the
consolidated balance sheets for cash and cash equivalents,
accounts receivable, accounts payable and certain accrued
liabilities approximate fair value due to the short maturities
of these instruments. As of December 31, 2003, the fair
value of our long-term debt was $90.5 million based on its
quoted price.

12.     CAPITAL
STOCK

Under our Certificate of Incorporation, we are
authorized to issue 10,125,000 shares of capital stock,
consisting of 10,000,000 shares of common stock, par value $0.01
per share, and 125,000 shares of preferred stock, par value
$0.01 per share. In connection with the Plan of Reorganization
and the merger of Holdings into Predecessor Sterling, we issued
a total of 2,825,000 shares of common stock. Subject to
applicable law and the provisions of our Certificate of
Incorporation, the indenture governing the New Notes and the New
Revolver, dividends may be declared on our shares of capital
stock at the discretion of our Board of Directors and may be
paid in cash, in property or in shares of our capital stock.

Upon the effective date of the Plan of
Reorganization, we authorized 25,000 shares and issued 2,175
shares of our Series A Convertible Preferred Stock
(Series A Preferred Stock). Each share of
Series A Preferred Stock is convertible at the option of
the holder thereof at any time into 1,000 shares of our common
stock, subject to adjustments. The Series A Preferred Stock
has a cumulative dividend rate of 4% per quarter, payable in
additional shares of Series A Preferred Stock in arrears on
the first Business Day of each calendar quarter. As our shares
of Series A Preferred Stock are convertible into shares of
our Common Stock (currently on a one to 1,000 share basis), each
dividend paid in additional shares of our Series A
Preferred Stock has a dilutive effect on our shares of Common
Stock. Since the initial issuance of Series A Preferred
Stock, we have issued an additional 383.826 shares of our
Series A Preferred Stock (convertible into 383,826 shares
of our Common Stock) in dividends.

Our Series A Preferred Stock carries a
liquidation preference of $13,793.11 per share, subject to
adjustments. We may redeem all or any number of our shares of
Series A Preferred Stock at any time after
December 19, 2005, at a redemption price determined in
accordance with Certificate of Designations, Preferences, Rights
and Limitations of our Series A Preferred Stock, provided
that the current equity value of our capital stock issued on the
effective date of the Plan of Reorganization exceeds specified
levels. The holders of our Series A Preferred Stock may
elect to have us redeem all or any of their shares of
Series A Preferred Stock following a specified change of
control at a redemption price equal to the greater of



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the liquidation preference for such shares (plus
    accrued and unpaid dividends), or                                                                                                                                                                                                                                                                                                                                    
|
| |  | in the event of a merger or consolidation, the
    fair market value of the consideration that would have been
    received in such merger or consolidation in respect of the
    shares of our common stock into which such shares of
    Series A Preferred Stock were convertible immediately prior
    to such merger or consolidation had such shares of Series A
    Preferred Stock been converted prior thereto or
|
| |  | in the event of some other specified change of
    control, the current market value of the shares of our common
    stock into which such shares of Series A Preferred Stock
    were convertible immediately                                                                                                                                                                                                            

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STATEMENTS  (Continued)




| |  |                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | prior to such change of control had such shares
    of Series A Preferred Stock been converted prior thereto
    (plus accrued and unpaid dividends).

Upon the effective date of our Plan of
Reorganization, we also issued warrants (the
Warrants) to purchase, in the aggregate, 949,367
shares of common stock. Each Warrant represents the right, at
any time on or before December 19, 2008, to purchase one
share of our common stock at an exercise price of $52 per share
(subject to adjustments).

13.     RELATED PARTY
TRANSACTIONS

Resurgence Asset Management, L.L.C.
(Resurgence) has beneficial ownership of a
substantial majority of the voting power of our equity
securities due to its investment and disposition authority over
securities owned by its and its affiliates managed funds
and accounts. Currently, Resurgence has beneficial ownership of
over 98% of our Series A Preferred Stock and over 63% of
our Common Stock, representing ownership of almost 79% of the
total voting power of our equity. Each share of our
Series A Preferred Stock is convertible at the option of
the holder thereof at any time into 1,000 shares of our Common
Stock, subject to adjustments. The holders of our Series A
Preferred Stock are entitled to designate a number of our
Directors roughly proportionate to their overall equity
ownership, but in any event not less than a majority of our
Directors as long as they hold in the aggregate at least 35% of
the total voting power of our equity. As a result, these holders
have the ability to control our management, policies and
financing decisions, elect a majority of our Board and control
the vote on all matters presented to a vote of our stockholders.
In addition, our shares of Series A Preferred Stock, almost
all of which are beneficially owned by Resurgence, carry a
cumulative dividend rate of 4% per quarter, payable in
additional shares of Series A Preferred Stock. Each
dividend paid in additional shares of our Series A
Preferred Stock has a dilutive effect on our shares of Common
Stock and increases the percentage of the total voting power of
our equity beneficially owned by Resurgence. Since the initial
issuance of our Series A Preferred Stock, we have issued an
additional 383.826 shares of our Series A Preferred Stock
(convertible into 383,826 shares of our common stock) in
dividends, which represents in excess of 7% of the current total
voting power of our equity securities. Five of our directors,
Messrs. James B. Rubin, Byron J. Haney, Marc S. Kirschner,
Robert T. Symington and Keith R. Whittaker, are employed by
Resurgence. Pursuant to established policies of Resurgence, all
director compensation earned by Messrs Rubin, Haney, Kirschner,
Symington and Whittaker is paid to Resurgence. During 2003, we
paid Resurgence an aggregate amount equal to $185,500 related to
director compensation along with reimbursement of an immaterial
amount of direct, out-of-pocket expenses incurred in connection
with services as directors. During the period October 1 to
December 19, 2002, with the approval of the Bankruptcy
Court, we made payments totaling approximately $1 million
to Resurgence in reimbursement of certain expenses incurred by
Resurgence in its role as the Investor in our Plan of
Reorganization and in accordance with our contractual
obligations.

14.     NEW
ACCOUNTING STANDARDS

In July 2001, the FASB 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 and also applies to entities
emerging from bankruptcy. SFAS No. 142, which was effective
for fiscal periods beginning after December 15, 2001,
requires that an intangible asset that is acquired 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 141 was applied through the implementation of
fresh-start accounting under the provisions of SOP 90-7.
The adoption of SFAS No. 142 did not have a significant
impact on our financial statements.

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143, which we applied beginning
on October 1, 2002, addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. There was not a material impact on our financial
statements upon the adoption of SFAS No. 143.

In August 2001, the FASB 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 was effective for us on
October 1, 2002. Accordingly, we reported the sale of our
pulp chemicals and acrylic fibers businesses that occurred on
December 19, 2002 as discontinued operations in our
consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. One of the major changes under this statement
impacts the accounting for the classification of gains and
losses from the extinguishment of debt. We adopted SFAS
No. 145 as part of our fresh-start accounting (see
Note 3) upon our emergence from bankruptcy on
December 19, 2002. As a result, we have classified gains
and losses from our debt restructuring as a component of income
(loss) from continuing operations in the accompanying
consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146,
Accounting For Costs Associated with Exit or Disposal
Activities. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. We
adopted SFAS No. 146 through the implementation of
fresh-start accounting under the provisions of SOP 90-7 and
it did not have an impact on our financial statements.

In January 2003, the FASB issued SFAS
No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure. SFAS No. 148 amends
FASB SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition
for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and
interim financial statements of the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for
fiscal years beginning after December 15, 2002. We adopted
SFAS No. 148 through the implementation of fresh-start
accounting under the provisions of SOP 90-7 and it did not
have an impact on our financial statements. The disclosure
requirements of SFAS No. 148 have been applied in the
accompanying consolidated financial statements.

In January 2003, the FASB released Interpretation
No. 46, Consolidation of Variable Interest
Entities (FIN 46), which was subsequently
revised in December 2003. FIN 46 addresses whether equity
investments should be consolidated based on guidelines
associated with what party has financial risks and controlling
financial interest. We adopted FIN 46 for our fiscal year
ended December 31, 2003 and it did not have an impact on
our financial statements.

