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




                                    FORM 10-Q




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



                 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2003
                          COMMISSION FILE NUMBER 0-5905




                                  CHATTEM, INC.
                             A TENNESSEE CORPORATION
                  I.R.S. EMPLOYER IDENTIFICATION NO. 62-0156300
                              1715 WEST 38TH STREET
                          CHATTANOOGA, TENNESSEE 37409
                             TELEPHONE: 423-821-4571









REGISTRANT 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, AND HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12b-2 OF THE EXCHANGE
ACT).

AS OF OCTOBER 9, 2003 19,159,379 SHARES OF THE COMPANY'S COMMON STOCK, WITHOUT
PAR VALUE, WERE OUTSTANDING.

================================================================================
<PAGE>

                                  CHATTEM, INC.
                                  -------------

                                      INDEX
                                      -----

                                                                        PAGE NO.
                                                                        --------

PART I.    FINANCIAL INFORMATION

           Item 1.  Financial Statements

                    Consolidated Balance Sheets as of
                    August 31, 2003 and November 30, 2002 ................    3

                    Consolidated Statements of Income for
                    the Three and Nine Months Ended August
                    31, 2003 and 2002.....................................    5

                    Consolidated Statements of Cash Flows
                    for the Nine Months Ended August 31,
                    2003 and 2002.........................................    6

                    Notes to Consolidated Financial Statements ...........    7

           Item 2.  Management's Discussion and Analysis of
                    Financial Condition and Results of Operations ........   25

           Item 3.  Quantitative and Qualitative Disclosures
                    About Market Risks....................................   37

           Item 4.  Controls and Procedures...............................   37

PART II.   OTHER INFORMATION

           Item 1.  Legal Proceedings.....................................   38

           Item 2.  Changes in Securities and Use of Proceeds.............   38

           Item 3.  Defaults Upon Senior Securities.......................   38

           Item 4.  Submission of Matters to a Vote of Security Holders...   38

           Item 5.  Other Information.....................................   38

           Item 6.  Exhibits and Reports on Form 8-K .....................   38

SIGNATURES ...............................................................   39






                                       2
<PAGE>

                          PART 1. FINANCIAL INFORMATION
                          -----------------------------
ITEM 1.    FINANCIAL STATEMENTS
-------------------------------

                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                                 (In thousands)

<TABLE><CAPTION>
                                                                         AUGUST 31,    NOVEMBER 30,
ASSETS                                                                     2003            2002
------                                                                   --------        --------
                                                                        (Unaudited)
<S>                                                                      <C>             <C>
CURRENT ASSETS:
  Cash and cash equivalents .....................................        $ 21,721        $ 15,924
  Accounts receivable, less allowances of  $5,155 at
    August 31, 2003 and $3,897 at November 30, 2002 .............          28,540          25,673
  Refundable and deferred income taxes ..........................          11,857           9,837
  Inventories ...................................................          19,778          18,769
  Prepaid expenses and other current assets .....................           3,148           2,184
                                                                         --------        --------
    Total current assets ........................................          85,044          72,387
                                                                         --------        --------

PROPERTY, PLANT AND EQUIPMENT, NET ..............................          28,132          26,658
                                                                         --------        --------

OTHER NONCURRENT ASSETS:
  Patents, trademarks and other purchased product rights, net ...         245,906         245,787
  Debt issuance costs, net ......................................           5,867           7,126
  Other .........................................................           3,931           3,605
                                                                         --------        --------
    Total other noncurrent assets ...............................         255,704         256,518
                                                                         --------        --------

      TOTAL ASSETS ..............................................        $368,880        $355,563
                                                                         ========        ========

      The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       3
<PAGE>

                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                                 (In thousands)


<TABLE><CAPTION>
                                                                         AUGUST 31,    NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY                                       2003            2002
------------------------------------                                     --------        --------
                                                                        (Unaudited)
<S>                                                                      <C>             <C>
CURRENT LIABILITIES:
   Current maturities of long-term debt .........................        $  8,250        $  7,250
   Accounts payable .............................................           9,798          12,209
   Payable to bank ..............................................             425             452
   Accrued liabilities ..........................................          22,777          21,104
                                                                         --------        --------
     Total current liabilities ..................................          41,250          41,015
                                                                         --------        --------

LONG-TERM DEBT, less current maturities .........................         206,434         217,458
                                                                         --------        --------

DEFERRED INCOME TAXES ...........................................          27,388          20,744
                                                                         --------        --------

OTHER NONCURRENT LIABILITIES ....................................           1,671           1,602
                                                                         --------        --------

COMMITMENTS AND CONTINGENCIES (Note 15)


SHAREHOLDERS' EQUITY:
  Preferred shares, without par value, authorized 1,000,
    none issued .................................................            --              --
  Common shares, without par value, authorized 50,000,
    issued 19,157 at August 31, 2003 and 19,177 at
    November 30, 2002 ...........................................          77,811          79,313
   Retained earnings (deficit) ..................................          17,850          (1,097)
                                                                         --------        --------
                                                                           95,661          78,216
  Unamortized value of restricted common shares issued ..........          (2,253)         (1,713)
  Cumulative other comprehensive income:
    Foreign currency translation adjustment .....................          (1,271)         (1,759)
                                                                         --------        --------
     Total shareholders' equity .................................          92,137          74,744
                                                                         --------        --------

        TOTAL LIABILITIES AND SHAREHOLDERS'
          EQUITY ................................................        $368,880        $355,563
                                                                         ========        ========

      The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>



                                       4
<PAGE>

                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                        CONSOLIDATED STATEMENTS OF INCOME
                        ---------------------------------
             (Unaudited and in thousands, except per share amounts)

<TABLE><CAPTION>
                                                                     FOR THE THREE MONTHS                FOR THE NINE MONTHS
                                                                        ENDED AUGUST 31,                    ENDED AUGUST 31,
                                                                  ---------------------------         ---------------------------
                                                                     2003              2002              2003              2002
                                                                  ---------         ---------         ---------         ---------
<S>                                                               <C>               <C>               <C>               <C>
REVENUES:
  Net sales ..............................................        $  58,972         $  63,457         $ 180,366         $ 169,617
  Royalties ..............................................              210               947               874             1,873
                                                                  ---------         ---------         ---------         ---------
    Total revenues .......................................           59,182            64,404           181,240           171,490
                                                                  ---------         ---------         ---------         ---------

COSTS AND EXPENSES:
  Cost of sales ..........................................           15,995            17,526            51,399            48,673
  Advertising and promotion ..............................           17,075            21,307            54,009            55,276
  Selling, general and administrative ....................           10,234             9,926            30,445            29,002
                                                                  ---------         ---------         ---------         ---------
    Total costs and expenses .............................           43,304            48,759           135,853           132,951
                                                                  ---------         ---------         ---------         ---------

INCOME FROM OPERATIONS ...................................           15,878            15,645            45,387            38,539
                                                                  ---------         ---------         ---------         ---------

OTHER INCOME (EXPENSE):
  Interest expense .......................................           (5,057)           (5,374)          (15,431)          (15,518)
  Investment and other income, net .......................               32                79               119               243
                                                                  ---------         ---------         ---------         ---------
    Total other income (expense) .........................           (5,025)           (5,295)          (15,312)          (15,275)
                                                                  ---------         ---------         ---------         ---------
INCOME BEFORE INCOME TAXES AND CHANGE
  IN ACCOUNTING PRINCIPLE ................................           10,853            10,350            30,075            23,264

PROVISION FOR INCOME TAXES ...............................            4,016             3,933            11,128             8,840
                                                                  ---------         ---------         ---------         ---------

INCOME BEFORE CHANGE IN ACCOUNTING
  PRINCIPLE ..............................................            6,837             6,417            18,947            14,424

CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE, NET OF INCOME TAX
  BENEFIT ................................................             --                --                --              (8,877)
                                                                  ---------         ---------         ---------         ---------

NET INCOME ...............................................        $   6,837         $   6,417         $  18,947         $   5,547
                                                                  =========         =========         =========         =========

NUMBER OF COMMON SHARES:
  Weighted average outstanding-basic .....................           19,148            18,940            19,178            18,458
                                                                  =========         =========         =========         =========
  Weighted average and potential dilutive outstanding ....           19,905            19,870            19,897            19,246
                                                                  =========         =========         =========         =========

NET INCOME PER COMMON SHARE:
  Basic:
    Income before change in accounting principle .........        $     .36         $     .34         $     .99         $     .78
    Change in accounting principle .......................             --                --                --                (.48)
                                                                  ---------         ---------         ---------         ---------
      Total basic ........................................        $     .36         $     .34         $     .99         $     .30
                                                                  =========         =========         =========         =========
  Diluted:
    Income before change in accounting principle .........        $     .34         $     .32         $     .95         $     .75
    Change in accounting principle .......................             --                --                --                (.46)
                                                                  ---------         ---------         ---------         ---------
      Total diluted ......................................        $     .34         $     .32         $     .95         $     .29
                                                                  =========         =========         =========         =========

                     The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       5
<PAGE>

                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
        (Unaudited and in thousands, except share and per share amounts)

