The following is Management's Discussion and Analysis of certain significant factors that have affected the Company's financial condition and results of operations during the interim period included in the accompanying condensed consolidated financial statements.

Overview

The Company produces and sells intermediate chemicals that are used in a wide variety of applications worldwide. The overall business comprises three reportable segments:

• Surfactants - Surfactants, which accounted for 75 percent of consolidated net sales for the first three quarters of 2008, are principal ingredients in consumer and industrial cleaning products such as detergents for washing clothes, dishes, carpets, floors and walls, as well as shampoos, body washes, toothpastes and fabric softeners. Other applications include germicidal quaternary compounds, lubricating ingredients, emulsifiers (for spreading agricultural products), plastics and composites and biodiesel. Surfactants are manufactured at six North American sites (five in the U.S. and one in Canada), three European sites (United Kingdom, France and Germany) and three Latin American sites (Mexico, Brazil and Colombia). The Company also owns 50 percent of a surfactant joint venture in the Philippines, which is not included in consolidated results or in the surfactant segment results, as it is accounted for under the equity method. In September 2008, the Company entered into a joint venture agreement with Nalco Company. The joint venture, named TIORCO, LLC, was formed to market custom engineered chemical solutions for increased production of crude oil and gas from existing fields. The Company has a 50 percent ownership stake in TIORCO, LLC and will account for the venture under the equity method.

• Polymers - Polymers, which accounted for 23 percent of consolidated net sales for the first three quarters of 2008, include three primary product lines:
phthalic anhydride, polyols and polyurethane systems. Phthalic anhydride is used in polyester alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. Polyols are used in the manufacture of laminate insulation board for the construction industry and are also sold to the appliance, flexible foam and coatings, adhesives, sealants and elastomers (C.A.S.E.) markets. Polyurethane systems products are used in specialty applications like aerospace and adhesives. In the U.S., polymer product lines are manufactured at its Millsdale, Illinois, site. Polyols are also manufactured at the Company's Wesseling (Cologne), Germany facility, as well as at its joint venture in Nanjing, China (which is included in consolidated results). During the second quarter of 2008, the Company raised its ownership stake in the joint venture from 55 percent to 80 percent. The Company also has a polymer sales office in Brazil that does not include manufacturing facilities.

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 expands the scope of what entities may carry at fair value by offering an irrevocable option to record many types of financial assets and liabilities at fair value. Concurrent with its adoption of SFAS No. 159, the Company elected the fair value option for the mutual fund investment assets related to its deferred compensation plans. The fair value election for the mutual fund investment assets was made to reduce the income volatility caused by the prior accounting treatment for the Company's deferred compensation plans and related investment assets. Specifically, beginning in 2008, fair value changes for the mutual fund investment assets are recorded in the income statement in the same periods that the offsetting changes in the deferred compensation liabilities are recorded in the income statement (the changes, however, are on different lines of the consolidated income statement:
Other, net for mutual fund investment value changes and Administrative expense for deferred compensation liability changes). In prior years, value changes for the mutual fund investments were recorded as direct adjustments to shareholders' equity in the accumulated other comprehensive income line of the balance sheet while the changes in deferred compensation liability related to the mutual funds were recorded in the income statement. The accounting treatment for the portions of the deferred compensation liabilities that are tied to the Company's common stock values is not affected by the fair value election. In compliance with the transition rules of SFAS No. 159, $834,000 of cumulative unrealized mutual fund investment gains, net of taxes, which were included in accumulated other comprehensive income on December 31, 2007, were reclassified into retained earnings in January 2008.

The effects on pretax income of all deferred compensation related activities for the three and nine month periods ended September 30, 2008 and 2007 are displayed below:

                                                                   (Income) / Expense
                                                    Three Months Ended           Nine Months Ended
                                                       September 30                 September 30
                                                   2008          2007            2008           2007
Deferred Compensation (Administrative
Expense)                                         $     1.2    $       0.9      $     4.4       $  1.5

Investment Income (Other, net)                          -            (0.1 )         (0.2 )       (0.4 )

Unrealized (Gain) / Loss on Investments
(Other, net)                                           1.6             -             2.7           -

Net Pretax Income Effect                         $     2.8    $       0.8      $     6.9       $  1.1

Sale of Commodity Polyurethane Systems Product Lines

On July 31, 2008, the Company sold select polyurethane system product lines, which were a part of the polymer segment, to Bayer MaterialScience LLC (Bayer). No manufacturing assets were included in the sale and no employees were terminated. The sold product lines were insulation materials used in appliances, water heaters, doors, roofs, picnic coolers and other similar applications, and represented approximately $16.0 million in Company annual net sales. The products, which are manufactured at the Company's Millsdale, Illinois, facility, will continue to be produced for Bayer during a transition period of up to two years. The sale was for $9.9 million of cash, which the Company reported as a pretax gain in the third quarter ended September 30, 2008. The Company will continue to produce and sell polyurethane systems for specialty applications. Freed-up capacity will be used to manufacture other C.A.S.E. and flexible foam polymers and surfactant products.

