##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-Q

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the Quarterly Period ended June 30,
    2004                                            
|  
|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

Sterling Chemicals, Inc.

(Exact name of Registrant as specified in its
charter)


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

Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, par value $.01 per
share

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

APPLICABLE ONLY TO ISSUERS 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 July 31, 2004, Sterling Chemicals,
Inc. had 2,825,000 shares of common stock outstanding.



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IMPORTANT INFORMATION REGARDING THIS FORM
10-Q

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

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

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, energy and
    ocean-going vessels 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, including, without
limitation, our Annual Report on Form 10-K for the fiscal
year ended December 31, 2003 (our Annual
Report), include additional factors that could adversely
affect our business, results of operations and financial
condition and performance. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Certain Known Events, Trends,
Uncertainties and Risk Factors contained in our Annual
Report. Given these risks and uncertainties, investors should
not place undue reliance on forward-looking statements.
Forward-looking statements included in this Form 10-Q speak
only as of the date of this Form 10-Q 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.

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Subsequent Events

All statements contained in this Form 10-Q,
including the forward-looking statements discussed above, are
made as of August 10, 2004, unless those statements are
expressly made as of another date. We disclaim any
responsibility for the accuracy of any information contained in
this Form 10-Q to the extent such information is affected
or impacted by events, circumstances or developments occurring
after August 10, 2004 or by the passage of time after such
date and, except as required by applicable securities laws, we
do not intend to update such information. 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.

Document Summaries

Descriptions of documents and agreements
contained in this Form 10-Q 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 our Annual Report, other periodic reports we file
with the Securities and Exchange Commission or this
Form 10-Q.

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.

iii



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STERLING CHEMICALS, INC.

INDEX

|                                                                                                       |  |      |    | 
|------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                       |  | Page
|                                                                                                       |  |     
|PART I. FINANCIAL
    INFORMATION                                                                     
|Item 1.  Financial
    Statements                                                                      |  |      | 2  | 
|Item 2.  Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations |  |      | 15 | 
|Item 3.  Quantitative
    and Qualitative Disclosures About Market Risk                                |  |      | 22 | 
|Item 4.  Controls
    and Procedures                                                                   |  |      | 22 | 
|PART II. OTHER
    INFORMATION                                                                        
|Item 1.  Legal
    Proceedings                                                                         |  |      | 23 | 
|Item 4.  Submission
    of Matters to a Vote of Security Holders                                       |  |      | 23 | 
|Item 6.  Exhibits
    and Reports on Form 8-K                                                          |  |      | 24 | 
|12th Amend. to Amended Salaried Employees' Pension Plan                                               
|13th Amend.to Amended Salaried Employees' Pension Plan                                                
|8th Amend.to Hourly Paid Employee's Pension Plan                                                      
|5th Amend.to 6th Amended Savings & Investment Plan                                                    
|Articles of Agreement                                                                                 
|Letter of Deloitte & Touche LLP                                                                       
|Rule 13a-14a Certification of CEO                                                                     
|Rule 13a-14a Certification of CFO                                                                     
|Section 1350 Certification of CEO                                                                     
|Section 1350 Certification of CFO                                                                     



1



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##### Table of Contents






PART I.

FINANCIAL INFORMATION






|        |                     
|------- | --------------------
|Item 1. | Financial Statements

STERLING CHEMICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                               |                              |                                           |         |                  |        |      |         |           |       |   |         |           |        |   |         |           |       |  
|-------------------------------------------------------------- | ---------------------------- | ----------------------------------------- | ------- | ---------------- | ------ | ---- | ------- | --------- | ----- | - | ------- | --------- | ------ | - | ------- | --------- | ----- | -
|                                                               |                              |                                           |         |                 
|                                                               |                              | Three Months Ended                        |         | Six Months Ended
|                                                               |                              | June 30,                                  |         | June 30,        
|                                                               |                              |                                           |         |                 
|                                                               |                              | 2004                                      |         | 2003             |        | 2004 |         | 2003     
|                                                               |                              |                                           |         |                  |        |      |         |          
|                                                               |                              |                                          
|                                                               |                              | (Dollars in thousands, except share data)
|                                                               |                              |                                          
|                                                               |                              | (Unaudited)                              
|Revenues                                                       |                              | $                                         | 184,375 |                  |        | $    | 120,610 |           |       | $ | 332,277 |           |        | $ | 242,978 |          
|Cost of goods sold                                             |                              |                                           | 181,770 |                  |        |      | 129,672 |           |       |   | 339,471 |           |        |   | 254,402 |          
|                                                               |                              |                                           |         |                  |        |      |         |           |       |   |         |           |        |   |         |          
|Gross profit (loss)                                            |                              |                                           | 2,605   |                  |        |      | (9,062  | )         |       |   | (7,194  | )         |        |   | (11,424 | )        
|Selling, general and administrative expenses                   |                              |                                           | 3,104   |                  |        |      | 3,907   |           |       |   | 6,285   |           |        |   | 8,593   |          
|Impairment of goodwill                                         |                              |                                           | 48,463  |                  |        |      |        |           |       |   | 48,463  |           |        |   |        |          
|Other expense                                                  |                              |                                           |        |                  |        |      | 157     |           |       |   |        |           |        |   | (3,521  | )        
|Interest and debt related expenses, net of
    interest income |                              |                                           | 2,593   |                  |        |      | 2,243   |           |       |   | 5,122   |           |        |   | 3,844   |          
|                                                               |                              |                                           |         |                  |        |      |         |           |       |   |         |           |        |   |         |          
|Loss from continuing operations before income tax              |                              |                                           | (51,555 | )                |        |      | (15,369 | )         |       |   | (67,064 | )         |        |   | (20,340 | )        
|Benefit for income taxes                                       |                              |                                           | (971    | )                |        |      | (5,594  | )         |       |   | (6,620  | )         |        |   | (7,025  | )        
|                                                               |                              |                                           |         |                  |        |      |         |           |       |   |         |           |        |   |         |          
|Loss from continuing operations                                |                              |                                           | (50,584 | )                |        |      | (9,775  | )         |       |   | (60,444 | )         |        |   | (13,315 | )        
|Loss from discontinued operations, net of tax
    expense      |                              |                                           |        |                  |        |      | 342     |           |       |   |        |           |        |   | 976     |          
|                                                               |                              |                                           |         |                  |        |      |         |           |       |   |         |           |        |   |         |          
|Net loss                                                       |                              | $                                         | (50,584 | )                |        | $    | (10,117 | )         |       | $ | (60,444 | )         |        | $ | (14,291 | )        
|Preferred stock dividends                                      |                              |                                           | 1,468   |                  |        |      | 1,255   |           |       |   | 2,880   |           |        |   | 2,462   |          
|                                                               |                              |                                           |         |                  |        |      |         |           |       |   |         |           |        |   |         |          
|Net loss attributable to common stockholders                   |                              | $                                         | (52,052 | )                |        | $    | (11,372 | )         |       | $ | (63,324 | )         |        | $ | (16,753 | )        
|                                                               |                              |                                           |         |                  |        |      |         |           |       |   |         |           |        |   |         |          
|Loss per share of common stock, basic and diluted:             |                              |                                           |         |                  |        |      |         |           |       |   |         |           |        |   |         |          
|                                                               | From continuing operations   |                                           | $       | (18.43           | )      |      | $       | (3.91     | )     |   | $       | (22.42    | )      |   | $       | (5.58     | )    
|                                                               | From discontinued operations |                                           |         |                 |        |      |         | (0.12     | )     |   |         |          |        |   |         | (0.35     | )    
|                                                               |                              |                                           |         |                  |        |      |         |           |       |   |         |           |        |   |         |          
|                                                               |                              | Net loss                                  |         | $                | (18.43 | )    |         | $         | (4.03 | ) |         | $         | (22.42 | ) |         | $         | (5.93 | )
|                                                               |                              |                                           |         |                  |        |      |         |           |       |   |         |           |        |   |         |          
|Weighted average shares outstanding:                           |                              |                                           |         |                  |        |      |         |           |       |   |         |           |        |   |         |          
|                                                               | Basic and diluted            |                                           |         | 2,825,000        |        |      |         | 2,825,000 |       |   |         | 2,825,000 |        |   |         | 2,825,000 |      

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

2



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STERLING CHEMICALS, INC.

