UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 2008

FOR THE TRANSITION PERIOD FROM            TO            

1-4462

Commission File Number

STEPAN COMPANY

(Exact name of registrant as specified in its charter)

Edens and Winnetka Road, Northfield, Illinois 60093

(Address of principal executive offices)

Registrant’s telephone number (847) 446-7500

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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨

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

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

Item 1 —- Financial Statements

STEPAN COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Unaudited

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

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STEPAN COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

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

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STEPAN COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

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

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STEPAN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31,June 30, 2008

Unaudited

The condensed consolidated financial statements included herein have been prepared by 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 consolidatedCompany’s financial position of the Company as of March 31,June 30, 2008, and the condensed consolidatedits results of operations for the three and six months ended June 30, 2008 and 2007 and its cash flows for the threesix months ended March 31,June 30, 2008 and 2007, have been included. These financial statements and related footnotes should be read in conjunction with the financial statements and related footnotes included in the Company’s 2007 Form 10-K.

In January 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 159,The Fair Value Option for Financial Assets and Financial Liabilities.SFAS No. 159 expands the scope of what entities may carry at fair value by offering an irrevocable option to record many types of financial assets and liabilities at fair value. Period-to-period changes in fair value are recorded in an entity’s income statement.

On January 1, 2008, the Company elected the fair value option for the mutual fund investment assets related to its deferred compensation plans. The fair value election for the mutual fund investment assets was made to reduce the income volatility caused by the prior accounting treatment for the Company’s deferred compensation plans. In accordance with SFAS No. 159, the mutual fund investment assets, which were previously classified as available-for-sale securities, are treated as trading securities. Therefore, beginning in the first quarter of 2008, fair value changes for the mutual fund investment assets are recorded in the income statement in the same periods that the offsetting changes in the deferred compensation liabilities are recorded. In prior years, value changes for the mutual fund investments were recorded as direct adjustments to shareholders’ equity in accumulated other comprehensive income.

In compliance with the transition rules of SFAS No. 159, $834,000 of cumulative unrealized mutual fund investment gains (net of taxes of $540,000), which were included in accumulated other comprehensive income on December 31, 2007, were reclassified into retained earnings in January 2008. UnrealizedThe Company recognized $174,000 of unrealized gains on trading securities for the periodthree months ended March 31,June 30, 2008, were $1,291,000.and $1,117,000 of unrealized losses for the six months ended June 30, 2008. The gains and losses were recorded in the Other, net line of the consolidated statements of income. See Note 15.

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In January 2008, the Company also adopted SFAS No. 157,Fair Value Measurements. The guidance in the new standard is applicable in circumstances where other accounting pronouncements mandate or permit fair value measurements. In February 2008, the FASBFinancial Accounting Standards Board (FASB) issued FASB Staff Position Nos. FAS 157-1 and FAS 157-2 (FSP FAS 157-1 and 157-2). FSP FAS 157-1 excludes SFAS No. 13,Accounting for Leases, as well as other accounting pronouncements that address fair value measurements for leases, from the scope of SFAS No. 157. FSP FAS 157-2 delays the effective date of SFAS No. 157 for all nonrecurring fair value measurements of nonfinancial assets and liabilities until fiscal years beginning after November 15, 2008.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard establishes a framework, in the form of a three-level hierarchy, for measuring fair value. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. It gives the highest priority, Level 1, to inputs that are quoted prices in active markets for identical assets and liabilities. Level 2 represents inputs other than quoted prices included within Level 1 that are directly or indirectly observable and market-based information for similar assets and liabilities. Level 3 includes unobservable inputs which reflect the entity’s own assumptions about the assumptions market participants use in pricing the assets and liabilities.

Currently, the only recurringThe following table presents assets and liabilities measured at fair value measurement thatas of June 30, 2008 and the Company makes is forlevel within the mutual fund assets related to the deferred compensation plans. The fair value for mutual fund assets are measured using observable quoted prices for identical assetshierarchy in active markets, and their total fair value iswhich the published market price per unit multiplied by the number of units held. The fair value measurements forfall:

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On May 15, 2008, the Company increased its controlling ownership stake in the Stepan China joint venture (a reporting unit within the Company’s mutual funds fall entirely within Level 1polymer reportable segment) from 55 percent to 80 percent. The Company achieved the step up in ownership by contributing an additional $3,109,000 of capital (all cash) to Stepan China. By agreement, the minority joint venture partner made no additional capital contribution, thereby reducing its minority ownership stake in Stepan China from 45 percent to 20 percent. The Company accounted for this transaction as a step acquisition, applying purchase accounting treatment as required by SFAS No. 141,Business Combinations. No intangible assets or goodwill were acquired as a result of the fair value hierarchy. The fair valuestep acquisition. Stepan China’s accounts have been included in the Company’s consolidated financial statements since the formation of the mutual fund investment assets were $13,267,000 and $14,803,000 at March 31, 2008 and December 31, 2007, respectively.joint venture, when the Company first obtained controlling interest.

