UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                -----------------
                                    FORM 10-K
                                -----------------

(Mark One)

|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2005
                                       OR

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

           For the transition period from ___________ to ___________.

                         Commission file number: 1-13648
                    -----------------------------------------

                               Balchem Corporation
             (Exact name of Registrant as specified in its charter)

Maryland                                 13-2578432
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
incorporation or organization)

                       P.O. Box 600, New Hampton, NY 10958
               (Address of principal executive offices) (Zip Code)
       Registrant's telephone number, including area code: (845) 326-5600

           Securities registered pursuant to Section 12(b) of the Act:

Title of each class                 Name of each exchange on which registered
Common Stock, par value             American Stock Exchange
$.06-2/3 per share

        Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Registrant is a well-known  seasoned  issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|

Indicate by check mark  whether the  Registrant  is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|

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 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 if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

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|

<PAGE>

The aggregate  market value of the common stock issued and  outstanding and held
by non-affiliates of the Registrant, based upon the closing price for the common
stock  on the  American  Stock  Exchange  on June  30,  2005  was  approximately
$228,426,000. For purposes of this calculation, shares of the Registrant held by
directors   and  officers  of  the   Registrant   and  under  the   Registrant's
401(k)/profit sharing plan have been excluded.

The number of shares outstanding of the Registrant's common stock was 11,646,731
as of March 1, 2006.

                       DOCUMENTS INCORPORATED BY REFERENCE

Selected portions of the Registrant's proxy statement for its 2006 Annual
Meeting of Stockholders (the "2006 Proxy Statement") are incorporated by
reference in Part III of this Report.

<PAGE>

                                     Part I

Item 1. Business

General:

      Balchem  Corporation  ("Balchem" or the  "Company"),  incorporated  in the
State of  Maryland  in 1967,  is engaged  in the  development,  manufacture  and
marketing  of  specialty  performance  ingredients  and  products  for the food,
nutritional,  feed,  pharmaceutical and medical  sterilization  industries.  The
Company has three  segments:  specialty  products,  encapsulated  /  nutritional
products and the  unencapsulated  feed supplements  segment (also referred to in
this report as "BCP Ingredients" or "BCP").  Products relating to choline animal
feed for non-ruminant  animals are primarily reported in the unencapsulated feed
supplements segment.  Human choline nutrient products and encapsulated  products
are  reported in the  encapsulated  /  nutritional  products  segment.  Chelated
products,  nutritional  products  for the  animal  health  industry,  as well as
calcium carbonate products for the pharmaceutical  industry are also reported in
the encapsulated / nutritional products segment.

      The Company  sells its products  through its own sales force,  independent
distributors and sales agents.  Financial  information  concerning the Company's
business,  business segments and geographic  information appears in the Notes to
our  Consolidated  Financial  Statements  included  under  Item 8  below,  which
information is incorporated herein by reference.

      The Company operates three  subsidiaries,  all of which are  wholly-owned:
BCP Ingredients,  Inc., a Delaware  corporation;  Balchem  Minerals  Corporation
("BMC"), a Delaware  corporation;  and Chelated Minerals  Corporation ("CMC"), a
Utah corporation. Unless otherwise stated to the contrary, or unless the context
otherwise  requires,  references to the Company in this report includes  Balchem
and subsidiaries.

Encapsulated / Nutritional Products
-----------------------------------

      The    encapsulated    /    nutritional    products    segment    provides
microencapsulation  and agglomeration  solutions to a variety of applications in
food,  pharmaceutical  and  nutritional  ingredients  to enhance  performance of
nutritional  fortification,   processing,  mixing,  packaging  applications  and
shelf-life.  Major product applications are baked goods, refrigerated and frozen
dough systems,  processed  meats,  seasoning  blends,  confections,  nutritional
supplements and animal  nutrition.  We also market human grade choline  nutrient
products  through this industry  segment for wellness  applications.  Choline is
recognized  to play a key role in the  structural  integrity of cell  membranes,
processing dietary fat, reproductive  development and neural functions,  such as
memory and muscle function.  Balchem's portfolio of granulated calcium carbonate
products are primarily used in, or in conjunction  with, novel  over-the-counter
and  prescription  pharmaceuticals  for the treatment of  osteoporosis,  gastric
disorders and calcium deficiencies in the United States.

      In the animal health industries,  Balchem markets REASHURE(R)  Choline, an
encapsulated   choline  product  that  boosts  health  and  milk  production  in
transition and early lactation cows. Commercial sales are currently derived from
the dairy industry where REASHURE(R)  delivers nutrient supplements that survive
the rumen and are biologically available,  providing required nutritional levels
to dairy cows during  certain weeks  preceding and following  calving,  commonly
referred to as the  "transition  period" of the animal.  Also marketed in animal
health is NITROSHURETM, an encapsulated urea supplement for lactating dairy cows
that is  designed  to  create a  slow-release  nitrogen  source  for the  rumen,
allowing for greater  flexibility  in feed rations for dairy  nutritionists  and
producers, and NIASHURETM,  our microencapsulated niacin product for dairy cows.
In  addition,   CMC  manufactures,   sells  and  distributes   chelated  mineral
supplements  for use in animal  feed  industries  throughout  the  world.  CMC's
proprietary  chelation  technology  provides  enhanced  nutrient  absorption for
various species of domestic and companion animals.


                                       1
<PAGE>

Specialty Products
------------------

      The specialty  products  segment  repackages and distributes the following
specialty gases:  ethylene oxide, blends of ethylene oxide,  propylene oxide and
methyl chloride.

      Ethylene oxide,  at the 100% level, is sold as a sterilant gas,  primarily
for use in the health  care  industry.  It is used to  sterilize a wide range of
medical devices because of its versatility and effectiveness in treating hard or
soft  surfaces,  composites,  metals,  tubing and  different  types of  plastics
without  negatively  impacting the performance or appearance of the device being
sterilized.  The Company's  100% ethylene  oxide product is  distributed  by the
Company in uniquely designed,  recyclable double-walled stainless steel drums to
assure compliance with safety,  quality and environmental  standards as outlined
by the U.S. Environmental  Protection Agency (the "EPA") and the U.S. Department
of Transportation. The Company's inventory of these specially built drums, along
with the Company's  three filling  facilities,  represent a significant  capital
investment. Contract sterilizers,  medical device manufacturers, and medical gas
distributors  are the  Company's  principal  customers  for this  product.  As a
fumigant,  ethylene  oxide blends and  propylene  oxide are highly  effective in
killing bacteria, fungi, and insects in spices and other seasoning materials. In
addition,  the Company also sells single use canisters  with 100% ethylene oxide
for use in medical device sterilization.

      We  sell  two  other  products,   propylene  oxide  and  methyl  chloride,
principally to customers  seeking smaller (as opposed to bulk)  quantities whose
requirements include timely delivery and safe handling.  Propylene oxide is used
for   fumigation  in  spice   treatment  and  in  various   chemical   synthesis
applications.  It is also  utilized in  manufacturing  operations to make paints
more durable,  and for  manufacturing  specialty  starches and textile coatings.
Methyl chloride is used as a raw material in specialty  herbicides,  fertilizers
and pharmaceuticals, as well as in malt and wine preservers.

      Our specialty products segment operates as ARC Specialty Products.

BCP Ingredients
---------------

      This segment  manufactures  and supplies  choline  chloride,  an essential
nutrient for animal health,  predominantly to the poultry and swine  industries.
Choline  plays  a vital  role in the  metabolism  of fat  and the  building  and
maintaining of cell  structures.  Choline  deficiency can result in, among other
symptoms,  reduced  growth  and  perosis in  poultry,  and fatty  liver,  kidney
necrosis  and general  poor health  condition  in swine.  In  addition,  certain
derivatives of choline  chloride are also  manufactured and sold into industrial
applications.  Choline  chloride is manufactured and sold in both an aqueous and
dry  form  and is sold  through  the  Company's  own  sales  force,  independent
distributors and sales agents.

Recent Developments
-------------------

      On November 7, 2005,  the Company  entered into a license  agreement  (the
"License  Agreement") with Project Management and Development Co., Ltd. ("PMD"),
a corporation  organized under the laws of Great Britain.  The License Agreement
gives  PMD  the  right  to  utilize   the   Company's   proprietary   continuous
manufacturing   technology  for  the  production  of  aqueous  choline  chloride
("Company Technology") in connection with PMD's construction and operation of an
aqueous choline chloride  production  facility at PMD's Al-JuBail,  Saudi Arabia
petrochemical facility, currently scheduled for completion in 2008.

      The License Agreement provides PMD with the exclusive right to use Company
Technology in certain countries,  as well as the non-exclusive  right to market,
sell and use the products derived from Company Technology on a world-wide basis.
The License  Agreement further provides that the Company will be PMD's exclusive
North American  distributor  for said products during the term of the agreement.
The License Agreement  terminates either 10 years from the start-up of the PMD's
production facility or December 31, 2020, whichever is earlier.


                                       2
<PAGE>

      Pursuant to the License Agreement,  PMD will pay the Company a license fee
of  $1,400,000  and fees of $840,000  for the delivery by the Company of certain
preliminary  drawings,  specifications,   process  design  documents  containing
Company  Technology,  and  additional  training.  These  fees  are to be paid in
installments upon achievement of certain performance milestones set forth in the
License Agreement.

      The Company will provide certain  performance  guarantees  associated with
Company  Technology.  In the  event  that  the PMD  manufacturing  facility,  if
properly designed and constructed,  fails to attain said performance guarantees,
liquidated damages may be assessed, but not exceeding 70% of the license fee.

      On February 8, 2006, the Company, through BMC, completed an acquisition of
all of the outstanding capital stock of Chelated Minerals Corporation ("CMC"), a
privately held Utah corporation,  for a purchase price of $17,350,000 subject to
adjustment based upon CMC's actual working capital and other adjustments.

      On February 6, 2006, the Company and its principal bank entered into a new
Loan  Agreement  (the  "New  Loan  Agreement")  providing  for a  term  loan  of
$10,000,000  (the "Term Loan"),  the proceeds of which were used to fund the CMC
acquisition,  in part.  The remaining  balance of the purchase  price of the CMC
acquisition was funded through  Balchem's cash on hand. The Term Loan is payable
in equal monthly installments of principal,  together with accrued interest, and
has a maturity  date of March 1, 2009.  The Term Loan is subject to an  interest
rate  equal  to LIBOR  plus  1.00%.  The  Loan  Agreement  also  provides  for a
short-term   revolving   credit  facility  of  $3,000,000  (the  "New  Revolving
Facility").  Borrowings under the New Revolving  Facility bear interest at LIBOR
plus 1.00%.  No amounts have been drawn on the New Revolving  Facility as of the
date hereof.  The New Revolving Facility expires in February,  2007.  Management
believes that such facility will be renewed in the normal course of business.

Raw Materials:
--------------

      The raw  materials  utilized  by the  Company  in the  manufacture  of its
products  are  generally  available  from a number of  commercial  sources.  The
Company is not experiencing any current difficulties in procuring such materials
and does not anticipate any such  problems;  however,  the Company cannot assure
that will always be the case.

Intellectual Property:
----------------------

      The  Company  currently  holds  a  number  of  patents  and  uses  certain
trade-names and trademarks. It also uses know-how, trade secrets,  formulae, and
manufacturing  techniques  that assist in maintaining  competitive  positions of
certain of its products.  Formulae and know-how are of particular  importance in
the manufacture of a number of the Company's products. The Company believes that
certain of its patents,  in the  aggregate,  are  advantageous  to its business.
However,  it is believed  that no single  patent or related  group of patents is
currently so material to the Company that the  expiration or  termination of any
single patent or group of patents  would  materially  affect its  business.  The
Company believes that its sales and competitive position are dependent primarily
upon the  quality  of its  products,  its  technical  sales  efforts  and market
conditions, rather than on any patent protection.

Licensing:
----------

      As discussed above under "Recent  Developments",  the Company entered into
the License  Agreement with PMD in November 2005 under which the Company granted
to PMD the right to utilize the Company's proprietary  continuous  manufacturing
technology for the  production of aqueous  choline  chloride in connection  with
PMD's  construction  and  operation of an aqueous  choline  chloride  production
facility at PMD's  Al-JuBail,  Saudi Arabia  petrochemical  facility,  currently
scheduled for completion in 2008.

      As discussed below under "Environmental  Matters" the Company's ability to
sell ethylene oxide is dependent upon maintaining registration with the EPA as a
medical device sterilant and spice fumigant. In


                                       3
<PAGE>

addition,  certain of the Company's  encapsulated and choline products must meet
state  licensing  requirements  prior to sales in  certain  states  and  foreign
countries.

Seasonality:
------------

      In general,  the business of the Company's segments is not seasonal to any
material extent.

Backlog:
--------

      At  December  31,  2005,  the Company  had a total  backlog of  $2,688,000
(including  $1,794,000  for the  encapsulated  / nutritional  products  segment,
$548,000 for the specialty  products segment and $346,000 for BCP  Ingredients),
as compared to a total  backlog of  $2,027,000  at December 31, 2004  (including
$807,000 for the encapsulated / nutritional  products segment,  $812,000 for the
specialty products segment and $408,000 for the BCP Ingredients segment). It has
generally  been the  Company's  policy and  practice to maintain an inventory of
finished products and / or component  materials for its segments to enable it to
ship products within a short time after receipt of a product order.

Competition:
------------

      The Company's competitors include many large and small companies,  some of
which have greater  financial,  research and  development,  production and other
resources than the Company.  Competition in the encapsulation  markets served by
the  Company is based  primarily  on  performance,  customer  support,  quality,
service and price. The development of new and improved  products is important to
the  Company's  success.  This  competitive   environment  requires  substantial
investments in product and  manufacturing  process research and development.  In
addition,  the winning and  retention of customer  acceptance  of the  Company's
encapsulated  products involve substantial  expenditures for application testing
and sales efforts.  The Company also engages  various  universities to assist in
research and provide independent third-party analysis. In the specialty products
business,   the  Company  faces   competition   from   alternative   sterilizing
technologies and products.  Competition in the animal feed markets served by the
Company is based primarily on service and price.

Research & Development:
-----------------------

      During the years  ended  December  31,  2005,  2004 and 2003,  the Company
incurred research and development  expense of approximately  $2.1 million,  $1.8
million  and $2.1  million,  respectively,  on  Company-sponsored  research  and
development  for  new  products  and  improvements  to  existing   products  and
manufacturing processes,  principally in the encapsulated / nutritional products
segment.  During the year ended  December 31,  2005,  an average of 15 employees
were devoted full time to research and development  activities.  The Company has
historically  funded its research and development  programs with funds available
from current  operations with the intent of recovering  those costs from profits
derived  from  future  sales of products  resulting  from,  or enhanced  by, the
research and development effort.

      The Company prioritizes its product development activities in an effort to
allocate its resources to those  product  candidates  that the Company  believes
have the greatest  commercial  potential.  Factors  considered by the Company in
determining the products to pursue include projected  markets and needs,  status
of its proprietary  rights,  technical  feasibility,  expected and known product
attributes, and estimated costs to bring the product to market.

Capital Projects:
-----------------

      Capital expenditures were approximately $1.8 million for 2005, compared to
$1.2 million in 2004.  Excluding  property,  plant and equipment acquired in the
CMC acquisition  described in Note 13 in our Consolidated  Financial Statements,
capital expenditures are projected to be approximately $2.3 million for 2006.


                                       4
<PAGE>

Environmental / Regulatory Matters:
-----------------------------------

      The Federal  Insecticide,  Fungicide and  Rodenticide  Act  ("FIFRA"),  as
amended, a health and safety statute,  requires that certain products within the
Company's  specialty  products  segment must be registered  with the EPA because
they are considered pesticides. In order to obtain a registration,  an applicant
typically must demonstrate through extensive test data that its product will not
cause unreasonable adverse effects on the environment.  The Company holds an EPA
registration  permitting it to sell ethylene oxide as a medical device sterilant
and spice  fumigant.  The  Company  is in the  process  of  re-registering  this
product's  use in compliance  with FIFRA  re-registration  requirements  for all
pesticide products. In December 2004, the EPA informed the Company and the other
technical  registrant  under  the  current  registration  that  the  Agency  was
beginning the 6-phase process to develop a Re-registration  Eligibility Decision
(RED) for this  product.  The EPA intends to finalize  the RED by August 2006 in
accordance  with the  statutory  mandate of the Food Quality  Protection  Act of
1996.  This  multi-phase  process has recently  entered Phase 5, and the EPA has
stated that they still intend to finalize the process by the statutory deadline.
The Company has actively participated in the RED process and will continue to do
so until its conclusion.  As of this date, the EPA has expressed  concerns about
dietary  exposures to a reaction product,  as well as occupational  exposures to
the product itself. The EPA requested  additional  information from the industry
which the Company  will be  actively  involved  in  providing.  The EPA has also
indicated  that  additional  testing may be  required  in order to maintain  the
current uses.  The Company  believes that the use will continue to be permitted,
although  the Agency may require  some  additional  restrictions  on the current
uses. Additionally, the product, when used as a medical device sterilant, has no
known equally effective substitute.  Management believes absence of availability
of this  product  could  not be  easily  tolerated  by  various  medical  device
manufacturers  and the  health  care  industry  due to the  resultant  infection
potential, if the product were unavailable.

      Under   California's   Proposition  65  (Safe  Drinking  Water  and  Toxic
Enforcement  Act of 1986),  100%  ethylene  oxide,  when used as a sterilant  or
fumigant,  is listed by the State of California as a carcinogen and reproductive
toxin. As a result,  the Company is required to provide a prescribed  warning to
any person in California who may be exposed to this product.  Failure to provide
such  warning  would  result in  liability  of up to $2,500  per day per  person
exposed.

      The Company's facility in Verona,  Missouri,  while held by a prior owner,
was  designated  by the EPA as a  Superfund  site  and  placed  on the  National
Priorities  List in 1983,  because of dioxin  contamination  on  portions of the
site.  Remediation  conducted by the prior owner under the  oversight of the EPA
and the Missouri  Department of Natural  Resources  ("MDNR") included removal of
dioxin   contaminated   soil  and  equipment,   capping  of  areas  of  residual
contamination  in four  relatively  small  areas of the site  separate  from the
manufacturing  facilities,  and the installation of wells to monitor groundwater
and surface water  contamination for certain organic chemicals.  No ground water
or surface water treatment was required.  The Company  believes that remediation
of the site is complete. In 1998, the EPA certified the work on the contaminated
soils to be complete.  In February  2000,  after the  conclusion of two years of
monitoring  groundwater  and surface water,  the former owner  submitted a draft
third party risk assessment  report to the EPA and MDNR  recommending no further
action.  The prior  owner is  awaiting  the  response of the EPA and MDNR to the
draft risk assessment.

      While the Company must  maintain the  integrity of the capped areas in the
remediation  areas on the site, the prior owner is responsible for completion of
any further  Superfund  remedy.  The Company is indemnified by the sellers under
its May 2001 asset  purchase  agreement  covering its  acquisition of the Verona
facility for potential liabilities associated with the Superfund site and one of
the sellers, in turn, has the benefit of certain contractual  indemnification by
the prior owner that implemented the above-described Superfund remedy.

      In connection with normal operations at its plant facilities,  the Company
is required to maintain environmental and other permits including those relating
to ethylene oxide operations.


                                       5
<PAGE>

The Company believes it is in compliance in all material  respects with federal,
state,  and local  provisions  that have been enacted or adopted  regulating the
discharge  of  materials  into the  environment  or  otherwise  relating  to the
protection of the  environment.  Such  compliance  includes the  maintenance  of
required   permits  under  air  pollution   regulations   and  compliance   with
requirements of the Occupational Safety and Health  Administration.  The cost of
such  compliance has not had a material effect upon the results of operations or
financial condition of the Company. The New York State environmental  regulatory
proceeding referred to in Item 3 below has been substantially completed.

Employees:
----------

      As of March 1, 2006,  the  Company  employed  approximately  200  persons.
Approximately  50  employees  at the  Company's  Verona,  Missouri  facility are
covered by a collective bargaining agreement which expires in 2007.

