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.


*(Dollars in thousands, except per share amounts)*	Three Months Ended September 30						Nine Months Ended September 30						Three Months Ended March 31
	2004			2003			2004			2003
*(Dollars in thousands, except per share amounts)*													2005			2004
*(Dollars in thousands, except per share amounts)*	$	238,697		$	196,066		$	696,431		$	583,575		$	264,252		$	221,387
Cost of Sales		212,490			169,173			610,076			501,395			234,436			191,735

Gross Profit		26,207			26,893			86,355			82,180			29,816			29,652

Operating Expenses:
Marketing		7,066			7,230			21,660			21,714			7,751			7,394
Administrative		8,353			10,549			26,043			26,223			7,554			7,941
Research, development and technical services		6,770			6,113			19,516			18,690			7,627			6,314

		22,189			23,892			67,219			66,627			22,932			21,649

Operating Income		4,018			3,001			19,136			15,553			6,884			8,003

Other Income (Expenses):
Interest, net		(1,704	)		(2,034	)		(5,557	)		(6,253	)		(1,799	)		(2,061	)
Income from equity in joint venture		441			619			1,459			1,796
Foreign exchange gain (loss) and other, net		11			179			(760	)		1,268
Income/(loss) from equity in joint venture														(108	)		485
Foreign exchange loss and other, net														(30	)		(501	)

		(1,252	)		(1,236	)		(4,858	)		(3,189	)		(1,937	)		(2,077	)

Income Before Provision for Income Taxes		2,766			1,765			14,278			12,364
Income Before Provision for Income Taxes and Minority Interest														4,947			5,926
Provision for Income Taxes		875			467			4,555			4,018			1,707			1,896
Minority Interest														4			0

Net Income	$	1,891		$	1,298		$	9,723		$	8,346		$	3,244		$	4,030

Net Income Per Common Share (Note 6):
Basic	$	0.19		$	0.12		$	1.02		$	0.87		$	0.34		$	0.43

Diluted	$	0.19		$	0.12		$	1.00		$	0.85		$	0.33		$	0.42

Shares Used to Compute Net Income Per Common Share (Note 6):
Basic		8,981			8,886			8,964			8,884			8,994			8,943

Diluted		9,038			9,084			9,696			9,085			9,696			9,698

Dividends per Common Share	$	0.1925		$	0.1900		$	0.5775		$	0.5700		$	0.1950		$	0.1925

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


*(Dollars in thousands)*	September 30, 2004			December 31, 2003			March 31, 2005			December 31, 2004
*Assets*
Current Assets:
Cash and cash equivalents	$	7,019		$	4,235		$	5,035		$	6,261
Receivables, net		146,098			113,353			158,620			135,978
Inventories (Note 3)		67,105			70,548			80,250			76,176
Deferred income taxes		8,826			8,077			7,650			7,448
Other current assets		9,301			8,247			8,532			9,621

Total current assets		238,349			204,460			260,087			235,484

Property, Plant and Equipment:
Cost		766,169			745,097
Less: accumulated depreciation		563,134			534,432
Cost (Note 10)								779,355			777,463
Less: accumulated depreciation (Note 10)								572,964			568,593

Property, plant and equipment, net		203,035			210,665			206,391			208,870

Goodwill, net (Note 9)		7,781			7,621			7,699			7,759

Other intangible assets, net (Note 9)		10,679			12,016			10,136			10,579

Other non-current assets		27,961			29,455			29,072			30,084

Total assets	$	487,805		$	464,217		$	513,385		$	492,776

*Liabilities and Stockholders’ Equity*
Current Liabilities:
Current maturities of long-term debt	$	16,425		$	23,670		$	23,087		$	17,973
Accounts payable		79,421			74,113			92,016			98,322
Accrued liabilities		36,273			35,156			36,037			41,307

Total current liabilities		132,119			132,939			151,140			157,602

Deferred income taxes		13,797			14,570			6,903			7,758

Long-term debt, less current maturities		115,500			92,004			121,782			94,018

Other non-current liabilities		58,443			62,637
Other non-current liabilities (Note 10)								64,715			64,223

Commitments and Contingencies (Note 4)

Minority Interest (Note 10)		945			—
Minority Interest								930			934

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
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
5¹/2% convertible preferred stock, cumulative, voting without par value; authorized 2,000,000 shares; issued 580,632 shares in 2005 and 581,482 shares in 2004								14,516			14,537
Common stock, $1 par value; authorized 30,000,000 shares; issued 10,033,525 shares in 2005 and 10,032,555 shares in 2004								10,033			10,032
Additional paid-in capital		23,846			22,277			24,469			24,449
Accumulated other comprehensive loss (Note 7)		(18,560	)		(19,560	)		(18,155	)		(16,539	)
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	)
Retained earnings (unrestricted approximately $31,954 in 2005 and $31,372 in 2004)								158,663			157,373
Less: Treasury stock, at cost 1,039,445 shares in 2005 and in 2004								(21,611	)		(21,611	)

Stockholders’ equity		167,001			162,067			167,915			168,241

Total liabilities and stockholders’ equity	$	487,805		$	464,217		$	513,385		$	492,776

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


	Nine Months Ended September 30
*(Dollars in thousands)*	2004			2003			March 31, 2005			March 31, 2004
Cash Flows From Operating Activities
Net income	$	9,723		$	8,346		$	3,244		$	4,030
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		30,564			30,466			10,029			10,105
Recognition of deferred revenue		(284	)		(344	)
Deferred income taxes		(1,725	)		(1,108	)		(979	)		866
Other non-cash items		1,485			(1,392	)		(132	)		(655	)
Changes in assets and liabilities:
Receivables, net		(32,745	)		(12,826	)		(24,458	)		(35,691	)
Inventories		3,443			(1,534	)		(4,598	)		5,570
Accounts payable and other accrued liabilities		4,900			9,300
Other current assets								1,021			220
Accounts payable and accrued liabilities								(10,099	)		9,425
Pension liabilities		(348	)		1,603			1,517			1,018
Environmental and legal liabilities		(1,579	)		2,520			(640	)		(798	)
Other current assets		(1,054	)		(325	)
Deferred revenues								(158	)		(111	)

Net Cash Provided by Operating Activities		12,380			34,706
Net Cash Used In Operating Activities								(25,253	)		(6,021	)

Cash Flows From Investing Activities
Expenditures for property, plant and equipment		(23,243	)		(24,744	)		(8,188	)		(6,236	)
Dividend from Philippine joint venture		1,700			—
Other non-current assets		275			(2,335	)		10			169
Formation of China joint venture		945			—

Net Cash Used in Investing Activities		(20,323	)		(27,079	)
Net Cash Used In Investing Activities								(8,178	)		(6,067	)

Cash Flows From Financing Activities
Revolving debt and notes payable to banks, net		17,079			15,370			35,689			3,829
Other debt borrowings		16,167			—			—			9,842
Other debt repayments		(16,995	)		(16,599	)		(1,436	)		(912	)
Purchases of treasury stock, net								—			(192	)
Dividends paid		(5,779	)		(5,664	)		(1,954	)		(1,922	)
Stock option exercises		495			97			—			385
Other		(302	)		(17	)

Net Cash Provided by (Used In) Financing Activities		10,665			(6,813	)
Net Cash Provided By Financing Activities								32,299			11,030

Effect of Exchange Rate Changes on Cash		62			(858	)		(94	)		11

Net Increase (Decrease) in Cash and Cash Equivalents		2,784			(44	)
Net Decrease in Cash and Cash Equivalents								(1,226	)		(1,047	)
Cash and Cash Equivalents at Beginning of Period		4,235			3,188			6,261			4,235

Cash and Cash Equivalents at End of Period	$	7,019		$	3,144		$	5,035		$	3,188

Supplemental Cash Flow Information:
Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds							$	1,877		$	(8	)

Cash payments of interest	$	5,713		$	6,086		$	1,806		$	1,741

Cash payments of income taxes, net of refunds	$	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 ~~September 30, 2004,~~March 31, 2005, and the condensed consolidated results of operations ~~for the three and nine months then ended~~ and cash flows for the ~~nine~~three months then ended have been included.

