FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

(Mark One)     Quarterly Report Pursuant to Section 13 or 15(d) of
   [X]                 the Securities Exchange Act of 1934

                For The Quarterly Period Ended September 30, 2006

                                       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
incorporation or organization)                       Identification Number)

P.O. Box 600 New Hampton, New York                           10958
---------------------------------------        ---------------------------------
(Address of principal executive offices)                  (Zip Code)

                                  845-326-5600
               --------------------------------------------------
               Registrant's telephone number, including area code:

Indicate  by a check  mark  whether  the  registrant  (1) has filed all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was  required  to file such  reports),  and (2) has been  subject to
filing requirements for the past 90 days.

                Yes |X|                                     No |_|

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, 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|

As of November 3, 2006 the registrant had 11,653,917 shares of its Common Stock,
$.06 2/3 par value, outstanding.

<PAGE>
Part 1 - Financial Information
Item 1.  Financial Statements

                                    BALCHEM CORPORATION
                           Condensed Consolidated Balance Sheets
                                      (In thousands)
                                        (unaudited)

<TABLE>
<CAPTION>

                                          Assets                         September 30,     December 31,
                                                                              2006             2005
                                                                         -------------    -------------
<S>                                                                             <C>              <C>
Current assets:
  Cash and cash equivalents                                              $       2,660    $      12,996
  Accounts receivable                                                           11,283           11,521
  Inventories                                                                    8,716            8,540
  Prepaid income taxes                                                              --              143
  Prepaid expenses and other                                                       716            1,790
  Deferred income taxes                                                            280              276
                                                                         -------------    -------------
        Total current assets                                                    23,655           35,266

 Property, plant and equipment, net                                             30,970           24,400

 Goodwill                                                                       25,152           13,327
 Intangible assets with finite lives, net                                        7,073            2,148
                                                                         -------------    -------------
        Total assets                                                     $      86,850    $      75,141
                                                                         =============    =============


                           Liabilities and Stockholders' Equity
Current liabilities:
   Trade accounts payable                                                $       3,450    $       2,562
   Accrued expenses                                                              1,449            2,601
   Accrued compensation and other benefits                                       1,701            1,756
   Customer deposits and other deferred revenue                                    270            1,186
   Dividends payable                                                                --            1,045
   Income tax payable                                                              983               --
                                                                         -------------    -------------
        Total current liabilities                                                7,853            9,150

 Deferred income taxes                                                           6,376            4,015
 Other long-term obligations                                                     1,073            1,043
                                                                         -------------    -------------
                Total liabilities                                               15,302           14,208
                                                                         -------------    -------------

 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;
    11,655,087 shares issued and 11,633,030 shares outstanding
    at September 30, 2006 and 11,640,964 shares issued and
     11,576,948 shares outstanding at December 31, 2005                            777              776
   Additional paid-in capital                                                    8,803            8,008
   Retained earnings                                                            62,370           53,306
   Treasury stock, at cost: 22,057 and 64,016 shares at
     September 30, 2006 and December 31, 2005,
     respectively                                                                 (402)          (1,157)
                                                                         -------------    -------------
        Total stockholders' equity                                              71,548           60,933

                                                                         -------------    -------------
        Total liabilities and stockholders' equity                       $      86,850    $      75,141
                                                                         =============    =============
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       2
<PAGE>
                               BALCHEM CORPORATION
                  Condensed Consolidated Statements of Earnings
                      (In thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                           Three Months Ended       Nine Months Ended
                                              September 30,           September 30,
                                            2006        2005        2006        2005
                                          --------    --------    --------    --------
<S>                                          <C>         <C>         <C>         <C>
Net sales                                 $ 25,122    $ 21,145    $ 74,819    $ 59,969

Cost of sales                               16,449      13,496      49,124      38,026
                                          --------    --------    --------    --------

Gross profit                                 8,673       7,649      25,695      21,943

Operating expenses:
   Selling expenses                          1,683       1,200       5,293       3,511
   Research and development expenses           549         492       1,561       1,537
   General and administrative expenses       1,460       1,226       4,521       3,854
                                          --------    --------    --------    --------
                                             3,692       2,918      11,375       8,902

                                          --------    --------    --------    --------
Earnings from operations                     4,981       4,731      14,320      13,041

Other expenses (income):
  Interest (income)                            (13)        (46)       (102)       (155)
  Interest expense                              16           2         186           6
  Other, net                                    --         (82)         --         (82)
                                          --------    --------    --------    --------

Earnings before income tax expense           4,978       4,857      14,236      13,272

  Income tax expense                         1,827       1,833       5,172       4,950
                                          --------    --------    --------    --------

Net earnings                              $  3,151    $  3,024    $  9,064    $  8,322
                                          ========    ========    ========    ========

Net earnings per common share - basic     $   0.27    $   0.26    $   0.78    $   0.72
                                          ========    ========    ========    ========

Net earnings per common share - diluted   $   0.26    $   0.25    $   0.75    $   0.69
                                          ========    ========    ========    ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       3
<PAGE>
<TABLE>
<CAPTION>
                               BALCHEM CORPORATION
                 Condensed Consolidated Statements of Cash Flows
                                 (In thousands)
                                   (unaudited)

                                                                         Nine Months Ended
                                                                           September 30,
                                                                         2006        2005
                                                                       --------    --------
<S>                                                                         <C>         <C>
Cash flows from operating activities:
Net earnings                                                           $  9,064    $  8,322

Adjustments to reconcile net earnings to net cash
provided by operating activities:
  Depreciation and amortization                                           2,573       2,078
  Shares issued under employee benefit plans                                281         215
  Deferred income taxes                                                     (11)         97
  Stock compensation expense                                                786          --
  Excess tax benefits from stock compensation                                --         176
  Provision for doubtful accounts                                            23         (32)
  Gain on sale of equipment                                                  --         (82)
    Changes in assets and liabilities net of effects of acquisition:
     Accounts receivable                                                    215      (1,474)
     Inventories                                                            376      (1,717)
     Prepaid expenses and other current assets                            1,074         842
     Income taxes                                                         1,125         826
     Customer deposits and other deferred revenue                          (916)       (687)
     Accounts payable and accrued expenses                                 (318)      1,217
     Other long-term obligations                                             41          46
                                                                       --------    --------
        Net cash provided by operating activities                        14,313       9,827
                                                                       --------    --------

Cash flows from investing activities:
  Capital expenditures                                                   (1,235)     (1,186)
  Proceeds from sale of property, plant & equipment                          --         389
  Cash paid for intangible assets acquired                                  (71)       (102)
  Acquisition of assets                                                 (22,772)    (11,419)
                                                                       --------    --------
        Net cash used in investing activities                           (24,078)    (12,318)
                                                                       --------    --------

Cash flows from financing activities:
  Proceeds from borrowings                                               10,000          --
  Principal payments on borrowings                                      (10,000)         --
  Proceeds from stock options                                               321       1,263
  Excess tax benefits from stock compensation                               163          --
  Dividends paid                                                         (1,045)       (685)
  Purchase of treasury stock                                                 --         (88)
  Other financing activities                                                (10)        (10)
                                                                       --------    --------
        Net cash (used in) provided by financing activities                (571)        480
                                                                       --------    --------

Decrease in cash and cash equivalents                                   (10,336)     (2,011)

Cash and cash equivalents beginning of period                            12,996      12,734
                                                                       --------    --------
Cash and cash equivalents end of period                                $  2,660    $ 10,723
                                                                       ========    ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(All dollar amounts in thousands, except per share data)

NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------

The  condensed  consolidated  financial  statements  presented  herein have been
prepared by the Company in accordance with the accounting  policies described in
its December 31, 2005 consolidated  financial statements,  and should be read in
conjunction with the consolidated  financial  statements and notes, which appear
in our  Annual  Report  on Form  10-K  for the year  ended  December  31,  2005.
References in this report to the "Company" mean Balchem  Corporation  and/or its
subsidiaries,  BCP Ingredients,  Inc., Balchem Minerals Corporation and Chelated
Minerals Corporation, as the context requires.

