Disclosed herein is an improved process for producing sulfonated lignin surfactants for use as dispersants for disperse dyes and vat dyes. The improved process is to react a sulfonated lignin and epihalohydrin under certain conditions to block a portion of the free-phenolic hydroxyl group and at the same time cross-link the lignin molecules to increase the molecular weight. Another aspect of the process of this invention is to oxidize the thus treated lignin to stabilize its properties. Dispersants made according to this process have improved fiber staining and heat stability properties over other lignin-based dispersants.