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 78 percent of consolidated net sales for the first half of 2009, 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 holds a 50 percent ownership interest in two joint ventures, Stepan Philippines and TIORCO, LLC, that are excluded from surfactant segment operating results as they are accounted for under the equity method of accounting. TIORCO, LLC was formed in September 2008.

• Polymers - Polymers, which accounted for 19 percent of consolidated net sales for the first half of 2009, include two primary product lines: polyols and phthalic anhydride. 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.) industries. Phthalic anhydride is used in polyester alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In the U.S., polymer product lines are manufactured at the Company's Millsdale, Illinois, site. Polyols are also manufactured at the Company's Wesseling (Cologne), Germany facility, as well as at its 80-percent owned joint venture in Nanjing, China (which is included in consolidated results). The Company also has a polymer sales office in Brazil; no polymer manufacturing facilities are located in Brazil.

• Specialty Products - Specialty products, which accounted for three percent of consolidated net sales for the first half of 2009, include flavors, emulsifiers and solubilizers used in the food and pharmaceutical industries. Specialty products are manufactured primarily at the Company's Maywood, New Jersey, site.

Despite the continued challenges of the global economic recession, the Company achieved record second quarter and first half income results. The economic slowdown negatively affected sales volume, which was down nine percent quarter over quarter and 11 percent year over year. Sales volume for the Company's polymers segment continued to lag behind last year's levels, as activity in

Deferred Compensation Plans

The accounting for the Company's deferred compensation plans can cause period-to-period fluctuations in Company expenses and profits. For the second quarter of 2009, expense related to the Company's deferred compensation plans was $2.4 million higher than that reported for the same quarter of 2008. However, deferred compensation-related expenses for the first half of 2009 was $4.7 million lower than that for the first half of 2008. The pretax and after tax effects of all deferred compensation-related activities and the income statement line items in which the effects were recorded are displayed below (see the 'Corporate Expenses' section of this management discussion and analysis for further details):

                                                                 (Income) / Expense
                                                  Three Months Ended              Six Months Ended
                                                       June 30                         June 30
(Dollars in millions)                            2009             2008           2009            2008

Deferred Compensation (Administrative
Expense)                                       $     5.4         $  2.5        $   (0.1 )       $  3.1

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

Realized/Unrealized (Gains) / Losses on
Investments (Other, net)                            (0.8 )         (0.2 )          (0.5 )          1.1


Net Pretax Income Effect                       $     4.6         $  2.2        $   (0.6 )       $  4.1


After Tax Effect                               $     2.8         $  1.4        $   (0.4 )       $  2.6

The Company's foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects period-to-period comparisons of financial statement items (i.e. because foreign exchange rates fluctuate, similar period-to-period local currency results for a foreign subsidiary may translate into different U.S. dollar results). For the three and six month periods ending June 30, 2009, the U.S. dollar strengthened against nearly all the foreign currencies in the locations where the Company does business, when compared to the exchange rates for the three and six month periods ending June 30, 2008. Consequently, reported net sales, expense and income amounts for the three and six month periods ending June 30, 2009, were lower than they would have been had the foreign currency exchange rates remained constant with the rates for the same periods of 2008. Below is a table that presents the impact that foreign currency translation had on the changes in consolidated net sales and various income line items for the three and six month periods ending June 30, 2009:

                            Three Months Ended                        Inc (Dec) Due
                                 June 30             Increase          to Foreign
       (In millions)         2009         2008      (Decrease)         Translation

       Net Sales          $    321.2    $  420.4   $      (99.2 )    $         (22.2 )
       Gross Profit             65.7        50.0           15.7                 (3.5 )
       Operating Income         31.2        17.6           13.6                 (2.1 )
       Pretax Income            30.6        14.5           16.1                 (2.2 )


                             Six Months Ended                         Inc (Dec) Due
                                 June 30             Increase          to Foreign
       (In millions)         2009         2008      (Decrease)         Translation

       Net Sales          $    639.3    $  801.8   $     (162.5 )    $         (49.1 )
       Gross Profit            114.4        95.9           18.5                 (7.8 )
       Operating Income         57.4        34.5           22.9                 (5.1 )
       Pretax Income            53.9        27.3           26.6                 (5.1 )

Three Months Ended June 30, 2009 and 2008

Summary

Net income for the second quarter of 2009 improved 101 percent to $19.6 million, or $1.83 per diluted share, compared to $9.8 million, or $0.93 per diluted share, for the second quarter of 2008. Below is a summary discussion of the major factors leading to the year-to-year changes in net sales, profits and expenses. A detailed discussion of segment operating performance for the second quarter of 2009 follows the summary.