The Company has stock options outstanding under its 1992 Stock Option Plan and stock options and performance stock awards outstanding under its 2000 Stock Option Plan and its 2006 Incentive Compensation Plan. Compensation expense charged against income for all plans was $921,000$1,733,000 and $207,000$2,654,000, respectively, for the three and six months ended March 31,June 30, 2008, compared to $276,000 and 2007, respectively.$483,000, respectively, for the three and six months ended June 30, 2007. Unrecognized compensation cost for stock options and stock awards was $1,177,000$1,022,000 and $1,962,000,$2,663,000, respectively, at March 31,June 30, 2008, compared to $504,000 and $574,000, respectively, at December 31, 2007. The quarter-to-quarter increaseincreases in compensation expense and the increases in unrecognized compensation costs since December 31, 2007, resulted primarily from management’s first quarter 2008 assessment that the probable levels of profitability on which the vesting of performance stock awards are based would be higher than originally projected, which led to an increase in the number of performance stock awards that are ultimately expected to vest. Also, contributing to the increaseincreases in compensation expense and unrecognized compensation costs were first quarter 2008 grants of 118,850124,195 stock options and 94,500 performance stock awards. The unrecognized compensation cost at March 31,June 30, 2008, is expected to be recognized over weighted average periods of 1.61.4 years and 2.11.8 years for stock options and performance stock awards, respectively.

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Inventories comprise the following:

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Inventories are priced primarily using the last-in, first-out (LIFO) inventory valuation method. If the first-in, first-out (FIFO) inventory valuation method had been used for all inventories, inventory balances would have been approximately $32,544,000$37,229,000 and $30,961,000 higher than reported at March 31,June 30, 2008, and December 31, 2007, 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 U.S.U. S. Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Superfund Amendments of 1986 (“Superfund”). Over the years, the Company has received requests for information related to or has been named by the government as a PRP at 2322 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.

The Company has estimated a range of possible environmental and legal losses from $10.1$10.8 million to $34.4 million at March 31,June 30, 2008. At March 31,June 30, 2008, the Company’s accrued liability for such losses, which represents the Company’s best estimate within the estimated range of possible environmental and legal losses, was $17.1 million compared to $17.2 million at December 31, 2007. During the first threesix months of 2008, non-capital cash outlays related to legal and environmental matters approximated $0.5$1.2 million compared to $3.9$4.6 million in the first threesix months of 2007. In the prior year quarter,2007, the Company paid a personal injury settlement related to the Company’s formerly owned site in Wilmington, Massachusetts.

For certain sites, estimates cannot be made of the total costs of compliance, or the Company’s share of such costs; consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations.

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Management believes that in the event of one or more adverse determinations in any annual or interim period, the impact on the Company’s 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 material contingencies at March 31,June 30, 2008:

Maywood, New Jersey Site

The Company’s property in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site and other nearby properties (Maywood site) were

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listed on the National Priorities List in September 1993 pursuant to the provisions of CERCLA because of certain alleged chemical contamination. Pursuant to an Administrative Order on Consent entered into between 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 and also submitted additional information regarding groundwater in May 2007.2007 and June 2008. The Company is awaiting the issuance of a Record of Decision (ROD) from USEPA relating to the Maywood site and the proposed chemical remediation. The final ROD will be issued sometime after a public comment period.

Also, the New Jersey Department of Environmental Protection (NJDEP) filed a complaint against the Company and other entities on February 6, 2006, alleging that the defendants discharged hazardous substances at the Maywood site and at neighboring properties not part of the Maywood site resulting in damage to natural resources and the incurrence of response costs. The complaint was amended and removedCompany has reached a settlement agreement in principal to federal court but was remandedresolve said litigation. Such agreement in principal is subject to state courtadditional NJDEP approvals. The Company believes that a resolution of its liability for this litigation will not have a material impact on September 22, 2006.the financial position, results of operations or cash flows of the Company.

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 with USEPA, the final cost of such 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.

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D’Imperio Property Site

During the mid-1970’s, Jerome Lightman and the Lightman Drum Company disposed of hazardous substances at several sites in New Jersey. The Company was named as a potentially responsible party (PRP) in the caseUnited States v. Lightman (1:92-cv-4710 D.N.J.), which involved the D’Imperio Property Site located in New Jersey. In the second quarter of 2007, the Company reached an agreement with respect to the past costs and future allocation percentage in said litigation for costs related to the D’Imperio site, including costs to comply with USEPA’s Unilateral Administrative Orders. The Company paid the settlement amount in the third quarter of 2007. 2007.The resolution of the Company’s liability for this litigation did not have a material impact on the financial position, results of operations or cash flows of the Company. In December 2007, the Company received updated remediation cost estimates, which were considered in the Company’s determination of its range of estimated possible losses and reserve balance at December 31, 2007.

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Remediation work is continuing at this site. Based on current information, the Company believes that it has adequate reserves for claims associated with the D’Imperio site. However, actual costs could differ from current estimates.

