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 77 percent of consolidated net sales for the first three quarters 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. The joint ventures are accounted for under the equity method. TIORCO, LLC was formed in September 2008.

• Polymers - Polymers, which accounted for 20 percent of consolidated net sales for the first three quarters 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 unsaturated polyester resins, 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 three quarters 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 net income for the three and nine months ended September 30, 2009. The economic slowdown continued to negatively affect sales volume, which was down seven percent quarter over quarter and 10 percent year over year. Sales volume for the Company's polymers segment lags behind last year's

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 third quarter of 2009, expense related to the Company's deferred compensation plans was $1.5 million higher than that reported for the same quarter of 2008. However, deferred compensation-related expenses for the first three quarters of 2009 were $3.2 million lower than expenses for the first three quarters 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          Nine Months Ended
                                                      September 30               September 30
(Dollars in millions)                              2009            2008       2009            2008

Deferred Compensation (Administrative
Expense)                                         $     5.3        $  1.2    $     5.1        $  4.4

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

Realized/Unrealized (Gains) / Losses on
Investments (Other, net)                              (1.0 )         1.6         (1.4 )         2.7


Net Pretax Income Effect                         $     4.3        $  2.8    $     3.7        $  6.9


After Tax Effect                                 $     2.7        $  1.7    $     2.3        $  4.3

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 nine month periods ending September 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 nine month periods ending September 30, 2008. Consequently, reported net sales, expense and income amounts for the three and nine month periods ending September 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 nine month periods ending September 30, 2009 and 2008:

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

       Net Sales          $   326.2    $   432.9   $     (106.7 )    $         (12.5 )
       Gross Profit            68.9         42.8           26.1                 (1.8 )
       Operating Income        33.7         28.8            4.9                 (1.2 )
       Pretax Income           30.4         24.4            6.0                 (1.0 )


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

       Net Sales          $   965.6    $ 1,234.8   $     (269.2 )    $         (61.6 )
       Gross Profit           183.3        138.6           44.7                 (9.5 )
       Operating Income        91.0         63.3           27.7                 (6.2 )
       Pretax Income           84.3         51.7           32.6                 (6.3 )

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,

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 and 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 Internal Revenue Code. See Note 15 in the Notes to Condensed Consolidated Financial Statements for additional information.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2009 and 2008

Summary

Net income for the third quarter of 2009 improved 15 percent to $19.5 million, or $1.80 per diluted share, compared to $17.0 million, or $1.59 per diluted share, for the third quarter of 2008. Prior year net income benefited from $11.3 million (net of tax) of gains on the above-noted sales of the polyurethane systems product lines and Millsdale land. 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 2009 follows the summary.

Consolidated net sales declined $106.7 million, or 25 percent, between quarters. Lower average selling prices, a seven percent decline in sales volume and the effects of foreign currency translation accounted for approximately $64.3 million, $29.9 million and $12.5 million, respectively, of the net sales reduction. Lower raw material costs drove the drop in average selling prices. The sales volume declines were largely due to the impact of the slow economy. Sales volume for the polymers segment was down 13 percent, due to weak demand for roofing insulation in commercial construction. Sales volume was down six percent for the surfactants segment, primarily due to a decline in demand for biodiesel, oilfield chemicals and surfactants used in construction materials for housing. Consumer laundry and personal care volume grew.

Third quarter 2009 operating income was $4.8 million, or 17 percent, greater than third quarter 2008 operating income despite the 2008 $9.9 million and $8.5 million gains reported on the sales of the polyurethane product lines and Millsdale land, respectively.