~~The Company includes~~ These financial statements and related footnotes should be read in conjunction with the financial statements ~~of its Chinese joint venture~~and related footnotes included 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.~~Form 10-K.

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.


*(In thousands, except per share amounts)*	For the Three Months Ended September 30				For the Nine Months Ended September 30				For the Three Months Ended March 31
	2004		2003		2004		2003		2005		2004
Net income, as reported	$	1,891	$	1,298	$	9,723	$	8,346	$	3,244	$	4,030
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		4		157

Net income, pro forma	$	1,714	$	1,138	$	9,205	$	7,890	$	3,240	$	3,873

Earnings per share:
Basic - as reported	$	0.19	$	0.12	$	1.02	$	0.87	$	0.34	$	0.43

Basic - pro forma	$	0.17	$	0.11	$	0.96	$	0.82	$	0.34	$	0.41

Diluted - as reported	$	0.19	$	0.12	$	1.00	$	0.85	$	0.33	$	0.42

Diluted - pro forma	$	0.17	$	0.10	$	0.95	$	0.80	$	0.33	$	0.40

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), “Share-Based Payment”, that revises SFAS No. 123, “Accounting for Stock-Based Compensation”, and requires accounting for equity-based employee compensation transactions at fair value. Consequently, pursuant to the SEC’s April 2005 amendment to the accounting standard’s effective date, the Company will record equity-based employee compensation expense in its Consolidated Statement of Income by applying the fair value recognition provisions of SFAS No. 123(R) beginning January 1, 2006.


*(Dollars in thousands)*	September 30, 2004		December 31, 2003		March 31, 2005		December 31, 2004
Finished products	$	44,259	$	47,809	$	55,199	$	52,859
Raw materials		22,846		22,739		25,051		23,317

Total inventories	$	67,105	$	70,548	$	80,250	$	76,176

Inventories priced using the last-in, first-out (LIFO) inventory valuation method as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, amounted to 7883 percent and 77 percent, respectively, of total inventories. If the first-in, first-out (FIFO) inventory valuation method had been used for all inventories, inventory balances would have been approximately ~~$13.2 million~~$15,593,000 and ~~$8.6 million~~$14,771,000 higher than reported at ~~September 30, 2004,~~March 31, 2005, and December 31, ~~2003,~~2004, 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~~The Company has estimated a range of possible environmental and legal losses from ~~$8.6~~$8.4 million to ~~$40.2~~$39.7 million at ~~September 30, 2004.~~March 31, 2005. At ~~September 30, 2004,~~March 31, 2005, the Company’s accrued liability for such losses, which represents the Company’s best estimate within the estimated range of ~~the reserve for such~~possible environmental and legal losses, was ~~$18.8~~$18.5 million for legal contingencies and environmental matters compared to ~~$19.6~~$18.9 million at December 31, ~~2003.~~2004.

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~~the Company’s financial position, cash flows and results of operations. InManagement believes that 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, individually and in the aggregate, 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 (Maywood 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)~~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~~Maywood site and the proposed chemical 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.

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.

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 Maywood site related to remediation of chemical contamination. However, depending on the results of the ongoing discussions ~~regarding the Maywood site, particularly radiological contamination,~~with USEPA, the final cost of the chemical remediation could differ from the current estimates.

In addition, under the terms of a settlement agreement reached on November 12, 2004, the United States Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in 1985 under which the United States will take title to and responsibility for radioactive waste removal at the Maywood Site, including past and future remediation costs incurred by the United States.

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.

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~~In December 2004, 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 settlement amount paid pursuant to the Consent Decree ~~to be entered by the court in the final quarter of 2004. The payment due under the Consent Decree will~~did 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.

with no limitation on the ultimate amount of contributions. ~~The~~To date, the Company has paid the current owner $1.0 million for the Company’s portion of environmental response costs through the fourth quarter of 2004. At March 31, 2005, the Company has recorded a reserve of ~~$0.6~~$0.7 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, ~~that~~which 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 has not yet filed a response. The Company also joined the PRP group. 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. The Company’s response was submitted on September 24, 2004. The Company 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~~Such monitoring indicated that ~~future~~ remediation ~~may be~~is required at one of the Company’s sites. Although there has been no enforcement order, the Company ~~is in the process of preparing~~has developed a remediation plan, ~~that will be submitted~~which it expects to ~~the appropriate governmental agency.~~execute in 2005. The Company believes it has adequate reserves for the remediation of this site.


													UNITED KINGDOM
	UNITED STATES												Three Months Ended March 31
*(Dollars in thousands)*	Three Months Ended September 30						Nine Months Ended September 30						2005			2004
	2004			2003			2004			2003
Service cost	$	803		$	740		$	2,558		$	2,316		$	176		$	145
Interest cost		1,380			1,277			4,232			3,995			189			169
Expected return on plan assets		(1,617	)		(1,519	)		(4,902	)		(4,752	)		(161	)		(147	)
Amortization of prior service cost		111			84			285			263
Amortization of net loss		223			35			871			109			15			13

Net periodic benefit cost	$	900		$	617		$	3,044		$	1,931		$	219		$	180

As disclosed in its financial statements for the year ended December 31, ~~2003,~~2004, the Company ~~expected~~expects to contribute ~~$3,841,000~~approximately $1,675,000 to its funded U.S. qualified pension plans in 2005 and to pay ~~$117,000~~$216,000 in 2005 related to its unfunded non-qualified ~~plans in 2004. In April 2004, pension relief legislation was signed into law, and significantly reduced the Company’s required 2004 contribution to its U.S. qualified pension~~ plans. ~~In the third quarter~~As of ~~2004, management elected to make a contribution to its U.S. qualified pension plans in excess of the minimum required for 2004. Accordingly, as of September 30, 2004, $3,631,000~~March 31, 2005, no contributions had been ~~contributed~~made to the ~~U.S. qualified pension~~qualifed plans and ~~$96,000~~$54,000 had been paid related to the non-qualified plans. ~~The Company does not anticipate making any additional contributions~~

As disclosed in the Company’s financial statements for the year ended December 31, 2004, Stepan UK Limited expects to contribute approximately $357,000 to its ~~U.S. qualified~~ pension ~~plans.~~plan in 2005. As of March 31, 2005, $82,000 had been contributed to the U.K. pension plan.

Below is the computation of basic and diluted earnings per share for the three ~~and nine~~ months ended ~~September 30, 2004~~March 31, 2005 and ~~2003.~~2004.

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 nine~~ months ended ~~September 30, 2004~~March 31, 2005 and ~~2003.~~2004.