Sale of Land

In September 2008, the Company sold 88 acres of land at its Millsdale manufacturing facility in Elwood, Illinois, to an industrial park developer for $8.6 million. The land had a cost basis of $0.1 million, so the Company recorded a pretax gain of $8.5 million in the third quarter ended September 30, 2008. The gain was not attributed to any reportable segment. For income tax purposes, the land disposition along with the acquisition of an office building near the Company's corporate headquarters were structured as a tax-deferred like-kind exchange, pursuant to Section 1031 of the IRC. The office building, purchased for $6.4 million, will house employees currently located in a leased facility that is nearing the end of its lease term. See Note 5 in the Notes to Condensed Consolidated Financial Statements for additional information.

Transition Defined Contribution Pension Expense

In 2006, the Company froze its U.S. salaried defined benefit pension plan. At that time, a funded defined contribution plan was established that provided for fixed Company contributions and additional discretionary transition contributions to employee retirement accounts. The additional discretionary transition contributions were instituted to partially compensate certain U.S. employees for the loss in benefits resulting from freezing the defined benefit plan. In September 2008, the Company's Board of Directors approved an acceleration of a portion of the discretionary transition contributions. As a result, $1.9 million of additional transition contribution expense was recorded in the third quarter ended September 30, 2008. The additional expense was allocated to cost of sales and operating expenses. The contributions to the employees' retirement accounts were determined as of September 30, 2008, and were paid on October 7, 2008.

Three Months Ended September 30, 2008 and 2007

Summary

Net income for the third quarter of 2008 increased to $17.0 million, or $1.59 per diluted share, compared to $3.1 million, or $0.31 per diluted share, for the third quarter of 2007. Below is a summary discussion of the major factors leading to the quarter-to-quarter changes in net sales, profits and expenses. A detailed discussion of segment operating performance for the third quarter of 2008 follows the summary.

Consolidated net sales increased $94.5 million, or 28 percent, from quarter to quarter. All reportable segments reported net sales increases. Higher average selling prices, a three percent increase in sales volume and the favorable effects of foreign currency translation accounted for approximately $78.3 million, $9.6 million and $6.6 million, respectively, of the net sales increase. Higher average selling prices reflected the Company's continued efforts to pass on the cost of rising material costs to customers. Sales volume was higher for all three segments. The foreign currency translation effect resulted from the quarter-over-quarter weakening of the U.S. dollar against nearly all local currencies of the countries where the Company has operations.

Operating income for the third quarter of 2008 was $20.6 million higher than operating income for the same quarter of 2007. Gross profit was up $7.9 million, or 23 percent, from quarter to quarter. The profit improvement was driven by the surfactants segment, which reported 2008 third quarter gross profit that exceeded 2007 third quarter gross profit by $10.1 million, or 46 percent. The surfactant growth reflected favorable sales mix and selling price increases, which began to recoup some of the profit margin lost in prior years to escalating raw material costs. Gross profit for the polymer and specialty products segments declined from quarter to quarter. Current year consolidated gross profit included approximately $1.0 million of the pension transition expense. Prior year gross profit included $1.3 million of non-recurring curtailment expense related to the freezing of the Millsdale hourly portion of the Millsdale/Anaheim hourly defined benefit pension plan.

Operating expenses declined $12.7 million, or 48 percent, between quarters. The $9.9 million gain on sale of the commodity polyurethane systems product lines and the $8.5 million gain on sale of Millsdale land were included in operating expenses. Excluding the gains on sales, operating expenses increased $5.7 million, or 21 percent. The primary items accounting for the operating expense increase were incentive-based compensation ($1.7 million), pension transition expense ($0.9 million), bad debt expense ($0.7 million), outside services and consulting expenses ($0.6 million), salary expense ($0.6 million) and deferred compensation expense ($0.4 million). The effects of foreign currency translation added $0.5 million to the increase.

