UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 2007

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.     Yesx    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x     Non-accelerated filer  ¨

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- 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, 2007

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 consolidated financial position of the Company as of March 31,June 30, 2007, and the condensed consolidated results of operations for the three and six months then ended and cash flows for the threesix months then ended 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 2006 Form 10-K.

The Company has stock options outstanding under its 1992 Stock Option Plan and stock options and stock awards outstanding under its 2000 Stock Option Plan and its 2006 Incentive Compensation Plan. Compensation expense charged against income for all plans was $207,000$276,000 and $50,000$483,000, respectively, for the three and six months ended March 31,June 30, 2007, compared to $146,000 and 2006, respectively.$196,000, respectively, for the three and six months ended June 30, 2006. Unrecognized compensation cost for stock options and stock awards was $1,045,000$861,000 and $848,000,$755,000, respectively, at March 31,June 30, 2007, compared to $370,000 and $314,000, respectively, at December 31, 2006. The quarter-to-quarter increase in compensation expense and the increases in unrecognized compensation costs since December 31, 2006, resulted from first quarter 2007 grants of 113,600 stock options and 90,000 stock awards made under the Company’s 2006 Incentive Compensation Plan. The unrecognized compensation expense at March 31,June 30, 2007, is expected to be recognized over weighted average periods of 1.61.4 years and 2.42.2 years for stock options and stock awards, respectively.

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Inventories comprise the following:

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Inventories are primarily priced using the last-in, first-out (LIFO) inventory valuation method as of March 31, 2007 and December 31, 2006, amounted to 77 percent of total inventories.method. If the first-in, first-out (FIFO) inventory valuation method had been used for all inventories, inventory balances would have been approximately $25,380,000$26,180,000 and $24,555,000 higher than reported at March 31,June 30, 2007, and December 31, 2006, 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. 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 2223 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 $10.7$10.6 million to $39.8$39.7 million at March 31,June 30, 2007. At March 31,June 30, 2007, 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 $19.0$18.9 million compared to $22.1 million at December 31, 2006. The December 31, 2006, to March 31,June 30, 2007, reduction in the accrued liability balance for environmental and legal losses resulted from the payment made for the previously disclosed 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; accordingly,consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations. 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.

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Following are summaries of the material contingencies at March 31,June 30, 2007:

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 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 2003.2003 and also submitted additional information regarding groundwater in May 2007. 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 removed to federal court but was remanded to state court on September 22, 2006.

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.States

Ewan, D’Imperio and Lightman Drum Company Sites

During the mid-1970’s, Jerome Lightman and the Lightman Drum Company disposed of hazardous substances at several sites in New Jersey. The Company has been named as a potentially responsible party (PRP) in the caseUnited States v. Lightman (1:92-cv-4710 D.N.J.), which involves the D’Imperio Superfund Site and the Ewan Superfund Site, both located in New Jersey. TheIn the second quarter of 2007, the Company has reached an agreement in principle

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with respect to the past costs and future allocation percentage in said litigation for costs related to the D’Imperio Superfund Site, including costs to comply with USEPA’s Unilateral Administrative Orders, as well as for the past costs and allocation percentage at the Ewan Superfund Site. Such agreement in principle is subject to additional approvals, including

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final execution of a settlement agreement in the first half of 2007. On a related matter if the aforementioned litigation is settled, the Company,and as a condition of settlement, the Company will dismiss its appeal currently pending in 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 litigation. Under the partial consent decree, the government recovered past costs at the D’Imperio Superfund Site from all PRPs including the Company. The Company paid its assessed share in July 2007, but will not seek to recover the sums it paid ifnow that the settlement is finalized. The Company believes that a resolution of itsthe Company’s liability for this litigation will not have a material impact on the financial position, results of operations or cash flows of the Company.

In addition to the Ewan and D’Imperio Superfund Sites, 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 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 allocation percentage decreased. However, the allocation has not yet been finalized by the Lightman Yard PRP Group. The PRPs who agreed to conduct the interim remedial action will enter into an Administrative Settlement Agreement and Order on Consent for Removal Action with USEPA. The Administrative SettlementUSEPA, and these PRPs will also enter into a Supplemental Lightman Yard Participation and Interim Funding Agreement isto fund the agreed upon removal action. Both of these agreements are currently being negotiated. When the agreements are finalized, the Company will pay a soil removal assessment, which is not expected to have a material impact on the financial position, results of operations or cash flows of the Company.

The Company believes that based on current information it has adequate reserves for the Jerome Lightman-related environmental sites.