Item 1A. Risk Factors

      This Report contains  "forward-looking  statements"  within the meaning of
Section 21E of the  Securities  Exchange Act of 1934, as amended,  which reflect
our  expectation  or belief  concerning  future  events that  involve  risks and
uncertainties.  We can  not  assure  you  that  the  expectations  reflected  in
forward-looking  statements  will prove  correct.  Various  factors  could cause
results to differ materially from our expectations, such as:

      o     changes in laws or regulations affecting our operations;

      o     changes in our business tactics or strategies;

      o     acquisitions of new or complementary operations;

      o     sales of any of our existing operations;

      o     changing market forces or  contingencies  that  necessitate,  in our
            judgment, changes in our plans, strategy or tactics; and

      o     fluctuations  in the  investment  markets or interest  rates,  which
            might materially affect our operations or financial condition.

      In addition,  the following matters,  and all forward-looking  statements,
are qualified in their entirety by these cautionary statements:

      Increased competition would hurt our business and financial results.

      We face  competition  in our  markets  from a number  of large  and  small
companies,  some of which have  greater  financial,  research  and  development,
production  and other  resources than we do. Our  competitive  position is based
principally on  performance,  quality,  customer  support,  service,  breadth of
product line,  manufacturing  or packaging  technology and the selling prices of
our  products.  Our  competitors  can be  expected  to  improve  the  design and
performance  of their  products and to introduce new products  with  competitive
price and performance  characteristics.  We may not have sufficient resources to
maintain our current competitive position or market share.

      One of our customers  accounts for about 10% of our business;  the loss of
that customer could adversely impact our business and financial results.

      Due to consolidation of customer businesses in the contract  sterilization
industry,  we  have  one  specialty  products  customer,   which  accounted  for
approximately 9% and 11% of our net sales in 2005 and 2004,  respectively.  This
customer  accounted  for 8% and 10% of our  accounts  receivable  net balance at
December 31, 2005 and 2004, respectively. The loss of this customer could have a
material adverse effect on our business and financial results.


                                       6
<PAGE>

      The loss of governmental  permits and approvals would materially harm some
of our businesses.

      Pursuant to applicable  environmental and safety laws and regulations,  we
are required to obtain and maintain certain  governmental permits and approvals,
including an EPA  registration  for our ethylene  oxide  sterilant  product.  We
maintain an EPA registration of ethylene oxide as a medical device sterilant and
fumicide.  We are in the process of  re-registering  this product in  accordance
with  FIFRA.  There  is  no  guaranty  that  the  EPA  will  continue  to  allow
registration of ethylene oxide for the uses mentioned  above. The failure of the
EPA to allow  re-registration  of ethylene  oxide would have a material  adverse
impact on our business.

      Our Channahon,  Illinois  manufacturing  facility manufactures our calcium
carbonate line of pharmaceutical  ingredients.  This facility is registered with
the United States Food and Drug  Administration  ("FDA") as a drug manufacturing
facility.  These products also must be  manufactured  in conformity with current
Good  Manufacturing  Practice (cGMP)  regulations as interpreted and enforced by
the FDA. Modifications,  enhancements or changes in manufacturing  facilities or
procedures of our pharmaceutical products are, in many circumstances, subject to
FDA approval,  which may be subject to a lengthy application process or which we
may be unable to obtain. Our Channahon,  Illinois facility,  as well as those of
any third-party cGMP manufacturers that we may use, are periodically  subject to
inspection by the FDA and other governmental  agencies,  and operations at these
facilities  could be interrupted  or halted if the results of these  inspections
are unsatisfactory. Failure to comply with FDA or other governmental regulations
can result in fines, unanticipated compliance expenditures, recall or seizure of
products,  total or  partial  suspension  of  production,  enforcement  actions,
injunctions and criminal prosecution.

      Permits and approvals may be subject to revocation, modification or denial
under certain circumstances.  Our operations or activities (including the status
of  compliance  by the  prior  owner  of the  Verona,  Missouri  facility  under
Superfund  remediation)  could  result in  administrative  or  private  actions,
revocation  of required  permits or  licenses,  or fines,  penalties or damages,
which could have an adverse  effect on us. In  addition,  we can not predict the
extent to which any  legislation  or  regulation  may  affect the market for our
products or our cost of doing business.

      Raw  material  shortages or price  increases  would  adversely  affect our
business and financial results.

      The principal raw materials that we use in the manufacture of our products
can be subject to price  fluctuations.  While the selling prices of our products
tend to  increase or decrease  over time with the cost of raw  materials,  these
changes may not occur  simultaneously or to the same degree. At times, we may be
unable to pass  increases in raw material  costs through to our customers in the
form of price increases.  Increases in the price of raw materials, if not offset
by product price increases,  would have an adverse impact on our  profitability.
We are not experiencing any current  difficulties in procuring raw materials and
we do not anticipate any such problems. However, we can not assure you that this
will always be the case.

      Our financial  success  depends in part on the reliability and sufficiency
of our manufacturing facilities.

      Our  revenues  depend on the  continued  operation  of our  manufacturing,
packaging,  and processing facilities.  The operation of our facilities involves
risks,  including  the  breakdown,   failure,  or  substandard   performance  of
equipment, power outages, the improper installation,  or operation of equipment,
explosions,  fires,  natural disasters and the need to comply with environmental
and other  directives  of  governmental  agencies.  The  occurrence  of material
operational  problems,  including  but not  limited to the above  events,  could
adversely  affect  our  profitability  during  the  period  of such  operational
difficulties.


                                       7
<PAGE>

      Our failure or inability to protect our  intellectual  property could harm
our business and financial results.

      We hold 15 patents in the United States and  overseas,  as well as utilize
certain  unpatented  trade  secrets.  Third  parties  could  seek to  challenge,
invalidate or circumvent our patents. Moreover, there could be successful claims
against us alleging that we infringe the intellectual property rights of others.
If we are unable to protect all of our intellectual  property  rights,  or if we
are found to be infringing the  intellectual  property  rights of others,  there
could  be  an  adverse  effect  on  our  business  and  financial  results.  Our
competitive position also depends on unpatented trade secrets. Competitors could
independently develop substantially  equivalent proprietary  information,  which
could hurt our business and financial results.

      We face risks  associated  with our sales to customers  outside the United
States.

      For the year ended  December 31, 2005,  approximately  7% of our net sales
consisted of sales outside the United States, predominately to Europe, Japan and
Mexico. Such sales are generally denominated in U.S. Dollars at a specific price
per unit.  Changes in the relative  values of currencies take place from time to
time and could in the future  adversely  affect  prices  foreign  customers  are
willing to pay for our products. In addition, international sales are subject to
other inherent risks,  including possible labor unrest,  political  instability,
export duties and quotas.  These factors could have a material adverse impact on
our ability to increase or maintain our international sales.

      Our success depends in large part on our key personnel.

      Our operations significantly depend on the continued efforts of our senior
executives.  The loss of the  services  of certain  executives  for an  extended
period  of time  could  have a  material  adverse  effect  on our  business  and
financial results.

      Litigation  can be  costly  and can  adversely  affect  our  business  and
financial results.

      We, like all companies involved in the food and pharmaceutical industries,
are subject to potential claims for product liability  relating to our products.
Such claims,  irrespective of their outcomes or merits,  could be time-consuming
and expensive to defend,  and could result in the  diversion of management  time
and attention.  Any of these  situations could have a material adverse effect on
our business and financial  results.  It is possible  that an adverse  result in
Casey  Liesse,  et al. v. AGA AB, et al.  (please  see Item 3 of the  Report) or
other legal proceedings commenced against us could have a negative impact on our
financial condition or liquidity.

      If we are unable to increase  sales to the  pharmaceutical  industry,  our
future growth could be limited.

      A significant part of our future growth depends on our ability to increase
the sales of our current pharmaceutical product line, as well as the development
of new products for use in the pharmaceutical industry. Our inability to execute
this strategy could have an adverse effect on our future rate of growth.

Available Information:
----------------------

      The Company's  Internet  website address is  www.balchem.com.  The Company
makes available through its website,  free of charge, its Annual Reports on Form
10-K,  Quarterly  Reports  on Form 10-Q and  Current  Reports  on Form 8-K,  and
amendments to such reports,  as soon as reasonably  practicable  after they have
been  electronically  filed with the  Securities and Exchange  Commission.  Such
reports  are  available  via a link from the  Investor  Information  page on the
Company's  website  to a list of the  Company's  reports on the  Securities  and
Exchange Commission's Edgar website.


                                       8
<PAGE>

Item 1B. Unresolved Staff Comments

      None.

Item 2. Properties

      In  February  2002,  the  Company  entered  into a ten (10) year lease for
approximately  20,000 square feet of office space in New Hampton,  New York. The
office  space is serving as the  Company's  general  offices  and as  laboratory
facilities for the Company's encapsulated / nutritional products business.

      Manufacturing  facilities  owned  by  the  Company  for  its  encapsulated
products  segment  and a  blending,  drumming  and  terminal  facility  for  the
Company's  ethylene  oxide  business,  are presently  housed in three  buildings
located in Slate  Hill,  New York  comprising  a total of  approximately  51,000
square feet. The Company owns a total of  approximately  16 acres of land on two
parcels in this community.

      The  Company  also owns a  facility  located on an  approximately  24 acre
parcel of land in Green Pond,  South  Carolina.  The site consists of a drumming
facility,  a canister  filling  facility,  a maintenance  building and an office
building.  The Company uses this site for  processing  products in its specialty
products segment.  The Green Pond site comprises a total of approximately 34,000
square feet.

      The Verona,  Missouri site, which is located on  approximately  100 acres,
consists of  manufacturing  facilities  relating to choline  animal feed,  human
choline  nutrients,  and a drumming  facility for the Company's  ethylene  oxide
business,  together with buildings  utilized for warehousing such products.  The
Verona  site  comprises  a total  of  approximately  151,000  square  feet.  The
facility,  while under prior ownership, was designated by the EPA as a Superfund
site  as  noted  in  the  previous  discussion  under  Item 1  "Environmental  /
Regulatory Matters."

      The Company leases  production and warehouse space in Channahon,  Illinois
as a result  of the June 30,  2005  acquisition  of  certain  assets  of  Loders
Croklaan  USA,  LLC,  as  described  in  Note  4 to our  Consolidated  Financial
Statements.  The  Company  uses this  facility  for  production  related  to the
Company's  pharmaceutical  line of  business.  The initial  term of the lease is
effective through September 30, 2010, subject to earlier  termination by Balchem
upon sixty (60) days notice,  or by the  landlord,  upon sixty (60) days notice,
but only in the event the landlord no longer is required to maintain its Title V
Air  Permit,  issued  by the  United  States  Environmental  Protection  Agency,
applicable to the landlord's  entire  operation at its  manufacturing  facility,
adjacent to Balchem's leased facility.  The Company's leased space in Channahon,
Illinois totals approximately 26,000 square feet.

      The Company,  through CMC,  owns a  manufacturing  facility and  warehouse
located upon  approximately  5 acres of land in Salt Lake City, Utah as a result
of its acquisition of Chelated Minerals Corporation  described in Note 13 to our
Consolidated Financial Statements.  The Company manufactures and distributes its
chelated  mineral  nutrients  for animal  feed  products at this  location.  The
Company's  buildings in Salt Lake City,  Utah comprise a total of  approximately
16,500 square feet.

Item 3. Legal Proceedings

      In 1982 the Company  discovered and thereafter  removed a number of buried
drums  containing  unidentified  waste material from the Company's site in Slate
Hill, New York. The Company thereafter entered into a Consent Decree to evaluate
the drum  site  with  the New  York  Department  of  Environmental  Conservation
("NYDEC")  and  performed  a Remedial  Investigation/Feasibility  Study that was
approved by NYDEC in February  1994.  Based on NYDEC  requirements,  the Company
cleaned the area and removed additional soil from the drum burial site. The cost
for this clean-up and the related reports was approximately  $164,000.  Clean-up
was  completed  in 1996,  but NYDEC  required  the  Company to monitor  the site
through 1999. The Company  continues to be involved in discussions with NYDEC to
evaluate test results and determine  what,  if any,  additional  actions will be
required on the part of the Company to close out the  remediation  of this site.
Additional  actions,  if any,  would  likely  require  the  Company to  continue
monitoring  the site.  The cost of such  monitoring  has recently been less than
$5,000 per year.


                                       9
<PAGE>

      Casey  Liesse,  et al. v. AGA AB, et al.,  Circuit  Court of Cook  County,
Illinois,  Case  No.  02 L  000498,  was  commenced  in  2002  against  over  80
defendants,  among  which is the  Company.  The  action  alleges  that  nineteen
individual  plaintiffs  were exposed to ethylene oxide and other  chemicals used
for sterilizing or cleaning  medical  instruments  during their  employment at a
hospital  in  Harvey,  Illinois.  As a  result  of  the  alleged  exposure,  the
plaintiffs claim they have suffered various physical and psychological injuries.
During the time period plaintiffs  suffered their alleged injuries,  the Company
was in the business of repackaging and distributing  ethylene oxide, among other
products. The Company never sold any product to the hospital but has been joined
due  to  the  fact  that  it  distributed  ethylene  oxide  for  medical  device
sterilization  to other  companies  that blend  ethylene  oxide for sales to the
hospital noted. On February 9, 2006 by way of Order of the aforementioned Court,
Balchem's  Motion for Summary  Judgment,  which  sought  dismissal of all claims
against Balchem, was granted with respect to all claims of negligence,  products
liability and/or conspiracy by Plaintiff against Balchem. While this decision is
subject to appeal,  the ruling  dismisses the Plaintiff's  case in chief against
Balchem.  Balchem is still subject to ancillary  claims of  indemnification  and
contribution  relating to certain other  defendants that were not dismissed from
the matter.

      The Company is also involved in other legal proceedings through the normal
course of business.  Management believes that any unfavorable outcome related to
these  proceedings  will not have a material  effect on the Company's  financial
position, results of operations or liquidity.

Item 4. Submission of Matters to a Vote of Security Holders

      None.

PART II

Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Stockholder
Matters

      (a)   Market Information.

      On December  15, 2005,  the Board of  Directors of the Company  approved a
three-for-two  split of the Company's common stock to be effected in the form of
a stock  dividend to  shareholders  of record on December 30,  2005.  Such stock
dividend  was made on  January  20,  2006.  The stock  split was  recognized  by
reclassifying  the par value of the additional  shares resulting from the split,
from additional paid-in capital to common stock.

      On December  16, 2004,  the Board of  Directors of the Company  approved a
three-for-two  split of the Company's common stock to be effected in the form of
a stock  dividend to  shareholders  of record on December 30,  2004.  Such stock
dividend  was made on  January  20,  2005.  The stock  split was  recognized  by
reclassifying  the par value of the additional  shares resulting from the split,
from additional paid-in capital to common stock.

      All  references to number of common  shares and per share  amounts  except
shares  authorized in the accompanying  consolidated  financial  statements were
retroactively adjusted to reflect the effect of the December 2005 stock split.

      The Company's  common stock is traded on the American Stock Exchange under
the symbol BCP. The high and low closing prices for the common stock as recorded
in the American Stock Exchange Market Statistical Reports for 2005 and 2004, for
each quarterly period during the past two years,  adjusted for the December 2005
and 2004 three-for-two  stock splits (effected by means of stock dividends) were
as follows:


                                       10
<PAGE>

=========================================================
Quarterly Period                     High          Low
---------------------------------------------------------
Ended March 31, 2005               $  16.67      $  14.47
Ended June 30, 2005                   20.05         14.57
Ended September 30, 2005              21.63         17.54
Ended December 31, 2005               19.87         17.34
=========================================================

=========================================================
Quarterly Period                     High          Low
---------------------------------------------------------
Ended March 31, 2004               $  11.94      $  10.00
Ended June 30, 2004                   12.45         10.78
Ended September 30, 2004              13.33         11.96
Ended December 31, 2004               15.51         13.02
=========================================================

      (b)   Record Holders.

      As of March 1, 2006,  the  approximate  number of holders of record of the
Company's common stock was as follows:

               Title of Class              Number of Record Holders
               --------------              ------------------------

      Common Stock, $.06-2/3 par value                194*

      *An unknown  number of  stockholders  hold stock in street name. The total
number of  beneficial  owners of the  Company's  common stock is estimated to be
approximately 5,706.

      (c)   Dividends.

      The Company  declared  cash  dividends of $0.09 and $0.06 per share on its
common  stock  during  its  fiscal  years  ended  December  31,  2005 and  2004,
respectively  (after giving  effect to the December 2005 and 2004  three-for-two
stock splits).

      For information concerning prior stockholder approval of and other matters
relating to our equity  incentive  plans,  see Item 12 in this Annual  Report on
Form 10-K.

Item 6. Selected Financial Data

All dollar amounts are in thousands (other than per share amounts). Earnings per
share  and  dividend   amounts  have  been   adjusted  for  the  December   2005
three-for-two stock split (effected by means of a stock dividend).

<TABLE>
<CAPTION>
                                          (In thousands, except per share data)
========================================================================================
Year ended December 31,        2005(1)(2)    2004(1)     2003(1)     2002(1)     2001(1)
----------------------------------------------------------------------------------------
<S>                             <C>         <C>         <C>         <C>         <C>
Statement of Operations Data
----------------------------
Net sales                       $ 83,095    $ 67,406    $ 61,875    $ 60,197    $ 46,142
Earnings before income
   tax expense                    17,191      12,715       8,763      11,845       8,369
Income tax expense                 6,237       4,689       3,125       4,429       3,259
Net earnings                      10,954       8,026       5,638       7,416       5,110
Basic net earnings per
   common share                 $    .95    $    .71    $    .52    $    .69    $    .49
Diluted net earnings per
   common share                 $    .91    $    .69    $    .50    $    .67    $    .47
----------------------------------------------------------------------------------------
</TABLE>


                                       11
<PAGE>

<TABLE>
<CAPTION>
========================================================================================
At December 31,                   2005        2004        2003        2002        2001
----------------------------------------------------------------------------------------
<S>                             <C>         <C>         <C>         <C>         <C>
Balance Sheet Data
------------------
Total assets                    $ 75,141    $ 60,405    $ 56,906    $ 53,298    $ 44,477

Long-term debt                        --          --       7,839       9,581      11,323
Other long-term
   obligations                     1,043       1,003         985         964         994
Total stockholders' equity        60,933      50,234      39,781      33,269      25,332
Dividends per common share      $    .09    $    .06    $   .035    $   .035    $   .029
========================================================================================
</TABLE>

      (1)   Includes the operating results,  cash flows,  assets and liabilities
            relating to the  acquisition  of certain assets and product lines of
            DCV, Inc. and its affiliate  DuCoa L.P. from the date of acquisition
            (June 1, 2001) forward.

      (2)   Includes the operating  results,  cash flows, and assets relating to
            the  acquisition  of  certain  assets  and  product  lines of Loders
            Croklaan  USA,  LLC  from  the date of  acquisition  (July 1,  2005)
            forward.

Item 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

      This Report  contains  forward-looking  statements,  within the meaning of
Section 21E of the  Securities  Exchange Act of 1934, as amended,  which reflect
the Company's  expectation or belief concerning future events that involve risks
and  uncertainties.  The actions and  performance  of the Company  could  differ
materially from what is contemplated by the forward-looking statements contained
in this Report.  Factors that might cause  differences from the  forward-looking
statements  include those referred to or identified in Item 1A above.  Reference
should be made to such factors and all forward-looking  statements are qualified
in their entirety by the above cautionary statements.

                              RESULTS OF OPERATIONS
                              ---------------------

      Overview
      --------

      The Company  develops,  manufactures,  distributes  and markets  specialty
performance  ingredients  and  products for the food,  pharmaceutical,  feed and
medical  sterilization   industries.   The  Company's  reportable  segments  are
strategic  businesses that offer products and services to different markets. The
Company   presently  has  three   reportable   segments:   specialty   products;
encapsulated / nutritional products; and BCP Ingredients.

      Specialty Products
      ------------------

      The specialty  products  segment  repackages and distributes the following
specialty gases:  ethylene oxide, blends of ethylene oxide,  propylene oxide and
methyl chloride.