Losses from the Company's Philippine joint venture increased $1.3 million from quarter to quarter. Much of the decline resulted from the effects of the Company reserving for royalty receivables due from the joint venture. Based on a review of updated cash flow forecasts, Company management concluded that the collection of the receivables due from Stepan Philippines was unlikely. The joint venture profitability has been recovering, but cash flow remains tight due to losses over recent years combined with higher working capital requirements brought on by rapidly escalating raw material costs.

The effective tax rate was 30.2 percent for the third quarter ended September 30, 2008, compared to 32.0 percent for the third quarter ended September 30, 2007. The decrease in the effective tax rate was primarily due to the favorable impact of increased foreign generated income taxable at lower rates than in the U.S.

Segment Results



                                                                 Specialty     Segment
(Dollars in thousands)               Surfactants    Polymers     Products      Results    Corporate       Total
For the three months ended
September 30, 2008
Net sales                           $     318,388   $ 103,518   $    11,041   $ 432,947          -      $ 432,947
Operating income                           12,986      14,231         1,392      28,609         215        28,824

For the three months ended
September 30, 2007
Net sales                           $     243,196   $  86,301   $     8,901   $ 338,398          -      $ 338,398
Operating income                            6,371       6,104         2,433      14,908      (6,705 )       8,203

Surfactants

Surfactants net sales for the third quarter of 2008 increased $75.2 million, or 31 percent, over net sales for the same quarter of 2007. Higher average selling prices, a two percent increase in sales volume and the favorable effects of foreign currency translations accounted for approximately $65.8 million, $5.4 million and $4.0 million, respectively, of the quarter-to-quarter change. All regions contributed to the net sales improvement. A quarter-to-quarter comparison of net sales by region follows:

                                  For the Three Months Ended
                               September 30,     September 30,     Increase /    Percent
   (Dollars in thousands)           2008              2007         (Decrease)    Change
   North America               $      213,986    $      160,500   $     53,486     +33
   Europe                              71,721            57,334         14,387     +25
   Latin America                       32,681            25,362          7,319     +29

   Total Surfactants Segment   $      318,388    $      243,196   $     75,192     +31

The 25 percent increase in net sales for European operations was entirely due to a 24 percent improvement in average selling prices and the favorable effect of foreign currency translation, which accounted for $13.8 million and $1.3 million, respectively, of the increase. Selling price increases, necessitated by rising raw material costs, and a more favorable customer and product mix of sales caused the improvement in average selling prices. Sales volume for the third quarter of 2008 was one percent lower than sales volume for the same quarter of 2007, which reduced the net sales gain by $0.7 million.

Net sales for Latin American operations increased 29 percent due to a 16 percent improvement in average selling prices, the favorable effect of foreign currency translation and a two percent gain in sales volume, which contributed $4.1 million, $2.6 million and $0.6 million, respectively, to the increase. The improved average selling prices resulted primarily from the pass through of higher raw material costs. Additional business for the Company's Brazil subsidiary, primarily agricultural chemicals, and spot business for the Colombia subsidiary drove the sales volume gain. A drop in fabric softener sales for the Company's Mexico subsidiary partially offset the foregoing gains.

Surfactants operating income for the third quarter of 2008 was up $6.6 million, or 104 percent, over operating income for the same period of 2007. Gross profit increased $10.1 million, or 46 percent. All three regions posted higher quarter-to-quarter gross profit. Operating expenses increased $3.5 million, or 23 percent. Quarter-to-quarter comparisons of gross profit by region and total segment operating expenses and operating income follow:

                                  For the Three Months Ended
                               September 30,     September 30,     Increase /    Percent
   (Dollars in thousands)           2008              2007         (Decrease)    Change
   North America               $       23,113    $       16,547   $      6,566     +40
   Europe                               4,201             3,357            844     +25
   Latin America                        4,881             2,142          2,739    +128

   Total Surfactants Segment   $       32,195    $       22,046   $     10,149     +46
   Operating Expenses                  19,209            15,675          3,534     +23

   Operating Income            $       12,986    $        6,371   $      6,615    +104

Gross profit for European operations increased 25 percent between quarters due to higher average selling prices that more than offset the effect of a one percent drop in sales volume. Third quarter 2008 selling prices averaged 24 percent higher than third quarter 2007 selling prices due to price increases implemented to regain some of the profit margin lost in previous years to rising raw material costs. A more favorable mix of sales contributed to the improved gross profit.