CONDENSED CONSOLIDATED BALANCE
SHEETS

|                                           |                                      |                            |         |              |         |   |         |         |         | 
|------------------------------------------ | ------------------------------------ | -------------------------- | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                           |                                      | June 30,                   |         | December 31,
|                                           |                                      | 2004                       |         | 2003        
|                                           |                                      |                            |         |             
|                                           |                                      |                           
|                                           |                                      | (Dollars in thousands)    
|                                           |                                      |                           
|                                           |                                      | (Unaudited)               
|ASSETS                                    
|Current assets:                            |                                      |                            |         |              |         |   |         |        
|                                           | Cash and cash equivalents            |                            | $       | 17,903       |         |   | $       | 42,384  |        
|                                           | Accounts receivable, net             |                            |         | 75,420       |         |   |         | 87,565  |        
|                                           | Inventories                          |                            |         | 70,956       |         |   |         | 61,583  |        
|                                           | Prepaid expenses                     |                            |         | 2,951        |         |   |         | 6,430   |        
|                                           | Deferred tax asset                   |                            |         | 9,518        |         |   |         | 9,081   |        
|                                           |                                      |                            |         |              |         |   |         |        
|                                           |                                      | Total current assets       |         |              | 176,748 |   |         |         | 207,043 | 
|Property, plant and equipment, net         |                                      |                            | 271,052 |              |         |   | 277,613 |        
|Goodwill                                   |                                      |                            |        |              |         |   | 48,463  |        
|Other assets, net                          |                                      |                            | 19,036  |              |         |   | 17,384  |        
|                                           |                                      |                            |         |              |         |   |         |        
|                                           |                                      | Total assets               |         | $            | 466,836 |   |         | $       | 550,503 | 
|                                           |                                      |                            |         |              |         |   |         |        
|                                          
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Current liabilities:                       |                                      |                            |         |              |         |   |         |        
|                                           | Accounts payable                     |                            | $       | 50,312       |         |   | $       | 64,833  |        
|                                           | Accrued liabilities                  |                            |         | 22,062       |         |   |         | 24,045  |        
|                                           |                                      |                            |         |              |         |   |         |        
|                                           |                                      | Total current liabilities  |         |              | 72,374  |   |         |         | 88,878  | 
|Long-term debt                             |                                      |                            | 100,579 |              |         |   | 100,579 |        
|Deferred tax liability                     |                                      |                            | 43,459  |              |         |   | 49,909  |        
|Deferred credits and other liabilities     |                                      |                            | 86,138  |              |         |   | 86,407  |        
|Redeemable preferred stock                 |                                      |                            | 38,174  |              |         |   | 35,294  |        
|Commitments and contingencies (Note 6)     |                                      |                            |         |              |         |   |         |        
|Stockholders equity:                      |                                      |                            |         |              |         |   |         |        
|                                           | Common stock, $.01 par value         |                            |         | 28           |         |   |         | 28      |        
|                                           | Additional paid-in capital           |                            |         | 202,522      |         |   |         | 205,402 |        
|                                           | Accumulated deficit                  |                            |         | (76,187      | )       |   |         | (15,743 | )      
|                                           | Accumulated other comprehensive loss |                            |         | (251         | )       |   |         | (251    | )      
|                                           |                                      |                            |         |              |         |   |         |        
|                                           |                                      | Total stockholders equity |         |              | 126,112 |   |         |         | 189,436 | 
|                                           |                                      |                            |         |              |         |   |         |        
|Total liabilities and stockholders equity |                                      | $                          | 466,836 |              |         | $ | 550,503 |        
|                                           |                                      |                            |         |              |         |   |         |        

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

3



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##### Table of Contents



STERLING CHEMICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                |                                    |                        |         |         |   |   |         |         |  
|------------------------------------------------------------------------------- | ---------------------------------- | ---------------------- | ------- | ------- | - | - | ------- | ------- | -
|                                                                                |                                    |                       
|                                                                                |                                    | Six Months Ended      
|                                                                                |                                    | June 30,              
|                                                                                |                                    |                       
|                                                                                |                                    | 2004                   |         | 2003   
|                                                                                |                                    |                        |         |        
|                                                                                |                                    |                       
|                                                                                |                                    | (Dollars in thousands)
|                                                                                |                                    | (Unaudited)           
|Cash flows from operating activities:                                           |                                    |                        |         |         |   |   |         |        
|Net loss from continuing operations                                             |                                    | $                      | (60,444 | )       |   | $ | (13,315 | )      
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                    |                        |         |         |   |   |         |        
|                                                                                | Depreciation and amortization      |                        |         | 14,196  |   |   |         | 13,259  |  
|                                                                                | Impairment of goodwill             |                        |         | 48,463  |   |   |         |        |  
|                                                                                | Interest amortization              |                        |         | 199     |   |   |         | 188     |  
|                                                                                | Deferred tax benefit               |                        |         | (6,887  | ) |   |         | (7,092  | )
|                                                                                | Other                              |                        |         |        |   |   |         | (1      | )
|Change in assets/liabilities:                                                   |                                    |                        |         |         |   |   |         |        
|                                                                                | Accounts receivable                |                        |         | 12,145  |   |   |         | (14,191 | )
|                                                                                | Inventories                        |                        |         | (9,373  | ) |   |         | (892    | )
|                                                                                | Prepaid expenses                   |                        |         | 3,479   |   |   |         | 1,124   |  
|                                                                                | Other assets                       |                        |         | (3,393  | ) |   |         | (200    | )
|                                                                                | Accounts payable                   |                        |         | (14,521 | ) |   |         | (220    | )
|                                                                                | Accrued liabilities                |                        |         | (1,983  | ) |   |         | (4,659  | )
|                                                                                | Other liabilities                  |                        |         | (269    | ) |   |         | 627     |  
|                                                                                |                                    |                        |         |         |   |   |         |        
|Net cash used in operating activities                                           |                                    |                        | (18,388 | )       |   |   | (25,372 | )      
|                                                                                |                                    |                        |         |         |   |   |         |        
|Cash flows used in investing activities:                                        |                                    |                        |         |         |   |   |         |        
|                                                                                | Capital expenditures               |                        |         | (6,093  | ) |   |         | (7,239  | )
|                                                                                |                                    |                        |         |         |   |   |         |        
|Cash flows from financing activities:                                           |                                    |                        |         |         |   |   |         |        
|                                                                                | Net borrowings under the Revolver  |                        |         |        |   |   |         |        |  
|                                                                                |                                    |                        |         |         |   |   |         |        
|Net decrease in cash and cash equivalents from
    continuing operations        |                                    |                        | (24,481 | )       |   |   | (32,611 | )      
|Net decrease in cash and cash equivalents from
    discontinued operations      |                                    |                        |        |         |   |   | (976    | )      
|Cash and cash equivalents  beginning
    of year                               |                                    |                        | 42,384  |         |   |   | 99,818  |        
|                                                                                |                                    |                        |         |         |   |   |         |        
|Cash and cash equivalents  end of
    period                                   |                                    | $                      | 17,903  |         |   | $ | 66,231  |        
|                                                                                |                                    |                        |         |         |   |   |         |        
|Supplemental disclosures of cash flow information:                              |                                    |                        |         |         |   |   |         |        
|                                                                                | Net interest paid                  |                        | $       | 5,187   |   |   | $       | 4,480   |  
|                                                                                | Cash paid for reorganization items |                        |         |        |   |   |         | 13,115  |  

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

4



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##### Table of Contents



STERLING CHEMICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)




|   |                      
|-- | ---------------------
|1. | Basis of Presentation



| |                                   
| | ----------------------------------
| | Interim Financial
    Information:

In our opinion, the accompanying unaudited
condensed consolidated financial statements reflect all
adjustments necessary to present fairly our consolidated
financial position and consolidated results of operations and
cash flows for the applicable three and six-month periods ended
June 30, 2004 and June 30, 2003. All such adjustments
are of a normal and recurring nature. The results of operations
and cash flows for the periods presented are not necessarily
indicative of the results to be expected for the full year.

The accompanying unaudited condensed consolidated
financial statements should be, and are assumed to have been,
read in conjunction with the consolidated financial statements
and notes included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2003 (our Annual
Report). The accompanying condensed consolidated balance
sheet as of December 31, 2003 has been derived from the
audited consolidated balance sheet as of December 31, 2003
included in our Annual Report. The accompanying condensed
consolidated financial statements, as of June 30, 2004 and
for the three and six-month periods ended June 30, 2004 and
June 30, 2003, have been reviewed by Deloitte &
Touche LLP, our independent public accountants, whose report is
included herein.



| |                     
| | --------------------
| | Recent Developments:

On July 28, 2004, the holders of our
Series A Convertible Preferred Stock (our Preferred
Stock) elected Philip Sivin to our Board of Directors to
replace James B. Rubin, our former Chairman of the Board and one
of our former directors. Our Board does not have any immediate
plans to fill the position of the Chairman of the Board.
Mr. Rubin was originally appointed to our Board of
Directors by the holders of our Preferred Stock on
December 19, 2001 and, under the Restated Certificate of
Designations, Preferences, Rights and Limitations of our
Preferred Stock, the holders of our Preferred Stock have the
exclusive right to replace Mr. Rubin.