In May 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS No. 149 is intended to
result in more consistent reporting of contracts as either
freestanding derivative instruments subject to
Statement 133 in its entirely, or as hybrid instruments
with debt host contracts and embedded derivative features. SFAS
No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did
not have an impact on our financial statements.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS
No. 150 requires certain financial instruments that embody
obligations of the issuer and have characteristics of both
liabilities and equity to be classified as

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STERLING CHEMICALS, INC. AND
SUBSIDIARIES




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


liabilities. SFAS No. 150 is effective for
all financial instruments created or modified after May 31,
2003 and to other instruments at the beginning of the first
interim period beginning after June 15, 2003. The adoption
of SFAS No. 150 did not have an impact on our financial
statements.

In December 2003, the FASB revised SFAS
No. 132, Employers Disclosures about Pensions
and other Postretirement Benefits. The revised statement
retains the disclosures required by the original SFAS
No. 132 and requires additional disclosures describing the
types of plan assets, investment strategy, measurement date,
plan obligations, cash flows and components of net periodic
benefit cost recognized during interim periods. The revised
statement is effective for financial statements with fiscal
years ending after December 15, 2003. On December 8,
2003, the Medicare Prescription Drug Improvement and
Modernization Act of 2003 (the Act) was passed. The
Act introduces a prescription drug benefit under Medicare
(Medicare Part D), as well as a federal subsidy to sponsors
of retiree health care benefit plans that provide a benefit that
is at least actuarially equivalent to Medicare Part D. In
January 2004, the FASB issued FASB Staff Position No.
FAS 106-1, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug Improvement and
Modernization Act of 2003, which is effective for interim
or annual financial statements of fiscal years ending after
December 7, 2003 and permits a one-time election to defer
accounting for the effects of the Act. In accordance with the
FAS 106-1, we have elected to defer accounting for the
effects of the Act and, as such, any measures of the
postretirement benefit obligation or net periodic postretirement
benefit cost in the financial statements or accompanying notes
do not reflect the effects of the Act. Specific authoritative
guidance on the accounting for the federal subsidy is pending
and that guidance, when issued, could require us to change
previously reported information. However, we do not believe that
the effect of the Act will be material to our consolidated
financial statements. The disclosure requirements of SFAS
No. 132 have been applied in the accompanying consolidated
financial statements.

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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of

Sterling Chemicals, Inc.:


We have audited the accompanying consolidated
balance sheets of Sterling Chemicals, Inc. and subsidiaries (the
Company) as of December 31, 2003 and 2002
(Successor Company balance sheets) and the related consolidated
statements of operations, changes in stockholders equity
(deficiency in assets) and cash flows for the year ended
December 31, 2003, and the period from December 20,
2002 to December 31, 2002 (Successor Company operations)
and for the period from October 1, 2002 to
December 19, 2002 and the fiscal years ended September 30,
2002 and 2001 (Predecessor Company operations). These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the financial
statements, on November 20, 2002, the Bankruptcy Court
entered an order confirming the plan of reorganization which
became effective after the close of business on
December 19, 2002. Accordingly, the accompanying financial
statements have been prepared in conformity with AICPA Statement
of Position 90-7, Financial Reporting for Entities in
Reorganization Under the Bankruptcy Code, for the
Successor Company as a new entity with assets, liabilities and a
capital structure having carrying values not comparable with
prior periods as described in Notes 1 and 3.

In our opinion, the Successor Company financial
statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2003
and 2002, and the results of its operations and its cash flows
for the year ended December 31, 2003, and for the period
from December 20, 2002 to December 31, 2002 in
conformity with accounting principles generally accepted in the
United States of America. Further, in our opinion, the
Predecessor Company financial statements referred to above
present fairly, in all material respects, the results of its
operations and its cash flows for the period from
October 1, 2002 to December 19, 2002 and the fiscal
years ended September 30, 2002 and 2001 in conformity with
accounting principles generally accepted in the United States of
America.

As disclosed in Note 1 to the financial
statements, in December 2002, the Company changed its fiscal
year-end from September 30 to December 31.



| |                      
| | ---------------------
| | DELOITTE & TOUCHE LLP

Houston, Texas

March 19, 2004


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STERLING CHEMICALS, INC. AND
SUBSIDIARIES

SUPPLEMENTAL FINANCIAL INFORMATION

QUARTERLY FINANCIAL DATA (unaudited)

|                                                                      |  |                                               |             |         |  |         |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------- |  | --------------------------------------------- | ----------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                      |  |                                               |             | First   |  | Second  |         | Third   |  | Fourth 
|                                                                      |  | Year                                          |             | Quarter |  | Quarter |         | Quarter |  | Quarter
|                                                                      |  |                                               |             |         |  |         |         |         |  |        
|                                                                      |  |                                              
|                                                                      |  | (Dollars in Thousands, Except Per Share Data)
|Revenues                                                              |  |                                               | 2003        |         |  | $       | 122,368 |         |  | $       | 120,610 |   |  | $ | 160,110 |   |  | $ | 187,635 |  
|                                                                      |  |                                               | Fiscal 2002 |         |  |         | 63,355  |         |  |         | 61,922  |   |  |   | 136,392 |   |  |   | 120,132 |  
|Gross profit (loss)                                                   |  |                                               | 2003        |         |  |         | (2,125  | )       |  |         | (9,299  | ) |  |   | 7,060   |   |  |   | 5,347   |  
|                                                                      |  |                                               | Fiscal 2002 |         |  |         | (4,210  | )       |  |         | (3,170  | ) |  |   | 17,883  |   |  |   | 17,143  |  
|Net income (loss) from continuing
    operations(1)                   |  |                                               | 2003        |         |  |         | (3,540  | )       |  |         | (9,775  | ) |  |   | 1,535   |   |  |   | (1,443  | )
|                                                                      |  |                                               | Fiscal 2002 |         |  |         | (23,204 | )       |  |         | (22,676 | ) |  |   | (484    | ) |  |   | (6,252  | )
|Income (loss) from discontinued operations(2)                         |  |                                               | 2003        |         |  |         | (634    | )       |  |         | (342    | ) |  |   |        |   |  |   |        |  
|                                                                      |  |                                               | Fiscal 2002 |         |  |         | 8,517   |         |  |         | 7,314   |   |  |   | 7,427   |   |  |   | (6,628  | )
|Net income (loss) attributable to common
    stockholders(3)          |  |                                               | 2003        |         |  |         | (5,381  | )       |  |         | (11,372 | ) |  |   | 230     |   |  |   | (2,801  | )
|Net income (loss) per share of common stock,
    basic and diluted(3) |  |                                               | 2003        |         |  |         | (1.90   | )       |  |         | (4.03   | ) |  |   | 0.08    |   |  |   | (0.99   | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We incurred $17.0 million in reorganization
    items in fiscal 2002 as a result of our Chapter 11
    proceedings. Contractual interest expense not paid or accrued
    was $49 million in fiscal 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) | Pursuant to the Plan of Reorganization, on
    December 19, 2002, the Debtors pulp chemicals
    business was sold to Superior Propane for approximately $373
    million and the Debtors acrylic fibers business was sold
    to local management of that business for nominal consideration.
    In accordance with SFAS No. 144, Accounting for the
    Impairment and Disposal of Long Lived Assets, we have
    reported the operating results of these businesses as
    discontinued operations in the consolidated statement of
    operations and cash flows for Predecessor Sterling, and the
    assets and liabilities of these businesses have been presented
    separately as assets held for sale and liabilities related to
    discontinued operations in Predecessor Sterlings
    consolidated balance sheet.
|   
|(3) | In fiscal 2002, all issued and outstanding shares
    of Predecessor Sterlings capital stock were held by
    Holdings and, accordingly, net income (loss) attributable to
    common stockholders and per share data are not presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             






|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial
    Disclosure.

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission, and
that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Management necessarily applied
its judgment in assessing the costs and benefits of such
controls and procedures which, by their nature, can provide only
reasonable assurance regarding managements control
objectives.

