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

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

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

                   For the fiscal year ended December 31, 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 Identification
incorporation or organization)                   Number)

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

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

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

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|

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

Indicate by check mark whether the Registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

(Check one): Large accelerated filer |_| Accelerated filer |X| Non-accelerated
filer |_|

Indicate by check mark whether the  Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|

<PAGE>

The aggregate  market value of the common stock issued and  outstanding and held
by non-affiliates of the Registrant, based upon the closing price for the common
stock  on the  American  Stock  Exchange  on June  30,  2006  was  approximately
$257,428,000. For purposes of this calculation, shares of the Registrant held by
directors   and  officers  of  the   Registrant   and  under  the   Registrant's
401(k)/profit sharing plan have been excluded.

The number of shares outstanding of the Registrant's common stock was 17,795,446
as of March 1, 2007.

                       DOCUMENTS INCORPORATED BY REFERENCE
Selected  portions  of the  Registrant's  proxy  statement  for its 2007  Annual
Meeting  of  Stockholders  (the  "2007  Proxy  Statement")  to be filed with the
Securities  and Exchange  Commission  pursuant to Regulation 14A within 120 days
after  Registrant's  fiscal  year-end of December 31, 2006 are  incorporated  by
reference in Part III of this Report.

<PAGE>

            Cautionary Statement Regarding Forward-Looking Statements
            ---------------------------------------------------------

      This  Annual  Report on Form 10-K  contains  "forward-looking  statements"
within the meaning of Section 21E of the  Securities  Exchange  Act of 1934,  as
amended.  Forward-looking statements are not statements of historical facts, but
rather reflect our current  expectations or beliefs concerning future events and
results. We generally use the words "believes,"  "expects,"  "intends," "plans,"
"anticipates,"   "likely,"   "will"  and   similar   expressions   to   identify
forward-looking  statements.  Such forward-looking  statements,  including those
concerning our  expectations,  involve risks,  uncertainties  and other factors,
some of which are  beyond  our  control,  which may  cause our  actual  results,
performance or achievements,  or industry  results,  to be materially  different
from any future  results,  performance or  achievements  expressed or implied by
such forward-looking statements. The risks, uncertainties and factors that could
cause our  results  to  differ  materially  from our  expectations  and  beliefs
include,  but are not limited to, those  factors set forth in this Annual Report
on Form 10-K under "Item 1A. - Risk Factors" below, as well as the following:

            o     changes in laws or regulations affecting our operations;

            o     changes in our business tactics or strategies;

            o     acquisitions of new or complementary operations;

            o     sales of any of our existing operations;

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

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

      We cannot assure you that the  expectations or beliefs  reflected in these
forward-looking  statements  will prove  correct.  We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new  information,  future events or  otherwise.  You are cautioned not to unduly
rely  on  such  forward-looking   statements  when  evaluating  the  information
presented in this Annual Report on Form 10-K.

                                     Part I

Item 1. Business

General:

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

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


                                       1
<PAGE>

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

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

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

      In animal health  industries,  Balchem  markets  REASHURE(R)  Choline,  an
encapsulated  choline  product that improves health and production in transition
and early lactation dairy cows.  REASHURE(R)  delivers choline that survives the
rumen and is biologically  available,  providing required  nutritional levels to
dairy cows during  certain  weeks  preceding  and  following  calving,  commonly
referred to as the "transition  period" of the animal.  Also 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  industries  throughout  the  world.  CMC's
proprietary  chelation  technology provides for enhanced nutrient absorption for
various species of production and companion animals.

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

      Our specialty  products  segment operates as ARC Specialty  Products.  The
specialty  products segment  repackages and distributes the following  specialty
gases:  ethylene  oxide,  blends of ethylene  oxide,  propylene oxide and methyl
chloride.

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

      We  sell  two  other  products,   propylene  oxide  and  methyl  chloride,
principally  to customers  seeking  smaller (as opposed to bulk)  quantities and
whose requirements include timely delivery and safe handling. Propylene oxide is
used for  fumigation  in  spice  treatment  and in  various  chemical  synthesis
applications. It is also utilized in industrial applications to make paints more
durable, and for manufacturing  specialty


                                       2
<PAGE>

starches and textile coatings. Methyl chloride is used as a raw material in
specialty herbicides, fertilizers and pharmaceuticals, as well as in malt and
wine preservers.

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

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

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

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

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

      The Company  currently  holds 15 patents in the United States and overseas
and uses  certain  trade-names  and  trademarks.  It also uses  know-how,  trade
secrets,  formulae,  and  manufacturing  techniques  that assist in  maintaining
competitive  positions of certain of its products.  Formulae and know-how are of
particular  importance in the manufacture of a number of the Company's products.
The  Company  believes  that  certain  of its  patents,  in the  aggregate,  are
advantageous to its business.  However,  it is believed that no single patent or
related  group of patents is  currently  so  material  to the  Company  that the
expiration  or  termination  of any  single  patent  or group of  patents  would
materially  affect  its  business.  The  Company  believes  that its  sales  and
competitive  position are dependent  primarily upon the quality of its products,
its  technical  sales efforts and market  conditions,  rather than on any patent
protection.

Licensing:
---------

      The Company entered into a license  agreement with Project  Management and
Development  Co.,  Ltd., a British  corporation  ("PMD") in November  2005 under
which the Company  granted PMD the right to utilize  the  Company's  proprietary
continuous  manufacturing  technology  for the  production  of  aqueous  choline
chloride in  connection  with PMD's  construction  and  operation  of an aqueous
choline  chloride   production   facility  at  PMD's  Al-Jubail,   Saudi  Arabia
petrochemical  facility,  currently  scheduled  for  completion in late 2009. In
addition,  PMD has  the  exclusive  right  to use  such  technology  in  certain
countries,  as well as the  non-exclusive  right  to  market,  sell  and use the
products  derived from such  technology  on a  world-wide  basis except that the
Company is to be PMD's exclusive North American distributor for such products.

      The  License  Agreement  terminates  either 10 years from the  start-up of
PMD's  production  facility or December  31, 2020,  whichever is earlier.  As of
August 2006, PMD assigned the license agreement in its entirety to its successor
in interest, Al Kayan Petrochemical Company.

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

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


                                       3
<PAGE>

Backlog:
-------

      At  December  31,  2006,  the Company  had a total  backlog of  $2,853,000
(including  $1,769,000  for the  encapsulated  / nutritional  products  segment,
$655,000 for the specialty  products segment and $429,000 for BCP  Ingredients),
as compared to a total  backlog of  $2,688,000  at December 31, 2005  (including
$1,794,000 for the encapsulated / nutritional products segment, $548,000 for the
specialty products segment and $346,000 for the BCP Ingredients segment). It has
generally  been the  Company's  policy and  practice to maintain an inventory of
finished products and / or component  materials for its segments to enable it to
ship products within a short time after receipt of a product order.

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

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

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

      During the years  ended  December  31,  2006,  2005 and 2004,  the Company
incurred research and development  expense of approximately  $2.0 million,  $2.1
million  and $1.8  million,  respectively,  on  Company-sponsored  research  and
development  for  new  products  and  improvements  to  existing   products  and
manufacturing processes,  principally in the encapsulated / nutritional products
segment.  During the year ended  December 31,  2006,  an average of 13 employees
were devoted full time to research and development  activities.  The Company has
historically  funded its research and development  programs with funds available
from current  operations with the intent of recovering  those costs from profits
derived  from  future  sales of products  resulting  from,  or enhanced  by, the
research and development effort.

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

Acquisitions, Dispositions, and Capital Projects:
------------------------------------------------

      In 2006, the Company made two significant acquisitions.

      In August 2006, we acquired from BioAdditives, LLC, CMB Additives, LLC and
CMB  Realty  of  Louisiana,  an  animal  feed  grade  aqueous  choline  chloride
manufacturing facility and related assets located in St. Gabriel,  Louisiana. In
connection,  we also acquired from such sellers the remaining interest in a land
lease  (approximately  19 years)  relating to the realty upon which the acquired
facility and related assets are located.  In this Annual Report on Form 10-K, we
refer to this acquisition as the "St. Gabriel Acquisition."

      In February 2006, we acquired all of the outstanding capital stock of CMC,
which was then  privately  held. In this Annual Report on Form 10-K, we refer to
this acquisition as the "CMC Acquisition."


                                       4
<PAGE>

      In  addition,  in June  2005,  we  acquired  Loders  Croklaan  USA,  LLC's
encapsulation,  agglomeration and granulation business. In this Annual Report on
Form 10-K, we refer to this acquisition as the "Loders Crooklaan Acquisition."

      Excluding our 2006 acquisitions,  capital  expenditures were approximately
$2.3 million for 2006, as compared to $1.8 million in 2005. Capital expenditures
are projected to be approximately $4.8 million for 2007.

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

      The  Federal  Insecticide,  Fungicide  and  Rodenticide  Act,  as  amended
("FIFRA"),  a health and safety statute,  requires that certain  products within
the Company's specialty products segment must be registered with the EPA because
they are considered pesticides. In order to obtain a registration,  an applicant
typically must demonstrate through extensive test data that its product will not
cause unreasonable adverse effects on the environment.  The Company holds an EPA
registration  permitting it to sell ethylene oxide as a medical device sterilant
and spice  fumigant.  The  Company  is in the  process  of  re-registering  this
product's  use in compliance  with FIFRA  re-registration  requirements  for all
pesticide products. In December 2004, the EPA informed the Company and the other
technical  registrant  under  the  current  registration  that  the  Agency  was
beginning the 6-phase process to develop a Re-registration  Eligibility Decision
(RED) for this product.  This multi-phase process entered Phase 5 last year. The
EPA's Office of Pesticide  Programs  (OPP) had  originally  stated its intent to
finalize the RED by August 2006, but bifurcated the process, and dealt only with
the  reassessment  of spice  residue  tolerances  mandated  by the Food  Quality
Protection Act of 1996. On August 9, 2006,  OPP issued a Tolerance  Reassessment
Progress and Risk  Management  Decision  (TRED)  relating to the use of ethylene
oxide to treat spices.  This TRED  prohibits the use of ethylene  oxide to treat
basil, effective August 1, 2007, but allows the continuing use of ethylene oxide
to treat all other spices, provided users follow a mandated treatment method. In
the Federal  Register  notice  announcing the TRED, the EPA stated its intent to
complete  the RED process for ethylene  oxide in 2007.  Upon  completion  of the
EPA's Office of Research and Development (ORD) assessment of the carcinogenicity
of ethylene oxide, OPP will complete  preparation of the RED. ORD issued a draft
"Evaluation  of the  Carcinogenicity  of Ethylene  Oxide" in a Federal  Register
notice, dated September 22, 2006. This assessment is currently undergoing review
by a special panel of the Science  Advisory Board.  ORD indicates the assessment
will be finalized by the summer of 2007.  The Company has actively  participated
in the public access  portions of both the ORD assessment  process and the OPP's
RED process and will continue to do so until their  conclusions.  With regard to
the RED process,  as of this date, the OPP expressed concerns about occupational
exposures to ethylene oxide. The EPA requested  additional  information from the
industry,  which the Company is actively involved in providing. The EPA has also
indicated  additional  testing may be required in order to maintain  the current
uses. The Company believes that the use will continue to be permitted,  although
the  Agency  may  require  some   additional   restrictions   on  current  uses.
Additionally, the product, when used as a medical device sterilant, has no known
equally  effective  substitute.  Management  believes absence of availability of
this  product  could  not  be  easily   tolerated  by  various   medical  device
manufacturers  and the  health  care  industry  due to the  resultant  infection
potential, if the product were unavailable.

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

      The Company's facility in Verona,  Missouri,  while held by a prior owner,
was  designated  by the EPA as a  Superfund  site  and  placed  on the  National
Priorities  List in 1983,  because of dioxin  contamination  on  portions of the
site.  Remediation  conducted by the prior owner under the  oversight of the EPA
and the Missouri  Department of Natural  Resources  ("MDNR") included removal of
dioxin   contaminated   soil  and  equipment,   capping  of  areas  of  residual
contamination  in four  relatively  small  areas of the site  separate  from the
manufacturing  facilities,  and the installation of wells to monitor groundwater
and surface water for


                                       5
<PAGE>

contamination  for certain organic  chemicals.  No ground water or surface water
treatment  has  been  required.  In  1998,  the EPA  certified  the  work on the
contaminated soils to be complete. In February 2000, after the conclusion of two
years of monitoring  groundwater and surface water, the former owner submitted a
draft third party risk  assessment  report to the EPA and MDNR  recommending  no
further action.  The prior owner is awaiting the response of the EPA and MDNR to
the draft risk assessment.

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

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

      The Company  believes it is in  compliance  in all material  respects with
federal,  state,  and  local  provisions  that  have  been  enacted  or  adopted
regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment.  Such compliance  includes the maintenance
of  required  permits  under  air  pollution  regulations  and  compliance  with
requirements of the Occupational Safety and Health  Administration.  The cost of
such  compliance has not had a material effect upon the results of operations or
financial  condition  of the  Company.  In  1982,  the  Company  discovered  and
thereafter  removed a number  of  buried  drums  containing  unidentified  waste
material from the Company's site in Slate Hill, New York. The Company thereafter
entered  into a  Consent  Decree  to  evaluate  the drum  site with the New York
Department  of  Environmental  Conservation  ("NYDEC")  and performed a Remedial
Investigation/Feasibility  Study that was  approved by NYDEC in  February  1994.
Based on NYDEC  requirements,  the Company  remediated the area and removed soil
from the drum burial site. This proceeding has been substantially completed (see
Item 3).

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

Employees:
---------

      As of March 1, 2007,  the  Company  employed  approximately  230  persons.
Approximately  50  employees  at the  Company's  Verona,  Missouri  facility are
covered by a collective bargaining agreement which expires in 2007.

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

      The Company's  headquarters  is located at 52 Sunrise Park Road,  P.O. Box
600, New Hampton, NY 10958. The Company's telephone number is (845) 326-5600 and
its Internet  website  address is  www.balchem.com.  The Company makes available
through its website,  free of charge, its Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current  Reports on Form 8-K,  and  amendments  to such
reports,  as soon as reasonably  practicable after they have been electronically
filed with the  Securities and Exchange  Commission.  Such reports are available
via a link from the Investor Information page on the


                                       6
<PAGE>

Company's  website  to a list of the  Company's  reports on the  Securities  and
Exchange Commission's EDGAR website.

Item 1A. Risk Factors

      Our business involves a high degree of risk and uncertainty, including the
following risks and uncertainties:

      Increased competition could hurt our business and financial results.

      We face  competition  in our  markets  from a number  of large  and  small
companies,  some of which have  greater  financial,  research  and  development,
production  and other  resources than we do. Our  competitive  position is based
principally on  performance,  quality,  customer  support,  service,  breadth of
product line,  manufacturing  or packaging  technology and the selling prices of
our  products.  Our  competitors  might be  expected  to improve  the design and
performance  of their  products and to introduce new products  with  competitive
price and performance characteristics.  We expect to do the same to maintain our
current competitive position and market share.

      One of our customers  accounts for about 8% of our  business;  the loss of
that customer could adversely impact our business and financial results.