Ewan Property Site

The caseUnited States v. Lightman (1:92-cv-4710 D.N.J.), described above for the D’Imperio site, also involved the Ewan Property Site located in New Jersey. The agreement described above also included a settlement with respect to the past costs and future allocation percentage in said litigation for costs related to the past costs and allocation percentage at the Ewan site. The Company paid the settlement amount in the third quarter of 2007. The resolution of the Company’s liability for this litigation did not have a material impact on the financial position, results of operations or cash flows of the Company.

In addition, the NJDEP filed a natural resource damages complaint in June 2007 against the Company and other entities regarding the Ewan site. The Company was served with the complaint in May 2008. The parties, including the Company, are engaged in discussions with NJDEP to resolve this litigation.

There is some monitoring and operational work continuing at the Ewan site. Based on current information, the Company believes that it has adequate reserves for claims associated with the Ewan site. However, actual costs could differ from current estimates.

Lightman Drum Company Superfund Site

The Company received a Section 104(e) Request for Information from USEPA dated March 21, 2000, regarding the Lightman Drum Company Superfund 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 decided that it will participate in the performance of the RI/FS as a member of the Lightman Yard PRP Group. Due to the addition of other PRPs, the Company’s allocation percentage decreased. However, the allocation has not yet been finalized by the Lightman Yard PRP Group.

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The Feasibility Study was submitted to USEPA in December 2007. The PRPs who agreed to conduct the interim remedial action entered into an Administrative Settlement Agreement and Order on Consent for Removal Action with USEPA, and these PRPs also entered into a Supplemental Lightman Yard Participation and Interim Funding Agreement to fund the agreed-upon removal action. The Company paid a soil removal assessment upon execution of the agreements which did not have a material impact on the financial position, results of operations or cash flows of the Company. In December 2007, the Company received updated remediation cost estimates, which were considered in the Company’s determination of its range of estimated possible losses and reserve balance at December 31, 2007.

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The Company believes that based on current information it has adequate reserves for claims associated with the Lightman site. However, actual costs could differ from current estimates.

Wilmington Site

The Company is currently contractually obligated to contribute to the response costs associated with the Company’s formerly-owned site at 51 Eames Street, Wilmington, Massachusetts. Remediation at this site is being managed by its current owner to whom the Company sold the property in 1980. Under the agreement, once total site remediation costs exceed certain levels, 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. To date, the Company has paid the current owner $1.5 million for the Company’s portion of environmental response costs through the thirdfourth quarter of 2007 (the current owner of the site bills the Company one calendar quarter in arrears). The Company has recorded a liability for its portion of the estimated remediation costs for the site. 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, in response to the special notice letter received by the PRPs in June 2006 from USEPA seeking performance of an RI/FS at the site, certain PRPs, including the Company, signed an Administrative Settlement Agreement and Order on Consent for the RI/FS effective July 2007.

The Company and other prior owners also entered into an agreement in April 2004 waiving certain statute of limitations defenses for claims which may be filed by the Town of Wilmington, Massachusetts, in connection with this site. While the Company has denied any liability for any such claims, the Company agreed to this waiver while the parties continue to discuss the resolution of any potential claim which may be filed.

The Company believes that based on current information it has adequate reserves for the claims related to this site.

Other Sites

The Company has been named as a de minimis PRP at other sites, and as such the Company believes that a resolution of its liability will not have a material impact on the financial position, results of operations or cash flows of the Company.

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Defined Benefit Pension Plans

Components of Net Periodic Benefit Cost

Employer Contributions

U.S. Plans

The Company expects to contribute approximately $750,000 to its U.S. qualified defined benefit pension plans in 2008 and to pay $328,000 in 2008 related to its unfunded non-qualified plans. As of March 31,June 30, 2008, no contributions$250,000 had been madecontributed to the qualified plans and $39,000$57,000 had been paid related to the non-qualified plans.

U.K. Plan

Stepan UK Limited expects to contribute approximately $381,000 to its defined benefit pension plan in 2008. As of March 31,June 30, 2008, $95,000$190,000 had been contributed to the plan.

Defined Contribution Plans

Defined contribution plan expense for the Company’s retirement savings plans was $1,386,000$1,388,000 and $2,774,000, respectively, for the three and six months ended March 31,June 30, 2008, compared to $1,122,000 and $1,129,000$2,251,000, respectively, for the three and six months ended March 31,June 30, 2007.

Expense

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Expenses related to the Company’s profit sharing plan was $674,000were $808,000 and $343,000$1,483,000, respectively, for the three and six months ended March 31,June 30, 2008, compared to $325,000 and 2007, respectively.$668,000, respectively, for the three and six months ended June 30, 2007.

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Below is the computation of basic and diluted earnings per share for the three and six months ended March 31,June 30, 2008 and 2007.

