UNITED
      STATES


SECURITIES
      AND
      EXCHANGE COMMISSION


Washington,
      D.C.
      20549





FORM
      10-K





(Mark
      One)


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





For
      the
      fiscal year ended December 31, 2007


OR


o
            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 incorporation or organization)
            
            (I.R.S.
                Employer Identification 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 registeredCommon
                Stock, par value $.06-2/3 per share
            
            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 o No þ





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 o No þ





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 þ
      No o





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. þ





Indicate
      by check mark whether the Registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act.




(Check
                  one):
              Large
                  accelerated filer o
              Accelerated
                  filer þNon-accelerated
                  filer o
              Smaller
                  reporting company o











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





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 NASDAQ Global Market on June 30, 2007 was approximately
      $317,332,000. 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 18,039,214
      as
      of March 3, 2008.





DOCUMENTS
      INCORPORATED BY
      REFERENCE




Selected
      portions of the Registrant’s proxy statement for its 2008 Annual Meeting of
      Stockholders (the “2008 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, 2007 are incorporated by reference
      in Part III of this Report.





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:





·
            changes
                in laws or regulations affecting our
                operations;




·
            changes
                in our business tactics or
                strategies;




·
            acquisitions
                of new or complementary operations;




·
            sales
                of any of our existing operations;




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




·
            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, calcium carbonate products
      for the pharmaceutical industry and encapsulated products are reported in the
      encapsulated / nutritional products segment. Chelated products and nutritional
      products for the animal health 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


The
      Company operates four domestic subsidiaries, all of which are wholly-owned:
      BCP,
      Balchem Minerals Corporation (“BMC”), BCP Saint Gabriel, Inc. (“BCP St.
      Gabriel”), each a Delaware corporation, and Chelated Minerals Corporation
      (“CMC”), a Utah corporation.  We also operate three wholly-owned
      subsidiaries in Europe:  Balchem BV and Balchem Trading BV, both Dutch
      limited liability companies, and Balchem Italia Srl, an Italian limited
      liability company.  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®
      Choline,
      an encapsulated choline product that improves health and production in
      transition and early lactation dairy cows.  Also in animal health we
      market NITROSHURETM,
      an
      encapsulated urea supplement for lactating dairy cows, allowing for greater
      flexibility in feed rations for dairy nutritionists and producers, and
      NIASHURETM,
      our
      microencapsulated niacin product.  In addition, we manufacture, sell
      and distribute chelated mineral supplements for use in animal feed throughout
      the world, utilizing our proprietary chelation technology 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.





We
      sell
      ethylene oxide, at the 100% level, 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. In addition, ethylene oxide blends are highly
      effective as a fumigant, 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 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.


2


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 our own sales force, independent distributors and sales agents.
      Certain derivatives of choline chloride are also marketed into industrial
      applications.  In addition to choline chloride acquired through the
      Akzo Nobel Acquisition, which is defined below, this segment manufactures and
      sells methylamines.  Methylamines are a primary building block for the
      manufacture of choline products and are also used in a wide range of industrial
      applications.





Raw
      Materials:





The
      raw
      materials utilized by the Company in the manufacture of its products are
      generally available from a number of commercial sources. Such raw materials
      include materials derived from petrochemicals, minerals, metals and other
      readily available commodities and are subject to price fluctuations due to
      market conditions. 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 17 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.  As of
      August 2006, PMD assigned the license agreement in its entirety to its successor
      in interest, Al Kayan Petrochemical Company.  On August 1, 2007 Al
      Kayan Petrochemical Company assigned the license agreement in its entirety
      to
      its successor in interest, Saudi Kayan Petrochemical Company (“SKPC”). Under the
      license agreement, SKPC has the right to utilize the Company’s proprietary
      continuous manufacturing technology for the production of aqueous choline
      chloride in connection with SKPC’s construction and operation of an aqueous
      choline chloride production facility at SKPC’s Al-Jubail, Saudi Arabia
      petrochemical facility, currently scheduled for completion in late
      2010.  In addition, SKPC 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 SKPC’s exclusive North American distributor for
      such products.




The
      license agreement terminates either 10 years from the start-up of SKPC’s
      production facility or December 31, 2020, whichever is earlier.







3


Seasonality:





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





Backlog:





At
      December 31, 2007, the Company had a total backlog of $7,303,000 (including
      $2,661,000 for the encapsulated/nutritional products segment; $354,000 for
      the
      specialty products segment and $4,288,000 for BCP Ingredients), as compared
      to a
      total backlog of $2,853,000 at December 31, 2006 (including $1,769,000 for
      the
      encapsulated/nutritional products segment; $655,000 for the specialty products
      segment and $429,000 for BCP Ingredients). The increase in our backlog is
      principally a result of acquisitions in the BCP segment as described below.
      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 two months after receipt of a product order. All orders
      in
      the current backlog are expected to be filled in the 2008 fiscal
      year.





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 product 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, 2007, 2006 and 2005, the Company incurred research
      and development expense of approximately $2.5 million, $2.0 million and $2.1
      million, respectively, on Company-sponsored research and development for new
      products and improvements to existing products and manufacturing processes,
      principally in the encapsulated / nutritional products
      segment.  During the year ended December 31, 2007, an average of 15
      employees were devoted full time to research and development activities. The
      Company has historically funded its research and development programs with
      funds
      available from current operations with the intent of recovering those costs
      from
      profits derived from future sales of products resulting from, or enhanced by,
      the research and development effort.





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





Acquisitions,
      Dispositions,
      and Capital Projects:





In
      2007,
      we made two significant acquisitions.





In
      April,
      pursuant to an asset purchase agreement dated March 30, 2007, we acquired the
      methylamines and choline chloride business and manufacturing facilities of
      Akzo
      Nobel Chemicals S.p.A., located in Marano Ticino, Italy, through our affiliate,
      Balchem BV.  Balchem BV subsequently assigned


4


this
      asset purchase agreement to its wholly-owned subsidiary, Balchem Italia Srl.
      In
      this Annual Report on Form 10-K, we refer to this acquisition as the “Akzo Nobel
      Acquisition”.





In
      March,
      BCP acquired certain choline chloride business assets of Chinook Global Limited
      ("Chinook"), a privately held Ontario corporation. In this Annual Report on
      Form
      10-K, we refer to this acquisition as the “Chinook Acquisition”.





In
      addition, 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
      renewable land lease (approximately 19 years remaining on the original term)
      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.  CMC is a manufacturer and global marketer of
      chelated mineral nutritional supplements for livestock, pet and swine
      feeds. In this Annual Report on Form 10-K, we refer to this acquisition as
      the “CMC Acquisition.”





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 Croklaan Acquisition.”





Excluding
      our 2007 acquisitions, capital expenditures were approximately $4.9 million
      for
      2007, as compared to $2.3 million in 2006.  Capital expenditures are
      projected to be approximately $5.6 million for 2008.





Environmental
      / Regulatory
      Matters:





The
      Federal Insecticide, Fungicide and Rodenticide Act, as amended (“FIFRA”), a
      health and safety statute, requires that certain products within our 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. We hold an EPA registration
      permitting us to sell ethylene oxide as a medical device sterilant and spice
      fumigant.  We are in the process of reregistering this product’s use in
      compliance with FIFRA re-registration requirements for all pesticide
      products.  In December 2004, the EPA informed us and the other technical
      registrant under the current registration that the EPA was beginning the 6-phase
      process to develop a Re-registration Eligibility Decision (RED) for this
      product. In 2006, the EPA's Office of Pesticide Programs (OPP) bifurcated
      the process, and dealt first with the reassessment of spice residue
      tolerances in order to meet the deadline 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 a mandated treatment method is used
      beginning August 1, 2008. In current published status reports, the EPA states
      that it will issue the RED covering all uses of ethylene oxide, including its
      use as a medical device sterilant, in March 2008.   We have
      actively participated in the public access portions of the EPA’s Office of
      Research and Development’s assessment of the carcinogenicity of ethylene oxide
      and OPP's RED process, and will continue to do so until their
      conclusions.  We believe that the use of ethylene oxide will continue
      to be permitted, although the EPA has indicated additional testing may be
      required in order to maintain the current uses after the RED is
      issued,  and the EPA 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.


5


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 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, local and international 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).





The
      Channahon, Illinois manufacturing facility manufactures a calcium carbonate
      line
      of pharmaceutical grade 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. The 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.











6


Employees:





As
      of
      March 1, 2008, the Company employed approximately 320
      persons.  Approximately 73 employees at our Marano, Ticino, Italy
      facility are covered by a national collective bargaining agreement, which
      expires in 2010. Approximately 55 employees at the Company’s Verona, Missouri
      facility are covered by a collective bargaining agreement, which expires in
      2012.





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 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.





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.





The
      Channahon, Illinois 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.


7


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





Raw
      material shortages or price increases 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.
      We
      believe we have reliable sources of supply for our raw materials under normal
      market conditions. We cannot, however, predict the likelihood or impact of
      any
      future raw material shortages. Any shortages could have a material adverse
      impact on our results of operations.





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, failure to achieve or maintain safety or quality standards, work
      stoppages, supply or logistical outages, 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
      17 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 and manufacturing operations
      outside the United States.




For
      the
      year ended December 31, 2007, approximately 25% of our net sales consisted
      of
      sales outside the United States, predominately to Europe, Japan and
      China.  In addition, we conduct a portion of our manufacturing outside
      the United States. International sales are subject to inherent risks. The
      majority of our foreign sales occur through our foreign sales subsidiaries
      and
      the remainder of our foreign sales result from exports to foreign distributors,
      resellers and customers. Our foreign sales and operations are subject to a
      number of risks, including: longer accounts receivable collection periods;
      the
      impact of recessions and other economic conditions in economies outside the
      United States; export duties and quotas; unexpected changes in regulatory
      requirements; certification requirements; environmental regulations; reduced
      protection for intellectual property rights in some countries; potentially
      adverse tax consequences; political and economic instability; and preference
      for
      locally produced products. These factors could have a material adverse impact
      on
      our ability to increase or maintain our international sales.


8


We
      may, from time to time,
      experience problems in our labor relations.




In
      North
      America, approximately 55 employees, or 23% of our North American workforce,
      as
      of December 31, 2007, are represented by a union under a single collective
      bargaining agreement.  This agreement expires in 2012.  In
      Europe, approximately 73 employees are covered by a collective bargaining
      agreement.  This agreement expires in 2010.  We believe that
      our present labor relations with all of our unionized employees are
      satisfactory, however, our failure to renew these agreements on reasonable
      terms
      could result in labor disruptions and increased labor costs, which could
      adversely affect our financial performance.  Similarly, if our
      relations with the unionized portion of our workforce do not remain positive,
      such employees could initiate a strike, work stoppage or slowdown in the future.
      In the event of such an action, we may not be able to adequately meet the needs
      of our customers using our remaining workforce and our operations and financial
      condition could be adversely affected.




Our
      international operations subject us to currency translation risk and currency
      transaction risk which could cause our results to fluctuate from period to
      period.




The
      financial condition and results of operations of our foreign subsidiaries are
      reported in Euros and then translated into U.S. dollars at the applicable
      currency exchange rate for inclusion in our consolidated financial statements.
      Exchange rates between these currencies in recent years have fluctuated
      significantly and may do so in the future. In the past year, as a result of
      the
      strength of the Euro compared to the U.S. dollar, our operating results in
      U.S.
      dollars were positively affected upon translation. The positive impact of the
      strengthening Euro may not continue in the future and may even reverse if the
      Euro declines in value compared to the U.S. dollar.  Furthermore, we
      incur currency transaction risk whenever we enter into either a purchase or
      a
      sales transaction using a currency different than the functional currency.
      Given
      the volatility of exchange rates, we may not be able to effectively manage
      our
      currency transactions and/or translation risks. Volatility in currency exchange
      rates could impact our business and financial results.





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 and attention.
      Any of these situations could have a material adverse effect on our business
      and
      financial results.





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.


9







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.





The
      Company, through its European subsidiary, Balchem Italia Srl, acquired in the
      Akzo Nobel Acquisition a facility located on an approximately 30 acre parcel
      of
      land in Marano Ticino, Italy. The Company manufactures and distributes
      methylamines, animal feed grade choline and human choline nutrients 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 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.





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.


10


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 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.





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, 2007 and 2006, adjusted for the December 2006 three-for-two stock
      split (effected by means of a stock dividend) were as follows:





Quarterly
                Period
            
            High
            
            
            LowEnded
                March 31, 2007
            
            $
            18.56
            
            
            $
            14.09Ended
                June 30, 2007
            
            
            19.17
            
            
            
            17.15Ended
                September 30, 2007
            
            
            21.25
            
            
            
            15.60Ended
                December 31, 2007
            
            
            24.00
            
            
            
            20.16





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





On
      March
      3, 2008 the closing price for the common stock on the Nasdaq Global Market
      was
      $20.63.