Operating expenses for the third quarter of 2009 were $21.3 million, or 153 percent, greater than operating expenses for the same quarter of last year. Major items accounting for the increase in expenses were as follows:

                                                   Increase /
                   (Dollars in millions)           (Decrease)

                   Gain on Sale of Product Lines   $       9.9
                   Gain on Sale of Land                    8.5
                   Deferred Compensation Expense           4.0
                   Foreign Currency Translation           (0.7 )
                   Legal/Environmental Expense             0.5
                   Other                                  (0.9 )

                   Total                           $      21.3

The gains on sales of product lines and land are explained in the 'Overview' section of this management discussion and analysis (MD&A). The increase in deferred compensation expense reflected increases in the values of Company common stock and mutual funds to which the deferred compensation liabilities are tied (see the 'Corporate Expenses' section of this MD&A for further details). The increase in legal/environmental expense was mainly due to a favorable adjustment made to the environmental reserve in the third quarter of 2008. The other caption primarily reflects declines in discretionary spending (e.g. travel and entertainment, dues, consulting fees, etc.) resulting from a Company-wide cost savings initiative.

Interest expense for the third quarter of 2009 was $0.9 million, or 38 percent, lower than interest expense for the third 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, increased $1.0 million between quarters. SPI reported an equity loss of $1.8 million, which was $0.4 million greater than the loss reported in last year's third quarter. The current quarter included $1.2 million of expense for the reserve of value added tax receivable balances that are in dispute with Philippine tax authorities. TIORCO, which was formed in September 2008, reported $0.6 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 was income of $0.7 million for the third quarter of 2009 compared to $0.6 million of expense for the same period of 2008, a favorable swing of $1.3 million. A $2.5 million increase in investment related income and a $1.2 million unfavorable swing in foreign exchange gains and losses accounted for the other, net income change. Unrealized and realized gains related to the mutual

The effective tax rate was 35.6 percent for the third quarter ended September 30, 2009, compared to 30.2 percent for the third quarter ended September 30, 2008. The increase in the effective tax rate was primarily attributable to a lower tax benefit realized on foreign joint venture equity income and a greater percentage of consolidated income being generated in the U.S. where the effective tax rate is higher.

Segment Results



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

For the three months ended
September 30, 2009
Net sales                          $     240,083   $  75,355   $    10,787   $ 326,225          -       $ 326,225
Operating income                          27,384      15,096         4,211      46,691     (13,038 )       33,653

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

Surfactants

Surfactants net sales for the third quarter of 2009 declined $78.3 million, or 25 percent, from net sales for the third quarter of 2008. A 16 percent drop in average selling prices, a six percent decrease in sales volume and the effects of foreign currency translation accounted for approximately $49.3 million, $17.6 million and $11.4 million, respectively, of the net sales change. 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)           2009              2008         (Decrease)       Change
  North America               $      157,084    $      213,986   $    (56,902 )        -27
  Europe                              58,072            71,721        (13,649 )        -19
  Latin America                       24,927            32,681         (7,754 )        -24

  Total Surfactants Segment   $      240,083    $      318,388   $    (78,305 )        -25

The 27 percent decline in net sales for North American operations was attributable to a 19 percent decline in average selling prices and a nine percent decrease in sales volume, which accounted for $37.1 million and $19.0 million, respectively, of the reduction. The effects of foreign currency translation contributed $0.8 million to the drop in net sales. The decrease in average selling

Net sales for European operations declined 19 percent due to an 11 percent decrease in average selling prices and the effects of foreign currency translation, which accounted for $7.8 million and $6.1 million, respectively, of the decline. Lower raw material costs drove the reduction in average selling prices. Sales volume was essentially unchanged from quarter to quarter.

Net sales for Latin American operations declined 24 percent due a 15 percent decline in average selling prices and the effects of foreign currency translation, which accounted for $5.1 million and $4.6 million, respectively, of the decrease. The lower average selling prices reflected falling raw material costs. Sales volume increased six percent from quarter to quarter, which reduced the net sales decline by about $1.9 million. Additional business at the Company's Brazil subsidiary drove the sales volume improvement, which was partially offset by sales volume declines at the Company's Mexico and Colombia subsidiaries.