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 $1.2$1.4 million for the Company’s portion of environmental response costs through the thirdfirst quarter of 20062007 (the current owner of the site has not billedbills the Company for the fourthone calendar quarter of 2006 and the first quarter of 2007)in arrears). At March 31,June 30, 2007, the Company’s reserve is $1.1 million for current and future claims associated with this 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, the Company received a Notice of Potential Liability letter from USEPA dated January 12, 2006, regarding this site. The Company’s response was filed on January 31, 2006. The Company then received a special notice letter from USEPA dated June 19, 2006, advising the Company and the other PRPs at the site, that they have 45 days to begin negotiations with USEPA to conduct certain response actions, including

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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. Thesite, certain PRPs, responded to USEPAincluding the Company, signed an Administrative Settlement Agreement and Order on August 25, 2006, that they will agree to participate in such negotiations in order to reach an agreement on the performance of an RI/FSConsent for the site. The PRPs are awaiting a response from USEPA.RI/FS.

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.

On February 15, 2007,As a result of the Company entered into a settlement agreement with 19 plaintiffsfor the case regarding alleged personal injury claims, they asserted against the Company and other prior owners regarding this site. The agreement has been fully executed and was submitted to the court for approval in April 2007. As a result of this settlement and as previously reported, the company recorded a fourth quarter 2006 charge of $3.0 million for this settlement. The settlement amount was paid in the first quarter of 2007.2007 and the case has been dismissed.

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

Defined Benefit Pension Plans

Components of Net Periodic Benefit Cost

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The quarter-to-quarter and year-to-year reductionreductions in net periodic pension costcosts for the defined benefit pension plans reflected the freezing of the U.S. salaried, supplemental executive, Maywood hourly and United Kingdom defined benefit pension plans on June 30, 2006. Service costs ceased being accrued for the noted plans as of that date. During July 2007, the Company has also negotiated to freeze the Millsdale, Illinois, hourly defined benefit plan. See Note 15.

Employer Contributions

U.S. Plans

The Company expects to contribute approximately $4,185,000$5,037,000 to its U.S. qualified defined benefit pension plans in 2007 and to pay $297,000 in 2007 related to its unfunded non-qualified plans. As of March 31,June 30, 2007, $901,000$1,982,000 had been contributed to the qualified plans and $51,000$70,000 had been paid related to the non-qualified plans.

U.K. Plan

Stepan UK Limited expects to contribute approximately $427,000 to its defined benefit pension plan in 2007. As of March 31,June 30, 2007, $94,000$189,000 had been contributed to the plan.

Defined Contribution Plans

Defined contribution plan expense for the Company’s retirement savings plans was $1,129,000$1,122,000 and $2,251,000, respectively, for the three and six months ended March 31,June 30, 2007. There was no such expense for the three and six months ended March 31,June 30, 2006, as the Company began sponsoring defined contribution retirement savings plans on July 1, 2006, after its U.S. salaried, supplemental executive, Maywood hourly and United Kingdom defined benefit pension plans were frozen. See Note 15 relative to the inclusion of Millsdale, Illinois, hourly workers in the defined contribution plan effective August 2007.

ExpenseExpenses related to the Company’s profit sharing plan waswere $325,000 and $200,000$650,000, respectively, for the three and six months ended March 31,June 30, 2007, compared to $300,000 and 2006, respectively.$500,000, respectively, for the three and six months in 2006.

10

Below is the computation of basic and diluted earnings per share for the three and six months ended March 31,June 30, 2007 and 2006.

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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, 2007 and 2006.

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 products, which are manufactured at the Company’s Maywood, New Jersey, facility, will continue to be produced for The HallStar Company during a transition period of up to one year. 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 Company’s surfactants segment. The gain was net of $2,356,000 of write-downs for equipment and inventory ($739,000) as well as severance charges ($17,000) and a provision for expected losses on the fulfillment of a manufacturing agreement associated with the product line sale ($1,600,000).

The Company pursued the product line sale after reviewing strategic alternatives for improving the profitability of its Maywood, New Jersey, plant. The reconfigured plant will continue to produce esters for the industrial markets as well as the Company’s specialty flavor and food ingredient products.

The Company tests its goodwill balances for impairment in the second quarter of each calendar year. The 2007 test 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. Improvements in the reporting unit’s operating results have been lower than previous forecasts used to test for impairments. As a result of the impairment, the Company recorded a non-cash $3,467,000 charge against operating

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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. No impairment of goodwill related to other Company reporting units was indicated by the annual test.

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, 2007 and 2006 are summarized below:

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

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Debt comprises the following:

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.

In January 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation 48 (FIN 48),Accounting for Uncertainty in Income Taxes. As a result of the implementation, the Company recognized a $467,000 decrease to liabilities for uncertain tax positions. As required by FIN 48, this decrease was accounted for as an adjustment to the January 1, 2007, balance of retained earnings on the balance sheet. Including the cumulative effect decrease, the Company had approximately $1,599,000 of total unrecognized tax benefits at January 1, 2007. This liability includesincluded an estimate of interest and penalties. Of the total liability for unrecognized tax benefits, $1,392,000 (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period. As of June 30, 2007, unrecognized tax benefits totaled $1,666,000. Of this liability, approximately $1,437,000 (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future periods.