On April 2, 2004, we entered into a Purchase
and Sale Agreement with Sigma Investment Holdings, L.L.C.
(Sigma) that governs the possible sale of our idled
methanol plant. The closing of the sale was originally scheduled
to occur on or before April 30, 2004. However, we and Sigma
have extended the closing date, and we now expect the closing to
occur during the third quarter of 2004, although no assurances
can be given to that effect. Pursuant to the terms of the
Purchase and Sale Agreement, as of July 29, 2004, Sigma has
made a $3.5 million non-refundable good faith deposit
towards the purchase price, of which $0.4 million had been
received as of June 30, 2004. If the sale is consummated,
the methanol plant will be dismantled and the purchaser has
informed us that they will reassemble the methanol plant in
Asia. Under our Methanol Production Agreement with BP Amoco
Chemical Company (BP Chemicals),
BP Chemicals is entitled to a portion of the net proceeds
from any sale of our methanol plant (or the good faith deposit
if the sale is not ultimately consummated). After taking into
account sales commissions and various costs and expenses we
expect to incur in connection with preparing the methanol plant
for dismantling, as well as the distribution to
BP Chemicals, we expect to retain approximately
$3 million from any sale of our methanol plant to Sigma.
The assets comprising the methanol plant were not ascribed any
value upon our application of fresh-start accounting in 2002. As
a result, no assets have been recorded as held for
sale in our financial statements.

We have approximately 140 hourly employees
at our Texas City facility, all of whom are represented by The
Texas City Metal Trades Council, AFL-CIO, of Galveston County,
Texas (the Union). Our prior collective bargaining
agreement with the Union expired on May 1, 2004 and, on
May 3, 2004, after rejecting our final and concluding
offer, the Union ordered its members to walk off the job. On
May 7,

5



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##### Table of Contents



STERLING CHEMICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2004, the Unions membership voted to end
the strike and return to work. During the strike, we were able
to operate our facilities and supply our customers without
interruption. On May 27, 2004, we entered into a new
collective bargaining agreement with the Union which expires on
May 1, 2007.



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

On July 16, 2001, 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 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
Effective Date), 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. Due to the Debtors emergence from bankruptcy and the
implementation of fresh-start accounting, we refer to ourselves
as Predecessor Sterling for periods on or before
December 19, 2002 and Reorganized Sterling for
periods after December 19, 2002.

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, on
the Effective Date, Reorganized Sterling issued
65,000 shares of its common stock to the holders of
Holdings 13 1/2% Senior Secured Discount Notes in
satisfaction of their claims. On the Effective Date, Resurgence
Asset Management, L.L.C., on behalf of itself and certain of its
and its affiliates managed funds and accounts
(collectively, the Investor), paid $30 million
for 2,175 shares of our Preferred Stock, and an additional
$30 million was paid to Reorganized Sterling in exchange
for 2,175,000 shares of our 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. Pursuant to the Plan
of Reorganization, the unsecured creditors of the Debtors (other
than unsecured creditors of Holdings), received pro rata shares
of 11.7% of our common stock (on a fully diluted basis assuming
the conversion of all shares of our Preferred Stock into shares
of our common stock) and warrants to acquire 949,367 shares
of our common stock at an exercise price of $52 per share
(subject to adjustment).

Pursuant to the Plan of Reorganization, on the
Effective Date the Debtors pulp chemicals business was
sold to Superior Propane, Inc. for $373 million, and the
Debtors acrylic fibers business was sold to local
management of that business for nominal consideration. Following
these sales, Reorganized Sterling retained $80 million of
the net proceeds from the sale of the Debtors pulp
chemicals business and Reorganized Sterling owned and operated
only the Debtors core petrochemicals business. The
remaining net proceeds from the sale of the Debtors pulp
chemicals business were distributed 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 original principal amount of
Reorganized Sterlings new 10% Senior Secured Notes
due 2007 (our Secured Notes) in satisfaction of
their claims. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144,
Accounting for the Impairment and Disposal of Long Lived
Assets, we have reported activity pertaining to the
Debtors prior pulp chemicals and acrylic fibers businesses
as discontinued operations in the condensed consolidated
statements of operations.

On the Effective Date, Reorganized Sterling also
established a new revolving credit facility (the
Revolver) which provides up to $100 million in
revolving credit loans (subject to borrowing base

6



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##### Table of Contents



STERLING CHEMICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

limitations) with The CIT Group/ Business Credit,
Inc., as administrative agent and a lender, and certain other
lenders.



|   |                         
|-- | ------------------------
|2. | Stock-Based Compensation

In connection with the implementation of the Plan
of Reorganization, we adopted our 2002 Stock Plan and reserved
379,747 shares of our common stock for issuance under our
2002 Stock Plan (subject to adjustment). 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. On February 11, 2003,
we granted options to purchase a total of 348,500 shares of
our common stock to certain of our officers and key employees 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 or exceeds 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 our
net loss and loss per share attributable to common stockholders
if 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, calculated pursuant to SFAS No. 123,
Accounting for Stock-Based Compensation, for the
three and six-month periods ended June 30, 2004 and
June 30, 2003. There were no options outstanding under our
2002 Stock Plan prior to February 11, 2003.

|                                                                                                                                                    |  |                                           |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | ------- | ---------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                                    |  |                                           |         |                 
|                                                                                                                                                    |  | Three Months Ended                        |         | Six Months Ended
|                                                                                                                                                    |  | June 30,                                  |         | June 30,        
|                                                                                                                                                    |  |                                           |         |                 
|                                                                                                                                                    |  | 2004                                      |         | 2003             |  | 2004 |         | 2003
|                                                                                                                                                    |  |                                           |         |                  |  |      |         |     
|                                                                                                                                                    |  |                                          
|                                                                                                                                                    |  | (Dollars in thousands, except share data)
|Net loss attributable to common stockholders, as
    reported                                                                                       |  | $                                         | (52,052 | )                |  | $    | (11,372 | )    |  | $ | (63,324 | ) |  | $ | (16,753 | )
|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 |  |                                           | 270     |                  |  |      | 594     |      |  |   | 702     |   |  |   | 891     |  
|                                                                                                                                                    |  |                                           |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Pro forma net loss                                                                                                                                  |  | $                                         | (52,322 | )                |  | $    | (11,966 | )    |  | $ | (64,026 | ) |  | $ | (17,644 | )
|                                                                                                                                                    |  |                                           |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|Loss per share attributable to common
    stockholders:                                                                                             |  |                                           |         |                  |  |      |         |      |  |   |         |   |  |   |         |  
|As reported                                                                                                                                         |  | $                                         | (18.43  | )                |  | $    | (4.03   | )    |  | $ | (22.42  | ) |  | $ | (5.93   | )
|Pro forma                                                                                                                                           |  |                                           | (18.52  | )                |  |      | (4.24   | )    |  |   | (22.66  | ) |  |   | (6.25   | )

7



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##### Table of Contents



STERLING CHEMICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |            
|-- | -----------
|3. | Inventories

|                                      |  |                        |        |              |  |   |        | 
|------------------------------------- |  | ---------------------- | ------ | ------------ |  | - | ------ | 
|                                      |  | June 30,               |        | December 31,
|                                      |  | 2004                   |        | 2003        
|                                      |  |                        |        |             
|                                      |  |                       
|                                      |  | (Dollars in thousands)
|Finished products                     |  | $                      | 38,378 |              |  | $ | 37,944 | 
|Raw materials                         |  |                        | 13,762 |              |  |   | 16,480 | 
|Inventories under exchange agreements |  |                        | 12,926 |              |  |   | 1,325  | 
|Stores and supplies                   |  |                        | 5,890  |              |  |   | 5,834  | 
|                                      |  |                        |        |              |  |   |        | 
|                                      |  | $                      | 70,956 |              |  | $ | 61,583 | 
|                                      |  |                        |        |              |  |   |        | 



|   |                                                 
|-- | ------------------------------------------------
|4. | Long-Lived Assets and Impairment of
    Goodwill

As part of our review of financial results for
the three months ended June 30, 2004, we have performed an
assessment of the carrying value of our long-lived assets to be
held and used, including goodwill. This assessment was performed
because of the recent negative industry and economic trends
affecting both our current operations and expected future
margins, primarily driven by high raw materials and energy
prices. At the conclusion of this assessment, we recorded a
non-cash impairment of goodwill charge of $48.5 million for
the three months ended June 30, 2004. Recoverability was
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 representing the time value of money and the inherent risk
of 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.