(b)           Record
      Holders.





As
      of
      March 3, 2008, the approximate number of holders of record of the Company’s
      common stock was 192.  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 10,411.








11


(c)           Dividends.





The Company declared cash
      dividends of $0.11 and $0.09 per share on its common stock during its fiscal
      years ended December 31, 2007 and 2006, respectively.





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,
      2007, the overall stock market return during such period for shares comprising
      the Russell 2000® 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, 2002 and the subsequent reinvestment of dividends. 
The Russell 2000® Index measures the performance of the shares of the 2000
      smallest companies included in the Russell 3000® Index.  In light of the
      Company's industry segments, the 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.











Item
      6.  Selected Financial Data





The
      selected statements of operations data set forth below for the three years
      in
      the period ended December 31, 2007 and the selected balance sheet data as
      of December 31, 2007 and 2006 have been derived from our Consolidated
      Financial Statements included elsewhere herein. The selected financial data
      as
      of December 31, 2005, 2004 and 2003 and for the years ended
      December 31, 2004 and 2003 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.


12


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).





(In
      thousands, except per share data)


Year
                ended December 31,
            
            2007
              (1)(2)(3)(4)(5)
            
            
            2006
              (1)(2)(3)
            
            
            2005
              (1)
            
            
            2004
            
            
            2003Statement
                of
                Operations DataNet
                sales
            
            $
            176,201
            
            
            $
            100,905
            
            
            $
            83,095
            
            
            $
            67,406
            
            
            $
            61,875Earnings
                before income
              tax
                expense
            
            
            24,829
            
            
            
            19,101
            
            
            
            17,191
            
            
            
            12,715
            
            
            
            8,763Income
                tax expense
            
            
            8,711
            
            
            
            6,823
            
            
            
            6,237
            
            
            
            4,689
            
            
            
            3,125Net
                earnings
            
            
            16,118
            
            
            
            12,278
            
            
            
            10,954
            
            
            
            8,026
            
            
            
            5,638Basic
                net earnings per
              common
                share
            
            $
            .91
            
            
            $
            .70
            
            
            $
            .63
            
            
            $
            .48
            
            
            $
            .35Diluted
                net earnings per
              common
                share
            
            $
            .87
            
            
            $
            .67
            
            
            $
            .61
            
            
            $
            .46
            
            
            $
            .33





At
                December 31,
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Balance
                Sheet
                DataTotal
                assets
            
            $
            154,424
            
            
            $
            92,333
            
            
            $
            75,141
            
            
            $
            60,405
            
            
            $
            56,906Long-term
                debt
            
            
            17,398
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,839Other
                long-term
              obligations
            
            
            1,529
            
            
            
            784
            
            
            
            1,043
            
            
            
            1,003
            
            
            
            985Total
                stockholders’ equity
            
            
            93,080
            
            
            
            75,362
            
            
            
            60,933
            
            
            
            50,234
            
            
            
            39,781Dividends
                per common share
            
            $
            .11
            
            
            $
            .09
            
            
            $
            .06
            
            
            $
            .04
            
            
            $
            .023





(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.


(4)
            Includes
                the operating results, cash flows, and assets relating to the Chinook
                Acquisition from the date of acquisition (March 19, 2007)
                forward.


(5)
            Includes
                the operating results, cash flows, and assets relating to the Akzo
                Nobel
                Acquisition from the date of acquisition (May 1, 2007)
                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”.





13


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 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. Propylene oxide and methyl chloride
      are also 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 the food,
      pharmaceutical, human and animal nutrition markets to enhance therapeutic
      performance, taste, processing, packaging and shelf-life.  Major end
      product 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
      development of brain 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.
      BCP also manufactures and sells methylamines.  Methylamines are a
      primary building block for the manufacture of choline products and are also
      used
      in a wide range of 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 in a highly competitive global marketplace.





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


14


The
      following tables summarize consolidated net sales by segment and business
      segment earnings from operations for the three years ended December
      31, 2007, 2006 and 2005 (in thousands):





Business
      Segment Net Sales:


2007
            
            
            2006
            
            
            2005Specialty
                Products
            
            $
            33,057
            
            
            $
            32,026
            
            
            $
            29,433Encapsulated/Nutritional
                Products
            
            
            49,919
            
            
            
            41,565
            
            
            
            32,499BCP
                Ingredients
            
            
            93,225
            
            
            
            27,314
            
            
            
            21,163Total
            
            $
            176,201
            
            
            $
            100,905
            
            
            $
            83,095





Business
      Segment Earnings From Operations:


2007
            
            
            2006
            
            
            2005Specialty
                Products
            
            $
            11,824
            
            
            $
            11,315
            
            
            $
            11,007Encapsulated/Nutritional
                Products
            
            
            7,194
            
            
            
            4,200
            
            
            
            3,217BCP
                Ingredients
            
            
            6,888
            
            
            
            3,647
            
            
            
            2,679Total
            
            $
            25,906
            
            
            $
            19,162
            
            
            $
            16,903





Fiscal
      Year 2007 compared to Fiscal Year 2006


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





Net
      Sales





Net
      sales
      for 2007 were $176,201, as compared with $100,905 for 2006, an increase of
      $75,296 or 74.6%. Net sales for the specialty products segment were $33,057
      for
      2007, as compared with $32,026 for 2006, an increase of $1,031 or 3.2%. This
      increase was principally due to an increase in sales volume, along with modest
      price increases for products in this segment. Net sales for the encapsulated
      /
      nutritional products segment were $49,919 for 2007, as compared with $41,565
      for
      2006, an increase of $8,354 or 20.1%.  This result was driven
      principally by increased global sales of human nutritional and choline products,
      and includes $1,952 from the Akzo Nobel Acquisition.  Sales of
      REASHURE®, Niashure and chelated minerals, our specialty animal nutrition and
      health products targeted for ruminant animals, and increases in the companion
      animal market also contributed to this growth. Net sales for the BCP Ingredients
      segment was $93,225 in 2007, as compared with $27,314 for 2006, an increase
      of
      $65,911 or 241.3%.  This result reflects sales from the Chinook
      Acquisition and the Akzo Nobel Acquisition in 2007, which contributed in the
      aggregate approximately $62,495 of the revenue in this segment. The remaining
      increase (approximately 12.5%) was due to increased volumes sold in the core
      dry
      and aqueous choline, as well as the specialty industrial product
      lines.





Operating
      Expenses





Operating
      expenses for 2007 increased to $21,024 from $14,844 for 2006, an increase of
      $6,180 or 41.6%.  This increase was due primarily to $2,300 of
      additional amortization expense, plus sales and technical personnel expense
      associated with the Chinook and Akzo Nobel acquisitions. We also incurred
      approximately $1,224 of commercial development expenses toward our
      pharmaceutical market initiatives in 2007.  With these increases,
      operating expenses were 11.9% of sales or 2.8 percentage points less than the
      operating expenses as a percent of sales incurred in 2006.  During
      2007 and 2006, the Company spent $2,514 and $2,019 respectively, on research
      and
      development programs, substantially all of which pertained to the Company’s
      encapsulated / nutritional products segment for both human and animal
      health.





Business
      Segment Earnings
      From Operations





As
      a
      result of the foregoing, earnings from operations for 2007 were $25,906 as
      compared to $19,162 for 2006, reflecting a 35.2% increase from year to year.
      Earnings from operations for the specialty products segment increased to $11,824
      in 2007 from $11,315 in 2006,an increase of $509
      or
      4.5%, due largely to increases in sales volume and modest sales price increases.
      These increases were partially offset


15


by
      higher
      raw material prices.Earnings from operations
      for the encapsulated / nutritional products segment increased to $7,194 in
      2007
      from $4,200 in 2006,an increase of $2,994
      or
      71.3%, as this segment was favorably affected by the Akzo Nobel Acquisition,
      increased volumes sold principally in the human choline markets and specialty
      animal nutrition and health markets.Earnings from operations
      for the BCP Ingredients segment, increased to $6,888 in 2007 from $3,647 in
      2006,an increase of
      $3,241 or 88.9%, as a result of the previously noted increased sales volumes
      and
      improved productivity, partially offset by certain petro-chemical raw material
      cost increases.





Other
      Expenses
      (Income)





Interest
      income for 2007 totaled $166, as compared to $128 for 2006.  This
      increase is attributable to an increase in the Company’s average cash balance
      during 2007. Interest expense, net of capitalized interest, was $1,562 for
      2007,
      as compared to $189 for 2006.  This increase is attributable to the
      increase in average current and long-term debt resulting from the Chinook
      Acquisition and Akzo Nobel Acquisition.  Other income of $319 for 2007
      is the result of favorable fluctuations in foreign currency exchange rates
      between the U.S. dollar (the reporting currency) and functional foreign
      currencies.





Income
      Tax
      Expense





The
      Company’s effective tax rate for 2007 and 2006 was 35.1% and 35.7%,
      respectively.  This decrease in the effective tax rate is primarily
      attributable to a domestic manufacturer's deduction and to a change in
      allocation relating to state income taxes. The adoption of Interpretation No.
      48, “ Accounting for Uncertainty in Income Taxes ” (“FIN 48”) adversely affected
      the 2007 income tax expense by $220 and the effective tax rate by
      0.9%.





Net
      Earnings





Primarily
      as a result of the above-noted increase in sales, net earnings were $16,118
      for
      2007, as compared with $12,278 for 2006, an increase of 31.3%.





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 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 Note 5 to our Consolidated Financial Statements).  The Company
      also experienced increased volumes sold in the human choline market, favorable
      changes in product mix in the domestic and international food markets, and
      volume improvements in sales of REASHURE®,
      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.





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


16


expense
      of $982 relating to the adoption of the provisions of SFAS No. 123R
      (revised 2004), “Share-Based Payment”, 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.





Business
      Segment 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 an 13.4% increase from year to year.
      Earnings from operations for the specialty products segment were $11,315,an increase of $308
      or
      2.8%, due largely to increases in sales volume and modest sales price increases.
      These increases were partially offset by higher raw material prices.Earnings from operations
      for the encapsulated / nutritional products segment increased 30.6% as this
      segment was 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. Earnings
      from operations for the BCP Ingredients segment were $3,647 as compared to
      $2,679 for 2005, reflecting a 36.1% increase from year to year. This segment
      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.





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 fromthe
      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.


17


LIQUIDITY
      AND CAPITAL
      RESOURCES





Contractual
      Obligations





The
      Company's contractual obligations and debt obligations, excluding revolver
      borrowings, as of December 31, 2007, are summarized in the table
      below:





Payments
                due by periodContractual
                Obligations
            
            Total
            
            
            Less
                than
              1
                year
            
            
            1-3
                years
            
            
            3-5
                years
            
            
            More
                than 5 yearsLong-term
                debt obligations
            
            $
            24,777
            
            
            $
            7,379
            
            
            $
            17,398
            
            
            $
            -
            
            
            $
            -Operating
                lease obligations (1)
            
            
            1,821
            
            
            
            797
            
            
            
            885
            
            
            
            104
            
            
            
            35Purchase
                obligations (2)
            
            
            8,068
            
            
            
            8,068
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            34,666
            
            
            $
            16,244
            
            
            $
            18,283
            
            
            $
            104
            
            
            $
            35





(1)
            
            Principally
                includes obligations associated with future minimum non-cancelable
                operating lease obligations (including the headquarters office space
                entered into in 2002).





(2)
            
            Principally
                includes open purchase orders with vendors for inventory not yet
                received
                or recorded on our balance sheet.





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 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 acquisition.  No such
      contingent consideration has been earned or paid in 2007.





As
      a
      result of the adoption of FIN 48 on January 1, 2007, we recorded a liability
      for
      uncertain tax positions, net of federal tax benefit, of $511. We are unable
      to
      reasonably estimate the amount or timing of payments for this liability, if
      any.





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





The
      Company expects its operations to continue generating sufficient cash flow
      to
      fund working capital requirements and necessary capital investments. The Company
      is actively pursuing additional acquisition candidates. The Company could seek
      additional bank loans or access to financial markets to fund such acquisitions,
      its operations, working capital, necessary capital investments or other cash
      requirements should it deem it necessary to do so.





Acquisitions
      and
      Dispositions





Effective
      April 30, 2007, pursuant to
      an asset purchase agreement dated March 30, 2007 (the “Akzo Nobel Asset Purchase
      Agreement”), the Company, through its European subsidiary, Balchem B.V.,
      completed an acquisition of the methylamines and choline chloride business
      and
      manufacturing facilities of Akzo Nobel Chemicals S.p.A., located in Marano
      Ticino, Italy (the “Akzo Nobel Acquisition”) for a provisional purchase price
      including acquisition costs of $9,165, subject to adjustment based on actual
      working capital and other adjustments.