												Three Months Ended March 31
*(Dollars in thousands)*	Three Months Ended September 30						Nine Months Ended September 30					2005			2004
	2004			2003			2004			2003
Net income	$	1,891		$	1,298		$	9,723		$	8,346	$	3,244		$	4,030
Other comprehensive income:
Foreign currency translation gain/(loss)		987			(2,414	)		1,035			960		(1,488	)		1,316
Unrealized gain/(loss) on securities		(107	)		25			(35	)		352		(128	)		82

Comprehensive income	$	2,771		$	(1,091	)	$	10,723		$	9,658	$	1,628		$	5,428

The total accumulated other comprehensive ~~loss of $18,560,000 consisted of $4,754,000 of foreign currency translation adjustments, $89,000 of unrealized gains on securities (net of income taxes of $60,000)~~losses at March 31, 2005 and ~~$13,895,000 of minimum pension liability adjustments (net of income taxes of $9,000,000). At~~ December 31, ~~2003,~~2004, comprised 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.following:

Effective January 1, 2005, the Company changed the components of its segment operating income to reflect a change in the information now used by the chief operating decision makers in reviewing segment results. In 2005, the Company began charging corporate manufacturing expenses, which are corporate support expenses for engineering, purchasing and transportation, against the reportable segments’ operating income. In prior years, these expenses were charged to unallocated corporate expense. The ~~Company has three reportable segments: surfactants, polymers and specialty products.~~ aggregate amount of corporate manufacturing expenses charged to the segments in 2005 was $2,171,000.

Financial results of the Company’s operating segments for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2005 and 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 September 30, 2004
For the quarter ended March 31, 2005
Net sales	$	177,979	$	54,657	$	6,061	$	238,697	$	201,158	$	57,363	$	5,731	$	264,252
Operating income		5,157		6,567		1,015		12,739		5,457		5,795		662		11,914

For the three months ended September 30, 2003
For the quarter ended March 31, 2004
Net sales	$	150,330	$	39,018	$	6,718	$	196,066	$	176,001	$	37,554	$	7,832	$	221,387
Operating income		5,963		5,064		1,742		12,769		8,353		3,837		2,730		14,920

For the nine months ended September 30, 2004
Net sales	$	535,395	$	140,545	$	20,491	$	696,431
Operating income		23,940		14,781		5,426		44,147

For the nine months ended September 30, 2003
Net sales	$	462,854	$	101,913	$	18,808	$	583,575
Operating income		22,899		12,868		4,620		40,387

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

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 ~~$7,781,000~~$7,699,000 and ~~$7,621,000~~$7,759,000 as of ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, respectively. The entire amount of goodwill ~~related~~relates 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 ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003.~~2004. The changes in the intangible assets’ gross carrying amounts were entirely due to the effects of currency translation.


*(Dollars in thousands)*	Gross Carrying Amount				Accumulated Amortization
	Sept. 30, 2004		Dec. 31, 2003		Sept. 30, 2004		Dec. 31, 2003		Gross Carrying Amount				Accumulated Amortization
*(Dollars In thousands)*									March 31, 2005		Dec 31, 2004		March 31, 2005		Dec 31, 2004
Other Intangible Assets:
Patents	$	2,000	$	2,000	$	833	$	733	$	2,000	$	2,000	$	900	$	867
Trademarks, customer lists, know-how		18,428		18,406		9,016		8,007
Trademarks										5,501		5,503		2,638		2,548
Customer lists										4,765		4,780		3,363		3,242
Know-how^(a)										8,476		8,480		3,853		3,703
Non-compete agreements		2,340		2,310		2,240		1,960		2,396		2,413		2,248		2,237

Total	$	22,768	$	22,716	$	12,089	$	10,700	$	23,138	$	23,176	$	13,002	$	12,597

Aggregate amortization expenses for the ~~three~~quarters ended March 31, 2005 and ~~nine months ended September 30,~~March 31, 2004, were ~~$421,000~~$423,000 and ~~$1,334,000, respectively. Aggregate amortization expenses for the three and nine six months ended September 30, 2003 were $417,000 and $1,329,000,~~$389,000, 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:

In ~~February 2004,~~January 2005, the ~~Company~~Company’s Brazilian subsidiary entered into an agreement to purchase a ~~joint venture~~subsidiary of a multinational cleaning products company for a minimal purchase price. The purchase contract included a 10-year capital lease agreement ~~with Sinopec, Jinling Petrochemical Corporation in Nanjing, China. The joint venture~~under which $463,000 was ~~formed to manufacture the Company’s aromatic polyester polyols~~paid for the ~~domestic Chinese market. Final construction~~first 24 months with gross remaining payments due of $1,855,000. At the end of the ~~facility is expected by mid-2005. The Company and its partner own 55 percent and 45 percent, respectively,~~lease agreement, all of the ~~joint venture.~~relevant assets will be transferred and assigned to the Company. The assets and liabilities under the capital lease were recorded at the present value of the minimum lease payments. The leased assets are recorded under the property, plant and equipment caption and the capital lease liability is recorded under the other non-current liabilities caption in the condensed consolidated balance sheet. Depreciation expense for the assets held under the capital lease is included in depreciation expense in the first quarter of 2005. This capital lease obligation is a non-cash financing and investing activity.

~~Non-cash financing activities for~~On September 1, 2004, a fire at the ~~nine months ended September 30, 2004, included the receipt into treasury of 71,123 shares~~production facility of the Company’s ~~common stock tendered in lieu~~United Kingdom subsidiary destroyed drying equipment used to manufacture powdered laundry detergent. During the first quarter of ~~cash by employees exercising options on 95,016 shares~~2005, the Company received business interruption insurance proceeds of $887,000 related to the ~~Company’s common stock.~~fire. The ~~tendered shares, which~~proceeds were ~~owned by employees for more than six months, were valued at $1,688,000.~~recorded as a reduction of cost of goods sold.

In March ~~2004,~~2005, the ~~Financial~~ FASB issued Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations”, an interpretation of FASB Statement No. 143,Accounting ~~Standards Board (FASB) ratified~~for Asset Retirement Obligations.The interpretation clarifies that the ~~consensus reached by~~term conditional asset retirement obligation refers to a legal obligation to perform an asset retirement activity in which the ~~Emerging Issues Task Force (EITF) with respect~~timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An

entity is required to ~~EITF Issue No. 03-1 “The Meaning~~recognize a liability for the fair value 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 impaireda conditional asset retirement obligation if the fair value of the ~~investment is less than its cost. The impairment is considered other-than-temporary unless~~liability can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate 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 thean asset retirement obligation. The effective date of ~~certain provisions~~this interpretation is no later than the end of ~~EITF Issue No. 03-1 to an as yet undetermined date. Had~~fiscal year ending after December 15, 2005. The Company is currently investigating the ~~guidance, as currently written, been applied during the three month period ended September 30, 2004, the Company~~effect, if any, that FIN 47 would have ~~recognized an impairment loss~~on the Company’s financial position, cash flows and results of ~~approximately $214,000.~~operations.

Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentation, notably $68,000 and $1,072,000 of foreign exchange gains for the three and nine months ended 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~~2004 Form 10-K.