We carried out an evaluation, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, on the effectiveness of the design and

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##### Table of Contents



operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15, as of the
end of the fiscal period covered by this report on
Form 10-K. Based upon that evaluation, each of our Chief
Executive Officer and our Chief Financial Officer concluded that
our disclosure controls and procedures are effective in timely
alerting them to material information relating to us (including
our consolidated subsidiaries) required to be disclosed in our
Exchange Act reports. In connection with our evaluation, no
change was identified in our internal control over financial
reporting that occurred during the fourth quarter of 2003 that
has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Reference is made to the information responsive
to Item 10 of this Part III contained in our definitive
proxy statement for our 2004 Annual Meeting of Stockholders
which is hereby incorporated herein by reference in response to
this item.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Reference is made to the information responsive
to Item 11 of this Part III contained in our definitive
proxy statement for our 2004 Annual Meeting of Stockholders
which is hereby incorporated herein by reference in response to
this item.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Reference is made to the information responsive
to Item 12 of this Part III contained in our definitive
proxy statement for our 2004 Annual Meeting of Stockholders
which is hereby incorporated herein by reference in response to
this item.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Reference is made to the information responsive
to Item 13 of this Part III contained in our definitive
proxy statement for our 2004 Annual Meeting of Stockholders
which is hereby incorporated herein by reference in response to
this item.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Reference is made to the information responsive
to Item 14 of this Part III contained in our definitive
proxy statement for our 2004 Annual Meeting of Stockholders
which is hereby incorporated herein by reference in response to
this item.



PART IV






|         |                                                                                  
|-------- | ---------------------------------------------------------------------------------
|Item 15. | Exhibits, Consolidated Financial Statement
    Schedules and Reports on Form 8-K.

(a) Financial Statements, Financial
Statement Schedules and Exhibits.



| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Consolidated Financial Statements. See
    Item 8. Financial Statements and Supplementary
    Data  Index to Financial Statements.                                                                                                                                                             
|
| | 2. Consolidated Financial Statement
    Schedules. All schedules for which provision is made in
    Regulation S-X either are not required under the related
    instruction or are inapplicable and, therefore, have been
    omitted.                                                              
|
| | 3. Exhibits. See the Exhibit Index for
    a list of those exhibits filed herewith, which index also
    includes and identifies management contracts or compensatory
    plans or arrangements required to be filed as exhibits to this
    Form 10-K by Item 601(b)(10)(iii) of
    Regulation S-K.

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##### Table of Contents



(b) Reports on Form 8-K.



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. On December 12, 2003, we filed a
    Current Report on Form 8-K reporting Items 5 and 7
    related to the settlement of certain disputes with Monsanto
    Company and the planned restart of the DSIDA production facility.

(c) Exhibit index.

|        |       |  |  |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | ----- |  |  | ---------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                       
|Number  |       |  |  | Description of Exhibit
|        |       |  |  |                       
|        | 2.1   |  |  |                       |  | Certificate of Ownership and Merger merging
    Sterling Chemicals Holdings, Inc. into Sterling Chemicals, Inc.
    (incorporated herein by reference from Exhibit 2.1 to our
    Annual Report on Form 10-K for the fiscal year ended
    September 30, 2002).                                                                                                                                                                                                                                              
|        | 2.2   |  |  |                       |  | Joint Plan of Reorganization of Sterling
    Chemicals Holdings, Inc., et. al., Debtors, dated
    October 14, 2002 (incorporated herein by reference from
    Exhibit 2.1 to our Form 8-K filed on November 26,
    2002).                                                                                                                                                                                                                                                                                  
|        | 2.3   |  |  |                       |  | First Modification to Joint Plan of
    Reorganization of Sterling Chemicals Holdings, Inc.,
    et. al., Debtors, dated November 18, 2002
    (incorporated herein by reference from Exhibit 2.2 to our
    Form 8-K filed on November 26, 2002).                                                                                                                                                                                                                                                           
|        | 3.1   |  |  |                       |  | Amended and Restated Certificate of Incorporation
    of Sterling Chemicals, Inc. (incorporated herein by reference
    from Exhibit 3.1 to our Annual Report on Form 10-K for
    the fiscal year ended September 30, 2002).                                                                                                                                                                                                                                                                                
|        | **3.2 |  |  |                       |  | Restated Certificate of Designations,
    Preferences, Rights and Limitations of Series A Convertible
    Preferred Stock of Sterling Chemicals, Inc.                                                                                                                                                                                                                                                                                                                                                        
|        | 3.3   |  |  |                       |  | Restated Bylaws of Sterling Chemicals, Inc.
    (conformed copy) (incorporated herein by reference from
    Exhibit 3.3 to our Quarterly Report on Form 10-Q for
    the quarterly period ended June 30, 2003).                                                                                                                                                                                                                                                                                              
|        | 4.1   |  |  |                       |  | Warrant Agreement dated as of December 19,
    2002 by and between Sterling Chemicals, Inc., and Wells Fargo
    Bank Minnesota, N.A., as warrant agent (incorporated herein by
    reference from Exhibit 5 to our Form 8-A filed on
    December 19, 2002).                                                                                                                                                                                                                                                
|        | 4.2   |  |  |                       |  | Registration Rights Agreement dated as of
    December 19, 2002 by and between Sterling Chemicals, Inc.
    and Resurgence Asset Management, L.L.C. (incorporated herein by
    reference from Exhibit 7 to our Form 8-A filed on
    December 19, 2002).                                                                                                                                                                                                                                                    
|        | 4.3   |  |  |                       |  | Tag Along Agreement dated as of December 19,
    2002 by and among Sterling Chemicals, Inc., Resurgence Asset
    Management, L.L.C. and the Official Committee of the Unsecured
    Creditors (incorporated herein by reference from Exhibit 8
    to our Form 8-A filed on December 19, 2002).                                                                                                                                                                                                             
|        | 4.4   |  |  |                       |  | Indenture dated December 19, 2002 by and
    among Sterling Chemicals, Inc., as Issuer, Sterling Chemicals
    Energy, Inc., as Guarantor, and National City Bank, as Trustee,
    governing the 10% Senior Secured Notes due 2007 of Sterling
    Chemicals, Inc. (incorporated herein by reference from
    Exhibit T3-C to Amendment No. 3 to our Form T-3
    filed on December 19, 2002).                                                                                                               
|        | 4.5   |  |  |                       |  | Deed of Trust, Assignment of Leases and Rents,
    Security Agreement and Fixture Filing dated December 19,
    2002 made by Sterling Chemicals, Inc., as Trustor, to
    Thomas S. Henderson, as Individual Trustee for the benefit
    of National City Bank, in its capacity as described therein, as
    Beneficiary (incorporated herein by reference from
    Exhibit 4.2 to our Transition Report on Form 10-Q for
    the transition period ended December 31, 2002).                                
|        | 4.6   |  |  |                       |  | Security Agreement dated as of December 19,
    2002 by and among Sterling Chemicals, Inc. and Sterling
    Chemicals Energy, Inc., as Assignors, National City Bank, as
    Collateral Agent, and National City Bank, as Indenture Trustee
    for the benefit of the holders the 10% Senior Secured Notes due
    2007 of Sterling Chemicals, Inc. (incorporated herein by
    reference from Exhibit 4.3 to our Transition Report on
    Form 10-Q for the transition period ended December 31,
    2002).