In the opinion of management,  the unaudited  condensed  consolidated  financial
statements  furnished in this Form 10-Q include all adjustments  necessary for a
fair  presentation  of the financial  position,  results of operations  and cash
flows for the interim periods  presented.  All such  adjustments are of a normal
recurring  nature.  The condensed  consolidated  financial  statements have been
prepared  in  accordance  with U.S.  generally  accepted  accounting  principles
governing  interim  financial  statements and the  instructions to Form 10-Q and
Article  10 of  Regulation  S-X under the  Securities  Exchange  Act of 1934 and
therefore  do not include  some  information  and notes  necessary to conform to
annual  reporting  requirements.  The results of operations  for the nine months
ended September 30, 2006 are not necessarily indicative of the operating results
expected for the full year or any interim period.

NOTE 2 - ACQUISITION OF ASSETS
------------------------------

On August 24, 2006,  the Company  acquired an animal feed grade aqueous  choline
chloride  manufacturing  facility  and related  assets  located in St.  Gabriel,
Louisiana  from  BioAdditives,  LLC,  CMB  Additives,  LLC  and  CMB  Realty  of
Louisiana.  The St. Gabriel assets are not yet in service, and it is anticipated
that manufacturing in the facility will commence in November 2006.

NOTE 3 - CMC ACQUISITION
------------------------

On February 8, 2006, the Company,  through its wholly owned  subsidiary  Balchem
Minerals  Corporation  ("BMC"),  completed an acquisition (the "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 Loan
Agreement (the "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 the Company's  cash on hand.  At September  30, 2006,  the Term Loan had
been repaid in full.

The CMC  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

                                       5
<PAGE>

preliminary allocation of the total purchase price, including acquisition costs,
of CMC's net  tangible and  intangible  assets was based on the  estimated  fair
values as of February 8, 2006.  Adjustments to these  estimates will be included
in the  allocation of the purchase  price of CMC upon  settlement of any working
capital  or  other  adjustments.  The  excess  of the  purchase  price  over the
identifiable  intangible and net tangible assets was allocated to goodwill.  The
preliminary purchase price has been allocated as follows (in thousands):

-----------------------------------------------------
                                           Fair Value
                                            Recorded
                                          in Purchase
                                           Accounting
-----------------------------------------------------
Accounts receivable                       $       884
Inventory                                         552
Property, plant and equipment                   1,980
Current liabilities                              (388)
Other long-term liabilities                    (2,368)
Goodwill                                       11,826
Financing costs                                    49
Other intangible assets                         5,285
-----------------------------------------------------
         Total                            $    17,820
-----------------------------------------------------

The consolidated  financial  statements include the results of operations of the
acquired product lines from the date of purchase.

Pro Forma Summary of Operations

The following  unaudited pro forma  information  has been prepared as if the CMC
acquisition  had  occurred on January 1, 2005 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 CMC  acquisition  had
occurred at the  beginning of the periods  presented and is not intended to be a
projection of future results.

--------------------------------------------------
                                   Pro-Forma
                               Three months Ended
                                  September 30,
                                2006        2005
--------------------------------------------------
Net sales                    $   25,122  $  22,460
Net earnings                      3,151      3,111
Basic EPS                           .27        .27
Diluted EPS                         .26        .26
--------------------------------------------------

                                       6
<PAGE>


-------------------------------------------------
                                 Pro-Forma
                              Nine months Ended
                                September 30,
                               2006       2005
-------------------------------------------------

Net sales                   $  75,553  $  64,426
Net earnings                    9,078      8,716
Basic EPS                         .78        .76
Diluted EPS                       .75        .73
-------------------------------------------------

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

Effective June 30, 2005,  pursuant to an asset  purchase  agreement of same date
(the "Loders 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 Loders Asset Purchase  Agreement also provides for the contingent payment by
the Company to Seller of additional consideration based upon the volume of sales
during the three year  period  following  the  acquisition  associated  with one
particular product acquired by the Company.  Such contingent  consideration,  if
earned and paid, will be recorded as an additional cost of the acquired  product
lines.

The Loders Croklaan 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 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 amounts are subject to subsequent revision
to give effect to other  pre-acquisition  contingencies that may become resolved
during subsequent periods.

The consolidated  financial  statements include the results of operations of the
acquired product lines from the date of purchase.

                                       7
<PAGE>

Pro Forma Summary of Operations

The following unaudited pro forma information has been prepared as if the Loders
Croklaan  acquisition  had occurred on January 1, 2005 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  Loders   Croklaan
acquisition  had occurred at the  beginning of the periods  presented and is not
intended to be a projection of future results.

--------------------------------------------------
                                       Pro-Forma
                                      Three months
                                         Ended
                                     September 30,
                                         2005
--------------------------------------------------
Net sales                           $      21,145
Net earnings                                3,024
Basic EPS                                     .26
Diluted EPS                                   .25
--------------------------------------------------

--------------------------------------------------
                                       Pro-Forma
                                      Nine months
                                         Ended
                                     September 30,
                                         2005
--------------------------------------------------
Net sales                            $     63,256
Net earnings                                8,894
Basic EPS                                     .77
Diluted EPS                                   .74
--------------------------------------------------

NOTE 5 - STOCK INCENTIVE PLAN
-----------------------------

In December  2004, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share Based
Payment,"  ("SFAS 123R").  SFAS 123R establishes the accounting for transactions
in  which  an  entity  pays  for  employee   services  in  share-based   payment
transactions.  SFAS 123R  eliminates  the  ability  to account  for  share-based
compensation   transactions  using  the  intrinsic  value  method  and  requires
companies to measure the cost of employee  services  received in exchange for an
award of equity instruments based on the grant-date fair value of the award. The
fair value of employee share options and similar  instruments is estimated using
option-pricing models that take into account the unique characteristics of those
instruments. That cost is recognized over the period during which an employee is
required to provide service in exchange for the award.  The Company adopted SFAS
123R  effective  January  1, 2006,  using the  modified  prospective  transition
method.  Under this method,  compensation  cost is recognized for awards granted
and for awards modified,  repurchased or cancelled in the period after adoption.
Compensation  cost is also recognized for the unvested portion of awards granted
prior to  adoption  over the

                                       8
<PAGE>

remaining  requisite  service  period.  Prior year financial  statements are not
restated to reflect and do not include,  the effect of SFAS 123R.  The Company's
results for the three and nine months ended  September  30, 2006  reflected  the
following  compensation  cost  as a  result  of  adopting  SFAS  123R  and  such
compensation  cost had the  following  effects  on net  earnings  and  basic and
diluted earnings per share:

-----------------------------------------------------------------------------
                                                 Three Months      Nine Months
                                                    Ended            Ended
                                                 September 30,    September 30,
                                                     2006             2006
-----------------------------------------------------------------------------
Cost of sales                                     $       27      $      81
Operating expenses                                       235            705
Net earnings                                            (206)          (665)
Basic earnings per common share                        (0.02)         (0.06)
Diluted earnings per common share                 $    (0.02)     $   (0.05)
-----------------------------------------------------------------------------

Additionally,  upon adoption of SFAS 123R,  excess tax benefits related to stock
compensation  are  presented as a cash inflow from  financing  activities.  This
change had the effect of decreasing  cash flows from  operating  activities  and
increasing  cash flows from financing  activities by $-0- and $163 for the three
and nine months ended September 30, 2006, respectively.