During our assessment of our long-lived assets
other than goodwill, we analyzed recoverability based on our
projected undiscounted net future cash flows over the remaining
life of the assets. Based on this analysis, no impairment loss
was required as these projected cash flows were greater than the
carrying amount.



|   |               
|-- | --------------
|5. | Long-Term Debt

Pursuant to the Plan of Reorganization, on
December 19, 2002, we issued $94.3 million in original
principal amount of our Secured Notes to the holders of
Predecessor Sterlings 12 3/8% Notes. Our Secured
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. Our Secured 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. Our Secured Notes
and Sterling Energys guaranty are secured by a first
priority lien on all of our production facilities and related
assets.

Our Secured 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 our Secured Notes through the
issuance of additional Secured Notes rather than the payment of
cash. However, if we pay interest through the issuance of
additional Secured Notes rather than the payment of cash, the
interest rate for the relevant period is increased to
13 3/8%. In December 2003, we made an interest payment on
our Secured Notes at the higher rate through the issuance of
$6.3 million in original principal amount of Secured Notes,
increasing the

8



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##### Table of Contents



STERLING CHEMICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

aggregate principal amount of outstanding Secured
Notes to $100.6 million. All other interest payments on our
Secured Notes have been made in cash. Subject to compliance with
the terms of the Revolver, we may redeem our Secured 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 our Secured Notes at 101% of the outstanding
principal amount thereof plus accrued and unpaid interest. Under
certain circumstances, we are also required to use the proceeds
of other asset sales to repurchase any of our Secured Notes
tendered by the holders of our Secured Notes at a price equal to
100% of the outstanding principal amount thereof plus accrued
and unpaid interest.

The indenture governing our Secured 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
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 Revolver has an initial term ending on
September 19, 2007. Under the Revolver, Reorganized
Sterling and Sterling Energy are co-borrowers and are jointly
and severally liable for any indebtedness thereunder. The
Revolver is secured by first priority liens on all of our
accounts receivable, inventory and other specified assets, as
well as all of the issued and outstanding capital stock of
Sterling Energy.

Borrowings under the 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
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 Revolver). Under the Revolver, we
are also required to pay an aggregate commitment fee of
0.50% per year (payable monthly) on any unused portion of
the Revolver. Available credit under the 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 Revolver must
exceed outstanding borrowings thereunder by $8 million at
all times. As of June 30, 2004, total credit available
under the Revolver was limited to $63 million due to these
borrowing base limitations. As of June 30, 2004, there were
no loans outstanding under the Revolver, although we had
$1 million in outstanding letters of credit issued pursuant
to the Revolver.

The 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 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 Revolver plus cash on hand is less than
$20 million. The 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.



|   |                              
|-- | -----------------------------
|6. | Commitments and Contingencies



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

We have certain long-term agreements that provide
for the dedication of 100% of our production of acetic acid,
plasticizers, sodium cyanide and disodium iminodiacetic acid, or
DSIDA, each to one

9



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##### Table of Contents



STERLING CHEMICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

customer. We also have various sales and
conversion agreements that dedicate significant portions of our
production of styrene and acrylonitrile to certain customers.
Some of these agreements provide for cost recovery plus an
agreed profit margin based upon market prices.



| |                           
| | --------------------------
| | Environmental Regulations:

Our operations involve the handling, production,
transportation, treatment and disposal of materials that are
classified as hazardous or toxic waste and that are extensively
regulated by environmental 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.

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 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.

10



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##### Table of Contents



STERLING CHEMICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On December 13, 2002, the Texas Commission
for Environmental Quality adopted a revised State Implementation
Plan (SIP) for compliance with the ozone provisions
of the Clean Air Act. The SIP is currently being reviewed by the
Environmental Protection Agency, 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
will 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 will be incurred over the
four-year period that began on January 1, 2004. Under
certain of our production agreements, we should be able to
recover a small portion of these costs from the other parties to
these agreements. 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, offset some of 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.



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

As previously discussed, the Debtors filed
voluntary petitions for reorganization under Chapter 11 of
the Bankruptcy Code on July 16, 2001. As a result of the
commencement of the Chapter 11 cases, an automatic stay 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. 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. 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.

Very few issues remain outstanding before the
Bankruptcy Court, all of which relate to the allowability or
amount 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.

We are subject to various other claims and legal
actions that arise in the ordinary course of our business.



|   |                                                    
|-- | ---------------------------------------------------
|7. | Pension Plans and Other Postretirement
    Benefits

Effective December 31, 2003, we adopted
SFAS No. 132 (as revised in December 2003),
Employers Disclosures about Pensions and Other
Postretirement Benefits. This standard requires the
disclosure of the components of net periodic benefit cost
recognized during interim periods.

11



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##### Table of Contents



STERLING CHEMICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Net periodic pension costs consisted of the
following components:

|                               |  |                        |        |                        |  |      |        |      |  |   |        |   |  |   |        |  
|------------------------------ |  | ---------------------- | ------ | ---------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                               |  |                        |        |                       
|                               |  | Three Months Ended     |        | Six Months Ended      
|                               |  | June 30,               |        | June 30,              
|                               |  |                        |        |                       
|                               |  | 2004                   |        | 2003                   |  | 2004 |        | 2003
|                               |  |                        |        |                        |  |      |        |     
|                               |  |                        |        |                       
|                               |  | (Dollars in thousands) |        | (Dollars in thousands)
|Service cost                   |  | $                      | 904    |                        |  | $    | 828    |      |  | $ | 1,732  |   |  | $ | 1,656  |  
|Interest cost                  |  |                        | 1,861  |                        |  |      | 1,908  |      |  |   | 3,770  |   |  |   | 3,817  |  
|Expected return on plan assets |  |                        | (1,655 | )                      |  |      | (1,301 | )    |  |   | (2,956 | ) |  |   | (2,602 | )
|                               |  |                        |        |                        |  |      |        |      |  |   |        |   |  |   |        |  
|Net pension costs              |  | $                      | 1,110  |                        |  | $    | 1,435  |      |  | $ | 2,546  |   |  | $ | 2,871  |  
|                               |  |                        |        |                        |  |      |        |      |  |   |        |   |  |   |        |  

Other postretirement benefits costs consisted of
the following components:

|                               |  |                        |        |                        |  |      |      |      |  |   |        |   |  |   |       |  
|------------------------------ |  | ---------------------- | ------ | ---------------------- |  | ---- | ---- | ---- |  | - | ------ | - |  | - | ----- | -
|                               |  |                        |        |                       
|                               |  | Three Months Ended     |        | Six Months Ended      
|                               |  | June 30,               |        | June 30,              
|                               |  |                        |        |                       
|                               |  | 2004                   |        | 2003                   |  | 2004 |      | 2003
|                               |  |                        |        |                        |  |      |      |     
|                               |  |                        |        |                       
|                               |  | (Dollars in thousands) |        | (Dollars in thousands)
|Service cost                   |  | $                      | 79     |                        |  | $    | 115  |      |  | $ | 156    |   |  | $ | 230   |  
|Interest cost                  |  |                        | 397    |                        |  |      | 584  |      |  |   | 788    |   |  |   | 1,168 |  
|Curtailment gain               |  |                        | (1,418 | )                      |  |      |     |      |  |   | (1,418 | ) |  |   |      |  
|Expected return on plan assets |  |                        | (83    | )                      |  |      | (119 | )    |  |   | (164   | ) |  |   | (238  | )
|                               |  |                        |        |                        |  |      |      |      |  |   |        |   |  |   |       |  
|Net pension costs              |  | $                      | (1,025 | )                      |  | $    | 580  |      |  | $ | (638   | ) |  | $ | 1,160 |  
|                               |  |                        |        |                        |  |      |      |      |  |   |        |   |  |   |       |  

In June 2004, we had a reduction in force at our
Texas City plant. This reduction in force led to a curtailment
of our postretirement benefit plan resulting in a
$1.4 million curtailment gain. $1.3 million of the
gain is reflected in cost of goods sold and $0.1 million is
reflected in selling, general and administrative expenses. In
addition, our plan was amended as of June 1, 2004 as
follows: employees hired after this date are not eligible for
retiree medical benefits, our contribution rates for retiree
medical coverage are frozen at the 2004 level and prescription
drug co-pays were increased 5%. This amendment reduced the
accumulated postretirement benefit obligation by
$9.2 million, which is being amortized over the average
remaining service period to full eligibility of the active plan
participants (which is 8.5 years).



|   |                         
|-- | ------------------------
|8. | New Accounting Standards

In December 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation
Number (FIN) 46-R,Consolidation of Variable
Interest Entities. FIN 46-R, which modifies certain
provisions and effective dates of FIN 46, sets forth
criteria to be used in determining whether an investment in a
variable interest entity should be consolidated. These
provisions are based on the general premise that if a company
controls another entity through interests other than voting
interests, that company should consolidate the controlled
entity. We do not believe that any of our investments or any of
other arrangements that come within the definition of a variable
interest entity are required to be consolidated under
FIN 46-R.