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Comprehensive income includes net income and all other non-owner changes in equity that are not reported in net income. Below is the Company’s comprehensive income for the three and six months ended March 31,June 30, 2008 and 2007.2007:

On April 30, 2007, the Company sold its specialty ester surfactant product line for the personal care market to The HallStar Company (formerly CPH Holding Corporation). No physical assets were included in the sale. The product line represented approximately $15,000,000 in Company net sales. The sale was for $6,200,000 of cash plus the transfer to the Company of a specialty agricultural surfactant product line, which included $250,000 of intangible assets and $196,000 of inventory. As a result of the sale, the Company reported a $4,290,000 pretax gain in the second quarter ended June 30, 2007. The entire gain was attributable to the surfactants segment.

In 2007, the Company’s annual test of goodwill impairment indicated that the goodwill related to its United Kingdom subsidiary (Stepan UK) was impaired. Stepan UK is a reporting unit of the Company’s surfactants reportable segment. The goodwill impairment reflected an estimated reduction in the fair value of Stepan UK’s business as a result of lower discounted cash flow forecasts for the business. As a result of the impairment, the Company recorded a non-cash $3,467,000 charge against operating income for the three months ended June 30, 2007. The charge equaled the entire balance of Stepan UK’s goodwill. The fair value of Stepan UK was estimated using the present value of future cash flows.

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The Company has three reportable segments: surfactants, polymers and specialty products. Segment operating results for the three and six months ended March 31,June 30, 2008 and 2007 are summarized below:

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

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Debt comprises the following:

In June 2008, the Company entered into a $30,000,000 unsecured term loan with three U.S. banks. This loan has a final maturity of five years with amortization of $1,500,000 per year in 2009 through 2012 and $26,000,000 in 2013. This agreement contains two interest rate options from which the Company may choose: 1) LIBOR plus spreads ranging from 1.00 percent to 2.00 percent, depending on the Company’s leverage ratio or 2) the prime rate plus spreads ranging from 0.0 percent to 0.75 percent. This agreement requires the maintenance of certain financial ratios and covenants that are similar to those contained in the existing $60,000,000 committed bank credit agreement.

The various loan agreements contain provisions, which, among others, require maintenance of certain financial ratios and place limitations on additional debt, investments and payment of dividends. The Company is in compliance with its loan agreements.

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Other, net in the consolidated statements of income included the following:

Investment related lossincome for the first three months ofended June 30, 2008, included $1,291,000$174,000 of unrealized income on mutual fund investment assets. For the six months ended June 30, 2008, investment related loss included $1,117,000 of unrealized losses on mutual fund investment assets. See Note 2.

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R),Business Combinations, which is effective on a prospective basis for business combinations having acquisition dates on or after the beginning of the first annual reporting years beginning on or after December 15, 2008 (January 1, 2009, for the Company). SFAS No. 141(R) replaces SFAS No. 141,Business Combinations. The objective of the standard is to improve the reported financial information about an entity’s business combinations and their effects. The standard establishes principles and requirements for recognizing and measuring the identifiable assets acquired, the liabilities assumed, noncontrolling interests and goodwill acquired or bargain purchase gain. Major changes from current accounting treatment for business combinations include measuring more types of acquired assets and liabilities at fair value, remeasuring any contingent consideration at fair value in subsequent reporting periods and expensing all acquisition-related costs. Principles and requirements are also set forth for determining relevant financial statement disclosure information. Because the requirements of SFAS No. 141(R) are primarily for prospective business combinations, the Company will adopt this accounting standard is not expected to have an effect onfor acquisitions completed after the Company’s financial position, cash flows or results of operations.standard’s effective date.

In December 2007, the FASB released SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements, which is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (January 1, 2009, for the Company). SFAS No. 160 amends Accounting Research Bulletin No. 151.51,Consolidated Financial Statements. The objective of the standard is to improve the financial information about noncontrolling interests reported in an entity’s consolidated financial statements. SFAS No. 160 establishes accounting and reporting standards that require the clear presentation of noncontrolling interests in an entity’s consolidated balance sheets and income statements. This includes reporting noncontrolling interests as a component of stockholders’ equity, but separate from the parent company’s equity. The standard also requires that noncontrolling interests are initially to be measured at fair value. The Company is in the process of analyzing the impact, if any, of this pronouncement on its financial statements.

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In March 2008, the FASB released SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities, which is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 (January 1, 2009, for the Company). Early application is encouraged. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how these instruments and related hedged items are accounted for under SFAS No. 133 and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and, cash flow. To meet those objectives, this statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. The Company will beginstandard is not expected to assesshave an effect on the effect that the adoptionCompany’s financial position, cash flows, or results of SFAS No. 161 may have on its financial reporting.operations.

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Item 2—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 that have affected the Company’s financial condition and results of operations during the interim period included in the accompanying condensed consolidated financial statements.