Net income for the ~~third~~first quarter of ~~2004 increased 46~~2005 declined 20 percent, to ~~$1.9~~$3.2 million, or ~~$0.19~~$0.33 per diluted share, compared to ~~$1.3~~$4.0 million, or ~~$0.12~~$0.42 per diluted share, for the ~~third~~first quarter of ~~2003.~~2004. The decline in net income resulted from a $1.3 million year-to-year increase in operating expenses. Higher research expenses accounted for the operating expense result. The effect of a four percent improvement in sales volume was completely offset by the effects of rising raw material costs, which led first quarter 2005 gross profit to be essentially unchanged from first quarter 2004 gross profit. Surfactants gross profit declined due to weak margins in the U.K. Polymers gross profit rose significantly due to higher volume and recovery of prior margin deterioration. Specialty products gross profit was down due to a large drop in volume that is expected to recover over the balance of the year. Below is a summary discussion of the major factors leading to the ~~quarter-to-quarter increase~~year-to-year decrease in net income. A detailed discussion of ~~third~~first quarter ~~2004~~2005 segment operating performance follows the summary.

Consolidated net sales increased ~~$42.6~~$42.9 million, or 2219 percent, from year to ~~$238.7~~year. Higher selling prices, due primarily to higher raw material costs, accounted for approximately $31.4 million ~~for~~of the ~~third quarter of 2004 from $196.1~~increase. A four percent increase in sales volume and a $3.7 million ~~for the third quarter of 2003. The~~favorable effect of foreign currency translation ~~which reflected~~also contributed to the ~~strengthening~~year-to-year change.

Gross profit for the first quarter of ~~the European euro, British pound sterling and Canadian dollar against the U.S. dollar, contributed $4.4 million of the increase in consolidated net sales. Surfactants segment net sales were up $27.6~~2005 increased $0.2 million, or 18one percent, ~~due to higher selling prices, increased U.S. (‘domestic’) sales volume and favorable foreign currency translation. Net sales~~over gross profit for the ~~polymers segment increased $15.6~~first quarter of 2004. A $2.7 million, or 4044 percent, ~~due to higher sales volume for all businesses and higher selling prices. The~~improvement in polymers gross profit was nearly entirely offset by a $2.0 million, or 59 percent, drop in specialty products ~~segment reported~~gross profit and a ~~$0.6~~$0.4 million, or 10two percent, ~~decrease~~drop in ~~net~~surfactants gross profit. The surfactants gross profit result included a $0.9 million reduction of cost of sales due to ~~lower sales~~the receipt of ~~pharmaceutical products.~~business interruption insurance proceeds related to the 2004 fire at the Stepan United Kingdom (UK) manufacturing facility. Excluding the positive effect of the business interruption proceeds, surfactant gross profit dropped $1.3 million, or six percent, primarily due to weaker results in the UK. Higher raw material costs continued to hurt profits for all three segments.

Operating income ~~increased 34 percent, to $4.0 million~~ for the ~~third~~first quarter of ~~2004~~2005 fell $1.1 million, or 14 percent, from ~~$3.0~~operating income reported in the first quarter of 2004. Operating expenses, which include marketing, administrative and research expenses, increased $1.3 million, or six percent, for the same quarter of 2003. Operating expenses, which declined $1.7 million, or seven percent, from quarter to quarter accounted for most of the operating income improvement. A $1.1 million favorable swing in deferred compensation expense arising from a decrease in the price of the Company’s stock used to compute changes in deferred compensation accounted for part of the operating expense decline. In addition, 2003 third quarter operating expenses included $1.5 million of charges for potential future environmental remediation. No such expenses were 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 quarter-to-quarter increase in gross profit. In the surfactants segment, growth in domestic operations’ gross profit was more than offset by a decline in gross profit from foreign operations, where rising raw material costs have been difficult to pass on to customers, particularly in Europe where excess manufacturing capacity exists in the industry.period.

Research expenses were up $1.3 million, or 21 percent, from year to year. Major items included in the research expense variance were a $0.4 million increase in salaried payroll expenses, a $0.3 million increase in outside contracting for the development, testing and registration of new technologies and a $0.2 million increase in lab repair and maintenance expense. Higher fringe benefit expense, notably pension and healthcare costs, accounted for $0.3 million of the salaried payroll expense increase. Marketing expenses were $0.4 million, or five percent, higher in the first quarter of 2005 than they were for the same period of 2004, due primarily to a $0.2 million increase in bad debt expense and to a $0.2 million increase in fringe benefits, due primarily to pension and healthcare costs. Administrative expenses were down $0.4 million, or five percent, due largely to a $0.6 million decrease in general legal expense and a $0.6 million decrease in system implementation expenses partially offset by $0.4 million of higher salaried payroll expense, due primarily to pension and healthcare costs, and $0.4 million of lower deferred compensation income related to the Company’s deferred compensation plans.

Interest expense declined $0.3 million, or 1613 percent, from ~~quarter~~year to ~~quarter~~year primarily 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~~$0.6 million ~~due~~ to ~~lower~~a loss of $0.1 million for the first quarter of 2005 compared to income of $0.5 million for the first quarter of 2004. Lower sales volume, higher raw material costs and a less ~~favorable~~profitable mix of ~~sales.~~sales all contributed to the drop in income from the Philippine joint venture.

Foreign exchange and other, net, which includes foreign exchange gains and losses and investment-related income and expense, was ~~$11,000~~$30,000 of expense for the ~~third~~first quarter of ~~2004~~2005 versus ~~the $0.2~~$0.5 million of ~~income reported in~~expense for the ~~third~~first quarter of ~~2003.~~2004. The favorable year-to-year change was primarily due to a decline in foreign exchange losses.

The effective tax rate was ~~31.6~~34.5 percent for the ~~third~~first quarter ended ~~September 30, 2004,~~March 31, 2005 compared to ~~26.5~~32.0 percent for the ~~third~~first quarter ended ~~September 30, 2003.~~March 31, 2004. The higher effective tax rate was primarily attributable to a lower tax benefit realized ~~on foreign~~as a result of an equity loss from the Company’s Philippines joint venture in 2005 compared to equity income ~~and~~in 2004. In addition, the Company recorded a larger valuation allowance in 2005 versus 2004 for its German subsidiary due to increased losses for which no tax ~~credits as a percentage of consolidated income.~~benefit was recognized.


*(Dollars in thousands)*	Surfactants		Polymers		Specialty Products		Segment Results		Corporate		Total		Surfactants		Polymers		Specialty Products		Segment Results		Corporate		Total
For the three months ended September 30, 2004
For the three months ended March 31, 2005
Net sales	$	177,979	$	54,657	$	6,061	$	238,697	—		$	238,697	$	201,158	$	57,363	$	5,731	$	264,252	—		$	264,252
Operating income		5,157		6,567		1,015		12,739	(8,721	)		4,018		5,457		5,795		662		11,914	(5,030	)		6,884

For the three months ended September 30, 2003
For the three months ended March 31, 2004
Net sales	$	150,330	$	39,018	$	6,718	$	196,066	—		$	196,066	$	176,001	$	37,554	$	7,832	$	221,387	—		$	221,387
Operating income		5,963		5,064		1,742		12,769	(9,768	)		3,001
Operating income – as reported														8,353		3,837		2,730		14,920	(6,917	)		8,003
Operating income – pro forma														6,883		3,589		2,730		13,202	(5,199	)		8,003

In 2005, the Company began charging corporate support expenses for engineering, purchasing and transportation to the operating segments. In prior years, these expenses were

charged to unallocated corporate expense. This change enables the chief operating decision makers to review results of operations and assess segment performance with the noted expenses included, which they had not done in the past. The pro forma amounts in the above table display 2004 segment operating income and corporate expense as if the specified corporate support expenses were charged to the operating segments. For analysis purposes, the following segment discussion compares 2005 operating results to the 2004 pro forma results.