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|        |          |  |  |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -------- |  |  | ---------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |  |  |                       
|Number  |          |  |  | Description of Exhibit
|        |          |  |  |                       
|        | 10.1     |  |  |                       |  | Revolving Credit Agreement dated as of
    December 19, 2002 by and among Sterling Chemicals, Inc. and
    Sterling Chemicals Energy, Inc., as Borrowers, the various
    financial institutions as are or may become parties thereto from
    time to time, as the Lenders, and The CIT Group/ Business
    Credit, Inc., as the Administrative Agent for the Lenders
    (incorporated herein by reference from Exhibit 4.4 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).
|        | 10.1(a)  |  |  |                       |  | First Amendment to Revolving Credit Agreement
    dated as of February 12, 2003 by and among Sterling
    Chemicals, Inc. and Sterling Chemicals Energy, Inc., as
    Borrowers, the various financial institutions party thereto, as
    the Lenders, and The CIT Group/ Business Credit, Inc., as
    the Administrative Agent for the Lenders (incorporated herein by
    reference from Exhibit 4.8 to our Transition Report on
    Form 10-Q for the transition period ended December 31,
    2002).                      
|        | 10.2     |  |  |                       |  | Security Agreement dated as of December 19,
    2002 made by Sterling Chemicals, Inc. and Sterling Chemicals
    Energy, Inc., as Grantors, in favor of The CIT Group/
    Business Credit, Inc., as Administrative Agent for the Secured
    Parties (incorporated herein by reference from Exhibit 4.5
    to our Transition Report on Form 10-Q for the transition
    period ended December 31, 2002).                                                                                                                     
|        | 10.3     |  |  |                       |  | Pledge Agreement dated as of December 19,
    2002 made by Sterling Chemicals, Inc. and Sterling Chemicals
    Energy, Inc., as Pledgors, in favor of The CIT Group/ Business
    Credit, Inc., as Administrative Agent for the Secured Parties
    (incorporated herein by reference from Exhibit 4.6 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).                                                                                                                       
|        | 10.4*    |  |  |                       |  | Sterling Chemicals, Inc. 2002 Stock Plan
    (incorporated herein by reference to Exhibit 6 to our
    Form 8-A filed on December 19, 2002).                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10.5*    |  |  |                       |  | Third Amended and Restated Key Employee
    Protection Plan, incorporated by reference from
    Exhibit 10.2 to our Annual Report on Form 10-K for the
    fiscal year ended September 30, 2001.                                                                                                                                                                                                                                                                                                                               
|        | 10.6*    |  |  |                       |  | Amended and Restated Supplemental Pay Plan
    (incorporated herein by reference from Exhibit 10.1 to our
    Quarterly Report on Form 10-Q for the quarterly period
    ended June 30, 2001).                                                                                                                                                                                                                                                                                                                                 
|        | 10.6(a)* |  |  |                       |  | First Amendment to Amended and Restated
    Supplemental Pay Plan (incorporated herein by reference from
    Exhibit 10.2(a) to our Annual Report on Form 10-K for
    the fiscal year ended September 30, 2002).                                                                                                                                                                                                                                                                                                              
|        | **10.7*  |  |  |                       |  | Third Amended and Restated Severance Pay Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.8*    |  |  |                       |  | Sterling Chemicals, Inc. Amended and Restated
    Salaried Employees Pension Plan (Effective as of
    May 1, 1996) (incorporated herein by reference from
    Exhibit 10.4 to our Annual Report on Form 10-K for the
    fiscal year ended September 30, 2000).                                                                                                                                                                                                                                                              
|        | 10.8(a)* |  |  |                       |  | First Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (Effective as of January 31, 1997) (incorporated herein by
    reference from Exhibit 10.4(a) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).                                                                                                                                                                                                                           
|        | 10.8(b)* |  |  |                       |  | Second Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (Effective as of January 1, 1997) (incorporated herein by
    reference from Exhibit 10.4(b) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).                                                                                                                                                                                                                           
|        | 10.8(c)* |  |  |                       |  | Third Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (Effective as of November 1, 1998) (incorporated herein by
    reference from Exhibit 10.4(c) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).                                                                                                                                                                                                                           
|        | 10.8(d)* |  |  |                       |  | Fourth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (Effective as of December 31, 1998) (incorporated herein by
    reference from Exhibit 10.4(d) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).                                                                                                                                                                                                                         

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|        |            |  |  |                        |  |                                                                                                                                                                                                                                                                                                           
|------- | ---------- |  |  | ---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |            |  |  |                       
|Number  |            |  |  | Description of Exhibit
|        |            |  |  |                       
|        | 10.8(e)*   |  |  |                       |  | Fifth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (Effective as of April 1, 1999) (incorporated herein by
    reference from Exhibit 10.4(e) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).         
|        | 10.8(f)*   |  |  |                       |  | Sixth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (Effective as of May 14, 1999) (incorporated herein by
    reference from Exhibit 10.4(f) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).          
|        | 10.8(g)*   |  |  |                       |  | Seventh Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (incorporated herein by reference from Exhibit 10.1 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).                                     
|        | 10.8(h)*   |  |  |                       |  | Eighth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (incorporated herein by reference from Exhibit 10.2 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).                                      
|        | 10.8(i)*   |  |  |                       |  | Ninth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (incorporated herein by reference from Exhibit 10.3 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).                                       
|        | 10.8(j)*   |  |  |                       |  | Tenth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (incorporated herein by reference from Exhibit 10.2 to our
    Quarterly Report on Form 10-Q for the quarterly period
    ended June 30, 2003).                                             
|        | **10.8(k)* |  |  |                       |  | Eleventh Amendment to the Sterling Chemicals,
    Inc. Amended and Restated Salaried Employees Pension Plan.                                                                                                                                                                                             
|        | 10.9*      |  |  |                       |  | Sterling Chemicals, Inc. Pension Benefit
    Equalization Plan (incorporated herein by reference from
    Exhibit 10.10 to our Registration Statement on
    Form S-1 (Registration No. 33-24020)).                                                                                                       
|        | 10.10*     |  |  |                       |  | Sterling Chemicals, Inc. Amended and Restated
    Supplemental Employee Retirement Plan (incorporated herein by
    reference from Exhibit 10.34 to our Annual Report on
    Form 10-K for the fiscal year ended September 30, 1989
    (SEC File Number 1-10059)).                                       
|        | 10.11      |  |  |                       |  | Sterling Chemicals, Inc. Amended and Restated
    Hourly Paid Employees Pension Plan (Effective as of
    May 1, 1996) (incorporated herein by reference from
    Exhibit 10.3(c) to our Annual Report on Form 10-K for
    the fiscal year ended September 30, 1996 (SEC File
    Number 333-04343-01)).
|        | 10.11(a)   |  |  |                       |  | First Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Hourly Paid Employees Pension Plan
    (Effective as of December 31, 1998) (incorporated herein by
    reference from Exhibit 10.7(a) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).  
|        | 10.11(b)   |  |  |                       |  | Second Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Hourly Paid Employees Pension Plan
    (Effective as of December 17, 1998) (incorporated herein by
    reference from Exhibit 10.7(b) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000). 
|        | 10.11(c)   |  |  |                       |  | Third Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Hourly Paid Employees Pension Plan
    (Effective as of September 20, 1999) (incorporated herein
    by reference from Exhibit 10.7(c) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000). 
|        | 10.11(d)   |  |  |                       |  | Fourth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Hourly Paid Employees Pension Plan
    (incorporated herein by reference from Exhibit 10.4 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).                                   
|        | 10.11(e)   |  |  |                       |  | Fifth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Hourly Paid Employees Pension Plan
    (incorporated herein by reference from Exhibit 10.5 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).                                    