<TABLE><CAPTION>
                                                                         FOR THE NINE MONTHS ENDED
                                                                                AUGUST 31,
                                                                         ------------------------
                                                                           2003            2002
                                                                         --------        --------
OPERATING ACTIVITIES:
<S>                                                                      <C>             <C>
  Net income ....................................................        $ 18,947        $  5,547
  Adjustments to reconcile net income to net cash provided by
    operating activities:
      Depreciation and amortization .............................           4,565           3,969
      Increase in deferred income taxes .........................           5,907           4,333
      Cumulative effect of change in accounting principle, net ..            --             8,877
      Stock option charge .......................................            --               175
      Other, net ................................................             (94)            (75)
      Changes in operating assets and liabilities, net of product
        acquisition:
        Accounts receivable .....................................          (2,867)         (8,290)
        Refundable income taxes .................................              40           1,031
        Inventories .............................................          (1,009)           (244)
        Prepaid expenses and other current assets ...............            (964)           (354)
        Accounts payable and accrued liabilities ................            (778)         21,037
                                                                         --------        --------
           Net cash provided by operating activities ............          23,747          36,006
                                                                         --------        --------

INVESTING ACTIVITIES:
  Purchases of property, plant and equipment ....................          (3,933)         (2,622)
  Purchases of patents, trademarks and other product rights .....            (373)        (74,996)
  Decrease in other assets, net .................................             108             254
                                                                         --------        --------
           Net cash used in investing activities ................          (4,198)        (77,364)
                                                                         --------        --------

FINANCING ACTIVITIES:
  Repayment of long-term debt ...................................         (10,000)         (8,000)
  Proceeds from long-term debt ..................................            --            45,000
  Proceeds from exercise of stock options .......................           1,533           6,146
  Repurchase of common shares ...................................          (5,351)         (1,650)
  Change in payable to bank .....................................             (27)             62
  Debt issuance costs ...........................................             (25)         (1,133)
                                                                         --------        --------
           Net cash (used in) provided by financing activities ..         (13,870)         40,425
                                                                         --------        --------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
  CASH EQUIVALENTS ..............................................             118             113
                                                                         --------        --------

CASH AND CASH EQUIVALENTS:
  Increase (decrease) for the period ............................           5,797            (820)
  At beginning of period ........................................          15,924          35,445
                                                                         --------        --------
  At end of period ..............................................        $ 21,721        $ 34,625
                                                                         ========        ========

SCHEDULE OF NON-CASH INVESTING AND FINANCING
  ACTIVITIES:
  Issuance of 69,000 shares of restricted common stock at a value
    of $14.50 per share .........................................        $  1,000        $   --

PAYMENTS FOR:
  Interest ......................................................        $  9,916        $  9,862
  Taxes .........................................................        $  2,680        $    536


     The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>



                                       6
<PAGE>

                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (UNAUDITED)

All monetary and share amounts are expressed in thousands unless contrarily
evident. Unless otherwise indicated the number of shares of our common stock and
related per share computations included in these financial statements and notes
thereto have been adjusted to reflect the two-for-one split of our common stock
on November 29, 2002.


1.   BASIS OF PRESENTATION
     ---------------------
     The accompanying unaudited consolidated financial statements have been
     prepared in accordance with generally accepted accounting principles for
     interim financial information and the instructions to Form 10-Q and Rule
     10-01 of Regulation S-X. Accordingly, they do not include all of the
     information and footnotes required by generally accepted accounting
     principles for complete financial statements. These consolidated financial
     statements should be read in conjunction with the audited consolidated
     financial statements and related notes thereto included in our Annual
     Report on Form 10-K for the year ended November 30, 2002. The accompanying
     unaudited consolidated financial statements, in the opinion of management,
     include all adjustments necessary for a fair presentation. All such
     adjustments are of a normal recurring nature.

2.   CASH AND CASH EQUIVALENTS
     -------------------------
     We consider all short-term deposits and investments with original
     maturities of three months or less to be cash equivalents.

3.   RECLASSIFICATIONS
     -----------------
     Certain prior year amounts have been reclassified to conform to the current
     period's presentation.

4.   RECENT ACCOUNTING PRONOUNCEMENTS
     --------------------------------
     In June 2001, the Financial Accounting Standards Board ("FASB") issued
     Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
     for Asset Retirement Obligations" ("SFAS 143"). We adopted SFAS 143 on
     December 1, 2002. SFAS 143 establishes accounting standards for the
     recognition and measurement of an asset retirement obligation and its
     associated asset retirement cost. It also provides accounting guidance for
     legal obligations associated with the retirement of tangible long-lived
     assets. The adoption of SFAS 143 did not have an impact on our financial
     position, results of operations or cash flows.

     In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
     No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
     Corrections" ("SFAS 145"). We adopted SFAS 145 on December 1, 2002. SFAS
     145 requires us to classify gains and losses on extinguishments of debt as
     income or loss from continuing operations rather than as extraordinary
     items as previously required under SFAS No. 4, "Reporting Gains and Losses
     from Extinguishment of Debt". We are also required to reclassify any gain
     or loss on extinguishment of debt previously classified as an extraordinary
     item in prior periods presented. SFAS 145 also provides accounting
     standards for certain lease modifications that have economic effects
     similar to sale-leaseback transactions and various other technical
     corrections. The adoption of SFAS 145 did not have an impact on our
     financial position, results of operations or cash flows.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
     Associated with Exit or Disposal Activities" ("SFAS 146"). We adopted SFAS
     146 on January 1, 2003. SFAS 146 supercedes Emerging Issues Task Force
     Issue No. 94-3. SFAS 146 requires that the liability for a cost associated
     with an exit or disposal activity be recognized when the liability is
     incurred, not at the date of an entity's commitment to an exit or disposal
     plan. SFAS 146 is to be applied prospectively to exit or disposal
     activities initiated after December 31, 2002. The adoption of SFAS 146 did
     not have an impact on our financial position, results of operations or cash
     flows.

                                        7
<PAGE>

     In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
     Accounting and Disclosure Requirements for Guarantees, Including Indirect
     Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 supercedes
     Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness
     of Others," and provides guidance on the recognition and disclosures to be
     made by a guarantor in its interim and annual financial statements about
     its obligations under certain guarantees. The initial recognition and
     measurement provisions of FIN 45 are effective for guarantees issued or
     modified after December 31, 2002 and are to be applied prospectively. The
     disclosure requirements are effective for financial statements for interim
     or annual periods ending after December 15, 2002. We had no instruments or
     guarantees that required additional or enhanced disclosure under FIN 45 at
     August 31, 2003, and no guarantees issued or modified after December 31,
     2002 that required recognition and measurement in accordance with the
     provisions of FIN 45, except as disclosed in Note 19. The adoption of FIN
     45 did not have an impact on our financial position, results of operations
     or cash flows.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
     Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS
     No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to provide
     alternative methods of transition for a voluntary change to the
     fair-value-based method of accounting for stock-based employee
     compensation. SFAS 148 also amends Accounting Principles Board Opinion No.
     28, "Interim Financial Reporting" ("APB 28"), to require disclosure in the
     summary of significant accounting policies of the effects of an entity's
     accounting policy with respect to stock-based employee compensation on
     reported net income and earnings per share in annual and interim financial
     statements. The transition guidance and annual disclosure provisions of
     SFAS 148 are effective for fiscal years ending December 31, 2002. We
     implemented the interim disclosure provision in our first fiscal quarter of
     2003. The adoption of SFAS 148 did not have an impact on our financial
     position, results of operations or cash flows.

     In January 2003, the FASB issued Interpretation No. 46, " Consolidation of
     Variable Interest Entities" ("FIN 46"). FIN 46 requires a company to
     consolidate a variable interest entity ("VIE"), as defined, when the
     company will absorb a majority of the VIE's expected losses, receives a
     majority of the VIE's expected residual returns or both. FIN 46 also
     requires consolidation of existing, non-controlled affiliates if the VIE is
     unable to finance its operations without investor support, or where the
     other investors do not have exposure to the significant risks and rewards
     of ownership. FIN 46 applies immediately to a VIE created or acquired after
     January 31, 2003. For a VIE created before February 1, 2003, FIN 46 applies
     in the first fiscal year or interim period beginning after June 15, 2003.
     The adoption of FIN 46 did not have an impact on our financial position,
     results of operations or cash flows.

     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
     Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149
     amends and clarifies accounting for derivative instruments, including
     certain derivative instruments embedded in other contracts and for hedging
     activities under SFAS No. 133, "Accounting for Derivative Instruments and
     Hedging Activities." SFAS 149 is generally effective for derivative
     instruments, including derivative instruments embedded in certain
     contracts, entered into or modified after June 30, 2003 and for hedging
     relationships designated after June 30, 2003. The adoption of SFAS 149 did
     not have an impact on our financial position, results of operations or cash
     flows.

     In July 2003, the Emerging Issues Task Force ("EITF") reached a consensus
     on Issue No. 03-11, "Reporting Gains and Losses on Derivative Instruments
     and Hedging Activities, and Not Held for Trading Purposes" ("EITF 03-11").
     EITF 03-11 addresses when gains and losses on derivative contracts not held
     for trading purposes should be reported on a net basis. The adoption of
     EITF 03-11 did not have an impact on our financial position, results of
     operations or cash flows.

5.   STOCK-BASED COMPENSATION
     ------------------------
     Our 1998 Non-Statutory Stock Option Plan provides for the issuance of up to
     1,400 shares of common stock to key employees, while the 1999 Non-Statutory
     Stock Option Plan for Non-Employee Directors allows for the issuance of up
     to 200 shares of common stock. The 2000 Non-Statutory Stock Option Plan
     provides for the issuance of up to 1,500 shares of common stock. The 2003
     Stock Incentive Plan, which was adopted by our board of directors on
     January 21, 2003 and was approved by our shareholders at the April 16, 2003
     annual shareholders' meeting, provides for the issuance of up to 1,500
     shares of common stock. Options vest ratably over four years and are
     exercisable for a period of up to ten years from the date of grant.