The Company has elected to include interest and penalty amounts within the tax provision (benefit). The total amount of accrued interest and penalties as of the date of adoption was $374,000. For the six months ended June 30, 2007, an additional $44,000 of interest and penalties were recorded.

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The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is not subject to U.S. federal income tax examinations by tax authorities for years before 2003. Some foreign jurisdictions and various U.S. states jurisdictions may be subject to examination back to 2001.

The effective tax rate rose to 37.6 percent for the quarter ended June 30, 2007, compared to 30.7 percent for the quarter ended June 30, 2006. The year-to-date effective tax rate rose to 33.5 percent compared to 29.4 percent in the prior year. The increases were attributable to the goodwill impairment charge of $3,467,000 (see Note 9), which is not tax deductible. Partially offsetting this increase was a $711,000 reduction in the German valuation allowance based on recent and forecast improvement in the German taxable income. As a result, 100 percent of the remaining German tax loss carryforward has been recognized.

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During the quarter ended March 31, 2006, the Company reached a $900,000 settlement agreement with its electricity provider for lost profits and expenses incurred by the Company as a result of a 2005 unplanned electric outage precipitated by an undersized transformer installed by the electricity provider. The settlement income was recorded as a reduction of Cost of Sales in the Condensed Consolidated Statements of Income and was allocated to the polymers ($667,000) and surfactants ($233,000) segments.

Non-cash investing and financing activities for the quarters ended March 31, 2007, and 2006, included the receipt of shares of the Company’s common stock tendered in lieu of cash by employees exercising stock options. The tendered shares, which were owned by employees for more than six months, had values of $707,000 (24,029 shares) in the first quarter of 2007 and $59,000 (2,118 shares) in the first quarter of 2006, and were recorded as treasury stock.

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157,Fair Value Measurements. This statement defines fair value, provides a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The guidance in the new standard is applicable in circumstances where other accounting pronouncements mandate or permit fair value measurements. SFAS No. 157, which is effective for financial statements issued for fiscal years beginning after November 15, 2007, does not require any new fair value measurements. However, application of the new standard may alter an entity’s current practice. The Company is in thecontinues its process of determining the effect, if any, that adoption of SFAS No. 157 will have on its financial position, cash flows and results of operations.

In February 2007, the FASB issued 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. Changes in fair value would be recorded in an entity’s income statement. This accounting standard also establishes presentation and disclosure requirements that are intended to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for the Company on January 1, 2008. Earlier application is permitted

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under certain circumstances. The Company is in thecontinues its process of assessing the impact, if any, that the adoption of SFAS No. 159 will have on its financial position, cash flows and results of operations.

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On April 30,In July 2007, the hourly workers at the Company’s Millsdale plant in Elwood, Illinois, ratified a new union contract, which resulted in an amendment to the Stepan Company Retirement Plan for Millsdale Hourly and Anaheim Hourly Employees (the “Plan”), a defined benefit pension plan. The amendment will be effective on July 16, 2007. No future benefits for covered Millsdale union employees will accrue under the Plan after August 31, 2007. In addition, no new Millsdale union employees will be eligible to participate in the Plan. Benefits earned through August 31, 2007, will be available to participants when they retire, in accordance with the terms of the Plan. The Company will also increase the multiplier that is used in the formula to compute the benefit due a Millsdale union participant. In the third quarter of 2007, the Company sold its specialty ester surfactant product line forwill record an estimated $775,000 curtailment loss as a result of the personal care market to The HallStar Company (formerly CPH Holding Corporation). No physical assets were included in the sale. The product line represents approximately $15.0 millioncessation of Company net sales. The products, which are manufactured at the Company’s Maywood, New Jersey, facility, will continue to be produced for The HallStar Company during a transition period. The sale was for cash plus the transferfuture benefit accruals and $600,000 of additional expense related to the Company of a specialty agricultural surfactant product line.multiplier revision. The Company estimates that it will report a pretax gain for this sale of approximately $3.5 million to $4.0 million in the second quarter of 2007 from the sale proceeds net of related write downs for equipment, inventory and severance charges. This estimate isare subject to change. The net gain relates entirelyPlan changes will have no impact on current retirees, former employees with vested benefits, or Anaheim union participants. As of August 1, 2007, the Company will establish a defined contribution plan for the Millsdale union workers that will have a fixed Company contribution rate of four percent of base wages. In addition, the Company agreed to the surfactants segment.a supplemental transition benefit.