Surfactants net sales for the ~~third~~first quarter of ~~2004~~2005 increased ~~$27.6~~$25.2 million, or 1814 percent, from net sales for the ~~third~~first quarter of ~~2003. Approximately $3.9~~2004. Higher selling prices, due primarily to higher raw material costs, a four percent increase in sales volume and $3.3 million of favorable foreign currency translation all contributed to the year-to-year increase in net sales. The higher selling prices accounted for about $15.2 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 surfactanttotal surfactants increase. Net sales ~~increased $23.7 million. Domestic~~for domestic operations ~~accounted for most of the increase as net sales improved $21.4~~grew $18.7 million, or 2317 percent, ~~due~~of which approximately $16.6 million related to 2004 and 2005 selling price increases ~~that were effected in the second and third quarters of 2004~~initiated to pass rising raw material costs on to ~~customers and to a 10~~customers. A two percent ~~growth~~increase in sales ~~volume. The higher selling prices accounted for about $12.0 million of the net sales increase. All domestic businesses~~volume also contributed to the ~~quarter-to-quarter sales volume~~ increase ~~particularly laundry and cleaning products, which accounted for 38 percent of the~~in domestic ~~improvement.~~operations net sales. Excluding the effects of foreign currency translation, net sales for foreign operations increased ~~$2.4~~$3.2 million, or ~~four~~five percent, on an eight percent increase in sales volume. Most of the improvement in foreign operations net sales was derived from the Company’s Mexican subsidiary, which accounted for $2.5 million of the increase. The increase resulted from a 24 percent growth in sales volume. The Company’s Brazilian subsidiary accounted for most of the foreign operations sales volume growth due to new sales resulting from the acquisition of a manufacturing plant in January 2005. The new volume resulted in a $0.4 million increase in net sales for Brazil. Net sales for the Company’s Canadian subsidiary increased $0.7 million, due largely to selling price increases, while net sales for European operations increased $0.5 million, despite sales volume declines at all three locations. Stepan Colombia’s net sales fell $0.9 million on a ~~one~~20 percent decline in sales volume. The Company’s Mexican subsidiary accounted for the foreign operations’ net sales improvement, reporting a net sales increase of $3.5 million. Sales volume for Mexican operations increased 42 percent due primarily to an increase in fabric softener sales volume, which contributed $2.8 million of Mexico’s quarter-to-quarter net sales growth. Net sales for European operations fell $1.2

Surfactants first quarter 2005 operating income declined $1.4 million, or ~~three~~21 percent, ~~on a three percent sales volume decline.~~

~~Surfactants third~~from first quarter 2004 operating ~~income decreased $0.8~~income. Gross profit fell $0.4 million, or 14two percent, from ~~third quarter 2003~~year to year, and operating ~~income. Operating income for domestic operations~~expenses increased ~~$1.6~~$1.0 million, ~~while operating income for foreign operations declined $2.4 million. Gross profit was $17.9 million~~or eight percent, for the ~~third quarter of 2004, down $0.9 million from the $18.7 million reported for the third quarter of 2003.~~same period. Domestic gross profit for the ~~third~~first quarter of ~~2004~~2005 was ~~up $1.9~~down $0.4 million, or 16three percent, from third quarter 2003 gross profit. Higher sales volume and a favorable sales mix led to the increase in gross profit. Prices for most major surfactant raw materials increased during the third quarter, as high global demand kept supplies tight and crude oil prices continued to rise. Because raw material prices are expected to continue rising in the short-term, the Company announced additional selling price increases effective October 1, 2004. This is the third such increase in 2004. Thirdfirst quarter 2004 gross ~~profit for foreign operations fell $2.8 million, or 41 percent, from gross profit for last year’s third quarter.~~profit. The effect of the small sales volume gain was more than offset by increased manufacturing costs and less favorable sales mix. Gross profits were up for the Company’s Mexican, Canadian and ~~Canadian~~Brazilian subsidiaries by $0.8 million, $0.3 million and ~~$0.2~~$0.1 million, respectively, but their impact on foreign operations gross profit was ~~more than~~entirely offset by European operations’ gross profit that dropped ~~$3.3~~$1.0 million and by Colombian subsidiary gross profit that fell $0.2 million. ~~Higher~~High raw material costs ~~drove the decline, as~~continued to hurt European profit. Due to excess industry manufacturing capacity and vertically integrated competitors, the Company has not been successful in ~~passing rising~~recovering much of the rapidly escalating raw material costs, ~~to customers,~~ particularly in the United ~~Kingdom, due~~Kingdom. Lower sales volume also contributed to ~~excess industry manufacturing capacity~~the European result. In the first quarter of 2005, the Company received $0.9 million in ~~Europe. It should be noted that in~~business interruption insurance proceeds related to the September 2004 a fire at Stepan UK’s manufacturing plant that destroyed equipment used for drying certain surfactant products. The ~~equipment represented~~proceeds were recorded as a ~~small portion~~reduction in first quarter cost of sales. Excluding the insurance proceeds, gross profit from European operations fell $1.9 million from year to year.

As noted above, 2005 first quarter operating expenses increased $1.0 million, or eight percent, over operating expenses for the first quarter of 2004. Domestic operations research expenses accounted for the entire increase, due to the segment’s share of the ~~facility’s capacity, and~~variances discussed in the ~~event had a negligible effect on third quarter profits. Replacement~~Results of 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 were essentially unchanged at $12.7 million from quarter to quarter. Expenses for domestic operations increased $0.4 million, due to higher research and development costs related to the testing and registering of biocidal products and due to increased outside consulting on new poly-amino surfactant technologies. Operating expenses for foreign operations fell $0.4 million due principally to lower European administrative expenses.Operations “Summary” section.

Polymers net sales for the ~~third~~first quarter of ~~2004~~2005 increased ~~$15.6~~$19.8 million, or 4053 percent, over net sales for the ~~third~~first quarter of ~~2003.~~2004. Higher selling prices, a 13five percent increase in sales volume, and ~~$0.5~~$0.4 million of favorable foreign currency translation on European sales all led to the increase in net sales. Increased selling prices, due largely to higher raw material costs, accounted for about $17.7 million of the year-to-year net sales improvement. Within the polymers segment, ~~phthalic anhydride’s (PA)~~ net sales were up $7.4 million, or 81 percent, due to higher selling prices 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 led to the increase in net sales. An improved domestic economy accounted for the sales volume improvement, as volumes to all major customers increased. Net sales for polyurethane polyols increased ~~$6.9~~$13.0 million, or 2862 percent, on higher selling prices and sales ~~volume.~~volume and the previously noted favorable foreign currency translation effect. Excluding the favorable effect of foreign currency exchange, the average selling price for the ~~third~~first quarter of ~~2004~~2005 was up about 1534 percent over the average selling price for the ~~third~~first quarter of ~~2003,~~2004, reflecting selling price increases ~~effected~~implemented in the ~~second and third~~final three quarters of 2004 and in 2005 to allay the effect of rising raw

material prices. Sales volume grew ~~nine~~20 percent, ~~which reflected~~primarily due to an improved U.S. construction ~~economy~~economy. Phthalic anhydride (PA) net sales were up $4.4 million, or 37 percent, despite a 16 percent drop in sales volume. Higher selling prices, due to passing on raw material cost increases to customers and ~~a growing share~~to manufacturing fee increases effected after the first quarter of 2004, more than offset the effect of the ~~European laminate board market.~~lower sales volume. Weak demand from customers serving the unsaturated polyester resin market accounted for the sales volume decline. Polyurethane systems net sales improved ~~$1.3~~$2.4 million, or 2751 percent, ondue to a 33 percent growth in sales volume ~~that increased 44 percent due primarily~~and to higher selling prices. The sales volume improvement reflected new business and gains at existing accounts, and the ~~growth in business with a customer first acquired during the second quarter of 2003. Lower average~~higher selling prices ~~attributable~~resulted from partially passing on increased raw material costs to ~~a change in customer mix, lower priced sales volume, partially offset the impact of the higher sales volume.~~customers.