78



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|        |            |   |  |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | ---------- | - |  | ---------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |            |   |  |                       
|Number  |            |   |  | Description of Exhibit
|        |            |   |  |                       
|        | 10.11(f)   |   |  |                       |  | Sixth Amendment to the Sterling Chemicals, Inc.
    Hourly Paid Employees Pension Plan (incorporated herein by
    reference from Exhibit 10.3 to our Quarterly Report on
    Form 10-Q for the quarterly period ended June 30,
    2003).                                                                                                                                                      
|        | **10.11(g) |   |  |                       |  | Seventh Amendment to the Sterling Chemicals, Inc.
    Hourly Paid Employees Pension Plan.                                                                                                                                                                                                                                                                                                       
|        | 10.12*     |   |  |                       |  | Sterling Chemicals, Inc. Sixth Amended and
    Restated Savings and Investment Plan dated as of October 1,
    2000 (incorporated herein by reference from Exhibit 10.8 to
    our Annual Report on Form 10-K for the fiscal year ended
    September 30, 2000).                                                                                                                                 
|        | 10.12(a)   | * |  |                       |  | First Amendment to the Sixth Amended and Restated
    Savings and Investment Plan dated as of October 1, 2000
    (incorporated herein by reference from Exhibit 10.1 to our
    Quarterly Report on Form 10-Q for the quarterly period
    ended December 31, 2001).                                                                                                                            
|        | 10.12(b)   | * |  |                       |  | Second Amendment to the Sixth Amended and
    Restated Savings and Investment Plan (incorporated herein by
    reference from Exhibit 10.6 to our Transition Report on
    Form 10-Q for the transition period ended December 31,
    2002).                                                                                                                                                     
|        | 10.12(c)   | * |  |                       |  | Third Amendment to the Sixth Amended and Restated
    Savings and Investment Plan (incorporated herein by reference
    from Exhibit 10.7 to our Transition Report on
    Form 10-Q for the transition period ended December 31,
    2002).                                                                                                                                                      
|        | 10.12(d)   | * |  |                       |  | Fourth Amendment to the Sixth Amended and
    Restated Savings and Investment Plan (incorporated herein by
    reference from Exhibit 10.4 to our Quarterly Report on
    Form 10-Q for the quarterly period ended June 30,
    2003).                                                                                                                                                           
|        | 10.13      |   |  |                       |  | Articles of Agreement between Sterling Chemicals,
    Inc., its successors and assigns, and Texas City, Texas Metal
    Trades Council, AFL-CIO Texas City, Texas, September 28,
    2002 to May 1, 2004 (incorporated herein by reference from
    Exhibit 10.13 to our Annual Report on Form 10-K for
    the fiscal year ended September 30, 2002).                                           
|        | 10.14*     |   |  |                       |  | Form of Indemnity Agreement with each of its
    officers and directors (incorporated herein by reference from
    Exhibit 10.17 to our Annual Report on Form 10-K for
    the fiscal year ended September 30, 1996 (SEC File
    Number 333-04343-01)).                                                                                                                                         
|        | 10.15*     |   |  |                       |  | Employment Agreement dated as of January 23,
    2001 among David G. Elkins, Sterling Chemicals Holdings,
    Inc. and Sterling Chemicals, Inc. (incorporated herein by
    reference from Exhibit 10.16 to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2002).                                                                                                
|        | 10.16*     |   |  |                       |  | Severance Agreement dated effective as of
    January 2, 2003 between David G. Elkins and Sterling
    Chemicals, Inc. (incorporated herein by reference from
    Exhibit 10.10 to our Transition Report on Form 10-Q
    for the transition period ended December 31, 2002).                                                                                                                    
|        | 10.17*     |   |  |                       |  | Settlement Agreement, Waiver and General Release
    dated March 17, 2003 between Frank P. Diassi and
    Sterling Chemicals, Inc. (incorporated herein by reference from
    Exhibit 10.1 to our Quarterly Report on Form 10-Q for
    the transition period ended March 31, 2003).                                                                                                             
|        | +10.18     |   |  |                       |  | Amended and Restated Production Agreement dated
    March 31, 1998 between BP Chemicals, Inc. (predecessor
    in interest to BP Amoco Chemical Company) and Sterling
    Chemicals, Inc. (incorporated herein by reference from
    Exhibit 10.2 to our Quarterly Report on Form 10-Q for
    the quarterly period ended March 31, 1998 (SEC File
    Number 333-04343-01)).                    
|        | +10.19     |   |  |                       |  | Joint Venture Agreement dated March 31, 1998
    between BP Chemicals Inc. (predecessor in interest to
    BP Amoco Chemical Company) and Sterling Chemicals, Inc.
    (incorporated herein by reference from Exhibit 10.4 to our
    Quarterly Report on Form 10-Q for the quarterly period
    ended March 31, 1998 (SEC File
    Number 333-04343-01)).                                       
|        | +10.19(a)  |   |  |                       |  | First Amendment to Joint Venture Agreement dated
    effective as of March 31, 1998 between
    BP Chemicals Inc. (predecessor in interest to
    BP Amoco Chemical Company) and Sterling Chemicals, Inc.
    (incorporated herein by reference from Exhibit 10.26(a) to
    our Annual Report on Form 10-K for the fiscal year ended
    September 30, 1998 (SEC File
    Number 333-04343-01)).

79



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|        |           |  |  |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | --------- |  |  | ---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |  |  |                       
|Number  |           |  |  | Description of Exhibit
|        |           |  |  |                       
|        | +10.20    |  |  |                       |  | Acrylonitrile Expanded Relationship and Master
    Modification Agreement dated June 19, 2003 between
    BP Chemicals Inc. (predecessor in interest to
    BP Amoco Chemical Company) and Sterling Chemicals, Inc.
    (incorporated herein by reference from Exhibit 10.1 to our
    Quarterly Report on Form 10-Q for the quarterly period
    ended June 30, 2003).                                                                                   
|        | +10.21    |  |  |                       |  | Second Amended and Restated Production Agreement
    dated effective as of August 1, 1996 between
    BP Chemicals Inc. (predecessor in interest to
    BP Amoco Chemical Company) and Sterling Chemicals, Inc.
    (incorporated herein by reference from Exhibit 10.3 to our
    Quarterly Report on Form 10-Q for the quarterly period
    ended March 31, 1998 (SEC File
    Number 333-04343-01)).                                                   
|        | +10.21(a) |  |  |                       |  | Amendment to Second Amended and Restated
    Production Agreement dated as of March 1, 2001 between
    BP Chemicals Inc. (predecessor in interest to
    BP Amoco Chemical Company) and Sterling Chemicals, Inc.
    (incorporated herein by reference from Exhibit 10.1 to our
    Quarterly Report on Form 10-Q for the quarterly period
    ended March 31, 2001).                                                                                    
|        | +10.22    |  |  |                       |  | Amended and Restated Product Sales Agreement
    dated effective as of January 1, 1998 between
    BASF Corporation and Sterling Chemicals, Inc. (incorporated
    herein by referenced from Exhibit 10.11 to our Annual
    Report on Form 10-K for the fiscal year ended
    September 30, 1997 (SEC File
    Number 333-04343-01)).                                                                                                                    
|        | 10.23     |  |  |                       |  | License Agreement dated August 1, 1986
    between Monsanto Company and Sterling Chemicals, Inc.
    (incorporated herein by reference from Exhibit 10.25 to our
    Registration Statement on Form S-1 (Registration
    No. 33-24020)).                                                                                                                                                                                                                 
|        | 10.24     |  |  |                       |  | Asset and Stock Purchase Agreement dated as of
    November 13, 2002 among Sterling Chemicals, Inc. and
    Sterling Canada, Inc., Sterling Pulp Chemicals US Inc.,
    Sterling Pulp Chemicals, Inc. and Sterling Chemicals
    Acquisitions, Inc., as Sellers, and Superior Propane Inc.,
    as Purchaser (incorporated herein by reference from
    Exhibit 10.23 to our Annual Report on Form 10-K for
    the fiscal year ended September 30, 2002).
|        | 10.25     |  |  |                       |  | Investment Agreement dated as of October 11,
    2002 among Sterling Chemicals Holdings, Inc., Sterling
    Chemicals, Inc. and Resurgence Asset Management, L.L.C.
    (incorporated herein by reference from Exhibit 2.1 to our
    Annual Report on Form 10-K for the fiscal year ended
    September 30, 2002).                                                                                                                                       
|        | 14.1      |  |  |                       |  | Sterling Chemicals, Inc. Code of Ethics for the
    Chief Executive Officer and Senior Financial Officers
    (incorporated herein by reference from Exhibit 14.1 to our
    Quarterly Report on Form 10-Q for the quarterly period
    ended June 30, 2003).                                                                                                                                                                                             
|        | **21.1    |  |  |                       |  | Subsidiaries of Sterling Chemicals, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | **23.1    |  |  |                       |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | **31.1    |  |  |                       |  | Rule 13a-14(a) Certification of the Chief
    Executive Officer                                                                                                                                                                                                                                                                                                                                                                                           
|        | **31.2    |  |  |                       |  | Rule 13a-14(a) Certification of the Chief
    Financial Officer                                                                                                                                                                                                                                                                                                                                                                                           
|        | **32.1    |  |  |                       |  | Section 1350 Certification of the Chief
    Executive Officer                                                                                                                                                                                                                                                                                                                                                                                             
|        | **32.2    |  |  |                       |  | Section 1350 Certification of the Chief
    Financial Officer                                                                                                                                                                                                                                                                                                                                                                                             
|        | 99.1      |  |  |                       |  | Amended and Restated Audit Committee Charter of
    Sterling Chemicals, Inc. (incorporated herein by reference from
    Exhibit 99.1 to our Quarterly Report on Form 10-Q for
    the quarterly period ended September 30, 2003).                                                                                                                                                                                                                         
|        | **99.2    |  |  |                       |  | Amended and Restated Corporate Governance
    Committee Charter of Sterling Chemicals, Inc.                                                                                                                                                                                                                                                                                                                                                               



---



|  |                                                                
|- | ---------------------------------------------------------------
|* | Management contracts or compensatory plans
    or arrangements.



|   |                             
|-- | ----------------------------
|** | Filed or furnished herewith.



|  |                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|+ | Portions of the exhibit have been omitted and
    filed separately with the Securities and Exchange Commission
    pursuant to a request for confidential treatment.