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 for fiscal
years ending after December 7, 2003, and permits a one-time
election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003
(the Act). In May 2004, the FASB issued FASB Staff
Position No. 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003
(FAS 106-2) which supercedes FAS 106-1.
FAS 106-2 provides guidance on the accounting for the
effects of the Act for employers that sponsor postretirement

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STERLING CHEMICALS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

heath care plans that provide prescription drug
benefits, and requires those employers to provide certain
disclosures regarding the effect of the federal subsidy provided
under the Act. FAS 106-2 will apply to us for all interim
and annual periods commencing on or after July 1, 2004. We
believe that the prescription drug benefits provided under our
postretirement plan are actuarially equivalent to the Medicare
benefit available to participants under our plan, a prerequisite
for qualifying for the subsidy, but we do not believe that the
subsidy provided under the Act will have a material impact on
our condensed consolidated financial statements.

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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

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

We have reviewed the accompanying condensed
consolidated balance sheet of Sterling Chemicals, Inc. and
subsidiaries (the Company) as of June 30, 2004,
and the related condensed consolidated statements of operations
and cash flows for the three- and six-month periods ended
June 30, 2004 and June 30, 2003, respectively. These
financial statements are the responsibility of the
Companys management.

We conducted our review in accordance with
standards of the Public Accounting Oversight Board (United
States). A review of interim financial information consists
principally of applying analytical procedures to financial data
and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
audit conducted in accordance with standards of the Public
Accounting Oversight Board (United States), the objective of
which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such
an opinion.

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

We have previously audited, in accordance with
auditing standards generally accepted in the United States of
America, the consolidated balance sheet of the Company as of
December 31, 2003, and the related consolidated statements
of operations, stockholders equity, and cash flows for the
period then ended (not presented herein); and in our report
dated March 19, 2004, we expressed an unqualified opinion
on those consolidated financial statements and included an
explanatory paragraph referring to the application of fresh
start accounting in 2002 in accordance with the AICPAs
Statement of Position 90-7, Financial Reporting for
Entities in Reorganization Under the Bankruptcy Code, and
the lack of comparability of financial information between
periods and included an explanatory paragraph referring to the
Companys change in fiscal year-end from September 30
to December 31 in 2002. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet
as of December 31, 2003 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from
which it has been derived.

DELOITTE & TOUCHE LLP

Houston, Texas

August 10, 2004


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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion should be read in
conjunction with our condensed consolidated financial statements
(including the Notes thereto) included in Item 1,
Part I of this report.

Recent Developments

On July 28, 2004, the holders of our
Series A Convertible Preferred Stock (our Preferred
Stock) elected Philip Sivin to our Board of Directors to
replace James B. Rubin, our former Chairman of the Board and one
of our former directors. The position of the Chairman of the
Board is vacant at this time. Mr. Rubin was originally
appointed to our Board of Directors by the holders of our
Preferred Stock on December 19, 2001 and, under the
Restated Certificate of Designations, Preferences, Rights and
Limitations of our Preferred Stock, the holders of our Preferred
Stock have the exclusive right to replace Mr. Rubin.

On April 2, 2004, we entered into a Purchase
and Sale Agreement with Sigma Investment Holdings, L.L.C.
(Sigma) that governs the possible sale of our idled
methanol plant. The closing of the sale was originally scheduled
to occur on or before April 30, 2004. However, we and Sigma
have extended the closing date, and we now expect the closing to
occur during the third quarter of 2004, although no assurances
can be given to that effect. Pursuant to the terms of the
Purchase and Sale Agreement, as of July 29, 2004, Sigma has
made a $3.5 million non-refundable good faith deposit
towards the purchase price, of which $0.4 million had been
received as of June 30, 2004. If the sale is consummated,
the methanol plant will be dismantled and the purchaser has
informed us that they will reassemble the methanol plant in
Asia. Under our Methanol Production Agreement with BP Amoco
Chemical Company (BP Chemicals),
BP Chemicals is entitled to a portion of the net proceeds
from any sale of our methanol plant (or the good faith deposit
if the sale is not ultimately consummated). After taking into
account sales commissions and various costs and expenses we
expect to incur in connection with preparing the methanol plant
for dismantling, as well as the distribution to BP Chemicals, we
expect to retain approximately $3 million from any sale of
our methanol plant to Sigma. The assets comprising the methanol
plant were not ascribed any value upon our application of
fresh-start accounting in 2002. As a result, no assets have been
recorded as held for sale in our financial
statements.

We have approximately 140 hourly employees
at our Texas City facility, all of whom are represented by The
Texas City Metal Trades Council, AFL-CIO, of Galveston County,
Texas (the Union). Our prior collective bargaining
agreement with the Union expired on May 1, 2004 and, on
May 3, 2004, after rejecting our final and concluding
offer, the Union ordered its members to walk off the job. On
May 7, 2004, the Unions membership voted to end the
strike and return to work. During the strike, we were able to
operate our facilities and supply our customers without
interruption. On May 27, 2004, we entered into a new
collective bargaining agreement with the Union which expires on
May 1, 2007.

Business Overview

We manufacture a variety of petrochemicals.
However, 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. 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. 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.

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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 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 are significantly influenced by changes in the
price for natural gas.

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 affect our
raw materials conversion yields.

Styrene prices were fairly high, from a
historical perspective, during the second quarter of 2004, and
demand for styrene currently appears to be balanced with supply,
especially for domestic customers. However, due to high energy
costs and raw materials prices in North America, opportunities
to sell styrene into the spot export market in the second
quarter of 2004 were, for the most part, precluded and most
United States styrene producers were unable to realize
meaningful margin improvements on their domestic styrene sales.
As previously mentioned, the combined cost of raw materials and
energy resources is far greater than all other costs of
production combined, with the cost of benzene having more effect
on our overall styrene manufacturing costs than any other raw
material. Costs for both benzene and ethylene increased during
the second quarter of 2004 from those paid during 2003,
primarily due to tight benzene supply demand balance. In early
April, benzene costs escalated to historical highs for both spot
and contract volumes, and prices continued to rise over the
course of the second quarter of 2004. Prices for benzene
continued to escalate in July 2004 with spot prices exceeding
$4 per gallon. If benzene prices remain at these
unprecedented levels, or increase further, demand for styrene
may be negatively impacted and margins could be adversely
impacted. Several industry experts are forecasting a
continuation of historically high benzene prices as a result of
the tight supply demand balance for the next few years.
Continuation of historically high benzene prices could result in
reduced demand for styrene or the inability of styrene producers
to completely pass the increased cost on to styrene consumers or
both. If this in fact occurs, benzene prices could have a
material negative impact on the financial performance of our
styrene operations during that period, and significantly reduce
our earnings potential during any peak in the styrene markets
that may occur during that time frame. While many industry
experts expect an up cycle in the styrene markets over the next
few years, no assurances can be given that a peak in the styrene
markets will in fact occur during that time frame, or the
magnitude of the impact that a continuation of historically high
benzene prices would have on our financial performance. In
addition, the projected financial performance of some of our
other products is lower than previous forecasts, due to a
variety of factors.

As a result of the conditions described above, we
have performed an assessment of the carrying value of our
long-lived assets to be held and used, including goodwill. This
assessment was performed because of the recent negative industry
and economic trends affecting both our current operations and
expected future margins, primarily driven by high raw materials
and energy prices. At the conclusion of this assessment, we
recorded a non-cash impairment of goodwill charge of
$48.5 million for the three months ended June 30,
2004. Recoverability was 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 representing the time value
of money and the inherent risk of uncertainty of the future cash
flows. The discount rate, adjusted

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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.