      Due to consolidation of customer businesses in the contract  sterilization
industry,  we  have  one  specialty  products  customer,   which  accounted  for
approximately  8% and 9% of our net sales in 2006 and 2005,  respectively.  This
customer  accounted  for 10% and 8% of our  accounts  receivable  net balance at
December 31, 2006 and 2005, respectively. The loss of this customer could have a
material adverse effect on our business and financial results.

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

      Pursuant to applicable  environmental and safety laws and regulations,  we
are required to obtain and maintain certain  governmental permits and approvals,
including an EPA  registration  for our ethylene  oxide  sterilant  product.  We
maintain an EPA registration of ethylene oxide as a medical device sterilant and
fumicide.  We are in the process of  re-registering  this product in  accordance
with FIFRA. The EPA may not allow re-registration of ethylene oxide for the uses
mentioned  above.  The failure of the EPA to allow  re-registration  of ethylene
oxide  would  have a  material  adverse  effect on our  business  and  financial
results.

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

      Permits and approvals may be subject to revocation, modification or denial
under certain circumstances.  Our operations or activities (including the status
of  compliance  by the  prior  owner  of the  Verona,  Missouri  facility  under
Superfund  remediation)  could  result in  administrative  or  private  actions,
revocation  of required  permits or  licenses,  or fines,  penalties or damages,
which could have an adverse


                                       7
<PAGE>

effect  on us.  In  addition,  we can  not  predict  the  extent  to  which  any
legislation  or regulation may affect the market for our products or our cost of
doing business.

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

      The principal raw materials that we use in the manufacture of our products
can be subject to price  fluctuations.  While the selling prices of our products
tend to  increase or decrease  over time with the cost of raw  materials,  these
changes may not occur  simultaneously or to the same degree. At times, we may be
unable to pass increases in raw material  costs through to our  customers.  Such
increases  in the  price  of raw  materials,  if not  offset  by  product  price
increases,  or substitute  raw  materials,  would have an adverse  impact on our
profitability.

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

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

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

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

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

      For the year ended December 31, 2006,  approximately  10% of our net sales
consisted of sales outside the United States, predominately to Europe, Japan and
China. Such sales are generally  denominated in U.S. Dollars at a specific price
per unit.  Changes in the relative  values of currencies take place from time to
time and could in the future  adversely  affect  prices  foreign  customers  are
willing to pay for our products. In addition, international sales are subject to
other inherent risks,  including possible labor unrest,  political  instability,
export duties and quotas.  These factors could have a material adverse impact on
our ability to increase or maintain our international sales.

      Our success depends in large part on our key personnel.

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

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

      We, like all companies involved in the food and pharmaceutical industries,
are subject to potential claims for product liability  relating to our products.
Such claims,  irrespective of their outcomes or merits,  could be time-consuming
and expensive to defend,  and could result in the  diversion of management  time


                                       8
<PAGE>

and attention.  Any of these  situations could have a material adverse effect on
our business and financial  results.  It is possible  that an adverse  result in
Casey Liesse, et al. v. AGA AB, et al. (see Item 3 of the Report) or other legal
proceedings  commenced  against us could have a negative impact on our financial
condition or liquidity.

Item 1B. Unresolved Staff Comments

      None.

Item 2. Properties

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

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

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

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

      The Company leases  production and warehouse space in Channahon,  Illinois
as a result of the Loders Croklaan  Acquisition.  The Company uses this facility
for production  related to the Company's  pharmaceutical  line of business.  The
initial term of the lease is effective  through  September 30, 2010,  subject to
earlier  termination by Balchem upon sixty days notice,  or by the landlord upon
sixty days notice.  The  Company's  leased space in Channahon,  Illinois  totals
approximately 26,000 square feet.

      The Company,  through CMC, owns a  manufacturing  facility and  warehouse,
comprising approximately 16,500 square feet, located on approximately 5 acres of
land in Salt Lake City,  Utah.  The Company  manufactures  and  distributes  its
chelated mineral nutrients for animal feed products at this location.

      The  Company,  through  BCP,  acquired in the St.  Gabriel  Acquisition  a
manufacturing facility located upon approximately 11 acres of realty leased from
Taminco Higher Amines, Inc. in St. Gabriel,  Louisiana. The Company manufactures
and distributes animal feed grade choline chloride at this location.

Item 3. Legal Proceedings

      In 1982 the Company  discovered and thereafter  removed a number of buried
drums  containing  unidentified  waste material from the Company's site in Slate
Hill, New York. The Company thereafter entered into a Consent Decree to evaluate
the drum  site  with  the New  York  Department  of  Environmental  Conservation
("NYDEC")  and  performed  a Remedial  Investigation/Feasibility  Study that was
approved by NYDEC in February  1994.  Based on NYDEC  requirements,  the Company
remediated  the area and removed  soil from the drum burial  site.  Clean-up was
completed  in 1996,  and NYDEC  required the Company to


                                       9
<PAGE>

monitor  the  site  through  1999.  The  Company  continues  to be  involved  in
discussions  with NYDEC to evaluate  monitoring  results and determine  what, if
any, additional actions will be required on the part of the Company to close out
the remediation of this site.  Additional  actions, if any, would likely require
the Company to continue  monitoring  the site.  The cost of such  monitoring has
recently been less than $5,000 per year.

      Casey  Liesse,  et al. v. AGA AB, et al.,  Circuit  Court of Cook  County,
Illinois,  Case  No.  02 L  000498,  was  commenced  in  2002  against  over  80
defendants,  among  which is the  Company.  The  action  alleges  that  nineteen
individual  plaintiffs  were exposed to ethylene oxide and other  chemicals used
for sterilizing or cleaning  medical  instruments  during their  employment at a
hospital  in  Harvey,  Illinois.  As a  result  of  the  alleged  exposure,  the
plaintiffs claim they have suffered various physical and psychological injuries.
During the time period plaintiffs  suffered their alleged injuries,  the Company
was in the business of repackaging and distributing  ethylene oxide, among other
products.  The  Company  never  sold any  product to the  hospital  but has been
injoined due to the fact that it  distributed  ethylene oxide for medical device
sterilization  to other  companies  that blend  ethylene  oxide for sales to the
hospital noted. On February 9, 2006, the trial court ruled in favor of Balchem's
Motion for Summary,  dismissing  all of the  plaintiffs'  claims of  negligence,
products liability and/or conspiracy against the Company. The plaintiffs filed a
Notice of Appeal to the trial court's summary judgment order, and on October 19,
2006 the Illinois Court of Appeals dismissed the plaintiffs'  appeal for failure
to file  the  record  on  appeal  within  the  prescribed  time  and for want of
prosecution.  The  plaintiffs did not seek to appeal this ruling to the Illinois
Supreme  Court,  thereby  precluding  the right of any  further  appeals  by the
plaintiffs of the rulings in favor of the Company. Plaintiffs continue to pursue
claims and file appeals against other defendants in the action but these have no
direct impact on the Company.  Balchem may still be subject to ancillary  claims
of indemnification and contribution from other defendants in the litigation, but
the Company  believes that these claims are either  without merit or time barred
or both.

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

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

      None.

PART II

Item 5. Market for the Registrant's Common Equity,  Related Stockholder Matters
        and Issuer Purchases of Equity Securities

      (a)   Market Information.

      On  December 8, 2006,  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 29,  2006.  Such stock
dividend  was made on  January  19,  2007.  The stock  split was  recognized  by
reclassifying  the par value of the additional  shares resulting from the split,
from additional paid-in capital to common stock.

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

      On December  16, 2004,  the Board of  Directors of the Company  approved a
three-for-two  split of the Company's common stock to be effected in the form of
a stock  dividend to  shareholders  of record on


                                       10
<PAGE>

December 30, 2004.  Such stock  dividend was made on January 20, 2005. The stock
split was recognized by  reclassifying  the par value of the  additional  shares
resulting from the split, from additional paid-in capital to common stock.

      All  references to number of common  shares and per share  amounts  except
shares  authorized in the accompanying  consolidated  financial  statements were
retroactively adjusted to reflect the effect of the December 2006 stock split.

      Since  December 22,  2006,  the  Company's  common stock has traded on the
Nasdaq Global Market under the trading  symbol BCPC.  Prior to that,  our common
stock traded on the American  Stock  Exchange  under the trading symbol BCP. The
high and low closing  prices for the common stock as recorded for each quarterly
period  during the years  ended  December  31, 2006 and 2005,  adjusted  for the
December 2006 and 2005  three-for-two  stock splits  (effected by means of stock
dividends) were as follows:

================================================================
Quarterly Period                          High           Low
----------------------------------------------------------------
Ended March 31, 2006                  $    15.99     $    13.57
Ended June 30, 2006                        15.85          13.41
Ended September 30, 2006                   15.93          13.07
Ended December 31, 2006                    19.25          12.80
================================================================

================================================================
Quarterly Period                          High           Low
----------------------------------------------------------------
Ended March 31, 2005                  $    11.11     $     9.64
Ended June 30, 2005                        13.37           9.71
Ended September 30, 2005                   14.42          11.69
Ended December 31, 2005                    13.25          11.56
================================================================

      On March 1, 2007 the  closing  price for the  common  stock on the  Nasdaq
Global Market was $14.53.

      (b)   Record Holders.

      As of March 1, 2007,  the  approximate  number of holders of record of the
Company's  common stock was 198. Such number does not include  stockholders  who
hold their stock in street name.  The total number of  beneficial  owners of the
Company's common stock is estimated to be approximately 7,271.

      (c)   Dividends.

      The Company  declared  cash  dividends of $0.09 and $0.06 per share on its
common  stock  during  its  fiscal  years  ended  December  31,  2006 and  2005,
respectively  (after giving  effect to the December 2006 and 2005  three-for-two
stock splits).

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

      (d)   Performance Graph.

      The graph below sets forth the cumulative total stockholder  return on the
Company's  Common Stock  (referred to in the table as "BCPC") for the five years
ended  December 31, 2006, the overall stock market return during such period for
shares comprising the Russell 2000(R) Index (which the Company believes includes
companies with market  capitalization  similar to that of the Company),  and the
overall  stock  market  return  during  such  period for shares  comprising  the
Standard & Poor's  500 Food  Group  Index,  in each case  assuming a  comparable
initial investment of $100 on December 31, 2001 and the subsequent  reinvestment
of dividends.  The Russell  2000(R) Index measures the performance of the shares
of the 2000 smallest  companies  included in the Russell 3000(R) Index. In light
of the Company's industry segments,  the


                                       11
<PAGE>

Company  does  not  believe  that   published   industry-specific   indices  are
necessarily  representative of stocks  comparable to the Company.  Nevertheless,
the  Company  considers  the  Standard  &  Poor's  500  Food  Group  Index to be
potentially useful as a peer group index with respect to the Company in light of
the Company's  encapsulated / nutritional  products segment.  The performance of
the Company's  Common Stock shown on the graph below is historical  only and not
indicative of future performance.

                                               Russell        S&P Food
                                  BCPC     2000(R) Index    Group Index
                            -----------------------------------------------
        12/31/01               $  100.00       $  100.00     $  100.00
        12/31/02               $  113.82       $   79.52     $  102.85
        12/31/03               $  106.79       $  117.09     $   89.49
        12/31/04               $  162.48       $  138.55     $  103.97
        12/31/05               $  209.44       $  144.86     $   93.10
        12/31/06               $  270.63       $  171.47     $  105.69

                             Stock Price         Value          Value
                            -----------------------------------------------
        12/31/01               $    6.33       $1,941.39      239.1297
        12/31/02               $    7.20       $1,543.73      245.9495
        12/31/03               $    6.76       $2,273.20      213.9892
        12/31/04               $   10.28       $2,689.86      248.6118
        12/31/05               $   13.25       $2,812.35      222.6220
        12/31/06               $   17.12       $3,328.90      252.7360

Item 6. Selected Financial Data

The selected  statements of operations  data set forth below for the three years
in the period ended December 31, 2006 and the selected  balance sheet data as of
December  31, 2006 and 2005 have been derived  from our  Consolidated  Financial
Statements included elsewhere herein. The selected financial data as of December
31, 2004,  2003 and 2002 and for the years ended December 31, 2003 and 2002 have
been derived from audited Consolidated Financial Statements not included herein,
but which were previously filed with the SEC. The following  information  should
be read in conjunction with Item 7 --  "Management's  Discussion and Analysis of
Financial  Condition and Results of Operations" and the  Consolidated  Financial
Statements and notes thereto included elsewhere herein.

All dollar amounts are in thousands (other than per share amounts). Earnings per
share and dividend  amounts have been adjusted for the December  2006,  2005 and
2004 three-for-two stock splits (effected by means of stock dividends).

<TABLE>
<CAPTION>
                        (In thousands, except per share data)
=======================================================================================
Year ended December 31,             2006       2005        2004       2003       2002
                                 (1)(2)(3)      (1)
---------------------------------------------------------------------------------------
<S>                              <C>         <C>         <C>        <C>        <C>
Statement of Operations Data
-----------------------------
Net sales                        $ 100,905   $ 83,095    $ 67,406   $ 61,875   $ 60,197
Earnings before income
   tax expense                      19,101     17,191      12,715      8,763     11,845
Income tax expense                   6,823      6,237       4,689      3,125      4,429
Net earnings                        12,278     10,954       8,026      5,638      7,416
Basic net earnings per
  common share                   $     .70   $    .63    $    .48   $    .35   $    .46
Diluted net earnings per
  common share                   $     .67   $    .61    $    .46   $    .33   $    .44
---------------------------------------------------------------------------------------
</TABLE>


                                       12
<PAGE>

<TABLE>
<CAPTION>
==========================================================================================
At December 31,                     2006        2005        2004        2003        2002
------------------------------------------------------------------------------------------
<S>                              <C>         <C>         <C>         <C>         <C>
Balance Sheet Data
------------------
Total assets                     $  92,333   $  75,141   $  60,405   $  56,906   $  53,298

Long-term debt                          --          --          --       7,839       9,581
Other long-term
  Obligations                          784       1,043       1,003         985         964
Total stockholders' equity          75,362      60,933      50,234      39,781      33,269
Dividends per common share       $     .09   $     .06   $     .04   $    .023   $    .023
==========================================================================================
</TABLE>

      (1)   Includes the operating  results,  cash flows, and assets relating to
            the Loders Croklaan  Acquisition from the date of acquisition  (July
            1, 2005) forward.

      (2)   Includes the operating  results,  cash flows, and assets relating to
            the CMC Acquisition from the date of acquisition  (February 8, 2006)
            forward.

      (3)   Includes the operating  results,  cash flows, and assets relating to
            the St. Gabriel Acquisition from the date of acquisition (August 24,
            2006) forward.

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

      Overview
      --------

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

      The  following  discussion  and analysis of our  financial  condition  and
results of  operations  should be read in  conjunction  with Item 6 -- "Selected
Financial Data" and our Consolidated  Financial Statements and the related notes
included in this report.  Those statements in the following  discussion that are
not historical in nature should be considered to be  forward-looking  statements
that   are   inherently   uncertain.   See   "Cautionary   Statement   Regarding
Forward-Looking Statements".