                                       8
<PAGE>

     For SFAS 123 purposes, as amended by SFAS 148, the fair value of each
     option grant has been estimated as of the date of grant using the
     Black-Scholes option-pricing model with the following weighted average
     assumptions for grants in 2003 and 2002: expected dividend yield of 0%,
     expected volatility of 64% and 65%, respectively, risk-free interest rates
     of 4.47% and 4.14%, respectively, and expected lives of six years.

     Had compensation expense for stock option grants been determined based on
     the fair value at the grant dates consistent with the method prescribed by
     SFAS 123, our net income and net income per share would have been adjusted
     to the pro forma amounts for the three and nine months ended August 31,
     2003 and 2002, as indicated below:

<TABLE> <CAPTION>
                                                For the Three Months      For the Nine Months
                                                  Ended August 31,         Ended August  31,
                                                --------------------     ---------------------
                                                  2003        2002         2003         2002
                                                --------    --------     --------     --------
<S>                                             <C>         <C>          <C>          <C>
        Net income:
          As reported......................     $  6,837    $  6,417     $ 18,947     $  5,547
          Compensation costs...............          516         491        1,552        1,321
                                                --------    --------     --------     --------
          Pro forma........................     $  6,321    $  5,926     $ 17,395     $  4,226
                                                ========    ========     ========     ========

        Net income per share, basic:
          As reported......................     $    .36    $    .34     $    .99     $    .30
          Pro forma........................     $    .33    $    .31     $    .91     $    .23

        Net income per share, diluted:
          As reported......................     $    .34    $    .32     $    .95     $    .29
          Pro forma........................     $    .32    $    .30     $    .87     $    .22
</TABLE>

6.   PATENT, TRADEMARKS AND OTHER PURCHASED PRODUCT RIGHTS
     -----------------------------------------------------
     With our adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"
     ("SFAS 142"), on December 1, 2001, we obtained independent appraisals to
     determine the fair values of our intangible assets and compared their fair
     values with their carrying values to determine the write-down of $8,877,
     net of income tax benefit of $5,440, or $.46 per diluted share. These
     charges, which are reported in our Consolidated Statements of Income as a
     cumulative effect of change in accounting principle, relate to our
     SUNSOURCE product line, which experienced a decline in sales volume since
     its initial purchase in 1997, and to a lesser degree our DEXATRIM product
     line, which discontinued the marketing of one if its products in November
     2000. After reviewing all pertinent information relating to the revaluation
     of these intangible assets and performing the annual impairment test as
     prescribed by SFAS 142 as of November 30, 2002, we determined that a
     revaluation thereof was not required. The carrying value of trademarks,
     which are not subject to amortization under the provisions of SFAS 142, was
     $244,763 and $244,390 as of August 31, 2003 and November 30, 2002,
     respectively.

     The gross carrying amount of intangible assets subject to amortization at
     both August 31, 2003 and November 30, 2002, which consist primarily of
     non-compete agreements, was $2,400. The related accumulated amortization of
     intangible assets at August 31, 2003 and November 30, 2002, was $1,257 and
     $1,002, respectively. Amortization of our intangible assets subject to
     amortization under the provisions of SFAS 142 was $85 for the three months
     ended August 31, 2003 and 2002, respectively, and $255 and $183 for the
     nine months ended August 31, 2003 and 2002, respectively. Estimated annual
     amortization expense for these assets for the years ended November 30,
     2003, 2004, 2005, 2006 and 2007 is $340, $294, $290, $290 and $123,
     respectively.

                                        9
<PAGE>

7.   ADVERTISING EXPENSES
     --------------------
     We incur significant expenditures on television, radio and print
     advertising to support our nationally branded over-the-counter ("OTC")
     health care products. Customers purchase products from us with the
     understanding that the brands will be supported by our extensive media
     advertising. This advertising supports the retailers' sales effort and
     maintains the important brand franchise with the consuming public.
     Accordingly, we consider our advertising program to be clearly implicit in
     our sales arrangements with our customers. Therefore, we believe it is
     appropriate to allocate a percentage of the necessary supporting
     advertising expenses to each dollar of sales by charging a percentage of
     sales on an interim basis based upon anticipated annual sales and
     advertising expenditures (in accordance with APB 28) and adjusting that
     accrual to the actual expenses incurred at the end of the year.

8.   SHIPPING AND HANDLING
     ---------------------
     Shipping and handling costs of $1,602 and $1,365 are included in selling
     expenses for the three months ended August 31, 2003 and 2002, respectively,
     and $4,647 and $4,521 for the nine months ended August 31, 2003 and 2002,
     respectively.

9.   CONCENTRATIONS OF CREDIT RISK
     -----------------------------
     On January 22, 2002, Kmart Corporation ("Kmart"), a customer representing
     approximately 5% of fiscal 2001 consolidated revenues, filed a petition
     under Chapter 11 of the United States Bankruptcy Code. This bankruptcy
     filing did not impact our results of operations and financial position for
     fiscal 2001 as substantially all accounts receivable due from Kmart as of
     November 30, 2001 were subsequently collected. At the time of the filing
     Kmart owed us approximately $1,200. In the first quarter of fiscal 2002, we
     established an allowance for doubtful accounts of $1,000 to cover our
     estimated bad debt related to Kmart. In the second quarter of fiscal 2002,
     we sold our receivable from Kmart to a financial institution for $367. We
     continue to sell to Kmart at decreased volume levels, and as of August 31,
     2003 and November 30, 2002 our receivables from Kmart were approximately
     $940 and $796, respectively. We consider the August 31, 2003 balance
     collectible as substantially all of the balance was collected subsequent to
     that date.

10.  INVENTORIES
     -----------
     Inventories consisted of the following at August 31, 2003 and November 30,
     2002:

                                                         2003          2002
                                                     -----------   -----------

         Raw materials and work in process           $     8,218   $     9,104
         Finished goods ..........................        13,287        11,392
         Excess of current cost over LIFO
           values ................................        (1,727)       (1,727)
                                                     -----------   -----------
             Total inventories ...................   $    19,778   $    18,769
                                                     ===========   ===========







                                       10
<PAGE>

11.  ACCRUED LIABILITIES
     -------------------
     Accrued liabilities consisted of the following at August 31, 2003 and
     November 30, 2002:

                                                              2003        2002
                                                           ---------   ---------

          Interest.....................................    $   7,601   $   3,366
          Salaries, wages, commissions and pensions....        2,742       3,739
          Product advertising and promotion............        4,620       7,524
          Product acquisitions.........................          501         737
          Taxes........................................        4,292       1,993
          Consulting fees..............................          485         747
          Legal fees...................................          205         789
          Insurance....................................        1,092         934
          Other .......................................        1,239       1,275
                                                           ---------   ---------
              Total accrued liabilities ...............    $  22,777   $  21,104
                                                           =========   =========

12.  LONG-TERM DEBT
     --------------
     On March 28, 2002, we obtained a $60,000 senior secured credit facility
     from a syndicate of commercial banks led by Bank of America, N.A., as agent
     (the "Credit Facility"). The Credit Facility includes a $15,000 revolving
     credit facility and a $45,000 term loan. The Credit Facility together with
     our available cash was used to finance the acquisition of SELSUN BLUE and
     was used to provide working capital for general corporate purposes. The
     $45,000 term loan and any outstanding loans under the revolving credit
     facility mature on March 28, 2007. The Credit Facility is secured by the
     stock of our domestic subsidiaries and all of our present and future
     assets, excluding real property. The Credit Facility contains covenants,
     representations, warranties and other agreements by us that are customary
     in credit agreements and security instruments relating to financings of
     this type. At August 31, 2003, we owed $10,000 of the term loan of the
     Credit Facility and no outstanding balance under its revolving loan
     provision.

     Although we entered into a preliminary agreement to amend the Credit
     Facility on May 23, 2003 to increase the revolving line of credit from
     $15,000 to $50,000 and modify certain other terms and conditions, we did
     not complete this amendment. On August 22, 2003, the Credit Facility was
     amended to revise the restrictions on the amount of capital expenditures
     allowed and the dollar amount of our common stock we can purchase, redeem,
     acquire or retire.

13.  COMPREHENSIVE INCOME
     --------------------
     Comprehensive income consisted of the following components for the three
     and nine months ended August 31, 2003 and 2002, respectively:

                                    For the Three Months    For the Nine Months
                                      Ended August 31,        Ended August 31,
                                     -------------------     -------------------
                                       2003       2002         2003       2002
                                     --------   --------     --------   --------

       Net income.................   $  6,837   $  6,417     $ 18,947   $  5,547
       Other - foreign currency
        translation adjustment....        171        426          488        477
                                     --------   --------     --------   --------
          Total...................   $  7,008   $  6,843     $ 19,435   $  6,024
                                     ========   ========     ========   ========

14.  STOCK BUYBACK
     -------------
     In fiscal 1999 and 2000, our board of directors authorized repurchases of
     our common stock not to exceed $20,000. Under these authorizations 1,142
     shares, before the two-for-one split of our common stock on November 29,
     2002, had been reacquired through November 30, 2002 at a cost of $15,225.
     In January 2003, our board of directors increased the total authorization
     to repurchase our common stock under the buyback

                                       11
<PAGE>

     program to $10,000. In the first nine months of fiscal 2003, we repurchased
     360 shares of our common stock for $5,351. All repurchased shares were
     retired and returned to unisssued. At August 31, 2003, $4,649 of our
     current authorization was available for future repurchases. We, however,
     are limited in our ability to repurchase shares due to restrictions under
     the terms of the indenture with respect to which our 8.875% senior
     subordinated notes were issued and under the terms of the Credit Facility.
     The amendment to the Credit Facility on August 22, 2003 modified the
     restrictions to repurchase shares at levels consistent with the current
     board authorization (see discussion in Note 12).