Gross profit for Latin American operations improved 128 percent due to improvement at all three Latin American subsidiaries. Despite lower sales volume, Stepan Mexico's gross profit increased due to higher selling prices and to a reduction of outsourcing expenses. In 2007, the Mexico subsidiary purchased some product for resale while working through the start-up of its new fabric softener facility. Stepan Colombia's gross profit improved due to a combination of higher selling prices, higher sales volume and lower raw material costs. The lower material costs reflected the effects of building up the inventory quantity of strategic raw material prior to a price increase. The raw material advantage is not expected to continue. Additional agricultural chemicals business drove the improvement in Stepan Brazil's profits. The favorable effects of foreign currency translation added approximately $0.5 million to the quarter-to-quarter gross profit growth.

Operating expenses for the surfactants segment increased $3.5 million, or 23 percent, from quarter to quarter. Excluding the effects of foreign currency translation, operating expenses increased $3.1 million, or 20 percent. North American operations accounted for $2.2 million of the expense increase, as research and development expenses and marketing expenses rose $1.3 million and $0.9 million, respectively. Most of the increases for both research and development and marketing resulted from higher salary expense, incentive-based compensation and pension transition expense. A large part of the remaining operating expense increase was attributable to additional bad debt expense for European operations ($0.5 million).

Third quarter 2008 net sales for the polymers segment increased $17.2 million, or 20 percent, over net sales for the third quarter of 2007. Higher selling prices, a five percent increase in sales volume and the favorable effects of foreign currency translation accounted for approximately $9.9 million, $4.7 million and $2.6 million of the net sales improvement, respectively. A quarter-to-quarter comparison of net sales by region is displayed below:

                                For the Three Months Ended
                              September 30,     September 30,     Increase /    Percent
    (Dollars in thousands)        2008               2007         (Decrease)    Change
    North America            $        74,350    $       64,745   $      9,605     +15
    Europe                            25,318            18,903          6,415     +34
    Asia and Other                     3,850             2,653          1,197     +45

    Total Polymers Segment   $       103,518    $       86,301   $     17,217     +20

The 15 percent increase in net sales for North American operations resulted from a 13 percent increase in average selling prices and a two percent increase in sales volume. Price increases to pass on higher raw material costs accounted for the rise in average selling prices. A 12 percent increase in sales volume for polyols, partially offset by a 12 percent decline in sales volume for phthalic anhydride and an 11 percent decline in sales volume for polyurethane systems, accounted for the two percent increase in sales volume for North American operations. Strong demand from existing customers led to the sales volume increase for polyols. Softness in the unsaturated polyester resins market, which provides plastics and composite materials for the automotive, recreation vehicles and boating industries, drove most of the drop in phthalic anhydride sales volume. The lower polyurethane systems sales reflected the July sale of the Company's commodity systems product lines.

The 34 percent increase in net sales for European operations resulted from a 16 percent increase in polyol sales volume, a favorable foreign currency translation effect and a five percent increase in average selling prices. Higher sales volume accounted for $3.1 million of the quarter-to-quarter net sales increase, and foreign currency translation and selling price increases accounted for $2.2 million and $1.1 million, respectively, of the increase. The higher sales volume reflected a strong European insulation market. Higher energy costs and insulation standards continue to drive an increase in insulation demand. The rise in average selling prices resulted from the pass through of higher raw material costs.

The increase in net sales for Asia and Other regions was due primarily to a 26 percent increase in sales volume and the favorable effects of foreign currency translation, which contributed $0.7 million and $0.4 million, respectively, to the increase.

                                For the Three Months Ended
                           September 30,         September 30,     Increase /      Percent
  (Dollars in thousands)        2008                 2007          (Decrease)      Change
  North America            $        5,521       $         6,659   $     (1,138 )     -17
  Europe                            2,961                 3,026            (65 )     -2
  Asia and Other                      387                   244            143       +59

  Total Polymers Segment   $        8,869       $         9,929   $     (1,060 )     -11
  Operating Expenses (1)           (5,362 )               3,825         (9,187 )     NM

  Operating Income         $       14,231       $         6,104   $      8,127      +133

(1) 2008 includes the $9.9 million gain on the sale of the commodity polyurethane systems product lines

The 17 percent decline in gross profit for North American operations was principally attributable to the escalation of raw material costs that more than offset the effect of the two percent improvement in sales volume. Average raw material costs for all product lines were up approximately 16 percent from quarter to quarter. The Company will continue its efforts to pass through raw material cost increases to stop margin deterioration and regain profit margin. An October 1 price increase was announced.

Gross profit for European operations dropped 2 percent form quarter to quarter due to higher raw material costs and outsourcing costs that more than offset the . . .