Consolidated net sales declined $99.2 million, or 24 percent, between quarters. A nine percent decline in sales volume, lower average selling prices and the effects of foreign currency translation accounted for approximately $38.6 million, $38.4 million and $22.2 million, respectively, of the net sales reduction. The sales volume declines were due in large part to the effects of the global economic recession. Sales volume for the polymers segment was down 18 percent, due to the weak demand for roofing insulation in commercial construction. Sales volume was down seven percent for the surfactants segment, primarily due to weak demand for biodiesel, oilfield chemicals and surfactants used in construction materials for housing, while laundry and personal care volume grew in North America and Europe. Average selling prices have fallen primarily in response to a drop in raw material costs.

Second quarter 2009 operating income was $13.6 million, or 77 percent, higher than second quarter 2008 operating income. Gross profit increased $15.7 million, or 31 percent. All segments reported year-to-year gross profit growth. Lower raw material costs contributed to each segment's improvement. By segment, surfactants gross profit was up $12.8 million, or 38 percent, specialty products gross profit was up $2.3 million, or 91 percent, and polymers gross profit was up $0.4 million, or two percent. The effects of foreign currency translation reduced the year-to-year consolidated gross profit growth by approximately $3.5 million.

Operating expenses for the second quarter of 2009 were $2.1 million, or six percent, greater than operating expenses for the second quarter of 2008. Major items accounting for the increase in expenses were as follows:

                                                     Increase /
                 (Dollars in millions)               (Decrease)
                 Deferred Compensation Expense       $       2.9
                 Foreign Currency Translation               (1.3 )
                 U.S. Incentive-based Compensation           1.1
                 Bad Debt Provision                          0.7
                 Travel and Entertainment Expense           (0.5 )
                 Other                                      (0.8 )

                 Total                               $       2.1

Interest expense for the second quarter of 2009 was $1.0 million, or 38 percent, lower than interest expense for the second quarter of 2008. Lower average debt levels, resulting from a decrease in working capital requirements, led to the decline. Lower raw material costs drove the decline in working capital.

The loss from equity joint ventures, which includes results for the 50-percent owned Stepan Philippines Inc. (SPI) and TIORCO, LLC (TIORCO) joint ventures, declined $0.3 million between quarters. Equity income for SPI was $0.4 million, which was a $1.0 million improvement over last year's second quarter. TIORCO, which was formed in September 2008, reported $0.7 million of equity loss. Start-up expenses coupled with the economy's negative effect on demand for the oil recovery services the venture provides drove the TIORCO result.

Other, net income increased $1.2 million between years. A $0.6 million increase in investment related income and a $0.6 million favorable swing in foreign exchange gains and losses accounted for the other, net income change. Gains related to the mutual funds held for the Company's deferred compensation plans were $0.8 million for the second quarter of 2009 compared to $0.2 million for the second quarter of 2008. Foreign exchange activity resulted in $0.5 million of gains for the second quarter of 2009 compared to $0.1 million of losses for the same period of 2008.

The effective tax rate was 36.1 percent for the second quarter ended June 30, 2009, compared to 32.8 percent for the second quarter ended June 30, 2008. The increase in the effective tax rate was primarily attributable to a greater percentage of consolidated income being generated in the U.S. where the effective tax rate is higher. Lower U.S. tax credits also contributed to the higher effective tax rate.