      Ethylene oxide,  at the 100% level,  is sold as a chemical  sterilant gas,
primarily for use in the health care  industry and is used to sterilize  medical
devices.  Contract  sterilizers,  medical device  manufacturers  and medical gas
distributors are the Company's principal  customers for this product.  Blends of
ethylene  oxide  are sold as  fumigants  and are  highly  effective  in  killing
bacteria,  fungi,  and insects in spices and other seasoning type materials.  In
addition,  the Company also sells single use canisters  with 100% ethylene oxide
for use in medical device sterilization. Propylene oxide and methyl chloride are
sold principally to customers seeking smaller (as opposed to bulk) quantities.

      Management  believes  that  future  success  in  this  segment  is  highly
dependent  on the  Company's  ability  to  maintain  its strong  reputation  for
excellent quality, safety and customer service.


                                       12
<PAGE>

      Encapsulated / Nutritional Products
      -----------------------------------

      The    encapsulated    /    nutritional    products    segment    provides
microencapsulation  and agglomeration  solutions to a variety of applications in
food,  pharmaceutical  and  nutritional  ingredients  to enhance  performance of
nutritional  fortification,   processing,  mixing,  packaging  applications  and
shelf-life.  Major end product  applications  are baked goods,  refrigerated and
frozen  dough  systems,   processed  meats,   seasoning   blends,   confections,
nutritional  supplementations  and animal nutrition.  We also market human grade
choline   nutrient   products   through  this  industry   segment  for  wellness
applications.  Choline  is  recognized  to  play a key  role  in the  structural
integrity of cell membranes,  processing dietary fat,  reproductive  development
and neural functions, such as memory and muscle function. Balchem's portfolio of
granulated   calcium   carbonate   products   are   primarily   used  in   novel
over-the-counter   and  prescription   pharmaceuticals   for  the  treatment  of
osteoporosis, gastric disorders and calcium deficiencies in the United States.

      Management  believes this  segment's  key  strengths  are its  proprietary
technology  and  end-product  application  capabilities.   The  success  of  the
Company's efforts to increase revenue in this segment is highly dependent on the
timing of marketing  launches of new products in the U.S. and international food
and nutrition  markets by the Company's  customers and  prospects.  The Company,
through  its  innovative  proprietary  technology  and  applications  expertise,
continues  to develop  new  products  designed  to solve and respond to customer
problems  and  needs.  Sales of  products  for the animal  nutrition  and health
industry are highly dependent on dairy industry economics as well as the ability
of the  Company to  leverage  the  results  of  existing  successful  university
research on the animal health benefits of the Company's products.

      BCP Ingredients
      ---------------

      BCP Ingredients  manufactures and supplies choline chloride,  an essential
nutrient for animal health,  to the poultry and swine  industries.  In addition,
certain  derivatives  of choline  chloride  are also  marketed  into  industrial
applications.

      Management believes that success in this commodity-oriented marketplace is
highly dependent on the Company's  ability to maintain its strong reputation for
excellent  product quality and customer service.  In addition,  the Company must
continue to increase  production  efficiencies in order to maintain its low-cost
position  to  effectively  compete  for  market  share in a  highly  competitive
marketplace.

      The Company sells  products for all three  segments  through its own sales
force, independent distributors, and sales agents.

      The  following  tables  summarize  consolidated  net sales by segment  and
business  segment  earnings  (loss) for the three  years  ended  December 31 (in
thousands):

<TABLE>
<CAPTION>
Business Segment Net Sales:
==========================================================================================
                                                           2005        2004         2003
------------------------------------------------------------------------------------------
<S>                                                      <C>         <C>          <C>
Specialty Products                                       $ 29,433    $ 28,767     $ 26,163
Encapsulated/Nutritional Products                          32,499      24,759       24,043
BCP Ingredients                                            21,163      13,880       11,669
------------------------------------------------------------------------------------------
Total                                                    $ 83,095    $ 67,406     $ 61,875
==========================================================================================

<CAPTION>
Business Segment Earnings (Loss) Before Income Taxes:
==========================================================================================
                                                           2005        2004         2003
------------------------------------------------------------------------------------------
<S>                                                      <C>         <C>          <C>
Specialty Products                                       $ 11,007    $ 10,693     $  9,409
Encapsulated/Nutritional Products                           3,217         992         (962)
BCP Ingredients                                             2,679       1,112          568
Interest and other income (expense)                           288         (82)        (252)
------------------------------------------------------------------------------------------
Earnings before income taxes                             $ 17,191    $ 12,715     $  8,763
==========================================================================================
</TABLE>


                                       13
<PAGE>

Fiscal Year 2005 compared to Fiscal Year 2004
(All amounts in thousands, except share and per share data)

      Net Sales
      ---------

      Net  sales  for 2005 were  $83,095  compared  with  $67,406  for 2004,  an
increase of $15,689 or 23.3%. Net sales for the specialty  products segment were
$29,433 for 2005  compared  with $28,767 for 2004,  an increase of $666 or 2.3%.
This increase was due principally to greater sales volumes of ethylene oxide for
medical device sterilization and propylene oxide for starch modification as well
as a modest  price  increase  adopted  early in 2005 to help  offset  rising raw
material costs.  This increase was partially offset by a decline in volumes sold
in the  ethylene  oxide  blends  product  line and  single  use  ethylene  oxide
canisters for use in sterilization  equipment.  Net sales for the encapsulated /
nutritional  products  segment were $32,499 for 2005  compared  with $24,759 for
2004,  an increase of $7,740 or 31.3%.  This  increase  was due  principally  to
increased  volumes  sold in the  domestic  food and human  choline  markets  and
approximately  $3,300 associated with the Company's new  pharmaceutical and food
business lines resulting from the June 30, 2005 acquisition of certain assets of
the Loders  Croklaan  USA,  LLC  encapsulation,  agglomeration  and  granulation
business, as described in Note 4 to our Consolidated  Financial Statements.  The
Company also  experienced  volume  improvements  in the animal  health  industry
relating to  REASHURE(R),  NITROSHURETM  and NIASHURETM,  our  microencapsulated
niacin  product for dairy  cows.  These  increases  were  partially  offset by a
decline  in  volumes  sold  in the  international  food  product  lines  and the
nutritional supplement product line. Net sales of $21,163 were realized for 2005
in the BCP  Ingredients  segment  compared with $13,880 for 2004, an increase of
$7,283 or 52.5%.  This  increase  was due to  increased  volumes sold in the dry
choline,  aqueous choline,  and specialty  industrial  product lines, along with
modest price increases in all three product lines.

      Gross Margin
      ------------

      Gross margin for 2005  increased to $28,680  compared to $23,806 for 2004,
an increase of 20.5%,  due largely to the above noted  increase in sales.  Gross
margin percentage for 2005 was 34.5% as compared to 35.3% for 2004 as our margin
percentage was  unfavorably  affected by product mix and higher raw material and
energy  costs.  Gross  margin  percentage  for the  specialty  products  segment
decreased  slightly  primarily  due to rising raw material  costs.  Gross margin
percentage in the encapsulated / nutritional  products segment increased 1.8% as
margins were  favorably  affected by increased  production,  a result of greater
sales volume as described  above.  Gross margin  percentage  in BCP  Ingredients
increased  3.8% and was favorably  affected by increased  production  volumes of
choline chloride and specialty derivative products.

      Operating Expenses
      ------------------

      Operating expenses for 2005 increased to $11,777 from $11,009 for 2004, an
increase of $768 or 7.0%. Total operating expenses as a percentage of sales were
14.2% for 2005  compared to 16.3% for 2004.  The increase in operating  expenses
for 2005 was  principally  a result of new hires,  increased  charges for search
fees  associated  with new  hires  and  associated  relocation  expenses.  These
increases were partially offset by a decrease in selling  expenses.  During 2005
and  2004,   the   Company   spent   $2,053   and   $1,752,   respectively,   on
Company-sponsored research and development programs,  substantially all of which
pertained to the Company's  encapsulated / nutritional products segment for both
food and animal feed applications.

      Earnings From Operations
      ------------------------

      As a result  of the  foregoing,  earnings  from  operations  for 2005 were
$16,903 as compared to $12,797 for 2004,  reflecting a 32.1%  increase from year
to year.


                                       14
<PAGE>

      Other Expenses (Income)
      -----------------------

      Interest  income for 2005 totaled $214 as compared to $125 for 2004.  This
increase is  attributable  to an increase in the Company's  average cash balance
during 2005.  Interest  expense was $8 for 2005 compared to $219 for 2004.  This
decrease  is the result of the  prepayment  of the  Company's  outstanding  loan
balance in December 2004. Other income of $82 in 2005 represents the net gain on
the sale of equipment.

      Income Tax Expense
      ------------------

      The Company's  effective  tax rate for 2005 was 36.3%  compared to a 36.9%
rate for 2004.

      Net Earnings
      ------------

      As a result  of the  foregoing,  net  earnings  were  $10,954  for 2005 as
compared with $8,026 for 2004, reflecting a 36.5% increase from 2004 to 2005.

Fiscal Year 2004 compared to Fiscal Year 2003
(All amounts in thousands, except share and per share data)

      Net Sales
      ---------

      Net  sales  for 2004 were  $67,406  compared  with  $61,875  for 2003,  an
increase of $5,531 or 8.9%.  Net sales for the specialty  products  segment were
$28,767 for 2004 compared with $26,163 for 2003, an increase of $2,604 or 10.0%.
This increase was due principally to greater sales volumes of ethylene oxide for
medical device contractor  sterilization and single use ethylene oxide canisters
for use in sterilization equipment. Net sales for the encapsulated / nutritional
products  segment  were  $24,759 for 2004  compared  with  $24,043 for 2003,  an
increase of $716 or 3.0%, led by volume improvements in the domestic food market
as well as  increasing  dairy  industry  acceptance  of  NITROSHURE TM, which we
launched in the first  quarter of 2004.  Sales in this segment  were  negatively
affected by competitive  pressures in the human food and nutrition markets which
resulted in lower  average  selling  prices as  compared to the prior year.  Net
sales of $13,880 were realized for 2004 in the BCP Ingredients  segment compared
with  $11,669 for 2003,  an increase of $2,211 or 18.9%.  This  increase was due
principally  to increased  volumes  sold in the aqueous and dry choline  product
lines, along with some very modest price increases in both product lines.

      Gross Margin
      ------------

      Gross margin for 2004  increased to $23,806  compared to $21,152 for 2003.
Gross margin as a percentage  of net sales for 2004 was 35.3%  compared to 34.2%
for 2003.  Although  sales  volumes  and gross  margin  have  increased  in 2004
compared  to the  comparable  prior  year  period,  our  margins,  in all  three
segments,  were  unfavorably  impacted by rising raw material and energy  costs.
Gross margin  percentage for the specialty  products  segment was 50.9% for 2004
compared to 50.1% for 2003.  Margins for the specialty products segment improved
due principally to increased  sales volume of packaged  ethylene oxide and sales
of single use ethylene oxide  canisters for use in medical device  sterilization
and lower  amortization  expense.  Gross margin percentage in the encapsulated /
nutritional  products  segment  was 31.0% for 2004  compared  to 29.6% for 2003.
Margins were favorably  impacted by increased  sales volume to the domestic food
market.  Margins in the encapsulated / nutritional products segment in 2003 were
unfavorably   affected  by  a  designed  reduction  in  inventory  levels  which
negatively  impacted the Company's  gross  margins due to the  resulting  excess
plant manufacturing capacity. As noted above, during 2004, increased competition
in both the human food and nutrition  markets  resulted in lower average selling
prices which  partially  offset  improvements in profit margins for this segment
during 2004.  Margins for BCP Ingredients  were favorably  affected by increased
production  volumes of choline  chloride  and  choline  derivative  products  in
addition to the modest price increases noted above.


                                       15
<PAGE>

      Operating Expenses
      ------------------

      Operating  expenses for 2004  declined to $11,009 from $12,137 for 2003, a
decrease of $1,128 or 9.3%.  Total  operating  expenses as a percentage of sales
were 16.3% for 2004 compared to 19.6% for 2003.  This decrease was principally a
result of a decrease in selling,  marketing and research  expenses,  a result of
the Company having made several  organizational  and business changes  affecting
the  encapsulated  / nutritional  products  segment.  Many of these changes were
effected  late in the  fourth  quarter  of  2003 in an  effort  to  refocus  our
commercial efforts,  reduce operating expenses and improve the overall financial
performance of this segment.  These decreases were partially offset by increased
charges for search fees associated with new hires and higher  professional  fees
including those required to comply with the  Sarbanes-Oxley  Act of 2002. During
2004  and  2003,  the  Company  spent  $1,752  and  $2,083,   respectively,   on
Company-sponsored research and development programs,  substantially all of which
pertained to the Company's  encapsulated / nutritional products segment for both
food and animal health applications.

      Earnings From Operations
      ------------------------

      As a result  of the  foregoing,  earnings  from  operations  for 2004 were
$12,797 compared to $9,015 for 2003, reflecting a 42.0% increase year over year.

      Other Expenses (Income)
      -----------------------

      Interest  expense  for 2004  totaled  $219  compared  to $272 for 2003,  a
decrease  of $53.  This  decrease  is the  result of lower  average  outstanding
borrowings during the period.  Interest income for 2004 totaled $125 compared to
$20 for 2003. This increase is the result of higher average cash balances during
the period.

      Income Tax Expense
      ------------------

      The  Company's  effective  tax rate in 2004 was 36.9%  compared to a 35.7%
rate for 2003.

      Net Earnings
      ------------

      As a result of the  foregoing,  net earnings were $8,026 for 2004 compared
with $5,638 for 2003, reflecting a 42.4% increase from 2003 to 2004.

                               FINANCIAL CONDITION
                               -------------------

                         LIQUIDITY AND CAPITAL RESOURCES
                         -------------------------------

      Contractual Obligations
      -----------------------

      The Company's contractual  obligations and commitments principally include
obligations  associated  with  future  minimum  non-cancelable  operating  lease
obligations  (including  the  headquarters  office space  entered into in 2002).
These aggregate commitments are as follows:


                                       16
<PAGE>

==========================================
            Year
------------------------------------------
2006                               $   562
2007                                   521
2008                                   478
2009                                   569
2010                                   150
Thereafter                              21
------------------------------------------

Total minimum lease payments       $ 2,301
==========================================

      As part of the June 30, 2005 acquisition of certain assets relating to the
encapsulation,  agglomeration  and granulation  business of Loders Croklaan USA,
LLC, the Asset Purchase  Agreement  provides for the  contingent  payment by the
Company of additional  consideration  based upon the volume of sales  associated
with one particular product acquired by the Company during the three year period
following the acquisition.  Such contingent consideration will be recorded as an
additional cost of the acquired product lines. No such contingent  consideration
has been earned or paid as of December 31, 2005.

      The Company knows of no current or pending demands on, or commitments for,
its liquid assets that will materially affect its liquidity.

      The Company expects its operations to continue generating  sufficient cash
flow to fund working capital requirements and necessary capital investments. The
Company is actively pursuing additional acquisition candidates.  As described in
Note 13 to our  Consolidated  Financial  Statements,  on February  8, 2006,  the
Company,  through its wholly  owned  subsidiary  Balchem  Minerals  Corporation,
acquired all of the outstanding  capital stock of Chelated Minerals  Corporation
("CMC"),  a privately  held Utah  corporation,  for a purchase  price of $17,350
before working capital and other  adjustments.  CMC is a manufacturer and global
marketer  of mineral  nutritional  supplements  for  livestock,  pet and poultry
feeds.

      Cash
      ----

      Cash and cash  equivalents  increased to $12,996 at December 31, 2005 from
$12,734 at December 31, 2004. The $262 increase resulted from an increase in net
cash  provided by  operating  activities  of $13,698  offset by net cash used in
investing  activities of $12,943 and cash used in financing  activities of $493.
Working capital  amounted to $26,116 at December 31, 2005 as compared to $23,505
at December 31, 2004, an increase of $2,611.

      Operating Activities
      --------------------

      Cash flows from operating activities provided $13,698 for 2005 as compared
with $12,145 for 2004. The increase in cash flows from operating  activities was
due primarily to increases in net income, accounts payable and accrued expenses,
and income taxes.  The foregoing was partially offset by an increase in accounts
receivable and inventories and a decrease in amortization expense.

      Investing Activities
      --------------------

      Capital   expenditures  were  approximately  $1,800  for  2005.  Excluding
property,  plant and equipment acquired in the CMC acquisition described in Note
13 in our Consolidated Financial Statements,  capital expenditures are projected
to be  approximately  $2.3 million for 2006.  Cash paid for the  acquisition  of
assets relating to the Loders Croklaan USA, LLC fluidized bed  encapsulation and
granulation  business,  including  acquisition  costs,  was  $11,419.  With  the
exception of $985, which was paid during the quarter ended June 30, 2005, all of
such payment was made on July 1, 2005 from the Company's cash reserves.


                                       17
<PAGE>

      The overall  effect of the foregoing was that cash flows used in investing
activities were $12,943 in 2005 and $1,229 in 2004.

      Financing Activities
      --------------------

      In June 1999,  the board of directors  authorized the repurchase of shares
of the Company's outstanding common stock over a two-year period commencing July
2, 1999. Under this program,  which was subsequently  extended through 2006, the
Company had, as of December 31, 2004,  repurchased a total 514,974  shares at an
average cost of $6.17 per share,  none of which remained in treasury at December
31, 2004. In June 2005, the board of directors  authorized  another extension of
the stock repurchase  program for up to an additional  600,000 shares,  over and
above those 514,974  shares  previously  repurchased  under the program.  During
2005, a total of 66,300 shares have been  purchased at an average cost of $18.07
per share,  64,016 of which remain in treasury at December 31, 2005. The Company
intends to acquire  shares from time to time at prevailing  market prices if and
to the extent it deems it  advisable  to do so based among other  factors on its
assessment of corporate cash flow and market conditions.

      There was no debt  outstanding at December 31, 2005 or 2004. In June 2001,
the Company and its  principal  bank  entered into a Loan  Agreement  (the "Loan
Agreement") providing for a term loan of $13,500, which was subsequently paid in
full in December 2004. The Loan  Agreement  provided for a short-term  revolving
credit  facility  of $3,000 (the  "Revolving  Facility").  Borrowings  under the
Revolving Facility bear interest at LIBOR plus 1.00%. No amounts have been drawn
on the Revolving Facility as of December 31, 2005 and 2004.

      On February 8, 2006, the Company, through its wholly owned subsidiary BMC,
completed  an  acquisition  of all of the  outstanding  capital  stock of CMC, a
privately  held Utah  corporation,  for a purchase  price of $17,350  subject to
adjustment  based upon CMC's actual working  capital and other  adjustments.  On
February 6, 2006,  the Company and its  principal  bank  entered into a new Loan
Agreement (the "New Loan  Agreement")  providing for a term loan of $10,000 (the
"Term Loan"), the proceeds of which were used to fund the acquisition,  in part.
The  remaining  balance  of the  purchase  price of the  acquisition  was funded
through  Balchem's  cash on hand.  The Term  Loan is  payable  in equal  monthly
installments of principal,  together with accrued  interest,  and has a maturity
date of March 1, 2009.  The Term Loan is subject  to an  interest  rate equal to
LIBOR  plus  1.00%.  The New  Loan  Agreement  also  provides  for a  short-term
revolving credit facility of $3,000 (the "New Revolving  Facility").  Borrowings
under the New Revolving  Facility bear interest at LIBOR plus 1.00%.  No amounts
have been drawn on the New  Revolving  Facility as of the date  hereof.  The New
Revolving  Facility  expires in February,  2007.  Management  believes that such
facility will be renewed in the normal course of business.

      Proceeds from stock options  exercised  totaled $1,409 and $2,563 for 2005
and 2004, respectively.  Dividend payments were $685 and $389 for 2005 and 2004,
respectively.

      The overall  effect of the foregoing was that cash flows used in financing
activities were $493 in 2005 and $7,421 in 2004.

      Other Matters Impacting Liquidity
      ---------------------------------

      The Company currently  provides  postretirement  benefits in the form of a
retirement  medical  plan  under  a  collective  bargaining  agreement  covering
eligible retired employees of the Verona, Missouri facility. The amount recorded
on the Company's  balance  sheet as of December 31, 2005 for this  obligation is
$987. The postretirement plan is not funded. Historical cash payments made under
such plan approximated $50 per year.