Polymers ~~2004 third~~2005 first quarter operating income improved ~~$1.5~~$2.2 million, or 3062 percent, from ~~2003 third~~2004 first quarter operating income. Gross profit increased ~~$1.8~~$2.7 million, or 2344 percent, for the same period. Both polyurethane polyols and polyurethane systems contributed to the improved gross profit, reporting increases of $2.6 million, or 65 percent, and $0.4 million, or 51 percent, respectively. The previously noted selling price increases, which aided in partially recovering past margin deterioration, and sales volume growth accounted for the higher gross profit. Gross profit for PA ~~improved $1.1~~fell $0.3 million, or ~~170~~17 percent, due to the previously noted 1516 percent ~~growth~~drop 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 improvement. 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 mostvolume. The effect of the ~~gross profit improvement. The 2004 second~~aforementioned manufacturing toll fee increases was essentially offset by outsourcing costs necessitated in part by a scheduled maintenance shutdown of a reactor and ~~third quarter selling price increases aided~~by a four percent increase in ~~stemming the margin deterioration, which resulted from increased raw material~~plant costs ~~that lowered profits over the first half of the year.~~due primarily to higher utility expenses. Because additional increases in raw material costs are expected ~~due to continued short supply and uncertain oil prices,~~in the near term, selling price increases were announced effective ~~October~~April 1, ~~2004. Gross profit~~2005, for ~~polyurethane systems declined $0.1 million, or eight percent, from quarter-to-quarter. The change in sales mix and higher raw material costs more than offset the effect of higher sales volume.~~all three polymer businesses. Operating expenses were up ~~$0.3~~$0.5 million, or 1120 percent from ~~quarter~~year to ~~quarter,~~year. Approximately $0.4 million of the operating expense increase resulted from a $0.2 million increase in domestic marketing expenses and a $0.2 million increase in domestic research expenses. Higher sales commission expense and higher salaried payroll expenses, due ~~largely~~in part to ~~a greater allocation~~increased pension and healthcare benefit costs, accounted for most of the marketing expense variance. Higher salaried payroll expenses and outside consulting and technical service expenses accounted for the research ~~and development expenses required to support the business.~~increase.

Net sales for the ~~third~~first quarter of ~~2004~~2005 were ~~$6.1 million, a $0.6~~$2.1 million, or 1027 percent, ~~decrease from~~lower than net sales reported for the ~~$6.7 million reported in the third~~first quarter of ~~2003.~~2004. Operating income declined ~~$0.7~~$2.1 million, or 4276 percent, from year to $1.0 million for the third quarter of 2004 from $1.7 million for the same quarter of 2003. Lower sales volumes of pharmaceutical-related products, which carry higher selling prices and profit margins than food and flavoring products, led to the declineyear. The declines in net sales and operating ~~income.~~income reflected lower sales volumes for food and flavoring and pharmaceutical product lines. In 2004, two pharmaceutical customers purchased a disproportionate share of their annual requirements in the first quarter, a pattern that was not repeated in the first quarter of 2005. The Company expects ~~fourth quarter pharmaceutical~~full year 2005 sales volume for pharmaceutical products to ~~improve over third~~approximate volume levels of 2004. Operating expenses were $0.1 million higher in the first quarter ~~sales volume.~~of 2005 than in the same quarter of 2004, due primarily to increased research expenses.

Corporate expenses, which primarily include corporate administrative (including legal and environmental expenses) ~~and corporate manufacturing~~ expenses that are not allocated to the reportable segments, decreased ~~$1.1~~$0.2 million, or 113 percent, to ~~$8.7~~$5.0 million in the ~~third~~first quarter of ~~2004~~2005 from ~~$9.8~~$5.2 million in the ~~third~~first quarter of ~~2003. A $1.1~~2004. Major items included in the year-to-year variance were a $0.6 million decrease in general legal expense and a $0.6 million decrease in system implementation expenses partially offset by $0.4 million of higher salaried payroll expense and $0.4 million of lower deferred compensation ~~expense arising from a decrease~~income related to the Company’s deferred compensation plans ($0.4 million of income in the ~~price~~first quarter of 2005 compared to $0.8 million of income for the same period of 2004). The decline in general legal expense reflected a reduction in the use of outside legal counsel, and the drop in system implementation expenses reflected the completion of the Company’s ~~stock used to compute changes~~enterprise resource planning system implementation project in ~~deferred compensation accounted for a part of the corporate expense 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 third quarter expenses included a $1.5 million addition to the Company’s environmental remediation liability. No such expenses were incurred in 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 expenses for the China joint venture ($0.3 million), partially offset the decrease in deferred compensation and environmental remediation costs.

Net income for the first nine months of 2004 increased $1.4 million, or 17 percent, to $9.7 million, or $1.00 per diluted share, compared to $8.3 million, or $0.85 per diluted share, for the first 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 segment operating performance for the first nine months of 2004 follows the summary.

Consolidated net sales increased $112.8 million, or 19 percent, to $696.4 million for the first nine months of 2004 from $583.6 million for the first 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 $16.9Approximately $0.3 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 $72.5 million, or 16 percent, due~~salaried payroll costs related to higher ~~selling prices, favorable foreign currency translation~~fringe benefit costs, particularly pension and increased sales volumes. Net sales for the polymers segment increased $38.6 million, or 38 percent, due primarily to higher sales volume and higher selling prices. The specialty products segment reported a $1.7 million, or 9 percent, increase in net sales due to higher sales volumes of food ingredient and pharmaceutical products.

Operating income was up $3.5 million, or 23 percent, to $19.1 million for the first nine months of 2004 from $15.6 million for the same period of 2003. Gross profit was up $4.2 million, or five percent. All three segments reported gross profits that exceeded those of the prior year. Higher sales volumes and a favorable sales mix, particularly for domestic surfactants, drove the gross profit improvement. However, high raw material costs continued to temper profits. Operating expenses, which include marketing, administrative and research and development expenses, increased $0.6 million, or one percent, to $67.2 million for the first nine months of 2004 from $66.6 million for the first nine months of 2003. The unfavorable effects of foreign currency translation ($1.2 million), increased research and development expenses ($0.8 million), primarily due to the testing and registration of new products, and the non-recurrence of 2003 settlement income related to an old legal case ($1.0 million) were generally offset by a decline in environmental remediation expenses ($2.0 million).