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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:

Two events having significant effects on the Company’s results of operations occurred in the second quarter of 2007: the sale of the Company’s specialty esters product line and the impairment of the goodwill related to the Company’s United Kingdom subsidiary (Stepan UK).

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The following is a discussion of those two events:

Sale of Specialty Esters Product Line

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 $15.0 million in Company net sales. The products, which are manufactured at the Company’s Maywood, New Jersey, facility, will continue to be produced for The HallStar Company during a transition period. The sale was for $6.2 million of cash plus the transfer to the Company of a specialty agricultural surfactant product line. As a result of the sale, the Company reported a $4.3 million pretax gain in the second quarter ended June 30, 2007. The gain was net of related write-downs for equipment and inventory as well as severance charges and a provision for expected losses on the fulfillment of a manufacturing agreement associated with the product line sale. See Note 8 to the Condensed Consolidated Financial Statements for additional detail regarding the recorded gain.

The Company pursued the product line sale after reviewing strategic alternatives for improving the profitability of its Maywood, New Jersey, plant. The reconfigured plant will continue to produce esters for the industrial markets as well as the Company’s specialty flavor and food ingredient products. The reduced cost structure of the remaining businesses is expected to increase the site’s profitability in 2008.

Goodwill Impairment

As required by SFAS No. 142,Goodwill and Other Intangible Assets, the Company performs an annual impairment test of goodwill. The Company performs its test during the second calendar quarter of each year. The first step of the goodwill impairment test is to compare each reporting unit’s net book value to its fair value. If fair value exceeds net book value then no impairment is indicated, and no further steps must be performed. The 2007 test identified that the book value of Stepan UK, a reporting unit of the Company’s surfactants segment, exceeded its fair value. The fair value of Stepan UK was estimated by applying a discounted cash flow method to the projected cash flows of Stepan UK. Because the first step of the test indicated a potential impairment of goodwill, a second step was required to determine the amount, if any, of the impairment. The second step compares the implied fair value of goodwill (i.e., the reporting unit’s fair value less the fair value of the reporting unit’s net assets, excluding goodwill) to the book value of goodwill. If the book vale of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in the amount of the excess. Upon completion of the second step, the Company determined that the impairment loss for Stepan UK was $3.5 million, the entire amount of goodwill on Stepan UK’s books. The $3.5 million non-cash goodwill impairment loss was recorded in the three month period ended June 30, 2007.

The goodwill impairment reflected an estimated reduction in the fair value of Stepan UK’s business as a result of the increased risk of attaining the forecasted future cash flows. The increased risk is attributed to increases in sales volume expected from the shutdown of a competitor not materializing to the degree originally anticipated.

No impairment of goodwill related to other Company reporting units was indicated by the annual test.

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RESULTS OF OPERATIONS

Three Months Ended March 31,June 30, 2007 and 2006

Summary

Net income for the firstsecond quarter of 2007 improved 8754 percent to $5.7$4.7 million, or $0.56$0.47 per diluted share, compared to $3.0$3.1 million, or $0.31 per diluted share, for the firstsecond quarter of 2006. Operating income increased $4.4$3.5 million, or 7051 percent, due to a $3.0between years. The previously discussed $4.3 million decreasenet gain on the sale of the specialty esters product line and the $3.5 million Stepan UK goodwill impairment charge were included in compensation expenses related to the Company’s deferred compensation plans and improvements2007 second quarter operating income. Improvements in the surfactants and specialty productspolymers segments operating results.results accounted for most of the growth in operating profits. 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 2007 follows the summary.

First quarter 2007 consolidatedConsolidated net sales for the second quarter of 2007 were $23.4$44.1 million, or eight15 percent, higher than firstsecond quarter 2006 consolidated net sales. All reportable segments reported net sales increases. A nine percent increase in sales volume, a three percent improvement in average selling prices and the favorable effects of currency translation accounted for approximately $25.1$25.7 million, $11.3 million, and $5.8$7.1 million, respectively, of the net sales increase. All reportable segments contributed to the growth in sales volume. Average selling prices dropped about one percent between quarters as a resultimproved due to the pass through of raw material price increases partially offset by a change in sales mix for North American surfactants. The decline in average selling prices reduced the quarter-to-quarter net sales increase by about $7.5 million.

OperatingSecond quarter 2007 operating income for the first quarter of 2007 was $4.4$3.5 million, or 7051 percent, higher than second quarter 2006 operating income forincome. The $4.3 million net gain on the firstsale of the specialty esters product line and the $3.5 million goodwill impairment charge were included in 2007 second quarter of 2006.operating income. Gross profit was up $2.5$5.0 million, or eight15 percent, while operating expenses declined $1.9increased $1.5 million, or sevensix percent. TheBoth the surfactants segment accounted for $2.3 million ofand polymers segments reported quarter-to-quarter increases in gross profit. Higher sales volume was a major contributor to the gross profit increase as results for North America operations improved due to higher sales volumes and lower overhead costs. Gross profit for the polymers segment was down slightly from quarter-to-quarter as the effects ofincreases, although higher raw material costs and lower sales volume in North America offset a significant improvement in profit for European operations.tempered polymers results. Gross profit for the specialty products segment was up due to higher sales volume and improved sales mix.down slightly between quarters.