During our assessment of our long-lived assets
other than goodwill, we analyzed recoverability based on our
projected undiscounted net future cash flows over the remaining
life of the assets. Based on this analysis, no impairment loss
was required as these projected cash flows were greater than the
carrying amount.

Results of Operations



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Three Months Ended June 30, 2004
    Compared to Three Months Ended June 30, 2003



| |                                
| | -------------------------------
| | Revenues and Cost of Goods Sold

Our revenues were $184 million for the
second quarter of 2004, compared to $121 million in
revenues for the second quarter of 2003. This increase in
revenues primarily resulted from higher sales prices and sales
volumes of styrene during the second quarter of 2004, and
increased revenues realized from a full quarters
production of acrylonitrile and sodium cyanide in the second
quarter of 2004. In the second quarter of 2003, we began the
process of restarting our acrylonitrile facility and the sodium
cyanide unit and did not complete that process until the third
quarter of 2003, resulting in smaller quantities of finished
goods being produced than would have resulted had these
facilities operated for the entire quarter.

Revenues from our styrene operations were
$111 million for the second quarter of 2004, an increase of
25% from the $89 million in revenues we received from these
operations for the second quarter of 2003. This increase in
revenues from our styrene operations resulted primarily from a
33% increase in direct sales prices and a 6% increase in styrene
sales volumes in the second quarter of 2004 compared to the
second quarter of 2003. During the second quarter of 2004, the
prices we paid for benzene and ethylene, the two primary raw
materials required for styrene production, increased 67% and
23%, respectively, from the prices we paid for these products
during the second quarter of 2003. The average price we paid for
natural gas for the second quarter of 2004 increased 7% compared
to the average price we paid for natural gas during the second
quarter of 2003. Margins on our styrene sales for the second
quarter of 2004 increased from those realized during the second
quarter of 2003 as the increase in our sales prices for styrene
more than offset the increases in our raw materials costs.

Revenues from our acrylonitrile operations were
$39 million in the second quarter of 2004 compared to the
$4 million in revenues we received from these operations in
the second quarter of 2003 primarily because our acrylonitrile
facility and the sodium cyanide unit operated for the entire
quarter during 2004 but were only in the process of being
restarted in the second quarter of 2003. During the second
quarter of 2004, the prices we paid for propylene and ammonia,
the two primary raw materials required for acrylonitrile
production, increased 48% and 5%, respectively, from the prices
we paid for these products during the second quarter of 2003.
Margins on our acrylonitrile sales for the second quarter of
2004 decreased from those realized during the second quarter of
2003, primarily due to higher propylene costs.

Revenues from our other petrochemicals
operations, primarily acetic acid, plasticizers and methanol,
were $34 million for the second quarter of 2004, an
increase of 23% from the $28 million in revenues received
from these operations during the second quarter of 2003. This
increase in revenues resulted primarily from an increase in
acetic acid sales volumes and sales prices in the second quarter
of 2004 compared to those realized in the second quarter of
2003. This increase was partially offset by a reduction in
revenues and gross profit derived from our contract with
Methanex Corporation, which expired on December 31, 2003.



| |                         
| | ------------------------
| | Benefit for Income Taxes

During the second quarter of 2004, we recorded a
$0.8 million benefit for income taxes compared to a
$6 million benefit for income taxes for the same quarter in
2003, primarily due to the change in pre-tax income.

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Six Months Ended June 30, 2004 Compared
to Six Months Ended June 30, 2003



| |                                
| | -------------------------------
| | Revenues and Cost of Goods Sold

Our revenues were $332 million for the six
month period ended June 30, 2004, compared to the
$243 million in revenues we received during the six month
period ended June 30, 2003. This increase in revenues
resulted primarily from higher sales prices and sales volumes of
styrene during the first two quarters of 2004, and increased
revenues realized from production of acrylonitrile and sodium
cyanide in the first two quarters of 2004. In the first quarter
of 2003, our acrylonitrile facility and related derivative
production facilities were shut down. In the second quarter of
2003, we began the process of restarting our acrylonitrile
facility and the sodium cyanide unit and did not complete that
process until the third quarter of 2003, resulting in
significantly reduced quantities of finished goods being
produced in the first two quarters of 2003 than would have
resulted had these facilities operated for the entire period.

During the first quarter of 2004, we performed
maintenance turnarounds on our styrene and acrylonitrile
production facilities. 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 18 to 24 months. We expense the costs of
turnarounds as the associated expenses are incurred. As expenses
for turnarounds can be significant, especially for our styrene
and acrylonitrile units, the impact of turnarounds can be
material for financial reporting periods during which the
turnarounds actually occur. During the first quarter of 2004, we
incurred $14 million of maintenance costs associated with
the above-mentioned turnarounds.

Revenues from our styrene operations were
$205 million for the six month period ended June 30,
2004, an increase of 14% from the $179 million in revenues
we received from these operations for the six month period ended
June 30, 2003. This increase in revenues from our styrene
operations was primarily due to an increase in direct sales
prices during the first two quarters of 2004 compared to those
realized during the first two quarters of 2003. Direct sales
prices for styrene and total styrene sales volumes increased 20%
and 5%, respectively, during the first two quarters of 2004
compared to those realized during the first two quarters of
2003. During the first two quarters of 2004, prices for benzene
and ethylene, the two primary raw materials required for styrene
production, increased 32% and 17%, respectively, from the prices
we paid for these products in the first two quarter of 2003. The
average price we paid for natural gas for the first two quarters
of 2004 decreased 7% from the average price we paid for natural
gas during the first two quarters of 2003. Margins on our
styrene sales for the first two quarters of 2004 increased from
those realized during the first two quarters of 2003 as the
increase in our sales prices for styrene more than offset the
increases in our benzene and ethylene costs.

Revenues from our acrylonitrile operations
increased to $65 million during the first six months of
2004 compared to the $5 million in revenues we received
from these operations in the first six months of 2003 primarily
due to the increased revenues realized from production of
acrylonitrile and sodium cyanide in the first two quarters of
2004. As previously discussed, in the first quarter of 2003, our
acrylonitrile facility and related derivative production
facilities were shut down. During the first two quarters of
2004, the prices we paid for propylene and ammonia, the two
primary raw materials required for acrylonitrile production,
increased 40% and 13%, respectively, from the prices we paid for
these products during the first two quarters of 2003. Margins on
our acrylonitrile sales for the first two quarters of 2004
decreased from those realized during the first two quarters of
2003, primarily due to higher propylene costs.

Revenues from our other petrochemicals
operations, primarily acetic acid, plasticizers and methanol,
were $62 million for the six month period ended
June 30, 2004, an increase of 6% from the $59 million
in revenues we received from these operations during the six
month period ended June 30, 2003. This increase in revenues
resulted primarily from an increase in acetic acid sales volumes
and sales prices in the first two quarters of 2004 compared to
those realized in the first two quarters of 2003. This increase
was

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partially offset by a reduction in revenues and
gross profit derived from our contract with Methanex
Corporation, which expired on December 31, 2003.




| |                                                          
| | ---------------------------------------------------------
| | Selling, General and Administrative
    (SG&A) Expenses

Our SG&A expenses for the six month period
ended June 30, 2004 were $6 million compared to the
$9 million in SG&A expenses we recorded for the six
month period ended June 30, 2003. This decrease was largely
due to the absence of costs that were incurred in the first two
quarters of 2003 for bankruptcy related professional fees and
ongoing matters related to our emergence from bankruptcy on
December 19, 2002.



| |             
| | ------------
| | Other Income

We had no other income for the six month period
ended June 30, 2004 compared to the $3.5 million in
other income we recorded for the six month period ended
June 30, 2003, which consisted of a Texas sales tax refund
of $3.7 million reduced by other expense of
$0.2 million.

Liquidity and Capital Resources

On July 16, 2001, Sterling Chemicals
Holdings, Inc., 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 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. Due to the Debtors
emergence from bankruptcy and the implementation of fresh-start
accounting, we refer to ourselves as Predecessor
Sterling for periods on or before December 19, 2002
and Reorganized Sterling for periods after
December 19, 2002.

Pursuant to the Plan of Reorganization, on
December 19, 2002, we issued $94.3 million in original
principal amount of 10% Senior Secured Notes due 2007 (our
Secured Notes) to the holders of Predecessor
Sterlings 12 3/8% Senior Secured Notes. Our
Secured 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. Our Secured
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. Our Secured Notes
and Sterling Energys guaranty are secured by a first
priority lien on all of our production facilities and related
assets.