80



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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

| |                         
| | ------------------------
| | STERLING CHEMICALS, INC.
| | (Registrant)            

| |    |                     
| | -- | --------------------
| | By | /s/ RICHARD K. CRUMP

| |                                                    
| | ---------------------------------------------------
| |                                                    
| | Richard K. Crump                                   
| | President, Chief Executive Officer and
    Director

| |    |                        
| | -- | -----------------------
| | By | /s/ PAUL G. VANDERHOVEN

| |                                  
| | ---------------------------------
| |                                  
| | Paul G. Vanderhoven              
| | Senior Vice President-Finance and
| | Chief Financial Officer          

Date: March 19, 2004


Pursuant to the requirements of the Securities
and Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                               |  |                                                               |  |                |  | 
|---------------------------------------------- |  | ------------------------------------------------------------- |  | -------------- |  | 
|                                               |  |                                                               |  |               
|Signature                                      |  | Title                                                         |  | Date          
|                                               |  |                                                               |  |               
|Principal Executive Officer:                   |  |                                                               |  |               
|                                              
|/s/ RICHARD K. CRUMPRichard K. Crump           |  | President, Chief Executive Officer and Director               |  | March 19, 2004
|Principal Financial Officer:                   |  |                                                               |  |               
|                                              
|/s/ PAUL G. VANDERHOVENPaul G. Vanderhoven     |  | Senior Vice President-Finance and Chief Financial
    Officer |  | March 19, 2004
|Principal Accounting Officer:                  |  |                                                               |  |               
|                                              
|/s/ JOHN R. BEAVERJohn R. Beaver               |  | Vice President, Corporate Controller                          |  | March 19, 2004
|                                              
|/s/ JAMES B. RUBINJames B. Rubin               |  | Chairman of the Board of Directors                            |  | March 19, 2004
|                                              
|/s/ BYRON J. HANEYByron J. Haney               |  | Director                                                      |  | March 19, 2004
|                                              
|/s/ MARC S. KIRSCHNERMarc S. Kirschner         |  | Director                                                      |  | March 19, 2004
|                                              
|/s/ ROBERT T. SYMINGTONRobert T. Symington     |  | Director                                                      |  | March 19, 2004
|                                              
|/s/ KEITH R. WHITTAKERKeith R. Whittaker       |  | Director                                                      |  | March 19, 2004
|                                              
|/s/ JOHN W. GILDEAJohn W. Gildea               |  | Director                                                      |  | March 19, 2004
|                                              
|/s/ THOMAS P. KRASNERThomas P. Krasner         |  | Director                                                      |  | March 19, 2004
|                                              
|/s/ DR. PETER TING KAI WUDr. Peter Ting Kai Wu |  | Director                                                      |  | March 19, 2004

81



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EXHIBIT INDEX

|        |       |  |  |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | ----- |  |  | ---------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                       
|Number  |       |  |  | Description of Exhibit
|        |       |  |  |                       
|        | 2.1   |  |  |                       |  | Certificate of Ownership and Merger merging
    Sterling Chemicals Holdings, Inc. into Sterling
    Chemicals, Inc. (incorporated herein by reference from
    Exhibit 2.1 to our Annual Report on Form 10-K for the
    fiscal year ended September 30, 2002).                                                                                                                                                                                                                                                                
|        | 2.2   |  |  |                       |  | Joint Plan of Reorganization of Sterling
    Chemicals Holdings, Inc., et. al., Debtors, dated
    October 14, 2002 (incorporated herein by reference from
    Exhibit 2.1 to our Form 8-K filed on November 26,
    2002).                                                                                                                                                                                                                                                                                                    
|        | 2.3   |  |  |                       |  | First Modification to Joint Plan of
    Reorganization of Sterling Chemicals Holdings, Inc., et.
    al., Debtors, dated November 18, 2002 (incorporated herein
    by reference from Exhibit 2.2 to our Form 8-K filed on
    November 26, 2002).                                                                                                                                                                                                                                                                             
|        | 3.1   |  |  |                       |  | Amended and Restated Certificate of Incorporation
    of Sterling Chemicals, Inc. (incorporated herein by
    reference from Exhibit 3.1 to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2002).                                                                                                                                                                                                                                                                                              
|        | **3.2 |  |  |                       |  | Restated Certificate of Designations,
    Preferences, Rights and Limitations of Series A Convertible
    Preferred Stock of Sterling Chemicals, Inc.                                                                                                                                                                                                                                                                                                                                                                          
|        | 3.3   |  |  |                       |  | Restated Bylaws of Sterling Chemicals, Inc.
    (conformed copy) (incorporated herein by reference from
    Exhibit 3.3 to our Quarterly Report on Form 10-Q for
    the quarterly period ended June 30, 2003).                                                                                                                                                                                                                                                                                                                
|        | 4.1   |  |  |                       |  | Warrant Agreement dated as of December 19,
    2002 by and between Sterling Chemicals, Inc., and Wells
    Fargo Bank Minnesota, N.A., as warrant agent (incorporated
    herein by reference from Exhibit 5 to our Form 8-A
    filed on December 19, 2002).                                                                                                                                                                                                                                                                  
|        | 4.2   |  |  |                       |  | Registration Rights Agreement dated as of
    December 19, 2002 by and between Sterling
    Chemicals, Inc. and Resurgence Asset Management, L.L.C.
    (incorporated herein by reference from Exhibit 7 to our
    Form 8-A filed on December 19, 2002).                                                                                                                                                                                                                                                                      
|        | 4.3   |  |  |                       |  | Tag Along Agreement dated as of December 19,
    2002 by and among Sterling Chemicals, Inc., Resurgence Asset
    Management, L.L.C. and the Official Committee of the Unsecured
    Creditors (incorporated herein by reference from Exhibit 8
    to our Form 8-A filed on December 19, 2002).                                                                                                                                                                                                                               
|        | 4.4   |  |  |                       |  | Indenture dated December 19, 2002 by and
    among Sterling Chemicals, Inc., as Issuer, Sterling
    Chemicals Energy, Inc., as Guarantor, and National City
    Bank, as Trustee, governing the 10% Senior Secured Notes due
    2007 of Sterling Chemicals, Inc. (incorporated herein by
    reference from Exhibit T3-C to Amendment No. 3 to our
    Form T-3 filed on December 19, 2002).                                                                                                                                 
|        | 4.5   |  |  |                       |  | Deed of Trust, Assignment of Leases and Rents,
    Security Agreement and Fixture Filing dated December 19,
    2002 made by Sterling Chemicals, Inc., as Trustor, to
    Thomas S. Henderson, as Individual Trustee for the benefit
    of National City Bank, in its capacity as described therein, as
    Beneficiary (incorporated herein by reference from
    Exhibit 4.2 to our Transition Report on Form 10-Q for
    the transition period ended December 31, 2002).                                                  
|        | 4.6   |  |  |                       |  | Security Agreement dated as of December 19,
    2002 by and among Sterling Chemicals, Inc. and Sterling
    Chemicals Energy, Inc., as Assignors, National City Bank,
    as Collateral Agent, and National City Bank, as Indenture
    Trustee for the benefit of the holders the 10% Senior Secured
    Notes due 2007 of Sterling Chemicals, Inc. (incorporated
    herein by reference from Exhibit 4.3 to our Transition
    Report on Form 10-Q for the transition period ended
    December 31, 2002).                  
|        | 10.1  |  |  |                       |  | Revolving Credit Agreement dated as of
    December 19, 2002 by and among Sterling Chemicals, Inc. and
    Sterling Chemicals Energy, Inc., as Borrowers, the various
    financial institutions as are or may become parties thereto from
    time to time, as the Lenders, and The CIT Group/ Business
    Credit, Inc., as the Administrative Agent for the Lenders
    (incorporated herein by reference from Exhibit 4.4 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).