      In  December  2003,  the  Medicare  Prescription  Drug,   Improvement  and
Modernization  Act of 2003 (the Act) was signed into law.  The Act  introduced a
plan  sponsor  subsidy  based  on  a  percentage  of  a   beneficiary's   annual
prescription  drug benefits,  within defined  limits,  and the opportunity for a
retiree to


                                       18
<PAGE>

obtain  prescription  drug benefits under  Medicare.  There was no impact of the
subsidy on the  postretirement  benefit obligation and net periodic cost in 2005
or 2004 as Medicare eligible retirees are not covered under the Company's plan.

      Critical Accounting Policies
      ----------------------------

      The  Securities  and  Exchange  Commission  ("SEC") has issued  disclosure
guidance  for  "critical   accounting   policies."  The  SEC  defines  "critical
accounting  policies" as those that require  application  of  management's  most
difficult,  subjective  or complex  judgments,  often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.

      Management  of the  Company is  required  to make  certain  estimates  and
assumptions  during the  preparation  of  consolidated  financial  statements in
accordance with accounting principles generally accepted in the United States of
America.  These estimates and  assumptions  impact the reported amount of assets
and liabilities  and disclosures of contingent  assets and liabilities as of the
date of the  consolidated  financial  statements.  Estimates and assumptions are
reviewed  periodically  and  the  effects  of  revisions  are  reflected  in the
consolidated  financial  statements  in the  period  they are  determined  to be
necessary. Actual results could differ from those estimates.

      The Company's  significant  accounting policies are described in Note 1 of
the Notes to Consolidated  Financial  Statements.  Not all of these  significant
accounting policies require management to make difficult,  subjective or complex
judgments or estimates.  However, management considers the following policies to
be critical within the SEC definition.

      Revenue Recognition
      -------------------

      Revenue is recognized upon product shipment,  passage of title and risk of
loss, and when  collection is reasonably  assured.  The Company  reports amounts
billed to  customers  related to shipping  and  handling as revenue and includes
costs incurred for shipping and handling in cost of sales.  Amounts received for
unshipped merchandise are not recognized as revenue but rather they are recorded
as customer deposits and are included in current liabilities.  In addition,  the
Company follows the provisions of the Securities and Exchange Commission's (SEC)
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition," which sets forth
guidelines  on the timing of revenue  recognition  based  upon  factors  such as
passage of title, installation, payments and customer acceptance.

      Revenue related to a process and product  license  agreement is recognized
using the  percentage  of  completion  method and the progress to  completion is
measured using the  efforts-expended  method. The Company follows the provisions
of the Financial Accounting Standards Board's (FASB) Statement of Position (SOP)
81-1,  "Accounting for Performance of Construction  Type and Certain  Production
Type  Contracts."  Revenue  is  recognized  as work is  performed  and costs are
incurred.

      Inventories
      -----------

      Inventories  are  valued  at the  lower of cost  (first  in,  first out or
average) or market  value and have been  reduced by an  allowance  for excess or
obsolete  inventories.  Inventory  reserves  are  generally  recorded  when  the
inventory for a product  exceeds twelve months of demand for that product and/or
when individual products have been in inventory for greater than six months.

      Long-Lived Assets
      -----------------

      Long-lived assets,  such as property,  plant, and equipment and intangible
assets with finite lives, are reviewed for impairment whenever events or changes
in  circumstances  indicate  that the  carrying  amount  of an asset  may not be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison of the carrying amount of an asset to estimated  undiscounted  future
cash flows expected to be generated by the asset.  If the carrying  amount of an
asset exceeds its estimated future cash flows, an impairment charge


                                       19
<PAGE>

is  recognized  by the amount by which the carrying  amount of the asset exceeds
the fair value of the asset, which is generally based on discounted cash flows.

      Goodwill,  which is not subject to  amortization,  is tested  annually for
impairment,  and more frequently if events and  circumstances  indicate that the
asset might be  impaired.  If an  indicator of  impairment  exists,  the Company
determines  the amount of  impairment  based on a comparison of the implied fair
value of its goodwill to its carrying value.

      Accounts Receivable
      -------------------

      We market our products to a diverse customer base,  principally throughout
the United States, Europe, Mexico and Japan. We grant credit terms in the normal
course of business to our customers.  We perform on-going credit  evaluations of
our  customers  and adjust  credit  limits  based upon  payment  history and the
customer's  current  credit  worthiness,  as determined  through review of their
current credit  information.  We continuously  monitor  collections and payments
from  customers  and maintain  allowances  for doubtful  accounts for  estimated
losses resulting from the inability of our customers to make required  payments.
Estimated  losses are based on historical  experience and any specific  customer
collection issues identified.  If the financial  condition of our customers were
to  deteriorate  resulting in an impairment  of their ability to make  payments,
additional allowances and related bad debt expense may be required.

      Post-employment Benefits
      ------------------------

      The Company  provides life insurance and health care benefits for eligible
retirees and health care benefits for retirees'  eligible  survivors.  The costs
and obligations  related to these benefits reflect the Company's  assumptions as
to  general  economic  conditions  and  health  care  cost  trends.  The cost of
providing  plan  benefits  also  depends on  demographic  assumptions  including
retirements,  mortality, turnover, and plan participation.  If actual experience
differs from these  assumptions,  the cost of  providing  these  benefits  could
increase or decrease.

      In  December  2003,  the  Medicare  Prescription  Drug,   Improvement  and
Modernization  Act of 2003 (the Act) was signed into law.  The Act  introduced a
plan  sponsor  subsidy  based  on  a  percentage  of  a   beneficiary's   annual
prescription  drug benefits,  within defined  limits,  and the opportunity for a
retiree to obtain prescription drug benefits under Medicare. There was no impact
of the subsidy on the postretirement benefit obligation and net periodic cost in
2005 or 2004 as Medicare  eligible  retirees are not covered under the Company's
plan.

      Intangible Assets with Finite Lives
      -----------------------------------

      The  useful  life  of an  intangible  asset  is  based  on  the  Company's
assumptions  regarding  expected  use  of the  asset;  the  relationship  of the
intangible asset to another asset or group of assets;  any legal,  regulatory or
contractual  provisions  that may  limit  the  useful  life of the asset or that
enable  renewal or extension of the asset's  legal or  contractual  life without
substantial  cost; the effects of  obsolescence,  demand,  competition and other
economic factors; and the level of maintenance  expenditures  required to obtain
the expected  future cash flows from the asset and their  related  impact on the
asset's  useful life.  If events or  circumstances  indicate that the life of an
intangible  asset has  changed,  it could result in higher  future  amortization
charges or recognition of an impairment loss.

      Income Taxes
      ------------

      Income  taxes are  accounted  for under  the asset and  liability  method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and operating loss and tax credit  carryforwards.  Deferred tax assets and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  The effect on deferred tax assets and  liabilities  of a
change in tax rates is recognized in


                                       20
<PAGE>

earnings in the period that includes the enactment  date. The Company  regularly
reviews  its  deferred  tax  assets for  recoverability  and would  establish  a
valuation allowance if it believed that such assets may not be recovered, taking
into  consideration   historical  operating  results,   expectations  of  future
earnings,  changes in its operations and the expected timing of the reversals of
existing temporary differences.

      New Accounting Pronouncements:

      In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial  Accounting  Standards ("SFAS") No. 123(R),  Shared-Based
Payment which  supersedes  Accounting  Principle  Board ("APB")  Opinion No. 25,
Accounting  for  Stock  Issued  to  Employees,  and its  related  implementation
guidance.  SFAS  No.  123(R)  requires  companies  to  recognize  in the  income
statement  the  grant-date  fair value of stock  options and other  equity-based
compensation issued to employees.  The requirements of SFAS 123(R) are effective
as of the beginning of the first fiscal year beginning  after June 15, 2005. The
Company will be required to adopt the provisions of SFAS 123(R) as of January 1,
2006.  Under FAS 123(R),  the Company must determine the appropriate  fair value
model to be used for valuing share-based  payments,  the amortization method for
compensation cost, and the transition method to be used at date of adoption. The
permitted   transition   methods   include  either   modified-retrospective   or
modified-prospective  adoption. Under the  modified-retrospective  option, prior
periods may be restated  either as of the  beginning  of the year of adoption or
for  all  periods  presented.  The  modified-prospective  method  requires  that
compensation expense be recorded for all unvested stock options at the beginning
of the first quarter of adoption of FAS 123(R), while the modified-retrospective
methods  would  record  compensation  expense  for all  unvested  stock  options
beginning with the first period  presented.  The Company plans to adopt SFAS No.
123 (R) using the modified-prospective method. Adoption of SFAS 123(R) will have
no impact on the historical  financial statements included in this Annual Report
on Form 10-K.  The impact of adoption of SFAS No.  123(R) cannot be predicted at
this time because it will depend on levels of  share-based  payments  granted in
the future.  However,  had the Company adopted SFAS No. 123(R) in prior periods,
the impact of that standard  would not have been  materially  different from the
impact of SFAS No. 123(R) as described in the disclosure of pro forma net income
and earnings per share in Note 1 to the Consolidated Financial Statements.

      In  November  2004,  the  Financial   Accounting  Standards  Board  issued
Statement of Financial  Accounting  Standard No. 151, "Inventory Costs." The new
statement  amends  Accounting  Research  Bulletin No. 43, Chapter 4,  "Inventory
Pricing,"  to clarify  the  accounting  for  abnormal  amounts of idle  facility
expense,  freight,  handling costs, and wasted material. This statement requires
that those items be  recognized  as current  period  charges and  requires  that
allocation of fixed  production  overheads to the cost of conversion be based on
the normal  capacity of the production  facilities.  This statement is effective
for fiscal  years  beginning  after June 15,  2005.  The Company does not expect
adoption of this statement to have a material impact on its financial  condition
or results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      Cash and cash equivalents are invested primarily in money market accounts.
Accordingly,  we believe we have limited  exposure to market risk for changes in
interest  rates.  However,  interest  payable under the Company's  term loan and
credit line is based on LIBOR plus 1.00%,  and thus  exposes the Company to some
interest rate risk in  connection  with its bank  financing.  The Company has no
derivative financial instruments or derivative commodity  instruments,  nor does
the Company have any financial  instruments  entered into for trading or hedging
purposes.  Foreign  sales are  generally  billed in U.S.  dollars.  The  Company
believes that its business operations are not exposed in any material respect to
market risk relating to foreign currency exchange risk or commodity price risk.


                                       21
<PAGE>

Item 8. Financial Statements and Supplementary Data

        Index to Financial Statements and Supplementary Financial Data:     Page

        Reports of Independent Registered Public Accounting Firms           23

        Consolidated Balance Sheets as of
        December 31, 2005 and 2004                                          26

        Consolidated Statements of Earnings for the
        years ended December 31, 2005, 2004 and 2003                        27

        Consolidated Statements of Stockholders' Equity
        for the years ended December 31, 2005, 2004 and 2003                28

        Consolidated Statements of Cash Flows
        for the years ended December 31, 2005, 2004 and 2003                29

        Notes to Consolidated Financial Statements                          30

        Report of Independent Registered Public Accounting Firm             48

        Schedule II - Valuation and Qualifying
        Accounts for the years ended December 31, 2005, 2004 and 2003       49


                                       22
<PAGE>

             Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
Balchem Corporation
New Hampton, New York

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Balchem
Corporation  and  Subsidiaries as of December 31, 2005 and 2004, and the related
consolidated  statements of earnings,  stockholders'  equity, and cash flows for
the years then ended. We also have audited management's assessment,  included in
the  accompanying   Management's  Report  on  Internal  Control  Over  Financial
Reporting,  that  Balchem  Corporation  and  Subsidiaries  maintained  effective
internal  control over  financial  reporting  as of December 31, 2005,  based on
criteria  established in "Internal  Control--Integrated  Framework issued by the
Committee  of  Sponsoring  Organizations  of the  Treadway  Commission  (COSO)."
Balchem Corporation's  management is responsible for these financial statements,
for maintaining effective internal control over financial reporting, and for its
assessment of the  effectiveness of internal  control over financial  reporting.
Our  responsibility is to express an opinion on these financial  statements,  an
opinion on management's  assessment,  and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements are free of material  misstatement  and whether  effective
internal  control  over  financial  reporting  was  maintained  in all  material
respects. Our audit of financial statements included examining, on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall financial  statement  presentation.  Our
audit of  internal  control  over  financial  reporting  included  obtaining  an
understanding   of  internal  control  over  financial   reporting,   evaluating
management's  assessment,  testing  and  evaluating  the  design  and  operating
effectiveness  of internal  control,  and performing such other procedures as we
considered necessary in the circumstances.  We believe that our audits provide a
reasonable basis for our opinions.

A company's  internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial  reporting
and the preparation of financial  statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial  reporting  includes those policies and procedures that (1) pertain to
the  maintenance  of records that, in reasonable  detail,  accurately and fairly
reflect the  transactions  and  dispositions  of the assets of the company;  (2)
provide  reasonable  assurance  that  transactions  are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting  principles,  and that receipts and  expenditures  of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of  unauthorized  acquisition,  use, or  disposition  of the company's
assets that could have a material effect on the financial statements.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions,  or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Balchem Corporation
and  Subsidiaries  as of December  31,  2005 and 2004,  and the results of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting  principles generally accepted in the United States of America.  Also
in  our  opinion,   management's   assessment   that  Balchem   Corporation  and
Subsidiaries  maintained  effective internal control over financial reporting as
of


                                       23
<PAGE>

December 31, 2005, is fairly stated, in all material respects, based on criteria
established in "Internal  Control--Integrated  Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO)." Furthermore,  in
our opinion,  Balchem Corporation and Subsidiaries  maintained,  in all material
respects, effective internal control over financial reporting as of December 31,
2005, based on criteria established in "Internal  Control--Integrated  Framework
issued by the Committee of Sponsoring  Organizations of the Treadway  Commission
(COSO)."

/s/McGladrey & Pullen, LLP
New York, New York
March 16, 2006


                                       24
<PAGE>

             Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Balchem Corporation:

      We have  audited the  accompanying  consolidated  statements  of earnings,
stockholders' equity, and cash flows of Balchem Corporation and subsidiaries for
the  year  ended  December  31,  2003.  In  connection  with  our  audit  of the
consolidated  financial  statements,  we  also  have  audited  the  consolidated
financial statement schedule, "Schedule II - Valuation and Qualifying Accounts,"
for the year ended December 31, 2003. These  consolidated  financial  statements
and  financial  statement  schedule  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements and financial statement schedule based on our audit.

      We  conducted  our audit in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audit provides a reasonable basis for our opinion.

      In  our  opinion,   the  consolidated   financial  statements  of  Balchem
Corporation and subsidiaries  referred to above present fairly,  in all material
respects,  the  results  of their  operations  and their cash flows for the year
ended December 31, 2003, in conformity with U.S. generally  accepted  accounting
principles.  Also in our opinion,  the related financial  statement schedule for
the year ended  December  31,  2003,  when  considered  in relation to the basic
consolidated  financial  statements  for such  year  taken as a whole,  presents
fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP
Short Hills, New Jersey
February 6, 2004


                                       25
<PAGE>

                               BALCHEM CORPORATION
                           Consolidated Balance Sheets
                           December 31, 2005 and 2004
             (Dollars in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                     Assets                                      2005         2004
                                     ------                                    --------     --------
<S>                                                                            <C>          <C>
Current assets:
   Cash and cash equivalents                                                   $ 12,996     $ 12,734
   Accounts receivable, net of allowance for doubtful accounts of $50
     and $82 at December 31, 2005 and 2004, respectively                         11,521        7,996
   Inventories                                                                    8,540        6,319
   Prepaid income taxes                                                             143          315
   Prepaid expenses                                                               1,790        1,527
   Deferred income taxes                                                            276          321
                                                                               --------     --------
        Total current assets                                                     35,266       29,212

Property, plant and equipment, net                                               24,400       24,188

Goodwill                                                                         13,327        6,368
Intangible assets, net                                                            2,148          637

                                                                               --------     --------
             Total assets                                                      $ 75,141     $ 60,405
                                                                               ========     ========

                      Liabilities and Stockholders' Equity
                      ------------------------------------
Current liabilities:
   Trade accounts payable                                                      $  2,562     $  1,466
   Accrued expenses                                                               2,601        1,212
   Accrued compensation and other benefits                                        1,756        1,492
   Customer deposits and other deferred revenue                                   1,186          852
   Dividends payable                                                              1,045          685
                                                                               --------     --------
        Total current liabilities                                                 9,150        5,707

Deferred income taxes                                                             4,015        3,461
Other long-term obligations                                                       1,043        1,003
                                                                               --------     --------
             Total liabilities                                                   14,208       10,171
                                                                               --------     --------

Commitments and contingencies (note 11)

Stockholders' equity:
   Preferred stock, $25 par value. Authorized 2,000,000
     shares; none issued and outstanding                                             --           --
   Common stock, $.0667 par value. Authorized 25,000,000 shares; 11,640,964
     shares issued and 11,576,948 outstanding at December 31, 2005 and
     11,431,738 shares issued and outstanding at December 31, 2004                  776          762
   Additional paid-in capital                                                     8,008        6,075
   Retained earnings                                                             53,306       43,397
   Treasury stock, at cost: 64,016 and 0 shares at December 31, 2005
     and 2004, respectively                                                      (1,157)          --
                                                                               --------     --------
     Total stockholders' equity                                                  60,933       50,234
                                                                               --------     --------

                                                                               --------     --------
             Total liabilities and stockholders' equity                        $ 75,141     $ 60,405
                                                                               ========     ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       26
<PAGE>

                               BALCHEM CORPORATION
                       Consolidated Statements of Earnings
                  Years Ended December 31, 2005, 2004 and 2003
                      (In thousands, except per share data)

                                               2005         2004         2003
                                             --------     --------     --------

Net sales                                    $ 83,095     $ 67,406     $ 61,875

Cost of sales                                  54,415       43,600       40,723
                                             --------     --------     --------

Gross margin                                   28,680       23,806       21,152

Operating expenses:
    Selling expenses                            4,739        4,815        5,718
    Research and development expenses           2,053        1,752        2,083
    General and administrative expenses         4,985        4,442        4,336
                                             --------     --------     --------
                                               11,777       11,009       12,137

                                             --------     --------     --------
Earnings from operations                       16,903       12,797        9,015

Other expenses (income):

    Interest income                              (214)        (125)         (20)
    Interest expense                                8          219          272
    Other, net                                    (82)         (12)          --

                                             --------     --------     --------
Earnings before income tax expense             17,191       12,715        8,763

    Income tax expense                          6,237        4,689        3,125
                                             --------     --------     --------

Net earnings                                 $ 10,954     $  8,026     $  5,638
                                             ========     ========     ========

Basic net earnings per common share          $   0.95     $   0.71     $   0.52
                                             ========     ========     ========

Diluted net earnings per common share        $   0.91     $   0.69     $   0.50
                                             ========     ========     ========

See accompanying notes to consolidated financial statements.