Our Secured 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 our Secured Notes through the
issuance of additional Secured Notes rather than the payment of
cash. However, if we pay interest through the issuance of
additional Secured Notes rather than the payment of cash, the
interest rate for the relevant period is increased to
13 3/8%. In December 2003, we made an interest payment
on our Secured Notes at the higher rate through the issuance of
$6.3 million in original principal amount of Secured Notes,
increasing the aggregate principal amount of outstanding Secured
Notes to $100.6 million. All other interest payments on our
Secured Notes have been made in cash. Subject to compliance with
the terms of the Revolver discussed below, we may redeem our
Secured 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

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repurchase our Secured Notes at 101% of the
outstanding principal amount thereof plus accrued and unpaid
interest. Under certain circumstances, we are also required to
use the proceeds of other asset sales to repurchase any of our
Secured Notes tendered by the holders of our Secured Notes at a
price equal to 100% of the outstanding principal amount thereof
plus accrued and unpaid interest.


The indenture governing our Secured 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
revolving credit facility (the 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 Revolver has an
initial term ending on September 19, 2007. Under the
Revolver, Reorganized Sterling and Sterling Energy are
co-borrowers and are jointly and severally liable for any
indebtedness thereunder. The Revolver is secured by first
priority liens on all of our accounts receivable, inventory and
other specified assets, as well as all of the issued and
outstanding capital stock of Sterling Energy.

Borrowings under the 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
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 Revolver). Under the Revolver, we
are also required to pay an aggregate commitment fee of
0.50% per year (payable monthly) on any unused portion of
the Revolver. Available credit under the 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 Revolver must
exceed outstanding borrowings thereunder by $8 million at
all times. As of June 30, 2004, total credit available
under the Revolver was limited to $63 million due to these
borrowing base limitations. As of June 30, 2004, there were
no loans outstanding under the Revolver, although we had
$1 million in outstanding letters of credit issued pursuant
to the Revolver.

Our liquidity (i.e., cash and cash
equivalents plus total credit available under the Revolver,
subject to the conditions to borrowings under the Revolver) was
$80 million at June 30, 2004, a decrease of
$36 million compared to our liquidity at December 31,
2003. This decrease was primarily due to the completion of
maintenance turnarounds of our styrene and acrylonitrile units
during the first quarter of 2004, coupled with weak operating
performance, particularly in acrylonitrile. The total cost of
these turnarounds, including maintenance expense, catalyst
installation and capital projects, was $21 million.

The 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 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 Revolver plus cash on hand is less than
$20 million. The 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.

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



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

Our working capital on June 30, 2004 was
$104 million, a decrease of $14 million from our
working capital of $118 million on December 31, 2003.
This decrease in working capital was primarily due to

20



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negative cash flows from operations during the
first six months of 2004, which were influenced by costs related
to the maintenance turnarounds described above and capital
expenditures. Working capital on June 30, 2004 was
essentially unchanged from March 31, 2004, as the decrease
in cash was offset by an increase in accounts receivable and
inventories. These increases were driven by increased feedstock
costs of our products during the second quarter of 2004 and
higher operating rates for our acrylonitrile business.




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

Net cash used in our operations was
$18 million for the six month period ended June 30,
2004, whereas net cash used in our operations during the six
month period ended June 30, 2003 was $25 million. This
improvement was primarily the result of working capital changes
during the two periods. Net cash flow used in our investing
activities was $6 million during the first two quarters of
2004 compared to the $7 million of net cash flow we used in
our investing activities during the first two quarters of 2003.
The net cash flow used in our investing activities during both
periods was for capital expenditures. We did not record any cash
provided by or used in financing activities during the first two
quarters of 2004 or the first two quarters of 2003 as borrowings
under the Revolver were equal to repayments during the first two
quarters of 2004 and there were no borrowings under the Revolver
during the first two quarters of 2003.



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

Our capital expenditures were $6 million
during the six month period ended June 30, 2004 and
$7 million during the six month period ended June 30,
2003. Capital expenditures are anticipated to be approximately
$15 million during the last two quarters of 2004, primarily
for complying with the State Implementation Plan (as discussed
in Note 6 of the Notes to Condensed Consolidated Financial
Statements), along with routine safety, environmental and
equipment replacement matters.

Critical Accounting Policies, Use of Estimates
and Assumptions

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts reported in the condensed consolidated
financial statements and related notes. Actual results could
differ from those estimates. On an ongoing basis, management
reviews its estimates, including those related to the allowance
for doubtful accounts, recoverability of long-lived assets,
deferred tax asset valuation allowance, litigation,
environmental liabilities, pension and post-retirement benefits
and various other operating allowances and accruals, based on
currently available information. Changes in facts and
circumstances may alter such estimates and affect our results of
operations and financial position in future periods. Except for
the impairment of goodwill discussed above, there have been no
material changes or developments in our evaluation of the
accounting estimates and the underlying assumptions or
methodologies that we believe to be Critical Accounting Policies
disclosed in our Form 10-K for the fiscal year ended
December 31, 2003.

New Accounting Standards

In December 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation
Number (FIN) 46-R,Consolidation of
Variable Interest Entities. FIN 46-R, which modifies
certain provisions and effective dates of FIN 46, sets
forth criteria to be used in determining whether an investment
in a variable interest entity should be consolidated. These
provisions are based on the general premise that if a company
controls another entity through interests other than voting
interests, that company should consolidate the controlled
entity. We do not believe that any of our investments or any of
other arrangements that come within the definition of a variable
interest entity are required to be consolidated under
FIN 46-R.

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 for fiscal
years ending after December 7, 2003 and permits a one-time
election to defer accounting for the effects of the Medicare
Prescription Drug,

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Improvement and Modernization Act of 2003 (the
Act). In May 2004, the FASB issued FASB Staff
Position No. 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003
(FAS 106-2) which supercedes FAS 106-1.
FAS 106-2 provides guidance on the accounting for the
effects of the Act for employers that sponsor postretirement
heath care plans that provide prescription drug benefits, and
requires those employers to provide certain disclosures
regarding the effect of the federal subsidy provided under the
Act. FAS 106-2 will apply to us for all interim and annual
periods commencing on or after July 1, 2004. We believe
that the prescription drug benefits provided under our
postretirement plan are actuarially equivalent to the Medicare
benefit available to participants under our plan, a prerequisite
for qualifying for the subsidy, but we do not believe that the
subsidy provided under the Act will have a material impact on
our condensed consolidated financial statements.







|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

Our financial results can be affected by volatile
changes in raw materials, natural gas and finished product sales
prices. We do not currently have cash flow exposure to changing
U.S. interest rates, as there are no draws outstanding
under the Revolver. However, the fair value of our Secured Notes
may vary in response to changing interest rates. Our Secured
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 our Secured Notes through the issuance of additional Secured
Notes rather than the payment of cash. However, if we pay
interest through the issuance of additional Secured Notes rather
than the payment of cash, the interest rate for the relevant
period is increased to 13 3/8%. In December 2003, we made
an interest payment on our Secured Notes at the higher rate
through the issuance of $6.3 million in original principal
amount of Secured Notes, increasing the aggregate principal
amount of outstanding Secured Notes to $100.6 million. All
other interest payments on our Secured Notes have been made in
cash.






|        |                        
|------- | -----------------------
|Item 4. | 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, of the effectiveness of the design and 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-Q. Based upon that evaluation, 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 controls over financial reporting that occurred during
the first quarter of 2004 that has materially affected, or is
reasonably likely to materially affect, our internal controls
over financial reporting.

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PART II.

OTHER INFORMATION







|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

The information under Legal
Proceedings in Note 6 to the consolidated financial
statements included in Item 1 of Part I of this report
is hereby incorporated by reference.