Segment Results



                                                                Specialty     Segment
(Dollars in thousands)              Surfactants    Polymers     Products      Results    Corporate        Total

For the three months ended
June 30, 2009
Net sales                          $     238,480   $  71,130   $    11,589   $ 321,199          -       $ 321,199
Operating income                          29,174      11,133         3,976      44,283     (13,095 )       31,188

For the three months ended
June 30, 2008
Net sales                          $     308,012   $ 103,088   $     9,299   $ 420,399          -       $ 420,399
Operating income                          15,479      10,476         1,688      27,643     (10,056 )       17,587

Surfactants net sales for the second quarter of 2009 declined $69.5 million, or 23 percent, from net sales for the same quarter of 2008. A 10 percent reduction in average selling prices, a seven percent drop in sales volume and the effects of foreign currency translation accounted for approximately $27.5 million, $22.3 million and $19.7 million, respectively, of the net sales change. A quarter-to-quarter comparison of net sales by region follows:

                                 For the Three Months Ended
                                                                  Increase /       Percent
  (Dollars in thousands)      June 30, 2009     June 30, 2008     (Decrease)       Change
  North America               $      162,088    $      206,583   $    (44,495 )        -22
  Europe                              51,410            69,349        (17,939 )        -26
  Latin America                       24,982            32,080         (7,098 )        -22

  Total Surfactants Segment   $      238,480    $      308,012   $    (69,532 )        -23

The 22 percent decline in net sales for North American operations was primarily attributable to a 12 percent decline in average selling prices and a 10 percent decrease in sales volume, which accounted for $21.9 million and $20.5 million, respectively, of the net sales reduction. The effects of foreign currency translation contributed $2.1 million to the drop in net sales. The decrease in average selling prices reflected lower raw material costs. Second quarter 2009 sales volumes for laundry and cleaning, personal care products and agricultural chemical products surpassed sales volumes for the year ago quarter, but sales of functional surfactants with industrial or construction applications continued to be adversely affected by the economy. A significant drop in biodiesel sales volume accounted for over 64 percent of the total decrease in North American volume. Because of the current unprofitable environment for biodiesel, the Company continued to focus its manufacturing resources on more profitable opportunities.

Net sales for European operations declined 26 percent due to the effects of foreign currency translation ($10.9 million) and a nine percent decrease in average selling prices. The reduction in average selling prices, which was driven by lower raw material costs, accounted for $6.4 million of the drop in net sales. Sales volume fell one percent from quarter to quarter.

Net sales for Latin American operations declined 22 percent due primarily to the effects of foreign currency translation. Sales volume fell two percent between quarters.

Surfactants operating income for the second quarter of 2009 was $13.7 million, or 88 percent, higher than operating income for the same period of 2008. Gross profit increased $12.8 million, or 38 percent. Lower raw material and freight costs, combined with purchasing led cost saving initiatives and the benefit of prior year restructuring of one manufacturing site, drove the gross profit improvement, which was tempered by a seven percent drop in sales volume and the effects of foreign currency translation (approximately $2.8 million). Operating expenses declined $0.9 million, or five percent. Quarter-to-quarter comparisons of gross profit by region and total segment operating expenses and operating income follow:

                                 For the Three Months Ended
                                                                  Increase /       Percent
  (Dollars in thousands)      June 30, 2009     June 30, 2008     (Decrease)       Change
  Gross Profit
  North America               $       35,704    $       24,074   $     11,630          +48
  Europe                               7,170             4,789          2,381          +50
  Latin America                        3,190             4,398         (1,208 )        -27

  Total Surfactants Segment   $       46,064    $       33,261   $     12,803          +38

  Operating Expenses                  16,890            17,782           (892 )         -5


  Operating Income            $       29,174    $       15,479   $     13,695          +88

Gross profit for European operations increased 50 percent due to lower raw material and freight costs combined with cost saving efforts. A more favorable customer mix, particularly for the United Kingdom subsidiary, also contributed. The unfavorable effects of foreign currency translation reduced Europe's quarter-to-quarter profit improvement by approximately $1.6 million.

Latin American operations' gross profit declined 27 percent due principally to the effects of foreign currency translation coupled with a two percent drop in sales volume.

Operating expenses for the surfactants segment were down $0.9 million (five percent) between quarters due to foreign currency translation ($1.1 million).