                                       27
<PAGE>

                               BALCHEM CORPORATION
                 Consolidated Statements of Stockholders' Equity
                  Years Ended December 31, 2005, 2004 and 2003
             (Dollars in thousands, except share and per share data)

<TABLE>
<CAPTION>

                                                           Additional                                                Total
                                      Common Stock          Paid-in      Retained          Treasury Stock        Stockholders'
                                   Shares       Amount      Capital      Earnings       Shares        Amount        Equity
                                 ----------   ----------   ----------   ----------    ----------    ----------    ----------
<S>                             <C>          <C>          <C>          <C>             <C>         <C>           <C>
Balance - December 31, 2002      11,032,286   $      736   $    3,137   $   30,807      (286,997)   $   (1,411)   $   33,269

Net earnings                             --           --           --        5,638            --            --         5,638
Dividends ($.035 per share)              --           --           --         (389)           --            --          (389)
Shares issued under employee
  benefit plans                          --           --          138           --        29,105           135           273
Shares issued under stock
    option plans and an income
     tax benefit of $183                 --           --          218           --       160,782           772           990
                                 ----------   ----------   ----------   ----------    ----------    ----------    ----------

Balance - December 31, 2003      11,032,286          736        3,493       36,056       (97,110)         (504)       39,781

Net earnings                             --           --           --        8,026            --            --         8,026
Dividends ($.06 per share)               --           --           --         (685)           --            --          (685)
Shares issued under employee
  benefit plans and other            21,090            2          254           --            --            --           256
Shares issued under stock
    option plans and an income
     tax benefit of $293            378,362           24        2,328           --        97,110           504         2,856
                                 ----------   ----------   ----------   ----------    ----------    ----------    ----------

Balance - December 31, 2004      11,431,738          762        6,075       43,397            --            --        50,234

Net earnings                             --           --           --       10,954            --            --        10,954
Dividends ($.09 per share)               --           --           --       (1,045)           --            --        (1,045)
Treasury shares purchased                --           --           --           --       (66,300)       (1,198)       (1,198)
Shares issued under employee
  benefit plans and other            34,755            1          210           --         2,284            41           252
Shares issued under stock
    option plans and an income
     tax benefit of $327            174,471           13        1,723           --            --            --         1,736
                                 ----------   ----------   ----------   ----------    ----------    ----------    ----------

Balance - December 31, 2005      11,640,964          776        8,008       53,306       (64,016)       (1,157)       60,933
                                 ==========   ==========   ==========   ==========    ==========    ==========    ==========

</TABLE>

See accompanying notes to consolidated financial statements.


                                       28
<PAGE>

                               BALCHEM CORPORATION
                      Consolidated Statements of Cash Flows
                  Years Ended December 31, 2005, 2004 and 2003
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                 2005         2004         2003
                                                               --------     --------     --------
<S>                                                            <C>          <C>          <C>
Cash flows from operating activities:
    Net earnings                                               $ 10,954     $  8,026     $  5,638

    Adjustments to reconcile net earnings to
    net cash provided by operating activities:
      Depreciation and amortization                               2,809        3,271        3,525
      Shares issued under employee benefit plans                    257          256          273
      Deferred income tax expense                                   599        1,388          598
      (Recovery of) provision for doubtful accounts                 (32)          (4)          36
      Income tax benefit from stock options exercised               327          293          183
      Disposition of intangible assets                               --           53           --
      Gain on sale of assets                                        (82)         (12)          --
          Changes in assets and liabilities
             Accounts receivable                                 (2,684)        (759)        (110)
             Inventories                                         (1,496)        (358)       1,277
             Prepaid expenses                                      (263)        (804)         582
             Accounts payable and accrued expenses                2,749          226       (1,859)
             Income taxes                                           172         (315)         975
             Customer deposits and other deferred revenue           334          852           --
             Other long-term obligations                             54           32           35
                                                               --------     --------     --------
                  Net cash provided by operating activities      13,698       12,145       11,153
                                                               --------     --------     --------

Cash flows from investing activities:
    Capital expenditures                                         (1,769)      (1,215)      (2,270)
    Proceeds from sale of property, plant and equipment             389           91           41
    Cash paid for intangible assets acquired                       (144)        (105)         (85)
    Acquisition of assets                                       (11,419)          --           --
                                                               --------     --------     --------
                  Net cash used in investing activities         (12,943)      (1,229)      (2,314)
                                                               --------     --------     --------

Cash flows from financing activities:
    Principal payments on long-term debt                             --       (9,581)      (1,742)
    Proceeds from stock options exercised                         1,409        2,563          807
    Dividends paid                                                 (685)        (389)        (382)
    Purchase of treasury stock                                   (1,198)          --           --
    Other financing activities                                      (19)         (14)         (14)
                                                               --------     --------     --------
                  Net cash used in financing activities            (493)      (7,421)      (1,331)
                                                               --------     --------     --------

Increase in cash and cash equivalents                               262        3,495        7,508

Cash and cash equivalents beginning of year                      12,734        9,239        1,731
                                                               --------     --------     --------
Cash and cash equivalents end of year                          $ 12,996     $ 12,734     $  9,239
                                                               ========     ========     ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       29
<PAGE>

BALCHEM CORPORATION
Notes to Consolidated Financial Statements
(All amounts in thousands, except share and per share data)

NOTE 1 - BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------------------------

Business Description
--------------------

Balchem  Corporation  (including,  unless the context  otherwise  requires,  its
wholly-owned subsidiaries:  BCP Ingredients,  Inc., Balchem Minerals Corporation
and Chelated Minerals Corporation, "Balchem", or the "Company"), incorporated in
the State of Maryland in 1967, is engaged in the  development,  manufacture  and
marketing of specialty  performance  ingredients  for the food,  pharmaceutical,
feed and medical sterilization industries.

Principles of Consolidation
---------------------------

The consolidated  financial  statements include the financial  statements of the
Company  and  its  subsidiaries.   All  significant  intercompany  balances  and
transactions  have been eliminated in consolidation.  Certain  reclassifications
have been made to prior period balances to conform with the presentation for the
current period.

Revenue Recognition
-------------------

Revenue is recognized upon product shipment,  passage of title and risk of loss,
and when collection is reasonably assured. The Company reports amounts billed to
customers  related to  shipping  and  handling  as revenue  and  includes  costs
incurred  for  shipping  and  handling in cost of sales.  Amounts  received  for
unshipped merchandise are not recognized as revenue but rather they are recorded
as customer deposits and are included in current liabilities.  In addition,  the
Company follows the provisions of the Securities and Exchange Commission's (SEC)
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition," which sets forth
guidelines  on the timing of revenue  recognition  based  upon  factors  such as
passage of title, installation, payments and customer acceptance.

Revenue related to the process and product license  agreement  described in Note
12 below is  recognized  using  the  percentage  of  completion  method  and the
progress  to  completion  is measured  using the  efforts-expended  method.  The
Company  follows the provisions of the Financial  Accounting  Standards  Board's
(FASB)  Statement  of  Position  (SOP)  81-1,  "Accounting  for  Performance  of
Construction Type and Certain Production Type Contracts."  Revenue is recognized
as work is performed and costs are incurred.

Cash and Cash Equivalents
-------------------------

The Company  considers  all highly  liquid debt  instruments  with a maturity of
three months or less to be cash equivalents.

Inventories
-----------

Inventories  are  stated at the  lower of cost or  market,  with cost  generally
determined on a first-in, first-out basis, and have been reduced by an allowance
for excess or obsolete  inventories.  Cost elements include material,  labor and
manufacturing overhead.


                                       30
<PAGE>

Property, Plant and Equipment and Depreciation
----------------------------------------------

Property,  plant and  equipment  are stated at cost.  Depreciation  of plant and
equipment is calculated using the straight-line method over the estimated useful
lives of the assets as follows:

      Buildings                       15-25 years
      Equipment                        3-12 years

Expenditures for repairs and maintenance are charged to expense. Alterations and
major  overhauls  that extend the lives or increase the capacity of plant assets
are capitalized.  When assets are retired or otherwise  disposed of, the cost of
the  assets  and the  related  accumulated  depreciation  are  removed  from the
accounts and any resultant gain or loss is included in earnings.

Business Concentrations
-----------------------

A specialty  products  customer  accounted  for 9%, 11% and 10% of the Company's
consolidated  net sales for 2005,  2004 and 2003,  respectively.  This  customer
accounted  for  8% and  10% of the  Company's  accounts  receivable  balance  at
December  31, 2005 and 2004,  respectively.  Approximately  7%, 8% and 8% of the
Company's net sales for 2005,  2004 and 2003,  respectively,  consisted of sales
outside the United States, predominately to Europe, Japan, and Mexico.

Trade  receivables  potentially  subject the Company to credit risk. The Company
extends  credit to its  customers  based upon an  evaluation  of the  customers'
financial  condition  and  credit  histories.  The  majority  of  the  Company's
customers are major national or international corporations.

Goodwill and Acquired Intangible Assets
---------------------------------------

Goodwill  represents the excess of costs over fair value of assets of businesses
acquired.  The  Company  adopted  the  provisions  of  SFAS  No.  141,  Business
Combinations,  and SFAS No. 142,  Goodwill and Other  Intangible  Assets,  as of
January 1, 2002.  These  standards  require  the use of the  purchase  method of
accounting for a business  combination and define an intangible asset.  Goodwill
and intangible assets acquired in a purchase business combination and determined
to have an indefinite useful life are not amortized,  but are instead tested for
impairment at least annually in accordance  with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives be
amortized  over  their  respective  estimated  useful  lives to their  estimated
residual  values,  and reviewed for impairment in accordance  with SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets.

As required by SFAS No. 142,  the Company  performed  an  assessment  of whether
there was an indication  that goodwill was impaired at the date of adoption.  In
connection  therewith,  the Company determined that its operations  consisted of
three  reporting  units and  determined  each  reporting  units'  fair value and
compared it to the reporting unit's net book value. Since the fair value of each
reporting  unit  exceeded  its  carrying  amount,  there  was no  indication  of
impairment and no further  transitional  impairment testing was required.  As of
December 31, 2005 and 2004, the Company also performed an impairment test of its
goodwill  balance.  As of such dates the Company's  reporting  units' fair value
exceeded  their carrying  amounts,  and therefore  there was no indication  that
goodwill was impaired.  Accordingly, the Company was not required to perform any
further  impairment tests. The Company plans to perform its impairment test each
December 31.

The Company had  unamortized  goodwill in the amount of $13,327 at December  31,
2005 and $6,368 at December 31, 2004, subject to the provisions of SFAS Nos. 141
and 142.  Unamortized goodwill is allocated to the Company's reportable segments
as follows:


                                       31
<PAGE>

======================================================================
                                                   2005          2004
----------------------------------------------------------------------
Specialty Products                              $  5,089      $  5,089
Encapsulated/Nutritional Products                  8,238         1,279
BCP Ingredients                                       --            --
----------------------------------------------------------------------
Total                                           $ 13,327      $  6,368
======================================================================

The  following  intangible  assets  are  stated at cost and are  amortized  on a
straight-line basis over the following estimated useful lives:

====================================================
                                        Amortization
                                           period
                                         (in years)
Customer lists                               10
Regulatory re-registration costs             10
Patents                                      17
Trademarks                                   17
====================================================

Income Taxes
------------

Income taxes are accounted for under the asset and  liability  method.  Deferred
tax assets  and  liabilities  are  recognized  for the  future tax  consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and  liabilities  and their  respective tax bases and operating
loss and tax credit  carry-forwards.  Deferred  tax assets and  liabilities  are
measured  using  enacted tax rates  expected  to apply to taxable  income in the
years in which those  temporary  differences  are  expected to be  recovered  or
settled.  The effect on deferred tax assets and  liabilities  of a change in tax
rates is recognized in income in the period that includes the enactment date.

Use of Estimates
----------------

Management of the Company is required to make certain  estimates and assumptions
during the preparation of consolidated  financial  statements in accordance with
accounting principles generally accepted in the United States of America.  These
estimates and  assumptions  impact the reported amount of assets and liabilities
and  disclosures  of  contingent  assets and  liabilities  as of the date of the
consolidated  financial  statements.  Estimates  and  assumptions  are  reviewed
periodically  and the effects of revisions  are  reflected  in the  consolidated
financial  statements in the period they are determined to be necessary.  Actual
results could differ from those estimates.

Fair Value of Financial Instruments
-----------------------------------

The Company has a number of  financial  instruments,  none of which are held for
trading  purposes.  The Company  estimates  that the fair value of all financial
instruments  at December 31, 2005 and 2004 does not differ  materially  from the
aggregate  carrying  values  of  its  financial   instruments  recorded  in  the
accompanying  consolidated balance sheets. The estimated fair value amounts have
been  determined  by  the  Company  using  available   market   information  and
appropriate  valuation  methodologies.   Considerable  judgment  is  necessarily
required in  interpreting  market data to develop the  estimates  of fair value,
and,  accordingly,  the estimates are not necessarily  indicative of the amounts
that the Company  could  realize in a current  market  exchange.  The  Company's
financial  instruments,   principally  cash  equivalents,  accounts  receivable,
accounts payable and accrued liabilities, are carried at cost which approximates
fair value due to the short-term maturity of these instruments.

Research and Development
------------------------

Research and development costs are expensed as incurred.


                                       32
<PAGE>

Stock Option Plan
-----------------

The Company has stock based  employee  compensation  plans,  which are described
more  fully  in Note 8. The  Company  accounts  for its  stock  option  plans in
accordance with the provisions of Accounting  Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations.  As
such,  compensation expense is recorded on the date of grant only if the current
market price of the underlying  stock exceeds the exercise price. No stock based
employee  compensation cost is reflected in net earnings, as all options granted
under  those  plans  had an  exercise  price  equal to the  market  value of the
underlying  common  stock on the date of grant.  The  Company  has  adopted  the
disclosure  standards of Statement of Financial  Accounting Standards (SFAS) No.
123,  "Accounting for Stock-Based  Compensation"  and SFAS 148,  "Accounting for
Stock-Based  Compensation  -  Transition  and  Disclosure  an  amendment of FASB
Statement  123," which require the Company to provide pro forma net earnings and
pro forma earnings per share  disclosures for employee and director stock option
grants made as if the fair-value based method of accounting for stock options as
defined in SFAS No. 123 had been applied.  The following  table  illustrates the
effect on net earnings and per share amounts if the Company had applied the fair
value   recognition   provisions  of  SFAS  No.  123  to  stock-based   employee
compensation:

<TABLE>
<CAPTION>
===============================================================================================
                                                               Year Ended December 31,
                                                               -----------------------
                                                         2005            2004            2003
                                                       (In thousands, except per share amounts)
-----------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>             <C>
Net Earnings
      Net earnings, as reported                       $  10,954       $   8,026       $   5,638

      Deduct:  Total stock-based employee
      compensation expense determined under fair
      value based method, net of related tax
      effects                                              (612)           (722)           (731)
                                                      -----------------------------------------
Net Earnings (pro forma)                              $  10,342       $   7,304       $   4,907
                                                      =========================================

Earnings per share:
      Basic EPS as reported                           $     .95       $     .71       $     .52
      Basic EPS (pro forma)                           $     .89       $     .65       $     .45
      Diluted EPS as reported                         $     .91       $     .69       $     .50
      Diluted EPS (pro forma)                         $     .86       $     .63       $     .43
===============================================================================================
</TABLE>

Impairment of Long-lived Assets
-------------------------------

Long-lived  assets,  such as  property,  plant,  and  equipment,  and  purchased
intangibles subject to amortization, are reviewed for impairment whenever events
or changes in  circumstances  indicate that the carrying  amount of an asset may
not be recoverable.  Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset.  If the carrying  amount of an
asset  exceeds  its  estimated  future  cash  flows,  an  impairment  charge  is
recognized  by the amount by which the carrying  amount of the asset exceeds the
fair value of the asset, which is generally based on discounted cash flows.

New Accounting Pronouncements
-----------------------------

In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R), Shared-Based
Payment which supersedes Accounting Principle Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123(R) requires companies to recognize in the income
statement the


                                       33
<PAGE>

grant-date  fair  value of stock  options  and other  equity-based  compensation
issued to  employees.  The  requirements  of SFAS 123(R) are effective as of the
beginning of the first fiscal year  beginning  after June 15, 2005.  The Company
will be required to adopt the  provisions  of SFAS 123(R) as of January 1, 2006.
Under FAS 123(R), the Company must determine the appropriate fair value model to
be  used  for  valuing  share-based   payments,   the  amortization  method  for
compensation cost, and the transition method to be used at date of adoption. The
permitted   transition   methods   include  either   modified-retrospective   or
modified-prospective  adoption. Under the  modified-retrospective  option, prior
periods may be restated  either as of the  beginning  of the year of adoption or
for  all  periods  presented.  The  modified-prospective  method  requires  that
compensation expense be recorded for all unvested stock options at the beginning
of the first quarter of adoption of FAS 123(R), while the modified-retrospective
methods  would  record  compensation  expense  for all  unvested  stock  options
beginning with the first period  presented.  The Company plans to adopt SFAS No.
123(R) using the modified-prospective  method. Adoption of SFAS 123(R) will have
no impact on the historical  financial statements included in this Annual Report
on Form 10-K.  The impact of adoption of SFAS No.  123(R) cannot be predicted at
this time because it will depend on levels of  share-based  payments  granted in
the future.  However,  had the Company adopted SFAS No. 123(R) in prior periods,
the  impact of that  standard  would  have  approximated  the impact of SFAS No.
123(R) as described in the  disclosure  of pro forma net income and earnings per
share in Note 1 to the consolidated financial statements.

In November 2004, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standard No. 151,  "Inventory  Costs." The new  statement
amends Accounting  Research Bulletin No. 43, Chapter 4, "Inventory  Pricing," to
clarify the accounting for abnormal amounts of idle facility  expense,  freight,
handling costs, and wasted material. This statement requires that those items be
recognized  as current  period  charges and requires  that  allocation  of fixed
production  overheads to the cost of conversion be based on the normal  capacity
of the  production  facilities.  This  statement is  effective  for fiscal years
beginning  after June 15,  2005.  The Company  does not expect  adoption of this
statement  to have a material  impact on its  financial  condition or results of
operations.

Net Earnings Per Common Share
-----------------------------

Basic net earnings per common share is  calculated by dividing net income by the
weighted average number of common shares outstanding during the period.  Diluted
net earnings per common share is  calculated in a manner  consistent  with basic
net earnings per common share except that the weighted  average number of common
shares   outstanding   also  includes  the  dilutive  effect  of  stock  options
outstanding (using the treasury stock method).

NOTE 2 - INVENTORIES
--------------------

Inventories at December 31, 2005 and 2004 consisted of the following:

=================================================
                                2005        2004
-------------------------------------------------
Raw materials                $  4,809    $  2,305
Finished goods                  3,731       4,014
-------------------------------------------------
  Total inventories          $  8,540    $  6,319
=================================================

On a regular  basis,  the Company  evaluates its  inventory  balances for excess
quantities and obsolescence by analyzing demand, inventory on hand, sales levels
and  other  information.  Based on these  evaluations,  inventory  balances  are
reduced, if necessary. The reserve for obsolete or slow moving inventory was $56
and $31 at December 31, 2005 and 2004, respectively.


                                       34
<PAGE>

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------

Property, plant and equipment at December 31, 2005 and 2004 are summarized as
follows:

=====================================================================
                                                 2005         2004
---------------------------------------------------------------------
Land                                           $     290    $     290
Building                                          10,509       10,241
Equipment                                         31,196       28,619
Construction in Progress                             332          387
---------------------------------------------------------------------
                                                  42,327       39,537
Less: Accumulated depreciation                    17,927       15,349
---------------------------------------------------------------------
   Property, plant and equipment, net          $  24,400    $  24,188
=====================================================================

Depreciation expense was $2,686, $2,583 and $2,445 for the years ended December
31, 2005, 2004 and 2003, respectively.

NOTE 4 - ACQUISITION OF ASSETS
------------------------------

Effective June 30, 2005, pursuant to an asset purchase agreement of same date
(the "Asset Purchase Agreement"), the Company acquired certain assets of Loders
Croklaan USA, LLC ("Seller") relating to the encapsulation, agglomeration and
granulation business for a purchase price including acquisition costs of $9,885
plus $725 for certain product inventories and $809 for certain accounts
receivable. With the exception of $985, which was paid during the quarter ended
June 30, 2005, all of such payment was made on July 1, 2005 from the Company's
cash reserves.

The Asset Purchase Agreement also provides for the contingent payment by the
Company of additional consideration to Seller based upon the volume of sales
associated with one particular product acquired by the Company during the three
year period following the acquisition. Such contingent consideration will be
recorded as an additional cost of the acquired product lines.

The preliminary allocation of the purchase price of the acquisition has been
assigned to the long-term net assets acquired as follows:

=================================================
                           Fair Value Recorded
                           in Purchase Accounting
-------------------------------------------------
Equipment                        $  1,436
Customer List                       1,350
Patent                                140
Goodwill                            6,959
-------------------------------------------------
       Total                     $  9,885
=================================================

The purchase price  allocations have been made on the basis of estimates made by
the Company. The financial statement items and amounts are subject to subsequent
revision to give effect to  reclassifications  related to the allocation between
identifiable   assets,   intangible   assets   and   goodwill   and  for   other
pre-acquisition   contingencies  that  may  become  resolved  during  subsequent
periods.