Prior to the adoption of SFAS 123R on January 1, 2006, the Company accounted for
stock based compensation plans under Accounting  Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). Compensation cost related
to stock options issued to employees was recorded only if the grant-date  market
price of the underlying  stock exceeded the exercise price.  The following table
illustrates  the effect on net  earnings  and earnings per share if a fair value
based method had been applied to all awards:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                                       Three Months    Nine Months
                                                          Ended          Ended
                                                       September 30,  September 30,
                                                           2006           2006
-----------------------------------------------------------------------------------
<S>                                                             <C>           <C>
Net earnings                                          $        3,024         8,322
Stock-based employee compensation expense included
in net earnings, net of related tax effects                       --            --
Stock-based employee compensation expense
determined under fair value based method, net of
related tax effects
                                                                 259           645
-----------------------------------------------------------------------------------
Pro forma net earnings                                $        2,765         7,677
-----------------------------------------------------------------------------------
Basic earnings per common share:
As reported                                           $         0.26          0.72
Pro forma                                                       0.24          0.67
Diluted earnings per common share:
As reported                                           $         0.25          0.69
Pro forma                                                       0.23          0.64
-----------------------------------------------------------------------------------
</TABLE>

                                       9
<PAGE>


The Company's stock  incentive plans allow for the granting of restricted  stock
awards and options to purchase  common stock.  Both incentive  stock options and
nonqualified  stock  options can be awarded  under the plans.  No option will be
exercisable for longer than ten years after the date of grant.  The shares to be
issued upon exercise of the outstanding options have been approved, reserved and
are adequate to cover all  exercises.  As of September  30, 2006,  the plans had
726,540  shares  available  for future  awards.  Compensation  expense for stock
options and restricted stock awards is recognized on a straight-line  basis over
the vesting period,  generally three years for stock options and seven years for
restricted stock awards. Certain awards provide for accelerated vesting if there
is a change in control (as defined in the plans) or other qualifying events.

Option  activity  for the nine months  ended  September  30, 2006 is  summarized
below:

--------------------------------------------------------------------------------
                                                                       Weighted
                                          Weighted                     Average
                                          Average     Aggregate       Remaining
                                          Exercise    Intrinsic      Contractual
                              Shares       Price        Value           Term
--------------------------------------------------------------------------------
Outstanding as of
December 31, 2005           1,435,465    $    12.57       10,479
  Granted                      10,300         22.59
  Exercised                   (43,048)         7.47
  Expired                          --                                      --
  Forfeited                   (14,100)        14.47
Outstanding as of
September 30, 2006          1,388,617    $    12.79   $    9,720          6.8
Exercisable as of
September 30, 2006            910,317    $    10.53   $    8,430          5.9
--------------------------------------------------------------------------------

The fair value of each option  grant is estimated on the date of the grant using
the  Black-Scholes  option-pricing  model with the  following  weighted  average
assumptions:  dividend yields of 0.4% and 0.4%; expected volatilities of 26% and
29%;  risk-free  interest  rates of 3.8% and 3.6%; and expected lives of 4.5 and
4.9 for the nine months ended September 30, 2006 and 2005, respectively.

For the nine month periods ended  September 30, 2006 and September 30, 2005, the
Company  used a  projected  expected  life  for  each  award  granted  based  on
historical  experience  of  employees'  exercise  behavior.  For the nine  month
periods ended September 30, 2006 and September 30, 2005,  expected volatility is
based on the Company's historical  volatility levels. For the nine month periods
ended  September 30, 2006 and September 30, 2005,  dividend  yields are based on
the Company's historical dividend yields.  Risk-free interest rates are based on
the implied yields currently  available on U.S. Treasury zero coupon issues with
a remaining term equal to the expected life.

Other information pertaining to option activity during the three and nine months
ended September 30, 2006 and 2005 was as follows:

                                       10
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                            Three Months Ended         Nine Months Ended
                                                               September 30,             September 30,
                                                             2006         2005         2006         2005
-----------------------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>          <C>         <C>
Weighted-average fair value of options granted            $       N/A  $     4.50   $     5.25  $     4.25
Total intrinsic value of stock options exercised          $        89  $       65   $      613  $    1,179
-----------------------------------------------------------------------------------------------------------
</TABLE>

Non-vested  restricted  stock  activity for the nine months ended  September 30,
2006 is summarized below:

--------------------------------------------------------------------------------
                                                                    Weighted
                                                                  Average Grant
                                                                    Date Fair
                                                     Shares           Value
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2005             22,500    $        19.83
Granted                                                     -                 -
Vested                                                      -                 -
Forfeited                                                   -                 -
Non-vested balance as of September 30, 2006            22,500    $        19.83
--------------------------------------------------------------------------------

As of  September  30, 2006 there was $1,625 of total  unrecognized  compensation
cost related to non-vested share-based  compensation  arrangements granted under
the plans; that cost is expected to be recognized over a weighted-average period
of 1.5 years.

NOTE 6 - INVENTORIES
--------------------

Inventories  at  September  30,  2006 and  December  31, 2005  consisted  of the
following:

-------------------------------------------------------------------------
                                            September 30,   December 31,
                                                2006           2005
-------------------------------------------------------------------------
Raw materials                               $     3,560    $       4,809
Finished goods                                    5,156            3,731
-------------------------------------------------------------------------
         Total inventories                  $     8,716    $       8,540
-------------------------------------------------------------------------

NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------

Property,  plant and  equipment at September  30, 2006 and December 31, 2005 are
summarized as follows:

---------------------------------------------------------------------------
                                                September 30,  December 31,
                                                     2006          2005
---------------------------------------------------------------------------
Land                                            $        650   $       290
Building                                              11,614        10,509
Equipment                                             37,515        31,196
Construction in Progress                               1,259           332
---------------------------------------------------------------------------
                                                      51,038        42,327
Less: Accumulated depreciation                        20,068        17,927
---------------------------------------------------------------------------
   Net property, plant and equipment            $     30,970   $    24,400
---------------------------------------------------------------------------

                                       11
<PAGE>

NOTE 8 - 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 of  December  31,  2005,  the Company  performed  an  impairment  test of its
goodwill  balance.  As of such date, the Company's  reporting units' fair values
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 will perform its impairment test next as
of December 31, 2006.