83



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|        |          |  |  |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- | -------- |  |  | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |  |  |                       
|Number  |          |  |  | Description of Exhibit
|        |          |  |  |                       
|        | 10.1(a)  |  |  |                       |  | First Amendment to Revolving Credit Agreement
    dated as of February 12, 2003 by and among Sterling
    Chemicals, Inc. and Sterling Chemicals Energy, Inc.,
    as Borrowers, the various financial institutions party thereto,
    as the Lenders, and The CIT Group/ Business Credit, Inc.,
    as the Administrative Agent for the Lenders (incorporated herein
    by reference from Exhibit 4.8 to our Transition Report on
    Form 10-Q for the transition period ended December 31,
    2002).
|        | 10.2     |  |  |                       |  | Security Agreement dated as of December 19,
    2002 made by Sterling Chemicals, Inc. and Sterling
    Chemicals Energy, Inc., as Grantors, in favor of The CIT
    Group/ Business Credit, Inc., as Administrative Agent for the
    Secured Parties (incorporated herein by reference from
    Exhibit 4.5 to our Transition Report on Form 10-Q for
    the transition period ended December 31, 2002).                                                                                               
|        | 10.3     |  |  |                       |  | Pledge Agreement dated as of December 19,
    2002 made by Sterling Chemicals, Inc. and Sterling Chemicals
    Energy, Inc., as Pledgors, in favor of The CIT Group/
    Business Credit, Inc., as Administrative Agent for the
    Secured Parties (incorporated herein by reference from
    Exhibit 4.6 to our Transition Report on Form 10-Q for
    the transition period ended December 31, 2002).                                                                                                 
|        | 10.4*    |  |  |                       |  | Sterling Chemicals, Inc. 2002 Stock Plan
    (incorporated herein by reference to Exhibit 6 to our
    Form 8-A filed on December 19, 2002).                                                                                                                                                                                                                                                                                                                                                             
|        | 10.5*    |  |  |                       |  | Third Amended and Restated Key Employee
    Protection Plan, incorporated by reference from
    Exhibit 10.2 to our Annual Report on Form 10-K for the
    fiscal year ended September 30, 2001.                                                                                                                                                                                                                                                                                                         
|        | 10.6*    |  |  |                       |  | Amended and Restated Supplemental Pay Plan
    (incorporated herein by reference from Exhibit 10.1 to our
    Quarterly Report on Form 10-Q for the quarterly period
    ended June 30, 2001).                                                                                                                                                                                                                                                                                                           
|        | 10.6(a)* |  |  |                       |  | First Amendment to Amended and Restated
    Supplemental Pay Plan (incorporated herein by reference from
    Exhibit 10.2(a) to our Annual Report on Form 10-K for
    the fiscal year ended September 30, 2002).                                                                                                                                                                                                                                                                                        
|        | **10.7*  |  |  |                       |  | Third Amended and Restated Severance Pay Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 10.8*    |  |  |                       |  | Sterling Chemicals, Inc. Amended and Restated
    Salaried Employees Pension Plan (Effective as of
    May 1, 1996) (incorporated herein by reference from
    Exhibit 10.4 to our Annual Report on Form 10-K for the
    fiscal year ended September 30, 2000).                                                                                                                                                                                                                                        
|        | 10.8(a)* |  |  |                       |  | First Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (Effective as of January 31, 1997) (incorporated herein by
    reference from Exhibit 10.4(a) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).                                                                                                                                                                                                     
|        | 10.8(b)* |  |  |                       |  | Second Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (Effective as of January 1, 1997) (incorporated herein by
    reference from Exhibit 10.4(b) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).                                                                                                                                                                                                     
|        | 10.8(c)* |  |  |                       |  | Third Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (Effective as of November 1, 1998) (incorporated herein by
    reference from Exhibit 10.4(c) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).                                                                                                                                                                                                     
|        | 10.8(d)* |  |  |                       |  | Fourth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (Effective as of December 31, 1998) (incorporated herein by
    reference from Exhibit 10.4(d) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).                                                                                                                                                                                                   
|        | 10.8(e)* |  |  |                       |  | Fifth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (Effective as of April 1, 1999) (incorporated herein by
    reference from Exhibit 10.4(e) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).                                                                                                                                                                                                        

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|        |            |  |  |                        |  |                                                                                                                                                                                                                                                                                                           
|------- | ---------- |  |  | ---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |            |  |  |                       
|Number  |            |  |  | Description of Exhibit
|        |            |  |  |                       
|        | 10.8(f)*   |  |  |                       |  | Sixth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (Effective as of May 14, 1999) (incorporated herein by
    reference from Exhibit 10.4(f) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).          
|        | 10.8(g)*   |  |  |                       |  | Seventh Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (incorporated herein by reference from Exhibit 10.1 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).                                     
|        | 10.8(h)*   |  |  |                       |  | Eighth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (incorporated herein by reference from Exhibit 10.2 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).                                      
|        | 10.8(i)*   |  |  |                       |  | Ninth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (incorporated herein by reference from Exhibit 10.3 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).                                       
|        | 10.8(j)*   |  |  |                       |  | Tenth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan
    (incorporated herein by reference from Exhibit 10.2 to our
    Quarterly Report on Form 10-Q for the quarterly period
    ended June 30, 2003).                                             
|        | **10.8(k)* |  |  |                       |  | Eleventh Amendment to the Sterling Chemicals,
    Inc. Amended and Restated Salaried Employees Pension Plan.                                                                                                                                                                                             
|        | 10.9*      |  |  |                       |  | Sterling Chemicals, Inc. Pension Benefit
    Equalization Plan (incorporated herein by reference from
    Exhibit 10.10 to our Registration Statement on
    Form S-1 (Registration No. 33-24020)).                                                                                                       
|        | 10.10*     |  |  |                       |  | Sterling Chemicals, Inc. Amended and Restated
    Supplemental Employee Retirement Plan (incorporated herein by
    reference from Exhibit 10.34 to our Annual Report on
    Form 10-K for the fiscal year ended September 30, 1989
    (SEC File Number 1-10059)).                                       
|        | 10.11      |  |  |                       |  | Sterling Chemicals, Inc. Amended and Restated
    Hourly Paid Employees Pension Plan (Effective as of
    May 1, 1996) (incorporated herein by reference from
    Exhibit 10.3(c) to our Annual Report on Form 10-K for
    the fiscal year ended September 30, 1996 (SEC File Number
    333-04343-01)).
|        | 10.11(a)   |  |  |                       |  | First Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Hourly Paid Employees Pension Plan
    (Effective as of December 31, 1998) (incorporated herein by
    reference from Exhibit 10.7(a) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000).  
|        | 10.11(b)   |  |  |                       |  | Second Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Hourly Paid Employees Pension Plan
    (Effective as of December 17, 1998) (incorporated herein by
    reference from Exhibit 10.7(b) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000). 
|        | 10.11(c)   |  |  |                       |  | Third Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Hourly Paid Employees Pension Plan
    (Effective as of September 20, 1999) (incorporated herein
    by reference from Exhibit 10.7(c) to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2000). 
|        | 10.11(d)   |  |  |                       |  | Fourth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Hourly Paid Employees Pension Plan
    (incorporated herein by reference from Exhibit 10.4 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).                                   
|        | 10.11(e)   |  |  |                       |  | Fifth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Hourly Paid Employees Pension Plan
    (incorporated herein by reference from Exhibit 10.5 to our
    Transition Report on Form 10-Q for the transition period
    ended December 31, 2002).                                    
|        | 10.11(f)   |  |  |                       |  | Sixth Amendment to the Sterling Chemicals, Inc.
    Hourly Paid Employees Pension Plan (incorporated herein by
    reference from Exhibit 10.3 to our Quarterly Report on
    Form 10-Q for the quarterly period ended June 30,
    2003).                                                               
|        | **10.11(g) |  |  |                       |  | Seventh Amendment to the Sterling Chemicals, Inc.
    Hourly Paid Employees Pension Plan.                                                                                                                                                                                                                