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

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

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

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

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

      The    encapsulated    /    nutritional    products    segment    provides
microencapsulation,  chelation  and  agglomeration  solutions  to a  variety  of
applications  in food,  pharmaceutical  and  nutritional  ingredients to enhance
therapeutic performance, taste, processing,  packaging and shelf-life. Major end
product


                                       13
<PAGE>

applications are baked goods,  refrigerated and frozen dough systems,  processed
meats,   seasoning   blends,    confections,    nutritional    supplementations,
pharmaceuticals  and  animal  nutrition.  We also  market  human  grade  choline
nutrient  products  through this  industry  segment for  wellness  applications.
Choline is  recognized  to play a key role in the  structural  integrity of cell
membranes,   processing  dietary  fat,   reproductive   development  and  neural
functions, such as memory and muscle function. Balchem's portfolio of granulated
calcium  carbonate  products are primarily  used in novel  over-the-counter  and
prescription   pharmaceuticals  for  the  treatment  of  osteoporosis,   gastric
disorders and calcium deficiencies in the United States.

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

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

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

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

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

      The  following  tables  summarize  consolidated  net sales by segment  and
business segment earnings before income taxes for the three years ended December
31, 2006, 2005 and 2004 (in thousands):

Business Segment Net Sales:
================================================================================
                                                  2006        2005        2004
--------------------------------------------------------------------------------
Specialty Products                             $  32,026   $  29,433   $  28,767
Encapsulated/Nutritional Products                 41,565      32,499      24,759
BCP Ingredients                                   27,314      21,163      13,880
--------------------------------------------------------------------------------
Total                                          $ 100,905   $  83,095   $  67,406
================================================================================

Business Segment Earnings Before Income Taxes:
================================================================================
                                                2006         2005        2004
--------------------------------------------------------------------------------
Specialty Products                           $  11,315    $  11,007   $  10,693
Encapsulated/Nutritional Products                4,200        3,217         992
BCP Ingredients                                  3,647        2,679       1,112
Interest and other income (expense)                (61)         288         (82)
--------------------------------------------------------------------------------
Total                                        $  19,101    $  17,191   $  12,715
================================================================================


                                       14
<PAGE>

Fiscal Year 2006 compared to Fiscal Year 2005
(All amounts in thousands, except share and per share data)

      Net Sales
      ---------

      Net  sales for 2006 were  $100,905  compared  with  $83,095  for 2005,  an
increase of $17,810 or 21.4%. Net sales for the specialty  products segment were
$32,026 for 2006,  as compared  with $29,433 for 2005,  an increase of $2,593 or
8.8%.  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 $41,565 for 2006  compared  with $32,499 for 2005, an increase of $9,066 or
27.9%.  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  $6,362  of  incremental  sales
associated with the Company's newly acquired pharmaceutical,  food, and chelated
minerals  business lines resulting from the Loders Croklaan  Acquisition and the
CMC Acquisition  (see Notes 7 and 6 to our  Consolidated  Financial  Statements,
respectively).  The Company also  experienced  volume  improvements  in sales of
REASHURE(R),  our animal  nutrition and health product  targeted for dairy cows.
Net sales for the BCP  Ingredients  segment of $27,314  were  realized  for 2006
compared  with $21,163 for 2005,  an increase of $6,151 or 29.1%.  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 $842 relating to the PMD license  agreement as compared to $158 in
2005 (see Note 14 to our Consolidated Financial Statements).

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

      Gross margin for 2006  increased to $34,006  compared to $28,680 for 2005,
an increase of 18.6%,  due largely to the above-noted  increase in sales.  Gross
margin  percentage  for 2006 was 33.7%,  as compared  to 34.5% for 2005,  as our
margin  percentage  was  unfavorably  affected  by  product  mix and  higher raw
material and energy costs.  Gross margin  percentage for the specialty  products
segment  decreased  slightly  primarily due to rising raw material costs.  Gross
margin  percentage in the encapsulated / nutritional  products segment increased
0.6% as margins were  favorably  affected by increased  production,  a result of
greater sales volume as described  above.  The favorable impact of the increased
production was partially  offset by higher raw material costs and an unfavorable
product mix in the pharmaceutical  calcium product line. Gross margin percentage
in BCP  Ingredients  increased  0.6% and was  favorably  affected  by  increased
production volumes of choline chloride and specialty derivative  products.  This
favorable impact was partially offset by higher raw material and energy costs.

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

      Operating expenses for 2006 increased to $14,844 from $11,777 for 2005, an
increase of $3,067 or 26.0%.  Total operating  expenses as a percentage of sales
were 14.7% for 2006,  as compared to 14.2% for 2005.  The  increase in operating
expenses for 2006 was principally a result of stock-based  compensation  expense
of $982  relating to the  adoption  of the  provisions  of SFAS 123R,  increased
payroll  costs  and  benefits  of $874  primarily  due to new  hires,  increased
expenditures  of $802 in  support  of the  Company's  continuing  efforts in the
pharmaceutical  industry, and higher amortization expense of $356 resulting from
the CMC Acquisition.  During 2006 and 2005, the Company spent $2,019 and $2,053,
respectively,   on   Company-sponsored   research  and   development   programs,
substantially all of which pertained to the Company's encapsulated / nutritional
products segment for both food and animal feed applications.

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

      As a result  of the  foregoing,  earnings  from  operations  for 2006 were
$19,162 as compared to $16,903 for 2005,  reflecting a 13.4%  increase from year
to year.


                                       15
<PAGE>

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

      Interest  income  for 2006 was $128 as  compared  to $214 for  2005.  This
decrease is  attributable  to a decrease in the  Company's  average cash balance
during 2006.  Interest  expense was $189 for 2006 compared to $8 for 2005.  This
increase is attributable to the average  outstanding  current and long-term debt
in 2006,  resulting from the CMC Acquisition in February 2006.  Other income for
2006 was $-0- as compared to $82 for 2005.  This decrease is attributable to the
inclusion of a gain on the sale of equipment in 2005.

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

      The Company's  effective  tax rate for 2006 was 35.7%  compared to a 36.3%
rate for 2005. 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  $12,278  for 2006 as
compared with $10,954 for 2005, reflecting a 12.1% increase from 2005 to 2006.

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

      Net Sales
      ---------

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

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

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


                                       16
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

=========================================
             Year
-----------------------------------------
2007                              $   672
2008                                  619
2009                                  652
2010                                  209
2011                                   79
Thereafter                             59
-----------------------------------------
Total minimum lease
payments                          $ 2,290
=========================================

      As part of the June 30, 2005  Loders  Croklaan  Acquisition,  we agreed to
make contingent  payments of additional  consideration  based upon the volume of
sales associated with one particular  product acquired


                                       17
<PAGE>

by the Company  during the three year period  following  the  acquisition.  Such
contingent consideration, if and when paid, is recorded as an additional cost of
the  acquired   product  lines.   As  of  December  31,  2006,  such  contingent
consideration of $23 has been earned and paid.

      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.

      Acquisitions and Dispositions
      -----------------------------

      Effective August 24, 2006, pursuant to an asset purchase agreement of same
date,  the  Company,  through  its  wholly  owned  subsidiaries  BCP and BCP St.
Gabriel,  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.  On February 8, 2006, the
Company,  through its wholly  owned  subsidiary  Balchem  Minerals  Corporation,
acquired all of the  outstanding  capital stock of CMC, for a purchase  price of
$17,350 before working capital and other adjustments.  CMC is a manufacturer and
global marketer of chelated mineral nutritional  supplements for livestock,  pet
and swine feeds.

      The Company is actively pursuing acquisition candidates.

      Cash
      ----

      Cash and cash  equivalents  decreased  to $5,189 at December 31, 2006 from
$12,996 at December 31, 2005. The $7,807 decrease resulted from net cash used in
investing  activities  of  $25,232  partially  offset  by net cash  provided  by
operating activities of $16,370 and net cash provided by financing activities of
$1,055.  Working capital amounted to $19,295 at December 31, 2006 as compared to
$26,116 at  December  31,  2005,  a decrease  of  $6,821,  primarily  due to the
aforementioned decrease in cash.

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

      Cash flows from operating activities provided $16,370 for 2006 as compared
with $13,698 for 2005. The increase in cash flows from operating  activities was
due  primarily  to  increases  in net income  and  non-cash  expenses  including
depreciation expense and stock compensation expense of $1,097.

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

      Capital   expenditures  were   approximately   $2,300  for  2006.  Capital
expenditures  are projected to be  approximately  $4,800 for calendar year 2007.
Cash  paid  for  acquisitions  in  2006,  including  acquisition  costs,  net of
acquisition accounts receivable collected, was $22,872.

      The overall  effect of the foregoing was that cash flows used in investing
activities were $25,232 in 2006, as compared to $12,943 in 2005.

      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 772,461  shares at an average cost
of $4.11 per share,  none of which remained in treasury at December 31, 2004. In
June 2005,  the board of  directors  authorized  another  extension of the stock
repurchase program for up to an additional 900,000 shares,  over and above those
772,461 shares previously repurchased under the program. During 2005, a total of
99,450 shares were  purchased at an average cost of $12.05 per share,  96,024 of


                                       18
<PAGE>

which  remained in treasury at December  31, 2005.  During  2006,  there were no
shares  purchased,  and no shares remained in treasury at December 31, 2006. The
Company intends to acquire shares from time to time at prevailing  market prices
if and to the extent it deems it advisable to do so based on its  assessment  of
corporate cash flow, market conditions and other factors.

      There was no debt outstanding at December 31, 2006 or December 31, 2005.

      On February 6, 2006,  the Company and its  principal  bank  entered into a
Loan Agreement (the "Loan Agreement")  providing for a term loan of $10,000 (the
"Term Loan"),  the proceeds of which were used to fund the CMC  Acquisition,  in
part.  As of December 31, 2006,  the Company made $10,000 in principal  payments
against the Term Loan, which paid the Term Loan in full. The Loan Agreement also
provided for a short-term  revolving  credit  facility of $3,000 (the "Revolving
Facility").  Borrowings under the Revolving Facility bear interest at LIBOR plus
1.00%. As of December 31, 2006, no amounts were drawn on the Revolving Facility.
The  Revolving  Facility  expires in May,  2007.  Management  believes that such
facility will be renewed in the normal course of business.

      Financing  activities also included  proceeds from stock options exercised
totaling $1,239 and $1,409 for 2006 and 2005,  respectively,  and $878 of excess
tax  benefits  associated  with  equity-based  compensation  for 2006.  Dividend
payments were $1,045 and $685 for 2006 and 2005, respectively.

      The  overall  effect of the  foregoing  was that cash  flows  provided  by
financing  activities  were  $1,055 in 2006,  as  compared to cash flows used in
financing activities of $493 in 2005.

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

      The Company currently  provides  postretirement  benefits in the form of a
retirement  medical  plan  under  a  collective  bargaining  agreement  covering
eligible retired employees of the Verona, Missouri facility. The amount recorded
on the Company's  balance  sheet as of December 31, 2006 for this  obligation is
$729. The postretirement plan is not funded. Historical cash payments made under
such plan have been less than $50 per year.

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

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

      The  Company's  "critical  accounting  policies"  are those  that  require
application of  management's  most difficult,  subjective or complex  judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently  uncertain and that may change in subsequent periods.  Management
considers the following accounting policies to be critical.

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

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


                                       19
<PAGE>

Recognition,"  which sets forth guidelines on the timing of revenue  recognition
based upon factors such as passage of title, installation, payments and customer
acceptance.

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

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

      Inventories  are  valued  at the  lower of cost  (first  in,  first out or
average) or market  value and have been  reduced by an  allowance  for excess or
obsolete  inventories.  Inventory  reserves  are  generally  recorded  when  the
inventory for a product  exceeds twelve months of demand for that product and/or
when individual  products have been in inventory for greater than six months. In
November  2004, the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standard No. 151,  "Inventory  Costs." The new  statement
amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory  Pricing",  to
clarify the accounting for abnormal amounts of idle facility  expense,  freight,
handling costs, and wasted material. This statement requires that those items be
recognized  as current  period  charges and requires  that  allocation  of fixed
production  overheads to the cost of conversion be based on the normal  capacity
of the  production  facilities.  The  provisions of this  statement were applied
prospectively  for inventory  costs incurred  beginning in our fiscal year 2006.
The adoption of this statement did not have a material  impact on our results of
operations, financial position or cash flow.

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

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

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

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

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

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

      The Company  provides life insurance and health care benefits for eligible
retirees and health care benefits for retirees'  eligible  survivors.  The costs
and obligations  related to these benefits reflect the


                                       20
<PAGE>

Company's  assumptions  as to general  economic  conditions and health care cost
trends.  The  cost of  providing  plan  benefits  also  depends  on  demographic
assumptions including retirements,  mortality, turnover, and plan participation.
If actual experience differs from these assumptions, the cost of providing these
benefits could increase or decrease.

      In September  2006,  the FASB issued FASB  Statement No. 158,  "Employers'
Accounting for Defined  Benefit  Pension and Other  Postretirement  Plans." This
Statement  requires  an employer to  recognize  the over funded or under  funded
status of a defined  benefit post  retirement  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. As a result of adopting SFAS No. 158 on December
31, 2006, we recorded $0.3 million as a reduction to the benefit  obligation and
$0.2  million,  net of  tax,  as a  one-time  adjustment  to  accumulated  other
comprehensive income in stockholders' equity.

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

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

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

      Income  taxes are  accounted  for under  the asset and  liability  method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and operating loss and tax credit  carryforwards.  Deferred tax assets and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  The effect on deferred tax assets and  liabilities  of a
change in tax rates is  recognized  in earnings in the period that  includes the
enactment  date.  The  Company  regularly  reviews its  deferred  tax assets for
recoverability  and would  establish a valuation  allowance if it believed  that
such assets may not be recovered, taking into consideration historical operating
results,  expectations  of future  earnings,  changes in its  operations and the
expected timing of the reversals of existing temporary differences.

      Stock-based Compensation
      ------------------------

      Beginning  in fiscal  2006,  we account for  stock-based  compensation  in
accordance  with SFAS No. 123R  (revised  2004),  "Share-Based  Payment"  ("SFAS
123R") as interpreted by SEC Staff  Accounting  Bulletin  ("SAB") No. 107. Under
the  fair  value   recognition   provisions  of  this   statement,   share-based
compensation  cost is measured at the grant date based on the value of the award
and is recognized as expense over the vesting period. Determining the fair value
of share-based awards at the grant date requires judgment,  including estimating
our stock  price  volatility,  employee  stock  option  exercise  behaviors  and
employee option forfeiture rates.  Expected volatilities are based on historical
volatility of the Company's  stock. The expected term of the options is based on
the  Company's  historical   experience  of  employees'  exercise  behavior.  As
stock-based  compensation  expense  recognized in the Consolidated  Statement of
Earnings is based on awards  ultimately  expected to vest, the amount of expense
has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary,  in subsequent periods
if actual  forfeitures  differ from those estimates.  Forfeitures were estimated
based on historical  experience.  As a result of adopting SFAS 123R, we recorded
$0.9 million of compensation expense, net of tax, in 2006. If factors change and
we employ different assumptions in the


                                       21
<PAGE>

application  of SFAS 123R,  the  compensation  expense  that we record in future
periods  may differ  significantly  from what we have  recorded  in the  current
period. Under the accounting method we followed prior to January 1, 2006, we did
not record any stock-based compensation expense related to stock options granted
to employees and directors for the years ended December 31, 2005 and 2004. If we
had included the cost of employee  stock option  compensation  in the  financial
statements  for the years ended  December  31, 2005 and 2004,  our net  earnings
would  have   decreased  by   approximately   $0.9  million  and  $0.8  million,
respectively, based on the fair value of the stock options granted to employees.
See Note 2 to the Consolidated Financial Statements for additional information.