Overview

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

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On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 159,The Fair Value Option for Financial Assets and Financial Liabilities.SFAS No. 159 expands the scope of what entities may carry at fair value by offering an irrevocable

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option to record many types of financial assets and liabilities at fair value. Concurrent with its adoption of SFAS No. 159, the Company elected the fair value option for the mutual fund investment assets related to its deferred compensation plans. The fair value election for the mutual fund investment assets was made to reduce the income volatility caused by the prior accounting treatment for the Company’s deferred compensation plans and related investment assets. Specifically, beginning in 2008, fair value changes for the mutual fund investment assets are recorded in the income statement in the same periods that the offsetting changes in the deferred compensation liabilities are recorded in the income statement (the changes, however, are on different lines of the consolidated income statement: Other, net for mutual fund investment value changes and Administrative expense for deferred compensation liability changes). In prior years, value changes for the mutual fund investments were recorded as direct adjustments to shareholders’ equity in the accumulated other comprehensive income line of the balance sheet while the changes in deferred compensation liability related to the mutual funds were recorded in the income statement. The accounting treatment for the portions of the deferred compensation liabilities that are tied to the Company’s common stock values is not affected by the fair value election. In compliance with the transition rules of SFAS No. 159, $834,000 of cumulative unrealized mutual fund investment gains, net of taxes, which were included in accumulated other comprehensive income on December 31, 2007, were reclassified into retained earnings in January 2008. In addition, as a result of the application of SFAS No. 159, $1.3 million of expense related to a first quarter 2008 decline in the fair value of the Company’s mutual fund assets was recorded in the Other, net line of the consolidated

The effects on pretax income statement for the three months ended March 31, 2008. The deferred compensation liability impact of the fair value decline in the mutual fund investments, which was $1.3 million of income, was part of the $0.7 million deferred compensation expense included in the Administrative expense line of the condensed income statement for the three months ended March, 31, 2008. An increase in the Company’s common stock price accounted for the balance of the deferred compensation expense. The pretax effect of all deferred compensation related activities isfor the three and six month periods ended June 30, 2008 and 2007 are displayed below:

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RESULTS OF OPERATIONS

Three Months Ended March 31,June 30, 2008 and 2007

Summary

Net income for the firstsecond quarter of 2008 improved 54106 percent to $8.7$9.8 million, or $0.85$0.93 per diluted share, compared to $5.7$4.7 million, or $0.56$0.47 per diluted share, for the firstsecond quarter of 2007. Operating income increased $6.3 million, or 60 percent, due largely to improved profitability for the surfactants segment. Pretax income increased $4.7 million, or 58 percent. The effect of the operating income improvement on pretax income was partially offset by $1.3 million of expense related to a decline in the fair value of the Company’s mutual fund investment assets held as partial funding for deferred compensation plans. (See the foregoing ‘Overview’ section of this discussion for comments regarding the change in accounting treatment arising from the Company’s January 1, 2008, adoption of SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities.) Below is a summary discussion of the major factors leading to the quarter-to-quarter changes in net sales, profits and expenses. A detailed discussion of segment operating performance for the firstsecond quarter of 2008 follows the summary.

First quarter 2008 consolidatedConsolidated net sales were $68.4increased $84.2 million, or 2225 percent, higher than firstfrom quarter 2007 consolidated net sales.to quarter. All reportable segments reported net sales increases. Higher average selling prices and the favorable effects of foreign currency translation accounted for approximately $63.0$70.9 million and $12.8$13.3 million, respectively, of the net sales increase. Higher average selling prices reflected numerous price increases effected since the first quarter of 2007Company’s continued efforts to pass on the cost of rising material costs to customerscustomers. Sales volume was unchanged from year-to-year, with an increase in polymers sales volume offset by declines in surfactants and specialty products sales volumes. The foreign currency translation effect resulted from a U.S. dollar that weakened against nearly all local currencies of the countries where the Company has operations.

Operating income for the second quarter of 2008 was $7.1 million, or 67 percent, higher than operating income for the same quarter of 2007. Gross profit was up $11.7 million, or 31 percent, between quarters, due primarily to favorable sales mix and selling price increases, which began to recoup some of the profit margin lost in prior years to escalating raw material costs. Gross profits for the surfactants and polymers segments improved between quarters, while gross profit for the specialty products segment remained unchanged.

Operating expenses increased $4.7 million, or 17 percent, between quarters. The prior year quarter included a $4.3 million benefit from the gain on the sale of the Company’s specialty esters product line, partially offset by a $3.5 million impairment charge for Stepan UK goodwill. Excluding the product line sale, the impairment charge and the $0.8 million unfavorable effect of foreign currency translation, operating expenses increased $3.1 million, or ten percent. Most of the operating expense increase was attributable to higher U.S. incentive-based compensation ($1.4 million), deferred compensation expense ($0.5 million) and salary expense ($0.4 million). Improved operating results accounted for the increases in incentive-based compensation expenses. The increase in deferred compensation expense resulted from a rise in the price of Company common stock to which a large portion of the deferred compensation liability is tied. Higher relocation and travel-related expenses contributed to the increase in operating expenses.

Losses from the Company’s Philippine joint venture increased $0.6 million from quarter to quarter. Lower sales volume and royalty income and unplanned production outages led to the increased loss. Foreign exchange losses also contributed.

Other, net, which includes foreign exchange gains and losses and investment related income and expense, was $0.1 million of income in the second quarter of 2008 compared to $0.5 million of expense for the second quarter of 2007. Most of the unfavorable quarter-to-quarter variance was attributable to a reduction in foreign currency exchange losses.

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The effective tax rate was 32.8 percent for the second quarter of 2008 compared to 37.6 percent for the same quarter of 2007. The 2007 effective tax rate was impacted by the $3.5 million Stepan UK goodwill impairment charge for which no tax benefit was realized.

Segment Results

Surfactants

Surfactants net sales for the second quarter of 2008 increased $65.2 million, or 27 percent, over net sales for the second quarter of 2007. Higher average selling prices and the favorable effects of foreign currency translations accounted for approximately $58.6 million and $9.3 million, respectively, of the quarter-to-quarter change. Sales volume dropped one percent between quarters, which reduced the growth in net sales by about $2.7 million. A quarter-to-quarter comparison of net sales by region follows:

The 25 percent increase in net sales for North American operations resulted from a 27 percent increase in average selling prices and the favorable effects of foreign currency translation, partially offset by a two percent decline in sales volume. Higher selling prices accounted for approximately $43.8 million of the net sales growth, but the effect of lower sales volume reduced the net sales growth by $3.9 million. The favorable impact of foreign currency translation was about $1.1 million. The increase in average selling prices reflected price increases implemented to pass on rising material costs to customers. Nearly all major product lines, except commodity laundry and cleaning products, contributed to the drop in sales volume. Sales volume for commodity laundry and cleaning products increased 13 percent between quarters primarily on the strength of improved fabric softener sales.

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The 27 percent increase in net sales for European operations was entirely due to a 23 percent improvement in average selling prices and the favorable effect of foreign currency translation, which accounted for $12.1 million and $5.3 million, respectively, of the increase. Sales volume for the second quarter of 2008 was five percent lower than sales volume for the same quarter of 2007. The decline was broad-based over all major product lines. Selling price increases necessitated by rising raw material costs and a more favorable productcustomer and customerproduct mix of surfactantssales caused the improvement in average selling prices. The foreign currency translation effect resulted from the strengthening of the European euro against the U.S. dollar.

The 42 percent increase in net sales for Latin American operations reflected a 14 percent improvement in average selling prices, a 13 percent gain in sales volume and the favorable effects of foreign currency translation. Increases in average selling prices and sales volume accounted for $3.7 million and $2.9 million, respectively, of the rise in net sales. SalesForeign currency translation contributed $2.8 million of the Latin American net sales growth. The improved average selling prices resulted primarily from the pass through of higher raw material costs. Additional business for the Company’s Brazil subsidiary, primarily in the agricultural market, drove the sales volume dropped about twogain.

Surfactants operating income for the second quarter of 2008 was up $7.3 million, or 89 percent, over operating income for the same period of 2007. Included in prior year operating income were a $4.3 million gain on the sale of the Company’s specialty esters product line and a $3.5 million charge for the impairment of Stepan UK’s goodwill. Gross profit increased $9.8 million, or 42 percent. All three regions posted higher quarter-to-quarter gross profit. Operating expenses increased $2.5 million, or 16 percent. Quarter-to-quarter comparisons of gross profit by region and total segment operating expenses and operating income follow:

The 30 percent increase in gross profit for North American operations was attributable to the previously noted selling price increases that resulted in recovering margin lost in prior periods due to escalating raw material costs, particularly for fabric softeners. Raw material costs continue to move upward, and another selling price increase was announced for July 1, 2008. A more favorable customer and product mix also contributed to the improved gross profit.

Gross profit for European operations increased 54 percent between quarters due to higher average selling prices and to a $0.6 million favorable impact of foreign currency translation. Excluding the currency translation effect, Europe’s gross profit increased $1.1 million, or 36

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percent, from quarter to quarter on sales volume that fell five percent. As mentioned earlier, second quarter 2008 selling prices averaged 23 percent higher than second quarter 2007 selling prices due to selling price increases implemented to regain some of the profit margin lost in previous years to rising raw material costs. A more favorable mix of sales contributed to the improved gross profit.

Gross profit for Latin American operations improved 142 percent due to improvement at all three Latin American subsidiaries. Stepan Mexico’s gross profit grew due to higher selling prices and to a reduction of outsourcing expenses. In the first half of 2007, the Mexico subsidiary purchased some product for resale while an expansion of its manufacturing facility was being completed. Stepan Colombia’s gross profit improved due to a combination of selling price and sales volume gains. Additional agricultural chemicals business drove the improvement in Stepan Brazil’s profits. The favorable effects of foreign currency translation added approximately $0.4 million to the quarter-to-quarter gross profit growth.

Operating expenses for the surfactants segment increased $2.5 million, or 16 percent, from quarter to quarter. Excluding the effects of foreign currency translation and the 2007 product line sale and Stepan UK impairment charge, operating expenses increased $1.0 million, or six percent. The increase was due to higher marketing ($0.6 million) and research and development expenses ($0.4 million) for North American operations, primarily asrelated to salary, incentive-based compensation and profit sharing expenses.

Polymers

Second quarter 2008 net sales for the polymers segment increased $18.2 million, or 21 percent, over net sales for the second quarter of 2007. Higher selling prices, the favorable effects of foreign currency translation and a resultfive percent increase in sales volume accounted for approximately $9.8 million, $4.0 million and $4.4 million of the net sales improvement, respectively. A quarter-to-quarter comparison of net sales by region is displayed below:

The 14 percent increase in net sales for North American operations resulted from a decline12 percent increase in average selling prices and a two percent increase in sales volume. Price increases to pass on higher raw material costs accounted for the rise in average selling prices. An eleven percent increase in sales volume for all surfactants regions, particularly within the personal care product line. Thepolyols, partially offset by a ten percent decline in sales volume reducedfor phthalic anhydride, accounted for the two percent increase in sales volume for North American operations. Strong demand from existing customers led to the sales volume increase for polyols. Softness in the unsaturated polyester resins market, which provides plastics and composite materials for the automotive, recreation vehicles and boating industries, drove most of the drop in phthalic anhydride sales volume. Merchant market sales represent about two-thirds of the Company’s phthalic anhydride production, with the remaining one-third used internally in the production of the Company’s growing polyol product line.

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The 53 percent increase in net sales for European operations resulted from a 23 percent increase in polyol sales volume, a seven percent increase in average selling prices and a favorable foreign currency translation effect. Higher sales volume accounted for $4.0 million of the quarter-to-quarter net sales increase, and foreign currency translation and selling price increases accounted for $3.7 million and $1.5 million, respectively, of the increase. The higher sales volume reflected a strong European insulation market. Higher energy costs and insulation standards continue to drive an increase in insulation demand. The rise in average selling prices resulted from the pass through of higher raw material costs.

The increase in net sales for Asia and Other regions was due to the favorable effects of foreign currency translation. Excluding the effects of foreign currency translation, net sales for Asia and Other regions fell $0.3 million, or 10 percent, on sales volume that declined nine percent.

Second quarter 2008 operating income for the polymers segment improved $1.8 million, or 21 percent, from operating income for the same period of 2007. Gross profit increased $2.5 million, or 20 percent and operating expenses increased $0.7 million, or 19 percent. Below are quarter-to-quarter comparisons of gross profit by region and total segment operating expenses and operating income:

The five percent increase in gross profit for North American operations was attributable to the recapture of lost margin due to the escalation of raw material costs, a more favorable product mix of sales and a two percent improvement in sales volume. A larger proportion of polyol sales volume coupled with a more profitable mix of urethane systems products accounted for the favorable product mix and more than offset the effects of rising raw material costs. Average raw material costs for all product lines were up approximately 10 percent from quarter to quarter, which moderated the quarter-to-quarter profit improvement. The Company will continue its efforts to pass through raw material cost increases to stem margin deterioration.

The 56 percent increase in gross profit for European operations was principally driven by the previously noted 23 percent gain in sales volume. A $0.7 million favorable effect of foreign currency translation and higher selling prices also contributed to the increased gross profit. Higher raw material costs tempered the profit improvement. Demand is expected to remain strong in Europe, but margin loss may result from persistent rising costs. Selling prices will be increased as the market allows.

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The increase in gross profit for Asia and Other regions was principally attributable to a more profitable mix of sales.

Polymer operating expenses were up $0.7 million, or 19 percent, from quarter to quarter. North American operations’ marketing and research and development expenses each accounted for $0.2 million of the increase. Higher incentive-based pay and profit sharing expenses accounted for most of the quarter-to-quarter growth in both the marketing and research and development areas. The effect of foreign currency translation contributed about $0.2 million to the total polymer segment operating expense increase.

Specialty Products

Second quarter 2008 net sales were $0.8 million, or nine percent, higher than second quarter 2007 net sales. Higher average selling prices, particularly for the segment’s food ingredient products, led to the net sales increase. The higher average selling prices reflected the pass through of higher raw material costs. Sales volume was down 14 percent between quarters, due largely to lower food and flavoring ingredient sales. Despite the increase in net sales, operating income was essentially unchanged from quarter to quarter.

Corporate Expenses

Corporate expenses, which comprise corporate operating expenses (including legal and environmental expenses) that are not allocated to the reportable segments, increased $2.0 million, or 25 percent, to $10.1 million for the second quarter of 2008 from $8.1 million for the second quarter of 2007. The following table depicts the major items that accounted for the quarter-to-quarter corporate expense increase:

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Six Months Ended June 30, 2008 and 2007

Summary

Net income for the first half of 2008 grew 78 percent to $18.5 million, or $1.79 per diluted share, compared to $10.4 million, or $1.03 per diluted share, for the first half of 2007. Below is a summary discussion of the major factors leading to the year-to-year changes in net sales, profits and expenses. A detailed discussion of segment operating performance for the first half of 2008 follows the summary.