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|        |           |   |  |                        |  |                                                                                                                                                                                                                                                                                                                                                                                              
|------- | --------- | - |  | ---------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |   |  |                       
|Number  |           |   |  | Description of Exhibit
|        |           |   |  |                       
|        | 10.12*    |   |  |                       |  | Sterling Chemicals, Inc. Sixth Amended and
    Restated Savings and Investment Plan dated as of October 1,
    2000 (incorporated herein by reference from Exhibit 10.8 to
    our Annual Report on Form 10-K for the fiscal year ended
    September 30, 2000).                                                                                                                             
|        | 10.12(a)  | * |  |                       |  | First Amendment to the Sixth Amended and Restated
    Savings and Investment Plan dated as of October 1, 2000
    (incorporated herein by reference from Exhibit 10.1 to our
    Quarterly Report on Form 10-Q for the quarterly period
    ended December 31, 2001).                                                                                                                        
|        | 10.12(b)  | * |  |                       |  | Second Amendment to the Sixth Amended and
    Restated Savings and Investment Plan (incorporated herein by
    reference from Exhibit 10.6 to our Transition Report on
    Form 10-Q for the transition period ended December 31,
    2002).                                                                                                                                                 
|        | 10.12(c)  | * |  |                       |  | Third Amendment to the Sixth Amended and Restated
    Savings and Investment Plan (incorporated herein by reference
    from Exhibit 10.7 to our Transition Report on
    Form 10-Q for the transition period ended December 31,
    2002).                                                                                                                                                  
|        | 10.12(d)  | * |  |                       |  | Fourth Amendment to the Sixth Amended and
    Restated Savings and Investment Plan (incorporated herein by
    reference from Exhibit 10.4 to our Quarterly Report on
    Form 10-Q for the quarterly period ended June 30,
    2003).                                                                                                                                                       
|        | 10.13     |   |  |                       |  | Articles of Agreement between Sterling Chemicals,
    Inc., its successors and assigns, and Texas City, Texas Metal
    Trades Council, AFL-CIO Texas City, Texas, September 28,
    2002 to May 1, 2004 (incorporated herein by reference from
    Exhibit 10.13 to our Annual Report on Form 10-K for
    the fiscal year ended September 30, 2002).                                       
|        | 10.14*    |   |  |                       |  | Form of Indemnity Agreement with each of its
    officers and directors (incorporated herein by reference from
    Exhibit 10.17 to our Annual Report on Form 10-K for
    the fiscal year ended September 30, 1996 (SEC File
    Number 333-04343-01)).                                                                                                                                     
|        | 10.15*    |   |  |                       |  | Employment Agreement dated as of January 23,
    2001 among David G. Elkins, Sterling Chemicals Holdings,
    Inc. and Sterling Chemicals, Inc. (incorporated herein by
    reference from Exhibit 10.16 to our Annual Report on
    Form 10-K for the fiscal year ended September 30,
    2002).                                                                                            
|        | 10.16*    |   |  |                       |  | Severance Agreement dated effective as of
    January 2, 2003 between David G. Elkins and Sterling
    Chemicals, Inc. (incorporated herein by reference from
    Exhibit 10.10 to our Transition Report on Form 10-Q
    for the transition period ended December 31, 2002).                                                                                                                
|        | 10.17*    |   |  |                       |  | Settlement Agreement, Waiver and General Release
    dated March 17, 2003 between Frank P. Diassi and Sterling
    Chemicals, Inc. (incorporated herein by reference from Exhibit
    10.1 to our Quarterly Report on Form 10-Q for the
    transition period ended March 31, 2003).                                                                                                         
|        | 10.18    |   |  |                       |  | Amended and Restated Production Agreement dated
    March 31, 1998 between BP Chemicals, Inc. (predecessor in
    interest to BP Amoco Chemical Company) and Sterling Chemicals,
    Inc. (incorporated herein by reference from Exhibit 10.2 to
    our Quarterly Report on Form 10-Q for the quarterly period
    ended March 31, 1998 (SEC File Number 333-04343-01)).                    
|        | 10.19    |   |  |                       |  | Joint Venture Agreement dated March 31, 1998
    between BP Chemicals Inc. (predecessor in interest to BP Amoco
    Chemical Company) and Sterling Chemicals, Inc. (incorporated
    herein by reference from Exhibit 10.4 to our Quarterly
    Report on Form 10-Q for the quarterly period ended
    March 31, 1998 (SEC File Number 333-04343-01)).                                       
|        | 10.19(a) |   |  |                       |  | First Amendment to Joint Venture Agreement dated
    effective as of March 31, 1998 between BP Chemicals Inc.
    (predecessor in interest to BP Amoco Chemical Company) and
    Sterling Chemicals, Inc. (incorporated herein by reference from
    Exhibit 10.26(a) to our Annual Report on Form 10-K for
    the fiscal year ended September 30, 1998 (SEC File
    Number 333-04343-01)).
|        | 10.20    |   |  |                       |  | Acrylonitrile Expanded Relationship and Master
    Modification Agreement dated June 19, 2003 between BP
    Chemicals Inc. (predecessor in interest to BP Amoco Chemical
    Company) and Sterling Chemicals, Inc. (incorporated herein by
    reference from Exhibit 10.1 to our Quarterly Report on
    Form 10-Q for the quarterly period ended June 30,
    2003).                      

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|        |           |  |  |                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | --------- |  |  | ---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |  |  |                       
|Number  |           |  |  | Description of Exhibit
|        |           |  |  |                       
|        | 10.21    |  |  |                       |  | Second Amended and Restated Production Agreement
    dated effective as of August 1, 1996 between BP Chemicals
    Inc. (predecessor in interest to BP Amoco Chemical Company) and
    Sterling Chemicals, Inc. (incorporated herein by reference from
    Exhibit 10.3 to our Quarterly Report on Form 10-Q for
    the quarterly period ended March 31, 1998 (SEC File Number
    333-04343-01)).                                                       
|        | 10.21(a) |  |  |                       |  | Amendment to Second Amended and Restated
    Production Agreement dated as of March 1, 2001 between BP
    Chemicals Inc. (predecessor in interest to BP Amoco Chemical
    Company) and Sterling Chemicals, Inc. (incorporated herein by
    reference from Exhibit 10.1 to our Quarterly Report on
    Form 10-Q for the quarterly period ended March 31,
    2001).                                                                                    
|        | 10.22    |  |  |                       |  | Amended and Restated Product Sales Agreement
    dated effective as of January 1, 1998 between BASF
    Corporation and Sterling Chemicals, Inc. (incorporated herein by
    referenced from Exhibit 10.11 to our Annual Report on
    Form 10-K for the fiscal year ended September 30, 1997
    (SEC File Number 333-04343-01)).                                                                                                                        
|        | 10.23     |  |  |                       |  | License Agreement dated August 1, 1986
    between Monsanto Company and Sterling Chemicals, Inc.
    (incorporated herein by reference from Exhibit 10.25 to our
    Registration Statement on Form S-1 (Registration
    No. 33-24020)).                                                                                                                                                                                                                 
|        | 10.24     |  |  |                       |  | Asset and Stock Purchase Agreement dated as of
    November 13, 2002 among Sterling Chemicals, Inc. and
    Sterling Canada, Inc., Sterling Pulp Chemicals US Inc., Sterling
    Pulp Chemicals, Inc. and Sterling Chemicals Acquisitions, Inc.,
    as Sellers, and Superior Propane Inc., as Purchaser
    (incorporated herein by reference from Exhibit 10.23 to our
    Annual Report on Form 10-K for the fiscal year ended
    September 30, 2002).
|        | 10.25     |  |  |                       |  | Investment Agreement dated as of October 11,
    2002 among Sterling Chemicals Holdings, Inc., Sterling
    Chemicals, Inc. and Resurgence Asset Management, L.L.C.
    (incorporated herein by reference from Exhibit 2.1 to our
    Annual Report on Form 10-K for the fiscal year ended
    September 30, 2002).                                                                                                                                       
|        | 14.1      |  |  |                       |  | Sterling Chemicals, Inc. Code of Ethics for the
    Chief Executive Officer and Senior Financial Officers
    (incorporated herein by reference from Exhibit 14.1 to our
    Quarterly Report on Form 10-Q for the quarterly period
    ended June 30, 2003).                                                                                                                                                                                             
|        | **21.1    |  |  |                       |  | Subsidiaries of Sterling Chemicals, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | **23.1    |  |  |                       |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | **31.1    |  |  |                       |  | Rule 13a-14(a) Certification of the Chief
    Executive Officer                                                                                                                                                                                                                                                                                                                                                                                           
|        | **31.2    |  |  |                       |  | Rule 13a-14(a) Certification of the Chief
    Financial Officer                                                                                                                                                                                                                                                                                                                                                                                           
|        | **32.1    |  |  |                       |  | Section 1350 Certification of the Chief
    Executive Officer                                                                                                                                                                                                                                                                                                                                                                                             
|        | **32.2    |  |  |                       |  | Section 1350 Certification of the Chief
    Financial Officer                                                                                                                                                                                                                                                                                                                                                                                             
|        | 99.1      |  |  |                       |  | Amended and Restated Audit Committee Charter of
    Sterling Chemicals, Inc. (incorporated herein by reference from
    Exhibit 99.1 to our Quarterly Report on Form 10-Q for the
    quarterly period ended September 30, 2003).                                                                                                                                                                                                                         
|        | **99.2    |  |  |                       |  | Amended and Restated Corporate Governance
    Committee Charter of Sterling Chemicals, Inc.                                                                                                                                                                                                                                                                                                                                                               



---



|  |                                                                
|- | ---------------------------------------------------------------
|* | Management contracts or compensatory plans or
    arrangements.



|   |                             
|-- | ----------------------------
|** | Filed or furnished herewith.



|  |                                                                                                                                                                     
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Portions of the exhibit have been omitted and
    filed separately with the Securities and Exchange Commission
    pursuant to a request for confidential treatment.

87