15.  COMMITMENTS AND CONTINGENCIES
     -----------------------------
     GENERAL LITIGATION
     ------------------
     As of October 1, 2003, we are named as a defendant in approximately 300
     lawsuits involving claims by approximately 630 plaintiffs alleging that the
     plaintiffs were injured as a result of ingestion of products containing
     phenylpropanolamine ("PPA"), which was an active ingredient in certain of
     our DEXATRIM products until November 2000. The lawsuits that are federal
     cases have been transferred to the United States District Court for the
     Western District of Washington (In re Phenylpropanolamine (PPA) Products
     Liability Litigation, MDL No. 1407). The remaining cases are state court
     cases which have been filed in a number of different states.

     Approximately 160 of the existing lawsuits involve alleged injuries by
     products manufactured and sold prior to our acquisition of DEXATRIM in
     December 1998. With respect to these lawsuits, we are being defended and
     are indemnified from liability by The DELACO Company, Inc. ("DELACO"),
     successor to Thompson Medical Company, Inc. which owned DEXATRIM prior to
     December 1998. We understand that DELACO maintains product liability
     insurance coverage for products manufactured and sold prior to December
     1998 with annual limits of coverage and has an excess liability policy, but
     otherwise has only nominal assets. Accordingly, it is unlikely that DELACO
     will be able to indemnify us beyond its insurance coverage although we
     believe we should not be held legally responsible for products we did not
     manufacture and sell. In addition, there can be no assurance that the
     insurance maintained by DELACO will be sufficient to cover claims related
     to products manufactured or sold prior to our acquisition of DEXATRIM. Our
     product liability insurance, as described more fully below, would not apply
     to claims arising from products manufactured and sold prior to our
     acquisition of DEXATRIM.

     We are currently defending the balance of approximately 140 lawsuits
     involving claims by approximately 410 plaintiffs. Of these 410 plaintiffs,
     approximately 170 allege injury as a result of ingestion of DEXATRIM
     containing PPA, approximately 180 allege injury as a result of ingestion of
     a product other than DEXATRIM, and approximately 60 have not identified a
     product.

     Of the approximately 170 plaintiffs who allege injury as a result of
     ingestion of DEXATRIM containing PPA, 23 plaintiffs are subject to pending
     motions to dismiss for failure to comply with discovery and/or motions for
     summary judgment applicable to injuries excluded by the federal court's
     evidentiary rulings; 23 plaintiffs have alleged in ingestion of DEXATRIM,
     but have not alleged the date of ingestion or the type of injury suffered;
     and we believe up to 25 plaintiffs may have purchased products sold by
     Thompson Medical Company prior to our acquisition of DEXATRIM in December
     1998. We believe that there are approximately 100 plaintiffs who have
     alleged that they suffered a stroke within three days of ingesting DEXATRIM
     products containing PPA that were sold after our acquisition of DEXATRIM in
     December 1998. We believe plaintiffs who make and are able to prove such
     allegations are more likely to recover damages from us. Based on discovery
     conducted to date, we believe that a limited number of these plaintiffs
     present alleged facts and circumstances and potential damages similar to
     the Villarreal case discussed below. However, as additional lawsuits are
     filed and discovery in the existing lawsuits continues, we expect to know
     more about the characteristics of these cases, which will result in changes
     in the number of plaintiffs whose alleged injuries are within the
     description outlined above and our assessment of the plaintiffs'
     allegations.

     On May 7, 2003, we announced that a settlement had been reached in the case
     of Jennifer Villarreal, et al. v. Chattem, Inc., et al., which was
     scheduled for trial in May 2003 in the District Court of Brazoria County,
     Texas. In this case, the plaintiff suffered a hemorrhagic stroke after
     allegedly ingesting DEXATRIM containing PPA. Pursuant to the terms of the
     settlement, we paid a settlement amount of $3,000 plus $500 for certain
     fees and expenses and were fully released from further liability in the
     case. The settlement was funded through our

                                       12
<PAGE>

     product liability insurance coverage and thus had no impact on our
     financial position, results of operations or cash flows. The settlement
     amount and related expenses did reduce the amount of insurance coverage
     available to us for the pending and any subsequently filed cases related to
     DEXATRIM containing PPA to $98,500.

     During the third quarter of fiscal 2003, the United States District Court
     for the Western District of Washington ruled that scientific evidence
     supporting the assertion that PPA is an independent risk factor for stroke
     is admissible at trial if the PPA was ingested within three days of the
     stroke. In cases where the ingestion of PPA occurred more than three days
     prior to the stroke, such evidence is inadmissible. The court also ruled
     that evidence supporting the assertion that PPA causes non-stroke injuries
     such as heart attack, seizures, arrhythmia and psychosis is inadmissible at
     trial. Consequently, we believe that federal court DEXATRIM cases involving
     ingestion of DEXATRIM with PPA outside the three-day period and cases
     alleging non-stroke injuries will be dismissed.

     There are no cases involving an alleged ingestion of DEXATRIM with PPA
     currently set for trial in 2003. We currently have one case set for trial
     in June 2004 and anticipate that additional cases may be set for trial in
     the second half of 2004.

     We are aggressively defending these lawsuits. Because of the number of
     lawsuits filed, the early stage of discovery in many of these cases, the
     non-specific factual allegations against a broad group of defendants in
     most of the cases, the unspecified amount of damages in most of the cases,
     and the unresolved evidentiary hearings and other legal matters presently
     pending before the various state and federal courts, it is impractical to
     state with certainty at this time the amount being sought in these cases.
     At this stage of the proceedings, we cannot express a range of likely
     outcomes or fully evaluate the risks that these lawsuits pose and,
     consequently, have not established reserves for the DEXATRIM litigation. It
     is also too early to estimate the number of lawsuits related to DEXATRIM
     with PPA that will be filed or whether our available insurance will be
     sufficient to cover these claims. If these lawsuits result in liabilities
     greater than our insurance coverage, we may not have sufficient resources
     to satisfy these obligations.

     We currently maintain product liability insurance that provides coverage
     for product liability claims, including those asserted in the lawsuits
     currently pending and anticipated to be filed against us relating to the
     existence of PPA in DEXATRIM. Subject to the outcome of the Kemper lawsuit
     discussed below, we have $98,500 of remaining product liability insurance
     coverage available to us for injuries related to DEXATRIM containing PPA
     occurring after our acquisition of DEXATRIM in December 1998 and prior to
     May 31, 2001 through policies with four different insurers, if the claims
     are made before May 31, 2004. Injuries occurring before December 1998 or
     after May 31, 2001, or claims made after May 31, 2004, would not be covered
     by these insurance policies. We currently have one claim in which there are
     multiple PPA manufacturers as defendants that relate to injuries occurring
     after May 31, 2001. We believe we have meritorious defenses to these
     claims, and are aggressively defending them. Our insurance policies are
     subject to certain other limitations that are generally customary for
     policies of this type.

     We maintain a significantly lower level of insurance coverage for all other
     potential claims relating to our products, including DEXATRIM products
     containing ephedrine. Our product liability insurance coverage for all of
     our other products, including DEXATRIM products containing ephedrine,
     consists of $10,000 of self-insured coverage through our captive insurance
     subsidiary, of which approximately $3,600 is currently funded, and a total
     of $30,000 of excess coverage through third party insurers.

     As previously reported, Kemper Indemnity Insurance Company ("Kemper") has
     filed a lawsuit against us in federal court in Chattanooga, Tennessee
     seeking to rescind a $50,000 policy of excess insurance coverage for
     product liability claims, including those relating to the existence of PPA
     in DEXATRIM (the "Kemper Policy"). Coverage under the Kemper Policy is in
     excess of $23,500 of product liability insurance coverage that is available
     to us from two other insurance companies. In addition, we have $25,000 of
     insurance coverage from a fourth insurance company that is in excess of the
     Kemper Policy. In the lawsuit, Kemper is seeking to rescind the Kemper
     Policy based on allegations that we failed to disclose material information
     regarding the Yale Study (a study initiated in 1994 by the Consumer
     Healthcare Products Association (formerly the Nonprescription Drug
     Manufacturers Association) in conjunction with the Yale University School
     of Medicine to investigate a possible association, if any, of stroke in
     women aged 18 to 49 using PPA) during the submission process to renew the
     Kemper Policy for coverage for the December 21, 1999 to May 31, 2001

                                       13
<PAGE>

     policy period. In the alternative, Kemper is seeking a declaratory judgment
     on certain policy interpretation issues that if granted would bar or limit
     coverage for PPA-related claims under the Kemper Policy.

     We believe that the claims made by Kemper in its lawsuit are without merit.
     We have filed an answer denying that Kemper is entitled to any of the
     relief sought and asserting counterclaims against Kemper and affiliated
     parties including Berkshire Hathaway Inc. alleging, among other things, a
     civil conspiracy to deny coverage, tortious interference with our insurance
     contract with Kemper, bad faith, violation of Tennessee's consumer
     protection law and fraud.

     If the Kemper Policy is rescinded or its coverage limited, then we would
     have significantly less insurance coverage with which to satisfy claims
     arising in the DEXATRIM with PPA cases, which in turn would substantially
     increase the likelihood that we would have to satisfy these claims from our
     assets. There can be no assurances that we would have sufficient resources
     to satisfy these claims.

     Although there are no currently pending lawsuits from our other product
     liability insurers, there can be no assurances that one or more of our
     insurers will not file and pursue a lawsuit to rescind or limit their
     insurance coverage on grounds that are similar to the claims alleged by
     Kemper, or other grounds.