The sevensix percent quarter-to-quarter declineincrease in operating expenses was attributable to the $3.5 million goodwill impairment charge, a $2.8$1.1 million or 27 percent, decrease(11 percent) increase in administrative expenses, partially offset by a $0.5$0.6 million or six percent, increase in marketing expenses and a $0.4 million, or six percent,(nine percent) increase in research and development expenses and a $0.6 million (six percent) increase in marketing expenses. The above noted declineincreases were partially offset by the $4.3 million net gain on the sale of the specialty esters product line. A $1.1 million increase in deferred compensation expenses accounted for the lowerhigher administrative expenses. Marketing expenses were up as a result of higher European operations bad debt requirements ($0.3 million) and higherHigher salary, and fringe benefit expenses. Higher salarybonus and fringe benefit expenses also accounted fordrove both the increase in research and development expenses.and marketing expense increases.

Other expense increased $0.4$0.5 million, or 2220 percent, between quarters.from quarter-to-quarter. Interest expense increased $0.2$0.3 million, or 1215 percent, due to higher average debt levels brought on by increased working capital needs and capital expenditures.needs. Other, net, which includes foreign exchange gains and losses and investment related income and expense, was $18.0 thousand$0.5 million of expense for the firstsecond quarter of 2007 compared to $0.1$0.4 million of incomeexpense for the same period a year ago.of 2006. Foreign exchange losses were up $0.3 million between quarters, while investment income was up $0.1 million.

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The effective tax rate was 29.637.6 percent for the firstsecond quarter ofended June 30, 2007, compared to 28.030.7 percent for the firstsecond quarter ended June 30, 2006. The increase was attributable to the goodwill impairment charge of 2006.$3.5 million, which is not tax deductible. Partially offsetting this increase was a $0.7 million reduction in the German valuation allowance based on recent and forecast improvement in the German taxable income. As a result, 100 percent of increased consolidated income for the quarter, theremaining German tax benefit realized from tax credits and deductions as a percentage of income was reduced resulting in a higher effective tax rate.loss carryforward has been recognized.

Segment Results

Surfactants

Surfactants net sales for the firstsecond quarter of 2007 increased $11.2$23.7 million, or five11 percent, over net sales for the firstsecond quarter of 2006. HigherAn eight percent increase in sales volume and the favorable effects of foreign currency translations accounted for approximately $21.5$16.8 million and $4.6$5.8 million, respectively, of the quarter-to-quarter change. Average selling prices dropped fourincreased three percent between quarters, duewhich contributed about $1.1 million to a higher mix of toll processing volume in which customers supplied the raw material for conversion into finished product.net sales growth. A quarter-to-quarter comparison of net sales by region follows:

For North American operations, an eight percent increase in sales volume, partially offset by a one percent drop in average selling prices, accounted for the seven percent increase in net sales. Most major product lines contributed to the gain in sales volumes, but the majority of the improvement was attributable to a 13 percent increase in U.S. commodity laundry products sales volume and a 10 percent increase in personal care products sales volume. The increases for both product lines reflected the securing of additional business from existing customers. The small drop in average selling prices reflected a change in sales mix for U.S. operations that included increased toll processing sales volume (when customers supply raw materials for conversion into finished product).

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Approximately $4.8 million of the increase in net sales for European operations was attributable to an 11 percent growth in sales volume. The favorable effecteffects of foreign currency translation and a fourtwo percent increase in average selling prices accounted for approximately $5.0about $4.0 million and $2.0$1.1 million, respectively, of the net sales increase for European operations.increase. The foreign currency translation effect resulted from the strengthening of the European euro and the British pound sterling against the U.S. dollar. Excluding the effect of currency translation, net sales for the Europe region grew four percent. A more favorable mix of sales coupled with increased selling prices, particularly for the region’s United Kingdom operation, led to the higher average selling prices. Sales volume for

For Latin American operations, the first quartereffects of 2007 was essentially unchanged from sales volume for the first quarter of 2006.

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The increase in net sales for the Latin America region was attributable toforeign currency translation, a 15 percent growth in sales volume and a fiveseven percent increase in average selling prices.prices and a two percent increase in sales volume accounted for $1.6 million, $1.3 million and $0.5 million, respectively, of the increase in net sales. All three Latin AmericaAmerican subsidiaries reported higher net sales. Growth in fabric softener sales and new business for the Company’s Brazil subsidiary drove the sales volume gain. ASelling price increases aimed at passing on raw material cost increases coupled with a more favorable mix of sales led to the increase in average selling prices.