Surfactants operating income for the third quarter of 2009 was $14.4 million higher than operating income for the third quarter of 2008. Gross profit increased $13.1 million, or 41 percent. Lower raw material costs drove the gross profit improvement. Reduced freight costs, combined with purchasing-led cost saving initiatives also contributed to the quarter-to-quarter profit growth. The six percent drop in sales volume and the effects of foreign currency translation (approximately $1.5 million) tempered the improvement. Operating expenses declined $1.3 million, or seven 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)           2009              2008         (Decrease)       Change
  Gross Profit
  North America               $       33,238    $       23,113   $     10,125          +44
  Europe                               8,540             4,201          4,339         +103
  Latin America                        3,508             4,881         (1,373 )        -28

  Total Surfactants Segment   $       45,286    $       32,195   $     13,091          +41

  Operating Expenses                  17,902            19,209         (1,307 )         -7


  Operating Income            $       27,384    $       12,986   $     14,398         +111

Gross profit for European operations increased due principally to lower raw material costs combined with cost saving efforts. A more favorable customer mix also contributed. The unfavorable effects of foreign currency translation reduced Europe's quarter-to-quarter profit improvement by approximately $0.8 million.

Latin American operations' gross profit declined due principally to a less profitable sales mix and the effects of foreign currency translation (approximately $0.6 million). The unfavorable impact of lower sales volume at the Company's Mexico and Colombia subsidiaries more than offset the effect of additional business at the Brazil subsidiary.

Operating expenses for the surfactants segment were down $1.3 million, or seven percent, between quarters due largely to declines of $1.0 million and $0.6 million in research and development and marketing expenses, respectively, for North American operations and to a $0.6 million favorable effect of foreign currency translation. The expense reductions were partially offset by a $1.0 million increase in operating expenses for European operations. Lower discretionary expenses for consulting, outside services and travel and entertainment accounted for the declines in both research and development and marketing expenses for North American operations. The increase in operating expenses for European operations was primarily attributable to an increased provision for potential bad debts and higher product registration expenses.

Polymers

Third quarter 2009 net sales for the polymers segment declined $28.2 million, or 27 percent, from third quarter 2008 net sales. A 13 percent drop in sales volume, driven by the economic recession, accounted for $13.6 million of the drop in net sales, while lower average selling prices and the unfavorable effects of foreign currency translation contributed $13.5 million and $1.1 million, respectively, to the decline. A quarter-to-quarter comparison of net sales by region is displayed below:

   (Dollars in thousands)      For the Three Months Ended
                            September 30,      September 30,     Increase /       Percent
                                 2009              2008          (Decrease)       Change
   North America            $       51,354    $        74,350   $    (22,996 )        -31
   Europe                           20,771             25,318         (4,547 )        -18
   Asia and Other                    3,230              3,850           (620 )        -16

   Total Polymers Segment   $       75,355    $       103,518   $    (28,163 )        -27

Net sales for North American operations fell 31 percent due to a 19 percent decline in sales volume and a 14 percent decline in average selling prices, which accounted for $14.4 million and $8.6 million, respectively, of the decrease in net sales. Sales volumes for polyols and phthalic anhydride fell 25 percent and five percent, respectively, due to the negative impact of the economic slowdown on the industries into which the segment sells. The decrease in average selling prices reflected lower raw material costs, particularly for phthalic anhydride.

Net sales for Asia and Other regions were down 16 percent from quarter to quarter due to a 20 percent decline in average selling prices. Sales volume improved four percent as a result of improvement from the Company's China subsidiary.

Polymer operating income for the third quarter of 2009 increased $0.9 million, or six percent, from operating income for the third quarter of 2008. Gross profit improved $10.7 million, or 120 percent, due primarily to lower raw material costs combined with reduced freight expense and the positive effects of cost containment efforts. Operating expenses increased $9.8 million, as the prior year benefited from the $9.9 million gain on the sale of the commodity polyurethane systems product lines. Below are quarter-to-quarter comparisons of gross profit by region and total segment operating expenses and operating income:

   (Dollars in thousands)      For the Three Months Ended
                            September 30,     September 30,        Increase /    Percent
                                 2009              2008            (Decrease)    Change
   Gross Profit
. . .