Interest expense declined $0.7 million, or 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 for the first nine months of 2004 compared to $1.3 million of income for the first nine months of 2003, resulting in a $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 nine months ended September 30, 2004, compared to 32.5 percent for the nine months ended 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. This benefit was partially offset by tax provided on a $2.0 million dividend received from the Company’s Philippine joint venture.

Surfactants net sales for the first nine months of 2004 increased $72.5 million, or 16 percent, over net sales for the first nine months of 2003. Approximately $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 nine months of Stepan UK financial results compared to 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 $52.5 million. Domestic net sales increased $36.8 million, or 12 percent, on sales volume that increased one percent. Higher selling prices, due to current year second and third quarter price increases to pass on raw material price increases to customers, accounted for approximately $33.1 million of the domestic net sales gain. The 2004 first half decline in domestic sales volume that resulted from the prior year loss of business from two large customers who moved previously outsourced production into internal production facilities has been offset by the culmination of small to moderate sales volume gains for numerous Company product lines. Excluding the effects of foreign currency translation and the additional month for Stepan UK, net sales for foreign operations increased $15.8 million, or 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 first nine months of 2004 increased $1.0 million, or four percent, over operating income reported for the same period of the prior year. Excluding the effects of 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 $2.6 million to $17.4 million for the first nine months of 2004 from $20.0 million for the first nine months of 2003. European operations accounted for $2.2 million of the gross profit decline. Higher raw material costs more than offset the 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 cost increases, particularly for the Stepan UK subsidiary. Operating expenses for the first nine months of 2004 decreased $0.4 million, or one percent, from operating expenses for the same period of last year. Domestic expenses declined $0.4 million from year to year due primarily to lower marketing expenses. Numerous items, including equipment rental, travel and entertainment and advertising expenses, accounted for the decrease. Expenses for foreign operations were unchanged from year to year.

Polymers net sales increased $38.6 million, or 38 percent, from year to year. An 18 percent increase in sales volume, higher prices, due primarily to partially passing raw material cost increases to customers, and $1.8 million of favorable foreign currency translation on European sales all led to the increase in net sales. The higher selling prices accounted for approximately $18.3 million of the year-to-year net sales improvement. Excluding the effect of foreign currency translation, polyurethane polyols net sales increased $17.3 million, or 28 percent, on sales volume that grew 17 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 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 $15.3 million, or 57 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 17 percent. Increased demand from an improved economy drove the higher volume, as volumes improved for all major customers. Polyurethane systems net sales improved $4.2 million, or 33 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 nine months of 2004 increased $1.9 million, or 15 percent, over operating income for the first nine months of 2003. Gross profit was up $2.4 million, or 11 percent, from year to year. All product lines reported year-over-year gross profit improvement. Gross profit for PA increased $1.3 million, or 33 percent, due primarily to higher sales volume. Higher raw material costs, which were particularly detrimental to the business in the first quarter of the current year, tempered the year-to-year gross profit increase. Gross profit for polyurethane polyols increased $0.9 million, or six percent, due to the 17 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, particularly in the 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 in the near-term. As a result, selling price increases were announced effective October 1, 2004, in an effort to stem additional deterioration of profit margin. Gross profit for polyurethane systems rose $0.2 million, or eight percent, due to the impact of higher sales volume, which was partially offset by rising raw material costs. Polymer operating expenses for the first nine months of 2004 were $0.5 million, or six percent, higher than operating expenses for the same period of 2003. Excluding the unfavorable effect of foreign currency translation, operating expenses were up $0.4 million from year to year due to operating expenses for the German polyol facility that did not commence operations until the third quarter of 2003.

Net sales for the first nine months of 2004 were $20.5 million, a $1.7 million, or nine percent, increase from the $18.8 million reported for the same period of 2003. Operating income increased $0.8 million to $5.4 million for the first nine months of 2004 from $4.6 million for the first nine months of 2003. The net sales and operating income gains reflected increased volumes for food ingredient and pharmaceutical products. Operating expenses increased $0.2 million, or 13 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 $0.2 million to $25.0 million in the third quarter of 2004 from $24.8 million in the third quarter of 2003. Prior year expenses were favorably impacted by $1.0 million of 2003 settlement income related to an old legal case. 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 offset by a $2.0 million decline in environmental remediation expenses, due to additional reserve requirements identified in 2003. No such expenses were necessary for 2004.healthcare benefits.

Net cash from operating activities ~~totaled $12.4~~totalled to a cash use of $25.3 million for the first ~~nine months~~quarter of ~~2004,~~2005, compared to ~~$34.7~~a use of $6.0 million for the same period in ~~2003. Higher sales levels have required more working capital in 2004, which in turn drove a net decrease of $22.3 million in cash from operations. Working capital consumed $25.5~~2004. Net income decreased by $0.8 million for the current year ~~to date,~~quarter compared to ~~$5.4~~the comparable period last year. Working capital has required $38.1 million for the ~~comparable period in 2003.~~current year quarter, compared to $20.5 million for the first quarter of 2004.

Accounts receivable increased ~~by $32.7 million since~~seasonally during the current year quarter, although less significantly than for same period in 2004. Inventories increased during 2005, compared to a decrease in 2004, with a significant portion of the current year increase planned to ensure supply levels during scheduled maintenance at a U.S. plant. Accounts payable and accrued liabilities decreased in 2005 compared to an increase in 2004 due to a high accounts payable balance at December 31, ~~2003 versus $12.8~~2004, resulting from cash management efforts. The January 1, 2005, discontinuation of extended payment terms provided by two suppliers during calendar year 2004 also contributed to the decrease.

Capital spending totaled $8.2 million for the first quarter of 2005, compared to $6.2 million for the same period last year, mostly due to higher selling prices and sales volumes. The higher selling prices were attributable to significant raw material price increases. Inventories decreased by $3.4 million for the first nine months of 2004, compared to an increase of $1.5 million for the same period in 2003. Accounts payable and accrued liabilities have been a $4.9 million cash source in 2004, compared to a $9.3 million cash source for the prior year period.

year. Capital spending ~~in 2004 has totaled $23.2~~for 2005 is expected to range from $40.0 million to $46.0 million compared to ~~$24.7~~the $33.8 million spent in 2004.

Total balance sheet debt, excluding capitalized leases, increased by $32.9 million for the first three ~~quarters~~months of ~~2003. Capital expenditures for the full year are expected to be in the range of $32~~2005, from $112.0 million to ~~$36~~$144.9 million.

~~Consolidated debt was up by $16.2 million for~~ As of March 31, 2005, the ~~first nine months of 2004, from $115.7 million to $131.9 million, with additional borrowings needed to finance working capital. The~~ ratio of long-term debt to long-term debt plus shareholders’ equity was ~~40.9~~42.0 percent, ~~as of September 30, 2004,~~ compared to ~~36.2~~35.8 percent as of December 31, ~~2003.~~2004. Approximately $65.7 million of total Company debt relates to unsecured promissory notes with maturities extending until 2015. These notes are the Company’s primary source of long term debt financing, and are supplemented by bank credit facilities to meet short and medium term needs.