On
      March 16, 2007, the Company, through
      BCP, entered into an asset purchase agreement (the "Asset Purchase Agreement")
      with Chinook Global Limited ("Chinook"), a privately held Ontario corporation,
      pursuant to which BCP acquired certain of Chinook's choline chloride business
      assets (the “Chinook Acquisition”) for a purchase price of approximately
      $29,000, plus the value of certain product inventories of approximately
      $1,840.  The Chinook Acquisition closed effective the same
      date.


18





On
      August
      24, 2006, pursuant to an asset purchase agreement of same date, the Company,
      through 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.





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





Cash





Cash
      and
      cash equivalents decreased to $2,307 at December 31, 2007 from $5,189 at
      December 31, 2006.  Working capital amounted to $16,139 at December
      31, 2007 as compared to $19,295 at December 31, 2006, a decrease of
      $3,156.





Operating
      Activities





Cash
      flows from operating activities provided $15,637 for 2007 compared to $16,370
      for 2006.  The decrease in cash flows from operating activities was
      primarily due to an increase in prepaid expenses and other and accounts
      receivable resulting from the Methylamines and Choline business acquired in
      the
      Akzo Nobel Acquisition and the customer list acquired in the Chinook Acquisition
      in which we did not acquire outstanding accounts
      receivable.  Combined, they contributed approximately $62,495 of
      revenue in 2007. This decrease was partially offset by an increase in net
      earnings, accounts payable and accrued expenses and depreciation and
      amortization expense.





Investing
      Activities





Capital
      expenditures were $4,869 for 2007 compared to $2,279 for 2006.  Cash
      paid in 2007 for the acquisition of certain business assets of Chinook Global
      Limited and the Akzo Nobel Methylamines and Choline business was
      $40,744.  $22,872 was paid for acquisitions in 2006.





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 1,158,692 shares
      at an
      average cost of $2.74 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 1,350,000
      shares, over and above those 1,158,692 shares previously repurchased under
      the
      program.  Under this extension, a total of 149,175 shares were
      purchased in 2005 at an average cost of $8.03 per share, none of which remained
      in treasury at December 31, 2007 or 2006.  During 2007 and 2006, no
      additional shares were purchased. 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.





At
      December 31, 2007, we had a total of $27,986 of debt outstanding, as compared
      to
      no debt outstanding at December 31, 2006.


19


On
      April
      30, 2007, the Company, and its principal bank entered into a Loan Agreement
      (the
“European Loan Agreement”) providing for an unsecured term loan of $10,244 (the
“European Term Loan”), the proceeds of which were used to fund the Akzo Nobel
      Acquisition (see Note 5) and initial working capital requirements. The European
      Term Loan is payable in equal monthly installments of principal, each equal
      to
      1/84th of the principal of the European Term Loan, together with accrued
      interest, with remaining principal and interest payable at maturity. The
      European Term Loan has a maturity date of May 1, 2010 and is subject to a
      monthly interest rate equal to EURIBOR plus 1%. At December 31, 2007, this
      interest rate was 5.288%.  The European Loan Agreement also provides
      for a short-term revolving credit facility of €2,000, translated to $2,946 as of
      December 31, 2007 (the "European Revolving Facility"). The European Revolving
      Facility is subject to a monthly interest rate equal to EURIBOR plus 1.25%,
      and
      accrued interest is payable monthly. The Company has drawn down €1,500 of the
      European Revolving Facility as of December 31, 2007. The European Revolving
      Facility has a maturity date of May 1, 2008.  Management believes that
      such facility will be renewed in the normal course of business.





On
      March
      16, 2007, the Company and its principal bank entered into a Loan Agreement
      (the
“New Loan Agreement”) providing for an unsecured term loan of $29,000 (the “New
      Term Loan”), the proceeds of which were used to fund the Chinook Acquisition
      (see Note 5). The New Term Loan is payable in equal monthly installments of
      principal, each equal to 1/60th of the principal of the New Term Loan, together
      with accrued interest, with remaining principal and interest payable at
      maturity. The New Term Loan has a maturity date of March 16, 2010 and is subject
      to a monthly interest rate equal to LIBOR plus 1%. At December 31, 2007, this
      interest rate was 6.027%. As of December 31, 2007, the Company has prepaid
      $10,000 of the New Term Loan. The New Loan Agreement also provides for a
      short-term revolving credit facility of $6,000 (the "New Revolving Facility").
      The New Revolving Facility is subject to a monthly interest rate equal to LIBOR
      plus 1%, and accrued interest is payable monthly. The Company has drawn down
      $1,000 of the New Revolving Facility as of December 31, 2007. The New Revolving
      Facility has a maturity date of May 31, 2009.  Management believes
      that such facility will be renewed in the normal course of
      business.





Proceeds
      from stock options exercised totaled $1,217 and $1,239 for 2007 and 2006,
      respectively. Dividend payments were $1,596 and $1,045 for 2007 and 2006,
      respectively.





Other
      Matters Impacting
      Liquidity





The
      Company currently provides postretirement benefits in the form of a retirement
      medical plan under a collective bargaining agreement covering eligible retired
      employees of its Verona, Missouri facility. The amount recorded on the Company’s
      balance sheet as of December 31, 2007 for this obligation is $805. The
      postretirement plan is not funded. Historical cash payments made under such
      plan
      have approximated $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.


20


Revenue
      Recognition





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





Revenue
      related to a process and
      product license agreement is recognized using the percentage of completion
      method and the progress to completion is measured using the efforts-expended
      method.  The Company follows the provisions of the 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


21


for
      doubtful accounts for estimated losses resulting from the inability of our
      customers to make required payments. Estimated losses are based on historical
      experience and any specific customer collection issues identified. If the
      financial condition of our customers were to deteriorate resulting in an
      impairment of their ability to make payments, additional allowances and related
      bad debt expense may be required.





Post-employment
      Benefits





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






In
      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 $300 as a reduction to the
      benefit obligation and $200, 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.





Beginning
        in fiscal 2007, we account for uncertainty in income taxes utilizing the
        Financial Accounting Standards Board’s Interpretation No. 48, “Accounting
        for Uncertainty in Income Taxes — an interpretation of FAS Statement
        No. 109” (“FIN 48”). This interpretation clarifies the accounting for
        uncertainty in income taxes recognized in an entity’s financial statements in
        accordance with SFAS 109. It prescribes a recognition threshold and
        measurement attribute for financial statement disclosure of tax positions
        taken
        or expected to be taken. This interpretation also provides guidance on
        derecognition, classification, interest and penalties, accounting in interim
        periods, and disclosures. The application of FIN 48 requires judgment
        related to the uncertainty in income taxes and could impact our effective
        tax
        rate.


22


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 $900 of compensation expense, net of tax, in 2006.  If
      factors change and we employ different assumptions in the 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 year ended December 31,
      2005.  If we had included the cost of employee stock option
      compensation in the financial statements for the year ended December 31, 2005
      our net earnings would have decreased by approximately $900, 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
      December 2007, the FASB issued SFAS No.141 (revised 2007), “Business
      Combinations”, or SFAS 141R. The purpose of issuing the statement is to replace
      current guidance in SFAS No.141 to better represent the economic value of a
      business combination transaction. The changes to be effected with SFAS 141R
      from
      the current guidance include, but are not limited to: (1) acquisition costs
      will be recognized separately from the acquisition; (2) known contractual
      contingencies at the time of the acquisition will be considered part of the
      liabilities acquired measured at their fair value; all other contingencies
      will
      be part of the liabilities acquired measured at their fair value only if it
      is
      more likely than not that they meet the definition of a liability;
      (3) contingent consideration based on the outcome of future events will be
      recognized and measured at the time of the acquisition; (4) business
      combinations achieved in stages (step acquisitions) will need to recognize
      the
      identifiable assets and liabilities, as well as noncontrolling interests, in
      the
      acquiree, at the full amounts of their fair values; and (5) a bargain
      purchase (defined as a business combination in which the total acquisition-date
      fair value of the identifiable net assets acquired exceeds the fair value of
      the
      consideration transferred plus any noncontrolling interest in the acquiree)
      will
      require that excess to be recognized as a gain attributable to the acquirer.
      SFAS 141R will be effective for any business combinations that occur after
      January 1, 2009.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
      in Consolidated Financial Statements — an amendment of ARB No. 51”, or
      SFAS 160. SFAS 160 was issued to improve the relevance, comparability,
      and transparency of financial information provided to investors by requiring
      all
      entities to report noncontrolling (minority) interests in subsidiaries in the
      same way, that is, as equity in the consolidated financial statements. Moreover,
      SFAS 160 eliminates the diversity that currently exists in accounting for
      transactions between an entity and noncontrolling interests by requiring they
      be
      treated as equity transactions. SFAS 160 will be effective January 1, 2009.
      The Company is currently evaluating the impact that SFAS 160 will have on
      its financial statements and disclosures.





In
      June
      2007, FASB ratified the consensus reached by the EITF on EITF Issue No. 07-3,
      "Accounting for Nonrefundable Advance Payments for Goods or Services to Be
      Used
      in Future Research and Development Activities" ("EITF 07-3"). EITF 07-3
      addresses the diversity that exists with respect to


23


the
      accounting for the non-refundable portion of a payment made by a research and
      development entity for future research and development activities. Under EITF
      07-3, an entity would defer and capitalize non-refundable advance payments
      made
      for research and development activities until the related goods are delivered
      or
      the related services are performed. EITF 07-3 will be effective for us beginning
      on January 1, 2008. The Company is currently evaluating the effect of EITF
      07-3
      on our consolidated financial statements.





The
      Company adopted the provisions of FASB Interpretation No.  48,
“Accounting for Uncertainty in Income Taxes”, or FIN 48, on January 1,
      2007.  FIN 48 clarifies whether or not to recognize assets or
      liabilities for tax positions taken that may be challenged by a taxing
      authority.  Additional information regarding FIN 48 is included in
      Note 8.





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.





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.  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.  As of December 31, 2007, the Company’s borrowings were
      under a bank term loan bearing interest at LIBOR plus 1.00%, a second bank
      term
      loan bearing interest at EURIBOR plus 1.00%, a revolving line of credit bearing
      interest at LIBOR plus 1.00% and a second revolving line of credit bearing
      interest at EURIBOR plus 1.25%.  A 100 basis point increase or
      decrease in interest rates, applied to the Company’s borrowings at December 31,
      2007, would result in an increase or decrease in annual interest expense and
      a
      corresponding reduction or increase in cash flow of approximately $280. The
      Company is exposed to market risks for changes in foreign currency rates and
      has
      exposure to commodity price risks, including prices of our primary raw
      materials. Our objective is to seek a reduction in the potential negative
      earnings impact of changes in foreign exchange rates and raw material pricing
      arising in our business activities. The Company manages these financial
      exposures, where possible, through pricing and operational means. Our practices
      may change as economic conditions change.


24





Item
                  8.
              Financial
                  Statements and Supplementary DataIndex
                  to Financial Statements and Supplementary Data:
              PageReport
                  of Independent Registered Public Accounting Firm
              26Consolidated
                  Balance Sheets as ofDecember
                  31, 2007 and 2006
              28Consolidated
                  Statements of Earnings for theyears
                  ended December 31, 2007, 2006 and 2005
              29Consolidated
                  Statements of Stockholders' Equityfor
                  the years ended December 31, 2007, 2006 and 2005
              30Consolidated
                  Statements of Cash Flowsfor
                  the years ended December 31, 2007, 2006 and 2005
              31Notes
                  to Consolidated Financial Statements
              32Report
                  of Independent Registered Public Accounting Firm
              55Schedule
                  II – Valuation and QualifyingAccounts
                  for the years ended December 31, 2007, 2006 and 2005
              56


25


REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Board of Directors and Stockholders


Balchem
      Corporation





We
      have
      audited the accompanying consolidated balance sheets of Balchem Corporation
      and
      Subsidiaries as of December 31, 2007 and 2006, and the related consolidated
      statements of earnings, stockholders' equity, and cash flows for each of the
      three years in the period ended December 31, 2007.  Our audit also
      included the financial statement schedule of Balchem Corporation listed in
      the
      Index at Item 8.  We also have audited Balchem Corporation's internal
      control over financial reporting as of December 31, 2007, 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 included in the accompanying Management’s Report on Internal
      Control Over Financial Reporting.  Our responsibility is to express an
      opinion on these financial statements and an opinion on 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 audits of the 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, assessing the risk that a material weakness exists, and testing
      and
      evaluating the design and operating effectiveness of internal control based
      on
      the assessed risk.  Our audits also included 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 8 to the consolidated financial statements, effective January
      1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting
      for
      Uncertainty in Income Taxes – an Interpretation of FASB No. 109.”  As
      discussed in Note 2 to the consolidated financial statements, in 2006 the
      Company adopted Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment”, using the modified prospective method.


26


In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Balchem Corporation as of December
      31, 2007 and 2006, and the results of its operations and its cash flows for
      each
      of the years in the three-year period ended December 31, 2007, in conformity
      with accounting principles generally accepted in the United States of
      America.  Also in our opinion, Balchem Corporation maintained, in all
      material respects, effective internal control over financial reporting as of
      December 31, 2007, based on criteria established in Internal Control—Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO).”