     We have also been named as a defendant in two lawsuits alleging that the
     plaintiffs were injured as a result of the ingestion of DEXATRIM containing
     ephedrine. Our available insurance for the defense of these lawsuits, as
     described above, is $40,000. We discontinued the manufacturing and shipment
     of DEXATRIM containing ephedrine on September 20, 2002.

     Effective on or about May 1, 2003, we and other retail and manufacturing
     defendants reached a settlement without admission of liability or violation
     of law in a lawsuit brought in the Superior Court of the State of
     California, County of San Francisco, by Citizens for Responsible Business,
     Inc. alleging our failure to comply with newly-added provisions of the
     Federal Food, Drug and Cosmetic Act with respect to the labeling of
     products purporting to contain "ginseng" in violation of the California
     Business and Professional Code. The settlement amount was not material to
     our results of operations. Under the terms of the settlement, the
     plaintiffs provided a general release to us and all of our suppliers,
     distributors and retailers with respect to all of our products, while we
     are prohibited from shipping after July 1, 2003 products containing
     "Siberian Ginseng" that do not comply with the new labeling requirements.

     Other claims, suits and complaints arise in the ordinary course of our
     business involving such matters as patents and trademarks, product
     liability, environmental matters and other alleged injuries or damage. The
     outcome of such litigation cannot be predicted, but, in the opinion of
     management, based in part upon the opinion of counsel, all such other
     pending matters are without merit or are of such kind or involve such other
     amounts as would not have a material adverse effect on our consolidated
     financial position, results of operations or cash flows if disposed of
     unfavorably.

     REGULATORY
     ----------
     The Federal Food and Drug Administration ("FDA"), the Drug Enforcement
     Administration and a number of state and local governments have enacted or
     proposed restrictions or prohibitions on the sale of products that contain
     ephedrine. Ephedrine can refer to the herbal substance derived from the
     plant ephedra or the plant heart leaf, which, until September 2002, was
     used in the manufacturing of some forms of DEXATRIM Natural and DEXATRIM
     Results, or synthetic ephedrine, a FDA regulated ingredient used in some
     OTC drug products, which has not been used in our products. These
     restrictions include the prohibition of OTC sales, required warnings or
     labeling statements, record keeping and reporting requirements, the
     prohibition of sales to minors, per transaction limits on the quantity of
     product that may be purchased and limitations on advertising and promotion.
     The enactment of further restrictions or prohibitions on sales, the
     perceived safety concerns related to ephedrine and the possibility of
     further regulatory action could result in an increase in the number of
     ephedrine related lawsuits filed, including ones in which we are named as a
     defendant. In 1997, the FDA published a proposed rule on the use of dietary
     supplements containing ephedrine alkaloids. In June 2002, the United States
     Department of Health and Human Services ("HHS") proposed an expanded
     scientific evaluation of ephedra which led to the issuance of a report on
     February 28, 2003 by the RAND-based Southern California Evidence-Based
     Practice Center (the "RAND Report"). The RAND Report concluded that
     ephedrine, ephedrine plus caffeine and ephedra-containing dietary
     supplements with or without herbs

                                       14
<PAGE>

     containing caffeine all promote modest amounts of weight loss over the
     short term and use of ephedra or ephedrine plus caffeine is associated with
     an increased risk of gastrointestinal, psychiatric and autonomic symptoms.
     The adverse event reports contained a smaller number of more serious
     adverse events. Given the small number of such events, the RAND Report
     concluded that further study would be necessary to determine whether
     consumption of ephedra or ephedrine may be causally related to these
     serious adverse events. In connection with the RAND Report, HHS has sought
     public comment on whether additional measures are required concerning the
     sale and distribution of dietary supplements containing ephedrine
     alkaloids. In September 2001, the Public Citizen Health Research Group
     petitioned the FDA to ban the production and sale of dietary supplements
     containing ephedrine alkaloids. To date, HHS, which oversees the FDA, and
     the FDA have not reached a final decision on the petition.

     We discontinued the manufacturing and shipment of DEXATRIM products
     containing ephedrine in September 2002. Our DEXATRIM products containing
     ephedrine may continue to be sold in isolated cases until our customers'
     existing supply of inventory is exhausted or until the products are
     returned to us. Negative publicity relating to the possible harmful effects
     of ephedrine and the possibility of further regulatory action to restrict
     or prohibit the sale of products containing ephedrine could result in a
     return of products from retailers or our decision to accept product returns
     of DEXATRIM with ephedrine, for which we provided a $750 allowance in the
     first quarter of fiscal 2003. At this time we believe we have received
     returns representing substantially all of the DEXATRIM with ephedrine and
     that this allowance amount is adequate to cover any returns of DEXATRIM
     product containing ephedrine that might yet be received. The unused portion
     of this allowance was $235 at August 31, 2003.

     We were notified in October 2000 that the FDA denied a citizen petition
     submitted by Thompson Medical Company, Inc., the previous owner of
     SPORTSCREME and ASPERCREME. The petition sought a determination that 10%
     trolamine salicylate, the active ingredient in SPORTSCREME and ASPERCREME,
     was clinically proven to be an effective active ingredient in external
     analgesic OTC drug products and should be included in the FDA's yet-to-be
     finalized monograph for external analgesics. We have met with the FDA and
     submitted a proposed protocol study to evaluate the efficacy of 10%
     trolamine salicylate as an active ingredient in OTC external analgesic drug
     products. We are working to develop alternate formulations for SPORTSCREME
     and ASPERCREME in the event that the FDA does not consider the available
     clinical data to conclusively demonstrate the efficacy of trolamine
     salicylate when the OTC external analgesic monograph is finalized. If 10%
     trolamine salicylate is not included in the final monograph, we would
     likely be required to discontinue these products as currently formulated
     and remove them from the market after expiration of an anticipated grace
     period. If this occurred, we believe we could still market these products
     as homeopathic products, and could also reformulate them using ingredients
     approved in the FDA monograph.

     Certain of our topical analgesic products are currently marketed under a
     FDA tentative final monograph. The FDA has recently proposed that the final
     monograph exclude external analgesic products in patch, plaster, or
     poultice form, unless the FDA receives additional data supporting the
     safety and efficacy of these products. We will present to the FDA
     information regarding the safety of the patches and arguments to support
     their product's inclusion in the final monograph. We are also involved in a
     coordinated industry effort to establish with the FDA a protocol of
     additional research that will allow the patches to be marketed under the
     final monograph even if the final monograph does not explicitly allow them.
     This additional research may require a considerable amount of expensive
     testing and data analysis by expert consultants. We believe that the
     monograph is unlikely to become final and take effect before May 2005. If
     neither of our actions described above are successful, and the final
     monograph excludes such products, we will have to file a new drug
     application ("NDA") in order to continue to market the ICY HOT Patch, or
     similar delivery systems, under other of our topical analgesic brands, and
     would have to remove the existing product from the market, as of the
     effective date of the final monograph, pending FDA review and approval of
     the NDA. The preparation of a NDA would likely take us six to 18 months
     and would be expensive. It typically takes the FDA at least 12 months to
     rule on the NDA once it is submitted.

16.  ACQUISITION AND SALE OF BRANDS
     ------------------------------
     On March 28, 2002, we acquired SELSUN BLUE, a line of medicated dandruff
     shampoos, from Abbott Laboratories ("Abbott") for $75,000, plus inventories
     of $1,380 and assumed liabilities of $1,178. This acquisition includes
     worldwide rights (except India) to manufacture, sell and market SELSUN BLUE
     plus related intellectual property and certain manufacturing equipment.
     Abbott, or manufacturers under contract to

                                       15
<PAGE>

     Abbott, manufactured the product for us domestically until June 2003 and
     internationally will manufacture the product for us, except in North
     America, until March 2004, or such earlier date as we enter into our own
     agreements with contract manufacturers. All of our SELSUN BLUE domestic
     product lines are presently being manufactured at our Chattanooga
     facilities. We generally pay Abbott a fee of ten percent over standard
     manufacturing costs until we assume manufacturing or enter into third party
     agreements. Abbott is also marketing, selling and distributing SELSUN BLUE
     products for us in certain foreign countries until we satisfy various
     foreign regulatory requirements, new distributors are in place and any
     applicable marketing permits are transferred. During the transition period,
     Abbott initially pays us a royalty equal to 28% of international sales of
     SELSUN BLUE in these countries with the royalty reduced to 14% of
     international sales in certain countries if foreign regulatory requirements
     are satisfied prior to our assumption of sales and marketing responsibility
     in such countries. Abbott pays all costs and expenses related to the
     manufacture, marketing and sales of SELSUN BLUE in these countries. As we
     assume responsibility for the sales and marketing effort in a country, the
     royalty arrangement with respect to such country terminates, and we record
     these international sales directly, as well as the costs and expenses
     associated with these sales. We have completed the transition for certain
     key markets and expect to complete the transition for the other foreign
     markets with significant sales by March 2004.

     The following table for the three and nine months ended August 31, 2003
     summarizes our estimate of how the results for SELSUN BLUE international,
     which are included as royalties on our Consolidated Statements of Income,
     would have been presented had the transition period been finalized on the
     date of acquisition:

               SELECTED SELSUN BLUE INTERNATIONAL DATA (Unaudited)

<TABLE><CAPTION>
                                                  For the Three           For the Nine
                                                   Months Ended           Months Ended
                                                    August 31,             August 31,
                                                       2003                   2003
                                                    ---------              ---------
<S>                                                 <C>                    <C>
       NET SALES..............................      $   1,364              $   5,469
                                                    ---------              ---------
       COSTS AND EXPENSES:
         Cost of sales........................            529                  2,119
         Advertising and promotion............            202                    809
         Selling, general and administrative..            423                  1,667
                                                    ---------              ---------
           Total costs and expenses...........          1,154                  4,595
                                                    ---------              ---------

       INCOME FROM OPERATIONS.................      $     210              $     874
                                                    =========              =========
</TABLE>

The following unaudited consolidated pro forma information assumes the
acquisition of SELSUN BLUE had occurred at the beginning of the period
presented:

            PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS (Unaudited)

                                                       For the Nine
                                                       Months Ended
                                                        August 31,
                                                           2002
                                                        ---------
        Total revenue...............................    $ 182,221
        Income before change in accounting
          principle.................................       14,965
        Net income..................................        6,088
        Earnings per share -  basic:
          Income before change in accounting
            principle...............................         0.81
          Net income................................         0.33

        Earnings per share- diluted:
          Income before change in accounting
            principle...............................         0.78
          Net income................................         0.32

                                       16
<PAGE>

17.  INCOME TAXES
     ------------
     We record income tax expense in our financial statements based on an
     estimated annual effective income tax rate. During the second quarter of
     fiscal 2003, we revised our estimated income tax rate based on the
     implementation of state and international tax planning strategies. This
     revision resulted in a decrease in the annual effective income tax rate to
     37% from 38% or a reduction in income tax expense of $109 and $301 for the
     three and nine months ended August 31, 2003, respectively.

18.  PRODUCT AND GEOGRAPHICAL SEGMENT INFORMATION
     --------------------------------------------
     Net sales of our domestic product categories within our single healthcare
     business segment for the three and nine months ended August 31, 2003 and
     2002, respectively, are as follows:

<TABLE> <CAPTION>
                                            For the Three Months      For the Nine Months
                                              Ended August 31,          Ended August 31,
                                          -----------------------   -----------------------
                                             2003          2002        2003          2002
                                          ---------     ---------   ---------     ---------
<S>                                       <C>           <C>         <C>           <C>
         Topical analgesics               $  14,540     $  16,224   $  42,738     $  46,632
         Medicated skin care products        16,926        16,584      44,988        40,526
         Dietary supplements                  9,664         9,943      30,232        31,861
         Medicated dandruff shampoos          6,116         5,429      20,928         9,251
         Other OTC products                   6,490         9,264      23,711        28,003
                                          ---------     ---------   ---------     ---------
           Total                          $  53,736     $  57,444   $ 162,597     $ 156,273
                                          =========     =========   =========     =========
</TABLE>

19.  CONSOLIDATING FINANCIAL STATEMENTS
     ----------------------------------
     The condensed consolidating financial statements, for the dates or periods
     indicated, of Chattem, Inc. ("Chattem"), Signal Investment & Management Co.
     ("Signal") and SunDex, LLC ("SunDex"), the guarantors of the long-term debt
     of Chattem, and the non-guarantor wholly-owned subsidiaries of Chattem are
     presented below. Signal and SunDex are wholly-owned subsidiaries of
     Chattem; the guarantee of Signal and SunDex is full and unconditional and
     joint and several. The guarantee of Signal and SunDex as of August 31, 2003
     arose in conjunction with Chattem's issuance of the 8.875% senior
     subordinated notes on March 24, 1998 and the $60,000 Credit Facility
     obtained by Chattem on March 28, 2002. The guarantees' terms match the
     terms of the 8.875% senior subordinated notes and the Credit Facility. The
     maximum amount of future payments the guarantors would be required to make
     under the guarantees as of August 31, 2003 is $214,538.









                                       17
<PAGE>

                                                                         Note 19
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                          CONSOLIDATING BALANCE SHEETS
                          ----------------------------
                                 AUGUST 31, 2003
                                 ---------------
                          (Unaudited and in thousands)

<TABLE><CAPTION>
                                                                      GUARANTOR     NON-GUARANTOR
                                                                      SUBSIDIARY      SUBSIDIARY
                                                      CHATTEM         COMPANIES       COMPANIES       ELIMINATIONS     CONSOLIDATED
                                                    ------------     ------------    ------------     ------------     ------------
<S>                                                 <C>              <C>             <C>              <C>              <C>
                     ASSETS
                     ------

CURRENT ASSETS:
  Cash and cash equivalents ....................    $     13,717     $        491    $      7,513     $         --     $     21,721
  Accounts receivable, less allowances of
   $5,155 ......................................          24,878           18,118           3,662          (18,118)          28,540
  Refundable and deferred income taxes .........          11,801               --              56               --           11,857
  Inventories ..................................          14,055            2,330           3,393               --           19,778
  Prepaid expenses and other current assets ....           2,924               --             224               --            3,148
                                                    ------------     ------------    ------------     ------------     ------------
      Total current assets .....................          67,375           20,939          14,848          (18,118)          85,044
                                                    ------------     ------------    ------------     ------------     ------------

PROPERTY, PLANT AND EQUIPMENT, NET .............          27,013              775             344               --           28,132
                                                    ------------     ------------    ------------     ------------     ------------

OTHER NONCURRENT ASSETS:
  Patents, trademarks and other purchased
     product rights, net .......................           1,143          244,763              --               --          245,906
  Debt issuance costs, net .....................           5,867               --              --               --            5,867
  Investment in subsidiaries ...................          86,790               --              --          (86,790)              --
  Other ........................................           3,416               --             515               --            3,931
                                                    ------------     ------------    ------------     ------------     ------------
      Total other noncurrent assets ............          97,216          244,763             515          (86,790)         255,704
                                                    ------------     ------------    ------------     ------------     ------------
      TOTAL ASSETS .............................    $    191,604     $    266,477    $     15,707     $   (104,908)    $    368,880
                                                    ============     ============    ============     ============     ============

     LIABILITIES AND SHAREHOLDERS' EQUITY
     ------------------------------------

CURRENT LIABILITIES:
  Current maturities of long-term debt .........    $      8,250     $         --    $         --     $         --     $      8,250
  Accounts payable .............................           8,495               --           1,303               --            9,798
  Payable to bank ..............................             425               --              --               --              425
  Accrued liabilities ..........................          38,099            1,561           1,235          (18,118)          22,777
                                                    ------------     ------------    ------------     ------------     ------------
      Total current liabilities ................          55,269            1,561           2,538          (18,118)          41,250
                                                    ------------     ------------    ------------     ------------     ------------

LONG-TERM DEBT, less current maturities ........         206,434               --              --               --          206,434
                                                    ------------     ------------    ------------     ------------     ------------

DEFERRED INCOME TAXES ..........................             178           27,210              --               --           27,388
                                                    ------------     ------------    ------------     ------------     ------------

OTHER NONCURRENT LIABILITIES ...................           1,671               --              --               --            1,671
                                                    ------------     ------------    ------------     ------------     ------------

INTERCOMPANY ACCOUNTS ..........................        (164,085)         160,671           3,414               --               --
                                                    ------------     ------------    ------------     ------------     ------------

SHAREHOLDERS' EQUITY:
  Preferred shares, without par value,
     authorized 1,000, none issued .............              --               --              --               --               --
  Common shares, without par value,
     authorized 50,000, issued 19,157 ..........          77,811           63,067           7,647          (70,714)          77,811
  Retained earnings ............................          17,850           13,968           2,914          (16,882)          17,850
                                                    ------------     ------------    ------------     ------------     ------------
      Total ....................................          95,661           77,035          10,561          (87,596)          95,661
  Unamortized value of restricted common
     shares issued .............................          (2,253)              --              --               --           (2,253)
  Cumulative other comprehensive income:
      Foreign currency translation adjustment ..          (1,271)              --            (806)             806           (1,271)
                                                    ------------     ------------    ------------     ------------     ------------
      Total shareholders' equity ...............          92,137           77,035           9,755          (86,790)          92,137
                                                    ------------     ------------    ------------     ------------     ------------
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY    $    191,604     $    266,477    $     15,707     $   (104,908)    $    368,880
                                                    ============     ============    ============     ============     ============
</TABLE>


                                       18
<PAGE>

                                                                         Note 19
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                          CONSOLIDATING BALANCE SHEETS
                          ----------------------------
                                NOVEMBER 30, 2002
                                -----------------
                                 (In thousands)
<TABLE><CAPTION>
                                                                      GUARANTOR     NON-GUARANTOR
                                                                      SUBSIDIARY      SUBSIDIARY
                                                      CHATTEM         COMPANIES       COMPANIES       ELIMINATIONS     CONSOLIDATED
                                                    ------------     ------------    ------------     ------------     ------------
<S>                                                 <C>              <C>             <C>              <C>              <C>
                      ASSETS
                      ------

CURRENT ASSETS:
  Cash and cash equivalents .....................   $     11,505     $      1,138    $      3,281     $         --     $     15,924
  Accounts receivable, less allowances of
   $3,897 .......................................         21,585            2,297           4,088           (2,297)          25,673
  Refundable and deferred income taxes ..........          9,791               --              46               --            9,837
  Inventories ...................................         12,734            3,139           2,896               --           18,769
  Prepaid expenses and other current assets .....          2,064               --             120               --            2,184
                                                    ------------     ------------    ------------     ------------     ------------
      Total current assets ......................         57,679            6,574          10,431           (2,297)          72,387
                                                    ------------     ------------    ------------     ------------     ------------

PROPERTY, PLANT AND EQUIPMENT, NET ..............         25,567              775             316               --           26,658
                                                    ------------     ------------    ------------     ------------     ------------

OTHER NONCURRENT ASSETS:
  Patents, trademarks and other purchased
     product rights, net ........................          1,397          244,390              --               --          245,787
  Debt issuance costs, net ......................          7,126               --              --               --            7,126
  Investment in subsidiaries ....................         66,783               --              --          (66,783)              --
  Other .........................................          3,590               --              15               --            3,605
                                                    ------------     ------------    ------------     ------------     ------------
      Total other noncurrent assets .............         78,896          244,390              15          (66,783)         256,518
                                                    ------------     ------------    ------------     ------------     ------------
      TOTAL ASSETS ..............................   $    162,142     $    251,739    $     10,762     $    (69,080)    $    355,563
                                                    ============     ============    ============     ============     ============

      LIABILITIES AND SHAREHOLDERS' EQUITY
      ------------------------------------

CURRENT LIABILITIES:
  Current maturities of long-term debt ..........   $      7,250     $         --    $         --     $         --     $      7,250
  Accounts payable ..............................         10,957               --           1,252               --           12,209
  Payable to bank ...............................            452               --              --               --              452
  Accrued liabilities ...........................         21,986              326           1,089           (2,297)          21,104
                                                    ------------     ------------    ------------     ------------     ------------
      Total current liabilities .................         40,645              326           2,341           (2,297)          41,015
                                                    ------------     ------------    ------------     ------------     ------------

LONG-TERM DEBT, less current maturities .........        217,458               --              --               --          217,458
                                                    ------------     ------------    ------------     ------------     ------------

DEFERRED INCOME TAXES ...........................         (1,065)          21,809              --               --           20,744
                                                    ------------     ------------    ------------     ------------     ------------

OTHER NONCURRENT LIABILITIES ....................          1,602               --              --               --            1,602
                                                    ------------     ------------    ------------     ------------     ------------

INTERCOMPANY ACCOUNTS ...........................       (171,242)         170,698             544               --               --
                                                    ------------     ------------    ------------     ------------     ------------

SHAREHOLDERS' EQUITY:
  Preferred shares, without par value,
     authorized 1,000, none issued ..............             --               --              --               --
  Common shares, without par value,
     authorized 50,000, issued 19,177 ...........         79,313           63,067           7,647          (70,714)          79,313
  Retained earnings (deficit) ...................         (1,097)          (4,161)          1,501            2,660           (1,097)
                                                    ------------     ------------    ------------     ------------     ------------
      Total .....................................         78,216           58,906           9,148          (68,054)          78,216
  Unamortized value of restricted common
     shares issued ..............................         (1,713)              --              --               --           (1,713)
  Cumulative other comprehensive income:
      Foreign currency translation adjustment ...         (1,759)              --          (1,271)           1,271           (1,759)
                                                    ------------     ------------    ------------     ------------     ------------
      Total shareholders' equity ................         74,744           58,906           7,877          (66,783)          74,744
                                                    ------------     ------------    ------------     ------------     ------------
      TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.   $    162,142     $    251,739    $     10,762     $    (69,080)    $    355,563
                                                    ============     ============    ============     ============     ============
</TABLE>

                                       19
<PAGE>

                                                                         Note 19
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                       CONSOLIDATING STATEMENTS OF INCOME
                       ----------------------------------
                    FOR THE NINE MONTHS ENDED AUGUST 31, 2003
                    -----------------------------------------
                          (Unaudited and in thousands)





<TABLE><CAPTION>
                                                                      GUARANTOR     NON-GUARANTOR
                                                                      SUBSIDIARY      SUBSIDIARY
                                                      CHATTEM         COMPANIES       COMPANIES       ELIMINATIONS     CONSOLIDATED
                                                    ------------     ------------    ------------     ------------     ------------
<S>                                                 <C>              <C>             <C>              <C>              <C>
TOTAL REVENUES .................................    $    135,909     $     53,512    $     14,225     $    (22,406)    $    181,240
                                                    ------------     ------------    ------------     ------------     ------------

COSTS AND EXPENSES:
  Cost of sales ................................          37,413            8,113           5,873               --           51,399
  Advertising and promotion ....................          41,218            8,333           4,458               --           54,009
  Selling, general and administrative...........          28,510              208           1,727               --           30,445
  Equity in subsidiary income ..................         (22,542)              --              --           22,542               --
                                                    ------------     ------------    ------------     ------------     ------------
      Total costs and expenses .................          84,599           16,654          12,058           22,542          135,853
                                                    ------------     ------------    ------------     ------------     ------------

INCOME FROM OPERATIONS .........................          51,310           36,858           2,167          (44,948)          45,387
                                                    ------------     ------------    ------------     ------------     ------------

OTHER INCOME (EXPENSE):
  Interest expense .............................         (15,431)              --              --               --          (15,431)
  Investment and other income, net .............              69                3              47               --              119
  Royalties ....................................         (20,567)          (1,561)           (278)          22,406               --
  Corporate allocations ........................           2,951           (2,870)            (81)              --               --
                                                    ------------     ------------    ------------     ------------     ------------
      Total other income (expense) .............         (32,978)          (4,428)           (312)          22,406          (15,312)
                                                    ------------     ------------    ------------     ------------     ------------

INCOME BEFORE INCOME TAXES .....................          18,332           32,430           1,855          (22,542)          30,075


(BENEFIT) PROVISION FOR INCOME
  TAXES ........................................            (615)          11,301             442               --           11,128
                                                    ------------     ------------    ------------     ------------     ------------

NET INCOME .....................................    $     18,947     $     21,129    $      1,413     $    (22,542)    $     18,947
                                                    ============     ============    ============     ============     ============
</TABLE>






                                       20
<PAGE>

                                                                         Note 19
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                       CONSOLIDATING STATEMENTS OF INCOME
                       ----------------------------------
                    FOR THE NINE MONTHS ENDED AUGUST 31, 2002
                    -----------------------------------------
                          (Unaudited and in thousands)




<TABLE><CAPTION>
                                                                      GUARANTOR     NON-GUARANTOR
                                                                      SUBSIDIARY      SUBSIDIARY
                                                      CHATTEM         COMPANIES       COMPANIES       ELIMINATIONS     CONSOLIDATED
                                                    ------------     ------------    ------------     ------------     ------------
<S>                                                 <C>              <C>             <C>              <C>              <C>
TOTAL REVENUES .................................    $    140,947     $     26,719    $     12,022     $     (8,198)    $    171,490
                                                    ------------     ------------    ------------     ------------     ------------

COSTS AND EXPENSES:
  Cost of sales ................................          38,893            5,193           4,587               --           48,673
  Advertising and promotion ....................          44,881            7,315           3,080               --           55,276
  Selling, general and administrative ..........          27,051              127           1,824               --           29,002
  Equity in subsidiary income ..................            (838)              --              --              838               --
                                                    ------------     ------------    ------------     ------------     ------------
      Total costs and expenses .................         109,987           12,635           9,491              838          132,951
                                                    ------------     ------------    ------------     ------------     ------------

INCOME FROM OPERATIONS .........................          30,960           14,084           2,531           (9,036)          38,539
                                                    ------------     ------------    ------------     ------------     ------------

OTHER INCOME (EXPENSE):
  Interest expense .............................         (15,518)              --              --               --          (15,518)
  Investment and other income, net .............             143               66              34               --              243
  Royalties ....................................          (6,984)            (973)           (241)           8,198               --
  Insurance premiums ...........................            (500)              --             500               --               --
  Corporate allocations ........................           1,862           (1,784)            (78)              --               --
                                                    ------------     ------------    ------------     ------------     ------------
      Total other income (expense) .............         (20,997)          (2,691)            215            8,198          (15,275)
                                                    ------------     ------------    ------------     ------------     ------------

INCOME BEFORE INCOME TAXES AND
  CHANGE IN ACCOUNTING PRINCIPLE ...............           9,963           11,393           2,746             (838)          23,264

PROVISION FOR INCOME TAXES .....................           4,416            3,999             425               --            8,840
                                                    ------------     ------------    ------------     ------------     ------------

INCOME BEFORE CHANGE IN
  ACCOUNTING PRINCIPLE..........................           5,547            7,394           2,321             (838)          14,424


CUMULATIVE EFFECT OF CHANGE IN
  ACCOUNTING PRINCIPLE, NET OF
  INCOME TAX BENEFIT ...........................              --           (8,877)             --               --           (8,877)
                                                    ------------     ------------    ------------     ------------     ------------

NET INCOME (LOSS) ..............................    $      5,547     $     (1,483)   $      2,321     $       (838)    $      5,547
                                                    ============     ============    ============     ============     ============
</TABLE>






                                       21
<PAGE>

                                                                         Note 19
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                     --------------------------------------
                    FOR THE NINE MONTHS ENDED AUGUST 31, 2003
                    -----------------------------------------
                          (Unaudited and in thousands)




<TABLE><CAPTION>
                                                                      GUARANTOR     NON-GUARANTOR
                                                                      SUBSIDIARY      SUBSIDIARY
                                                      CHATTEM         COMPANIES       COMPANIES       ELIMINATIONS     CONSOLIDATED
                                                    ------------     ------------    ------------     ------------     ------------
<S>                                                 <C>              <C>             <C>              <C>              <C>
OPERATING ACTIVITIES:
  Net income ...................................    $     18,947     $     21,129    $      1,413     $    (22,542)    $     18,947
  Adjustments to reconcile net income to net
    cash provided by operating activities:
    Depreciation and amortization ..............           4,451               --             114               --            4,565
    Deferred income tax provision ..............             516            5,401             (10)              --            5,907
    Other, net .................................            (101)              --               7               --              (94)
    Equity in subsidiary income ................         (22,542)              --              --           22,542               --
    Changes in operating assets and liabilities:
     Accounts receivable .......................          (3,293)         (15,821)            426           15,821           (2,867)
     Refundable income taxes ...................              40               --              --               --               40
     Inventories ...............................          (1,321)             809            (497)              --           (1,009)
     Prepaid expenses and other current assets .            (860)              --            (104)              --             (964)
     Accounts payable and accrued liabilities ..          13,611            1,235             197          (15,821)            (778)
                                                    ------------     ------------    ------------     ------------     ------------
     Net cash provided by operating activities .           9,448           12,753           1,546               --           23,747
                                                    ------------     ------------    ------------     ------------     ------------