Consolidated net sales increased $152.7 million, or 24 percent, between years. All reportable segments reported net sales increases. Higher average selling prices and the favorable effects of foreign currency translation accounted for approximately $134.2 million and $26.1 million, respectively, of the net sales increase. The increase in average selling prices resulted from the pass through of rising material costs to customers. Sales volume dropped one percent from year to year, which reduced the growth in net sales by about $7.4approximately $7.6 million. A decline in surfactants sales volume was largely offset by increases in sales volume for polymers and specialty products. The foreign currency translation effect resulted from a U.S. dollar that weakened against all local currencies of the countries where the Company has operations.

Operating income for the first quarterhalf of 2008 was $6.3 million, or 60 percent, higher thanexceeded operating income for the first quarterhalf of 2007.2007 by $13.4 million, or 64 percent. Gross profit was up $11.0$22.8 million, or 3231 percent, while operating expenses increased $4.7 million, or 19 percent. The surfactants segment drovefor the quarter-to-quarter improvement in gross profit, due to a more favorable product and customer mix of sales and tosame period. Improved unit margins driven by selling price increases and sales mix drove the gross profit improvement. The Company continues to raise prices to combat the deterioration of margins that beganresulted over the last few years due to recoup someraw material cost increases. Gross profit was up for all three reportable segments.

Operating expenses increased $9.4 million, or 18 percent, between years. The prior year included a $4.3 million benefit from the gain on the sale of the profit margin lost in prior years to escalating raw material costs, particularly withinCompany’s specialty esters product line, partially offset by a $3.5 million impairment charge of Stepan UK goodwill. Excluding the fabric softener product line. Gross profit forline sale, the polymers segment was down between quarters, asimpairment charge and the effects of higher raw material costs and lower sales volume in North America more than offset profit improvement for European operations. The favorable effects$1.6 million unfavorable effect of foreign currency translation, contributed $1.9operating expenses increased $7.0 million, or 13 percent. Deferred compensation expense, incentive-based compensation expense, and salary expense accounted for $2.5 million, $2.2 million, and $1.1 million, respectively, to the quarter-to-quarter increases in consolidated gross profit and operating income.

The 19 percent quarter-to-quarter increase in operating expenses was attributable to a $3.1 million, or 40 percent, increase in administrative expenses, a $0.8 million, or nine percent, increase in marketing expenses and a $0.8 million, or 10 percent, increase in research and development expenses. A $2.0 million increase in compensation expense related to the Company’s deferred compensation plans and a $0.4 million increase in U.S. salary and related

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fringe benefit expenses accounted for much of the increase in administrative expenses. Higher U.S. salary and related fringe benefit expenses also accounted for $0.5 million and $0.7$0.9 million, respectively, of the marketing and research and development expense increases. The effectsyear-to-year increase. An increase in the price of foreign currency translationCompany common stock, to which a large portion of the deferred compensation liability is tied, caused the increase in deferred compensation expense. Improved operating results accounted for approximatelythe increases in incentive-based compensation expenses. Higher consulting, relocation and travel-related expenses contributed to the increase in operating expenses.

Losses from the Company’s Philippine joint venture increased $0.7 million of the $4.7 million rise in consolidated operating expenses.between years due to lower sales volume and royalty income and unplanned production outages. Foreign exchange losses also contributed.

Other, net which includes foreign exchange gains and losses and investment related income and expense was $1.5increased $0.8 million of expense in the first quarter of 2008 comparedfrom year to $18 thousand of expense for the first quarter of 2007. Most of theyear. The unfavorable quarter-to-quarter variance was attributable to the effects of the January 1, 2008, election of the fair value option (afforded under SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities) for the Company’s mutual fund investment assets as described in the ‘Overview’ section of this discussion. In the first quarterhalf of 2008, the Company recorded $1.3recognized $1.1 million of expense resulting from the December 31, 2007, to March 31, 2008, reduction of fair value ofunrealized losses for the mutual fund investment assets. In prior interim and annual periods,years, changes in the fair value of the mutual

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funds were recorded to accumulated other comprehensive income in the equity section of the balance sheet. The effect of these losses was partially offset by a year-to-year reduction of foreign exchange losses.

The effective tax rate was 31.832.3 percent for the first quarterhalf of 2008 compared to 29.633.5 percent for the first quarterhalf of 2007. ReducedThe 2007 effective tax credits recognized in 2008 accountedrate was impacted by the $3.5 million Stepan UK goodwill impairment charge for mostwhich no tax benefit was realized. The effect of the change ingoodwill impairment charge was partially offset by the effective2007 release of valuation allowances on German tax rate.loss carryforwards.

Segment Results