The above  acquisition  has been  accounted  for using  the  purchase  method of
accounting  and the purchase price of the  acquisition  has been assigned to the
net assets  acquired  based on the fair value of such assets and  liabilities at
the date of  acquisition.  The  consolidated  financial  statements  include the
results of operations of the acquired product lines from the date of purchase.


                                       35
<PAGE>

Pro Forma Summary of Operations

The  following  unaudited  pro forma  information  has been  prepared  as if the
aforementioned  acquisition had occurred on January 1, 2004 and does not include
cost savings expected from the transaction. In addition to including the results
of operations,  the pro forma  information  gives effect primarily to changes in
depreciation and  amortization of tangible and intangible  assets resulting from
the acquisition.

The pro forma  information  presented  does not purport to be  indicative of the
results that actually would have been attained if the aforementioned acquisition
had occurred at the beginning of the periods presented and is not intended to be
a projection of future results.

===========================================================
                                          Pro Forma
                                          Year Ended
                                         December 31,
                                     2005          2004
---------------------------------------------------------
      Net sales                   $  86,382     $  71,747
      Net earnings                   11,422         9,042
      Basic EPS                         .99           .80
      Diluted EPS                       .95           .78
=========================================================

NOTE 5 - INTANGIBLE ASSETS WITH FINITE LIVES
--------------------------------------------

As of December 31, 2005 and 2004, the Company had identifiable intangible assets
as follows:

<TABLE>
<CAPTION>
=======================================================================================================
                                                  2005                         2004
                               Amortization      Gross          2005           Gross            2004
                                  Period        Carrying    Accumulated       Carrying     Accumulated
                                (In years)       Amount     Amortization       Amount      Amortization
-------------------------------------------------------------------------------------------------------
<S>                                     <C>      <C>            <C>            <C>             <C>
Customer lists                          10       $  1,350       $     67       $  6,760        $  6,760
Regulatory re-registration
costs                                   10             18              0            356             356
Patents                                 17            753            141            538             105
Trademarks                              17            210             49            207              37
Other                                    5            101             27             54              20
-------------------------------------------------------------------------------------------------------
                                                 $  2,432       $    284       $  7,915        $  7,278
========================================================================================================
</TABLE>

Amortization of identifiable  intangible assets was approximately $123, $688 and
$1,080 for 2005,  2004 and 2003,  respectively.  Assuming no change in the gross
carrying value of identifiable  intangible  assets,  the estimated  amortization
expense is approximately  $194 per annum for 2006 through 2009 and approximately
$184 in  2010.  At  December  31,  2005 and  2004,  there  were no  identifiable
intangible  assets  with  indefinite  useful  lives as defined by SFAS No.  142.
Identifiable  intangible assets are reflected in Intangible  assets,  net in the
Company's consolidated balance sheets. There were no changes to the useful lives
of intangible assets subject to amortization in 2005 and 2004.

At December 31, 2005,  the gross  carrying  amount  included a customer list and
patent  acquired  as part of the  acquisition  of  certain  assets of the Loders
Croklaan  USA,  LLC  encapsulation,   agglomeration  and  granulation  business,
described in note 4.

At December 31, 2004, the gross  carrying  amount and  accumulated  amortization
included a customer list and  regulatory  re-registration  costs that were fully
amortized  during 2004.  The  customer  list was related to the  Company's  1994
purchase  of certain  tangible  and  intangible  assets for one of its  packaged
specialty  products.  The Company  was  required  to pay  additional  contingent
amounts to compensate the seller for the


                                       36
<PAGE>

purchase of the seller's  customer  list in  accordance  with a formula based on
profits derived from sales of the specialty  packaged  ingredient.  In 1998, the
Company  elected to exercise the early  payment  option under the  agreement and
made a final  payment of $3,700 to the  seller in  settlement  of its  remaining
purchase price obligation under the terms of the agreement. Amounts allocated to
the customer list were amortized over its remaining  estimated  useful life on a
straight-line  basis concluding in August 2004 and are included in cost of sales
in 2004. Amortization expense included in cost of sales related to this customer
list was $636 in 2004 and $997 in 2003.

These   fully   amortized   customer   lists  as  well  as  certain   regulatory
re-registration  costs were written-off on March 31, 2005 and,  therefore,  were
not  included  in the gross  carrying  amount and  accumulated  amortization  at
December 31, 2005.

The Company is in the process of  re-registering  a product's  use in compliance
with FIFRA re-registration  requirements for all pesticide products. In December
2004, the U.S. Environmental  Protection Agency ("EPA") informed the Company and
the other technical  registrant under the current  registration that the EPA was
beginning the 6-phase process to develop a Re-registration  Eligibility Decision
(RED) for this  product.  The EPA intends to finalize  the RED by August 2006 in
accordance  with the  statutory  mandate of the Food Quality  Protection  Act of
1996.  This  multi-phase  process has recently  entered Phase 5, and the EPA has
stated that they still intend to finalize the process by the statutory deadline.
The Company has actively participated in the RED process and will continue to do
so until its conclusion.  As of this date, the EPA has expressed  concerns about
dietary  exposures to a reaction product,  as well as occupational  exposures to
the product itself. The EPA requested  additional  information from the industry
which the Company  will be  actively  involved  in  providing.  The EPA has also
indicated  that  additional  testing may be  required  in order to maintain  the
current uses.  The Company  believes that the use will continue to be permitted,
although  the Agency may require  some  additional  restrictions  on the current
uses. Additionally, the product, when used as a medical device sterilant, has no
known equally effective substitute.  Management believes absence of availability
of this  product  could  not be  easily  tolerated  by  various  medical  device
manufacturers  and the  health  care  industry  due to the  resultant  infection
potential, if the product were unavailable.

NOTE 6 - LONG-TERM DEBT & CREDIT AGREEMENTS
-------------------------------------------

There was no debt  outstanding  at December 31, 2005 or 2004. In June 2001,  the
Company  and  its  principal  bank  entered  into a Loan  Agreement  (the  "Loan
Agreement") providing for a term loan of $13,500, which was subsequently paid in
full in December 2004. The Loan  Agreement  provided for a short-term  revolving
credit  facility  of $3,000 (the  "Revolving  Facility").  Borrowings  under the
Revolving Facility bear interest at LIBOR plus 1.00%. No amounts have been drawn
on the Revolving Facility as of December 31, 2005 and 2004. On February 6, 2006,
the Company and its principal  bank entered into a new loan  agreement (the "New
Loan  Agreement")  providing  for an  unsecured  term loan of $10,000 (the "Term
Loan"),  the  proceeds of which were used to fund an  acquisition,  in part,  as
described in Note 13. The Term Loan is payable in equal monthly  installments of
principal,  together with accrued interest,  and has a maturity date of March 1,
2009.  The Term Loan is subject to an  interest  rate equal to LIBOR plus 1.00%.
The New Loan  Agreement  also  provides  for an unsecured  short-term  revolving
credit facility of $3,000 (the "New Revolving  Facility").  Borrowings under the
New Revolving Facility bear interest at LIBOR plus 1.00%.  Certain provisions of
the Term Loan require  maintenance  of certain  financial  ratios,  limit future
borrowings  and impose certain other  requirements  as contained in the New Loan
Agreement.  No amounts have been drawn on the New  Revolving  Facility as of the
date hereof.  The New Revolving Facility expires in February,  2007.  Management
believes that such facility will be renewed in the normal course of business.


                                       37
<PAGE>

NOTE 7 - INCOME TAXES
---------------------

Income tax expense consists of the following:

================================================================================
                                                2005         2004         2003
--------------------------------------------------------------------------------
Current:
   Federal                                    $  4,875     $  2,849     $  2,111
   State                                           763          453          416
Deferred:
   Federal                                         541        1,244          557
   State                                            58          143           41
--------------------------------------------------------------------------------
Total income tax provision                    $  6,237     $  4,689     $  3,125
================================================================================

The provision for income taxes differs from the amount  computed by applying the
Federal  statutory rate of 35% to earnings  before income tax expense due to the
following:

===============================================================================
                                             2005          2004          2003
-------------------------------------------------------------------------------
Income tax at Federal
   statutory rate                          $  6,017      $  4,450      $  3,067
State income taxes, net of
   Federal income tax benefit                   534           379           297
Other                                          (314)         (140)         (239)
-------------------------------------------------------------------------------
Total income tax provision                 $  6,237      $  4,689      $  3,125
===============================================================================

The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2005 and
2004 were as follows:

================================================================================
                                                             2005         2004
--------------------------------------------------------------------------------
Deferred tax assets:
   Customer list amortization                              $    119     $    551
   Inventories                                                  213          203
   Deferred compensation                                          6           25
   Non-employee stock options                                    99          100
   Other                                                        231          274
--------------------------------------------------------------------------------
        Total deferred tax assets                               668        1,153
--------------------------------------------------------------------------------
Deferred tax liabilities:
   Depreciation                                               3,712        3,788
   Prepaid expense                                              695          505
--------------------------------------------------------------------------------
        Total deferred tax liabilities                        4,407        4,293
--------------------------------------------------------------------------------
        Net deferred tax liability                         $  3,739     $  3,140
================================================================================

There is no valuation allowance for deferred tax assets at December 31, 2005 and
2004.  In  assessing  the  realizability  of  deferred  tax  assets,  management
considers  whether it is more  likely  than not that some  portion or all of the
deferred tax assets will not be realized.  The ultimate  realization of deferred
tax assets is dependent  upon the generation of future taxable income during the
periods in which  those  temporary  differences  become  deductible.  Management
considers the scheduled  reversal of deferred tax liabilities,  projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income
over the periods in which the  deferred  tax assets are  deductible,  management
believes it is more likely than not the  Company  will  realize the  benefits of
these  deductible  differences.  The amount of  deferred  tax asset  realizable,
however,  could change if management's  estimate of future taxable income should
change.


                                       38
<PAGE>

NOTE 8 - STOCKHOLDERS' EQUITY
-----------------------------

On  December  15,  2005,  the  Board of  Directors  of the  Company  approved  a
three-for-two  split of the Company's common stock to be effected in the form of
a stock  dividend to  shareholders  of record on December 30,  2005.  Such stock
dividend  was made on  January  20,  2006.  The stock  split was  recognized  by
reclassifying  the par value of the additional  shares resulting from the split,
from additional paid-in capital to common stock.

On  December  16,  2004,  the  Board of  Directors  of the  Company  approved  a
three-for-two  split of the Company's common stock to be effected in the form of
a stock  dividend to  shareholders  of record on December 30,  2004.  Such stock
dividend  was made on  January  20,  2005.  The stock  split was  recognized  by
reclassifying  the par value of the additional  shares resulting from the split,
from additional paid-in capital to common stock.

All  references to number of common  shares and per share amounts  except shares
authorized  in  the   accompanying   consolidated   financial   statements  were
retroactively adjusted to reflect the effect of the December 2005 stock split.

In June 1999, the board of directors  authorized the repurchase of shares of the
Company's  outstanding  common stock over a two-year  period  commencing July 2,
1999.  Under this program,  which was  subsequently  extended  through 2006, the
Company had, as of December 31, 2004,  repurchased a total 514,974  shares at an
average cost of $6.17 per share,  none of which remained in treasury at December
31, 2004. In June 2005, the board of directors  authorized  another extension of
the stock repurchase  program for up to an additional  600,000 shares,  over and
above those 514,974  shares  previously  repurchased  under the program.  During
2005, a total of 66,300 shares have been  purchased at an average cost of $18.07
per share,  64,016 of which remain in treasury at December 31, 2005. The Company
intends to acquire  shares from time to time at prevailing  market prices if and
to the extent it deems it  advisable  to do so based among other  factors on its
assessment of corporate cash flow and market conditions.

In June 1999, the Company adopted the Balchem  Corporation  1999 Stock Plan (the
"1999 Stock Plan") for officers, directors,  directors emeritus and employees of
and  consultants  to the  Company and its  subsidiaries.  The 1999 Stock Plan is
administered  by the  Compensation  Committee  of the Board of  Directors of the
Company.  Under the plan, options and rights to purchase shares of the Company's
common  stock are  granted at prices  established  at the time of grant.  Option
grants generally become exercisable 20% after 1 year, 60% after 2 years and 100%
after 3 years from the date of grant for employees and are fully  exercisable on
the  date  of  grant  for  directors.  Other  option  grants  are  either  fully
exercisable  on the date of  grant  or  become  exercisable  thereafter  in such
installments  as the  Committee  may  specify.  The 1999  Stock  Plan  initially
reserved an  aggregate  of 900,000  shares  (unadjusted  for the stock split) of
common stock for issuance  under the Plan. In April 2003, the Board of Directors
of the Company adopted and stockholders  subsequently  approved, the Amended and
Restated  1999 Stock Plan which  amended the 1999 Stock Plan by: (i)  increasing
the number of shares of common stock  reserved for issuance under the 1999 Stock
Plan by 900,000 shares (unadjusted for the stock split), to a total of 1,800,000
shares (unadjusted for the stock split) of common stock; and (ii) confirming the
right of the Company to grant awards of common stock  ("Awards")  in addition to
the other  Stock  Rights  available  under the 1999 Stock  Plan,  and  providing
certain  language  changes  relating  thereto.  The 1999 Stock Plan replaced the
Company's  incentive  stock  option plan (the "ISO Plan") and its  non-qualified
stock option plan (the "Non-Qualified  Plan"), both of which expired on June 24,
1999.  Unexercised options granted under the ISO Plan and the Non-Qualified Plan
prior to such  termination  remain  exercisable in accordance  with their terms.
Options  granted under the ISO Plan  generally  become  exercisable  20% after 1
year,  60% after 2 years  and 100%  after 3 years  from the date of  grant,  and
expire ten years from the date of grant. Options granted under the Non-Qualified
Plan,  generally vested on the date of grant, and expire ten years from the date
of grant.

On December 29,  2005,  the Board of  Directors  of the Company  authorized  the
Company to enter into Restricted Stock Purchase Agreements (the "Agreements") to
purchase the Company's common stock with


                                       39
<PAGE>

the five  non-employee  directors of the Company  pursuant to the Company's 1999
Stock Plan.  This  Agreement  replaces the Stock  Option Plan that  non-employee
directors   participated  in  in  prior  years.   Under  the  Agreements,   each
non-employee  director  purchased 4,500 shares of the Company's  common stock at
the purchase price of $.04-44/100 per share. The purchased stock is subject to a
repurchase  option in favor of the Company and to restrictions on transfer until
it vests in accordance with the provisions of the Agreements.

A summary of stock option plan activity for 2005,  2004,  and 2003 for all plans
is as follows:

================================================================================
                                                 # of           Weighted Average
                2005                            Shares           Exercise Price
--------------------------------------------------------------------------------
Outstanding at beginning of year               1,184,764           $   9.30
Granted                                          438,165              19.56
Exercised                                       (174,471)              8.07
Terminated or expired                            (12,993)             11.11
--------------------------------------------------------------------------------
Outstanding at end of year                     1,435,465           $  12.57
--------------------------------------------------------------------------------
Exercisable at end of year                       777,715           $   9.13
================================================================================

================================================================================
                                                 # of           Weighted Average
                2004                            Shares           Exercise Price
--------------------------------------------------------------------------------
Outstanding at beginning of year               1,351,375           $   7.12
Granted                                          337,497              12.60
Exercised                                       (475,472)              5.39
Terminated or expired                            (28,636)             10.21
--------------------------------------------------------------------------------
Outstanding at end of year                     1,184,764           $   9.31
--------------------------------------------------------------------------------
Exercisable at end of year                       682,209           $   7.51
================================================================================

================================================================================
                                                 # of           Weighted Average
                2003                            Shares           Exercise Price
--------------------------------------------------------------------------------
Outstanding at beginning of year               1,315,508           $   6.50
Granted                                          281,160               9.68
Exercised                                       (160,782)              5.03
Terminated or expired                            (84,511)              9.89
--------------------------------------------------------------------------------
Outstanding at end of year                     1,351,375           $   7.12
--------------------------------------------------------------------------------
Exercisable at end of year                       899,620           $   5.84
================================================================================

The fair value of each stock option  granted during the year is estimated on the
date of grant using the  Black-Scholes  option  pricing model with the following
assumptions:

===============================================================================
                                                   2005        2004        2003
-------------------------------------------------------------------------------
Expected life (years)                                 4           5           5
Expected volatility                                  28%         27%         33%
Expected dividend yield                             .36%        .40%        .40%
Risk-free interest rate                             3.8%        3.7%        3.0%
Weighted average fair value of options
granted during the year                           $5.19       $4.05       $3.59
===============================================================================

If the  fair-value  method  to  measure  compensation  cost for all of the above
mentioned  plans and awards  had been  used,  the  compensation  cost,  which is
required to be charged against income would have been $612 in 2005, $722 in 2004
and $731 in 2003. See Note 1 for the pro forma presentation.

Information related to stock options outstanding under all plans at December 31,
2005 is as follows:


                                       40
<PAGE>

<TABLE>
<CAPTION>
================================================================================================
                                          Options Outstanding            Options Exercisable
                                      ----------------------------    --------------------------
                                          Weighted       Weighted                       Weighted
                                          Average         Average                       Average
Range of Exercise        Shares          Remaining       Exercise        Number         Exercise
      Prices           Outstanding    Contractual Life     Price       Exercisable       Price
------------------------------------------------------------------------------------------------
<S>                     <C>              <C>              <C>            <C>             <C>
$  2.52 - $ 10.15         560,172        5.3 years        $  7.53        483,132         $  7.11
  10.24 -   15.42         457,378        8.1 years          12.14        220,168           11.07
  16.47 -   21.38         417,915        9.6 years          19.80         74,415           16.47
------------------------------------------------------------------------------------------------
                        1,435,465        7.4 years        $ 12.57        777,715         $  9.13
================================================================================================
</TABLE>

NOTE 9 - NET EARNINGS PER COMMON SHARE
--------------------------------------

The following presents a reconciliation of the numerator and denominator used in
calculating basic and diluted net earnings per common share:

<TABLE>
<CAPTION>
==========================================================================================================
                                                              Earnings        Number of Shares   Per Share
                    2005                                     (Numerator)       (Denominator)       Amount
----------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>                <C>
Basic EPS - Net earnings and weighted average
common shares outstanding                                        $ 10,954          11,560,756         $.95

Effect of dilutive securities - stock options                                         495,825
                                                                                   ----------

Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options                   $ 10,954          12,056,581         $.91
==========================================================================================================

<CAPTION>
==========================================================================================================
                                                              Earnings        Number of Shares   Per Share
                    2004                                     (Numerator)       (Denominator)       Amount
----------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>                <C>
Basic EPS - Net  earnings and weighted average
common shares outstanding                                        $  8,026          11,264,432         $.71

Effect of dilutive securities - stock options                                         380,916
                                                                                   ----------

Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options                   $  8,026          11,645,348         $.69
==========================================================================================================

<CAPTION>
==========================================================================================================
                                                              Earnings        Number of Shares   Per Share
                    2003                                     (Numerator)       (Denominator)       Amount
----------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>                <C>
Basic EPS - Net  earnings and weighted average common
shares outstanding                                               $  5,638          10,835,739         $.52

Effect of dilutive securities - stock options                                         409,355
                                                                                   ----------

Diluted EPS - Net earnings and weighted average common
shares outstanding and effect of stock options                   $  5,638          11,245,094         $.50
==========================================================================================================
</TABLE>

The Company had 321,000, 1,800 and 249,225 stock options outstanding at December
31,  2005,  2004 and 2003,  respectively  that could  potentially  dilute  basic
earnings per share in future periods that were not included in diluted  earnings
per share because their effect on the period presented was anti-dilutive.

NOTE 10 - EMPLOYEE BENEFIT PLANS
--------------------------------

The Company  sponsors a 401(k)  savings  plan for eligible  employees.  The plan
allows participants to make pretax contributions and the Company matches certain
percentages of those pretax contributions with shares


                                       41
<PAGE>

of the  Company's  common  stock.  The  profit  sharing  portion  of the plan is
discretionary  and  non-contributory.  All amounts  contributed  to the plan are
deposited into a trust fund  administered by independent  trustees.  The Company
provided  for profit  sharing  contributions  and matching  401(k)  savings plan
contributions  of $326 and $276 in 2005, $301 and $257 in 2004 and $307 and $273
in 2003, respectively.