The Company had goodwill in the amount of $25,152 and $13,327 at  September  30,
2006 and December 31, 2005, respectively, subject to the provisions of SFAS Nos.
141 and 142. At September 30, 2006, the balance of goodwill includes the cost in
excess of net assets acquired of both the CMC acquisition,  as described in Note
3, of $11,826 and the acquired assets of the Loders Croklaan StateStateUSA,  LLC
encapsulation,  agglomeration and granulation business,  described in Note 4, of
$6,959.

As of September  30, 2006 and December  31, 2005,  the Company had  identifiable
intangible assets with finite lives with a gross carrying value of approximately
$7,789 and $2,432, respectively, less accumulated amortization of $716 and $284,
respectively.  At  September  30, 2006,  the gross  carrying  amount  included a
customer  list,  trade  names  and  trade  secrets  acquired  as part of the CMC
acquisition,  as  described  in Note 3, as well as 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.

Identifiable  intangible  assets with  finite  lives at  September  30, 2006 and
December 31, 2005 are summarized as follows:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                     Gross                          Gross
                                   Amortization     Carrying      Accumulated     Carrying      Accumulated
                                     Period         Amount at    Amortization     Amount at    Amortization
                                   (in years)        9/30/06      at 9/30/06      12/31/05      at 12/31/05
-----------------------------------------------------------------------------------------------------------
<S>                                           <C>          <C>             <C>           <C>             <C>
Customer lists                               10   $      4,888   $        375   $      1,350   $         67
Regulatory re-registration
costs                                        10             28             --             18             --
Patents & trade secrets                   15-17          1,542            199            753            141
Trademarks & trade names                     17            874             81            210             49
Other                                         5            457             61            101             27
-----------------------------------------------------------------------------------------------------------
                                                  $      7,789   $        716   $      2,432   $        284
-----------------------------------------------------------------------------------------------------------
</TABLE>

                                       12
<PAGE>

Amortization  of  identifiable  intangible  assets  was $432 for the first  nine
months of 2006.  Assuming no change in the gross carrying value of  identifiable
intangible assets, the estimated  amortization expense for the remainder of 2006
is $162,  approximately  $634 per annum for 2007 through 2009,  $625 in 2010 and
$618 in 2011.  At September  30,  2006,  there were no  identifiable  intangible
assets with  indefinite  useful  lives as defined by SFAS No. 142.  Identifiable
intangible assets are reflected in "Intangible assets with finite lives, net" in
the Company's condensed consolidated balance sheet. There were no changes to the
useful lives of intangible assets subject to amortization during the nine months
ended September 30, 2006.

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

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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                               Net          Number of
                                                            Earnings         Shares       Per Share
        Three months ended September 30, 2006              (Numerator)   (Denominator)     Amount
----------------------------------------------------------------------------------------------------
<S>                                                       <C>              <C>          <C>
Basic EPS - Net earnings and weighted
average common shares outstanding                         $      3,151     11,630,050   $        .27

Effect of dilutive securities - stock options
and restricted stock                                                          518,985
                                                                         ------------
Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock              $      3,151     12,149,035   $        .26
----------------------------------------------------------------------------------------------------
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                               Net          Number of
                                                            Earnings         Shares       Per Share
        Three months ended September 30, 2005              (Numerator)   (Denominator)     Amount
----------------------------------------------------------------------------------------------------
<S>                                                       <C>              <C>          <C>
Basic EPS - Net earnings and weighted
average common shares outstanding                         $      3,024     11,591,802   $        .26

Effect of dilutive securities - stock options                                 551,181
                                                                         ------------

Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options                                   $      3,024     12,142,983   $        .25
----------------------------------------------------------------------------------------------------
</TABLE>

                                       13
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                               Net          Number of
                                                            Earnings         Shares       Per Share
        Nine months ended September 30, 2006               (Numerator)   (Denominator)     Amount
----------------------------------------------------------------------------------------------------
<S>                                                       <C>              <C>          <C>
Basic EPS - Net earnings and weighted
average common shares outstanding                         $      9,064     11,614,311   $        .78

Effect of dilutive securities - stock options
and restricted stock                                                          541,138
                                                                         ------------

Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options and restricted stock              $      9,064     12,155,449   $        .75
----------------------------------------------------------------------------------------------------
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                               Net          Number of
                                                            Earnings         Shares       Per Share
        Nine months ended September 30, 2005               (Numerator)   (Denominator)     Amount
----------------------------------------------------------------------------------------------------
<S>                                                       <C>              <C>          <C>
Basic EPS - Net earnings and weighted
average common shares outstanding                         $      8,322     11,549,027   $        .72

Effect of dilutive securities - stock options                                 490,355
                                                                         ------------

Diluted EPS - Net earnings and weighted
average common shares outstanding and
effect of stock options                                   $      8,322     12,039,382   $        .69
----------------------------------------------------------------------------------------------------
</TABLE>

The Company had stock options  covering  349,300 and 306,000 shares at September
30, 2006 and 2005,  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 - SEGMENT INFORMATION
-----------------------------

The Company's  reportable segments are strategic  businesses that offer products
and services to different  markets.  Presently,  the Company has three segments:
specialty products, encapsulated / nutritional products and BCP Ingredients, its
unencapsulated feed supplements segment.

Business Segment Net Sales:

------------------------------------------------------------------------
                               Three Months Ended     Nine Months Ended
                                  September 30,         September 30,
                               2006        2005        2006       2005
------------------------------------------------------------------------
Specialty Products           $  7,967    $  7,352   $ 23,927    $ 22,088
Encapsulated/Nutritional
Products                       10,348       8,503     30,676      23,131
BCP Ingredients                 6,807       5,290     20,216      14,750
------------------------------------------------------------------------
Total                        $ 25,122    $ 21,145   $ 74,819    $ 59,969
------------------------------------------------------------------------

                                       14
<PAGE>

Business Segment Earnings:

------------------------------------------------------------------------
                               Three Months Ended     Nine Months Ended
                                  September 30,         September 30,
                               2006        2005        2006       2005
------------------------------------------------------------------------
Specialty Products           $  2,864    $  2,846   $  8,400    $  8,377
Encapsulated/Nutritional
Products                        1,027         945      3,079       2,431
BCP Ingredients                 1,090         940      2,841       2,233
Interest and other income
(expense)                          (3)        126        (84)        231
------------------------------------------------------------------------
Earnings before income
taxes                        $  4,978    $  4,857   $ 14,236    $ 13,272
------------------------------------------------------------------------

NOTE 11- SUPPLEMENTAL CASH FLOW INFORMATION
-------------------------------------------

Cash paid during the nine months  ended  September  30, 2006 and 2005 for income
taxes and interest is as follows:

--------------------------------------------
                          Nine months ended
                             September 30,
                           2006       2005
--------------------------------------------
Income taxes             $  3,896   $  3,846
Interest                 $    186   $      6
--------------------------------------------

NOTE 12- COMMON STOCK
---------------------

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
distribution  was made on January  20,  2006.  Accordingly,  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  condensed  consolidated  financial  statements were  retroactively
adjusted to reflect the effect of the 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, 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 remain in treasury.  In June 2005,  the board of
directors authorized another extension to the stock repurchase program for up to
an  additional  600,000  shares,  that is, over and above those  514,974  shares
previously  repurchased  under the  program.  Under this  extension,  a total of
66,300 shares have been purchased at an average cost of $18.07,  22,057 of which
remain in treasury at September 30, 2006. During the nine months ended September
30, 2006, no additional shares have been purchased.

                                       15
<PAGE>

NOTE 13 - LONG TERM DEBT AND CREDIT AGREEMENTS
----------------------------------------------

On February 6, 2006,  the Company and its  principal  bank  entered  into a Loan
Agreement  providing for the Term Loan,  the proceeds of which were used to fund
the Acquisition,  as described in Note 3, in part. The remaining  balance of the
purchase price of the  Acquisition  was funded  through  Balchem's cash on hand.
During the nine months ended  September 30, 2006, the Company repaid in full the
$10,000 of principal  under the Term Loan.  The Loan Agreement also provides for
an unsecured  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 September 30,
2006. The Revolving Facility expires in February 2007.  Management believes that
such facility will be renewed in the normal course of business.

NOTE 14 - EMPLOYEE BENEFIT PLANS
--------------------------------

The Company  sponsors a 401(k)  savings  and profit  sharing  plan for  eligible
employees.  The plan allows  participants to make pretax  contributions  and the
Company matches certain percentages of those pretax contributions with shares 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 also currently  provides  postretirement  benefits in the form of an
unfunded  retirement  medical  plan  under  a  collective  bargaining  agreement
covering eligible retired employees of its Verona, Missouri facility.

Net periodic  benefit cost for such retirement  medical plan for the nine months
ended September 30, 2006 and September 30, 2005 was as follows:

------------------------------------------------------------------
                                                   2006      2005
------------------------------------------------------------------
Service Cost                                      $   21    $   24
Interest Cost                                         29        38
Expected return on plan assets                        --        --
Amortization of transition obligation                 --        --
Amortization of prior service cost                   (14)      (11)
Amortization of (gain) or loss                        (2)       --
------------------------------------------------------------------
Net periodic benefit cost                         $   34    $   51
------------------------------------------------------------------

The plan is unfunded and approved claims are paid from Company funds. Historical
cash payments made under such plan approximated $50 per year.

NOTE 15 - 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.

                                       16
<PAGE>

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  performance   guarantees,
liquidated damages may be assessed.  However, such damages may not exceed 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 September 30, 2006, the Company
has  recognized  $790 of income and $540 in expenses  since the inception of the
agreement.  For the nine  months  ended  September  30,  2006,  the  Company has
recognized $632 of income and $402 in expenses,  which are included in net sales
and cost of sales, respectively, in the BCP Ingredients segment.

NOTE 16 - NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------------

In November  2004,  the FASB issued  SFAS 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 has adopted the
provisions  of this  statement  as of January  1, 2006 and does not expect  this
statement  to have a material  effect on its  financial  condition or results of
operations.

In June 2006, FASB issued  Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes - an  Interpretation  of FASB Statement  109." This  interpretation
prescribes a recognition  threshold and measurement  attribute for the financial
statement  recognition and measurement of a tax position taken or expected to be
taken  in  a  tax  return.   This   Interpretation  also  provides  guidance  on
derecognition,  classification,  interest and  penalties,  accounting in interim
periods, disclosure, and transition. This interpretation is effective for fiscal
years beginning after December 15, 2006. The Company is currently evaluating the
effect  of  this  interpretation  on its  financial  condition  and  results  of
operations.

In September 2006, FASB issued SFAS No. 158,  "Employers  Accounting for Defined
Benefit Pension and Other  Postretirement  Plans." The new statement amends FASB

                                       17
<PAGE>

Statements No. 87, 88, 106 and 132(R).  This  statement  requires an employer to
recognize  the   overfunded  or   underfunded   status  of  a  defined   benefit
postretirement  plan (other than a multiemployer  plan) as an asset or liability
in its statement of financial  position and to recognize  changes in that funded
status in the year in which the changes occur through  comprehensive income of a
business entity.  This statement also requires an employer to measure the funded
status of a plan as of the date of its year-end statement of financial position,
with limited exceptions. This statement's requirement to initially recognize the
funded  status of a  defined  benefit  postretirement  plan and to  provide  the
required  disclosures  is effective  for fiscal years ending after  December 15,
2006. The  requirement to measure plan assets and benefit  obligations as of the
date of the  employer's  fiscal  year-end  statement  of  financial  position is
effective for fiscal years ending after  December 15, 2008. The Company does not
expect  adoption of this  statement to have a material  effect on its  financial
condition or results of operations.

In  September  2006,  the SEC staff issued  Staff  Accounting  Bulletin No. 108,
"Considering   the  Effects  of  Prior  Year   Misstatements   when  Quantifying
Misstatements  in Current Year Financial  Statements"  ("SAB 108").  SAB 108 was
issued in order to eliminate  the diversity of practice  surrounding  how public
companies quantify financial statement misstatements.  Traditionally, there have
been two  widely-recognized  methods for  quantifying  the effects of  financial
statement  misstatements:  the "roll-over" method and the "iron curtain" method.
The roll-over  method focuses  primarily on the impact of a misstatement  on the
income    statement--including    the    reversing    effect   of   prior   year
misstatements--but  its use can lead to the accumulation of misstatements in the
balance sheet. The iron-curtain  method, on the other hand, focuses primarily on
the effect of correcting the period-end  balance sheet with less emphasis on the
reversing effects of prior year errors on the income statement. We currently use
the   roll-over   method  for   quantifying   identified   financial   statement
misstatements.  In SAB 108, the SEC staff  established an approach that requires
quantification of financial statement  misstatements based on the effects of the
misstatements  on each of the  company's  financial  statements  and the related
financial statement  disclosures.  This model is commonly referred to as a "dual
approach"  because  it  requires  quantification  of errors  under both the iron
curtain and the roll-over methods.  SAB 108 permits existing public companies to
initially  apply  its  provisions   either  by  (i)  restating  prior  financial
statements as if the "dual  approach" had always been used or (ii) recording the
cumulative  effect of initially  applying the "dual  approach" as adjustments to
the  carrying  values of assets  and  liabilities  as of January 1, 2006 with an
offsetting adjustment recorded to the opening balance of retained earnings.  Use
of the "cumulative effect" transition method requires detailed disclosure of the
nature  and  amount  of  each  individual  error  being  corrected  through  the
cumulative  adjustment  and how and when it arose.  The  Company  will adopt the
provisions  of SAB 108 as of December 31, 2006 and does not expect this bulletin
to have a material effect on its financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
No. 157).  SFAS No. 157  establishes  a common  definition  for fair value to be
applied to US GAAP guidance requiring use of fair value, establishes a framework
for  measuring  fair  value,  and  expands  disclosure  about  such  fair  value
measurements.  SFAS No.  157 is  effective  for  fiscal  years  beginning  after
November 15, 2007. The Company is currently assessing the impact of SFAS No. 157
on its consolidated financial position and results of operations.

                                       18
<PAGE>

Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (All dollar amounts in thousands)

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.  Our actions and performance 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 1 of our Annual  Report on Form 10-K for the
year ended December 31, 2005 and other factors that may be identified  elsewhere
in this Report. Reference should be made to such factors and all forward-looking
statements are qualified in their entirety by the above cautionary statements.

Overview
--------

We develop, manufacture, distribute and market specialty performance ingredients
and  products  for the food,  nutritional,  pharmaceutical,  animal  health  and
medical device sterilization  industries.  Our reportable segments are strategic
businesses that offer products and services to different  markets.  We presently
have three reportable segments:  specialty products;  encapsulated / nutritional
products; and BCP Ingredients.

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

Our specialty products segment operates as ARC Specialty Products.

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 of the device being  sterilized.  Our 100%
ethylene  oxide  product  is  distributed  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.  Our inventory of
these specially built drums, along with our two filling facilities, represents a
significant   capital   investment.   Contract   sterilizers,   medical   device
manufacturers, and medical gas distributors are our principal customers for this
product. In addition, we also sell single use canisters with 100% ethylene oxide
for use in medical device  sterilization.  As a fumigant,  ethylene oxide blends
are highly effective in killing bacteria, fungi, and insects in spices and other
seasoning materials.

We sell two other products, propylene oxide and methyl chloride,  principally to
customers seeking smaller (as opposed to bulk) quantities and whose requirements
include  timely  delivery  and  safe  handling.  Propylene  oxide  is  used  for
fumigation in spice treatment, various chemical synthesis applications,  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, pharmaceuticals, malt and wine preservers.

                                       19
<PAGE>

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

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. 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 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.  Our 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 StateStateUnited States.

In the animal health industry,  we market 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 during certain
weeks preceding and following  calving,  commonly referred to as the "transition
period" of the  animal.  Also,  in animal  health,  we market  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
throughout the world. CMC's proprietary  chelation  technology provides enhanced
nutrient absorption for various species of domestic and companion animals.

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

This  segment  manufactures  and  supplies  raw 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.

We sell products for all three segments through our own sales force, independent
distributors and sales agents.

The following  tables  summarize  consolidated net sales by segment and business
segment  earnings  for the three and nine months  ended  September  30, 2006 and
September 30, 2005:

                                       20
<PAGE>

Business Segment Net Sales:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                         Three Months Ended      Nine Months Ended
                                            September 30,          September 30,
                                          2006        2005       2006        2005
-----------------------------------------------------------------------------------
<S>                                     <C>         <C>        <C>         <C>
Specialty Products                      $  7,967    $  7,352   $ 23,927    $ 22,088
Encapsulated/Nutritional
Products                                  10,348       8,503     30,676      23,131
BCP Ingredients                            6,807       5,290     20,216      14,750
-----------------------------------------------------------------------------------
Total                                   $ 25,122    $ 21,145   $ 74,819    $ 59,969
-----------------------------------------------------------------------------------
<CAPTION>

Business Segment Earnings:

-----------------------------------------------------------------------------------
                                         Three Months Ended      Nine Months Ended
                                            September 30,          September 30,
                                          2006        2005       2006        2005
-----------------------------------------------------------------------------------
<S>                                     <C>         <C>        <C>         <C>
Specialty Products                      $  2,864    $  2,846   $  8,400    $  8,377
Encapsulated/Nutritional
Products                                   1,027         945      3,079       2,431
BCP Ingredients                            1,090         940      2,841       2,233
Interest and other income
(expense)                                     (3)        126        (84)        231
-----------------------------------------------------------------------------------
Earnings before income
taxes                                   $  4,978    $  4,857   $ 14,236    $ 13,272
-----------------------------------------------------------------------------------
</TABLE>

The above  results were  impacted by the adoption of SFAS 123R,  as described in
the following paragraph.

Effective  January 1, 2006, we adopted the fair value method of  accounting  for
stock-based  compensation  under SFAS 123R,  which  allows  public  companies to
select from two  alternative  transition  methods when adopting  SFAS 123R,  the
modified  prospective  application  or the  retrospective  application.  We have
elected  to adopt the  provisions  of SFAS 123R using the  modified  prospective
application.  Under the modified prospective application, the provisions of SFAS
123R are applied to new awards and awards  modified,  repurchased  or  cancelled
after the  effective  date.  Additionally,  compensation  cost for the  unvested
portion of awards  outstanding  as of January 1, 2006 will be  recognized as the
requisite  service is rendered after January 1, 2006.  Financial  statements for
periods  prior to  January  1,  2006 are not  restated  to  reflect,  and do not
include, the effect of SFAS 123R.  Share-based  compensation expense of $786 was
recognized for the first nine months of 2006 for the unvested  portion of awards
outstanding  as of January 1, 2006.  We estimate that  share-based  compensation
expense for 2006 will be approximately $1,048.

                                       21
<PAGE>

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

Three months ended  September 30, 2006 compared to three months ended  September
30, 2005

Net Sales
---------

Net sales for the three months ended  September  30, 2006 were $25,122  compared
with  $21,145 for the three  months ended  September  30,  2005,  an increase of
$3,977 or 18.8%.  Net sales for the specialty  products  segment were $7,967 for
the three months ended September 30, 2006, as compared with $7,352 for the three
months ended  September 30, 2005, an increase of $615 or 8.4%. This increase was
principally due to an increase in sales volume along with modest price increases
for our ethylene oxide products for medical device sterilization.  Net sales for
the  encapsulated  /  nutritional  products  segment  were $10,348 for the three
months ended  September  30, 2006,  as compared with $8,503 for the three months
ended  September 30, 2005,  an increase of $1,845 or 21.7%.  Sales for the three
months ended  September 30, 2006,  includes  $1,200 of sales from CMC,  which we
acquired in February 2006 (see Note 3).  Additional  organic  growth was derived
principally  from  strength  in sales of food,  nutritional  and  human  choline
products,  which grew 9.0% over the prior year comparable  period.  Net sales of
$6,807 were  realized for the three months ended  September 30, 2006 for the BCP
Ingredients  (unencapsulated feed supplements)  segment, as compared with $5,290
for the three months ended  September  30, 2005, an increase of $1,517 or 28.7%.
This  increase  was due to increased  volumes  sold in dry and aqueous  choline,
along with modest price increases in all product lines.

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

Gross margin for the three months ended  September 30, 2006 increased to $8,673,
as compared to $7,649 for the three months ended September 30, 2005, an increase
of $1,024 or 13.4%,  due largely to the  above-noted  increase  in sales.  Gross
margin  percentage for the three months ended  September 30, 2006 was 34.5%,  as
compared to 36.2% for the three months ended  September 30, 2005.  This decrease
in gross margin  percentage was primarily a result of product mix and higher raw
material and fuel costs. Gross margin dollars for the specialty products segment
increased slightly as increases in sales volume and modest sales price increases
were partially offset by higher raw material prices. Gross margin dollars in the
encapsulated/nutritional  products  segment  increased  23.5%  as  margins  were
favorably  affected by sales  volumes  from the newly  acquired  CMC, as well as
increased  volumes sold in the  international  food,  human choline and ruminant
animal markets.  Gross margin dollars for the BCP Ingredients  segment increased
16.4% and was favorably affected by increased sales volumes, partially offset by
higher raw material costs and unfavorable changes in product mix.

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

Operating expenses for the three months ended September 30, 2006 were $3,692, as
compared to $2,918 for the three months ended September 30, 2005, an increase of
$774 or 26.5%.  This increase was primarily a result of increased  payroll costs
for new hires, stock based compensation expenses relating to the adoption of the
provisions  of  SFAS  No.  123R,   expenditures  in  support  of  the  Company's
pharmaceutical initiative, and

                                       22
<PAGE>

increased  amortization  expense  resulting  from  the  CMC  acquisition.  Total
operating  expenses  as a  percentage  of sales were 14.7% for the three  months
ended  September  30,  2006,  as  compared to 13.8% for the three  months  ended
September 30, 2005.  During the three months ended  September 30, 2006 and 2005,
the  Company  spent $549 and $492,  respectively,  on research  and  development
programs,  substantially all of which pertained to the Company's  encapsulated /
nutritional products segment for both human and animal health.

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

As a result of the  foregoing,  earnings  from  operations  for the three months
ended September 30, 2006 were $4,981, as compared to $4,731 for the three months
ended September 30, 2005.

Other expenses (income)
-----------------------

Interest  income for the three  months  ended  September  30,  2006 was $13,  as
compared to $46 for the three months ended  September 30, 2005. This decrease is
attributable to the decrease in the average total cash balance. Interest expense
was $16 for the three months ended September 30, 2006, as compared to $2 for the
three months ended  September  30, 2005.  This increase is  attributable  to the
increase in average  current debt resulting from the CMC acquisition in February
2006.  Other income for the three months ended  September 30, 2006 totaled $-0-,
as compared to $82 for the three months ended  September 30, 2005. This decrease
is  attributable  to the  inclusion of a gain on the sale of  equipment  for the
three months ended September 30, 2005.

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

Our  effective  tax rate for the three months ended  September 30, 2006 and 2005
was 36.7% and 37.7%,  respectively.  This  decrease in the effective tax rate is
primarily attributable to a change in allocation relating to state income taxes.

Net earnings
------------

As a result of the  foregoing,  net  earnings  were $3,151 for the three  months
ended  September  30, 2006 as compared  with $3,024 for the three  months  ended
September 30, 2005, an increase of 4.2%.

                                       23
<PAGE>

Nine months ended September 30, 2006 compared to nine months ended September 30,
2005

Net Sales
---------

Net sales for the nine months ended September 30, 2006 were $74,819, as compared
with  $59,969 for the nine  months  ended  September  30,  2005,  an increase of
$14,850 or 24.8%. Net sales for the specialty  products segment were $23,927 for
the nine months ended  September 30, 2006, as compared with $22,088 for the nine
months ended  September 30, 2005,  an increase of $1,839 or 8.3%.  This increase
was  principally  due to an increase  in sales  volume  along with modest  price
increases for our ethylene oxide products for medical device sterilization.  Net
sales for the  encapsulated / nutritional  products segment were $30,676 for the
nine months  ended  September  30, 2006,  as compared  with $23,131 for the nine
months ended  September 30, 2005, an increase of $7,545 or 32.6%.  This increase
was due  principally  to  increased  volumes sold in the human  choline  market,
favorable changes in product mix in the domestic and international  food markets
and  approximately  $5,220 of incremental  sales  associated  with the Company's
newly  acquired  pharmaceutical,  food,  and chelated  minerals  business  lines
resulting from the Loders Croklaan asset and CMC  acquisitions  (see Notes 4 and
3, respectively).  Net sales of the BCP Ingredients segment were $20,216 for the
nine months ended  September  30, 2006 for the, as compared with $14,750 for the
nine months  ended  September  30,  2005,  an increase of $5,466 or 37.1%.  This
increase  was due to  increased  volumes  sold in dry and  aqueous  choline  and
choline derivatives,  along with modest price increases in all product lines and
revenue recognized of $632 relating to the PMD license agreement (see Note 15).

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

Gross margin for the nine months ended  September 30, 2006 increased to $25,695,
as compared to $21,943 for the nine months ended September 30, 2005, an increase
of $3,752 or 17.1%,  due largely to the  above-noted  increase  in sales.  Gross
margin  percentage  for the nine months ended  September 30, 2006 was 34.3%,  as
compared to 36.6% for the nine months ended September 30, 2005. This decrease in
gross  margin  percentage  was  primarily a result of product mix and higher raw
material and fuel costs. Gross margin dollars for the specialty products segment
increased due to higher sales volume,  and modest  increases in average  selling
price.  These  increases  were partially  offset by higher raw material  prices.
Gross  margin  dollars  in  the  encapsulated  /  nutritional  products  segment
increased  32.0% as margins were favorably  affected by increased  sales volumes
from the  newly  acquired  CMC  products,  increased  volumes  sold in the human
choline market, as well as favorable product mixes in the international food and
ruminant  animal markets.  These increases were partially  offset by unfavorable
product mix in the pharmaceutical calcium product line. Gross margin dollars for
the BCP  Ingredients  segment  increased  26.5% and was  favorably  affected  by
increased  sales  volumes,  partially  offset by higher raw  material and energy
costs.

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

Operating expenses for the nine months ended September 30, 2006 were $11,375, as
compared to $8,902 for the nine months ended  September 30, 2005, an increase of
$2,473 or 27.8%. This increase was primarily a result of increased payroll costs
for new hires,

                                       24
<PAGE>

stock-based  compensation expenses relating to the adoption of the provisions of
SFAS 123R, expenditures in support of the Company's  pharmaceutical  initiative,
and increased  amortization  expense  resulting from the CMC acquisition.  Total
operating expenses as a percentage of sales were 15.2% for the nine months ended
September  30, 2006  compared to 14.8% for the nine months ended  September  30,
2005.  During the nine months  ended  September  30, 2006 and 2005,  the Company
spent $1,561 and $1,537,  respectively,  on research and  development  programs,
substantially all of which pertained to the Company's encapsulated / nutritional
products segment for both human and animal health.

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

As a result of the foregoing, earnings from operations for the nine months ended
September 30, 2006 were $14,320 as compared to $13,041 for the nine months ended
September 30, 2005.

Other expenses (income)
-----------------------

Interest  income for the nine months ended  September  30, 2006 totaled $102, as
compared to $155 for the nine months ended  September 30, 2005. This decrease is
attributable to the decrease in the average total cash balance. Interest expense
was $186 for the nine months ended September 30, 2006, as compared to $6 for the
nine months ended  September  30, 2005.  This  increase is  attributable  to the
increase  in  average   current  and  long-term  debt  resulting  from  the  CMC
acquisition in February 2006.  Other income for the nine months ended  September
30, 2006 totaled  $-0-,  as compared to $82 for the nine months ended  September
30, 2005.  This decrease is  attributable to the inclusion of a gain on the sale
of equipment for the nine months ended September 30, 2005.

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

The Company's  effective  tax rate for the nine months ended  September 30, 2006
and 2005 was 36.3% and 37.3%,  respectively.  This decrease in the effective tax
rate is  primarily  attributable  to a change in  allocation  relating  to state
income taxes.

Net earnings
------------

As a result of the foregoing, net earnings were $9,064 for the nine months ended
September 30, 2006 as compared  with $8,322 for the nine months ended  September
30, 2005, an increase of 8.9%.

                                       25
<PAGE>

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

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

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

As part of the June 30,  2005  acquisition  of certain  assets  relating  to the
encapsulation,  agglomeration  and granulation  business of Loders Croklaan USA,
LLC, we agreed to the contingent payment 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,  if any is paid,  will be recorded as an  additional  cost of the
acquired  product lines.  No such contingent  consideration  has been paid as of
September 30, 2006.

The Company's other contractual  obligations and commitments principally include
obligations  associated  with  future  minimum  non-cancelable  operating  lease
obligations  (including  a lease for our  headquarters  office  space,  which we
entered into in 2002).

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.  The Company
could seek  additional  bank loans or access to  financial  markets to fund such
acquisitions,  its operations, working capital, necessary capital investments or
other cash requirements should it deem it necessary to do so.

Cash
----

Cash and cash equivalents decreased to $2,660 at September 30, 2006 from $12,996
at December 31, 2005. The $10,336 decrease resulted primarily from net cash used
in investing  activities of $24,078,  principally  for the acquisition of all of
the  outstanding  capital  stock of CMC on February 8, 2006,  as well as for the
acquisition of the St.  Gabriel,  Louisiana  manufacturing  facility and related
assets from  BioAdditives,  LLC and CMB Additives,  LLC on August 24, 2006. Also
contributing  to the decrease in cash and cash  equivalents was net cash used in
financing  activities  of $571.  Partially  offsetting  these  decreases  was an
increase  in net cash  provided by  operating  activities  of  $14,313.  Working
capital  amounted  to $15,802 at  September  30,  2006 as compared to $26,116 at
December 31, 2005, a decrease of $10,314,  primarily  due to the  aforementioned
decrease in cash.

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

Cash flows from operating  activities provided $14,313 for the nine months ended
September  30, 2006,  as compared to $9,827 for the nine months ended  September
30, 2005. The increase in cash flows from operating activities was primarily due
to increases in net earnings,  depreciation expense and current income taxes, as
well as a decrease in prepaid  expenses.  This increase was partially  offset by
decreases in customer  deposits and other deferred  revenue and accounts payable
and accrued expenses.

                                       26
<PAGE>

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

Capital  expenditures  were $1,235 for the nine months ended  September 30, 2006
compared to $1,186 for the nine months ended September 30, 2005 and are expected
to be  approximately  $2,500  for all of  calendar  year  2006.  Cash  paid  for
acquisitions in 2006,  including  acquisition costs, net of acquisition accounts
receivable collected, was $22,772.

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, 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 remain in treasury.  In June 2005,  the board of
directors authorized another extension to the stock repurchase program for up to
an  additional  600,000  shares,  that is, over and above those  514,974  shares
previously  repurchased  under the  program.  Under this  extension,  a total of
66,300 shares have been purchased at an average cost of $18.07,  22,057 of which
remain in treasury at September 30, 2006. During the nine months ended September
30, 2006, no additional shares have been purchased.

On February 6, 2006,  the Company and its  principal  bank entered into the Loan
Agreement  providing  for the Term Loan of $10,000,  the  proceeds of which were
used to fund the CMC Acquisition (see Note 3), in part. The remaining balance of
the purchase price of the Acquisition was funded through Balchem's cash on hand.
The Loan Agreement also provides for a Revolving Facility of $3,000.  Borrowings
under the Revolving  Facility bear interest at LIBOR plus 1.00%. No amounts have
been drawn on the  Revolving  Facility as of September  30, 2006.  The Revolving
Facility expires in February 2007.  Management  believes that such facility will
be renewed in the normal course of business.

As of September 30, 2006, the Company made $10,000 in principal payments against
the Term Loan, which paid the term loan in full.

Proceeds  from  stock  options  exercised  totaled  $321 and $1,263 for the nine
months ended September 30, 2006 and 2005,  respectively.  Dividend payments were
$1,045  and  $685  for the nine  months  ended  September  30,  2006  and  2005,
respectively.

Pursuant to the Company's  adoption of the  provisions of SFAS 123R,  the excess
tax  benefits  of stock  options  exercised  of $163 for the nine  months  ended
September  30, 2006 is  classified  as a financing  activity.  These  excess tax
benefits had previously been classified as an operating activity.

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 its StateStateVerona,  StateMissouri facility. The
amount recorded on the Company's balance sheet as of September 30, 2006 for this
obligation is $1,018, and is included under "Other long-

                                       27
<PAGE>

term  obligations".  The  postretirement  plan is not  funded.  Historical  cash
payments made under such plan have approximated $50 per year.

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

Stock Options and Restricted Stock Awards

As  discussed  above,  effective  January 1, 2006,  we account  for  stock-based
compensation under SFAS 123R. Prior to January 1, 2006, we applied the intrinsic
value  method in  measuring  stock-based  compensation  under APB 25. Under SFAS
123R,  share-based payment awards result in a cost measured at fair value on the
awards' grant dates,  based on the estimated  number of awards expected to vest,
and that cost is recognized  through  earnings over the expected vesting period.
Under APB 25, when the exercise price of the Company's stock options equaled the
market value of the underlying  stock on the date of the grant,  no compensation
expense was recognized.

During the nine months ended September 30, 2006, other than the adoption of SFAS
123R, there were no changes to the Company's Critical  Accounting  Policies,  as
described  in its  Annual  Report on Form 10-K for the year ended  December  31,
2005.

Related Party Transactions
--------------------------

The Company was not engaged in related party transactions during the nine months
ended September 30, 2006.




                                       28
<PAGE>

Item 3.  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.  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.  As of September 30, 2006, the Company had no
borrowings  under any loan  agreements or other credit  facilities.  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.



                                       29
<PAGE>

Item 4.  Controls and Procedures

  (a) Evaluation of Disclosure Controls and Procedures

      Pursuant  to the  requirements  of the  Sarbanes-Oxley  Act of  2002,  the
      Company's management,  under the supervision and with the participation of
      the Company's Chief Executive  Officer and Chief  Financial  Officer,  has
      evaluated, as of the end of the period covered by this Quarterly Report on
      Form 10-Q,  the  effectiveness  of the Company's  disclosure  controls and
      procedures  (including its internal  controls and procedures).

      Based upon  management's  evaluation,  the Chief Executive Officer and the
      Chief Financial Officer have concluded that, as of the end of such period,
      the  Company's  disclosure  controls  and  procedures  were  effective  in
      identifying  the  information  required to be disclosed  in the  Company's
      periodic  reports  filed  with  the  Securities  and  Exchange  Commission
      ("SEC"),  including this Quarterly  Report on Form 10-Q, and ensuring that
      such  information is recorded,  processed,  summarized and reported within
      the time periods specified in the SEC's rules and forms.

 (b)  Changes in Internal Controls
      During  the most  recent  fiscal  quarter,  there has been no  significant
      change in the Company's internal control over financial reporting that has
      materially  affected,  or is reasonably likely to materially  affect,  the
      Company's internal control over financial reporting.


                                       30
<PAGE>

Part II. Other Information

Item 1A. Risk Factors

         There have been no material  changes in the Risk Factors  identified in
         the Company's  Annual  Report on Form 10-K for the year ended  December
         31, 2005.

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

         None.

Item 6.  Exhibits

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

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

         Exhibit 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.

         Exhibit 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.

                                   SIGNATURES


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
         the  Registrant  has duly caused this report to be signed on its behalf
         by the undersigned thereunto duly authorized.

                                                   BALCHEM CORPORATION
                                                   -------------------



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


         Date: November 8, 2006


                                       31
<PAGE>

                                  Exhibit Index

Exhibit No.                Description
-----------                -----------

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

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

Exhibit 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.

Exhibit 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.


                                       32