      New Accounting Pronouncements:

      In September  2006, the FASB issued SFAS 157,  "Fair Value  Measurements,"
which defines fair value, establishes a framework for measuring fair value under
generally accepted  accounting  principles,  and expands  disclosures about fair
value  measurements.  SFAS 157 does not require any new fair value measurements,
but  provides  guidance on how to measure  fair value by  providing a fair value
hierarchy  used to classify  the source of the  information.  This  statement is
effective  beginning in January 2008. The Company is evaluating whether adoption
of this statement will result in a change to its fair value measurements.

      In September  2006,  the SEC issued SAB 108,  "Considering  the Effects of
Prior  Year  Misstatements  when  Quantifying   Misstatements  in  Current  Year
Financial  Statements"  ("SAB 108"). SAB 108 requires  analysis of misstatements
using both an income  statement  (rollover  approach)  and a balance sheet (iron
curtain)  approach  in  assessing   materiality  and  provides  for  a  one-time
cumulative effect transition adjustment.  SAB 108 is effective for the Company's
fiscal year 2006 annual financial statements. The adoption of this statement did
not have a material impact on our consolidated results of operations,  financial
position or cash flows.

      In July 2006,  the FASB  issued  Interpretation  No. 48,  "Accounting  for
Uncertainty  in Income  Taxes"  ("FIN  48").  This  interpretation,  among other
things,  creates a two-step  approach for  evaluating  uncertain tax  positions.
Recognition (step one) occurs when an enterprise  concludes that a tax position,
based solely on its technical  merits, is  more-likely-than-not  to be sustained
upon  examination.  Measurement (step two) determines the amount of benefit that
more-likely-than-not  will be realized upon  settlement.  Derecognition of a tax
position that was previously  recognized would occur when a company subsequently
determines  that  a  tax  position  no  longer  meets  the  more-likely-than-not
threshold  of  being  sustained.  FIN 48  specifically  prohibits  the  use of a
valuation  allowance as a substitute for derecognition of tax positions,  and it
has  expanded  disclosure  requirements.  FIN 48 is  effective  for fiscal years
beginning  after  December 15, 2006,  in which the impact of adoption  should be
accounted for as a  cumulative-effect  adjustment  to the  beginning  balance of
retained  earnings.  The Company is evaluating FIN 48 and has not yet determined
the impact the adoption will have on the consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      Cash and cash equivalents are invested primarily in money market accounts.
Accordingly,  we believe we have limited  exposure to market risk for changes in
interest rates. However, interest payable under the Company's Revolving Facility
is based on LIBOR plus 1.00%, and thus could expose the Company to some interest
rate risk in connection  with its bank  financing.  No amounts were drawn on the
Revolving  Facility  as of December  31,  2006.  The  Company has no  derivative
financial instruments or derivative commodity instruments,  nor does the Company
have any  financial  instruments  entered into for trading or hedging  purposes.
Foreign sales are generally  billed in U.S.  dollars.  The Company believes that
its business  operations are not exposed in any material  respect to market risk
relating to foreign currency exchange risk or commodity price risk.


                                       22
<PAGE>

Item 8. Financial Statements and Supplementary Data

      Index to Financial Statements and Supplementary Financial Data:      Page

      Report of Independent Registered Public Accounting Firm              24

      Consolidated Balance Sheets as of
      December 31, 2006 and 2005                                           26

      Consolidated Statements of Earnings for the
      years ended December 31, 2006, 2005 and 2004                         27

      Consolidated Statements of Stockholders' Equity
      for the years ended December 31, 2006, 2005 and 2004                 28

      Consolidated Statements of Cash Flows
      for the years ended December 31, 2006, 2005 and 2004                 29

      Notes to Consolidated Financial Statements                           30

      Report of Independent Registered Public Accounting Firm              53

      Schedule II - Valuation and Qualifying
      Accounts for the years ended December 31, 2006, 2005 and 2004        54


                                       23
<PAGE>

             Report of Independent Registered Public Accounting Firm

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

We  have  audited  the  accompanying  consolidated  balance  sheets  of  Balchem
Corporation  and  Subsidiaries as of December 31, 2006 and 2005, and the related
consolidated  statements of earnings,  stockholders'  equity, and cash flows for
each of the years in the three-year period ended December 31, 2006. We also have
audited  management's  assessment,  included  in the  accompanying  Management's
Report on Internal Control Over Financial  Reporting,  that Balchem  Corporation
and Subsidiaries  maintained effective internal control over financial reporting
as  of  December  31,  2006,   based  on  criteria   established   in  "Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations  of  the  Treadway  Commission   (COSO)."  Balchem   Corporation's
management  is  responsible  for these  financial  statements,  for  maintaining
effective internal control over financial  reporting,  and for its assessment of
the   effectiveness   of  internal   control  over  financial   reporting.   Our
responsibility  is to  express  an opinion  on these  financial  statements,  an
opinion on management's  assessment,  and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audits.

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

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

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

As discussed in Note 2 to the Company's  Consolidated  Financial Statements,  on
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004),  "Share-Based  Payment",  which requires all share-based
payments,  including  grants of stock  options,  to be  recognized in the income
statement as an operating  expense,  based on their fair values.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Balchem Corporation
and  Subsidiaries  as of December  31,  2006 and 2005,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 2006, in conformity  with  accounting  principles  generally
accepted in the United  States of  America.  Also in our  opinion,  management's
assessment that Balchem Corporation and Subsidiaries


                                       24
<PAGE>

maintained  effective  internal control over financial  reporting as of December
31,  2006,  is  fairly  stated,  in all  material  respects,  based on  criteria
established in "Internal  Control--Integrated  Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO)." Furthermore,  in
our opinion,  Balchem Corporation and Subsidiaries  maintained,  in all material
respects, effective internal control over financial reporting as of December 31,
2006, based on criteria established in "Internal  Control--Integrated  Framework
issued by the Committee of Sponsoring  Organizations of the Treadway  Commission
(COSO)."

/s/McGladrey & Pullen, LLP
New York, New York
March 15, 2007


                                       25
<PAGE>

                               BALCHEM CORPORATION
                           Consolidated Balance Sheets
                           December 31, 2006 and 2005
             (Dollars in thousands, except share and per share data)


<TABLE>
<CAPTION>
                                                                                        2006       2005
                                                                                      --------   --------
<S>                                                                                   <C>        <C>
                                        Assets
                                        ------
Current assets:
    Cash and cash equivalents                                                         $  5,189   $ 12,996
    Accounts receivable, net of allowance for doubtful accounts of $50 and $50 at
      December 31, 2006 and 2005, respectively                                          11,578     11,521
    Inventories                                                                          9,918      8,540
    Prepaid income taxes                                                                    --        143
    Prepaid expenses                                                                     1,754      1,790
    Deferred income taxes                                                                  416        276
                                                                                       -------   --------
         Total current assets                                                           28,855     35,266

Property, plant and equipment, net                                                      31,313     24,400

Goodwill                                                                                25,253     13,327
Intangible assets with finite lives, net                                                 6,912      2,148

                                                                                      --------   --------
          Total assets                                                                $ 92,333   $ 75,141
                                                                                      ========   ========


                         Liabilities and Stockholders' Equity
                         ------------------------------------
Current liabilities:
    Trade accounts payable                                                            $  3,010   $  2,562
    Accrued expenses                                                                     1,827      2,601
    Accrued compensation and other benefits                                              1,869      1,756
    Customer deposits and other deferred revenue                                         1,072      1,186
    Dividends payable                                                                    1,596      1,045
    Income tax payable                                                                     186         --
                                                                                      --------   --------
        Total current liabilities                                                        9,560      9,150

Deferred income taxes                                                                    6,627      4,015
Other long-term obligations                                                                784      1,043
                                                                                      --------   --------
           Total liabilities                                                            16,971     14,208
                                                                                      --------   --------

Commitments and contingencies (note 13)

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; 17,733,849
    shares issued and outstanding at December 31, 2006 and 17,461,447 shares
    issued and 17,365,423 outstanding at December 31, 2005                                 788        776
 Additional paid-in capital                                                             10,393      8,008
 Retained earnings                                                                      63,988     53,306
 Accumulated other comprehensive income                                                    193         --
 Treasury stock, at cost: 0 and 96,024 shares at December 31, 2006
    and 2005, respectively                                                                  --     (1,157)
                                                                                      --------   --------
    Total stockholders' equity                                                          75,362     60,933
                                                                                      --------   --------

                                                                                      --------   --------
             Total liabilities and stockholders' equity                               $ 92,333   $ 75,141
                                                                                      ========   ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       26
<PAGE>


                               BALCHEM CORPORATION
                       Consolidated Statements of Earnings
                  Years Ended December 31, 2006, 2005 and 2004
                      (In thousands, except per share data)


                                                 2006        2005        2004
                                              ---------    --------    --------

Net sales                                     $ 100,905    $ 83,095    $ 67,406

Cost of sales                                    66,899      54,415      43,600
                                              ---------    --------    --------

Gross margin                                     34,006      28,680      23,806

Operating expenses:
    Selling expenses                              6,907       4,739       4,815
    Research and development expenses             2,019       2,053       1,752
    General and administrative expenses           5,918       4,985       4,442
                                              ---------    --------    --------
                                                 14,844      11,777      11,009

                                              ---------    --------    --------
Earnings from operations                         19,162      16,903      12,797

Other expenses (income):

    Interest income                                (128)       (214)       (125)
    Interest expense                                189           8         219
    Other, net                                       --         (82)        (12)

                                              ---------    --------    --------
Earnings before income tax expense               19,101      17,191      12,715

    Income tax expense                            6,823       6,237       4,689
                                              ---------    --------    --------

Net earnings                                  $  12,278    $ 10,954    $  8,026
                                              =========    ========    ========

Basic net earnings per common share           $    0.70    $   0.63    $   0.48
                                              =========    ========    ========

Diluted net earnings per common share         $    0.67    $   0.61    $   0.46
                                              =========    ========    ========

See accompanying notes to consolidated financial statements.

                                       27
<PAGE>
                               BALCHEM CORPORATION
                 Consolidated Statements of Stockholders' Equity
                  Years Ended December 31, 2006, 2005 and 2004
             (Dollars in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                                              Accumulated
                                                                                     Additional                  Other
                                                                 Common Stock         Paid-in     Retained   Comprehensive
                                                              Shares       Amount     Capital     Earnings      Income
                                                            ----------     ------     -------     --------   -------------
<S>                                                         <C>            <C>        <C>         <C>        <C>
 Balance - December 31, 2003                                16,548,429     $  736     $ 3,493     $ 36,056          --

 Net earnings                                                       --         --          --        8,026          --
 Dividends ($.04 per share)                                         --         --          --         (685)         --
 Shares issued under employee benefit plans and other           31,635          2         254           --          --
 Shares issued under stock option plans and
       an income tax benefit of $293                           567,543         24       2,328           --          --
                                                            ----------     ------     -------     --------      ------

 Balance - December 31, 2004                                17,147,607        762       6,075       43,397          --

 Net earnings                                                       --         --          --       10,954          --
 Dividends ($.06 per share)                                         --         --          --       (1,045)         --
 Treasury shares purchased                                          --         --          --           --          --
 Shares issued under employee benefit plans and other           52,133          1         210           --          --
 Shares issued under stock option plans and
       an income tax benefit of $327                           261,707         13       1,723           --          --
                                                            ----------     ------     -------     --------      ------

 Balance - December 31, 2005                                17,461,447        776       8,008       53,306          --

 Net earnings                                                       --         --          --       12,278          --
 Dividends ($.09 per share)                                         --         --          --       (1,596)         --
 Shares issued under employee benefit plans and other            1,079                     70
 Shares and options issued under stock option plans and
       an income tax benefit of $878                           271,323         12       2,315           --          --
Adjustment to initially apply FASB Statement No. 158,
       net of tax                                                   --         --          --           --         193
                                                            ----------     ------     -------     --------      ------
 Balance - December 31, 2006                                17,733,849     $  788     $10,393     $ 63,988      $  193
                                                            ==========     ======     =======     ========      ======
<CAPTION>
                                                                                         Total
                                                                Treasury Stock       Stockholders'
                                                             Shares        Amount       Equity
                                                            --------      -------    -------------

<S>                                                         <C>           <C>          <C>
 Balance - December 31, 2003                                (145,665)     $  (504)     $ 39,781

 Net earnings                                                     --           --         8,026
 Dividends ($.04 per share)                                       --           --          (685)
 Shares issued under employee benefit plans and other             --           --           256
 Shares issued under stock option plans and
      an income tax benefit of $293                          145,665          504         2,856
                                                            --------      -------      --------

 Balance - December 31, 2004                                      --           --        50,234

 Net earnings                                                     --           --        10,954
 Dividends ($.06 per share)                                       --           --        (1,045)
 Treasury shares purchased                                   (99,450)      (1,198)       (1,198)
 Shares issued under employee benefit plans and other          3,426           41           252
 Shares issued under stock option plans and
      an income tax benefit of $327                               --           --         1,736
                                                            --------      -------      --------

 Balance - December 31, 2005                                 (96,024)      (1,157)       60,933

 Net earnings                                                     --           --        12,278
 Dividends ($.09 per share)                                       --           --        (1,596)
 Shares issued under employee benefit plans and other         21,933          264           334
 Shares and options issued under stock option plans and
      an income tax benefit of $878                           74,091          893         3,220
Adjustment to initially apply FASB Statement No. 158,
      net of tax                                                  --           --           193
                                                            --------      -------      --------
 Balance - December 31, 2006                                      --      $    --      $ 75,362
                                                            ========      =======      ========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       28
<PAGE>

                            BALCHEM CORPORATION
                   Consolidated Statements of Cash Flows
               Years Ended December 31, 2006, 2005 and 2004
                   (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                               2006         2005         2004
                                                                            ---------    ---------    ---------
<S>                                                                         <C>          <C>          <C>
Cash flows from operating activities:
     Net earnings                                                           $  12,278    $  10,954    $   8,026

     Adjustments to reconcile net earnings to
     net cash provided by operating  activities:
        Depreciation and amortization                                           3,445        2,809        3,271
        Stock compensation expense                                              1,097           --           --
        Shares issued under employee benefit plans                                343          257          256
        Deferred income tax expense                                               104          599        1,388
        (Recovery of) provision for doubtful accounts                              --          (32)          (4)
        Income tax benefit from stock options exercised                            --          327          293
        Disposition of intangible assets                                           --           --           53
        Gain on sale of assets                                                     --          (82)         (12)
             Changes in assets and liabilities
                Accounts receivable                                               (57)      (2,684)        (759)
                Inventories                                                      (827)      (1,496)        (358)
                Prepaid expenses                                                   36         (263)        (804)
                Accounts payable and accrued expenses                            (212)       2,749          226
                Income taxes                                                      218          172         (315)
                Customer deposits and other deferred revenue                     (101)         334          852
                Other long-term obligations                                        46           54           32
                                                                            ---------    ---------    ---------
                     Net cash provided by operating activities                 16,370       13,698       12,145
                                                                            ---------    ---------    ---------

Cash flows from investing activities:
     Capital expenditures                                                      (2,279)      (1,769)      (1,215)
     Proceeds from sale of property, plant and equipment                           --          389           91
     Cash paid for intangible assets acquired                                     (81)        (144)        (105)
     Acquisitions                                                             (22,872)     (11,419)          --
                                                                            ---------    ---------    ---------
                     Net cash used in investing activities                    (25,232)     (12,943)      (1,229)
                                                                            ---------    ---------    ---------

Cash flows from financing activities:
     Proceeds from long-term debt                                              10,000           --           --
     Principal payments on long-term debt                                     (10,000)          --       (9,581)
     Proceeds from stock options exercised                                      1,239        1,409        2,563
     Excess tax benefits from stock compensation                                  878           --           --
     Dividends paid                                                            (1,045)        (685)        (389)
     Purchase of treasury stock                                                    --       (1,198)          --
     Other financing activities                                                   (17)         (19)         (14)
                                                                            ---------    ---------    ---------
                      Net cash provided by (used in) financing activities       1,055         (493)      (7,421)
                                                                            ---------    ---------    ---------

Increase (decrease) in cash and cash equivalents                               (7,807)         262        3,495

Cash and cash equivalents beginning of year                                    12,996       12,734        9,239
                                                                            ---------    ---------    ---------
Cash and cash equivalents end of year                                       $   5,189    $  12,996    $  12,734
                                                                            =========    =========    =========
Supplemental Cash Flow information - see Note 16
</TABLE>

See accompanying notes to consolidated financial statements.