The Company also currently  provides  postretirement  benefits in the form of an
unfunded  retirement  medical  plan  under  a  collective  bargaining  agreement
covering eligible retired  employees of the Verona facility.  The Company uses a
December 31 measurement date for its postretirement medical plan.

The actuarial recorded liabilities for such unfunded  postretirement  benefit is
as follows:

Change in benefit obligation:
===============================================================================
                                                             2005        2004
-------------------------------------------------------------------------------
Benefit obligation at beginning of year                    $   867      $ 1,082
         Service Cost with Interest to End of Year              32           31
         Interest Cost                                          50           49
         Participant contributions                              11           20
         Plan amendments                                         0         (221)
         Benefits Paid                                         (25)         (55)
         Actuarial (gain) or loss                                7          (39)
--------------------------------------------------------------------------------
Benefit obligation at end of year                          $   942      $   867
===============================================================================

Change in plan assets:
===============================================================================
                                                             2005         2004
-------------------------------------------------------------------------------
Fair value of plan assets at beginning of year             $    --      $    --
         Employer contributions                                 15           35
         Participant contributions                              11           20
         Benefits Paid                                         (26)         (55)
-------------------------------------------------------------------------------
Fair value of plan assets at end of year                   $    --      $    --
===============================================================================

Amounts recognized in consolidated balance sheet:
================================================================================
                                                             2005         2004
-------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation              $  (942)     $  (867)
Fair Value of Plan Assets                                       --           --
Funded Status                                                 (942)        (867)
Unrecognized Prior Service Cost                               (191)        (210)
Unrecognized Net (Gain)/Loss                                   146          143
-------------------------------------------------------------------------------
Accrued Postretirement Benefit Cost
(included in other long-term obligations)                  $   987      $   934
===============================================================================

Components of net periodic benefit cost:
================================================================================
                                                   2005        2004        2003
--------------------------------------------------------------------------------
Service Cost with Interest to End of Year        $    32     $    31          32
Interest Cost                                         50          49          62
Amortization of prior service cost                   (18)        (10)         --
Amortization of (gain) or loss                         3          --           1
--------------------------------------------------------------------------------
Total net periodic benefit cost                  $    67     $    70          95
================================================================================


                                       42
<PAGE>

Estimated future employer contributions and benefit payments are as follows:

=====================================
          Year
-------------------------------------
2006                          $    53
2007                               54
2008                               53
2009                               62
2010                               55
Years 2011-2015                   253
=====================================

Assumed  health  care  cost  trend  rates  have been  used in the  valuation  of
postretirement  health insurance benefits.  The trend rate is 11 percent in 2005
declining to 5 percent in 2012 and thereafter.  A one percentage  point increase
in health  care cost trend  rates in each year would  increase  the  accumulated
postretirement  benefit  obligation  as of December 31, 2005 by $108 and the net
periodic  postretirement  benefit cost for 2005 by $12. A one  percentage  point
decrease  in  health  care cost  trend  rates in each year  would  decrease  the
accumulated postretirement benefit obligation as of December 31, 2005 by $93 and
the net  periodic  postretirement  benefit  cost for 2005 by $10.  The  weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was 5.75% in 2005 and 6.00% in 2004.

In December 2003, the Medicare Prescription Drug,  Improvement and Modernization
Act of 2003 (the Act) was signed into law.  The Act  introduced  a plan  sponsor
subsidy  based on a  percentage  of a  beneficiary's  annual  prescription  drug
benefits,  within defined  limits,  and the  opportunity for a retiree to obtain
prescription drug benefits under Medicare. There was no impact of the subsidy on
the postretirement  benefit obligation and net periodic cost in 2004 as Medicare
eligible retirees are not covered under the Company's plan.

NOTE 11 - COMMITMENTS AND CONTINGENCIES
---------------------------------------

In connection  with the  aforementioned  acquisition of certain assets of Loders
Croklaan  USA,  LLC,  as  described  in  Note  4 to the  consolidated  financial
statements,  the Company entered into a lease agreement with seller, whereby the
Company  will lease a portion of seller's  Channahon,  Illinois  facility  where
seller principally  conducted the manufacturing portion of the acquired business
and utilized certain warehouse space. The initial term of the lease commenced in
February,  2006  and  runs  through  September  30,  2010,  subject  to  earlier
termination as defined in the lease agreement.  In addition, the Company entered
into certain  short-term  services and tolling  agreements  with the Seller.  In
February  2002,  the  Company  entered  into a ten  (10)  year  lease  which  is
cancelable in 2009 for  approximately  20,000  square feet of office space.  The
office space is now serving as the Company's general offices and as a laboratory
facility.  The Company  leases most of its vehicles and office  equipment  under
non-cancelable  operating  leases,  which expire at various  times through 2011.
Rent expense  charged to operations  under such lease  agreements for 2005, 2004
and 2003 aggregated approximately $576, $566 and $564,  respectively.  Aggregate
future minimum rental payments required under non-cancelable operating leases at
December 31, 2005 are as follows:

==========================================
          Year
------------------------------------------
2006                               $   562
2007                                   521
2008                                   478
2009                                   569
2010                                   150
Thereafter                              21
------------------------------------------
Total minimum lease payments       $ 2,301
==========================================

In 1982, the Company  discovered and thereafter removed a number of buried drums
containing  unidentified  waste  material from the Company's site in Slate Hill,
New York. The Company  thereafter  entered into a Consent Decree to evaluate the
drum site with the New York Department of Environmental Conservation


                                       43
<PAGE>

("NYDEC")  and  performed  a Remedial  Investigation/Feasibility  Study that was
approved by NYDEC in February  1994.  Based on NYDEC  requirements,  the Company
cleaned the area and removed additional soil from the drum burial site. The cost
for this clean-up and the related reports was approximately  $164.  Clean-up was
completed  in 1996,  but NYDEC  required the Company to monitor the site through
1999. The Company continues to be involved in discussions with NYDEC to evaluate
test results and determine what, if any,  additional actions will be required on
the part of the Company to close out the  remediation  of this site.  Additional
actions,  if any,  would likely  require the Company to continue  monitoring the
site. The cost of such monitoring has recently been less than $5 per year.

The  Company's  Verona,  Missouri  facility,  while held by a prior  owner,  was
designated by the EPA as a Superfund site and placed on the National  Priorities
List  in  1983,  because  of  dioxin  contamination  on  portions  of the  site.
Remediation  conducted by the prior owner under the oversight of the EPA and the
Missouri  Department of Natural  Resources  ("MDNR")  included removal of dioxin
contaminated soil and equipment,  capping of areas of residual  contamination in
four  relatively  small  areas  of the  site  separate  from  the  manufacturing
facilities,  and the  installation  of wells to monitor  groundwater and surface
water  contamination  by organic  chemicals.  No ground  water or surface  water
treatment was required.  The Company  believes that  remediation  of the site is
complete.  In 1998, the EPA certified the work on the  contaminated  soils to be
complete.  In February  2000,  after the  conclusion  of two years of monitoring
groundwater  and surface water,  the former owner  submitted a draft third party
risk assessment report to the EPA and MDNR  recommending no further action.  The
prior  owner is  awaiting  the  response  of the EPA and MDNR to the draft  risk
assessment.

While the  Company  must  maintain  the  integrity  of the  capped  areas in the
remediation  areas on the site, the prior owner is responsible for completion of
any further  Superfund  remedy.  The Company is indemnified by the sellers under
its May 2001 asset purchase  agreement  covering its  acquisition of the Verona,
Missouri facility for potential  liabilities  associated with the Superfund site
and  one of the  sellers,  in  turn,  has the  benefit  of  certain  contractual
indemnification  by the prior  owner that is  implementing  the  above-described
Superfund remedy.

From time to time,  the  Company  is a party to various  litigation,  claims and
assessments. Management believes that the alternate outcome of such matters will
not have a material  effect on the Company's  consolidated  financial  position,
results of operations, or liquidity.

NOTE 12 - LICENSE AGREEMENT
---------------------------

On November 7, 2005, the Company entered into a license  agreement (the "License
Agreement")  with Project  Management  and  Development  Co.,  Ltd.  ("PMD"),  a
corporation  organized  under the laws of Great Britain.  The License  Agreement
gives  PMD  the  right  to  utilize   the   Company's   proprietary   continuous
manufacturing   technology  for  the  production  of  aqueous  choline  chloride
("Company Technology") in connection with PMD's construction and operation of an
aqueous choline chloride  production  facility at PMD's Al-JuBail,  Saudi Arabia
petrochemical facility, currently scheduled for completion in 2008.

The  License  Agreement  provides  PMD with the  exclusive  right to use Company
Technology in certain countries,  as well as the non-exclusive  right to market,
sell and use the products derived from Company Technology on a world-wide basis.
The License  Agreement further provides that the Company will be PMD's exclusive
North American  distributor  for said products during the term of the agreement.
The License Agreement  terminates either 10 years from the start-up of the PMD's
production facility or December 31, 2020, whichever is earlier.

Pursuant  to the  License  Agreement,  PMD will pay the Company a license fee of
$1,400 and fees of $840 for the  delivery by the Company of certain  preliminary
drawings,   specifications,   process  design   documents   containing   Company
Technology,  and additional training.  These fees are to be paid in installments
upon  achievement  of certain  performance  milestones  set forth in the License
Agreement.

The Company will provide certain performance  guarantees associated with Company
Technology.  In the  event  that the PMD  manufacturing  facility,  if  properly
designed and constructed, fails to attain said


                                       44
<PAGE>

performance  guarantees,  liquidated damages may be assessed,  but not exceeding
70% of the license fee.

The Company is using the  percentage of completion  method to recognize  revenue
and expenses related to the License  Agreement and the  efforts-expended  method
for measuring the progress to  completion.  As of December 31, 2005, the Company
has recognized  $158 of income and $138 in expenses.  These amounts are included
in the net sales and cost of sales totals in the BCP Ingredients segment.

NOTE 13 - SUBSEQUENT EVENTS
---------------------------

On February 8, 2006, the Company,  through its wholly owned  subsidiary  Balchem
Minerals Corporation ("BMC"), completed an acquisition of all of the outstanding
capital stock of Chelated Minerals  Corporation  ("CMC"),  a privately held Utah
corporation,  for a purchase price of $17,350  subject to adjustment  based upon
CMC's actual  working  capital and other  adjustments.  On February 6, 2006, the
Company and its principal  bank entered into a new Loan Agreement (the "New Loan
Agreement")  providing for an unsecured  term loan of $10,000 (the "Term Loan"),
the proceeds of which were used to fund the acquisition,  in part. The remaining
balance of the purchase price of the  Acquisition  was funded through  Balchem's
cash on  hand.  The  Term  Loan is  payable  in equal  monthly  installments  of
principal,  together with accrued interest,  and has a maturity date of March 1,
2009.  The Term Loan is subject to an  interest  rate equal to LIBOR plus 1.00%.
The Loan Agreement also provides for an unsecured  short-term  revolving  credit
facility  of $3,000 (the "New  Revolving  Facility").  Borrowings  under the New
Revolving Facility bear interest at LIBOR plus 1.00%. No amounts have been drawn
on the New Revolving  Facility as of the date hereof. The New Revolving Facility
expires in  February,  2007.  Management  believes  that such  facility  will be
renewed in the normal course of business.

NOTE 14 - SEGMENT INFORMATION
-----------------------------

The Company's  reportable segments are strategic  businesses that offer products
and services to different  markets.  The Company  presently has three  segments:
specialty products,  encapsulated / nutritional  products and the unencapsulated
feed  supplements  segment  (also  referred  to as  BCP  Ingredients).  Products
relating to choline animal feed for non-ruminant  animals are primarily reported
in the unencapsulated feed supplements segment. Human choline nutrient products,
pharmaceutical   products  and   encapsulated   products  are  reported  in  the
encapsulated / nutritional products segment. They are managed separately because
each  business  requires  different  technology  and marketing  strategies.  The
specialty  products  segment  consists of three  specialty  chemicals:  ethylene
oxide,  propylene  oxide and methyl  chloride.  The  encapsulated  / nutritional
products  segment  provides  microencapsulation,  granulation and  agglomeration
solutions to a variety of applications in food,  pharmaceutical  and nutritional
ingredients to enhance  performance of  nutritional  fortification,  processing,
mixing,   packaging   applications  and  shelf-life.   The  unencapsulated  feed
supplements  segment is in the business of manufacturing  and supplying  choline
chloride,  an  essential  nutrient for animal  health,  to the poultry and swine
industries.  In  addition,  certain  derivatives  of choline  chloride  are also
manufactured  and sold into  industrial  applications  and are  included  in the
unencapsulated  feed  supplements  segment.  The Company sells  products for all
segments  through  its own  sales  force,  independent  distributors,  and sales
agents. The accounting  policies of the segments are the same as those described
in the summary of significant accounting policies.

Business Segment Net Sales:
================================================================================
                                            2005          2004          2003
--------------------------------------------------------------------------------
Specialty Products                       $   29,433    $   28,767    $   26,163
Encapsulated/Nutritional Products            32,499        24,759        24,043
BCP Ingredients                              21,163        13,880        11,669
--------------------------------------------------------------------------------
Total                                    $   83,095    $   67,406    $   61,875
================================================================================


                                       45
<PAGE>

Business Segment Earnings (Loss) Before Income Taxes:
================================================================================
                                            2005          2004          2003
--------------------------------------------------------------------------------
Specialty Products                       $   11,007    $   10,693    $    9,409
Encapsulated/Nutritional Products             3,217           992          (962)
BCP Ingredients                               2,679         1,112           568
Interest and other income (expense)             288           (82)         (252)
--------------------------------------------------------------------------------
Earnings before income taxes             $   17,191    $   12,715    $    8,763
================================================================================

Depreciation/Amortization:
================================================================================
                                            2005          2004          2003
--------------------------------------------------------------------------------
Specialty Products                       $    1,027    $    1,668    $    1,992
Encapsulated/Nutritional Products             1,313         1,155         1,102
BCP Ingredients                                 469           448           431
--------------------------------------------------------------------------------
Total                                    $    2,809    $    3,271    $    3,525
================================================================================

Business Segment Assets:
================================================================================
                                            2005          2004          2003
--------------------------------------------------------------------------------
Specialty Products                       $   19,799    $   18,456    $   19,376
Encapsulated/Nutritional Products            25,139        15,594        16,321
BCP Ingredients                              14,141        11,424        10,732
Other Unallocated                            16,062        14,931        10,477
--------------------------------------------------------------------------------
Total                                    $   75,141    $   60,405    $   56,906
================================================================================

Other unallocated  assets consist of certain cash,  prepaid  expenses,  deferred
income taxes and other deferred charges,  which the Company does not allocate to
its individual business segments.

Capital Expenditures:
================================================================================
                                            2005          2004          2003
--------------------------------------------------------------------------------
Specialty Products                       $      366    $      224    $    1,090
Encapsulated/Nutritional Products               520           470           661
BCP Ingredients                                 883           521           519
--------------------------------------------------------------------------------
Total                                    $    1,769    $    1,215    $    2,270
================================================================================

Geographic Revenue Information:
================================================================================
                                            2005          2004          2003
--------------------------------------------------------------------------------
United States                            $   77,355    $   61,869    $   56,727
Foreign Countries                             5,740         5,537         5,148
--------------------------------------------------------------------------------
Total                                    $   83,095    $   67,406    $   61,875
================================================================================

The Company has no foreign-based  operations.  Therefore,  all long-lived assets
are in the United States and revenue from foreign countries is based on customer
ship-to address.

NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
--------------------------------------------

Cash paid during the year for:
==========================================================
                          2005         2004         2003
----------------------------------------------------------
Income taxes            $  5,133     $  3,421     $  2,110
Interest                $      8     $    219     $    272
==========================================================

Non-cash financing activities:
==========================================================
                          2005         2004         2003
----------------------------------------------------------
Dividends payable       $  1,045     $    685     $    389
==========================================================


                                       46
<PAGE>

NOTE 16 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
------------------------------------------------------

(In thousands, except per share data)

<TABLE>
<CAPTION>
==============================================================================================================
                                            2005                                        2004
--------------------------------------------------------------------------------------------------------------
                           First     Second      Third     Fourth      First     Second     Third      Fourth
                          Quarter    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter    Quarter
--------------------------------------------------------------------------------------------------------------
<S>                       <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Net sales                 $19,340    $19,484    $21,145    $23,126    $15,644    $16,449    $17,356    $17,957
Gross profit                7,182      7,112      7,649      6,737      5,613      6,023      6,219      5,951
Earnings before
   income taxes             4,069      4,346      4,857      3,919      2,901      3,167      3,391      3,256
Net earnings                2,568      2,730      3,024      2,632      1,816      2,001      2,160      2,049
Basic net earnings
   per common share       $   .23    $   .23    $   .26    $   .23    $   .16    $   .18    $   .19    $   .18
Diluted net earnings
   per common share       $   .21    $   .23    $   .25    $   .22    $   .16    $   .17    $   .19    $   .17
==============================================================================================================
</TABLE>


                                       47
<PAGE>

             Report of Independent Registered Public Accounting Firm

To the Board of Directors
Balchem Corporation
New Hampton, NY

Our audits of the  consolidated  financial  statements and internal control over
financial  reporting  referred to in our report  dated March 16, 2006  (included
elsewhere  in this  Annual  Report on Form 10-K)  also  included  the  financial
statement schedule of Balchem Corporation and Subsidiaries, listed in Item 15(a)
of this Form 10-K for the years ended December 31, 2005 and 2004.  This schedule
is the responsibility of Balchem Corporation's management. Our responsibility is
to  express  an  opinion  based  on our  audits  of the  consolidated  financial
statements.

In our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

/s/McGladrey & Pullen, LLP
New York, NY
March 16, 2006


                                       48
<PAGE>

                                                                     Schedule II

                               BALCHEM CORPORATION
                        Valuation and Qualifying Accounts
                  Years Ended December 31, 2005, 2004 and 2003
                                 (In thousands)

<TABLE>
<CAPTION>
                                                             Additions
                                                     -------------------------
                                      Balance at     Charges to     Charges to
                                     Beginning of    Costs and        Other                         Balance at
Description                              Year         Expenses       Accounts       Deductions      End of Year
------------                         ------------    ----------     ----------     ------------     -----------
<S>                                    <C>            <C>            <C>           <C>               <C>
Year ended December 31, 2005
   Allowance for doubtful accounts     $     82       $     --       $     --      $    (32)(a)      $     50
   Inventory obsolescence reserve            31             25             --            --                56

Year ended December 31, 2004
   Allowance for doubtful accounts     $     86       $     --       $     --      $     (4)(a)      $     82
   Inventory obsolescence reserve            76             --             --           (45)(a)            31

Year ended December 31, 2003
   Allowance for doubtful accounts     $     90       $     36       $     --      $    (40)(a)      $     86
   Inventory obsolescence reserve           192             --             --          (116)(a)            76
</TABLE>

(a)   represents write-offs.


                                       49
<PAGE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

      KPMG  LLP  ("KPMG")  resigned  as  the  Company's  principal  accountants,
effective  August 18, 2004.  KPMG's audit reports on the Company's  consolidated
financial  statements as of and for the fiscal years ended December 31, 2002 and
2003 did not contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty or audit scope.  KPMG's report  covering
these consolidated  financial  statements referred to a change in accounting for
goodwill and intangible assets effective January 1, 2002.