First quarter 2007 net sales for North American operations were essentially unchanged from first quarter 2006 net sales. Sales volume was up 12 percent, but the effect of the higher The modest increase in sales volume was offset by average selling prices that fellattributable to higher fabric softener sales in Mexico and an overall 10 percent. The drop in average selling prices reflected a changepercent increase in sales mix for U.S. operations that included increased toll processing sales volume. U.S. sales volume increased 15 percent from quarter to quarter primarily due to additional business in the commodity laundry and personal care product lines. In addition, first quarter 2007 sales volume for biodiesel products, which comprises about six percent of U.S. surfactants sales volume, was up 81 percent over first quarter 2006 sales volume. In general, the additional commodity laundry, personal care and biodiesel sales volumes carried lower selling prices or toll fees than the remainder of the U.S. sales volumes.Colombia.

Surfactants operating income for the firstsecond quarter of 2007 was up $1.2$1.9 million, or 2029 percent, over operating income for the same period of 2006. Included in 2007 second quarter operating income were the previously noted $4.3 million net gain on the sale of the specialty esters product line and the $3.5 million goodwill impairment charge. Gross profit increased $2.3$2.8 million, or 1213 percent, driven by improved volume in North America. The improvement more than offset the decline in profitability from sales of biodiesel where margins deteriorated due to a rapid rise in the raw material, soybean oil, used to produce biodiesel. Due to the weaker biodiesel margins, expansion plans have been put on hold and operatingthe Company has notified the State of Illinois that we will not be utilizing the state grant awarded to the Company in 2006. Operating expenses (which include the product line sale gain and the goodwill impairment charge) increased $1.1$0.9 million, or eightsix percent. Quarter-to-quarter comparisons of gross profit by region and total segment operating expenses and operating income follow:

The quarter-to-quarter increase in gross profit for North American operations resulted from improved sales volume. Gross profit increased $2.3$3.1 million, or 1720 percent, on the previously noted 12eight percent improvement in sales volumevolume. In addition, manufacturing

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overhead cost of sales increased just one percent from quarter to quarter, which when coupled with approximately $1.2 millionthe eight percent gain in sales volume resulted in a higher unit (i.e. per pound of lower overhead costs. product sold) profit margin.

Approximately $0.5 millionhalf of the declineincrease in overhead costs related to reduced depreciation expense. In addition, the prior year overhead costs included approximately $0.5 million of costs related to the lockout of hourly employees at the Company’s manufacturing facility in Fieldsboro, New Jersey. The lockout began in January 2006 and ended in May 2006.

European operation’s gross profit increased partially as a result of a $0.4 millionfor European operations resulted from the favorable impact of foreign currency translation. ExcludingThe 11 percent increase in sales volume accounted for the currency translation effect, Europe’sremainder of the gross profit increased $0.2 million, or six percent, from quarter to quarter on sales volume that was unchanged.increase.

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Gross profit for Latin America operations declined 2629 percent between quarters despite sales volume that was up 15two percent. Higher raw material costs, particularly in Mexico, more than offset the effect of the sales volume growth. The Company passes on raw material increases as quickly as it can, but a number of customers are contractually protected for a period of time, generally for a calendar quarter.

Surfactants segment operating expenses for the firstsecond quarter of 2007 increased $1.1$0.9 million, or eightsix percent, over firstsecond quarter 2006 operating expenses. Foreign currency translation accounted for approximately $0.4 million of the quarter-to-quarter change. Operating expenses for the second quarter of 2007 included the $3.5 million Stepan UK goodwill impairment charge. U.S. research and development expenses increased $0.9 million, due to higher research and development ($0.5 million) and marketing expenses ($0.3 million) for North American operations and higher marketing expenses ($0.3 million) for European operations. An increase inbonus, salary and the related fringe benefit expenses accounted for theresulting from higher North American researchyear-over-year headcount and development andincreased bonus provision. U.S. marketing expenses. Higher bad debt expense,expenses increased $0.3 million due to higher bonus and fringe benefit expenses. The foregoing increases were offset by the entering$4.3 million net gain on the sale of a customer into bankruptcy proceedings, accounted for the increase in marketing expense for European operations.specialty esters product line.