Balchem
      Corporation, through its European subsidiary, Balchem B.V., completed an
      acquisition of certain assets of Akzo Nobel Chemicals S.p.A. effective April
      30,
      2007. Management’s Report on Internal Control Over Financial Reporting as of
      December 31, 2007 excluded from its assessment of the effectiveness of Balchem
      Corporation’s internal control over financial reporting the operations of
      Balchem B.V. and Subsidiaries representing total assets of $26,984,000 and
      total
      revenues of $30,457,000 included in the consolidated financial statements of
      Balchem Corporation and Subsidiaries as of and for the year ended
      December 31, 2007. Our audit of internal control over financial reporting
      of Balchem Corporation and Subsidiaries also excluded an evaluation of the
      effectiveness of internal control over financial reporting of Balchem B.V.
      and
      Subsidiaries.








/s/McGladrey
      & Pullen, LLP


New
      York,
      New York


March
      17,
      2008





27




BALCHEM
                  CORPORATIONConsolidated
                  Balance SheetsDecember
                  31, 2007 and 2006(Dollars
                  in thousands, except share and per share data)Assets
              
              2007
              
              
              2006Current
                  assets:Cash
                  and cash equivalents
              
              $
              2,307
              
              
              $
              5,189Accounts
                  receivable, net of allowance for doubtful accounts of $50 and $50
                  atDecember
                  31, 2007 and 2006, respectively
              
              
              29,640
              
              
              
              11,578Inventories
              
              
              15,680
              
              
              
              9,918Prepaid
                  expenses
              
              
              2,456
              
              
              
              1,754Deferred
                  income taxes
              
              
              515
              
              
              
              416Other
                  current assets
              
              
              1,871
              
              
              
              -Total
                  current assets
              
              
              52,469
              
              
              
              28,855Property,
                  plant and equipment, net
              
              
              42,080
              
              
              
              31,313Goodwill
              
              
              26,363
              
              
              
              25,253Intangible
                  assets with finite lives, net
              
              
              33,451
              
              
              
              6,912Other
                  assets
              
              
              61
              
              
              
              -Total
                  assets
              
              $
              154,424
              
              
              $
              92,333Liabilities
                  and
                  Stockholders' EquityCurrent
                  liabilities:Trade
                  accounts payable
              
              $
              11,190
              
              
              $
              3,010Accrued
                  expenses
              
              
              1,832
              
              
              
              1,827Accrued
                  compensation and other benefits
              
              
              8,684
              
              
              
              1,869Customer
                  deposits and other deferred revenue
              
              
              42
              
              
              
              1,072Dividends
                  payable
              
              
              1,975
              
              
              
              1,596Income
                  tax payable
              
              
              2,019
              
              
              
              186Current
                  portion of long-term debt
              
              
              7,379
              
              
              
              -Revolver
                  borrowings
              
              
              3,209
              
              
              
              -Total
                  current liabilities
              
              
              36,330
              
              
              
              9,560Long-term
                  debt
              
              
              17,398
              
              
              
              -Deferred
                  income taxes
              
              
              6,087
              
              
              
              6,627Other
                  long-term obligations
              
              
              1,529
              
              
              
              784Total
                  liabilities
              
              
              61,344
              
              
              
              16,971Commitments
                  and
                  contingencies (note 11)Stockholders'
                  equity:Preferred
                  stock, $25 par value. Authorized 2,000,000shares;
                  none issued and outstanding
              
              
              -
              
              
              
              -Common
                  stock, $.0667 par value. Authorized 25,000,000 shares;
                  17,979,353shares
                  issued and outstanding at December 31, 2007 and 17,733,849
                  sharesissued
                  and outstanding at December 31, 2006
              
              
              804
              
              
              
              788Additional
                  paid-in capital
              
              
              14,286
              
              
              
              10,393Retained
                  earnings
              
              
              77,840
              
              
              
              63,988Accumulated
                  other comprehensive income
              
              
              150
              
              
              
              193Total
                  stockholders' equity
              
              
              93,080
              
              
              
              75,362Total
                  liabilities and stockholders' equity
              
              $
              154,424
              
              
              $
              92,333




See
      accompanying notes to consolidated financial statements.




28




BALCHEM
                  CORPORATIONConsolidated
                  Statements of EarningsYears
                  Ended December 31, 2007, 2006 and 2005(In
                  thousands, except per share data)2007
              
              
              2006
              
              
              2005Net
                  sales
              
              $
              176,201
              
              
              $
              100,905
              
              
              $
              83,095Cost
                  of sales
              
              
              129,271
              
              
              
              66,899
              
              
              
              54,415Gross
                  margin
              
              
              46,930
              
              
              
              34,006
              
              
              
              28,680Operating
                  expenses:Selling
                  expenses
              
              
              11,930
              
              
              
              6,907
              
              
              
              4,739Research
                  and development expenses
              
              
              2,514
              
              
              
              2,019
              
              
              
              2,053General
                  and administrative expenses
              
              
              6,580
              
              
              
              5,918
              
              
              
              4,98521,024
              
              
              
              14,844
              
              
              
              11,777Earnings
                  from operations
              
              
              25,906
              
              
              
              19,162
              
              
              
              16,903Other
                  expenses (income):Interest
                  income
              
              
              (166
              )
              
              
              (128
              )
              
              
              (214
              )Interest
                  expense
              
              
              1,562
              
              
              
              189
              
              
              
              8Other,
                  net
              
              
              (319
              )
              
              
              -
              
              
              
              (82
              )Earnings
                  before income tax expense
              
              
              24,829
              
              
              
              19,101
              
              
              
              17,191Income
                  tax expense
              
              
              8,711
              
              
              
              6,823
              
              
              
              6,237Net
                  earnings
              
              $
              16,118
              
              
              $
              12,278
              
              
              $
              10,954Basic
                  net earnings per common share
              
              $
              0.91
              
              
              $
              0.70
              
              
              $
              0.63Diluted
                  net earnings per common share
              
              $
              0.87
              
              
              $
              0.67
              
              
              $
              0.61




See
      accompanying notes to consolidated financial statements.




29




BALCHEM
                    CORPORATIONConsolidated
                    Statements of Stockholders' EquityYears
                    Ended December 31, 2007, 2006 and 2005(Dollars
                    in thousands, except share and per share
                    data)
  AccumulatedAdditional
                
                
                
                
                
                Other
                
                
                
                
                
                
                
                
                TotalCommon
                    Stock
                
                
                Paid-in
                
                
                Retained
                
                Comprehensive
                
                Treasury
                    Stock
                
                
                Stockholders'Shares
                
                
                Amount
                
                
                Capital
                
                
                Earnings
                
                
                Income
                
                
                Shares
                
                
                Amount
                
                
                EquityBalance
                    - December 31, 2004
                
                
                17,147,607
                
                
                $
                762
                
                
                $
                6,075
                
                
                $
                43,397
                
                
                $
                -
                
                
                
                -
                
                
                $
                -
                
                
                $
                50,234Net
                    earnings
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                10,954
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                10,954Dividends
                    ($.06 per share)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,045
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,045
                )Treasury
                    shares purchased
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (99,450
                )
                
                
                (1,198
                )
                
                
                (1,198
                )Shares
                    issued under employee benefit plans and other
                
                
                52,133
                
                
                
                1
                
                
                
                210
                
                
                
                -
                
                
                
                -
                
                
                
                3,426
                
                
                
                41
                
                
                
                252Shares
                    issued under stock option plans andan
                    income tax benefit of $327
                
                
                261,707
                
                
                
                13
                
                
                
                1,723
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,736Balance
                    - December 31, 2005
                
                
                17,461,447
                
                
                
                776
                
                
                
                8,008
                
                
                
                53,306
                
                
                
                -
                
                
                
                (96,024
                )
                
                
                (1,157
                )
                
                
                60,933Net
                    earnings
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12,278
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12,278Dividends
                    ($.09 per share)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,596
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,596
                )Shares
                    issued under employee benefit plans and other
                
                
                1,079
                
                
                
                -
                
                
                
                70
                
                
                
                -
                
                
                
                -
                
                
                
                21,933
                
                
                
                264
                
                
                
                334Shares
                    and options issued under stock option plans andan
                    income tax benefit of $878
                
                
                271,323
                
                
                
                12
                
                
                
                2,315
                
                
                
                -
                
                
                
                -
                
                
                
                74,091
                
                
                
                893
                
                
                
                3,220Adjustment
                    to initially apply FASB Statement No. 158,net
                    of tax
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                193
                
                
                
                -
                
                
                
                -
                
                
                
                193Balance
                    - December 31, 2006
                
                
                17,733,849
                
                
                
                788
                
                
                
                10,393
                
                
                
                63,988
                
                
                
                193
                
                
                
                -
                
                
                
                -
                
                
                
                75,362Net
                    earnings
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                16,118
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                16,118Dividends
                    ($.11 per share)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,975
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,975
                )Shares
                    issued under employee benefit plans and other
                
                
                20,869
                
                
                
                1
                
                
                
                378
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                379Shares
                    and options issued under stock option plans andan
                    income tax benefit of $677
                
                
                224,635
                
                
                
                15
                
                
                
                3,515
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,530Cumulative
                    effect of adjustment from adoption of FIN 48
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (291
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (291
                )Net
                    change in pension asset/liability, net of taxes of $26
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (43
                )
                
                
                -
                
                
                
                -
                
                
                
                (43
                )Balance
                    - December 31, 2007
                
                
                17,979,353
                
                
                $
                804
                
                
                $
                14,286
                
                
                $
                77,840
                
                
                $
                150
                
                
                
                -
                
                
                $
                -
                
                
                $
                93,080




See
      accompanying notes to consolidated financial statements.




30




BALCHEM
                  CORPORATIONConsolidated
                  Statements of Cash FlowsYears
                  Ended December 31, 2007, 2006 and 2005(In
                  thousands)2007
              
              
              2006
              
              
              2005Cash
                  flows from operating activities:Net
                  earnings
              
              $
              16,118
              
              
              $
              12,278
              
              
              $
              10,954Adjustments
                  to reconcile net earnings tonet
                  cash provided by operating  activities:Depreciation
                  and amortization
              
              
              6,376
              
              
              
              3,445
              
              
              
              2,809Stock
                  compensation expense
              
              
              1,636
              
              
              
              1,097
              
              
              
              -Shares
                  issued under employee benefit plans
              
              
              379
              
              
              
              343
              
              
              
              257Deferred
                  income tax expense
              
              
              (617
              )
              
              
              104
              
              
              
              599(Recovery
                  of) provision for doubtful accounts
              
              
              -
              
              
              
              -
              
              
              
              (32
              )Income
                  tax benefit from stock options exercised
              
              
              -
              
              
              
              -
              
              
              
              327Foreign
                  currency transaction gain
              
              
              (195
              )
              
              
              -
              
              
              
              -Gain
                  on sale of assets
              
              
              (11
              )
              
              
              -
              
              
              
              (82
              )Other
              
              
              26
              
              
              
              -
              
              
              
              -Changes
                  in assets and liabilitiesAccounts
                  receivable
              
              
              (15,409
              )
              
              
              (57
              )
              
              
              (2,684
              )Inventories
              
              
              481
              
              
              
              (827
              )
              
              
              (1,496
              )Prepaid
                  expenses
              
              
              (2,218
              )
              
              
              36
              
              
              
              (263
              )Accounts
                  payable and accrued expenses
              
              
              7,634
              
              
              
              (212
              )
              
              
              2,749Income
                  taxes
              
              
              1,803
              
              
              
              218
              
              
              
              172Customer
                  deposits and other deferred revenue
              
              
              (1,030
              )
              
              
              (101
              )
              
              
              334Other
                  long-term obligations
              
              
              664
              
              
              
              46
              
              
              
              54Net
                  cash provided by operating activities
              
              
              15,637
              
              
              
              16,370
              
              
              
              13,698Cash
                  flows from investing activities:Capital
                  expenditures
              
              
              (4,869
              )
              
              
              (2,279
              )
              
              
              (1,769
              )Proceeds
                  from sale of property, plant and equipment
              
              
              11
              
              
              
              -
              
              
              
              389Cash
                  paid for intangible assets acquired
              
              
              (172
              )
              
              
              (81
              )
              
              
              (144
              )Cash
                  paid for acquisitions
              
              
              (40,744
              )
              
              
              (22,872
              )
              
              
              (11,419
              )Net
                  cash used in investing activities
              
              
              (45,774
              )
              
              
              (25,232
              )
              
              
              (12,943
              )Cash
                  flows from financing activities:Proceeds
                  from long-term debt
              
              
              38,946
              
              
              
              10,000
              
              
              
              -Principal
                  payments on long-term debt
              
              
              (15,106
              )
              
              
              (10,000
              )
              
              
              -Proceeds
                  from short-term obligations
              
              
              3,684
              
              
              
              -
              
              
              
              -Repayment
                  of short-term obligations
              
              
              (733
              )
              
              
              -
              
              
              
              -Proceeds
                  from stock options exercised
              
              
              1,217
              
              
              
              1,239
              
              
              
              1,409Excess
                  tax benefits from stock compensation
              
              
              677
              
              
              
              878
              
              
              
              -Dividends
                  paid
              
              
              (1,596
              )
              
              
              (1,045
              )
              
              
              (685
              )Purchase
                  of treasury stock
              
              
              -
              
              
              
              -
              
              
              
              (1,198
              )Other
                  financing activities
              
              
              -
              
              
              
              (17
              )
              
              
              (19
              )Net
                  cash provided by (used in) financing activities
              
              
              27,089
              
              
              
              1,055
              
              
              
              (493
              )Effect
                  of exchange rate changes on cash
              
              
              166
              
              
              
              -
              
              
              
              -Increase
                  (decrease) in cash and cash equivalents
              
              
              (2,882
              )
              
              
              (7,807
              )
              
              
              262Cash
                  and cash equivalents beginning of year
              
              
              5,189
              
              
              
              12,996
              
              
              
              12,734Cash
                  and cash equivalents end of year
              
              $
              2,307
              
              
              $
              5,189
              
              
              $
              12,996




See
        accompanying notes to consolidated financial statements.