      During the Company's  fiscal years ended  December 31, 2002 and 2003,  and
the subsequent  interim period from January 1, 2004 through August 18, 2004, the
date of KPMG's  resignation,  (i) there were no  disagreements  with KPMG on any
matter of accounting principles or practices, financial statement disclosure, or
auditing  scope or  procedure,  which  disagreements,  if not resolved to KPMG's
satisfaction,  would have caused KPMG to make reference to the subject matter of
the  disagreements  in  connection  with  its  report,  and (ii)  there  were no
"reportable  events" as such term is defined in Item  304(a)(1)(v) of Regulation
S-K.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

      The Company's  management,  with the  participation of the Company's Chief
Executive Officer and Chief Financial  Officer,  has evaluated the effectiveness
of the Company's  disclosure controls and procedures (as such term is defined in
Rules  13a-15(e) and  15d-15(e)  under the  Securities  Exchange Act of 1934, as
amended) as of the end of the period covered by this Annual Report on Form 10-K.
Based on such  evaluation,  the  Company's  Chief  Executive  Officer  and Chief
Financial  Officer  have  concluded  that,  as of the  end of such  period,  the
Company's disclosure controls and procedures are effective.

Management's Report on Internal Control Over Financial Reporting

      Management  of  Balchem   Corporation,   together  with  its  consolidated
subsidiaries  (the  "Company"),  is responsible for establishing and maintaining
adequate  internal  control over  financial  reporting.  The Company's  internal
control over financial  reporting is a process designed under the supervision of
the Company's  principal  executive and principal  financial officers to provide
reasonable  assurance  regarding the reliability of financial  reporting and the
preparation  of  the  Company's  financial  statements  for  external  reporting
purposes in accordance with U.S. generally accepted accounting principles.

      As of  December  31,  2005,  management  conducted  an  assessment  of the
effectiveness of the Company's  internal control over financial  reporting based
on the framework  established in Internal Control - Integrated  Framework issued
by the Committee of Sponsoring  Organizations of the Treadway Commission (COSO).
Based on this assessment,  management has determined that the Company's internal
control over financial reporting as of December 31, 2005 was effective.

      Our  internal  control  over  financial  reporting  includes  policies and
procedures  that  pertain to the  maintenance  of records  that,  in  reasonable
detail,  accurately and fairly reflect  transactions and dispositions of assets;
provide  reasonable  assurances that  transactions  are recorded as necessary to
permit  preparation of financial  statements in accordance  with U.S.  generally
accepted  accounting  principles,  and that receipts and  expenditures are being
made only in accordance with  authorizations  of management and the directors of
the Company;  and provide reasonable  assurance  regarding  prevention or timely
detection of  unauthorized  acquisition,  use or  disposition  of the  Company's
assets that could have a material effect on our financial statements.

Attestation Report of Registered Public Accounting Firm

      Management's  assessment of the  effectiveness  of the Company's  internal
control  over  financial  reporting  as of December 31, 2005 has been audited by
McGladrey & Pullen,  LLP, an independent  registered  public accounting firm, as
stated in their report which appears herein.


                                       50
<PAGE>

Changes in Internal Control Over Financial Reporting

      There has been no change in our internal control over financial  reporting
in our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

Item 9B . Other Information

      None.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

(a)   Directors of the Company.

      The  required  information  is to be  set  forth  in the  Company's  Proxy
Statement  for  the  2006  Annual  Meeting  of  Stockholders  (the  "2006  Proxy
Statement")  under  the  caption  "Directors  and  Executive   Officers,"  which
information is hereby incorporated herein by reference.

(b)   Executive Officers of the Company.

      The required  information  is to be set forth in the 2006 Proxy  Statement
under the caption  "Directors  and Executive  Officers,"  which  information  is
hereby incorporated herein by reference.

(c)   Section 16(a) Beneficial Ownership Reporting Compliance.

      The required  information  is to be set forth in the 2006 Proxy  Statement
under the caption "Section 16(a)  Beneficial  Ownership  Reporting  Compliance,"
which information is hereby incorporated herein by reference.

(d)   Code of Ethics.

      The  Company has  adopted a Code of Ethics for Senior  Financial  Officers
that applies to its Chief Executive Officer (principal executive officer), Chief
Financial Officer (principal financial officer and principal accounting officer)
and its Treasurer. The Company's Code of Ethics for Senior Financial Officers is
filed as Exhibit 14 to this Annual Report on Form 10-K.

Item 11. Executive Compensation.

      The information required by this Item is to be set forth in the 2006 Proxy
Statement  under  the  caption   "Directors  and  Executive   Officers,"   which
information is hereby incorporated herein by reference.

Item 12.  Security  Ownership of Certain  Beneficial  Owners and  Management and
Related Stockholder Matters.

      The information required by this Item is to be set forth in the 2006 Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
of Management" and the caption "Equity  Compensation  Plan  Information," all of
which information is hereby incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

      The  information  required  by this  Item is set  forth in the 2006  Proxy
Statement  under  the  caption   "Directors  and  Executive   Officers,"   which
information is hereby incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

      The  information  required  by this  Item is set  forth in the 2006  Proxy
Statement  under the caption  "Independent  Auditor Fees," which  information is
hereby incorporated herein by reference.


                                       51
<PAGE>

Item 15. Exhibits and Financial Statement Schedules.

(a)   The following documents are filed as part of this Form 10-K:

<TABLE>
<CAPTION>
                                                                               Form 10-K
      1.    Financial Statements                                               Page Number

<S>                                                                                   <C>
            Reports of Independent Registered Public Accounting Firms                 23

            Consolidated Balance Sheets as of
            December 31, 2005 and 2004                                                26

            Consolidated Statements of Earnings for the
            years ended December 31, 2005, 2004 and 2003                              27

            Consolidated Statements of Stockholders' Equity
            for the years ended December 31, 2005, 2004 and 2003                      28

            Consolidated Statements of Cash Flows
            for the years ended December 31, 2005, 2004 and 2003                      29

            Notes to Consolidated Financial Statements                                30

            Report of Independent Registered Public Accounting Firm                   48

      2.    Financial Statement Schedules

            Schedule II - Valuation and Qualifying
            Accounts for the years ended December 31, 2005, 2004 and 2003             49
</TABLE>

      3.    Exhibits

            2.1   Asset Purchase Agreement,  dated as of May 21, 2001, among BCP
                  Ingredients,  Inc. and DuCoa L.P., DCV, Inc. and DCV GPH, Inc.
                  and  certain  related  agreements  (forms of which  constitute
                  Exhibits to the Asset  Purchase  Agreement) as executed.  (The
                  Disclosure  Schedule  identified   throughout  Asset  Purchase
                  Agreement,  Schedule A to the Obligations Undertaking (list of
                  contracts  assumed by BCP Ingredients,  Inc.) and the Power of
                  Attorney and Security Agreement (referred to in Section 2.6 of
                  the  Asset  Purchase   Agreement)  and   Post-Closing   Escrow
                  Agreement  (referred  to in  Sections  3.2.2  and 3.3.3 of the
                  Asset  Purchase  Agreement),  have been  omitted.  The Company
                  agrees to furnish a copy of these  documents on a supplemental
                  basis to the Securities and Exchange Commission upon request.)
                  (incorporated  by  reference  to exhibit 2.1 to the  Company's
                  Current Report on Form 8-K dated June, 2001(the "2001 8-K".))

            3.1   Composite Articles of Incorporation of the Company.

            3.2   Composite By-laws of the Company (incorporated by reference to
                  Exhibit 3.2 to the Company's  Current Report on Form 8-K dated
                  February 23, 2005).

            4.1   Loan  Agreement  dated February 6, 2006 by and between Bank of
                  America,  N.A. and Balchem Corporation,  Promissory Note dated
                  February 6, 2006 from Balchem  Corporation to Bank of America,
                  N.A., and Amended and Restated Promissory Note (Revolving Line
                  of Credit) dated February 6, 2006 from Balchem  Corporation to
                  Bank of America,  N.A.  (incorporated by reference to Exhibits
                  10.2,  10.3 and 10.4 to the Company's  Current  Report on Form
                  8-K dated February 9, 2006).

            4.2   Amended and Restated  Guaranty dated February 6, 2006 from BCP
                  Ingredients,  Inc. to Bank of America,  N.A.  (incorporated by
                  reference to Exhibit 10.5 to the Company's


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<PAGE>

                  Current Report on Form 8-K dated February 9, 2006).

            4.3   Guaranty  dated   February  6,  2006  from  Balchem   Minerals
                  Corporation  to  Bank  of  America,   N.A.   (incorporated  by
                  reference to Exhibit 10.6 to the Company's  Current  Report on
                  Form 8-K dated February 9, 2006).

            10.1  Incentive  Stock  Option  Plan  of the  Company,  as  amended,
                  (incorporated  by  reference  to  the  Company's  Registration
                  Statement on Form S-8,  File No.  33-35910,  dated October 25,
                  1996,  and to Proxy  Statement,  dated April 22, 1998, for the
                  Company's 1998 Annual Meeting of Stockholders (the "1998 Proxy
                  Statement")).*

            10.2  Stock Option Plan for  Directors  of the  Company,  as amended
                  (incorporated  by  reference  to  the  Company's  Registration
                  Statement on Form S-8,  File No.  33-35912,  dated October 25,
                  1996, and to the 1998 Proxy Statement).

            10.3  Balchem  Corporation  Amended  and  Restated  1999  Stock Plan
                  (incorporated  by reference  to Exhibit 10.3 to the  Company's
                  Quarterly  Report on Form 10-Q for the quarter  ended June 30,
                  2003).*

            10.4  Balchem Corporation  401(k)/Profit Sharing Plan, dated January
                  1,  1998  (incorporated  by  reference  to  Exhibit  4 to  the
                  Company's   Registration  Statement  on  Form  S-8,  File  No.
                  333-118291, dated August 17, 2004).*

            10.5  Employment Agreement, dated as of January 1, 2001, between the
                  Company  and  Dino A.  Rossi  (incorporated  by  reference  to
                  Exhibit 10.5 to the  Company's  Annual Report on Form 10-K for
                  the year ended December 31, 2001 (the "2001 10-K")). *

            10.6  Lease  dated as of  February  8,  2002  between  Sunrise  Park
                  Realty,   Inc.  and  Balchem   Corporation   (incorporated  by
                  reference to Exhibit 10.7 to the 2001 10-K).

            10.7  Asset Purchase  Agreement dated June 30, 2005, between Balchem
                  Corporation  and Loders  Croklaan  USA, LLC  (incorporated  by
                  reference to Exhibit 2.1 of the  Company's  Current  Report on
                  Form 8-K dated July 1, 2005).

            10.8  Stock  Purchase  Agreement  dated  November  2, 2005,  between
                  Balchem Minerals Corporation and Chelated Minerals Corporation
                  (incorporated  by reference  to Exhibit 10.1 of the  Company's
                  Current Report on Form 8-K dated November 7, 2005).

            10.9  Process and Product License  Agreement dated November 7, 2005,
                  between  Balchem   Corporation  and  Project   Management  and
                  Development  Co., Ltd.  (incorporated  by reference to Exhibit
                  10.1  of the  Company's  Current  Report  on  Form  8-K  dated
                  November 14, 2005).

            10.10 Form of  Restricted  Stock  Purchase  Agreement  for Directors
                  (incorporated  by reference  to Exhibit 10.1 of the  Company's
                  Current Report on Form 8-K dated December 30, 2005).

            10.11 First  Amendment to Stock Purchase  Agreement dated January 5,
                  2006,  between  Balchem  Minerals   Corporation  and  Chelated
                  Minerals  Corporation  (incorporated  by  reference to Exhibit
                  10.1 of the Company's Current Report on Form 8-K dated January
                  10, 2006).

            14.   Code of Ethics for Senior Financial Officers  (incorporated by
                  reference to Exhibit 14 to the 2003 10-K).

            21.   Subsidiaries of Registrant.

            23.1  Consent of  McGladrey & Pullen,  LLP,  Independent  Registered
                  Public Accounting Firm

            23.2  Consent of KPMG LLP, Independent  Registered Public Accounting
                  Firm


                                       53
<PAGE>

            31.1  Certification  of Chief  Executive  Officer  pursuant  to Rule
                  13a-14(a).

            31.2  Certification  of Chief  Financial  Officer  pursuant  to Rule
                  13a-14(a).

            32.1  Certification  of Chief  Executive  Officer  pursuant  to Rule
                  13a-14(b)  and  Section  1350 of Chapter 63 of Title 18 of the
                  United States Code.

            32.2  Certification  of Chief  Financial  Officer  pursuant  to Rule
                  13a-14(b)  and  Section  1350 of Chapter 63 of Title 18 of the
                  United States Code.

            *  Each  of  the  Exhibits  noted  by an  asterisk  is a  management
            compensatory plan or arrangement.

                                   SIGNATURES

            Pursuant  to  the  requirements  of  Section  13  or  15(d)  of  the
Securities  Exchange Act of 1934,  the  registrant  has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

            Date: March 15, 2006       BALCHEM CORPORATION

                                       By:/s/ Dino A. Rossi
                                       -----------------------------------------
                                       Dino A. Rossi, President,
                                       Chief Executive Officer

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following  persons on behalf of the registrant and in the
capacities and on the dates indicated.

                                       /s/ Dino A. Rossi
                                       -----------------------------------------
                                       Dino A. Rossi, President,
                                       Chief Executive Officer, and Director
                                       (Principal Executive Officer)
                                       Date: March 15, 2006

                                       /s/ Francis J. Fitzpatrick
                                       -----------------------------------------
                                       Francis J. Fitzpatrick, Chief Financial
                                       Officer
                                       (Principal Financial and Principal
                                       Accounting Officer)
                                       Date: March 15, 2006

                                       /s/ Hoyt Ammidon, Jr.
                                       -----------------------------------------
                                       Hoyt Ammidon, Jr., Director
                                       Date: March 15, 2006

                                       /s/ Edward McMillan
                                       -----------------------------------------
                                       Edward McMillan, Director
                                       Date: March 15, 2006

                                       /s/ Kenneth P. Mitchell
                                       -----------------------------------------
                                       Kenneth P. Mitchell, Director
                                       Date: March 15, 2006

                                       /s/ Dr. John Televantos
                                       -----------------------------------------
                                       Dr. John Televantos, Director
                                       Date: March 15, 2006

                                       /s/ Dr. Elaine Wedral
                                       -----------------------------------------
                                       Dr. Elaine Wedral, Director
                                       Date: March 15, 2006



                                       54
<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number      Description
------      -----------

2.1         Asset  Purchase  Agreement,  dated  as of May 21,  2001,  among  BCP
            Ingredients,  Inc. and DuCoa L.P.,  DCV,  Inc. and DCV GPH, Inc. and
            certain related  agreements  (forms of which constitute  Exhibits to
            the Asset Purchase Agreement) as executed.  (The Disclosure Schedule
            identified  throughout Asset Purchase  Agreement,  Schedule A to the
            Obligations   Undertaking   (list  of   contracts   assumed  by  BCP
            Ingredients,  Inc.) and the Power of Attorney and Security Agreement
            (referred  to in Section 2.6 of the Asset  Purchase  Agreement)  and
            Post-Closing  Escrow  Agreement  (referred to in Sections  3.2.2 and
            3.3.3 of the  Asset  Purchase  Agreement),  have been  omitted.  The
            Company   agrees  to  furnish  a  copy  of  these   documents  on  a
            supplemental  basis to the Securities and Exchange  Commission  upon
            request.) (incorporated by reference to exhibit 2.1 to the Company's
            Current Report on Form 8-K dated June, 2001(the "2001 8-K".))

3.1         Composite Articles of Incorporation of the Company.

3.2         Composite  By-laws of the  Company  (incorporated  by  reference  to
            Exhibit  3.2 to the  Company's  Current  Report  on Form  8-K  dated
            February 23, 2005).

4.1         Loan  Agreement  dated  February  6,  2006  by and  between  Bank of
            America,  N.A.  and  Balchem  Corporation,   Promissory  Note  dated
            February 6, 2006 from Balchem Corporation to Bank of America,  N.A.,
            and Amended and Restated  Promissory Note (Revolving Line of Credit)
            dated February 6, 2006 from Balchem  Corporation to Bank of America,
            N.A.  (incorporated  by reference to Exhibits 10.2, 10.3 and 10.4 to
            the Company's Current Report on Form 8-K dated February 9, 2006).

4.2         Amended  and  Restated  Guaranty  dated  February  6,  2006 from BCP
            Ingredients,   Inc.  to  Bank  of  America,  N.A.  (incorporated  by
            reference to Exhibit 10.5 to the  Company's  Current  Report on Form
            8-K dated February 9, 2006).

4.3         Guaranty dated February 6, 2006 from Balchem Minerals Corporation to
            Bank of America, N.A.  (incorporated by reference to Exhibit 10.6 to
            the Company's Current Report on Form 8-K dated February 9, 2006).

10.1        Incentive   Stock   Option   Plan  of  the   Company,   as  amended,
            (incorporated by reference to the Company's  Registration  Statement
            on Form S-8, File No. 33-35910, dated October 25, 1996, and to Proxy
            Statement,  dated  April 22,  1998,  for the  Company's  1998 Annual
            Meeting of Stockholders (the "1998 Proxy Statement")).*

10.2        Stock  Option  Plan  for  Directors  of  the  Company,   as  amended
            (incorporated by reference to the Company's  Registration  Statement
            on Form S-8, File No.  33-35912,  dated October 25, 1996, and to the
            1998 Proxy Statement).

10.3        Balchem   Corporation   Amended   and   Restated   1999  Stock  Plan
            (incorporated   by  reference  to  Exhibit  10.3  to  the  Company's
            Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).*

10.4        Balchem  Corporation  401(k)/Profit  Sharing Plan,  dated January 1,
            1998  (incorporated  by  reference  to  Exhibit  4 to the  Company's
            Registration  Statement  on Form  S-8,  File No.  333-118291,  dated
            August 17, 2004).*

10.5        Employment  Agreement,  dated as of  January 1,  2001,  between  the
            Company  and Dino A. Rossi  (incorporated  by  reference  to Exhibit
            10.5 to the Company's  Annual Report on Form 10-K for the year ended
            December 31, 2001 (the "2001 10-K")). *


                                       55
<PAGE>

10.6        Lease dated as of February 8, 2002 between Sunrise Park Realty, Inc.
            and Balchem  Corporation  (incorporated by reference to Exhibit 10.7
            to the 2001 10-K).

10.7        Asset  Purchase  Agreement  dated  June 30,  2005,  between  Balchem
            Corporation and Loders Croklaan USA, LLC  (incorporated by reference
            to Exhibit  2.1 of the  Company's  Current  Report on Form 8-K dated
            July 1, 2005).

10.8        Stock Purchase  Agreement  dated November 2, 2005,  between  Balchem
            Minerals Corporation and Chelated Minerals Corporation (incorporated
            by reference to Exhibit 10.1 of the Company's Current Report on Form
            8-K dated November 7, 2005).

10.9        Process  and  Product  License  Agreement  dated  November  7, 2005,
            between Balchem  Corporation and Project  Management and Development
            Co.,  Ltd.  (incorporated  by  reference  to  Exhibit  10.1  of  the
            Company's Current Report on Form 8-K dated November 14, 2005).

10.10       Form  of   Restricted   Stock   Purchase   Agreement  for  Directors
            (incorporated by reference to Exhibit 10.1 of the Company's  Current
            Report on Form 8-K dated December 30, 2005).

10.11       First  Amendment to Stock Purchase  Agreement dated January 5, 2006,
            between  Balchem   Minerals   Corporation   and  Chelated   Minerals
            Corporation  (incorporated  by  reference  to  Exhibit  10.1  of the
            Company's Current Report on Form 8-K dated January 10, 2006).

14.         Code of  Ethics  for  Senior  Financial  Officers  (incorporated  by
            reference to Exhibit 14 to the 2003 10-K).

21.         Subsidiaries of Registrant.

23.1        Consent of McGladrey & Pullen,  LLP,  Independent  Registered Public
            Accounting Firm

23.2        Consent of KPMG LLP, Independent Registered Public Accounting Firm

31.1        Certification of Chief Executive Officer pursuant to Rule 13a-14(a).

31.2        Certification of Chief Financial Officer pursuant to Rule 13a-14(a).

32.1        Certification of Chief Executive  Officer pursuant to Rule 13a-14(b)
            and  Section  1350 of Chapter  63 of Title 18 of the  United  States
            Code.

32.2        Certification of Chief Financial  Officer pursuant to Rule 13a-14(b)
            and  Section  1350 of Chapter  63 of Title 18 of the  United  States
            Code.

*Each of the Exhibits noted by an asterisk is a management  compensatory plan or
arrangement.


                                       56