Polymers

FirstSecond quarter 2007 net sales for the polymers segment increased $11.0$19.9 million, or 1931 percent, over net sales for the firstsecond quarter of 2006. Higher selling prices and a five14 percent increase in sales volume accounted foreach contributed approximately $7.2$9.3 million and $2.6 million ofto the net sales improvement, respectively.improvement. The favorable effects of foreign currency translation added $1.2$1.3 million to the increase. A quarter-to-quarter comparison of net sales by region is displayed below:

Higher selling prices, due primarily to the pass through of raw material cost increases, and a seven percent increase in sales volume accounted for the North American net sales improvement. Average selling prices were 10 percent higher for the second quarter of 2007 than average selling prices for the same quarter of 2006. Most of the net sales and sales volume growth was generated by the polyols. Polyols sales volume increased 33 percent, while sales volumes for phthalic anhydride and polyurethane systems each fell 13 percent. The increase in sales volume reflected improved end use insulation market conditions for polyols.

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The increase in net sales for European operations resulted from a 4751 percent increase in sales volume, higher selling prices and the previously noted foreign currency translation effect. The higher sales volume reflected gains made throughout 2006 due to a stronger European roofing market and the recovery of business that was lost in 2005 due to competitive pressures. The exit of a competitor also contributed to the sales volume improvement. Excluding the effect of foreign currency exchange, average selling prices increased 2419 percent from quarter to quarter due to strong demand for the Company’s polyol products and to passing through higher raw material costs.

Higher selling prices, due primarily to the pass through of raw material cost increases, accounted for the increase in net sales for North America operations. A more favorable sales mix within the polyurethane systems product line also contributed to the increase in net sales. Average selling prices were nine percent higher for the first quarter of 2007 than average selling prices for the first quarter of 2006. Sales volume dropped two percent from quarter to quarter. First quarter 2007 sales volume for phthalic anhydride was essentially unchanged from the sales volume reported for the first quarter of 2006. Sales volumes for polyols and polyurethane systems fell two percent and 18 percent, respectively, between quarters.

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The increase in net sales for Asia and other regions was due to a 2438 percent increase in average selling prices and a 29 percent increase in sales volume. Most of the selling price increase resulted from passing on raw material cost increases to customers. New business for the Company’s China joint venture led to the sales volume gain.

Polymers second quarter 2007 operating income increased $1.5 million, or 21 percent, from operating income for the same period of 2006. Gross profit increased $1.9 million, or 18 percent, and operating expenses increased $0.4 million, or 10 percent. The 14 percent increase in sales volume drove the improvement in profits. Below are quarter-to-quarter comparisons of gross profit by region and total segment operating expenses and operating income:

For North American operations, higher raw material costs more than offset the effects of the seven percent increase in sales volumes. The continued escalation of raw material costs particularly hurt polyol profit margins. Second quarter 2007 average polyol raw material costs were up about 24 percent over raw material costs for the second quarter of 2006. Despite a 33 percent quarter-to-quarter increase in sales volume, polyols gross profit fell $0.4 million, or five percent. To combat the impact of the persistent rising raw material costs, the Company has announced North America polyol price increases that take effect on July 1, 2007.

The significant quarter-to-quarter increase in gross profit for European operations reflected the previously noted increases in polyol selling prices and sales volume. The Company expects strong demand to continue for its polyol product, while rising material costs may adversely affect profit margins.

The $0.1 million decline in gross profit for Asia and other regions was principally attributable to increased raw material costs.

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Polymer segment operating expenses for the second quarter of 2007 were $0.4 million, or 10 percent, higher than operating expenses for the second quarter of 2006. Higher research and development expenses in North America, increased marketing expenses in Europe and the effects of foreign currency translation accounted for the rise in operating expenses.

Specialty Products

Net sales for the second quarter of 2007 were $0.5 million, or seven percent, higher than net sales for the same period of 2006. Increased sales volumes for flavoring and food ingredient products led to the improved net sales. Operating income remained essentially unchanged from quarter to quarter. A lower sales volume of the higher margin pharmaceutical products offset the effect of the higher food and flavoring sales volumes.

Corporate Expenses

Corporate expenses, which comprise corporate operating expenses (including legal and environmental expenses) that are not allocated to the reportable segments, declined $0.2 million, or two percent, to $8.0 million for the second quarter of 2007 from $8.2 million for the second quarter of 2006. The following table depicts the major items that accounted for the quarter-to-quarter corporate expense decline:

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Six Months Ended June 30, 2007 and 2006

Summary

Net income for the first half of 2007 increased 70 percent to $10.4 million, or $1.03 per diluted share, from $6.1 million, or $0.62 per diluted share, for the first half of 2006. Operating income increased $7.9 million, or 60 percent. The previously discussed $4.3 million net gain on the sale of the specialty esters product line and the $3.5 million Stepan UK goodwill impairment charge were included in 2007 operating income. All three segments contributed to the improvement in consolidated operating income. In addition, compensation expense related to the Company’s deferred compensation plans fell $1.9 million between years, primarily due to a decline in the Company’s common stock price for the six months ended June 30, 2007, compared to an increase in stock price for the same period of 2006. 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 2007 follows the summary.