31




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., Chelated Minerals Corporation, Balchem BV, Balchem Trading BV,
      and Balchem Italia Srl (“Balchem” or the “Company”)), incorporated in the State
      of Maryland in 1967, is engaged in the development, manufacture and marketing
      of
      specialty performance ingredients and products for the food, nutritional, feed,
      pharmaceutical and medical sterilization industries.





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 12 below
      is recognized using the percentage of completion method and the progress to
      completion is measured using the efforts-expended method.  The Company
      follows the provisions of the 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 investments with a maturity of three months
      or less to be cash equivalents.





Inventories





Inventories
      are stated at the lower of cost or market, with cost generally determined on
      a
      first-in, first-out basis, and have been reduced by an allowance for excess
      or
      obsolete inventories.  Cost elements include material, labor and
      manufacturing overhead.  In November 2004, the Financial Accounting
      Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No.
      151, “Inventory Costs.” The new statement amends Accounting Research Bulletin
      No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
      amounts of idle facility expense, freight, handling costs, and wasted material.
      This statement requires that those items be recognized as current period charges
      and requires that allocation of fixed production overheads to the cost of
      conversion be based on the normal capacity of the production
      facilities.  The provisions of this statement were applied
      prospectively for inventory costs incurred


32


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
              15-25yearsEquipment
              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. The Company capitalized
      interest costs of $150, $-0-and $-0- in 2007, 2006 and 2005,
      respectively.





Business
      Concentrations





Financial
      instruments that subject the Company to credit risk consist primarily of
      investments and accounts receivable. Investments are managed within established
      guidelines to mitigate risks. Accounts receivable subject the Company to credit
      risk partially due to the concentration of amounts due from customers. 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. In 2007
      and 2006, no customer accounted for more than 10% of total net
      sales.





Goodwill
      and Acquired
      Intangible Assets





Goodwill
      represents the excess of costs over fair value of assets of businesses acquired.
      The Company adopted the provisions of SFAS No. 141, “Business Combinations”
(“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
      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, 2007 and 2006, 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 $26,363 at December 31, 2007
      and $25,253 at December 31, 2006, subject to the provisions of SFAS Nos. 141
      and
      142.  Unamortized goodwill is allocated to the Company’s reportable
      segments as follows:


33





2007
            
            
            2006Specialty
                Products
            
            $
            5,089
            
            
            $
            5,089Encapsulated/Nutritional
                Products
            
            
            20,186
            
            
            
            20,164BCP
                Ingredients
            
            
            1,088
            
            
            
            -Total
            
            $
            26,363
            
            
            $
            25,253




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
            
            
            10Regulatory
                re-registration costs
            
            
            10Patents
                & trade secrets
            
            15
              - 17Trademarks
                & trade names
            
            
            17Other
            
            
            5





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 and revenues and expenses during the reporting
      period. 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, 2007 and 2006 does not differ materially from the
      aggregate carrying values of its financial instruments recorded in the
      accompanying consolidated balance sheets. The estimated fair value amounts
      have
      been determined by the Company using available market information and
      appropriate valuation methodologies. Considerable judgment is necessarily
      required in interpreting market data to develop the estimates of fair value,
      and, accordingly, the estimates are not necessarily indicative of the amounts
      that the Company could realize in a current market exchange. The Company’s
      financial instruments, principally cash equivalents, accounts receivable,
      accounts payable and accrued liabilities, are carried at cost which approximates
      fair value due to the short-term maturity of these instruments.





34


Cost
      of
      Sales





Cost
      of
      sales are primarily comprised of raw materials and supplies consumed in the
      manufacture of product, as well as manufacturing labor, maintenance labor,
      depreciation expense, and direct overhead expense necessary to convert purchased
      materials and supplies into finished product. Cost of sales also includes
      inbound freight costs, outbound freight costs for shipping products to
      customers, warehousing costs, quality control and obsolescence
      expense.





Selling,
      General and
      Administrative  Expenses





Selling
      expenses consist primarily of compensation and benefit costs, trade promotions,
      advertising, commissions and other marketing costs. General and administrative
      expenses consist primarily of payroll and benefit costs, occupancy and operating
      costs of corporate offices, depreciation and amortization expense on
      non-manufacturing assets, information systems costs and other miscellaneous
      administrative costs.





Research
      and
      Development





Research
      and development costs are expensed as incurred.





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).





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 SFAS 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.





35


Impairment
      of Long-lived
      Assets





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





New
      Accounting
      Pronouncements





In
      December 2007, the FASB issued SFAS No.141 (revised 2007), “Business
      Combinations”, or SFAS 141R. The purpose of issuing the statement is to replace
      current guidance in SFAS No.141 to better represent the economic value of a
      business combination transaction. The changes to be effected with SFAS 141R
      from
      the current guidance include, but are not limited to: (1) acquisition costs
      will be recognized separately from the acquisition; (2) known contractual
      contingencies at the time of the acquisition will be considered part of the
      liabilities acquired measured at their fair value; all other contingencies
      will
      be part of the liabilities acquired measured at their fair value only if it
      is
      more likely than not that they meet the definition of a liability;
      (3) contingent consideration based on the outcome of future events will be
      recognized and measured at the time of the acquisition; (4) business
      combinations achieved in stages (step acquisitions) will need to recognize
      the
      identifiable assets and liabilities, as well as noncontrolling interests, in
      the
      acquiree, at the full amounts of their fair values; and (5) a bargain
      purchase (defined as a business combination in which the total acquisition-date
      fair value of the identifiable net assets acquired exceeds the fair value of
      the
      consideration transferred plus any noncontrolling interest in the acquiree)
      will
      require that excess to be recognized as a gain attributable to the acquirer.
      SFAS 141R will be effective for any business combinations that occur after
      January 1, 2009.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
      in Consolidated Financial Statements — an amendment of ARB No. 51”, or
      SFAS 160. SFAS 160 was issued to improve the relevance, comparability,
      and transparency of financial information provided to investors by requiring
      all
      entities to report noncontrolling (minority) interests in subsidiaries in the
      same way, that is, as equity in the consolidated financial statements. Moreover,
      SFAS 160 eliminates the diversity that currently exists in accounting for
      transactions between an entity and noncontrolling interests by requiring they
      be
      treated as equity transactions. SFAS 160 will be effective January 1, 2009.
      The Company is currently evaluating the impact that SFAS 160 will have on
      its financial statements and disclosures.





In
      June
      2007, FASB ratified the consensus reached by the EITF on EITF Issue No. 07-3,
      "Accounting for Nonrefundable Advance Payments for Goods or Services to Be
      Used
      in Future Research and Development Activities" ("EITF 07-3"). EITF 07-3
      addresses the diversity that exists with respect to the accounting for the
      non-refundable portion of a payment made by a research and development entity
      for future research and development activities. Under EITF 07-3, an entity
      would
      defer and capitalize non-refundable advance payments made for research and
      development activities until the related goods are delivered or the related
      services are performed. EITF 07-3 will be effective for us beginning on January
      1, 2008. The Company is currently evaluating the effect of EITF 07-3 on our
      consolidated financial statements.





The
      Company adopted the provisions of FASB Interpretation No.  48,
“Accounting for Uncertainty in Income Taxes”, or FIN 48, on January 1,
      2007.  FIN 48 clarifies whether or not to recognize assets or
      liabilities for tax positions taken that may be challenged by a taxing
      authority.  Additional information regarding FIN 48 is included in
      Note 8.





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


36


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.





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 SFAS No. 123, “Accounting for
      Stock-Based Compensation,” (“SFAS 123”). No stock-based compensation cost was
      recognized in the Statement of Earnings for the year ended December 31, 2005,
      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 years ended December 31, 2007 and 2006
      include (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
      required by SFAS 123R, the Company has made an estimate of expected forfeitures,
      based on its historical experience, and is recognizing compensation cost only
      for those stock-based compensation awards expected to vest.





Additionally,
      since adoption of SFAS 123R, excess tax benefits related to stock compensation
      are presented as a cash inflow from financing activities. This change had the
      effect of decreasing cash flows from operating activities and increasing cash
      flows from financing activities by $677 and $878 for the years ended December
      31, 2007 and 2006, respectively.





The
      Company’s results for the year ended December 31, 2007 and 2006 reflected the
      following compensation cost as a result of adopting SFAS 123R and such
      compensation cost had the following effects on net earnings and basic and
      diluted earnings per share:





Year
                EndedDecember
                31,2007
            
            
            2006Cost
                of sales
            
            $
            187
            
            
            $
            115Operating
                expenses
            
            
            1,449
            
            
            
            982Net
                earnings
            
            
            1,118
            
            
            
            888Basic
                EPS
            
            
            .06
            
            
            
            .05Diluted
                EPS
            
            $
            .06
            
            
            $
            .05




The
      following table illustrates the effect on net income and earnings per share
      if
      the fair value based method had been applied to the period before adoption
      of
      SFAS 123R (in thousands, except per share data):


37





Year
                EndedDecember 31, 2005Net
                earnings
            
            $
            10,954Stock-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
            
            
            904Pro
                forma net earnings
            
            $
            10,050Basic
                earnings per common share:As
                reported
            
            $
            0.63Pro
                forma
            
            $
            0.58Diluted
                earnings per common share:As
                reported
            
            $
            0.61Pro
                forma
            
            $
            0.55




On
      December 31, 2007, 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.
      Options granted under the 1999 Stock Plan expire ten years from the date of
      the
      grant. 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,
      2007, the plans had 723,678 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


38


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
                EndedWeighted
                Average Assumptions:
            
            December
                31, 2007
            
            December
                31, 2006
            
            December
                31,
              2005Expected
                Volatility
            
            
            27.0
            %
            
            
            26.4
            %
            
            
            28.9
            %Expected
                Term (in years)
            
            
            3.7
            
            
            
            4.5
            
            
            
            4.8Risk-Free
                Interest Rate
            
            
            4.1
            %
            
            
            3.8
            %
            
            
            3.6
            %Dividend
                Yield
            
            
            0.3
            %
            
            
            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 2007, 2006, and 2005 for all plans is as
      follows:





2007
            
            #
                of
              Shares
              (000s)
            
            Weighted
                Average
              Exercise
                PriceOutstanding
                at beginning of year
            
            
            2,170
            
            
            $
            10.13Granted
            
            
            10
            
            
            
            18.00Exercised
            
            
            (220
            )
            
            
            5.54Cancelled
            
            
            (16
            )
            
            
            14.34Outstanding
                at end of year
            
            
            1,944
            
            
            $
            10.66Exercisable
                at end of year
            
            
            1,488
            
            
            $
            9.09





39





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





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





The
      aggregate intrinsic value for outstanding stock options was $22,786 and $15,357
      at December 31, 2007 and 2006, respectively, with a weighted average remaining
      contractual term of 6.7 years at December 31, 2007.  Exercisable stock
      options at December 31, 2007 had an aggregate intrinsic value of $19,781 with
      a
      weighted average remaining contractual term of 6.2 years.