Polymers

Polymers net sales for the second quarter of 2009 declined $32.0 million, or 31 percent, from net sales for the second quarter of 2008. An 18 percent drop in sales volume, driven by the economic recession, accounted for $18.8 million of the net sales decline. Reduced average selling prices and the unfavorable effects of foreign currency translation contributed $10.7 million and $2.5 million, respectively, to the decrease in net sales. A quarter-to-quarter comparison of net sales by region is displayed below:

                               For the Three Months Ended
                                                                 Increase /       Percent
   (Dollars in thousands)   June 30, 2009      June 30, 2008     (Decrease)       Change
   North America            $       50,929    $        73,002   $    (22,073 )        -30
   Europe                           16,916             26,724         (9,808 )        -37
   Asia and Other                    3,285              3,362            (77 )         -2

   Total Polymers Segment   $       71,130    $       103,088   $    (31,958 )        -31

European operations' net sales declined 37 percent due to a 16 percent drop in average selling prices, 13 percent decrease in polyol sales volume and the unfavorable effects of foreign currency translation, which accounted for $3.7 million, $3.6 million and $2.5 million, respectively, of the reduction in net sales. The drop in sales volume reflected the effects of the global recession. Sales to most major customers were down between quarters. Lower raw material costs led to the decline in average selling prices.

Net sales for Asia and Other regions were down two percent from quarter to quarter due to an 18 percent decline in average selling prices that was largely offset by a 20 percent increase in sales volume.

Polymer operating income for the second quarter of 2009 increased $0.7 million, or six percent, from operating income for the second quarter of 2008. Gross profit improved $0.4 million, or two percent, due largely to lower raw material and freight costs and cost containment efforts, which offset the impact of lower sales volume. Below are quarter-to-quarter comparisons of gross profit by region and total segment operating expenses and operating income:

                                For the Three Months Ended
                                                                Increase /       Percent
    (Dollars in thousands)   June 30, 2009     June 30, 2008    (Decrease)       Change
    Gross Profit
    North America            $       10,956    $       10,015   $       941           +9
    Europe                            4,315             4,871          (556 )        -11
    Asia and Other                      216               244           (28 )        -11

    Total Polymers Segment   $       15,487    $       15,130   $       357           +2

    Operating Expenses                4,354             4,654          (300 )         -6


    Operating Income         $       11,133    $       10,476   $       657           +6

The nine percent increase in gross profit for North American operations was attributable to lower raw material costs, resulting primarily from the recession-driven drop in prices for crude oil and oil-derived products. The previously mentioned 21 percent decrease in sales volume tempered the impact of the lower raw material prices.

Gross profit for European operations declined 11 percent due to the 13 percent decrease in sales volume and the negative effects of foreign currency translation. Lower raw material costs mitigated the profit decline.

Approximately $0.2 million of the $0.3 million decline in operating expenses resulted from the effects of foreign currency translation.

Net sales for the second quarter of 2009 were $2.3 million, or 25 percent, higher than net sales for the same period of 2008. Higher sales volumes for all product lines led to the improvement in net sales. Operating income was up $2.3 million between quarters due to higher sales volumes and lower raw material costs, particularly for food ingredient products.

Corporate Expenses

Corporate expenses increased $3.0 million, or 30 percent, to $13.1 million for the second quarter of 2009 from $10.1 million for the second quarter of 2008. Deferred compensation expense accounted for $2.9 million of the increase, as the price of Company common stock, to which a large portion of the deferred compensation liability is tied, increased $16.86 per share from March 31, 2009, to June 30, 2009. In comparison, the share price increased $7.39 per share for the same period of 2008. Increases in the values of the mutual fund investment assets held for the deferred compensation plan also contributed to the higher deferred compensation expense.

Six Months Ended June 30, 2009 and 2008

Summary

Net income for the first half of 2009 increased 88 percent to $34.7 million, or $3.26 per diluted share, compared to $18.5 million, or $1.79 per diluted share, for the same period of 2008. Below is a summary discussion of the major factors leading to the year-to-year changes in net sales, profits and expenses. A detailed discussion of segment operating performance for the first half of 2009 follows the summary.

Consolidated net sales declined $162.5 million, or 20 percent, between years. Lower sales volume, the effects of foreign currency translation and lower average selling prices accounted for approximately $88.4 million, $49.1 million and $25.0 million, respectively, of the year-to-year decrease in net sales. Sales volumes fell 11 percent, due mainly to the slowdown in the world economy. Sales volume for the polymers segment dropped 25 percent, and sales volume slipped eight percent for the surfactants segment. Excluding biodiesel, surfactant volumes declined by only five percent. The decline in average selling prices reflected falling raw material costs.

Operating income for the first half of 2009 was $22.9 million, or 66 percent, greater than operating income for the first half of 2008. Gross profit was up . . .