                                    29
<PAGE>

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

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

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

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

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

The consolidated  financial  statements include the financial  statements of the
Company  and  its  subsidiaries.   All  significant  intercompany  balances  and
transactions have been eliminated in consolidation.

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

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

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

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

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


                                       30
<PAGE>

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

Inventories  are  stated at the  lower of cost or  market,  with cost  generally
determined on a first-in, first-out basis, and have been reduced by an allowance
for excess or obsolete  inventories.  Cost elements include material,  labor and
manufacturing  overhead.  In November 2004, the Financial  Accounting  Standards
Board  issued  Statement of Financial  Accounting  Standard No. 151,  "Inventory
Costs." The new statement amends Accounting Research Bulletin No. 43, Chapter 4,
"Inventory  Pricing," to clarify the  accounting  for  abnormal  amounts of idle
facility expense,  freight,  handling costs, and wasted material. This statement
requires that those items be recognized as current  period  charges and requires
that allocation of fixed production overheads to the cost of conversion be based
on the normal  capacity of the  production  facilities.  The  provisions of this
statement were applied  prospectively for inventory costs incurred  beginning in
fiscal year 2006. The adoption of this statement did not have a material  impact
on the Company's results of operations, financial position or cash flow.

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

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

      Buildings                     15-25 years
      Equipment                      3-12 years

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

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

A specialty  products  customer  accounted  for 8%, 9% and 11% of the  Company's
consolidated  net sales for 2006,  2005 and 2004,  respectively.  This  customer
accounted  for  10%  and 8% of the  Company's  accounts  receivable  balance  at
December 31, 2006 and 2005,  respectively.  Approximately  10%, 7% and 8% of the
Company's net sales for 2006,  2005 and 2004,  respectively,  consisted of sales
outside the United States, predominately to Europe, Japan, and China.

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

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

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

As required by SFAS No. 142,  the Company  performed  an  assessment  of whether
there was an indication  that goodwill was impaired at the date of adoption.  In
connection  therewith,  the Company determined that its operations  consisted of
three  reporting  units and  determined  each  reporting  units'  fair value and


                                       31
<PAGE>

compared it to the reporting unit's net book value. Since the fair value of each
reporting  unit  exceeded  its  carrying  amount,  there  was no  indication  of
impairment and no further  transitional  impairment testing was required.  As of
December 31, 2006 and 2005, the Company also performed an impairment test of its
goodwill  balance.  As of such dates the Company's  reporting  units' fair value
exceeded  their carrying  amounts,  and therefore  there was no indication  that
goodwill was impaired.  Accordingly, the Company was not required to perform any
further  impairment tests. The Company plans to perform its impairment test each
December 31.

The Company had  unamortized  goodwill in the amount of $25,253 at December  31,
2006 and $13,327 at December 31, 2005,  subject to the  provisions  of SFAS Nos.
141 and 142.  Unamortized  goodwill is  allocated  to the  Company's  reportable
segments as follows:

================================================================================
                                                                2006       2005
--------------------------------------------------------------------------------
Specialty Products                                            $ 5,089   $  5,089
Encapsulated/Nutritional Products                              20,164      8,238
BCP Ingredients                                                    --         --
--------------------------------------------------------------------------------
Total                                                         $25,253   $ 13,327
================================================================================

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

================================================
                                  Amortization
                                     period
                                   (in years)
Customer lists                         10
Regulatory re-registration costs       10
Patents & trade secrets              15 - 17
Trademarks & trade names               17
================================================

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

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

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

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

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

The Company has a number of  financial  instruments,  none of which are held for
trading  purposes.  The Company  estimates  that the fair value of all financial
instruments  at December 31, 2006 and 2005 does not differ  materially  from the
aggregate carrying values of its financial instruments recorded in the


                                       32
<PAGE>

accompanying  consolidated balance sheets. The estimated fair value amounts have
been  determined  by  the  Company  using  available   market   information  and
appropriate  valuation  methodologies.   Considerable  judgment  is  necessarily
required in  interpreting  market data to develop the  estimates  of fair value,
and,  accordingly,  the estimates are not necessarily  indicative of the amounts
that the Company  could  realize in a current  market  exchange.  The  Company's
financial  instruments,   principally  cash  equivalents,  accounts  receivable,
accounts payable and accrued liabilities, are carried at cost which approximates
fair value due to the short-term maturity of these instruments.

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

Research and development costs are expensed as incurred.

Stock-based Compensation
------------------------

The Company has stock-based  employee  compensation  plans,  which are described
more fully in Note 2. On January 1, 2006, the Company was required to adopt SFAS
No. 123R (revised 2004), "Share-Based Payment" ("SFAS 123R"), which requires all
share-based payments, including grants of stock options, to be recognized in the
income  statement  as an  operating  expense,  based on their fair  values.  The
Company estimates the fair value of each option award on the date of grant using
a Black-Scholes based option-pricing model.

Prior to adopting SFAS 123R, the Company accounted for stock-based  compensation
under Accounting  Principles Board Opinion No. 25,  "Accounting for Stock Issued
to Employees",  as permitted by Statement of Financial  Accounting  Standard No.
123, "Accounting for Stock-Based Compensation".  The modified prospective method
was applied in adopting  SFAS 123R and,  accordingly,  periods prior to adoption
have not been restated.

The  implementation  of SFAS 123R has had no  adverse  effect  on the  Company's
balance  sheet  or  total  cash  flows,  but it  does  impact  cash  flows  from
operations,  cash flows from financing activities,  cost of sales, gross profit,
operating expenses,  net income and earnings per share. Because periods prior to
adoption  have  not  been  restated,  comparability  between  periods  has  been
affected.  Additionally,  estimates of and assumptions  about forfeiture  rates,
terms,  volatility,  interest  rates and  dividend  yields are used to calculate
stock-based  compensation.   A  significant  change  to  these  estimates  could
materially affect the Company's operating results.

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

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

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

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined Benefit Pension and Other  Postretirement  Plans" ("SFAS 158"). SFAS 158
requires an employer to recognize  the over funded or under  funded  status of a
defined benefit post  retirement  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. As a result of adopting SFAS 158 on December 31, 2006, the
Company recorded $0.3 million as a reduction to the benefit  obligation and $0.2


                                       33
<PAGE>

million, net of tax, as a one-time adjustment to accumulated other comprehensive
income in stockholder's equity.

In September  2006, the FASB issued SFAS 157, "Fair Value  Measurements"  ("SFAS
157"),  which defines fair value,  establishes  a framework  for measuring  fair
value in generally accepted accounting principles, and expands disclosures about
fair  value  measurements.  SFAS  157  does  not  require  any  new  fair  value
measurements,  but provides guidance on how to measure fair value by providing a
fair  value  hierarchy  used to  classify  the source of the  information.  This
statement is  effective  beginning in January  2008.  The Company is  evaluating
whether  adoption  of this  statement  will result in a change to its fair value
measurements.

In September  2006,  the SEC issued SAB 108,  "Considering  the Effects of Prior
Year  Misstatements  when  Quantifying  Misstatements  in Current Year Financial
Statements" ("SAB 108"). SAB 108 requires  analysis of misstatements  using both
an income  statement  (rollover  approach)  and a balance  sheet (iron  curtain)
approach in assessing  materiality and provides for a one-time cumulative effect
transition  adjustment.  SAB 108 is effective for the Company's fiscal year 2006
annual  financial  statements.  The  adoption of this  statement  did not have a
material impact on our consolidated results of operations, financial position or
cash flows.

In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes" ("FIN 48"). This interpretation,  among other things, creates a
two-step approach for evaluating uncertain tax positions. Recognition (step one)
occurs when an enterprise  concludes  that a tax  position,  based solely on its
technical  merits,  is  more-likely-than-not  to be sustained upon  examination.
Measurement    (step   two)    determines    the   amount   of   benefit    that
more-likely-than-not  will be realized upon  settlement.  Derecognition of a tax
position that was previously  recognized would occur when a company subsequently
determines  that  a  tax  position  no  longer  meets  the  more-likely-than-not
threshold  of  being  sustained.  FIN 48  specifically  prohibits  the  use of a
valuation  allowance as a substitute for derecognition of tax positions,  and it
has  expanded  disclosure  requirements.  FIN 48 is  effective  for fiscal years
beginning  after  December 15, 2006,  in which the impact of adoption  should be
accounted for as a  cumulative-effect  adjustment  to the  beginning  balance of
retained  earnings.  The Company is evaluating FIN 48 and has not yet determined
the impact the adoption will have on the consolidated financial statements.

Beginning  in  fiscal  2006,  the  Company  began   accounting  for  stock-based
compensation in accordance with SFAS 123R as interpreted by SEC Staff Accounting
Bulletin No. 107. Under the fair value recognition provisions of this statement,
share-based  compensation  cost is measured at the grant date based on the value
of the award and is recognized as expense over the vesting  period.  Determining
the fair  value of  share-based  awards at the  grant  date  requires  judgment,
including estimating the Company's stock price volatility, employee stock option
exercise behaviors and employee option forfeiture rates.  Expected  volatilities
are based on historical  volatility of the Company's stock. The expected term of
the  options  is based on the  Company's  historical  experience  of  employees'
exercise  behavior.  As  stock-based  compensation  expense  recognized  in  the
Consolidated  Statement  of Earnings is based on awards  ultimately  expected to
vest,  the amount of expense has been reduced for  estimated  forfeitures.  SFAS
123R requires  forfeitures to be estimated at the time of grant and revised,  if
necessary,  in  subsequent  periods  if actual  forfeitures  differ  from  those
estimates. Forfeitures were estimated based on historical experience. If factors
change and the Company employs different  assumptions in the application of SFAS
123R,  the  compensation  expense that is recorded in future  periods may differ
significantly from what has been recorded in the current period.


                                       34
<PAGE>

In November 2004, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standard No. 151,  "Inventory  Costs." The new  statement
amends Accounting Research Bulletin No. 43, Chapter 4, "Inventory  Pricing",  to
clarify the accounting for abnormal amounts of idle facility  expense,  freight,
handling costs, and wasted material. This statement requires that those items be
recognized  as current  period  charges and requires  that  allocation  of fixed
production  overheads to the cost of conversion be based on the normal  capacity
of the  production  facilities.  The  provisions of this  statement were applied
prospectively  for inventory  costs incurred  beginning in our fiscal year 2006.
The adoption of this statement did not have a material  impact on our results of
operations, financial position or cash flow.

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

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

NOTE 2 - STOCKHOLDERS' EQUITY
-----------------------------

STOCK-BASED COMPENSATION

On  January  1,  2006,  the  Company  adopted  SFAS  123R,  which  requires  all
share-based payments, including grants of stock options, to be recognized in the
income statement as an operating expense, based on their fair values.

Prior to adopting SFAS 123R, the Company accounted for stock-based  compensation
under Accounting  Principles Board Opinion No. 25,  "Accounting for Stock Issued
to Employees"  ("Opinion 25"), as permitted by Statement of Financial Accounting
Standard No. 123,  "Accounting for Stock-Based  Compensation,"  ("SFAS 123"). No
stock-based  compensation  cost was  recognized in the Statement of Earnings for
the years  ended  December  31,  2005 and 2004,  as all  options  granted had an
exercise price equal to the market value of the  underlying  common stock on the
date of grant.  The  Company  has applied  the  modified  prospective  method in
adopting  SFAS  123R.  Accordingly,  periods  prior  to  adoption  have not been
restated. Under the modified prospective method, compensation cost recognized in
the  year  ended  December  31,  2006  includes  (a)  compensation  cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value  estimated  in  accordance  with the original
provisions of SFAS 123, and (b) compensation  cost for all share-based  payments
granted  subsequent  to  January  1, 2006,  based on the  grant-date  fair value
estimated in accordance with the provisions of SFAS 123R.

As a result of  adopting  SFAS 123R on  January 1, 2006,  the  Company's  income
before  income taxes and net income for the year ended  December  31, 2006,  are
$1.1 million and $0.9 million lower,  respectively,  than if it had continued to
account for share-based compensation under Opinion 25. As required by SFAS 123R,
the Company has made an estimate  of  expected  forfeitures  and is  recognizing
compensation  cost only for those  stock-based  compensation  awards expected to
vest.  Basic and diluted  earnings per share are each $0.05 lower for the twelve
months ended December 31, 2006, than if the Company had not adopted SFAS 123R.

Prior to the adoption of SFAS 123R,  the Company  presented  all tax benefits of
deductions  resulting from the exercise of stock options as operating cash flows
in the Statement of Cash Flows. SFAS 123R requires the cash flows resulting from
the tax benefits  resulting  from tax  deductions in excess of the  compensation
cost  recognized  for those  options  (excess tax  benefits) to be classified as
financing  cash flows.  The $0.9  million tax benefit from the exercise of stock
options  classified as a financing cash inflow would have been  classified as an
operating cash inflow if the Company had not adopted SFAS 123R.