Other
      information pertaining to option activity during the years ended December 31,
      2007 and 2006 was as follows:





Year
                Ended
              December
                31,2007
            
            
            2006Weighted-average
                fair value of options granted
            
            $
            6.44
            
            
            $
            4.91Total
                intrinsic value of stock options exercised ($000s)
            
            $
            2,721
            
            
            $
            2,929





Additional
      information related to stock options outstanding under all plans at December
      31,
      2007 is as follows:





Options
                Outstanding
            
            
            Options
                ExercisableRange
                of Exercise Prices
            
            
            SharesOutstanding(000s)
            WeightedAverageRemaining
                Contractual Term
            
            WeightedAverageExercise
              Price
            
            
            Number
                Exercisable(000s)
            
            WeightedAverageExercise
              Price$
            1.85 - $ 6.83
            
            
            
            604
            
            4.8
                years
            
            $
            6.18
            
            
            
            604
            
            
            $
            6.187.13 - 13.19
            
            
            
            598
            
            6.8
                years
            
            
            9.26
            
            
            
            566
            
            
            
            9.1213.81 - 20.56
            
            
            
            742
            
            8.2
                years
            
            
            15.42
            
            
            
            318
            
            
            
            14.541,944
            
            6.7
                years
            
            $
            10.66
            
            
            
            1,488
            
            
            $
            9.09







Non-vested
      restricted stock activity for the years ended December 31, 2007 and 2006 is
      summarized below:






40






Shares
                (000s)
            
            
            Weighted
              Average
                Grant
              Date
                Fair
              ValueNon-vested
                balance as of December 31, 2006
            
            
            113
            
            
            $
            16.40Granted
            
            
            5
            
            
            
            18.61Vested
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -Non-vested
                balance as of December 31, 2007
            
            
            118
            
            
            $
            16.49





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





As
      of
      December 31, 2007 and 2006, there was $2,586 and $4,036, respectively, of total
      unrecognized compensation cost related to non-vested share-based compensation
      arrangements granted under the plans. As of December 31, 2007, the unrecognized
      compensation cost is expected to be recognized over a weighted-average period
      of
      2 years. We estimate that share-based compensation expense for the year ended
      December 31, 2008 will be approximately $1,950.





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.





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 1,158,692 shares
      at an
      average cost of $2.74 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 1,350,000
      shares, over and above those 1,158,692 shares previously repurchased under
      the
      program. Under this extension, a total of 149,175 shares were purchased in
      2005
      at an average cost of $8.03 per share, none of which remained in treasury at
      December 31, 2007 or 2006.  During 2007 and 2006, no additional shares
      were purchased. 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.










41








NOTE
      3 -
      INVENTORIESInventories at December 31, 2007 and 2006 consisted of
      the following:





2007
            
            
            2006Raw
                materials
            
            $
            6,522
            
            
            $
            4,264Work
                in progress
            
            
            818
            
            
            
            143Finished
                goods
            
            
            8,340
            
            
            
            5,511Total
                inventories
            
            $
            15,680
            
            
            $
            9,918





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 inventory was $174 and $147 at December
      31, 2007 and 2006, respectively.





NOTE
      4 - PROPERTY, PLANT AND
      EQUIPMENT





Property,
      plant and equipment at December 31, 2007 and 2006 are summarized as
      follows:





2007
            
            
            2006Land
            
            $
            2,152
            
            
            $
            650Building
            
            
            15,520
            
            
            
            11,640Equipment
            
            
            45,599
            
            
            
            38,545Construction
                in progress
            
            
            3,067
            
            
            
            1,24766,338
            
            
            
            52,082Less:
                Accumulated depreciation
            
            
            24,258
            
            
            
            20,769Property,
                plant and equipment, net
            
            $
            42,080
            
            
            $
            31,313





Depreciation
      expense was $3,466, $2,842 and $2,686 for the years ended December 31, 2007,
      2006 and 2005, respectively.





NOTE
      5 -
      ACQUISITIONS





Akzo
      Nobel
      Acquisition





Effective
      April 30, 2007, pursuant to an asset purchase agreement dated March 30, 2007,
      the Company, through its European subsidiary, Balchem B.V., completed an
      acquisition of the methylamines and choline chloride business and manufacturing
      facilities of Akzo Nobel Chemicals S.p.A., located in Marano Ticino, Italy
      (the
“Akzo Nobel Acquisition”) for a purchase price, including acquisition costs, of
      $9,165, which excludes working capital acquired.





The
      Akzo
      Nobel 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 at the date of acquisition.
      The
      allocation of the total purchase price, including acquisition costs, was based
      on the estimated fair values as of April 30, 2007. The purchase price including
      certain working capital acquired has been allocated as follows:





42





Fair
                Value Recorded
              in
                Purchase AccountingProperty
                plant & equipment
            
            $
            7,994Short-term
                receivable
            
            
            2,462Inventories
            
            
            4,323Goodwill
            
            
            1,088Other
            
            
            83Accounts
                payable and accrued expenses
            
            
            (8,213
            )Total
            
            $
            7,737





Chinook
      Acquisition





On
      March
      16, 2007, the Company, through its wholly-owned subsidiary BCP Ingredients,
      Inc.
      ("BCP"), entered into an asset purchase agreement with Chinook Global Limited
      ("Chinook"), a privately held Ontario corporation, pursuant to which BCP
      acquired certain of Chinook's choline chloride business assets (the “Chinook
      Acquisition”) for a purchase price of approximately $29,000, which excludes
      working capital acquired.  The acquisition closed effective the same
      date.





The
      Chinook 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 at the date of
      acquisition. The allocation of the total purchase price, including acquisition
      costs, was based on the estimated fair values as of March 16, 2007. The purchase
      price including certain working capital acquired has been allocated as
      follows:





Fair
                Value Recorded
              in
                Purchase AccountingCustomer
                list
            
            $
            29,262Inventory
            
            
            1,840Short-term
                receivable
            
            
            1,850Short-term
                obligation
            
            
            (870
            )Other
            
            
            73Total
            
            $
            32,155





The
      short-term receivable was included in other current assets.





Pro
      Forma Summary of Operations





The
      following unaudited pro forma information has been prepared as if the Chinook
      Acquisition had occurred on January 1, 2007 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 Chinook Acquisition had occurred
      at the beginning of the periods presented and is not intended to be a projection
      of future results.





43





Pro
                Forma
              Year
                EndedDecember
                31,2007Net
                sales
            
            $
            185,188Net
                earnings
            
            
            16,595Basic
                EPS
            
            
            .93Diluted
                EPS
            
            
            .89





St.
      Gabriel
      Acquisition





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 19 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. In February 2007, the facility was placed into service.





CMC
      Acquisition





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 of approximately $500. 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 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 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. The excess of the purchase price over the
      identifiable intangible and net tangible assets was allocated to goodwill.
      The
      purchase price including certain working capital acquired has been allocated
      as
      follows:





Fair
                Value Recorded
              in
                Purchase AccountingAccounts
                receivable
            
            $
            884Inventory
            
            
            552Property,
                plant and equipment
            
            
            1,980Current
                liabilities
            
            
            (388
            )Other
                long-term liabilities
            
            
            (2,368
            )Goodwill
            
            
            11,925Other
                intangible assets
            
            
            5,334Total
            
            $
            17,919





44


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
                EndedDecember
                31,2006
            
            
            2005Net
                sales
            
            $
            101,639
            
            
            $
            89,117Net
                earnings
            
            
            12,284
            
            
            
            11,438Basic
                EPS
            
            
            .70
            
            
            
            .66Diluted
                EPS
            
            $
            .67
            
            
            $
            .63





Loders
      Croklaan
      Acquisition





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





The
      Loders Croklaan Acquisition 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 acquisition. As of December 31, 2007,
      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 AccountingEquipment
            
            $
            1,436Customer
                List
            
            
            1,350Patent
            
            
            140Goodwill
            
            
            6,982Total
            
            $
            9,908





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


45




Pro
      Forma Summary of Operations




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





Pro
                FormaYear
                Ended
              December
                31,2005Net
                sales
            
            $
            86,382Net
                earnings
            
            
            11,422Basic
                EPS
            
            
            .66Diluted
                EPS
            
            $
            .63





NOTE
      6 - INTANGIBLE ASSETS
      WITH FINITE LIVES





As
      of
      December 31, 2007 and 2006, the Company had identifiable intangible assets
      as
      follows:





Amortization
              Period
              (In
                years)
            
            2007
              Gross
              Carrying
              Amount
            
            
            2007
              Accumulated
                Amortization
            
            
            2006
              Gross
              Carrying
              Amount
            
            
            2006
              Accumulated
                AmortizationCustomer
                lists
            
            
            10
            
            
            $
            34,150
            
            
            $
            3,178
            
            
            $
            4,888
            
            
            $
            497Regulatory
                re-registration costs
            
            
            10
            
            
            
            28
            
            
            
            -
            
            
            
            28
            
            
            
            -Patents
                & trade secrets
            
            
            15-17
            
            
            
            1,621
            
            
            
            311
            
            
            
            1,550
            
            
            
            221Trademarks
                & trade names
            
            
            17
            
            
            
            884
            
            
            
            146
            
            
            
            876
            
            
            
            94Other
            
            
            5
            
            
            
            565
            
            
            
            162
            
            
            
            457
            
            
            
            75$
            37,248
            
            
            $
            3,797
            
            
            $
            7,799
            
            
            $
            887





Amortization
      of identifiable intangible assets was approximately $2,910, $603 and $123 for
      2007, 2006 and 2005, respectively. Assuming no change in the gross carrying
      value of identifiable intangible assets, the estimated amortization expense
      is
      approximately $3,636 per annum for 2008 through 2009, approximately $3,623
      per
      annum for 2010, approximately $3,614 per annum for 2011 and approximately $3,603
      per annum for 2012. At December 31, 2007 and 2006, 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 2007 and
      2006.





At
      December 31, 2007, the gross carrying amount included a customer list acquired
      as part of the Chinook Acquisition, 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
      Federal Insecticide, Fungicide and Rodenticide Act, as amended (“FIFRA”), a
      health and safety statute, requires that certain products within our specialty
      products segment must be registered with the U.S. Environmental Protection
      Agency (“EPA”)  because they are considered pesticides. Costs of such
      registration are included as regulatory re-registration costs in the table
      above.


46




NOTE
      7 - LONG-TERM DEBT
& CREDIT AGREEMENTS





On
      April
      30, 2007, the Company, and its principal bank entered into a Loan Agreement
      (the
“European Loan Agreement”) providing for an unsecured term loan of $10,244 (the
“European Term Loan”), the proceeds of which were used to fund the Akzo Nobel
      Acquisition (see Note 5) and initial working capital requirements. The European
      Term Loan is payable in equal monthly installments of principal, each equal
      to
      1/84th of the principal of the European Term Loan, together with accrued
      interest, with remaining principal and interest payable at maturity. The
      European Term Loan has a maturity date of May 1, 2010 and is subject to a
      monthly interest rate equal to EURIBOR plus 1%. At December 31, 2007, this
      interest rate was 5.288%.  The European Loan Agreement also provides
      for a short-term revolving credit facility of €2,000, translated to $2,946 as of
      December 31, 2007 (the "European Revolving Facility"). The European Revolving
      Facility is subject to a monthly interest rate equal to EURIBOR plus 1.25%,
      and
      accrued interest is payable monthly. The Company has drawn down €1,500 of the
      European Revolving Facility as of December 31, 2007. The European Revolving
      Facility has a maturity date of May 1, 2008.  Management believes that
      such facility will be renewed in the normal course of business.





On
      March
      16, 2007, the Company and its principal bank entered into a Loan Agreement
      (the
“New Loan Agreement”) providing for an unsecured term loan of $29,000 (the “New
      Term Loan”), the proceeds of which were used to fund the Chinook Acquisition
      (see Note 5). The New Term Loan is payable in equal monthly installments of
      principal, each equal to 1/60th of the principal of the New Term Loan, together
      with accrued interest, with remaining principal and interest payable at
      maturity. The New Term Loan has a maturity date of March 16, 2010 and is subject
      to a monthly interest rate equal to LIBOR plus 1%. At December 31, 2007, this
      interest rate was 6.027%. As of December 31, 2007, the Company has prepaid
      $10,000 of the New Term Loan. The New Loan Agreement also provides for a
      short-term revolving credit facility of $6,000 (the "New Revolving Facility").
      The New Revolving Facility is subject to a monthly interest rate equal to LIBOR
      plus 1%, and accrued interest is payable monthly. The Company has drawn down
      $1,000 of the New Revolving Facility as of December 31, 2007. The New Revolving
      Facility has a maturity date of May 31, 2009.  Management believes
      that such facility will be renewed in the normal course of
      business.





At
      December 31, 2007, we had a total of $27,986 of debt outstanding, as compared
      to
      no debt outstanding at December 31, 2006.