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

Our Annual Meeting of Stockholders was held on
April 16, 2004. At the Annual Meeting, eight of our
incumbent directors were re-elected and the appointment of
Deloitte & Touche LLP as our independent accountants
for the fiscal year ending December 31, 2004 was ratified
and approved. Under the Restated Certificate of Designations,
Preferences, Rights and Limitations of our Preferred Stock, the
holders of our Preferred Stock, voting separately as a class,
are entitled to elect a percentage of our directors determined
by the aggregate amount of shares of our Preferred Stock and our
common stock beneficially owned by Resurgence Asset Management,
L.L.C. and certain permitted transferees. Currently, the holders
of our Preferred Stock are entitled to elect a majority of our
directors. Under our Amended and Restated Certificate of
Incorporation, the holders of our Secured Notes have the
exclusive right, voting separately as a class, to elect one of
our directors until our Secured Notes have been paid in full,
with each holder being entitled to one vote for each $1,000 in
principal amount of our Secured Notes held of record by such
holder. In addition, under our Amended and Restated Certificate
of Incorporation, Mr. Thomas P. Krasner serves as one of
our directors as the designee of the Unsecured Creditors
Committee in our prior bankruptcy proceedings and has the right
to serve as one of our directors until our first annual meeting
held after December 19, 2004. Consequently,
Mr. Krasner did not stand for re-election at the Annual
Meeting but continues to serve as one of our directors. All of
our other directors are elected by the holders of our Preferred
Stock and the holders of our common stock, voting together as a
single class. At the Annual Meeting, five of our incumbent
directors were elected by the holders of our Preferred Stock,
two of our incumbent directors were elected by the holders of
our Preferred Stock and the holders of our common stock, voting
together as a single class, and one of our directors was elected
by the holders of our Secured Notes. The voting results for the
re-election of our eight incumbent directors are set forth below:

Directors elected by the holders of our Preferred
Stock:

|                    |  |     |           |          |  |  |   | 
|------------------- |  | --- | --------- | -------- |  |  | - | 
|Director            |  | For |           | Withheld
|                    |  |     |           |         
|James B. Rubin      |  |     | 2,558.826 |          |  |  | 0 | 
|Byron J. Haney      |  |     | 2,558.826 |          |  |  | 0 | 
|Marc S. Kirschner   |  |     | 2,558.826 |          |  |  | 0 | 
|Robert T. Symington |  |     | 2,558.826 |          |  |  | 0 | 
|Keith R. Whittaker  |  |     | 2,558.826 |          |  |  | 0 | 

Directors elected by the holders of our Preferred
Stock and the holders of our common stock, voting together as a
single class:

|                      |  |     |           |          |  |  |        | 
|--------------------- |  | --- | --------- | -------- |  |  | ------ | 
|Director              |  | For |           | Withheld
|                      |  |     |           |         
|Richard K. Crump      |  |     | 5,084,917 |          |  |  | 12,976 | 
|Dr. Peter Ting Kai Wu |  |     | 5,091,397 |          |  |  | 6,496  | 

Directors elected by the holders of our Secured
Notes:

|               |  |     |        |          |  |  |    | 
|-------------- |  | --- | ------ | -------- |  |  | -- | 
|Director       |  | For |        | Withheld
|               |  |     |        |         
|John W. Gildea |  |     | 56,286 |          |  |  | 17 | 

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Our shares of Preferred Stock and our shares of
common stock voted together as a single class on the
ratification and approval of the appointment of
Deloitte & Touche LLP as our independent accountants
for the fiscal year ending December 31, 2004. For purposes
of class voting, each share of our Preferred Stock has the right
to one vote for each share of our common stock into which such
share is convertible on the record date for such vote. Each
share of our Preferred Stock was convertible into
1,000 shares of our common stock on the record date for the
Annual Meeting. The voting results for the ratification and
approval of the appointment of Deloitte &
Touche LLP as our independent accountants for the fiscal
year ending December 31, 2004 are set forth below:

|    |           |         |  |         |    |  |  |  |       | 
|--- | --------- | ------- |  | ------- | -- |  |  |  | ----- | 
|For |           | Against |  | Abstain
|    |           |         |  |        
|    | 5,095,819 |         |  |         | 35 |  |  |  | 2,039 | 

There were no broker non-votes on any matter
voted on at the Annual Meeting.






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits: The following exhibits
are filed or furnished as part of this Form 10-Q:

|        |        |  |  |                        |  |                                                                                                                                                                                                                                                                                          
|------- | ------ |  |  | ---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |                       
|Number  |        |  |  | Description of Exhibit
|        |        |  |  |                       
|        | 2.1    |  |  |                       |  | Certificate of Ownership and Merger merging
    Sterling Chemicals Holdings, Inc. into Sterling Chemicals, Inc.
    (incorporated 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., dated October 14,
    2002 (incorporated 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., dated November 18, 2002 (incorporated 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 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. (incorporated by
    reference from Exhibit 3.2 to our Annual Report on
    Form 10-K for the fiscal year ended December 31, 2003).
|        | 3.3    |  |  |                       |  | Restated Bylaws of Sterling Chemicals, Inc.
    (conformed copy) (incorporated by reference from
    Exhibit 3.3 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended June 30, 2003).                                                                                   
|        | **10.1 |  |  |                       |  | Twelfth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan.                                                                                                                                                                             
|        | **10.2 |  |  |                       |  | Thirteenth Amendment to the Sterling Chemicals,
    Inc. Amended and Restated Salaried Employees Pension Plan.                                                                                                                                                                          
|        | **10.3 |  |  |                       |  | Eighth Amendment to the Sterling Chemicals, Inc.
    Hourly Paid Employees Pension Plan                                                                                                                                                                                                 
|        | **10.4 |  |  |                       |  | Fifth Amendment to the Sixth Amended and Restated
    Savings and Investment Plan.                                                                                                                                                                                                       
|        | **10.5 |  |  |                       |  | Articles of Agreement between Sterling Chemicals,
    Inc., its successors and assigns, and Texas City, Texas Metal
    Trades Council, AFL-CIO Texas City, Texas, May 27, 2004 to
    May 1, 2007.                                                                                      
|        | **15.1 |  |  |                       |  | Letter of Deloitte & Touche LLP
    regarding unaudited interim financial information.                                                                                                                                                                                                   
|        | **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                                                                                                                                                                                                                            

24



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---



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

(b) Reports on Form 8-K.



| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. On May 4, 2004, we filed a Current
    Report on Form 8-K reporting Items 5 and 7 related to
    the May 3, 2004 strike of our employees represented by The
    Texas City Metal Trades Council.

25



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, 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 and Chief Executive
    Officer

Date: August 10, 2004



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

| |                                    
| | -----------------------------------
| |                                    
| | Paul G. Vanderhoven                
| | Senior Vice President 
    Finance
| | and Chief Financial Officer        
| | (Principal Financial Officer)      

Date: August 10, 2004

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##### Table of Contents



EXHIBIT INDEX

|        |        |  |  |                        |  |                                                                                                                                                                                                                                                                                          
|------- | ------ |  |  | ---------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |                       
|Number  |        |  |  | Description of Exhibit
|        |        |  |  |                       
|        | 2.1    |  |  |                       |  | Certificate of Ownership and Merger merging
    Sterling Chemicals Holdings, Inc. into Sterling Chemicals, Inc.
    (incorporated 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., dated October 14,
    2002 (incorporated 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., dated November 18, 2002 (incorporated 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 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. (incorporated by
    reference from Exhibit 3.2 to our Annual Report on
    Form 10-K for the fiscal year ended December 31, 2003).
|        | 3.3    |  |  |                       |  | Restated Bylaws of Sterling Chemicals, Inc.
    (conformed copy) (incorporated by reference from
    Exhibit 3.3 to our Quarterly Report on Form 10-Q for
    the fiscal quarter ended June 30, 2003).                                                                                   
|        | **10.1 |  |  |                       |  | Twelfth Amendment to the Sterling Chemicals, Inc.
    Amended and Restated Salaried Employees Pension Plan.                                                                                                                                                                             
|        | **10.2 |  |  |                       |  | Thirteenth Amendment to the Sterling Chemicals,
    Inc. Amended and Restated Salaried Employees Pension Plan.                                                                                                                                                                          
|        | **10.3 |  |  |                       |  | Eighth Amendment to the Sterling Chemicals, Inc.
    Hourly Paid Employees Pension Plan                                                                                                                                                                                                 
|        | **10.4 |  |  |                       |  | Fifth Amendment to the Sixth Amended and Restated
    Savings and Investment Plan.                                                                                                                                                                                                       
|        | **10.5 |  |  |                       |  | Articles of Agreement between Sterling Chemicals,
    Inc., its successors and assigns, and Texas City, Texas Metal
    Trades Council, AFL-CIO Texas City, Texas, May 27, 2004 to
    May 1, 2007.                                                                                      
|        | **15.1 |  |  |                       |  | Letter of Deloitte & Touche LLP
    regarding unaudited interim financial information.                                                                                                                                                                                                   
|        | **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                                                                                                                                                                                                                            



---



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