The Company maintains contractual relationships with its ~~U.S.~~domestic banks that provide for revolving credit of up to ~~$60~~$60.0 million, which may be drawn upon as needed for general corporate purposes through May 2, 2007, under a revolving credit agreement. As of ~~September 30, 2004~~March 31, 2005, there were borrowings totaling ~~$25.9~~$42.8 million under ~~that~~this 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 ~~September 30, 2004~~March 31, 2005, the Company’s ~~foreign~~European subsidiaries had ~~unused borrowing~~euro-denominated term loans totaling $24.9 million including current maturities. The European subsidiaries also had short-term debt totaling $9.9 million under short-term bank credit lines as of March 31, 2005, with unborrowed capacity of approximately ~~$8.6~~$3.4 million ~~mostly~~at that date. The Company’s Mexican subsidiary had $1.4 million of debt outstanding at March 31, 2005. The Company’s Chinese joint venture has entered into a credit agreement allowing the joint venture to borrow up to $2.4 million, in local ~~currencies,~~currency, to finance plant construction. As of March 31, 2005, there were no borrowings under ~~their short-term bank lines of credit.~~this loan facility; however, the Company expects this loan facility to be fully utilized during 2005. Stepan Company has issued a guaranty to the lender for the Company’s proportionate interest (55 percent) in this credit facility.

The Company’s U.S. loan agreements contain provisions, which, among others, require maintenance of certain financial ratios and place limitations on additional debt, investments and payment of dividends. Due to lower earnings in Europe during 2004, Stepan Europe obtained agreements from its banks to waive certain required financial ratios under its bank term loans through December 31, 2004. The Company is in compliance with ~~all of~~ its loan ~~agreements.~~agreements during 2005.

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~~financial statements for the year ended December 31, ~~2003,~~2004, the Company ~~expected~~expects to contribute ~~$3,841,000~~approximately $1.7 million and $0.4 million, respectively, to ~~its~~the funded U.S. ~~qualified pension plans~~ and ~~to pay $117,000 related to its unfunded non-qualified~~United Kingdom plans in ~~2004. In April 2004, pension relief legislation was signed into law, and as a result, the Company reduced the forecasted 2004 contribution~~2005. Payments related 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.~~will approximate $0.2 million in 2005. As of ~~September 30, 2004, $3,631,000~~March 31, 2005, no contributions had been made to the funded U.S. plans, and $0.1 million had been contributed to the ~~qualified plans and $96,000~~United Kingdom plan. Approximately $0.1 million had been paid related to the unfunded non-qualified ~~plans.~~plan.

~~Although European margins are expected to remain weak, global~~The Company’s polymers segment started the year with a strong performance, but weaker specialty products earnings offset the improvement. Surfactants sales volume ~~should remain strong in the fourth quarter. Demand for polymer products is very strong,~~grew, and ~~the Company has orders for higher volumes of specialty products during the fourth quarter. The Company continues to increase its selling prices~~efforts to recover higher raw material ~~costs.~~costs have been successful in North America but have met greater resistance in Europe. Recent raw material price movements remain volatile, including some price decreases. However, the overall trend would suggest higher raw material costs for the remainder of 2005. Overall business conditions appear positive for the balance of 2005. The Company expects specialty products earnings to recover in the second quarter, and despite the slow start to 2005, management remains optimistic about full year earnings growth.

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. During the first quarter of 2005, the Company’s expenditures for capital projects related to the environment were $0.4 million. These projects are capitalized and depreciated over their estimated useful lives, which is typically 10 years. 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 ~~$6.4~~$2.5 million and ~~$6.2~~$2.0 million for the first ~~nine~~three months of ~~2004~~2005 and ~~2003,~~2004, 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~~The Company has estimated a range of possible environmental and legal losses from ~~$8.6~~$8.4 million to ~~$40.2~~$39.7 million at ~~September 30, 2004.~~March 31, 2005. At ~~September 30, 2004~~March 31, 2005 and December 31, ~~2003,~~2004, the Company’s ~~reserve~~accrued liability for such losses, which represents the Company’s best estimate within the estimated range of possible environmental and legal losses, was ~~$18.8~~$18.5 million and ~~$19.6~~$18.9 million, respectively, for legal contingencies and environmental matters. During the first ~~nine~~three months of ~~2004,~~2005, non-capital cash ~~payments~~outlays related to legal and environmental matters ~~including payments to legal counsel,~~ approximated ~~$4.1~~$0.9 million compared to $1.8 million for the first ~~nine~~three months of ~~2003.~~2004.

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~~the

Company’s financial position, cash flows and results of operations. InManagement believes that 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 orand 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.

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

There have been no material changes in the Company’s market risks since December 31, ~~2003.~~2004.

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.

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 reportingThere 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 (Maywood 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)~~CERCLA because of certain alleged chemical contamination. Pursuant to an Administrative Order on Consent entered into between ~~the United States Environmental Protection Agency (USEPA)~~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~~Maywood site and the proposed chemical 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.

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~~In December 2004, 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 settlement amount paid pursuant to the Consent Decree ~~to be entered by the court in the final quarter of 2004. The payment due under the Consent Decree will~~did 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~~is currently contractually obligated to contribute to the ~~Commonwealth of Massachusetts Department of Environmental Protection relating to~~response costs associated with 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.~~Massachusetts. 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~~Under the 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 through that date ($0.9 million) was 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 September 2004, the Company paid the current owner an additional $0.1 million for environmental response costs incurred in the fourth quarter of 2003 and the first and second quarters of 2004. 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~~To date, the Company has paid the current owner $1.0 million for the Company’s portion of environmental response costs through the fourth quarter of 2004. At March 31, 2005, the Company has recorded a reserve of ~~$0.6~~$0.7 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, ~~that~~which may be filed.

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.

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

~~Below is a summary by month of~~There were no share purchases by the Company during the first ~~nine~~three months of ~~2004:~~2005.

Form 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 ~~October 31, 2004~~April 30, 2005
Common Stock, $1 par value		~~8,984,790~~8,995,074 Shares


*(Dollars in thousands)*	March 31, 2005			December 31, 2004
Foreign currency translation losses	$	(2,303	)	$	(815	)
Unrealized gains on securities (net of income taxes of $159 in 2005 and $244 in 2004)		238			366
Minimum pension liability adjustments (net of income taxes of $10,515 in 2004 and 2005)	$	(16,090	)	$	(16,090	)

Total accumulated other comprehensive losses	$	(18,155	)	$	(16,539	)


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


For year ending 12/31/05	$	1,670
For year ending 12/31/06	$	1,504
For year ending 12/31/07	$	1,262
For year ending 12/31/08	$	1,132
For year ending 12/31/09	$	1,113
For year ending 12/31/10	$	1,108


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
January	—			—	N/A	N/A
February	—			—	N/A	N/A
March	8,649	^(a)	$	22.34	N/A	N/A
April	56,774	^(a)	$	23.90	N/A	N/A
May	—			—	N/A	N/A
June	—			—	N/A	N/A
July	5,700	^(a)	$	24.27	N/A	N/A
August	—			—	N/A	N/A
September	—			—	N/A	N/A


	For	Withheld
Thomas F. Grojean	8,474,329	242,745
F. Quinn Stepan, Jr.	8,588,669	128,405



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

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

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


		STEPAN COMPANY

~~STEPAN COMPANY~~Date: May 5, 2005

/s/ ~~James~~J. E. Hurlbutt
		J. E. Hurlbutt
		Vice President ~~and Corporate Controller~~ - Finance