The
      Company's debt obligations, excluding revolver borrowings, as of
      December 31, 2007, are summarized in the table below:





Payments
                due by periodTotal
            
            
            Year
                1
            
            
            Year
                2
            
            
            Year
                3Long-term
                debt obligations
            
            $
            24,777
            
            
            $
            7,379
            
            
            $
            7,379
            
            
            $
            10,019





NOTE
      8 - INCOME
      TAXES





Income
      tax expense consists of the following:





2007
            
            
            2006
            
            
            2005Current:Federal
            
            $
            7,983
            
            
            $
            6,295
            
            
            $
            4,875State
            
            
            1,299
            
            
            
            534
            
            
            
            763Deferred:Federal
            
            
            (420
            )
            
            
            (1
            )
            
            
            541State
            
            
            (151
            )
            
            
            (5
            )
            
            
            58Total
                income tax provision
            
            $
            8,711
            
            
            $
            6,823
            
            
            $
            6,237






47







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:





2007
            
            
            2006
            
            
            2005Income
                tax at Federal
              statutory
                rate
            
            $
            8,690
            
            
            $
            6,685
            
            
            $
            6,017State
                income taxes, net of
              Federal
                income tax benefit
            
            
            603
            
            
            
            344
            
            
            
            534Other
            
            
            (582
            )
            
            
            (206
            )
            
            
            (314
            )Total
                income tax provision
            
            $
            8,711
            
            
            $
            6,823
            
            
            $
            6,237





The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006
      were as follows:





2007
            
            
            2006Deferred
                tax assets:Inventories
            
            $
            388
            
            
            $
            371Restricted
                stock and stock options
            
            
            702
            
            
            
            200Other
            
            
            389
            
            
            
            145Total
                deferred tax assets
            
            
            1,479
            
            
            
            716Deferred
                tax liabilities:Customer
                list amortization
            
            $
            1,782
            
            
            $
            1,684Depreciation
            
            
            3,886
            
            
            
            3,873Prepaid
                expense
            
            
            525
            
            
            
            583Trade
                names and trademarks
            
            
            239
            
            
            
            239Technology
                and trade secrets
            
            
            269
            
            
            
            269Other
            
            
            350
            
            
            
            279Total
                deferred tax liabilities
            
            
            7,051
            
            
            
            6,927Net
                deferred tax liability
            
            $
            5,572
            
            
            $
            6,211





There
      is
      no valuation allowance for deferred tax assets at December 31, 2007 and 2006.
      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.





The
      Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes”, or FIN 48, on January 1, 2007.  FIN 48
      clarifies whether or not to recognize assets or liabilities for tax positions
      taken that may be challenged by a tax authority.  Upon adoption of FIN
      48, the Company recognized approximately a $291 decrease in its retained
      earnings balance.  A reconciliation of the beginning and ending amount
      of unrecognized tax benefits is as follows:














48





Liability
                for Unrecognized
              Tax
                BenefitsBalance
                at January 1, 2007
            
            $
            411Increases
                for tax positions of prior years
            
            
            320Decreases
                for tax positions of prior years
            
            
            (225
            )Increases
                for tax positions related to the current year
            
            
            227Balance
                at December 31, 2007
            
            $
            733





All
      of
      the Company’s unrecognized tax benefits, if recognized in future periods, would
      impact the Company’s effective tax rate in such future periods.





The
      Company recognizes both interest and penalties as part of the income tax
      provision. During the year ended December 31, 2007, the Company recognized
      approximately $52 in interest and penalties. As of December 31, 2007,
      accrued interest and penalties were $130.





The
      Company files income tax returns in the U.S. and in various states and foreign
      countries. In the major jurisdictions where the Company operates, it is
      generally no longer subject to income tax examinations by tax authorities for
      years before 2004. The Company does not anticipate any material change in the
      total amount of unrecognized tax benefits to occur within the next twelve
      months.





NOTE
      9 - NET EARNINGS PER
      COMMON SHARE





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





2007
            
            Earnings
              (Numerator)
            
            
            Number
                of Shares
              (Denominator)
            
            
            Per
                Share AmountBasic
                EPS – Net earnings and weighted average common shares
                outstanding
            
            $
            16,118
            
            
            
            17,771,521
            
            
            $
            .91Effect
                of dilutive securities – stock options and restricted
                stock
            
            
            
            
            
            
            839,011Diluted
                EPS – Net earnings and weighted average common shares outstanding and
                effect of stock options and restricted stock
            
            $
            16,118
            
            
            
            18,610,532
            
            
            $
            .87





2006
            
            Earnings
              (Numerator)
            
            
            Number
                of Shares
              (Denominator)
            
            
            Per
                Share AmountBasic
                EPS – Net earnings and weighted average common shares
                outstanding
            
            $
            12,278
            
            
            
            17,427,857
            
            
            $
            .70Effect
                of dilutive securities – stock options and restricted
                stock
            
            
            
            
            
            
            819,384Diluted
                EPS – Net earnings and weighted average common shares outstanding and
                effect of stock options and restricted stock
            
            $
            12,278
            
            
            
            18,247,241
            
            
            $
            .67











49





2005
            
            Earnings
              (Numerator)
            
            
            Number
                of Shares
              (Denominator)
            
            
            Per
                Share AmountBasic
                EPS – Net earnings and weighted average common shares
                outstanding
            
            $
            10,954
            
            
            
            17,341,133
            
            
            $
            .63Effect
                of dilutive securities – stock options
            
            
            
            
            
            
            743,739Diluted
                EPS – Net earnings and weighted average common shares outstanding and
                effect of stock options
            
            $
            10,954
            
            
            
            18,084,872
            
            
            $
            .61





The
      Company had 9,100, 307,875 and 481,500 stock options outstanding at December
      31,
      2007, 2006 and 2005, respectively that could potentially dilute basic earnings
      per share in future periods that were not included in diluted earnings per
      share
      because their effect on the period presented was anti-dilutive.





NOTE
      10- 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 $503
      and
      $379 in 2007, $395 and $343 in 2006 and $326 and $276 in 2005,
      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 No. 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,
      as a result of adopting SFAS No. 158, 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.





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





Change
      in
      benefit obligation:


2007
            
            
            2006Benefit
                obligation at beginning of year
            
            $
            729
            
            
            $
            942Service
                cost with interest to end of year
            
            
            29
            
            
            
            28Interest
                cost
            
            
            41
            
            
            
            39Participant
                contributions
            
            
            12
            
            
            
            11Plan
                amendments
            
            
            -
            
            
            
            -Benefits
                paid
            
            
            (57
            )
            
            
            (20
            )Actuarial
                (gain) or loss
            
            
            51
            
            
            
            (271
            )Benefit
                obligation at end of year
            
            $
            805
            
            
            $
            729

















50





Change
      in
      plan assets:


2007
            
            
            2006Fair
                value of plan assets at beginning of year
            
            $
            -
            
            
            $
            -Employer
                contributions
            
            
            45
            
            
            
            9Participant
                contributions
            
            
            12
            
            
            
            11Benefits
                paid
            
            
            (57
            )
            
            
            (20
            )Fair
                value of plan assets at end of year
            
            $
            -
            
            
            $
            -





Amounts
      recognized in consolidated balance sheet:


2007
            
            
            2006Accumulated
                postretirement benefit obligation
            
            $
            (805
            )
            
            $
            (729
            )Fair
                value of plan assets
            
            
            -
            
            
            
            -Funded
                status
            
            
            (805
            )
            
            
            (729
            )Unrecognized
                prior service cost
            
            
            N/A
            
            
            
            N/AUnrecognized
                net (gain)/loss
            
            
            N/A
            
            
            
            N/ANet
                amount recognized in consolidated balance sheet (after SFAS
                158)
              (included
                in other long-term obligations)
            
            $
            805
            
            
            $
            729Accrued
                postretirement benefit cost
              (included
                in other long-term obligations)
            
            $
            N/A
            
            
            $
            N/A





Components
      of net periodic benefit cost:


2007
            
            
            2006
            
            
            2005Service
                cost with interest to end of year
            
            $
            29
            
            
            $
            28
            
            
            $
            32Interest
                cost
            
            
            41
            
            
            
            39
            
            
            
            50Amortization
                of prior service cost
            
            
            (18
            )
            
            
            (18
            )
            
            
            (18
            )Amortization
                of (gain) or loss
            
            
            (3
            )
            
            
            (3
            )
            
            
            3Total
                net periodic benefit cost
            
            $
            49
            
            
            $
            46
            
            
            $
            67





Estimated
      future employer contributions and benefit payments are as follows:





Year2008
            
            $
            412009
            
            
            482010
            
            
            442011
            
            
            562012
            
            
            45Years
                2013-2017
            
            
            216





Assumed
      health care cost trend rates have been used in the valuation of postretirement
      health insurance benefits. The trend rate is 10 percent in 2008 declining to
      5
      percent in 2013 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, 2007 by $107 and the net periodic
      postretirement benefit cost for 2007 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, 2007 by $92 and the net
      periodic postretirement benefit cost for 2007 by $9. The weighted average
      discount rate used in determining the accumulated postretirement benefit
      obligation was 5.75% in 2007 and 2006.





NOTE
      11 - 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


51


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
      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 2012.
      Rent expense charged to operations under such lease agreements for 2007, 2006
      and 2005 aggregated approximately $583, $595 and $576, respectively. Aggregate
      future minimum rental payments required under non-cancelable operating leases
      at
      December 31, 2007 are as follows:





Year2008
            
            $
            7972009
            
            
            6732010
            
            
            2122011
            
            
            792012
            
            
            25Thereafter
            
            
            35Total
                minimum lease payments
            
            $
            1,821





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, 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 – 2007.





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 ultimate outcome of such
      matters will not have a material effect on the Company’s consolidated financial
      position, results of operations, or liquidity.


52




NOTE
      12 - SEGMENT
      INFORMATION





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





Business
      Segment Net Sales:


2007
            
            
            2006
            
            
            2005Specialty
                Products
            
            $
            33,057
            
            
            $
            32,026
            
            
            $
            29,433Encapsulated/Nutritional
                Products
            
            
            49,919
            
            
            
            41,565
            
            
            
            32,499BCP
                Ingredients
            
            
            93,225
            
            
            
            27,314
            
            
            
            21,163Total
            
            $
            176,201
            
            
            $
            100,905
            
            
            $
            83,095





Business
      Segment Earnings Before Income Taxes:


2007
            
            
            2006
            
            
            2005Specialty
                Products
            
            $
            11,824
            
            
            $
            11,315
            
            
            $
            11,007Encapsulated/Nutritional
                Products
            
            
            7,194
            
            
            
            4,200
            
            
            
            3,217BCP
                Ingredients
            
            
            6,888
            
            
            
            3,647
            
            
            
            2,679Interest
                and other income (expense)
            
            
            (1,077
            )
            
            
            (61
            )
            
            
            288Total
            
            $
            24,829
            
            
            $
            19,101
            
            
            $
            17,191





Depreciation/Amortization:


2007
            
            
            2006
            
            
            2005Specialty
                Products
            
            $
            876
            
            
            $
            941
            
            
            $
            1,027Encapsulated/Nutritional
                Products
            
            
            2,092
            
            
            
            1,983
            
            
            
            1,313BCP
                Ingredients
            
            
            3,408
            
            
            
            521
            
            
            
            469Total
            
            $
            6,376
            
            
            $
            3,445
            
            
            $
            2,809





Business
      Segment Assets:


2007
            
            
            2006
            
            
            2005Specialty
                Products
            
            $
            18,583
            
            
            $
            18,446
            
            
            $
            19,799Encapsulated/Nutritional
                Products
            
            
            45,477
            
            
            
            45,870
            
            
            
            25,139BCP
                Ingredients
            
            
            85,074
            
            
            
            20,434
            
            
            
            14,141Other
                Unallocated
            
            
            5,290
            
            
            
            7,583
            
            
            
            16,062Total
            
            $
            154,424
            
            
            $
            92,333
            
            
            $
            75,141




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


53




Capital
      Expenditures:


2007
            
            
            2006
            
            
            2005Specialty
                Products
            
            $
            307
            
            
            $
            195
            
            
            $
            366Encapsulated/Nutritional
                Products
            
            
            832
            
            
            
            595
            
            
            
            520BCP
                Ingredients
            
            
            3,730
            
            
            
            1,489
            
            
            
            883Total
            
            $
            4,869
            
            
            $
            2,279
            
            
            $
            1,769





Geographic
      Revenue Information:


2007
            
            
            2006
            
            
            2005United
                States
            
            $
            132,632
            
            
            $
            91,042
            
            
            $
            77,355Foreign
                Countries
            
            
            43,569
            
            
            
            9,863
            
            
            
            5,740Total
            
            $
            176,201
            
            
            $
            100,905
            
            
            $
            83,095





NOTE
      13 - SUPPLEMENTAL CASH
      FLOW INFORMATION





Cash
      paid
      during the year for:


2007
            
            
            2006
            
            
            2005Income
                taxes
            
            $
            6,718
            
            
            $
            5,621
            
            
            $
            5,133Interest,
                net of capitalized interest
            
            $
            1,466
            
            
            $
            189
            
            
            $
            8





Non-cash
      financing activities:


2007
            
            
            2006
            
            
            2005Dividends
                payable
            
            $
            1,975
            
            
            $
            1,596
            
            
            $
            1,045





Also
      see
      Note 5 for information regarding acquisitions of assets and stock.





NOTE
      14 - QUARTERLY
      FINANCIAL INFORMATION (UNAUDITED):


(In
      thousands, except per share data)





2007
            
            
            2006First
                Quarter
            
            
            Second
                Quarter
            
            
            Third
                Quarter
            
            
            Fourth
                Quarter
            
            
            FirstQuarter
            
            
            Second
                Quarter
            
            
            ThirdQuarter
            
            
            Fourth
                QuarterNet
                sales
            
            $
            27,599
            
            
            $
            44,371
            
            
            $
            50,498
            
            
            $
            53,733
            
            
            $
            24,597
            
            
            $
            25,100
            
            
            $
            25,122
            
            
            $
            26,086Gross
                profit
            
            
            9,741
            
            
            
            12,182
            
            
            
            12,609
            
            
            
            12,398
            
            
            
            8,222
            
            
            
            8,800
            
            
            
            8,673
            
            
            
            8,311Earnings
                before
              income
                taxes
            
            
            5,314
            
            
            
            6,367
            
            
            
            6,772
            
            
            
            6,376
            
            
            
            4,445
            
            
            
            4,813
            
            
            
            4,978
            
            
            
            4,865Net
                earnings
            
            
            3,441
            
            
            
            4,065
            
            
            
            4,457
            
            
            
            4,155
            
            
            
            2,858
            
            
            
            3,055
            
            
            
            3,151
            
            
            
            3,214Basic
                net earnings
              per
                common share
            
            $
            .19
            
            
            $
            .23
            
            
            $
            .25
            
            
            $
            .23
            
            
            $
            .16
            
            
            $
            .18
            
            
            $
            .18
            
            
            $
            .18Diluted
                net earnings
              per
                common share
            
            $
            .19
            
            
            $
            .22
            
            
            $
            .24
            
            
            $
            .22
            
            
            $
            .16
            
            
            $
            .17
            
            
            $
            .17
            
            
            $
            .17





54


Report
      of Independent Registered Public Accounting Firm





To
      the
      Board of Directors and Stockholders


Balchem
      Corporation





Our
      audits of the consolidated financial statements and internal control over
      financial reporting referred to in our report dated March 17, 2008 (included
      elsewhere in this Annual Report on Form 10-K) also included the financial
      statement schedule of Balchem Corporation and Subsidiaries, listed in the
      Index at Item 8 of this Form 10-K.  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
      17,
      2008


55




BALCHEM
                    CORPORATIONValuation
                    and Qualifying AccountsYears
                    Ended December 31, 2007, 2006 and 2005(In
                    thousands)AdditionsDescription
                
                Balance
                    at Beginning of Year
                
                
                Charges
                    to Costs and Expenses
                
                
                Charges
                    toOther Accounts
                
                
                Deductions
                
                
                Balance
                    at End of YearYear
                    ended December 31, 2007Allowance
                    for doubtful accounts
                
                $
                50
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                50Inventory
                    reserve
                
                
                147
                
                
                
                20
                
                
                
                7
                
                
                
                -
                
                
                
                174Year
                    ended December 31, 2006Allowance
                    for doubtful accounts
                
                $
                50
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                50Inventory
                    reserve
                
                
                56
                
                
                
                91
                
                
                
                -
                
                
                
                -
                
                
                
                147Year
                    ended December 31, 2005Allowance
                    for doubtful accounts
                
                $
                82
                
                
                $
                -
                
                
                $
                -
                
                
                $
                (32
                )(a)
                
                $
                50Inventory
                    reserve
                
                
                31
                
                
                
                25
                
                
                
                -
                
                
                
                -
                
                
                
                56




(a)  represents
        write-offs.







56




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, 2007, 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, 2007.





Balchem Corporation, through its European subsidiary, Balchem B.V., completed
        an
        acquisition of certain assets of Akzo Nobel Chemicals S.p.A. effective April
        30,
        2007 (the Akzo Nobel Acquisition, as defined and described in Note 5 of our
        notes to consolidated financial statements in Item 8). Management’s assessment
        of and conclusion on the effectiveness of our internal control over financial
        reporting excludes the internal control over financial reporting of Balchem
        B.V.
        and Subsidiaries. The acquisition contributed approximately 17.3 percent of
        our net sales for the year ended December 31, 2007 and accounted for
        approximately 17.5 percent of our total assets as of December 31,
        2007. Registrants are permitted to exclude acquisitions from their assessment
        of
        internal control over financial reporting during the first year if, among
        other
        circumstances and factors, there is not adequate time between the consummation
        date of the acquisition and the assessment date for assessing internal
        controls.





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





The
      independent registered public
      accounting firm of McGladrey & Pullen, LLP, has issued an attestation report
      on the Company’s internal control over financial reporting, excluding internal
      control over financial reporting of Balchem B.V. and Subsidiaries, which is
      included herein.


57


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
      2008 Annual Meeting of Stockholders (the “2008 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 2008 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 2008 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 2008 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 2008 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 2008 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 2008 Proxy Statement
      under
      the caption "Directors and Executive Officers," which information is hereby
      incorporated herein by reference.


58


Item
      14. Principal Accountant Fees and Services.





The
      information required by this Item
      is set forth in the 2008 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:




The
                  following documents are filed as part of this Form
                  10-K:Form
                  10-K1.
              Financial
                  Statements
              Page
                  NumberReport
                  of Independent Registered Public Accounting Firm
              26Consolidated
                  Balance Sheets as of December 31, 2007 and 2006
              28Consolidated
                  Statements of Earnings for theyears
                  ended December 31, 2007, 2006 and 2005
              29Consolidated
                  Statements of Stockholders' Equityfor
                  the years ended December 31, 2007, 2006 and 2005
              30Consolidated
                  Statements of Cash Flowsfor
                  the years ended December 31, 2007, 2006 and 2005
              31Notes
                  to Consolidated Financial Statements
              32Report
                  of Independent Registered Public Accounting Firm
              552.
              Financial
                  Statement SchedulesSchedule
                  II – Valuation and QualifyingAccounts
                  for the years ended December 31, 2007, 2006 and 2005
              56




3.
            Exhibits





2.1
            Sale
                and Purchase Agreement dated March 30, 2007, by and between Balchem
                B.V.
                and Akzo Nobel Chemicals S.p.A. (incorporated by reference to Exhibit
                2.1 of the Company’s Current Report on Form 8-K dated March 30,
                2007).





2.2
            Asset
                Purchase Agreement dated March 16, 2007, by and between BCP Ingredients,
                Inc. and Chinook Global Limited (incorporated by reference to Exhibit
                2.1 of the Company’s Current Report on Form 8-K dated March 16,
                2007).





2.3
            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).





2.4
            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).





2.5
            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).





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).


59


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 January 2,
                2008).





10.1
            Tolling
                Agreement, dated March 16, 2007 between BCP Ingredients, Inc. and
                Chinook
                Global Limited (incorporated by reference to Exhibit 10.1 to the
                Company’s
                Current Report on Form 8-K dated March 16,
                2007).





10.2
            Non-Competition
                Agreement, dated March 16, 2007 between BCP Ingredients, Inc. and
                Chinook
                Global Limited; Chinook Services, LLC; Chinook, LLC; Dean R. Lacy;
                Ronald
                Breen, and John N. Kennedy (incorporated by reference to Exhibit
                10.2 to
                the Company’s Current Report on Form 8-K dated March 16,
                2007).





10.3
            Loan
                Agreement dated March 16, 2007 by and between Bank of America, N.A.
                and
                Balchem Corporation (incorporated by reference to Exhibit 10.3 to
                the
                Company’s Current Report on Form 8-K dated March 16,
                2007).





10.4
            Promissory
                Note (Term Loan) dated March 16, 2007 from Balchem Corporation to
                Bank of
                America, N.A (incorporated by reference to Exhibit 10.4 to the Company’s
                Current Report on Form 8-K dated March 16,
                2007).





10.5
            Promissory
                Note (Revolving Line of Credit) dated March 16, 2007 from Balchem
                Corporation to Bank of America, N.A. (incorporated by reference to
                Exhibit
                10.5 to the Company’s Current Report on Form 8-K dated March 16,
                2007).





10.6
            Guaranty
                dated March 16, 2007 from BCP Ingredients, Inc. to Bank of America,
                N.A.
                (incorporated by reference to Exhibit 10.6 to the Company’s Current Report
                on Form 8-K dated March 16, 2007).





10.7
            Guaranty
                dated March 16, 2007 from Balchem Minerals Corporation to Bank of
                America,
                N.A. (incorporated by reference to Exhibit 10.7 to the Company’s Current
                Report on Form 8-K dated March 16,
                2007).





10.8
            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).





10.9
            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).





10.10
            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).





10.11
            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”)).*





10.12
            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).





10.13
            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).*


60


10.14
              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).*
 
 10.15
              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”)). *
 
 10.16
              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).
 
 10.17
              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).
 
 10.18
              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).
 
 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.





61




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 17, 2008
              BALCHEM
                  CORPORATIONBy:/s/
                  Dino A. RossiDino
                  A. Rossi, Chairman, President, andChief
                  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. RossiDino
                  A. Rossi, Chairman, President,Chief
                  Executive Officer, and Director (Principal Executive
                  Officer)Date:
                  March 17, 2008/s/
                  Francis J. FitzpatrickFrancis
                  J. Fitzpatrick, Chief FinancialOfficer
                  and Treasurer (Principal Financial and Principal Accounting
                  Officer)Date:
                  March 17, 2008/s/
                  Hoyt Ammidon, Jr.Hoyt
                  Ammidon, Jr., DirectorDate:
                  March 17, 2008/s/
                  Edward L. McMillanEdward
                  L. McMillan, DirectorDate:
                  March 17, 2008/s/
                  Kenneth P. MitchellKenneth
                  P. Mitchell, DirectorDate:
                  March 17, 2008Perry
                  W. Premdas, DirectorDate:
                  March 17, 2008/s/
                  Dr. John TelevantosDr.
                  John Televantos, DirectorDate:
                  March 17, 2008/s/
                  Dr. Elaine WedralDr.
                  Elaine Wedral, DirectorDate:
                  March 17, 2008





62





EXHIBIT
      INDEX


Exhibit


Number  Description





2.1
            Sale
                and Purchase Agreement dated March 30, 2007, by and between Balchem
                B.V.
                and Akzo Nobel Chemicals S.p.A. (incorporated by reference to Exhibit
                2.1 of the Company’s Current Report on Form 8-K dated March 30,
                2007).





2.2
            Asset
                Purchase Agreement dated March 16, 2007, by and between BCP Ingredients,
                Inc. and Chinook Global Limited (incorporated by reference to Exhibit
                2.1 of the Company’s Current Report on Form 8-K dated March 16,
                2007).





2.3
            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).





2.4
            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).





2.5
            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).





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 January 2,
                2008).




10.1
            Tolling
                Agreement, dated March 16, 2007 between BCP Ingredients, Inc. and
                Chinook
                Global Limited (incorporated by reference to Exhibit 10.1 to the
                Company’s
                Current Report on Form 8-K dated March 16,
                2007).





10.2
            Non-Competition
                Agreement, dated March 16, 2007 between BCP Ingredients, Inc. and
                Chinook
                Global Limited; Chinook Services, LLC; Chinook, LLC; Dean R. Lacy;
                Ronald
                Breen, and John N. Kennedy (incorporated by reference to Exhibit
                10.2 to
                the Company’s Current Report on Form 8-K dated March 16,
                2007).





10.3
            Loan
                Agreement dated March 16, 2007 by and between Bank of America, N.A.
                and
                Balchem Corporation (incorporated by reference to Exhibit 10.3 to
                the
                Company’s Current Report on Form 8-K dated March 16,
                2007).





10.4
            Promissory
                Note (Term Loan) dated March 16, 2007 from Balchem Corporation to
                Bank of
                America, N.A (incorporated by reference to Exhibit 10.4 to the Company’s
                Current Report on Form 8-K dated March 16,
                2007).





10.5
            Promissory
                Note (Revolving Line of Credit) dated March 16, 2007 from Balchem
                Corporation to Bank of America, N.A. (incorporated by reference to
                Exhibit
                10.5 to the Company’s Current Report on Form 8-K dated March 16,
                2007).





10.6
            Guaranty
                dated March 16, 2007 from BCP Ingredients, Inc. to Bank of America,
                N.A.
                (incorporated by reference to Exhibit 10.6 to the Company’s Current Report
                on Form 8-K dated March 16,
                2007).


63


10.7
            Guaranty
                dated March 16, 2007 from Balchem Minerals Corporation to Bank of
                America,
                N.A. (incorporated by reference to Exhibit 10.7 to the Company’s Current
                Report on Form 8-K dated March 16,
                2007).





10.8
            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).





10.9
            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).





10.10
            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).





10.11
            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”)).*





10.12
            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).





10.13
            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).*





10.14
            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).*





10.15
            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”)). *





10.16
            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).





10.17
            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).





10.18
            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).





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.









64





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.








65