                                       35
<PAGE>

The following table  illustrates the effect on net income and earnings per share
if the fair  value  based  method  had been  applied  to the prior  periods  (in
thousands, except per share data):

<TABLE>
<CAPTION>
=============================================================================================
                                                                          Year Ended
=============================================================================================
                                                                  December 31,   December 31,
                                                                      2005           2004
=============================================================================================
<S>                                                               <C>            <C>
Net earnings                                                      $     10,954   $      8,026
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                        904            808
---------------------------------------------------------------------------------------------
Pro forma net earnings                                            $     10,050   $      7,218
---------------------------------------------------------------------------------------------
Basic earnings per common share:
As reported                                                       $       0.63   $       0.48
Pro forma                                                         $       0.58   $       0.43
Diluted earnings per common share:
As reported                                                       $       0.61   $       0.46
Pro forma                                                         $       0.55   $       0.42
=============================================================================================
</TABLE>

On December 31, 2006, the Company had one share-based  compensation  plan, which
is described below (the "1999 Stock Plan").

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

The shares to be issued  upon  exercise  of the  outstanding  options  have been
approved,  reserved and are adequate to cover all exercises.  As of December 31,
2006, the plans had 721,953 shares available for future awards.

On December  8, 2006,  the Board of  Directors  of the  Company  authorized  the
Company  to  enter  into  Restricted   Stock  Purchase   Agreements  (the  "2006
Agreements") to purchase the Company's  common stock with the five  non-employee
directors and certain  employees of the Company  pursuant to the Company's


                                       36
<PAGE>

1999 Stock Plan.  Under the 2006  Agreements,  each  grantee  purchased  certain
shares,  ranging from 1,500 shares to 13,500  shares,  of the  Company's  common
stock at the purchase price of approximately $.04 per share. The purchased stock
is subject to a repurchase option in favor of the Company and to restrictions on
transfer until it vests in accordance with the provisions of the Agreements.

On December 29,  2005,  the Board of  Directors  of the Company  authorized  the
Company  to  enter  into  Restricted   Stock  Purchase   Agreements  (the  "2005
Agreements") to purchase the Company's  common stock with the five  non-employee
directors of the Company  pursuant to the Company's  1999 Stock Plan.  This 2005
Agreement   replaces   the  Stock  Option  Plan  that   non-employee   directors
participated in in prior years.  Under the 2005  Agreements,  each  non-employee
director  purchased  6,750 shares of the Company's  common stock at the purchase
price of  approximately  $.03 per  share.  The  purchased  stock is subject to a
repurchase  option in favor of the Company and to restrictions on transfer until
it vests in accordance with the provisions of the Agreements.

The fair  value of each  option  award  issued  under  the  1999  Stock  Plan is
estimated on the date of grant using a Black-Scholes based  option-pricing model
that uses the assumptions  noted in the following table.  Expected  volatilities
are based on historical  volatility of the Company's stock. The expected term of
the  options  is based on the  Company's  historical  experience  of  employees'
exercise  behavior.  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.

================================================================================
                                                    Year Ended
================================================================================
                                    December 31,    December 31,    December 31,
    Weighted Average Assumptions:       2006            2005            2004
================================================================================
Expected Volatility                      26.4%           28.9%           27.1%
Expected Term (in years)                  4.5             4.8             5.2
Risk-Free Interest Rate                   3.8%            3.6%            3.7%
Dividend Yield                            0.4%            0.4%            0.4%
================================================================================


The value of the restricted  shares is based on the intrinsic value of the award
at the date of grant.

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,  four years for employee restricted stock awards, and seven years
for non-employee  director  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.

A summary of stock option plan activity for 2006,  2005,  and 2004 for all plans
is as follows:

================================================================================
                                                   # of
                                                  Shares        Weighted Average
               2006                               (000s)         Exercise Price
--------------------------------------------------------------------------------
Outstanding at beginning of year                  2,153              $  8.38
Granted                                             305                17.67
Exercised                                          (267)                4.64
Cancelled                                           (21)                9.64
--------------------------------------------------------------------------------
Outstanding at end of year                        2,170              $ 10.13
--------------------------------------------------------------------------------
Exercisable at end of year                        1,277              $  7.40
================================================================================


                                       37
<PAGE>

================================================================================
                                                   # of
                                                  Shares        Weighted Average
                  2005                            (000s)         Exercise Price
--------------------------------------------------------------------------------
Outstanding at beginning of year                  1,777              $  6.21
Granted                                             657                13.04
Exercised                                          (262)                5.38
Cancelled                                           (19)                7.41
--------------------------------------------------------------------------------
Outstanding at end of year                        2,153              $  8.38
--------------------------------------------------------------------------------
Exercisable at end of year                        1,167              $  6.09
================================================================================

================================================================================
                                                   # of
                                                  Shares        Weighted Average
                  2004                            (000s)         Exercise Price
--------------------------------------------------------------------------------
Outstanding at beginning of year                  2,027              $  4.75
Granted                                             506                 8.40
Exercised                                          (713)                3.59
Cancelled                                           (43)                6.81
--------------------------------------------------------------------------------
Outstanding at end of year                        1,777              $  6.21
--------------------------------------------------------------------------------
Exercisable at end of year                        1,023              $  5.01
================================================================================

The  aggregate  intrinsic  value for  outstanding  stock options was $15,357 and
$10,479 at December  31, 2006 and 2005,  respectively,  with a weighted  average
remaining contractual term of 7.3 years at December 31, 2006.  Exercisable stock
options at December 31, 2006 had an aggregate  intrinsic value of $12,413 with a
weighted average remaining contractual term of 6.2 years.

Other information  pertaining to option activity during the years ended December
31, 2006 and 2005 was as follows:

================================================================================
                                                                  Year Ended
                                                                 December 31,
                                                               2006        2005
================================================================================
Weighted-average fair value of options granted                $   4.91  $   2.84
Total intrinsic value of stock options exercised ($000s)      $  2,929  $  1,466
================================================================================

Additional  information  related to stock options outstanding under all plans at
December 31, 2006 is as follows:

<TABLE>
<CAPTION>
=================================================================================
                                    Options Outstanding     Options Exercisable
                                  ----------------------  -----------------------
                                   Weighted
                                    Average     Weighted                 Weighted
                      Shares       Remaining    Average      Number      Average
 Range of Exercise  Outstanding   Contractual   Exercise   Exercisable   Exercise
      Prices          (000s)         Term        Price       (000s)       Price
---------------------------------------------------------------------------------
<S>                       <C>      <C>          <C>              <C>     <C>
  $ 1.85 - $6.83            784    5.0 years    $   5.71           784   $   5.71
    7.13 - 13.19            629    7.8 years        9.35           402       9.23
   14.13 - 17.81            757    9.2 years       15.37            91      13.81
---------------------------------------------------------------------------------
                          2,170    7.3 years    $  10.13         1,277   $   7.40
=================================================================================
</TABLE>


                                       38
<PAGE>

Non-vested  restricted  stock activity for the years ended December 31, 2006 and
2005 is summarized below:

================================================================================
                                                                    Weighted
                                                                  Average Grant
                                                                    Date Fair
                                               Shares (000s)          Value
================================================================================
Non-vested balance as of December 31, 2005                34      $       13.22
Granted                                                   79              17.76
Vested                                                    --                 --
Forfeited                                                 --                 --
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2006               113      $       16.40
================================================================================

================================================================================
                                                                    Weighted
                                                                  Average Grant
                                                                    Date Fair
                                               Shares (000s)          Value
================================================================================
Non-vested balance as of December 31, 2004                --      $          --
Granted                                                   34              13.22
Vested                                                    --                 --
Forfeited                                                 --                 --
--------------------------------------------------------------------------------
Non-vested balance as of December 31, 2005                34      $       13.22
================================================================================

As of December 31, 2006 there was $4,036 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
2.2 years.

STOCK SPLITS AND REPURCHASE OF COMMON STOCK

On  December  8,  2006,  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 29,  2006.  Such stock
dividend  was made on  January  19,  2007.  The stock  split was  recognized  by
reclassifying  the par value of the additional  shares resulting from the split,
from additional paid-in capital to common stock.

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

All  references to number of common  shares and per share amounts  except shares
authorized  in  the   accompanying   consolidated   financial   statements  were
retroactively adjusted to reflect the effect of the December 2006 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 772,461  shares at an average cost of
$4.11 per share,  none of which  remained in treasury at December 31,  2004.  In
June 2005,  the board of  directors  authorized  another  extension of the stock
repurchase program for up to an additional 900,000 shares,  over and above those
772,461 shares previously repurchased under the program. During 2005, a total of
99,450 shares were  purchased at an average cost of $12.05 per share,  96,024 of
which  remained in treasury at December  31, 2005.  During  2006,  there were no
shares purchased, and no


                                       39
<PAGE>

shares remained in treasury at December 31, 2006. The Company intends to acquire
shares  from time to time at  prevailing  market  prices if and to the extent it
deems it advisable  to do so based on its  assessment  of  corporate  cash flow,
market conditions and other factors.

NOTE 3 - INVENTORIES
--------------------

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

=====================================================
                               2006           2005
-----------------------------------------------------
Raw materials              $     4,264    $    4,809
Finished goods                   5,654         3,731
-----------------------------------------------------
  Total inventories        $     9,918    $    8,540
=====================================================

On a regular  basis,  the Company  evaluates its  inventory  balances for excess
quantities and obsolescence by analyzing demand, inventory on hand, sales levels
and  other  information.  Based on these  evaluations,  inventory  balances  are
reduced,  if  necessary.  The reserve for obsolete or slow moving  inventory was
$147 and $56 at December 31, 2006 and 2005, respectively.

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

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

=======================================================================
                                                 2006          2005
-----------------------------------------------------------------------
Land                                          $      650    $      290
Building                                          11,640        10,509
Equipment                                         38,545        31,196
Construction in progress                           1,247           332
-----------------------------------------------------------------------
                                                  52,082        42,327
Less: Accumulated depreciation                    20,769        17,927
-----------------------------------------------------------------------
 Property, plant and equipment, net           $   31,313    $   24,400
=======================================================================

Depreciation expense was $2,842,  $2,686 and $2,583 for the years ended December
31, 2006, 2005 and 2004, respectively.

NOTE 5 - ACQUISITION OF ASSETS
------------------------------

Effective August 24, 2006,  pursuant to an asset purchase  agreement of the same
date, the Company, through its wholly owned subsidiaries BCP Ingredients and BCP
St. Gabriel, acquired from BioAdditives,  LLC, CMB Additives, LLC and CMB Realty
of Louisiana (the "St.  Gabriel  Sellers") an animal feed grade aqueous  choline
chloride  manufacturing  facility  and related  assets  located in St.  Gabriel,
Louisiana  (the "St.  Gabriel  Acquisition").  The Company also acquired the St.
Gabriel Sellers'  remaining  interest in a land lease  (approximately  21 years)
relating to the realty upon which the acquired  facility and related  assets are
located.  The  acquisition  was funded through the Company's  cash reserves.  At
December  31,  2006,  the facility  was not in service.  In February  2007,  the
facility was placed in to service.

NOTE 6 - ACQUISITION OF STOCK
-----------------------------

On February 8, 2006, the Company,  through its wholly owned  subsidiary  Balchem
Minerals Corporation  ("BMC"),  completed an acquisition (the "CMC 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


                                       40
<PAGE>

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 CMC Acquisition,
in part. The remaining  balance of the purchase price of the CMC Acquisition was
funded through the Company's cash reserves.  At December 31, 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 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                                     11,903
Financing costs                                  49
Other intangible assets                       5,285
-------------------------------------------------------------
         Total                           $   17,897
=============================================================

The consolidated  financial  statements include the results of operations of CMC
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
                                              Year Ended
                                             December 31,
                                         2006            2005
------------------------------------------------------------------
Net sales                           $     101,639    $     89,117
Net earnings                               12,284          11,438
Basic EPS                                     .70             .66
Diluted EPS                         $         .67    $        .63
==================================================================


                                       41
<PAGE>

NOTE 7 - PRIOR YEAR 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 ("Loders  Croklaan")  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 (the "Loders Crooklaan  Acquisition").  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 to
Loders Croklaan by the Company 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
will be recorded as an  additional  cost of the acquired  product  lines.  As of
December  31, 2006,  such  contingent  consideration  of $23 has been earned and
paid.

The  allocation  of the  purchase  price of the  Loders  Crooklaan  Acquisition,
subject to contingencies, 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                                     6,982
----------------------------------------------------------------
        Total                            $   9,908
================================================================

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

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

Pro Forma Summary of Operations

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

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


                                       42
<PAGE>

=================================================================
                                              Pro Forma
                                              Year Ended
                                             December 31,
                                         2005            2004
-----------------------------------------------------------------
Net sales                           $     86,382    $     71,747
Net earnings                              11,422           9,042
Basic EPS                                    .66             .53
Diluted EPS                         $        .63    $        .52
=================================================================

NOTE 8 - INTANGIBLE ASSETS WITH FINITE LIVES
--------------------------------------------

As of December 31, 2006 and 2005, the Company had identifiable intangible assets
as follows:

<TABLE>
<CAPTION>
=============================================================================================
                                              2006                      2005
                             Amortization    Gross         2006         Gross        2005
                                Period      Carrying   Accumulated    Carrying   Accumulated
                              (In years)     Amount    Amortization    Amount    Amortization
---------------------------------------------------------------------------------------------
<S>                               <C>       <C>               <C>     <C>               <C>
Customer lists                       10     $  4,888          $ 497   $  1,350          $  67
Regulatory re-registration
costs                                10           28              0         18              0
Patents & trade secrets           15-17        1,550            221        753            141
Trademarks & trade names             17          876             94        210             49
Other                                 5          457             75        101             27
---------------------------------------------------------------------------------------------
                                            $  7,799          $ 887   $  2,432          $ 284
=============================================================================================
</TABLE>

Amortization of identifiable  intangible assets was approximately $603, $123 and
$688 for 2006,  2005 and  2004,  respectively.  Assuming  no change in the gross
carrying value of identifiable  intangible  assets,  the estimated  amortization
expense is  approximately  $637 per annum for 2007 through  2008,  approximately
$635 per annum for 2009 and approximately  $613 per annum for 2010 through 2011.
At December 31, 2006 and 2005, there were no identifiable intangible assets with
indefinite  useful  lives as defined by SFAS No.  142.  Identifiable  intangible
assets  are  reflected  in  the  Company's  consolidated  balance  sheets  under
Intangible assets,  net. There were no changes to the useful lives of intangible
assets subject to amortization in 2006 and 2005.

At December 31, 2006, the gross carrying amount included a customer list,  trade
name and trade  secrets  acquired as part of the CMC  Acquisition,  as well as a
customer list and patent acquired as part of the Loders Croklaan Acquisition.

The  Company is in the process of  re-registering  one of its  product's  use in
compliance  with the Federal  Insecticide,  Fungicide  and  Rodenticide  Act, as
amended ("FIFRA"),  re-registration  requirements for all pesticide products. In
December 2004, the U.S.  Environmental  Protection  Agency ("EPA")  informed the
Company and the other technical  registrant under the current  registration that
the Agency  was  beginning  the  6-phase  process  to develop a  Re-registration
Eligibility  Decision (RED) for this product.  This multi-phase  process entered
Phase 5 last year.  The EPA's Office of Pesticide  Programs (OPP) had originally
stated  its  intent to  finalize  the RED by August  2006,  but  bifurcated  the
process,  and  dealt  only with the  reassessment  of spice  residue  tolerances
mandated by the Food  Quality  Protection  Act of 1996.  On August 9, 2006,  OPP
issued a Tolerance  Reassessment  Progress and Risk  Management  Decision (TRED)
relating to the use of ethylene  oxide to treat spices.  This TRED prohibits the
use of ethylene oxide to treat basil,  effective  August 1, 2007, but allows the
continuing  use of  ethylene  oxide to treat all other  spices,  provided  users
follow a mandated  treatment  method.  In the Federal Register notice announcing
the TRED,  the EPA stated its intent to complete  the RED  process for  ethylene
oxide in 2007.  Upon  completion of the EPA's Office of Research


                                       43
<PAGE>

and Development (ORD) assessment of the  carcinogenicity  of ethylene oxide, OPP
will  complete  preparation  of the RED. ORD issued a draft  "Evaluation  of the
Carcinogenicity of Ethylene Oxide" in a Federal Register notice, dated September
22, 2006. This assessment is currently  undergoing  review by a special panel of
the Science  Advisory  Board.  ORD indicates the assessment will be finalized by
the summer of 2007. The Company has actively  participated  in the public access
portions of both the ORD  assessment  process and the OPP's RED process and will
continue to do so until their conclusions. With regard to the RED process, as of
this date, the OPP expressed concerns about  occupational  exposures to ethylene
oxide. The EPA requested  additional  information  from the industry,  which the
Company is actively involved in providing. The EPA has also indicated additional
testing  may be required in order to  maintain  the  current  uses.  The Company
believes  that the use will  continue to be  permitted,  although the Agency may
require some additional restrictions on current uses. Additionally, the product,
when  used  as a  medical  device  sterilant,  has no  known  equally  effective
substitute.  Management of the Company  believes absence of availability of this
product could not be easily  tolerated by various  medical device  manufacturers
and the health care industry due to the resultant  infection  potential,  if the
product were unavailable.

NOTE 9 - LONG-TERM DEBT & CREDIT AGREEMENTS
-------------------------------------------

There was no debt  outstanding  at December 31, 2006 or December  31,  2005.  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 CMC Acquisition,
in part. The Term Loan was payable in equal monthly  installments  of principal,
together with accrued  interest,  had a maturity date of March 1, 2009,  and was
subject to an interest rate equal to LIBOR plus 1.00%.  As of December 31, 2006,
the Company made $10,000 in principal payments against the Term Loan, which paid
the Term  Loan in full.  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%.
Certain  provisions of the Term Loan require  maintenance  of certain  financial
ratios,  limit  future  borrowings  and impose  certain  other  requirements  as
contained in the Loan Agreement.  As of December 31, 2006, no amounts were drawn
on the  Revolving  Facility.  The  Revolving  Facility  expires  in  May,  2007.
Management  believes  that such facility will be renewed in the normal course of
business.

NOTE 10 - INCOME TAXES
----------------------

Income tax expense consists of the following:

================================================================================
                                                       2006      2005      2004
--------------------------------------------------------------------------------
Current:
   Federal                                          $ 6,295   $ 4,875   $ 2,849
   State                                                534       763       453
Deferred:
   Federal                                               (1)      541     1,244
   State                                                 (5)       58       143
--------------------------------------------------------------------------------
Total income tax provision                          $ 6,823   $ 6,237   $ 4,689
================================================================================

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

================================================================================
                                                       2006      2005      2004
--------------------------------------------------------------------------------
Income tax at Federal
  statutory rate                                    $ 6,685   $ 6,017   $ 4,450
State income taxes, net of
  Federal income tax benefit                            344       534       379
Other                                                  (206)     (314)     (140)
--------------------------------------------------------------------------------
Total income tax provision                          $ 6,823   $ 6,237   $ 4,689
================================================================================


                                       44
<PAGE>

The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2006 and
2005 were as follows:

================================================================================
                                                   2006                 2005
--------------------------------------------------------------------------------
Deferred tax assets:
  Customer list amortization                   $          --        $        119
  Inventories                                            371                 213
  Deferred compensation                                   --                   6
  Restricted stock and stock options                     200                  99
  Other                                                  145                 231
--------------------------------------------------------------------------------
    Total deferred tax assets                            716                 668
--------------------------------------------------------------------------------
Deferred tax liabilities:
  Customer list amortization                   $       1,684        $         --
  Depreciation                                         3,873               3,712
  Prepaid expense                                        583                 695
  Trade names and trademarks                             239                  --
  Technology and trade secrets                           269                  --
  Other                                                  279                  --
--------------------------------------------------------------------------------
    Total deferred tax liabilities                     6,927               4,407
--------------------------------------------------------------------------------
    Net deferred tax liability                 $       6,211        $      3,739
================================================================================

There is no valuation allowance for deferred tax assets at December 31, 2006 and
2005.  In  assessing  the  realizability  of  deferred  tax  assets,  management
considers  whether it is more  likely  than not that some  portion or all of the
deferred tax assets will not be realized.  The ultimate  realization of deferred
tax assets is dependent  upon the generation of future taxable income during the
periods in which  those  temporary  differences  become  deductible.  Management
considers the scheduled  reversal of deferred tax liabilities,  projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income
over the periods in which the  deferred  tax assets are  deductible,  management
believes it is more likely than not the  Company  will  realize the  benefits of
these  deductible  differences.  The amount of  deferred  tax asset  realizable,
however,  could change if management's  estimate of future taxable income should
change.

NOTE 11 - NET EARNINGS PER COMMON SHARE
---------------------------------------

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

<TABLE>
<CAPTION>
===================================================================================================
                                                          Earnings     Number of Shares   Per Share
                  2006                                  (Numerator)     (Denominator)       Amount
---------------------------------------------------------------------------------------------------
<S>                                                       <C>              <C>               <C>
Basic EPS - Net earnings and weighted average
common shares outstanding                                 $ 12,278         17,427,857        $ .70

Effect of dilutive securities - stock options and
restricted stock                                                              819,384
                                                                           ----------

Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options     $ 12,278         18,247,241        $ .67
===================================================================================================
</TABLE>


                                       45
<PAGE>

<TABLE>
<CAPTION>
====================================================================================================
                                                           Earnings     Number of Shares   Per Share
                  2005                                   (Numerator)     (Denominator)       Amount
----------------------------------------------------------------------------------------------------
<S>                                                         <C>              <C>               <C>
Basic EPS - Net earnings and weighted average
common shares outstanding                                 $ 10,954         17,341,133        $ .63

Effect of dilutive securities - stock options                                 743,739
                                                                           ----------

Diluted EPS - Net earnings and weighted average
common shares  outstanding  nd effect of stock options    $ 10,954         18,084,872        $ .61
====================================================================================================
</TABLE>


<TABLE>
<CAPTION>
====================================================================================================
                                                           Earnings     Number of Shares   Per Share
                  2004                                   (Numerator)     (Denominator)       Amount
----------------------------------------------------------------------------------------------------
<S>                                                         <C>              <C>               <C>
Basic EPS - Net earnings and weighted average
common shares outstanding                                    $ 8,026         16,896,646        $ .48

Effect of dilutive securities - stock options                                   571,374
                                                                             ----------

Diluted EPS - Net earnings and weighted average
common shares outstanding and effect of stock options        $ 8,026         17,468,020        $ .46
====================================================================================================
</TABLE>

The Company had 307,875, 481,500 and 2,700 stock options outstanding at December
31,  2006,  2005 and 2004,  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 12- EMPLOYEE BENEFIT PLANS
-------------------------------

The Company  sponsors a 401(k)  savings  plan for eligible  employees.  The plan
allows participants to make pretax contributions and the Company matches certain
percentages of those pretax  contributions  with shares of the Company's  common
stock.   The  profit  sharing   portion  of  the  plan  is   discretionary   and
non-contributory. All amounts contributed to the plan are deposited into a trust
fund  administered  by  independent  trustees.  The Company  provided for profit
sharing contributions and matching 401(k) savings plan contributions of $395 and
$343 in 2006, $326 and $276 in 2005 and $301 and $257 in 2004, respectively.

The Company also currently  provides  postretirement  benefits in the form of an
unfunded  retirement  medical  plan  under  a  collective  bargaining  agreement
covering eligible retired  employees of the Verona facility.  The Company uses a
December 31 measurement date for its postretirement  medical plan. In accordance
with SFAS 158,  the Company is required  to  recognize  the over funded or under
funded  status  of  a  defined  benefit  post  retirement  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.  On December 31,  2006,  the
Company recorded $0.3 million as a reduction to the benefit  obligation and $0.2
million,  net of tax,  as a one-time  adjustment  to its  stockholders'  equity,
recorded under accumulated other comprehensive income.


                                       46
<PAGE>

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

Change in benefit obligation:
================================================================================
                                                              2006         2005
--------------------------------------------------------------------------------
Benefit obligation at beginning of year                  $     942    $     867
         Service cost with interest to end of year              28           32
         Interest cost                                          39           50
         Participant contributions                              11           11
         Plan amendments                                         0            0
         Benefits paid                                         (20)         (25)
         Actuarial (gain) or loss                             (271)           7
--------------------------------------------------------------------------------
Benefit obligation at end of year                        $     729    $     942
================================================================================

Change in plan assets:
================================================================================
                                                              2006         2005
--------------------------------------------------------------------------------
Fair value of plan assets at beginning of year           $      --    $      --
         Employer contributions                                  9           15
         Participant contributions                              11           11
         Benefits paid                                         (20)         (26)
--------------------------------------------------------------------------------
Fair value of plan assets at end of year                 $      --    $      --
================================================================================

Amounts recognized in consolidated balance sheet:
================================================================================
                                                               2006        2005
--------------------------------------------------------------------------------
Accumulated postretirement benefit obligation            $     (729)  $    (942)
Fair value of plan assets                                        --          --
Funded status                                                  (729)       (942)
Unrecognized prior service cost                                 N/A        (191)
Unrecognized net (gain)/loss                                    N/A         146
--------------------------------------------------------------------------------
Net amount recognized in consolidated balance
sheet (after FAS 158)                                    $      729   $     N/A
(included in other long-term obligations)
--------------------------------------------------------------------------------
Accrued postretirement benefit cost
(included in other long-term obligations)                $      N/A   $     987
================================================================================


<TABLE>
<CAPTION>
Components of net periodic benefit cost:
============================================================================================
                                                               2006        2005         2004
--------------------------------------------------------------------------------------------
<S>                                                      <C>          <C>           <C>
Service cost with interest to end of year                $       28   $      32     $     31
Interest cost                                                    39          50           49
Amortization of prior service cost                              (18)        (18)         (10)
Amortization of (gain) or loss                                   (3)          3           --
--------------------------------------------------------------------------------------------
Total net periodic benefit cost                          $       46   $      67     $     70
============================================================================================
</TABLE>


                                       47
<PAGE>

Estimated future employer contributions and benefit payments are as follows:

=====================================
          Year
-------------------------------------
2007                          $    35
2008                               41
2009                               48
2010                               43
2011                               54
Years 2012-2016                   187
=====================================

Assumed  health  care  cost  trend  rates  have been  used in the  valuation  of
postretirement  health insurance benefits.  The trend rate is 10 percent in 2007
declining to 5 percent in 2012 and thereafter.  A one percentage  point increase
in health  care cost trend  rates in each year would  increase  the  accumulated
postretirement  benefit  obligation  as of December  31, 2006 by $91 and the net
periodic  postretirement  benefit cost for 2006 by $10. A one  percentage  point
decrease  in  health  care cost  trend  rates in each year  would  decrease  the
accumulated postretirement benefit obligation as of December 31, 2006 by $78 and
the net  periodic  postretirement  benefit  cost  for 2006 by $8.  The  weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was 5.75% in 2006 and 5.75% in 2005.

NOTE 13 - COMMITMENTS AND CONTINGENCIES
---------------------------------------

In connection with the Loders Croklaan  Acquisition,  the Company entered into a
lease  agreement with Loders under which the Company leases a portion of Loders'
Channahon,  Illinois  facility where it principally  conducted the manufacturing
portion of the acquired  business  and utilized  certain  warehouse  space.  The
initial term of the lease commenced in February, 2006 and runs through September
30, 2010, subject to earlier termination.  In addition, the Company entered into
certain short-term services and tolling agreements with Loders.

In  February  2002,  the  Company  entered  into a ten (10) year lease  which is
cancelable in 2009 for  approximately  20,000  square feet of office space.  The
office space is now serving as the Company's general offices and as a laboratory
facility.  The Company  leases most of its vehicles and office  equipment  under
non-cancelable  operating  leases,  which expire at various  times through 2011.
Rent expense  charged to operations  under such lease  agreements for 2006, 2005
and 2004 aggregated approximately $595, $576 and $566,  respectively.  Aggregate
future minimum rental payments required under non-cancelable operating leases at
December 31, 2006 are as follows:

===========================================
               Year
-------------------------------------------
2007                                 $ 672
2008                                   619
2009                                   652
2010                                   209
2011                                    79
Thereafter                              59
-------------------------------------------
Total minimum lease payments       $ 2,290
===========================================

In 1982, the Company  discovered and thereafter removed a number of buried drums
containing  unidentified  waste  material from the Company's site in Slate Hill,
New York. The Company  thereafter  entered into a Consent Decree to evaluate the
drum site with the New York Department of Environmental  Conservation  ("NYDEC")
and  performed a Remedial  Investigation/Feasibility  Study that was approved by
NYDEC in February 1994.  Based on NYDEC  requirements,  the Company  cleaned the
area and removed  additional soil from the drum burial site, which was completed
in 1996.  The Company  continues  to be involved  in  discussions  with NYDEC to
evaluate test results and determine  what,  if any,  additional  actions will be
required on the part of the Company to close out the  remediation  of this site.
Additional actions, if any,


                                       48
<PAGE>

would likely  require the Company to continue  monitoring  the site. The cost of
such monitoring has been less than $5 per year for the period 2003 - 2006.

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

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

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

NOTE 14 - 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.  As of August 2006, PMD
assigned the license agreement in its entirety to its successor in interest,  Al
Kayan Petrochemical Company.

The License  Agreement gives PMD the right to utilize the Company's  proprietary
continuous  manufacturing  technology  for the  production  of  aqueous  choline
chloride (the "Licensed  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 late
2009. In addition,  the License Agreement  provides PMD with the exclusive right
to  use  the  Licensed   Technology  in  certain  countries,   as  well  as  the
non-exclusive  right to  market,  sell  and use the  products  derived  from the
Licensed  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  the Licensed
Technology,  and additional training.  These fees are to be paid in installments
upon  achievement  of certain  performance  milestones  set forth in the License
Agreement.

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


                                       49
<PAGE>

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.  The Company has  recognized  $842 of
revenue and $427 in  expenses  for 2006 and $158 of revenue and $138 in expenses
for 2005.  These  amounts are included in the net sales and cost of sales totals
in the BCP Ingredients segment.

NOTE 15 - SEGMENT INFORMATION
-----------------------------

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

<TABLE>
<CAPTION>
Business Segment Net Sales:
=========================================================================================
                                                       2006           2005          2004
-----------------------------------------------------------------------------------------
<S>                                              <C>            <C>           <C>
Specialty Products                               $    32,026    $    29,433   $    28,767
Encapsulated/Nutritional Products                     41,565         32,499        24,759
BCP Ingredients                                       27,314         21,163        13,880
-----------------------------------------------------------------------------------------
Total                                            $   100,905    $    83,095   $    67,406
=========================================================================================
</TABLE>

<TABLE>
<CAPTION>
Business Segment Earnings Before Income Taxes:
=========================================================================================
                                                       2006           2005          2004
-----------------------------------------------------------------------------------------
<S>                                              <C>            <C>           <C>
Specialty Products                               $    11,315    $    11,007   $    10,693
Encapsulated/Nutritional Products                      4,200          3,217           992
BCP Ingredients                                        3,647          2,679         1,112
Interest and other income (expense)                      (61)           288           (82)
-----------------------------------------------------------------------------------------
Total                                            $    19,101    $    17,191   $    12,715
=========================================================================================
</TABLE>

<TABLE>
<CAPTION>
Depreciation/Amortization:
=========================================================================================
                                                       2006           2005          2004
-----------------------------------------------------------------------------------------
<S>                                              <C>            <C>           <C>
Specialty Products                               $       941    $     1,027   $     1,668
Encapsulated/Nutritional Products                      1,983          1,313         1,155
BCP Ingredients                                          521            469           448
-----------------------------------------------------------------------------------------
Total                                            $     3,445    $     2,809   $     3,271
=========================================================================================
</TABLE>


                                       50
<PAGE>

<TABLE>
<CAPTION>
Business Segment Assets:
=========================================================================================
                                                       2006           2005          2004
-----------------------------------------------------------------------------------------
<S>                                              <C>            <C>           <C>
Specialty Products                               $    18,446    $    19,799   $    18,456
Encapsulated/Nutritional Products                     45,870         25,139        15,594
BCP Ingredients                                       20,434         14,141        11,424
Other Unallocated                                      7,583         16,062        14,931
-----------------------------------------------------------------------------------------
Total                                            $    92,333    $    75,141   $    60,405
=========================================================================================
</TABLE>

Other unallocated  assets consist of certain cash,  prepaid expenses,  leasehold
improvements,  net of accumulated depreciation, and deferred income taxes, which
the Company does not allocate to its individual business segments.

<TABLE>
<CAPTION>
Capital Expenditures:
=========================================================================================
                                                           2006        2005        2004
-----------------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>
Specialty Products                                    $     195   $     366   $     224
Encapsulated/Nutritional Products                           595         520         470
BCP Ingredients                                           1,489         883         521
-----------------------------------------------------------------------------------------
Total                                                 $   2,279   $   1,769   $   1,215
=========================================================================================
</TABLE>

<TABLE>
<CAPTION>
Geographic Revenue Information:
=========================================================================================
                                                2006             2005             2004
-----------------------------------------------------------------------------------------
<S>                                       <C>              <C>              <C>
United States                             $   91,042       $   77,355       $   61,869
Foreign Countries                              9,863            5,740            5,537
-----------------------------------------------------------------------------------------
Total                                     $  100,905       $   83,095       $   67,406
=========================================================================================
</TABLE>

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

NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION
--------------------------------------------

Cash paid during the year for:
=======================================================
                     2006         2005         2004
-------------------------------------------------------
Income taxes     $    5,621   $    5,133   $   3,421
Interest         $      189   $        8   $     219
=======================================================

Non-cash financing activities:
=========================================================
                         2006        2005        2004
---------------------------------------------------------
Dividends payable     $   1,596  $    1,045  $      685
=========================================================

Also see Notes 5, 6, and 7 for information regarding  acquisitions of assets and
stock.

                                       51
<PAGE>

NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
------------------------------------------------------
(In thousands, except per share data)

<TABLE>
<CAPTION>
=========================================================================================================
                                             2006                                   2005
---------------------------------------------------------------------------------------------------------
                             First    Second     Third    Fourth     First    Second     Third    Fourth
                            Quarter   Quarter   Quarter   Quarter   Quarter   Quarter   Quarter   Quarter
---------------------------------------------------------------------------------------------------------
<S>                         <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Net sales                   $24,597   $25,100   $25,122   $26,086   $19,340   $19,484   $21,145   $23,126
Gross profit                  8,222     8,800     8,673     8,311     7,182     7,112     7,649     6,737
Earnings before
  income taxes                4,445     4,813     4,978     4,865     4,069     4,346     4,857     3,919
Net earnings                  2,858     3,055     3,151     3,214     2,568     2,730     3,024     2,632
Basic net earnings
  per common share           $  .17    $  .17    $  .18    $  .18    $  .15    $  .15    $  .17    $  .15
Diluted net earnings
  per common share           $  .16    $  .17    $  .17    $  .18    $  .14    $  .15    $  .17    $  .15
=========================================================================================================
</TABLE>


                                       52
<PAGE>

             Report of Independent Registered Public Accounting Firm

To the Board of Directors
Balchem Corporation
New Hampton, NY

Our audits of the  consolidated  financial  statements and internal control over
financial  reporting  referred to in our report  dated March 15, 2007  (included
elsewhere  in this  Annual  Report on Form 10-K)  also  included  the  financial
statement schedule of Balchem Corporation and Subsidiaries, listed in Item 15(a)
of this Form 10-K for the years ended  December  31, 2006,  2005 and 2004.  This
schedule  is  the  responsibility  of  Balchem  Corporation's  management.   Our
responsibility  is to express an opinion based on our audits of the consolidated
financial statements.

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

/s/McGladrey & Pullen, LLP
New York, NY
March 15, 2007


                                       53
<PAGE>

                                                                     Schedule II

                               BALCHEM CORPORATION
                        Valuation and Qualifying Accounts
                  Years Ended December 31, 2006, 2005 and 2004
                                 (In thousands)


<TABLE>
<CAPTION>
                                                          Additions
                                                   -----------------------
                                     Balance at    Charges to   Charges to
                                    Beginning of   Costs and      Other                       Balance at
Description                             Year        Expenses     Accounts    Deductions       End of Year
-----------                         ------------   ----------   ----------   ----------       -----------
<S>                                  <C>           <C>          <C>           <C>               <C>
Year ended December 31, 2006
  Allowance for doubtful accounts    $       50    $       --   $       --    $      --         $      50
  Inventory obsolescence reserve             56            91           --           --               147

Year ended December 31, 2005
  Allowance for doubtful accounts    $       82    $       --   $       --    $     (32) (a)    $      50
  Inventory obsolescence reserve             31            25           --           --                56

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

(a)  represents write-offs.


                                       54
<PAGE>

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

    None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

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

Management's Report on Internal Control Over Financial Reporting

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

      As of  December  31,  2006,  management  conducted  an  assessment  of the
effectiveness of the Company's  internal control over financial  reporting based
on the framework  established in Internal Control - Integrated  Framework issued
by the Committee of Sponsoring  Organizations of the Treadway Commission (COSO).
Based on this assessment,  management has determined that the Company's internal
control over financial reporting was effective as of December 31, 2006.

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

Attestation Report of Registered Public Accounting Firm

      Management's  assessment of the  effectiveness  of the Company's  internal
control  over  financial  reporting  as of December 31, 2006 has been audited by
McGladrey & Pullen,  LLP, an independent  registered  public accounting firm, as
stated in their report which appears herein on pages 24 and 25.


                                       55
<PAGE>

Changes in Internal Control Over Financial Reporting

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

Item 9B. Other Information

      None.

                                    PART III

Item  10.  Directors,  Executive  Officers  of  the  Registrant,  and  Corporate
Governance.

(a)   Directors of the Company.

      The  required  information  is to be  set  forth  in the  Company's  Proxy
Statement  for  the  2007  Annual  Meeting  of  Stockholders  (the  "2007  Proxy
Statement")  under  the  caption  "Directors  and  Executive   Officers,"  which
information is hereby incorporated herein by reference.

(b)   Executive Officers of the Company.

      The required  information  is to be set forth in the 2007 Proxy  Statement
under the caption  "Directors  and Executive  Officers,"  which  information  is
hereby incorporated herein by reference.

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

      The required  information  is to be set forth in the 2007 Proxy  Statement
under the caption "Section 16(a)  Beneficial  Ownership  Reporting  Compliance,"
which information is hereby incorporated herein by reference.

(d)   Code of Ethics.

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

(e)   Corporate Governance.

      The required  information  is to be set forth in the 2007 Proxy  Statement
under  the  caption   "Corporate   Governance,"   which  information  is  hereby
incorporated herein by reference.

Item 11. Executive Compensation.

      The information required by this Item is to be set forth in the 2007 Proxy
Statement  under  the  caption   "Directors  and  Executive   Officers,"   which
information is hereby incorporated herein by reference.

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

      The information required by this Item is to be set forth in the 2007 Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and
of Management" and the caption "Equity  Compensation  Plan  Information," all of
which information is hereby incorporated herein by reference.

Item  13.  Certain   Relationships   and  Related   Transactions   and  Director
Independence.

      The  information  required  by this  Item is set  forth in the 2007  Proxy
Statement  under  the  caption   "Directors  and  Executive   Officers,"   which
information is hereby incorporated herein by reference.


                                       56
<PAGE>

Item 14. Principal Accounting Fees and Services.

      The  information  required  by this  Item is set  forth in the 2007  Proxy
Statement  under the caption  "Independent  Auditor Fees," which  information is
hereby incorporated herein by reference.

Item 15. Exhibits and Financial Statement Schedules.

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

<TABLE>
<CAPTION>
                                                                      Form 10-K
     1. Financial Statements                                          Page Number
<S>                                                                        <C>
        Report of Independent Registered Public Accounting Firm            24

        Consolidated Balance Sheets as of December 31, 2006 and 2005       26

        Consolidated Statements of Earnings for the
        years ended December 31, 2006, 2005 and 2004                       27

        Consolidated Statements of Stockholders' Equity
        for the years ended December 31, 2006, 2005 and 2004               28

        Consolidated Statements of Cash Flows
        for the years ended December 31, 2006, 2005 and 2004               29

        Notes to Consolidated Financial Statements                         30

        Report of Independent Registered Public Accounting Firm            53

     2. Financial Statement Schedules

        Schedule II - Valuation and Qualifying
        Accounts for the years ended December 31, 2006, 2005 and 2004      54
</TABLE>

     3. Exhibits

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

      3.1   Composite Articles of Incorporation of the Company  (incorporated by
            reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K
            dated March 16, 2006 for the year ended December 31, 2005).

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

      10.1  Loan  Agreement  dated  February  6,  2006  by and  between  Bank of
            America,  N.A.  and  Balchem  Corporation,   Promissory  Note  dated
            February 6, 2006 from Balchem Corporation to Bank of America,  N.A.,
            and Amended and Restated  Promissory Note (Revolving Line of Credit)
            dated February 6, 2006 from Balchem  Corporation to Bank of


                                       57
<PAGE>

            America, N.A.  (incorporated by reference to Exhibits 10.2, 10.3 and
            10.4 to the Company's  Current  Report on Form 8-K dated February 9,
            2006).

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

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

      10.4  Incentive   Stock   Option   Plan  of  the   Company,   as  amended,
            (incorporated by reference to the Company's  Registration  Statement
            on Form S-8,  File No.  333-35910,  dated  October 25, 1996,  and to
            Proxy Statement, dated April 22, 1998, for the Company's 1998 Annual
            Meeting of Stockholders (the "1998 Proxy Statement")).*

      10.5  Stock  Option  Plan  for  Directors  of  the  Company,   as  amended
            (incorporated by reference to the Company's  Registration  Statement
            on Form S-8, File No. 333-35912,  dated October 25, 1996, and to the
            1998 Proxy Statement).

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

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

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

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

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

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

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

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

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

      14.   Code of  Ethics  for  Senior  Financial  Officers  (incorporated  by
            reference to Exhibit 14 to the Company's  Annual Report on Form 10-K
            dated March 15, 2004 for the year ended December 31, 2003).


                                       58
<PAGE>

      21.   Subsidiaries of Registrant.

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

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

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

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

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

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

                                   SIGNATURES

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

      Date: March 15, 2007                BALCHEM CORPORATION

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

                                   SIGNATURES

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

    /s/ Dino A. Rossi
    -----------------------------------
    Dino A. Rossi, President,
    Chief Executive Officer, and Director (Principal Executive Officer)
    Date: March 15, 2007

    /s/ Francis J. Fitzpatrick
    -----------------------------------
    Francis J. Fitzpatrick, Chief Financial
    Officer and Treasurer (Principal Financial and Principal Accounting Officer)
    Date: March 15, 2007

    /s/ Hoyt Ammidon, Jr.
    -----------------------------------
    Hoyt Ammidon, Jr., Director
    Date: March 15, 2007

    /s/ Edward McMillan
    -----------------------------------
    Edward McMillan, Director
    Date: March 15, 2007

    /s/ Kenneth P. Mitchell
    -----------------------------------
    Kenneth P. Mitchell, Director
    Date: March 15, 2007

    /s/ Dr. John Televantos
    -----------------------------------
    Dr. John Televantos, Director
    Date: March 15, 2007

    /s/ Dr. Elaine Wedral
    -----------------------------------
    Dr. Elaine Wedral, Director
    Date: March 15, 2007


                                       59
<PAGE>

                                  EXHIBIT INDEX

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

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

      3.1      Composite Articles of Incorporation of the Company  (incorporated
               by reference  to Exhibit 3.1 to the  Company's  Annual  Report on
               Form 10-K dated  March 16, 2006 for the year ended  December  31,
               2005).

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

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

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

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

      10.4     Incentive   Stock  Option  Plan  of  the  Company,   as  amended,
               (incorporated   by  reference  to  the   Company's   Registration
               Statement  on Form S-8,  File No.  333-35910,  dated  October 25,
               1996,  and to Proxy  Statement,  dated  April 22,  1998,  for the
               Company's  1998 Annual Meeting of  Stockholders  (the "1998 Proxy
               Statement")).*

      10.5     Stock  Option  Plan for  Directors  of the  Company,  as  amended
               (incorporated   by  reference  to  the   Company's   Registration
               Statement  on Form S-8,  File No.  333-35912,  dated  October 25,
               1996, and to the 1998 Proxy Statement).

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

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

      10.8     Employment  Agreement,  dated as of January 1, 2001,  between the
               Company and Dino A. Rossi  (incorporated  by reference to Exhibit
               10.5 to the Company's Annual Report on


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               Form  10-K  for the year  ended  December  31,  2001  (the  "2001
               10-K")). *

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

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

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

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

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

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

      14.      Code of Ethics for Senior  Financial  Officers  (incorporated  by
               reference to Exhibit 14 to the  Company's  Annual  Report on Form
               10-K dated March 15, 2004 for the year ended December 31, 2003).

      21.      Subsidiaries of Registrant.

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

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

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

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

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

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


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