Consolidated net sales for the first half of 2007 were $67.5 million, or 12 percent, higher than consolidated net sales for the first half of 2006. All reportable segments reported net sales increases. A nine percent increase in sales volume, the favorable effects of currency translation, and higher average selling prices accounted for approximately $50.8 million, $13.1 million, and $3.6 million, respectively, of the net sales increase. All reportable segments posted higher year-over-year sales volumes.

Operating income for the first half of 2007 was $7.9 million, or 60 percent, greater than operating income for the same half of 2006. The $4.3 million net gain on the sale of the specialty esters product line and the $3.5 million goodwill impairment charge were included in 2007 operating income. Gross profit improved $7.5 million, or 11 percent, and operating expenses declined $0.4 million, or one percent. All three segments reported higher year-over-year gross profit, with surfactants contributing $5.1 million of the overall improvement on higher sales volumes and slightly better profit margins. Gross profit for the polymers segment was up year-to-year due to higher sales volume, but increased raw material costs somewhat tempered the results. Gross profit for the specialty products segment was up due to higher sales volume.

The one percent decline in operating expenses resulted from the $4.3 million gain on the sale of the specialty esters product line and a $1.7 million (eight percent) decrease in administrative expenses, partially offset by the $3.5 million goodwill impairment charge, a $1.1 million (eight percent) increase in research and development expenses and a $1.0 million (six percent) increase in marketing expenses. Deferred compensation expenses fell $1.9 million between years, which accounted for the reduced administrative expenses. Higher salary, bonus and fringe benefit expenses led to the increases the research and development and marketing expense increases.

Other expense increased $0.9 million, or 21 percent, between years. Interest expense increased $0.6 million, or 14 percent, due to higher average debt levels precipitated by increased working capital needs. Other, net, which includes foreign exchange gains and losses and investment related income and expense, was $0.5 million of expense for the first half of 2007 compared to $0.2 million of expense for the same period of 2006. Foreign exchange losses were up $0.4 million from year to year, while investment income was up $0.1 million for the same period.

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The effective tax rate was 33.5 percent for the first half of 2007 compared to 29.4 percent for the same period of 2006. The increase was attributable to the goodwill impairment charge of $3.5 million, which is not tax deductible. Partially offsetting this increase was a $0.7 million reduction in the German valuation allowance based on recent and forecast improvement in the German taxable income. As a result, 100 percent of the remaining German tax loss carryforward has been recognized.

Segment Results

Surfactants

Surfactants net sales for the first half of 2007 increased $34.9 million, or eight percent, over net sales for the first half of 2006. Higher sales volume and the favorable effects of foreign currency translations accounted for approximately $38.4 million and $10.5 million, respectively, of the year-to-year change. Average selling prices dropped three percent between years due to a higher mix of toll processing volume in which customers supplied the raw material for conversion into finished product. A year-to-year comparison of net sales by region follows:

The three percent increase in net sales for North American operations was driven entirely by a 10 percent growth in sales volume. A six percent decline in average selling prices partially offset the effect of the sales volume improvement. U.S. sales volume increased 12 percent between years primarily due to improvement in the commodity laundry and personal care product lines. In addition, sales volume for biodiesel products, which accounted for seven percent of U.S. surfactants sales volume, grew 24 percent year to year. In general, the additional commodity

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laundry, personal care and biodiesel sales volumes carried lower selling prices or toll fees than the remainder of the U.S. sales volumes, which led to the six percent drop in average selling prices.

For European operations, foreign currency translation, a five percent growth in sales volume and a three percent improvement in average selling prices accounted for $9.0 million, $4.5 million and $3.4 million, respectively, of the year-to-year net sales increase. The foreign currency translation effect resulted from the strengthening of the European euro and the British pound sterling against the U.S. dollar. Excluding the effect of currency translation, net sales for the Europe region grew eight percent. A more favorable mix of sales coupled with increased selling prices, particularly for the region’s United Kingdom operation, led to the higher average selling prices.

The increase in net sales for the Latin America region was attributable to a nine percent growth in sales volume and a seven percent increase in average selling prices. All three Latin America subsidiaries reported higher net sales. Growth in fabric softener sales and surfactants for the agricultural market in Brazil drove the sales volume gain. Price increases necessitated by higher raw material costs and a more favorable mix of sales led to the increase in average selling prices.

Surfactants operating income for the first half of 2007 was up $3.0 million, or 25 percent, higher than operating income for the first half of 2006. Included in 2007 operating income were the previously noted $4.3 million net gain on the sale of the specialty esters product line and the $3.5 million goodwill impairment charge. Gross profit increased $5.1 million, or 13 percent, and operating expenses (including the product line sale gain and goodwill improvement) increased $2.1 million, or seven percent. Year-to-year comparisons of gross profit by region and total segment operating expenses and operating income follow: