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 x No ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


	Three Months Ended June 30						Six Months Ended June 30
*(Dollars in thousands, except per share amounts)*	2004			2003			2004			2003			Three Months Ended September 30						Nine Months Ended September 30
													2004			2003			2004			2003
Net Sales	$	236,347		$	200,429		$	457,734		$	387,509		$	238,697		$	196,066		$	696,431		$	583,575
Cost of Sales		205,851			170,248			397,586			332,222			212,490			169,173			610,076			501,395

Gross Profit		30,496			30,181			60,148			55,287			26,207			26,893			86,355			82,180

Operating Expenses:
Marketing		7,200			7,856			14,594			14,484			7,066			7,230			21,660			21,714
Administrative		9,749			8,299			17,690			15,674			8,353			10,549			26,043			26,223
Research, development and technical services		6,432			6,362			12,746			12,577			6,770			6,113			19,516			18,690

		23,381			22,517			45,030			42,735			22,189			23,892			67,219			66,627

Operating Income		7,115			7,664			15,118			12,552			4,018			3,001			19,136			15,553

Other Income (Expenses):
Interest, net		(1,792	)		(2,035	)		(3,853	)		(4,219	)		(1,704	)		(2,034	)		(5,557	)		(6,253	)
Income from equity in joint venture		533			725			1,018			1,177			441			619			1,459			1,796
Foreign exchange gain (loss) and other, net		(270	)		805			(771	)		1,089			11			179			(760	)		1,268

		(1,529	)		(505	)		(3,606	)		(1,953	)		(1,252	)		(1,236	)		(4,858	)		(3,189	)

Income Before Provision for Income Taxes		5,586			7,159			11,512			10,599			2,766			1,765			14,278			12,364
Provision for Income Taxes		1,784			2,399			3,680			3,551			875			467			4,555			4,018

Net Income	$	3,802		$	4,760		$	7,832		$	7,048		$	1,891		$	1,298		$	9,723		$	8,346

Net Income Per Common Share (Note 6):
Basic	$	0.40		$	0.51		$	0.83		$	0.75		$	0.19		$	0.12		$	1.02		$	0.87

Diluted	$	0.39		$	0.49		$	0.81		$	0.72		$	0.19		$	0.12		$	1.00		$	0.85

Shares Used to Compute Net Income Per Common Share (Note 6):
Basic		8,968			8,885			8,956			8,883			8,981			8,886			8,964			8,884

Diluted		9,688			9,757			9,693			9,751			9,038			9,084			9,696			9,085

Dividends per Common Share	$	0.1925		$	0.1900		$	0.3850		$	0.3800		$	0.1925		$	0.1900		$	0.5775		$	0.5700

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.


*(Dollars in thousands)*	June 30, 2004			December 31, 2003			September 30, 2004			December 31, 2003
	Unaudited
*Assets*
Current Assets:
Cash and cash equivalents	$	6,625		$	4,235		$	7,019		$	4,235
Receivables, net		152,877			113,353			146,098			113,353
Inventories (Note 3)		64,109			70,548			67,105			70,548
Deferred income taxes		8,269			8,077			8,826			8,077
Other current assets		8,101			8,247			9,301			8,247

Total current assets		239,981			204,460			238,349			204,460

Property, Plant and Equipment:
Cost		755,828			745,097			766,169			745,097
Less: accumulated depreciation		551,638			534,432			563,134			534,432

Property, plant and equipment, net		204,190			210,665			203,035			210,665

Goodwill, net (Note 9)		7,664			7,621			7,781			7,621

Other intangible assets, net (Note 9)		11,099			12,016			10,679			12,016

Other non-current assets		27,894			29,455			27,961			29,455

Total assets	$	490,828		$	464,217		$	487,805		$	464,217

*Liabilities and Stockholders’ Equity*
Current Liabilities:
Current maturities of long-term debt	$	17,648		$	23,670		$	16,425		$	23,670
Accounts payable		91,426			74,113			79,421			74,113
Accrued liabilities		32,088			35,156			36,273			35,156

Total current liabilities		141,162			132,939			132,119			132,939

Deferred income taxes		13,560			14,570			13,797			14,570

Long-term debt, less current maturities		107,421			92,004			115,500			92,004

Other non-current liabilities		61,780			62,637			58,443			62,637

Commitments and Contingencies (Note 4)

Minority Interest (Note 10)		945			—			945			—

Stockholders’ Equity:
5-1/2% convertible preferred stock, cumulative, voting without par value; authorized 2,000,000 shares; issued 581,482 shares in 2004 and 582,082 shares in 2003		14,537			14,552			14,537			14,552
Common stock, $1 par value; authorized 30,000,000 shares; issued 10,007,871 shares in 2004 and 9,900,265 shares in 2003		10,008			9,900
Common stock, $1 par value; authorized 30,000,000 shares; Issued 10,022,541 shares in 2004 and 9,900,265 shares in 2003								10,023			9,900
Additional paid-in capital		23,524			22,277			23,846			22,277
Accumulated other comprehensive loss (Note 7)		(19,440	)		(19,560	)		(18,560	)		(19,560	)
Retained earnings (unrestricted approximately $32,270 in 2004 and $29,027 in 2003)		158,762			154,780
Less: Treasury stock, at cost 1,032,051 shares in 2004 and 966,671 in 2003		(21,431	)		(19,882	)
Retained earnings (unrestricted approximately $33,500 in 2004 and $29,027 in 2003)								158,724			154,780
Less: Treasury stock, at cost 1,037,751 shares in 2004 and 966,671 in 2003								(21,569	)		(19,882	)

Stockholders’ equity		165,960			162,067			167,001			162,067

Total liabilities and stockholders’ equity	$	490,828		$	464,217		$	487,805		$	464,217

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.


	Six Months Ended June 30						Nine Months Ended September 30
*(Dollars in thousands)*	2004			2003			2004			2003
Cash Flows From Operating Activities
Net income	$	7,832		$	7,048		$	9,723		$	8,346
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		19,967			20,599			30,564			30,466
Recognition of deferred revenue		(222	)		(229	)		(284	)		(344	)
Deferred income taxes		(1,405	)		47			(1,725	)		(1,108	)
Other non-cash items		675			(992	)		1,485			(1,392	)
Changes in assets and liabilities:
Receivables, net		(39,524	)		(18,633	)		(32,745	)		(12,826	)
Inventories		6,439			(1,261	)		3,443			(1,534	)
Accounts payable and other accrued liabilities		12,671			11,133			4,900			9,300
Pension liabilities		1,838			1,239			(348	)		1,603
Environmental and legal liabilities		(1,220	)		1,044			(1,579	)		2,520
Other current assets		146			368			(1,054	)		(325	)

Net Cash Provided by Operating Activities		7,197			20,363			12,380			34,706

Cash Flows From Investing Activities
Expenditures for property, plant and equipment		(13,168	)		(18,539	)		(23,243	)		(24,744	)
Dividend from Philippine joint venture		1,700			—			1,700			—
Other non-current assets		233			(1,691	)		275			(2,335	)
Formation of China joint venture		945			—			945			—

Net Cash Used in Investing Activities		(10,290	)		(20,230	)		(20,323	)		(27,079	)

Cash Flows From Financing Activities
Revolving debt and notes payable to banks, net		6,146			17,805			17,079			15,370
Other debt borrowings		15,856			162			16,167			—
Other debt repayments		(12,607	)		(13,122	)		(16,995	)		(16,599	)
Dividends paid		(3,850	)		(3,776	)		(5,779	)		(5,664	)
Stock option exercises		295			69			495			97
Other		(301	)		(17	)		(302	)		(17	)

Net Cash Provided by Financing Activities		5,539			1,121
Net Cash Provided by (Used In) Financing Activities								10,665			(6,813	)

Effect of Exchange Rate Changes on Cash		(56	)		(575	)		62			(858	)

Net Increase in Cash and Cash Equivalents		2,390			679
Net Increase (Decrease) in Cash and Cash Equivalents								2,784			(44	)
Cash and Cash Equivalents at Beginning of Period		4,235			3,188			4,235			3,188

Cash and Cash Equivalents at End of Period	$	6,625		$	3,867		$	7,019		$	3,144

Supplemental Cash Flow Information:
Cash payments of interest	$	3,974		$	4,319		$	5,713		$	6,086

Cash payments of income taxes, net of refunds	$	5,773		$	2,865		$	6,765		$	4,747

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

The condensed consolidated financial statements included herein have been prepared by the Stepan Company (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate and make the information presented not misleading. In the opinion of management all normal recurring adjustments necessary to present fairly the condensed consolidated financial position of the Company as of ~~June~~September 30, 2004, and the condensed consolidated results of operations for the three and ~~six~~nine months then ended and cash flows for the ~~six~~nine months then ended have been included.

The Company includes the financial statements of its Chinese joint venture in its consolidated financial statements on a three month lag basis; accordingly, the Company’s September 30, 2004, financial statements reflect the joint venture partners’ initial investment (which was made as of June 30, 2004) as minority interest.

Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no stock-based employee compensation cost is reflected in net income, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123.


*(Dollars in thousands)*	June 30, 2004		December 31, 2003		September 30, 2004		December 31, 2003
Finished products	$	42,334	$	47,809	$	44,259	$	47,809
Raw materials		21,775		22,739		22,846		22,739

Total inventories	$	64,109	$	70,548	$	67,105	$	70,548

Inventories priced using the last-in, first-out (LIFO) inventory valuation method as of ~~June~~September 30, 2004 and December 31, 2003, amounted to ~~79 and~~ 78 percent of total ~~inventories, respectively.~~inventories. If the first-in, first-out (FIFO) inventory valuation method had been used for all inventories, inventory balances would have been approximately ~~$10.2~~$13.2 million and $8.6 million higher than reported at ~~June~~September 30, 2004, and December 31, 2003, respectively.

There are a variety of legal proceedings pending or threatened against the Company. Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some future time. The Company’s operations are subject to extensive local, state and federal regulations, including the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Superfund amendments of 1986 (“Superfund”). The Company has been named by the government as a potential responsible party at 21 waste disposal sites where clean up costs have been or may be incurred under CERCLA and similar state statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it may incur with respect to these sites.

After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses from ~~$8.7~~$8.6 million to ~~$40.7~~$40.2 million at ~~June~~September 30, 2004. At ~~June~~September 30, 2004, the Company’s best estimate of the reserve for such losses was ~~$18.9~~$18.8 million for legal contingencies and environmental matters compared to $19.6 million at December 31, 2003.

For certain sites, estimates cannot be made of the total costs of compliance, or the Company’s share of such costs; accordingly, the Company is unable to predict the effect thereof on future results of operations. In the event of one or more adverse determinations in any annual or interim period, the impact on the Company’s financial position, cash flows and results of operations for those periods could be material. However, based upon the Company’s present belief as to its relative involvement at these sites, other viable entities’ responsibilities for cleanup, and the extended period over which any costs would be incurred, the Company believes that these matters will not have a material effect on the Company’s financial position.

Following are summaries of the environmental proceedings related to the major environmental sites where the Company has responsibility for participating in remediation efforts:

The Company’s site in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site, were listed on the National Priorities List in September 1993 pursuant to the provisions of the CERCLA because of certain alleged chemical contamination. Pursuant to an Administrative Order on Consent entered into between the United States Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company, and the issuance of an order by USEPA to the Company for property currently owned by the Company, the Company completed a Remedial Investigation Feasibility Study (RI/FS) in 1994. The Company submitted the Draft Final FS for Soil and Source Areas (Operable Unit 1) in September 2002. In addition, the Company submitted the Draft Final FS for Groundwater (Operable Unit 2) in June 2003. Discussions between USEPA and the Company regarding the chemical remediation are continuing. The Company is awaiting the issuance of a Record of Decision (ROD) from USEPA relating to the currently owned and formerly owned Company property and the proposed remediation. The final ROD will be issued sometime after a public comment period.

undertook to remediate properties which were used to process radiological material for the U.S. Government. In 1997, responsibility for this clean-up was transferred to the United States Army Corps of Engineers (USACE). On January 29, 1999, the Company received a copy of a USACE Report to Congress dated January 1998 in which the USACE expressed their intention to evaluate, with the USEPA, whether the Company and/or other parties might be responsible for cost recovery or contribution claims related to the Maywood site. Subsequent to the issuance of that report, the USACE advised the Company that it had requested legal advice from the Department of Justice as to the impact of the Agreement.

costs to date of $138 million. Costs associated with radiological waste at the Maywood site, which the Company believes represent all but a small portion of the amount referred to in the Justice Department letter, could be expected to aggregate substantially in excess of that amount. In the letter, the Justice Department invited the Company to discuss settlement of the matter in order to avoid the need for litigation. The Company believes that its liability, if any, for such costs has been resolved by the aforesaid Agreement. Despite the fact that the Company continues to believe that it has no liability to the United States for such costs, discussions with the Justice Department are currently ongoing to attempt to resolve this matter.

The Company believes it has adequate reserves for claims associated with the Maywood site, and has recorded a liability for the estimated probable costs it expects to incur at the site related to remediation of chemical contamination. However, depending on the results of the ongoing discussions regarding the Maywood site, particularly radiological contamination, the final cost of the remediation could differ from the current estimates.

The Company has been named as a potentially responsible party (PRP) in the caseUSEPA v. Jerome Lightman (92 CV 4710 D. N. J.), which involves the Ewan and D’Imperio Superfund Sites located in New Jersey. Trial on the issue of the Company’s liability at these sites was completed in March 2000. The Company is awaiting a decision from the court. If the Company is found liable at either site, a second trial as to the Company’s allocated share of clean-up costs at these sites will be held. The Company believes it has adequate defenses to the issue of liability. In the event of an unfavorable outcome related to the issue of liability, the Company believes it has adequate reserves. On a related matter, the Company has filed an appeal to the United States Third Circuit Court of Appeals objecting to the lodging of a partial consent decree in favor of the United States Government in this action. Under the partial consent decree, the

government recovered past costs at the site from all PRPs including the Company. The Company paid its assessed share but by objecting to the partial consent decree, the Company is seeking to recover back the sums it paid.

NJDEP settled such claims against the alleged responsible parties, resulting in the Company paying its portion ($83,061) in July 2002. This payment is subject to reallocation after the allocation phase of the above-identified trial, if any. Also, USEPA issued a Unilateral Administrative Order dated November 5, 2003, directed to all PRPs to perform certain remedial activities at the D’Imperio Superfund Site. The cost for all PRPs for this work is estimated to be $300,000 to $450,000. The Company would be responsible for its allocated share of these costs. The amount due by the Company will not have a material impact on the financial position, results of operations or cash flows of the Company.

with no limitation on the ultimate amount of contributions. The Company has recorded a reserve of ~~$0.7~~$0.6 million for current and future claims associated with this site. However, depending on the ultimate cost of the remediation at this site, the amount for which the company is liable could differ from the current estimates. In addition, the Company and other prior owners entered into an agreement in April 2004 waiving certain statute of limitations defenses for claims which may be filed by the Town of Wilmington, Massachusetts, in connection with this site. While the Company has denied any liability for any such claims, the Company agreed to this waiver while the parties continue to discuss the resolution of any potential claim ~~which~~that may be filed.

addition, the Company received a Notice of Potential Liability and Request to Perform RI/FS dated June 30, 2000, from USEPA. The Company has decided that it will participate in the performance of the RI/FS. However, based on the current information known regarding this site, the Company is unable to predict what its liability, if any, will be for this site.

The Company received a General Notice of Potential Liability letter from USEPA dated October 18, 2002, regarding the Liquid Dynamics Site located in Chicago, Illinois. The Company submitted a response to USEPA on November 5, 2002, stating that it is interested in negotiating a resolution of its potential responsibility at this site. In addition, the Company recently joined the PRP group. Based on the fact that the Company believes it is de minimis at this site, the Company believes that a resolution of its liability at this site will not have a material impact on the financial position, results of operations or cash flows of the Company.

The Company received a Section 104(e) Request for Information from USEPA dated June 2, 2003, regarding the Martin Aaron Site located in Camden, New Jersey. The Company’s response was submitted on August 11, 2003. In addition, the Company and other PRPs received a Notice of Potential Liability and Demand for Reimbursement of Costs Expended at this site dated June 9, 2004. The Company ~~and other PRPs have requested an extension until August 27, 2004, to file their~~has not yet filed a response. The Company continues to investigate this matter and, therefore, cannot predict what its liability, if any, will be for this site.

The Company received a Section 104(e) Request for Information from USEPA dated December 15, 2003, regarding the Wells G & H Superfund Site located in Woburn, Massachusetts. The Company’s response was submitted on March 18, 2004. The Company continues to investigate this matter and, therefore, cannot predict what its liability, if any, will be for this site.

The Company received a notice from the Pennsylvania Department of Environmental Protection dated June 23, 2004, regarding the Bottle House Site located in City of Allentown, Lehigh County, Pennsylvania. AThe Company’s response ~~to this notice is due~~was submitted on ~~or about August 16,~~September 24, 2004. The Company ~~is currently investigating~~continues to investigate this matter and, therefore, cannot predict what its liability, if any, will be for this site.

The Company performs ongoing ground water monitoring at a number of its plant sites. Recent results of such monitoring indicated that future remediation may be required at one of the Company’s sites. Although there has been no enforcement order, the Company is in the process of preparing a remediation plan that will be submitted to the appropriate governmental agency. The Company believes it has adequate reserves for the remediation of this site.


	UNITED KINGDOM
	Three Months Ended June 30						Six Months Ended June 30						UNITED STATES
*(Dollars in thousands)*	2004			2003			2004			2003			Three Months Ended September 30						Nine Months Ended September 30
													2004			2003			2004			2003
Service cost	$	143		$	101		$	288		$	202		$	803		$	740		$	2,558		$	2,316
Interest cost		166			128			335			256			1,380			1,277			4,232			3,995
Expected return on plan assets		(144	)		(110	)		(291	)		(220	)		(1,617	)		(1,519	)		(4,902	)		(4,752	)
Amortization of prior service cost														111			84			285			263
Amortization of net loss		13			11			26			22			223			35			871			109

Net periodic benefit cost	$	178		$	130		$	358		$	260		$	900		$	617		$	3,044		$	1,931

As disclosed in its financial statements for the year ended December 31, 2003, the Company expected to contribute $3,841,000 to its U.S. qualified pension plans and to pay $117,000 related to its unfunded non-qualified plans in 2004. In April 2004, pension relief legislation was signed into ~~law; as~~law, and significantly reduced the Company’s required 2004 contribution to its U.S. qualified pension plans. In the third quarter of 2004, management elected to make a ~~result, the Company now expects to contribute $1,574,000~~contribution to its U.S. qualified pension plans in excess of the minimum required for 2004. ~~The original estimate for the unfunded non-qualified plans is unchanged. As~~Accordingly, as of ~~June~~September 30, 2004, ~~$482,000~~$3,631,000 had been contributed to the U.S. qualified pension plans and ~~$75,000~~$96,000 had been paid related to the non-qualified plans. The Company does not anticipate making any additional contributions in 2004 to its U.S. qualified pension plans.

Below is the computation of basic and diluted earnings per share for the three and ~~six~~nine months ended ~~June~~September 30, 2004 and 2003.


	Three Months Ended June 30						Six Months Ended June 30
*(In thousands, except per share amounts)*	2004			2003			2004			2003			Three Months Ended September 30						Nine Months Ended September 30
													2004			2003			2004			2003
Computation of Basic Earnings per Share
Net income	$	3,802		$	4,760		$	7,832		$	7,048		$	1,891		$	1,298		$	9,723		$	8,346
Deduct dividends on preferred stock		(200	)		(200	)		(400	)		(400	)		(200	)		(200	)		(600	)		(600	)

Income applicable to common stock	$	3,602		$	4,560		$	7,432		$	6,648		$	1,691		$	1,098		$	9,123		$	7,746

Weighted-average number of common shares outstanding		8,968			8,885			8,956			8,883			8,981			8,886			8,964			8,884

Basic earnings per share	$	0.40		$	0.51		$	0.83		$	0.75		$	0.19		$	0.12		$	1.02		$	0.87

Computation of Diluted Earnings per Share

Net income	$	3,802		$	4,760		$	7,832		$	7,048

Weighted-average number of common shares outstanding		8,968			8,885			8,956			8,883
Add net shares issuable from assumed exercise of options (under treasury stock method)		56			207			73			203
Add weighted-average shares issuable from assumed conversion of convertible preferred stock		664			665			664			665

Shares applicable to diluted earnings		9,688			9,757			9,693			9,751

Diluted earnings per share	$	0.39		$	0.49		$	0.81		$	0.72

Comprehensive income includes net income and all other non-owner changes in equity that are not reported in net income. Below is the Company’s comprehensive income for the three and ~~six~~nine months ended ~~June~~September 30, 2004 and 2003.


	Three Months Ended June 30					Six Months Ended June 30
*(Dollars in thousands)*	2004			2003		2004		2003		Three Months Ended September 30						Nine Months Ended September 30
										2004			2003			2004			2003
Net income	$	3,802		$	4,760	$	7,832	$	7,048	$	1,891		$	1,298		$	9,723		$	8,346
Other comprehensive income:
Foreign currency translation gain/(loss)		(1,268	)		3,195		48		3,374		987			(2,414	)		1,035			960
Unrealized gain/(loss) on securities		(10	)		412		72		327		(107	)		25			(35	)		352

Comprehensive income	$	2,524		$	8,367	$	7,952	$	10,749	$	2,771		$	(1,091	)	$	10,723		$	9,658

At ~~June~~September 30, 2004, the total accumulated other comprehensive loss of ~~$19,440,000~~$18,560,000 consisted of ~~$5,741,000~~$4,754,000 of foreign currency translation adjustments, ~~$196,000~~$89,000 of unrealized gains on securities (net of income taxes of ~~$131,000)~~$60,000) and $13,895,000 of minimum pension liability adjustments (net of income taxes of $9,000,000). At December 31, 2003, the total accumulated other comprehensive loss of $19,560,000 included $5,789,000 of foreign currency translation adjustments, $124,000 of unrealized gains on securities (net of income taxes of $83,000) and $13,895,000 of minimum pension liability adjustments (net of income taxes of $9,000,000). Unrealized gains on securities relate entirely to investments held for the deferred compensation plans.

The Company has three reportable segments: surfactants, polymers and specialty products. Financial results of the Company’s operating segments for the three and ~~six~~nine months ended ~~June~~September 30, 2004 and 2003, are summarized below:


*(Dollars in thousands)*	Surfactants		Polymers		Specialty Products		Segment Totals		Surfactants		Polymers		Specialty Products		Segment Totals
For the three months ended June 30, 2004
For the three months ended September 30, 2004
Net sales	$	181,415	$	48,334	$	6,598	$	236,347	$	177,979	$	54,657	$	6,061	$	238,697
Operating income		10,430		4,377		1,681		16,488		5,157		6,567		1,015		12,739

For the three months ended June 30, 2003
For the three months ended September 30, 2003
Net sales	$	159,134	$	34,897	$	6,398	$	200,429	$	150,330	$	39,018	$	6,718	$	196,066
Operating income		9,411		5,258		1,595		16,264		5,963		5,064		1,742		12,769

For the six months ended June 30, 2004
For the nine months ended September 30, 2004
Net sales	$	357,416	$	85,888	$	14,430	$	457,734	$	535,395	$	140,545	$	20,491	$	696,431
Operating income		18,783		8,214		4,411		31,408		23,940		14,781		5,426		44,147

For the six months ended June 30, 2003
For the nine months ended September 30, 2003
Net sales	$	312,524	$	62,895	$	12,090	$	387,509	$	462,854	$	101,913	$	18,808	$	583,575
Operating income		16,936		7,804		2,878		27,618		22,899		12,868		4,620		40,387

Below are reconciliations of segment operating income to consolidated income before income taxes:


	Three Months Ended June 30						Six Months Ended June 30
*(Dollars in thousands)*	2004			2003			2004			2003			Three Months Ended September 30						Nine Months Ended September 30
													2004			2003			2004			2003
Operating income segment totals	$	16,488		$	16,264		$	31,408		$	27,618		$	12,739		$	12,769		$	44,147		$	40,387
Unallocated corporate expenses		(9,373	)		(8,600	)		(16,290	)		(15,066	)		(8,721	)		(9,768	)		(25,011	)		(24,834	)
Interest expense		(1,792	)		(2,035	)		(3,853	)		(4,219	)		(1,704	)		(2,034	)		(5,557	)		(6,253	)
Equity in earnings of joint venture		533			725			1,018			1,177			441			619			1,459			1,796
Foreign exchange and other, net		(270	)		805			(771	)		1,089			11			179			(760	)		1,268

Consolidated income before income taxes	$	5,586		$	7,159		$	11,512		$	10,599		$	2,766		$	1,765		$	14,278		$	12,364

Unallocated corporate expenses include corporate administrative (including legal and environmental expenses) and corporate manufacturing expenses, which are not included in segment operating income and are not used to evaluate segment performance.

The Company’s net carrying values of goodwill were ~~$7,664,000~~$7,781,000 and $7,621,000 as of ~~June~~September 30, 2004 and December 31, 2003, respectively. The entire amount of goodwill related to the surfactants reporting unit. The change in net carrying value resulted from the effects of currency translation.

The following table reflects the components of all other intangible assets, which have finite lives, as of ~~June~~September 30, 2004 and December 31, 2003.


*(Dollars in thousands)*	Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
	June 30, 2004		Dec. 31, 2003		June 30, 2004		Dec. 31, 2003		Sept. 30, 2004		Dec. 31, 2003		Sept. 30, 2004		Dec. 31, 2003
Other Intangible Assets:
Patents	$	2,000	$	2,000	$	800	$	733	$	2,000	$	2,000	$	833	$	733
Trademarks, customer lists, know-how		18,420		18,406		8,679		8,007		18,428		18,406		9,016		8,007
Non-compete agreements		2,299		2,310		2,141		1,960		2,340		2,310		2,240		1,960

Total	$	22,719	$	22,716	$	11,620	$	10,700	$	22,768	$	22,716	$	12,089	$	10,700

Aggregate amortization expenses for the three and ~~six~~nine months ended ~~June~~September 30, 2004, were ~~$524,000~~$421,000 and ~~$913,000,~~$1,334,000, respectively. Aggregate amortization expenses for the three and nine six months ended ~~June~~September 30, 2003 were ~~$538,000~~$417,000 and ~~$912,000,~~$1,329,000, respectively. Estimated amortization expense for identifiable intangibles assets, other than goodwill, for the current and each of the five succeeding fiscal years are as follows:


*(Dollars in thousands)*	*(Dollars in thousands)*
For year ending 12/31/04		$	1,639	$	1,639
For year ending 12/31/05		$	1,624	$	1,624
For year ending 12/31/06		$	1,461	$	1,461
For year ending 12/31/07		$	1,461	$	1,461
For year ending 12/31/08		$	1,457	$	1,457
For year ending 12/31/09		$	1,370	$	1,370

In February 2004, the Company entered into a joint venture agreement with Sinopec, Jinling Petrochemical Corporation in Nanjing, China. The joint venture was formed to manufacture the Company’s aromatic polyester polyols for the domestic Chinese market. ~~Once constructed, the China facility will join the Company’s Millsdale, Illinois and Wesseling, Germany sites to further expand the Company’s position as a worldwide provider of polyester polyols.~~ Final construction of the facility is expected by mid-2005.

The Company and its partner own 55 percent and 45 percent, respectively, of the joint venture. ~~As such, the Company will consolidate in its financial statements the joint~~

venture’s balance sheet, statement of income and statement of cash flows. The Company’s June 30, 2004, financial statements reflect the partners’ initial investment and the related minority interest.

Non-cash financing activities for the ~~six~~nine months ended ~~June~~September 30, 2004, included the receipt into treasury of ~~65,423~~71,123 shares of the Company’s common stock tendered in lieu of cash by employees exercising options on ~~89,166~~95,016 shares of the Company’s common stock. The tendered shares, which were owned by employees for more than six months, were valued at ~~$1,550,000.~~$1,688,000.

In March 2004, the Financial Accounting Standards Board (FASB) ratified the consensus reached by the Emerging Issues Task Force (EITF) with respect to EITF Issue No. 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. Issue No 03-1 provides guidance for determining when an investment classified as either available-for-sale or held-to-maturity is other-than-temporarily impaired. An investment is impaired if the fair value of the investment is less than its cost. The impairment is considered other-than-temporary unless the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for a forecasted recovery of fair value up to or beyond the cost of the investment, and evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. Originally, this guidance was to be applied in impairment evaluations made in reporting periods beginning after June 15, 2004; however, on September 30, 2004, the FASB delayed the effective date of certain provisions of EITF Issue No. 03-1 to an as yet undetermined date. Had the guidance, as currently written, been applied during the three month period ended September 30, 2004, the Company would have recognized an impairment loss of approximately $214,000.

Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentation, notably ~~$752,000~~$68,000 and ~~$1,004,000~~$1,072,000 of foreign exchange gains for the three and ~~six~~nine months ended ~~June~~September 30, 2003, respectively, were reclassified from ‘Cost of Sales’ to ‘Foreign exchange gain (loss) and other, net’ in the 2003 statements of income.

Item 2 - Management’s Discussion and Analysis of Financial Conditions and Results of Operations

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

Management’s Discussion and Analysis should be read in conjunction with the ‘Overview’ section of Management’s Discussion and Analysis included in the Company’s 2003 Form 10-K.

Net income for the ~~second~~third quarter of 2004 ~~decreased $1.0~~increased 46 percent, to $1.9 million, or ~~20 percent, to $3.8 million, or $0.39~~$0.19 per diluted share, compared to ~~$4.8~~$1.3 million, or ~~$0.49~~$0.12 per diluted share, for the ~~second~~third quarter of 2003. Below is a summary discussion of the major factors leading to the quarter-to-quarter ~~decline~~increase in net income. A detailed discussion of ~~second~~third quarter 2004 segment operating performance follows the summary.

Consolidated net sales increased ~~$35.9~~$42.6 million, or 1822 percent, to ~~$236.3~~$238.7 million for the ~~second~~third quarter of 2004 from ~~$200.4~~$196.1 million for the ~~second~~third quarter of 2003. The effect of foreign currency translation, which reflected the strengthening of the European euro, British pound sterling and Canadian dollar against the U.S. dollar, contributed ~~$4.0~~$4.4 million of the increase in consolidated net sales. ~~All three segments reported current quarter net sales that exceeded net sales reported in the prior year’s quarter.~~ Surfactants segment net sales were up ~~$22.3~~$27.6 million, or 1418 percent, due to higher selling prices, increased U.S. (‘domestic’) ~~and foreign operations’~~ sales ~~volumes~~volume and favorable foreign currency translation. Net sales for the polymers segment increased ~~$13.4~~$15.6 million, or 3940 percent, due to higher sales volume for all businesses and higher selling prices. The specialty products segment reported a ~~$0.2~~$0.6 million, or ~~three~~10 percent, ~~increase~~decrease in net sales due to ~~higher sale~~lower sales of ~~food and flavoring~~pharmaceutical products.

Operating income ~~fell $0.5 million, or seven~~increased 34 percent, to ~~$7.1~~$4.0 million for the ~~second~~third quarter of 2004 from ~~$7.6~~$3.0 million for the same quarter of 2003. Operating ~~incomes~~expenses, which declined $1.7 million, or seven percent, from quarter to quarter accounted for most of the ~~surfactants and specialty products segments were up 11 percent and five percent, respectively, but~~ operating income for the polymers segment dropped 17 percent. Rising raw material costs continued to negatively impact profit margins, particularly for the surfactants and polymers segments. Operating expenses, which include marketing, administrative and research and development expenses, increased $0.9improvement. A $1.1 million ~~or four percent, to $23.4 million for the second quarter of 2004 from $22.5 million for the second quarter of 2003. Compensation expense related to the Company’s~~favorable swing in deferred compensation ~~plan contributed $0.8 million of the increase due to the increase~~expense arising from a decrease in the price of the Company’s stock used to compute changes in deferred ~~compensation. Stepan Company common stock closed at $26.15 per share on June 30, 2004, compared to $22.84 per share on March 31, 2004.~~compensation accounted for part of the operating expense decline. In addition, 2003 ~~second~~third quarter operating expenses included $1.5 million of charges for potential future environmental remediation. No such expenses were ~~reduced by~~recognized in the third quarter of 2004. Research expenses were up $0.7 million from quarter to quarter primarily due to costs for testing and registering biocidal products and for outside consulting on new technologies. Gross profit was down $0.7 million, or three percent, between quarters, as rising raw material costs negated the impact of higher sales volumes. Only the polymers segment posted a ~~$1.0 million recovery of settlement costs related to an old legal case. The increases were partially~~quarter-to-quarter increase in gross profit. In the surfactants segment, growth in domestic operations’ gross profit was more than offset by a ~~$0.5 million reduction~~decline in ~~environmental remediation~~gross profit from foreign operations, where rising raw material costs ~~and by lower marketing expenses for most geographic locations.~~have been difficult to pass on to customers, particularly in Europe where excess manufacturing capacity exists in the industry.

Interest ~~expenses~~expense declined ~~$0.2~~$0.3 million, or 1216 percent, from quarter to quarter due to a higher proportion of bank debt, which carries lower interest rates than the Company’s long-term notes. Lower average debt levels also contributed to the decline.

Income from the Company’s Philippine joint venture fell $0.2 million due ~~primarily~~ to lower sales volume and a less favorable mix of sales.

Foreign exchange and other, net, which includes foreign exchange gains and losses and investment-related income and expense, was ~~$0.3 million of expense in~~$11,000 for the ~~second~~third quarter of 2004 ~~compared to $0.8~~versus the $0.2 million of income reported in the ~~second~~third quarter of ~~2003, resulting in a $1.1 million unfavorable swing in expense. Foreign exchange losses accounted for the current quarter results compared to foreign exchange gains in the same quarter of last year.~~2003.

The effective tax rate was ~~31.9~~31.6 percent for the ~~second~~third quarter ended ~~June~~September 30, 2004, compared to ~~33.5~~26.5 percent for the ~~second~~third quarter ended ~~June~~September 30, 2003. The ~~lower~~higher effective tax rate was primarily attributable to a lower tax benefit realized on foreign joint venture equity income and tax credits as a ~~$2.8 million charitable contribution~~percentage of intellectual property and state tax benefits realized on amended tax returns. These benefits were partially offset by tax provided on a $2.0 million dividend received from the Company’s Philippine joint venture.consolidated income.


*(Dollars in thousands)*	Surfactants		Polymers		Specialty Products		Segment Results		Corporate		Total		Surfactants		Polymers		Specialty Products		Segment Results		Corporate		Total
For the three months ended June 30, 2004
For the three months ended September 30, 2004
Net sales	$	181,415	$	48,334	$	6,598	$	236,347	—		$	236,347	$	177,979	$	54,657	$	6,061	$	238,697	—		$	238,697
Operating income		10,430		4,377		1,681		16,488	(9,373	)		7,115		5,157		6,567		1,015		12,739	(8,721	)		4,018

For the three months ended June 30, 2003
For the three months ended September 30, 2003
Net sales	$	159,134	$	34,897	$	6,398	$	200,429	—		$	200,429	$	150,330	$	39,018	$	6,718	$	196,066	—		$	196,066
Operating income		9,411		5,258		1,595		16,264	(8,600	)		7,664		5,963		5,064		1,742		12,769	(9,768	)		3,001

Surfactants net sales for the ~~second~~third quarter of 2004 increased ~~$22.3~~$27.6 million, or 1418 percent, from net sales for the ~~second~~third quarter of 2003. Approximately ~~$3.6~~$3.9 million of the increase was attributable to the favorable effects of foreign currency translation, due particularly to the strengthening euro, British pound sterling and Canadian dollar against the U.S. dollar. Excluding the effects of foreign currency translation, net surfactant sales increased ~~$18.7~~$23.7 million. Domestic operations accounted for most of the increase as net sales ~~increased $11.3~~improved $21.4 million, or 1123 percent, ~~on sales volume that was up one percent. Second quarter 2004~~due to selling price increases ~~which~~that were effected in the second and third quarters of 2004 to pass rising raw material costs on to customers and to a 10 percent growth in sales volume. The higher selling prices accounted for ~~most~~about $12.0 million of the ~~rise in~~ net ~~sales. The lost business that occurred in~~sales increase. All domestic businesses contributed to the ~~second half of 2003 when two large customers moved previously outsourced production into internal production facilities was replaced by the culmination of small to moderate~~quarter-to-quarter sales volume ~~gains~~increase, particularly laundry and cleaning products, which accounted for ~~numerous Company product lines.~~38 percent of the domestic improvement. Excluding the effects of foreign currency translation, net sales for foreign operations

increased ~~$7.4~~$2.4 million, onor four percent, despite a 12one percent decline in sales ~~volume increase.~~volume. The Company’s ~~European and~~ Mexican ~~operations~~subsidiary accounted for ~~most of~~ the foreign operations’ net sales improvement, reporting a net sales ~~increases~~increase of ~~$4.1 million and $3.4 million, respectively. Sales volume for European operations increased 14 percent due to increases across most major product lines.~~$3.5 million. Sales volume for Mexican operations increased 5542 percent due primarily to an increase in fabric softener sales volume, which contributed ~~$2.6~~$2.8 million of Mexico’s quarter-to-quarter net sales growth. Net sales for European operations fell $1.2 million, or three percent, on a three percent sales volume decline.

Surfactants ~~second~~third quarter 2004 operating income ~~increased $1.0~~decreased $0.8 million, or 1114 percent, from ~~second~~third quarter 2003 operating income. Operating income for domestic operations increased $1.6 million while operating income for foreign operations declined $2.4 million. Gross profit was ~~$22.8~~$17.9 million for the ~~second~~third quarter of 2004, ~~up slightly~~down $0.9 million from the ~~$22.7~~$18.7 million reported for the ~~second~~third quarter of 2003. ~~Excluding the favorable effects of foreign currency translation, surfactants gross profit declined $0.3 million, to $22.4 million.~~ Domestic gross profit for the ~~second~~third quarter of 2004 was ~~down $0.4~~up $1.9 million, or ~~three~~16 percent, from ~~second~~third quarter 2003 gross profit. ~~Second quarter 2004 price increases were sufficient to cover most rising material costs; however, higher freight~~Higher sales volume and ~~outsourcing costs contributed~~a favorable sales mix led to the ~~decline~~increase in gross profit. Prices for most major surfactant raw materials increased during the ~~second~~third quarter, as high global demand kept supplies ~~tight. The~~tight and crude oil prices continued to rise. Because raw material prices are expected to continue rising in the short-term, the Company announced ~~a July 1, 2004,~~additional selling price increases effective October 1, 2004. This is the third such increase ~~to recover further increases~~ in ~~material costs. Excluding the effects of foreign currency translation, second~~2004. Third quarter 2004 gross profit for foreign operations ~~increased $0.1~~fell $2.8 million, ~~over~~or 41 percent, from gross profit for last year’s ~~second~~third quarter. Gross profits were up for the Company’s Mexican and Canadian subsidiaries by $0.3 million and $0.2 million, respectively, but their impact on foreign operations gross profit was more than offset by European operations’ gross profit that dropped $3.3 million. Higher raw material costs ~~nearly offset~~drove the decline, as the Company has not been successful in passing rising costs to customers, particularly in the United Kingdom, due to excess industry manufacturing capacity in Europe. It should be noted that in September 2004 a fire at Stepan UK’s manufacturing plant destroyed equipment used for drying certain surfactant products. The equipment represented a small portion of the facility’s capacity, and the event had a negligible effect on third quarter profits. Replacement of ~~higher sales volumes.~~the equipment would take nine to twelve months, with the funding coming from insurance proceeds. Business interruption insurance is also in place and will aid in defraying losses suffered while the equipment is not in service. The effect on future profits is unknown at this time. Operating expenses ~~decreased $1.0~~were essentially unchanged at $12.7 million ~~or seven percent,~~ from quarter to quarter. ~~Domestic expenses accounted~~Expenses for ~~half of the expense decline~~domestic operations increased $0.4 million, due to ~~reductions in many areas including salaries, equipment rental~~higher research and ~~advertising~~development costs related to the testing and ~~promotion expenses. Foreign~~registering of biocidal products and due to increased outside consulting on new poly-amino surfactant technologies. Operating expenses for foreign operations ~~accounted for the remainder of the expense decline as all subsidiaries reported decreased or essentially unchanged operating~~fell $0.4 million due principally to lower European administrative expenses.

Polymers net sales for the ~~second~~third quarter of 2004 increased ~~$13.4~~$15.6 million, or 3940 percent, over net sales for the ~~second~~third quarter of 2003. ~~A 24~~Higher selling prices, a 13 percent increase in sales volume, ~~higher selling prices,~~ and ~~$0.4~~$0.5 million of favorable foreign currency translation on European sales all led to the increase in net sales. Within the polymers segment, polyurethane polyols net sales increased $7.9 million, or 38 percent, on sales volume that grew 30 percent due primarily to an increased share of the growing European laminate board market and to an improved U.S. construction economy that led to gaining additional domestic volume. Higher U.S. selling prices also contributed as the Company raised prices in the second quarter of 2004 in an effort to partially pass raw material cost increases on to customers. Phthalic Anhydride’sphthalic anhydride’s (PA) net sales were up ~~$3.9~~$7.4 million, or 4181 percent, due to higher selling prices ~~that reflected passing raw~~and a 15 percent increase in sales volume. Raw material cost increases, which were passed on to PA customers, as well as a second quarter 2004 manufacturing fee increase to merchant market customers ~~and~~led to the increase in net sales. An improved domestic economy accounted for the sales volume ~~that improved 13~~improvement, as volumes to all major customers increased. Net sales for polyurethane polyols increased $6.9 million, or 28 percent, ~~due largely~~on higher selling prices and sales volume. Excluding the favorable effect of foreign currency exchange, the average selling price for the third quarter of 2004 was up about 15 percent over the average selling price for the third quarter of 2003, reflecting selling price increases effected in the second and third quarters of 2004 to allay the effect of rising raw

material prices. Sales volume grew nine percent, which reflected an improved ~~domestic economy.~~U.S. construction economy and a growing share of the European laminate board market. Polyurethane systems net sales improved ~~$1.6~~$1.3 million, or 3527 percent, on sales volume that increased 3944 percent due primarily to the growth in business with a customer first acquired during the second quarter of 2003. Lower average selling prices, attributable to a change in customer mix, lower priced sales volume, partially offset the impact of the higher sales volume.

~~Despite the sales volume and net sales dollar increases, polymers~~Polymers 2004 ~~second~~third quarter operating income ~~decreased $0.9~~improved $1.5 million, or 1730 percent, from 2003 ~~second~~third quarter operating income. Gross profit ~~declined $0.6~~increased $1.8 million, or ~~seven~~23 percent, for the same period. ~~Polyurethane polyols accounted~~Gross profit for PA improved $1.1 million, or 170 percent, due to the ~~decline~~previously noted 15 percent growth in sales volume coupled with the second quarter 2004 manufacturing fee increase. Manufacturing costs, which dropped about 10 percent from quarter-to-quarter due to unexpected equipment repair costs in 2003, also contributed to the gross profit asimprovement. Third quarter 2004 gross profit for polyurethane polyols increased $0.7 million, or 12 percent, over 2003 third quarter gross profit. Increased sales volume drove most of the gross profit improvement. The 2004 second and third quarter ~~results were down $1.1~~

~~million, or 18 percent, from 2003 second quarter results. Second quarter 2004~~ selling price increases ~~did not keep pace with rising global~~aided in stemming the margin deterioration, which resulted from increased raw material costs ~~which reflected a short supply~~that lowered profits over the first half of ~~diethylene glycol (a major raw material for polyurethane polyols) and higher costs for orthoxylene (a petroleum-based raw material used in~~ the ~~manufacture of PA, which is a component of polyurethane polyols). Additional~~year. Because additional increases in raw material costs are ~~expected. Selling~~expected due to continued short supply and uncertain oil prices, selling price increases were announced effective ~~July~~October 1, 2004, in an effort to recoup some of the business’s lost profit margin. Gross profit for PA improved $0.3 million, or 20 percent, due to higher sales volume coupled with the previously mentioned second quarter 2004 manufacturing fee increase.2004. Gross profit for polyurethane systems ~~increased $0.2~~declined $0.1 million, or 22eight percent, ~~due to~~from quarter-to-quarter. The change in sales mix and higher raw material costs more than offset the ~~impact~~effect of higher sales ~~volume, which was partially offset by rising raw material costs.~~volume. Operating expenses were up $0.3 million, or 11 percent from quarter to quarter, due largely to ~~$0.1 million increases for both domestic marketing and~~a greater allocation of research and development expenses ~~and~~required to ~~$0.1 million of expense related to~~support the ~~new German facility that commenced operations in the third quarter of 2003.~~business.

Net sales for the ~~second~~third quarter of 2004 were ~~$6.6~~$6.1 million, a ~~$0.2~~$0.6 million, or ~~three~~10 percent, ~~increase~~decrease from the ~~$6.4~~$6.7 million reported in the ~~second~~third quarter of 2003. Operating income ~~increased $0.1~~declined $0.7 million, or ~~five~~42 percent, to ~~$1.7~~$1.0 million for the ~~second~~third quarter of 2004 from ~~$1.6~~$1.7 million for the same quarter of 2003. ~~Sales volume for~~Lower sales volumes of pharmaceutical-related products, which carry higher selling prices and profit margins than food and flavoring ~~applications were up slightly from~~products, led to the decline in net sales and operating income. The Company expects fourth quarter ~~to quarter, while~~pharmaceutical sales volume ~~of pharmaceutical applications remained flat.~~to improve over third quarter sales volume.

Corporate expenses, which primarily include corporate administrative (including legal and environmental expenses) and corporate manufacturing expenses that are not allocated to the reportable segments, ~~increased $0.8~~decreased $1.1 million, or ~~nine~~11 percent, to ~~$9.4~~$8.7 million in the ~~second~~third quarter of 2004 from ~~$8.6~~$9.8 million in the ~~second~~third quarter of 2003. A ~~$0.8~~$1.1 million ~~increase~~decrease in deferred compensation expense arising from ~~an increase~~a decrease in the price of the Company’s stock used to compute changes in deferred compensation accounted for a part of the corporate expense ~~increase.~~decline. Stepan Company common stock closed at $23.79 per share on September 30, 2004, compared to $26.15 per share on June 30, 2004. In addition, 2003 second quarter expenses were reduced by a $1.0 million recovery of settlement costs related to an old legal case. The foregoing increases were partially offset by a $0.5 million reduction in environmental remediation costs, as the prior year’s secondthird quarter expenses included ~~an increase~~a $1.5 million addition to the Company’s environmental remediation liability. No such expenses were incurred in ~~reserve requirements~~the third quarter of 2004. Increases in corporate salary and fringe benefits expenses ($0.5 million), general legal and audit fee expense ($0.6 million), and start-up related ~~to a contractual obligation~~expenses for ~~shared cleanup costs at a formerly owned site.~~the China joint venture ($0.3 million), partially offset the decrease in deferred compensation and environmental remediation costs.

Net income for the first ~~half~~nine months of 2004 increased ~~$0.8~~$1.4 million, or 1117 percent, to ~~$7.8~~$9.7 million, or ~~$0.81~~$1.00 per diluted share, compared to ~~$7.0~~$8.3 million, or ~~$0.72~~$0.85 per diluted share, for the first ~~half~~nine months of 2003. Below is a summary discussion of the major factors leading to the year-to-year improvement in net income. A detailed discussion of ~~first half 2004~~ segment operating performance for the first nine months of 2004 follows the summary.

Consolidated net sales increased ~~$70.2~~$112.8 million, or 1819 percent, to ~~$457.7~~$696.4 million for the first ~~half~~nine months of 2004 from ~~$387.5~~$583.6 million for the first ~~half~~nine months of 2003. The effect of foreign currency translation, which reflected the strengthening of the European euro, British pound sterling and Canadian dollar against the U.S. dollar, contributed ~~$12.5~~$16.9 million of the increase in consolidated net sales. All three segments reported year-to-year increases in net sales dollars. Surfactants segment net sales were up ~~$44.9~~$72.5 million, or 1416 percent, due to higher selling prices, favorable foreign currency translation ~~improved sales mix~~ and increased sales ~~volumes for foreign operations.~~volumes. Net sales for the polymers segment increased ~~$23.0~~$38.6 million, or 3738 percent, due primarily to higher sales volume and higher selling prices. The specialty products segment reported a ~~$2.3~~$1.7 million, or 199 percent, increase in net sales due to higher sales volumes of food ingredient and pharmaceutical products.

Operating income was up ~~$2.5~~$3.5 million, or 2023 percent, to ~~$15.1~~$19.1 million for the first ~~half~~nine months of 2004 from ~~$12.6~~$15.6 million for the same period of 2003. Gross profit was up $4.2 million, or five percent. All three segments reported ~~operating incomes~~gross profits that exceeded those of the prior ~~year results.~~year. Higher sales volumes and a favorable sales mix, particularly for domestic surfactants, drove the gross profit improvement. However, ~~rising~~high raw material costs continued to ~~have a negative effect on operating income, particularly for the surfactants and polymers segments.~~temper profits. Operating expenses, which include marketing, administrative and research and development expenses, increased ~~$2.3~~$0.6 million, or ~~five~~one percent, to ~~$45.0~~$67.2 million for the first ~~half~~nine months of 2004 from ~~$42.7~~$66.6 million for the first ~~half~~nine months of 2003. ~~Compensation expense related~~The unfavorable effects of foreign currency translation ($1.2 million), increased research and development expenses ($0.8 million), primarily due to the ~~Company’s deferred compensation plans was $0.6 million for~~testing and registration of new products, and the ~~first half of 2004 compared to $0.3 million of income for the same period~~non-recurrence of 2003 which caused a $0.9 million unfavorable swing in operating expenses. Increases in the value of the Company’s stock and the mutual fund assets tied to the deferred compensation plan led to the 2004 expense. In addition, the prior year included a $1.0 million recovery of settlement ~~costs~~income related to an old legal case ~~which reduced 2003 expenses. Approximately $0.9 million of the operating expense increase was due to the negative effects of foreign currency translation. The foregoing items~~($1.0 million) were ~~partially~~generally offset by a ~~$0.5 million reduction~~decline in environmental remediation ~~costs.~~expenses ($2.0 million).

Interest ~~expenses~~expense declined ~~$0.4~~$0.7 million, or ~~nine~~11 percent, between years due to a higher proportion of bank debt, which carries lower interest rates than the Company’s long-term notes. Lower average debt levels also contributed to the decline.

Income from the Company’s Philippine joint venture fell $0.3 million between years due to a less favorable sales mix and lower sales volume.

Foreign exchange and other, net, which includes foreign exchange gains and losses and investment-related income and expense, was $0.8 million of expense infor the first ~~half~~nine months of 2004 compared to ~~$1.1~~$1.3 million of income infor the first ~~half~~nine months of 2003, resulting in a ~~$1.9~~$2.1 million unfavorable swing in expense. Foreign exchange losses accounted for most of the current year results compared to foreign exchange gains for the same period of last year.

The effective tax rate was 31.9 percent for the ~~six~~nine months ended ~~June~~September 30, 2004, compared to ~~33.5~~32.5 percent for the ~~six~~nine months ended ~~June~~September 30, 2003. The lower effective tax rate was primarily attributable to a tax benefit realized on a $2.8 million charitable contribution of intellectual ~~property and state tax benefits realized on amended tax returns. These benefits were~~property. This benefit was partially offset by tax provided on a $2.0 million dividend received from the Company’s Philippine joint venture.


*(Dollars in thousands)*	Surfactants		Polymers		Specialty Products		Segment Results		Corporate		Total		Surfactants		Polymers		Specialty Products		Segment Results		Corporate		Total
For the six months ended June 30, 2004
For the nine months ended September 30, 2004
Net sales	$	357,416	$	85,888	$	14,430	$	457,734	—		$	457,734	$	535,395	$	140,545	$	20,491	$	696,431	—		$	696,431
Operating income		18,783		8,214		4,411		31,408	(16,290	)		15,118		23,940		14,781		5,426		44,147	(25,011	)		19,136

For the six months ended June 30, 2003
For the nine months ended September 30, 2003
Net sales	$	312,524	$	62,895	$	12,090	$	387,509	—		$	387,509	$	462,854	$	101,913	$	18,808	$	583,575	—		$	583,575
Operating income		16,936		7,804		2,878		27,618	(15,066	)		12,552		22,899		12,868		4,620		40,387	(24,834	)		15,553

Surfactants net sales for the first ~~half~~nine months of 2004 increased ~~$44.9~~$72.5 million, or 1416 percent, over net sales for the first ~~half~~nine months of 2003. Approximately ~~$11.3~~$15.1 million of the increase was attributable to the favorable effects of foreign currency translation, due particularly to the strengthening euro, British pound sterling and Canadian dollar against the U.S. dollar. The current year also includes ~~six~~nine months of Stepan UK financial results compared to ~~five~~eight months of financial results for the prior year, as improvements resulting from the enterprise resource planning (ERP) system implementation for Stepan UK in the fourth quarter of 2003 allowed Stepan UK to report its quarterly results without a one-month lag. Excluding the effects of foreign currency translation and the additional month for Stepan UK, net surfactant sales increased ~~$27.1~~$52.5 million. Net sales for foreign operations increased $11.7 million on a 12 percent volume increase. The Company’s European and Mexican operations accounted for the improvement in foreign operations’ net sales, reporting increases of $7.4 million and $4.7 million, respectively. Sales volume for European operations increased 14 percent due to increases across all major product lines. Sales volume for Mexican operations increased 38 percent due to an increase in fabric softener sales volume, which contributed $3.6 million of Mexico’s year-to-year net sales increase. Domestic net sales increased ~~$15.4~~$36.8 million, or ~~seven~~12 percent, on sales volume that ~~declined two~~increased one percent. ~~Second~~Higher selling prices, due to current year second and third quarter ~~2004~~ price increases ~~effected for the purpose of passing~~to pass on raw material price increases ~~and a change in~~to customers, accounted for approximately $33.1 million of the domestic net sales ~~mix compensated for the reduced sales volume and led to the rise in net sales.~~gain. The 2004 first half decline in domestic sales volume ~~particularly in~~that resulted from the ~~first quarter of 2004, was due principally to the~~prior year loss of business from two large customers who moved previously outsourced production into internal production ~~facilities. The effect of the lost business was mitigated~~facilities has been offset by the culmination of small to moderate sales volume gains for numerous Company product lines. ~~The additional sales volume carried higher average selling prices than the business that was lost.~~

Surfactants operating income for the first half of 2004 increased $1.8 million, or 11 percent, over operating income reported for the first half of 2003. Surfactants operating income included approximately $0.2 million related to the extra month of Stepan UK’s results in the first half of 2004. Gross profit increased $1.6 million, or four percent, to $44.4 million for the first half of 2004 from $42.8 million for the first half of 2003. Excluding the effects of foreign currency translation and the additional month offor Stepan UK, ~~surfactants gross profit declined~~

~~$0.2 million, to $42.6 million. Domestic gross profit was up $0.2~~net sales for foreign operations increased $15.8 million, or ~~one~~10 percent, on an eight percent volume increase. The Company’s Mexican and European operations accounted for most of the improvement in foreign operations’ net sales, reporting increases of $8.2 million and $7.8 million, respectively. Sales volume for Mexican operations increased 39 percent due to an increase in fabric softener sales volume, which contributed $4.5 million of Mexico’s year-to-year net sales increase. Sales volume for European operations increased eight percent due to increases across numerous product lines.

Surfactants operating income for the ~~previously noted selling price increases and sales mix change,~~first nine months of 2004 increased $1.0 million, or four percent, over operating income reported for the ~~effects~~same period of ~~which were largely offset by higher raw material costs.~~the prior year. Excluding the effects of ~~foreign~~ currency translation and the additional month of Stepan UK, surfactants operating income increased $1.4 million from year-to-year. Surfactants gross profit declined $0.4 million, or one percent, to $61.2 million for the first nine months of 2004 from $61.6 million for the first nine months of 2003. Domestic gross profit was up $2.2 million, or five percent, due primarily to a more favorable sales mix and to the increase in sales volume. Higher raw material costs, due to short supplies and high crude oil prices, dampened the year’s gross profit. Gross profit for foreign operations fell ~~$0.4~~$2.6 million to ~~$12.7~~$17.4 million for the first ~~half~~nine months of 2004 from ~~$13.1~~$20.0 million for the first ~~half~~nine months of 2003. ~~The drop in foreign~~European operations accounted for $2.2 million of the gross profit ~~reflected~~decline. Higher raw material costs more than offset the ~~continued negative~~ effect of higher sales volume. Due to excess industry manufacturing capacity, attempts to raise selling prices in Europe have not been successful in recovering all of the raw material ~~costs. First half~~cost increases, particularly for the Stepan UK subsidiary. Operating expenses for the first nine months of 2004 ~~operating expenses~~ decreased ~~$0.3~~$0.4 million, or one percent, from ~~first half 2003~~ operating ~~expenses.~~expenses for the same period of last year. Domestic expenses declined ~~$0.8~~$0.4 million from year to year asdue primarily to lower marketing ~~expenses and research expenses were down $0.5 million and $0.3 million, respectively. Marketing expenses fell due to reductions in many areas~~expenses. Numerous items, including ~~salaries,~~equipment rental, travel and entertainment ~~equipment rental~~ and advertising ~~and promotion expenses. Research~~ expenses, ~~were down due primarily to a greater allocation of resources required~~accounted for the ~~other segments.~~decrease. Expenses for foreign operations were ~~up $0.5 million due~~unchanged from year to ~~the unfavorable impact of foreign currency translation.~~year.

Polymers net sales increased ~~$23.0~~$38.6 million, or 3738 percent, from year to year. ~~A 21~~An 18 percent increase in sales volume, higher prices, due primarily to partially passing raw material cost increases to customers, and ~~$1.3~~$1.8 million of favorable foreign currency translation on European sales all led to the increase in net sales. ~~Within~~The higher selling prices accounted for approximately $18.3 million of the ~~polymers segment, polyurethane polyols~~year-to-year net sales ~~excluding~~improvement. Excluding the effect of foreign currency translation, polyurethane polyols net sales increased ~~$10.9~~$17.3 million, or 2928 percent, on sales volume that grew 2217 percent due primarily to additional domestic volume resulting from the improved economy and to an increased share of the growing European laminate board market. Higher selling prices also contributed as the Company benefited from a second and third quarter 2004 increase in selling prices, which passed a portion of raw material cost increases on to customers. PA’s net sales were up ~~$7.9~~$15.3 million, or 4557 percent, due to higher selling prices that reflected passing raw material cost increases on to customers as well as a second quarter 2004 manufacturing fee increase to merchant market customers and to sales volume that improved 1817 percent. Increased demand from an improved economy drove the higher ~~volume.~~volume, as volumes improved for all major customers. Polyurethane systems net sales improved ~~$2.9~~$4.2 million, or 3633 percent, on sales volume that increased 42 percent due primarily to increased business with a customer that was first acquired during the second quarter of 2003.

Polymers operating income for the first ~~half~~nine months of 2004 increased ~~$0.4~~$1.9 million, or ~~five~~15 percent, over operating income for the first ~~half~~nine months of 2003. Gross profit was up ~~$0.6~~$2.4 million, or ~~five~~11 percent, from year to year. All ~~businesses~~product lines reported ~~2004 first half~~year-over-year gross profit ~~that exceeded 2003 first half gross profit.~~improvement. Gross profit for ~~polyurethane systems grew $0.3~~PA increased $1.3 million, or 2033 percent, due primarily to higher sales volume. Higher raw material costs, which were particularly detrimental to the ~~impact~~business in the first quarter of ~~higher sales volume, which was partially offset by rising raw material costs.~~the current year, tempered the year-to-year gross profit increase. Gross profit for polyurethane polyols increased ~~$0.2~~$0.9 million, or ~~two~~six percent, due to the 2217 percent increase in sales volume and the benefit of internal production at the Company’s European polyurethane polyol

plant, which commenced operations in July 2003. Prior to July 2003, the Company outsourced most of its production of polyurethane polyols for the European market. Continued rising diethylene and orthoxylene costs negatively impacted the effect of increased sales ~~volume. As noted~~volume, particularly in the ~~quarter-to-quarter discussion, it~~first half of the year. The 2004 second and third quarter selling price increases minimized the effect of rising raw material costs in the third quarter. It is expected that raw material costs will continue to ~~increase.~~increase in the near-term. As a result, selling price increases were announced effective ~~July~~October 1, 2004, in an effort to ~~recoup some~~stem additional deterioration of ~~the business lost~~ profit margin. Gross profit for ~~PA increased $0.1~~

polyurethane systems rose $0.2 million, or ~~four~~eight percent, due to ~~improved~~the impact of higher sales volume, which was partially offset by ~~the effects of higher~~rising raw material ~~costs, which were particularly detrimental in the first quarter of the current year.~~costs. Polymer operating expenses for the first ~~half~~nine months of 2004 were ~~$0.2~~$0.5 million, or ~~four~~six percent, higher than operating expenses for the ~~first half~~same period of 2003. Excluding the unfavorable effect of foreign currency translation, operating expenses were up ~~$0.1~~$0.4 million from year to year due to operating expenses for the German polyol facility that did not ~~exist at this time last year.~~commence operations until the third quarter of 2003.

Net sales for the first ~~half~~nine months of 2004 were ~~$14.4~~$20.5 million, a ~~$2.3~~$1.7 million, or 19nine percent, increase from the ~~$12.1~~$18.8 million reported infor the ~~prior year’s first half.~~same period of 2003. Operating income increased ~~$1.5~~$0.8 million to ~~$4.4~~$5.4 million for the first ~~half~~nine months of 2004 from ~~$2.9~~$4.6 million for the first ~~half~~nine months of 2003. The net sales and operating income gains reflected increased volumes for food ingredient and pharmaceutical ~~applications.~~products. Operating expenses increased $0.2 million, or 1513 percent, primarily due to a higher allocation of research resources to support the business.

Corporate expenses, which primarily include corporate administrative (including legal and environmental expenses) and corporate manufacturing expenses that are not allocated to the reportable segments, increased ~~$1.2~~$0.2 million ~~or eight percent,~~ to ~~$16.3~~$25.0 million in the ~~second~~third quarter of 2004 from ~~$15.1~~$24.8 million in the ~~second~~third quarter of 2003. A $0.9 million increase in deferred compensation expense accounted for a part of the corporate expense increase. Deferred compensation expense was $0.6 million for the first half of 2004 compared to $0.3Prior year expenses were favorably impacted by $1.0 million of income for the same period of 2003. Increases in the value of the Company’s stock and the mutual fund assets tied to the deferred compensation plan led to the 2004 expense. In addition to the change in deferred compensation expense, expenses in 2003 ~~were favorably affected by a $1.0 million recovery of~~ settlement ~~costs~~income related to an old legal case. ~~Corporate expenses~~Year-to-year increases in general legal and audit fee expense ($1.0 million) and the recognition of start-up expense for the Company’s China joint venture ($0.3 million) also contributed to the rise in corporate expenses. The above were ~~favorably affected~~offset by a ~~$0.5~~$2.0 million ~~reduction~~decline in environmental remediation ~~costs, as the prior year’s first half~~ expenses, ~~included an increase in~~due to additional reserve requirements ~~related to a contractual obligation~~identified in 2003. No such expenses were necessary for ~~shared cleanup costs at a formerly owned site.~~2004.

Net cash from operating activities totaled ~~$7.2~~$12.4 million for the first ~~six~~nine months of 2004, compared to ~~$20.4~~$34.7 million for the same period in 2003. ~~The~~Higher sales levels have required more working capital in 2004, which in turn drove a net decrease of ~~$13.2~~$22.3 million ~~resulted mainly~~in cash from ~~higher working capital requirements in 2004.~~operations. Working capital consumed ~~$20.3~~$25.5 million for the ~~first half of 2004,~~current year to date, compared to ~~$8.4~~$5.4 million for the comparable period ~~last year, an increase of $11.9 million.~~in 2003.

Accounts receivable increased by ~~$39.5~~$32.7 million since December 31, 2003 versus ~~$18.6~~$12.8 million for the ~~comparable prior~~same period last year, ~~period, driven mainly by~~mostly due to higher selling prices and sales ~~both within and outside the U.S.~~volumes. The higher selling prices were attributable to significant raw material price increases. Inventories decreased by ~~$6.4~~$3.4 million for the first ~~half~~nine months of 2004, compared to an increase of ~~$1.3~~$1.5 million for the same period in 2003. Accounts payable and accrued liabilities ~~were~~have been a ~~$12.7~~$4.9 million cash source in 2004, ~~versus~~compared to a ~~$11.1~~$9.3 million cash source ~~in 2003.~~for the prior year period.

Capital spending in 2004 has totaled $23.2 million, compared to $24.7 million for the first three quarters of 2003. Capital expenditures for the ~~current year to date have totaled $13.2 million, compared to $18.5 million for the first half of 2003. Capital spending for the~~ full year isare expected to be in the range of ~~$32.0~~$32 million to ~~$36.0~~$36 million.

~~Total Company~~Consolidated debt ~~increased~~was up by ~~$9.4~~$16.2 million for the first ~~six~~nine months of 2004, from $115.7 million to ~~$125.1~~$131.9 million, aswith additional borrowings ~~were used~~needed to finance working capital. The ratio of long-term debt to long-term debt plus shareholders’ equity was ~~39.3~~40.9 percent ~~at June~~as of September 30, 2004, compared to 36.2 percent as of December 31, 2003.

The Company maintains contractual relationships with its U.S. banks that provide for revolving credit of up to $60 million, which may be drawn upon as needed for general corporate purposes through May 2, 2007 under a revolving credit agreement. As of ~~June~~September 30, 2004 there were borrowings totaling ~~$16.7~~$25.9 million under ~~this~~that agreement. The Company also meets short-term liquidity requirements through uncommitted domestic bank lines of credit.

The Company’s foreign subsidiaries maintain bank term loans and short-term bank lines of credit in their respective countries to meet working capital requirements as well as to fund capital expenditure programs and acquisitions. As of ~~June~~September 30, 2004 the Company’s foreign subsidiaries had unused borrowing capacity of approximately ~~$8.5~~$8.6 million, mostly in local currencies, under their short-term bank lines of credit.

The Company anticipates that cash from operations and from committed credit facilities will be sufficient to fund anticipated capital expenditures, dividends and other planned financial commitments for the foreseeable future. Any substantial acquisitions would require additional funding.

As disclosed in its Form 10-K for the year ended December 31, 2003, the Company expected to contribute $3,841,000 to its U.S. qualified pension plans and to pay $117,000 related to its unfunded non-qualified plans in 2004. In April 2004, pension relief legislation was signed into ~~law;~~law, and as a result, the Company ~~now expects to contribute $1,574,000~~reduced the forecasted 2004 contribution to its U.S. qualified pension plans to $1,574,000 in 2004. In the third quarter of 2004, management elected to make contributions to its U.S. qualified pension plans which exceeded the minimum amounts required and raised the total expected 2004 contribution to $3,631,000. The original estimate for the unfunded non-qualified plans is unchanged. As of ~~June~~September 30, 2004, ~~$482,000~~$3,631,000 had been contributed to the qualified plans and ~~$75,000~~$96,000 had been paid related to the non-qualified plans.

Although European margins are expected to remain weak, global sales volume should remain strong in the fourth quarter. Demand for polymer products is very strong, and the Company has orders for higher volumes of specialty products during the fourth quarter. The Company ~~expects that new commercial opportunities and an improving economy should lead~~continues to ~~second half 2004 sales volume that is~~increase its selling prices to recover higher ~~than sales volume for the second half of 2003. Higher crude oil prices continue to drive up~~ raw material costs that the Company must recover in the market place. Selling price increases were announced effective July 1, 2004, for surfactants and for polyurethane polyols. The Company expects further margin recovery and earnings growth during the balance of the year. It is anticipated that 2004 earnings will continue to show improvement over 2003.costs.

The Company is subject to extensive federal, state and local environmental laws and regulations. Although the Company’s environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent environmental regulation could require the Company to make additional unforeseen environmental expenditures. The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at our manufacturing locations were approximately ~~$4.0~~$6.4 million and ~~$3.9~~$6.2 million for the first ~~six~~nine months of 2004 and 2003, respectively. While difficult to project, it is not anticipated that these recurring expenses will increase significantly in the future.

The Company has been named by the government as a potentially responsible party at 21 waste disposal sites where cleanup costs have been or may be incurred under CERCLA and similar state statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it may incur with respect to the sites. It is the Company’s accounting policy to record liabilities when environmental assessments and/or remediation efforts are probable and the cost or range of possible costs can be reasonably estimated. When no amount within the range is a better estimate than any other amount, the minimum amount within the range is accrued. Some of the factors on which the Company bases its estimates include information provided by feasibility studies, potentially responsible party negotiations and the development of remediation plans. Because reported liabilities are recorded based on estimates, actual amounts could differ from those estimates. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses from ~~$8.7~~$8.6 million to ~~$40.7~~$40.2 million at ~~June~~September 30, 2004. At ~~June~~September 30, 2004 and December 31, 2003, the Company’s reserve was ~~$18.9~~$18.8 million and $19.6 million, respectively, for legal contingencies and environmental matters. During the first ~~six~~nine months of 2004, non-capital cash payments related to legal and environmental matters, including payments to legal counsel, approximated ~~$2.8~~$4.1 million compared to ~~$1.1~~$1.8 million for the first ~~six~~nine months of 2003.

For certain sites, estimates cannot be made of the total costs of compliance or the Company’s share of such costs; accordingly, the Company is unable to predict the effect thereof on future results of operations. In the event of one or more adverse determinations in any annual or interim period, the impact on the Company’s financial position, cash flows or results of operations for those periods could be material. However, based upon the Company’s present belief as to its relative involvement at these sites, other viable entities’ responsibilities for cleanup and the extended period over which any costs would be incurred, the Company believes that these matters will not have a material effect on the Company’s financial position. Certain of these matters are discussed in Item 1, Part 2, Legal Proceedings, in this report and in other filings of the Company with the Securities and Exchange Commission, which are available upon request from the Company. See also Note 4, Contingencies, in the Notes to Consolidated Financial Statements for a summary of the environmental proceedings related to certain environmental sites.

See Note 12 to the consolidated financial statements, included in Part I, Item 1, for information on recent accounting pronouncements that affect the Company.

Except for the historical information contained herein, the matters discussed in this document are forward looking statements that involve risks and uncertainties. The results achieved this quarter are not necessarily an indication of future prospects for the Company. Actual results in future quarters may differ materially. Potential risks and uncertainties include, among others, fluctuations in the volume and timing of product orders, changes in demand for the Company’s products, the ability to pass on raw material price increases, changes in technology, continued competitive pressures in the marketplace, outcome of environmental contingencies, availability of raw materials, foreign currency fluctuations and the general economic conditions.

There have been no material changes in the Company’s market risks since December 31, 2003.

Based on their evaluation of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q, our Chief Executive Officer and our acting Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934) are effective.

~~There~~The Company completed its implementation of an ERP system at its France and Germany subsidiaries in the third quarter of 2004. The implementation was part of a Company-wide initiative to replace its many stand-alone legacy computer systems with a more efficient fully integrated global system. As a matter of course in such implementations, certain internal controls surrounding the inputting, processing and accessing of information ultimately used in financial reporting were changed. The ERP system implemented in France and Germany was previously successfully implemented by the Company in the U.S., Canada, Mexico and the UK.

Other than the foregoing, there were no significant changes in internal controls that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Company’s site in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site, were listed on the National Priorities List in September 1993 pursuant to the provisions of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) because of certain alleged chemical contamination. Pursuant to an Administrative Order on Consent entered into between the United States Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company, and the issuance of an order by USEPA to the Company for property currently owned by the Company, the Company completed a Remedial Investigation Feasibility Study (RI/FS) in 1994. The Company submitted the Draft Final FS for Soil and Source Areas (Operable Unit 1) in September 2002. In addition, the Company submitted the Draft Final FS for Groundwater (Operable Unit 2) in June 2003. Discussions between USEPA and the Company regarding the chemical remediation are continuing. The Company is awaiting the issuance of a Record of Decision (ROD) from USEPA relating to the currently owned and formerly owned Company property and the proposed remediation. The final ROD will be issued sometime after a public comment period.

In 1985, the Company entered into a Cooperative Agreement with the United States of America represented by the Department of Energy (Agreement). Pursuant to this Agreement, the Department of Energy (DOE) took title to radiological contaminated materials and was to remediate, at its expense, all radiological waste on the Company’s property in Maywood, New Jersey. The Maywood property (and portions of the surrounding area) were remediated by the DOE under the Formerly Utilized Sites Remedial Action Program, a federal program under which the U.S. Government undertook to remediate properties which were used to process radiological material for the U.S. Government. In 1997, responsibility for this clean-up was transferred to the United States Army Corps of Engineers (USACE). On January 29, 1999, the Company received a copy of a USACE Report to Congress dated January 1998 in which the USACE expressed their intention to evaluate, with the USEPA, whether the Company and/or other parties might be responsible for cost recovery or contribution claims related to the Maywood site. Subsequent to the issuance of that report, the USACE advised the Company that it had requested legal advice from the Department of Justice as to the impact of the Agreement.

By letter dated July 28, 2000, the Department of Justice advised the Company that the USACE and USEPA had referred to the Justice Department claims against the Company for response costs incurred or to be incurred by the USACE, USEPA and the DOE in connection with the Maywood site and the Justice Department stated that the United States is entitled to recovery of its response costs from the Company under CERCLA. The letter referred to both radiological and non-radiological hazardous waste at the Maywood site and stated that the United States has incurred unreimbursed response costs to date of $138 million. Costs associated with radiological waste at the Maywood site, which the Company believes represent all but a small portion of the amount referred to in the Justice Department letter, could be expected to aggregate substantially in excess of that amount. In the letter, the Justice Department invited the Company

to discuss settlement of the matter in order to avoid the need for litigation. The Company believes that its liability, if any, for such costs has been resolved by the aforesaid Agreement. Despite the fact that the Company continues to believe that it has no liability to the United States for such costs, discussions with the Justice Department are currently ongoing to attempt to resolve this matter.

Regarding the D’Imperio Superfund Site, USEPA previously indicated it would seek penalty claims against the Company based on the Company’s alleged noncompliance with the modified Unilateral Administrative Order (Order). The Company entered into a Consent Decree with USEPA, which resolves all claims asserted against the Company for the alleged noncompliance with the Order. Following the requisite notice and comment period, the Company expects the Consent Decree to be entered by the court in the final quarter of 2004. The payment due under the Consent Decree will not have a material impact on the financial position, results of operations or cash flows of the Company. In addition, the Company received notice from the New Jersey Department of Environmental Protection (NJDEP) dated March 21, 2001, that NJDEP will pursue cost recovery against the alleged responsible parties, including the Company. The NJDEP’s claims include costs related to remediation of the D’Imperio Superfund Site in the amount of $434,406 and alleged natural resource damages in the amount of $529,584 (as of November 3, 2000). The NJDEP settled such claims against the alleged responsible parties, resulting in the Company paying its portion ($83,061) in July 2002. This payment is subject to reallocation after the allocation phase of the above-identified trial, if any. Also, USEPA issued a Unilateral Administrative Order dated November 5, 2003, directed to all PRPs to perform certain remedial activities at the D’Imperio Superfund Site. The cost for all PRPs for this work is estimated to be $300,000 to $450,000. The Company would be responsible for its allocated share of these costs. The amount due by the Company will not have a material impact on the financial position, results of operations or cash flows of the Company.

The Company has received two Requests for Information from the Commonwealth of Massachusetts Department of Environmental Protection relating to the Company’s formerly-owned site at 51 Eames Street, Wilmington, Massachusetts, the most recent of which was in October 2002. The Company’s response to the October 2002 request was filed in December 2002. Remediation at this site is being managed by its current owner to whom the Company sold the property in 1980. The Company subsequently entered into an agreement with the current owner whereby the Company is obligated to contribute to the response costs associated with this site once total site remediation costs exceed certain levels. In July 2003, the Company received a notice that contribution levels had been reached and a demand for payment from the current owner as to the Company’s outstanding share of environmental response costs incurred ~~to-date~~through that date ($0.9 million) iswas due under the terms of the agreement. The Company evaluated the current owner’s demand for payment and paid the current owner $0.9 million in two installments in March 2004 and April 2004. In ~~July~~September 2004, the Company ~~received a demand for payment from~~paid the current owner ~~requesting payment~~an additional $0.1 million for environmental response costs incurred in the fourth quarter of 2003 and the first and second quarters of 2004. ~~The total amount owed is approximately $67,000. The Company is currently evaluating this most recent demand for payment.~~ Under the agreement, the Company is obligated to contribute up to five percent of future response costs associated with this site with no limitation on the ultimate amount of contributions. The Company has recorded a reserve of ~~$0.7~~$0.6 million for current and future claims associated with this site. However, depending on the ultimate cost of the remediation at this site, the amount for which the company is liable could differ from the current estimates. In addition, the Company and other prior owners entered into an agreement in April 2004 waiving certain statute of limitations defenses for claims which may be filed by the Town of Wilmington, Massachusetts, in connection with this site. While the Company has denied any liability for any such claims, the Company agreed to this waiver while the parties continue to discuss the resolution of any potential claim ~~which~~that may be filed.

The Company received a Section 104(e) Request for Information from USEPA dated March 21, 2000, regarding the Lightman Drum Company Site located in Winslow Township, New Jersey. The Company responded to this request on May 18, 2000. In addition, the Company received a Notice of Potential Liability and Request to Perform RI/FS dated June 30, 2000, from USEPA. The Company has decided that it will participate in the performance of the RI/FS. However, based on the current information known regarding this site, the Company is unable to predict what its liability, if any, will be for this site.

The Company received a General Notice of Potential Liability letter from USEPA dated October 18, 2002, regarding the Liquid Dynamics Site located in Chicago, Illinois. The Company

submitted a response to USEPA on November 5, 2002, stating that it is interested in negotiating a resolution of its potential responsibility at this site. In addition, the Company recently joined

the PRP group. Based on the fact that the Company believes it is de minimis at this site, the Company believes that a resolution of its liability at this site will not have a material impact on the financial position, results of operations or cash flows of the Company.

The Company received a Section 104(e) Request for Information from USEPA dated June 2, 2003, regarding the Martin Aaron Site located in Camden, New Jersey. The Company’s response was submitted on August 11, 2003. In addition, the Company and other PRPs received a Notice of Potential Liability and Demand for Reimbursement of Costs Expended at this site dated June 9, 2004. The Company ~~and other PRPs have requested an extension until August 27, 2004, to file their~~has not yet filed a response. The Company continues to investigate this matter and therefore, cannot predict what its liability, if any, will be for this site.

Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Below is a summary by month of share purchases by the Company during the first ~~six~~nine months of 2004:

Period

Total Number

of Shares Purchased

Average Price

Paid per Share

Total Number of Shares
Purchased as Part of
Publicly Announced

Plans or Programs

Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs

Total Number

of Shares Purchased

Average Price

Paid per Share

Total Number of Shares
Purchased as Part of
Publicly Announced

Plans or Programs

Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs

January

—

N/A

—

N/A

February

—

N/A

—

N/A

March

8,649

^(a)

22.34

N/A

8,649

^(a)

22.34

N/A

April

56,774

^(a)

23.90

N/A

56,774

^(a)

23.90

N/A

May

—

N/A

—

N/A

June

—

N/A

—

N/A

July

5,700

^(a)

24.27

N/A

August

—

N/A

September

—

N/A

33Form 8-K, which was filed on October 21, 2004, included a press release, which provided certain information with respect to the Company’s financial results for the third quarter ended September 30, 2004.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Class		Outstanding at ~~July~~October 31, 2004
Common Stock, $1 par value		~~8,975,970~~8,984,790 Shares


	For the Three Months Ended June 30				For the Six Months Ended June 30
*(In thousands, except per share amounts)*	2004		2003		2004		2003
Net income, as reported	$	3,802	$	4,760	$	7,832	$	7,048
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		184		150		341		296

Net income, pro forma	$	3,618	$	4,610	$	7,491	$	6,752

Earnings per share:
Basic - as reported	$	0.40	$	0.51	$	0.83	$	0.75

Basic - pro forma	$	0.38	$	0.50	$	0.79	$	0.72

Diluted - as reported	$	0.39	$	0.49	$	0.81	$	0.72

Diluted - pro forma	$	0.37	$	0.47	$	0.77	$	0.69


*(In thousands, except per share amounts)*	For the Three Months Ended September 30				For the Nine Months Ended September 30
	2004		2003		2004		2003
Net income, as reported	$	1,891	$	1,298	$	9,723	$	8,346
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		177		160		518		456

Net income, pro forma	$	1,714	$	1,138	$	9,205	$	7,890

Earnings per share:
Basic - as reported	$	0.19	$	0.12	$	1.02	$	0.87

Basic - pro forma	$	0.17	$	0.11	$	0.96	$	0.82

Diluted - as reported	$	0.19	$	0.12	$	1.00	$	0.85

Diluted - pro forma	$	0.17	$	0.10	$	0.95	$	0.80


~~(a)~~		~~Exhibit (4)t(1)~~		–		~~Copy of Second Amendment dated as of May 3, 2004, to Amended 1993 Note Agreement, Amended 1995 Note Agreement, Amended 1998 Note Agreement and 2002 Note Purchase Agreement~~

~~(b)~~(a	)		Exhibit 31.1		–		Certification of Chairman and Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)

~~(c)~~(b	)		Exhibit 31.2		–		Certification of Vice President and Corporate Controller pursuant to Exchange Act Rule 13a-14(a)/15d-14(a)

~~(d)~~(c	)		Exhibit 32		–		Certification pursuant to 18 U.S.C. Section 1350

Reports on Form 8-K

~~Form 8-K, which was filed on July 22, 2004, included a press release, which provided certain information with respect to the Company’s financial results for the second quarter ended June 30, 2004.~~