INVESTING ACTIVITIES:
  Purchases of property, plant and equipment ...          (3,800)              --            (133)              --           (3,933)
  Purchases of patents, trademarks and other
    products rights ............................              --             (373)             --               --             (373)
  Change in other assets, net ..................             143               --             (35)              --              108
                                                    ------------     ------------    ------------     ------------     ------------
       Net cash used in investing activities ...          (3,657)            (373)           (168)              --           (4,198)
                                                    ------------     ------------    ------------     ------------     ------------

FINANCING ACTIVITIES:
  Repayment of long-term debt ..................         (10,000)              --              --               --          (10,000)
  Proceeds from exercise of stock options ......           1,533               --              --               --            1,533
  Repurchase of common shares ..................          (5,351)              --              --               --           (5,351)
  Change in payable to bank ....................             (27)              --              --               --              (27)
  Deferred debt issuance costs .................             (25)              --              --               --              (25)
  Changes in intercompany accounts .............           7,291          (10,027)          2,736               --               --
  Dividends paid ...............................           3,000           (3,000)             --               --               --
                                                    ------------     ------------    ------------     ------------     ------------
       Net cash (used in) provided by financing
       activities ..............................          (3,579)         (13,027)          2,736               --          (13,870)
                                                    ------------     ------------    ------------     ------------     ------------

EFFECT OF EXCHANGE RATE CHANGES ON
  CASH AND CASH EQUIVALENTS ....................              --               --             118               --              118
                                                    ------------     ------------    ------------     ------------     ------------

CASH AND CASH EQUIVALENTS:
  Increase (decrease) for the period ...........           2,212             (647)          4,232               --            5,797
  At beginning of period .......................          11,505            1,138           3,281               --           15,924
                                                    ------------     ------------    ------------     ------------     ------------
  At end of period .............................    $     13,717     $        491    $      7,513     $         --     $     21,721
                                                    ============     ============    ============     ============     ============
</TABLE>




                                       22
<PAGE>

                                                                         Note 19
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                     --------------------------------------
                    FOR THE NINE MONTHS ENDED AUGUST 31, 2002
                    -----------------------------------------
                          (Unaudited and in thousands)



<TABLE><CAPTION>
                                                                      GUARANTOR     NON-GUARANTOR
                                                                      SUBSIDIARY      SUBSIDIARY
                                                      CHATTEM         COMPANIES       COMPANIES       ELIMINATIONS     CONSOLIDATED
                                                    ------------     ------------    ------------     ------------     ------------
<S>                                                 <C>              <C>             <C>              <C>              <C>
OPERATING ACTIVITIES:
  Net income (loss) ............................    $      5,547     $     (1,483)   $      2,321     $       (838)    $      5,547
  Adjustments to reconcile net income (loss) to
    net cash provided by (used in) operating
    activities:
    Depreciation and amortization ..............           3,873               --              96               --            3,969
    Deferred income tax provision ..............           9,773           (5,440)             --               --            4,333
    Provision for income taxes .................          (3,999)           3,999              --               --               --
    Cumulative effect of change in accounting
      principle, net ...........................              --            8,877              --               --            8,877
    Stock option charge ........................             175               --              --               --              175
    Other, net .................................             (75)              --              --               --              (75)
    Equity in subsidiary income ................            (838)              --              --              838               --
    Changes in operating assets and liabilities,
      net of product acquisition:
       Accounts receivable .....................          (6,720)              --          (1,570)              --           (8,290)
       Refundable income taxes .................           1,031               --              --               --            1,031
       Inventories .............................           2,862           (2,368)           (738)              --             (244)
       Prepaid expenses and other current assets            (326)              --             (28)              --             (354)
       Accounts payable and accrued liabilities.          21,451               --            (414)              --           21,037
                                                    ------------     ------------    ------------     ------------     ------------
       Net cash provided by (used in) operating
       activities ..............................          32,754            3,585            (333)              --           36,006
                                                    ------------     ------------    ------------     ------------     ------------

INVESTING ACTIVITIES:
  Purchases of property, plant and equipment ...          (2,600)              --             (22)              --           (2,622)
  Purchases of patents, trademarks and other
    products rights ............................          (1,211)         (73,785)             --               --          (74,996)
  Decrease in other assets, net ................             225               --              29               --              254
                                                    ------------     ------------    ------------     ------------     ------------
       Net cash (used in) provided by
       investing activities ....................          (3,586)         (73,785)              7               --          (77,364)
                                                    ------------     ------------    ------------     ------------     ------------

FINANCING ACTIVITIES:
  Repayment of long-term debt ..................          (8,000)              --              --               --           (8,000)
  Proceeds from long-term debt .................          45,000               --              --               --           45,000
  Proceeds from exercise of stock options ......           6,146               --              --               --            6,146
  Repurchase of common shares ..................          (1,650)              --              --               --           (1,650)
  Change in payable to bank ....................              62               --              --               --               62
  Debt issuance costs ..........................          (1,133)              --              --               --           (1,133)
  Changes in intercompany accounts .............         (65,680)          65,886            (206)              --               --
  Dividends paid ...............................           3,000           (3,000)             --               --               --
                                                    ------------     ------------    ------------     ------------     ------------
       Net cash (used in) provided by financing
       activities ..............................         (22,255)          62,886            (206)              --           40,425
                                                    ------------     ------------    ------------     ------------     ------------

EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS ......................              11               --             102               --              113
                                                    ------------     ------------    ------------     ------------     ------------

CASH AND CASH EQUIVALENTS:
  Increase (decrease) for the period ...........           6,924           (7,314)           (430)              --             (820)
  At beginning of period .......................          20,648           10,003           4,794               --           35,445
                                                    ------------     ------------    ------------     ------------     ------------
  At end of period .............................    $     27,572     $      2,689    $      4,364     $         --     $     34,625
                                                    ============     ============    ============     ============     ============
</TABLE>



                                       23
<PAGE>

20. EARNINGS PER SHARE
    ------------------
    The following table presents the computation of per share earnings for the
    three and nine months ended August 31, 2003 and 2002, respectively:




<TABLE><CAPTION>
                                                          FOR THE THREE MONTHS ENDED      FOR THE NINE MONTHS ENDED
                                                                  AUGUST 31,                      AUGUST 31,
                                                         ----------------------------    ----------------------------
                                                             2003            2002            2003            2002
                                                         ------------    ------------    ------------    ------------
<S>                                                      <C>             <C>             <C>             <C>
NET INCOME:
  Income before change in accounting
   principle .........................................   $      6,837    $      6,417    $     18,947    $     14,424
  Change in accounting principle .....................             --              --              --          (8,877)
                                                         ------------    ------------    ------------    ------------
     Net income ......................................   $      6,837    $      6,417    $     18,947    $      5,547
                                                         ============    ============    ============    ============

NUMBER OF COMMON SHARES:
  Weighted average outstanding .......................         19,148          18,940          19,178          18,458
  Issued upon assumed exercise of
   outstanding stock options .........................            647             834             617             700
  Effect of issuance of restricted common
   shares ............................................            110              96             102              88
                                                         ------------    ------------    ------------    ------------
  Weighted average and potential
   dilutive outstanding ..............................         19,905          19,870          19,897          19,246
                                                         ============    ============    ============    ============
NET INCOME PER COMMON SHARE:
  Basic:
     Income before change in accounting
      principle ......................................   $        .36    $        .34    $        .99    $        .78
     Change in accounting principle ..................             --              --              --            (.48)
                                                         ------------    ------------    ------------    ------------
        Total basic ..................................   $        .36    $        .34    $        .99    $        .30
                                                         ============    ============    ============    ============
  Diluted:
     Income before change in accounting
      principle ......................................   $        .34    $        .32    $        .95    $        .75
     Change in accounting principle ..................             --              --              --            (.46)
                                                         ------------    ------------    ------------    ------------
        Total diluted ................................   $        .34    $        .32    $        .95    $        .29
                                                         ============    ============    ============    ============
</TABLE>




                                       24
<PAGE>

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
--------------------------------------------------------------------------
           RESULTS OF OPERATIONS
           ---------------------

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the audited consolidated financial
statements and related notes thereto included in our 2002 Annual Report on Form
10-K filed with the Securities and Exchange Commission. All of the applicable
amounts herein for the three and nine months ended August 31, 2003 and 2002
reflect the two-for-one split of our common stock on November 29, 2002. All
monetary and share amounts are expressed in thousands unless contrarily evident.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. The actual results may differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including, but not limited to, those described in our filings
with the Securities and Exchange Commission.

GENERAL
-------

We are a leading marketer and manufacturer of a broad portfolio of branded
over-the-counter ("OTC") healthcare products, toiletries and dietary
supplements, including such categories as topical analgesics, medicated skin
care products, dietary supplements, medicated dandruff shampoos and other OTC
products. Our portfolio of products includes well-recognized brands, such as:

         o  ICY HOT, ASPERCREME and FLEXALL topical analgesics;

         o  Medicated skin care products such as GOLD BOND medicated skin care
            powder, cream, lotion, first aid, swab and spray products; and
            PHISODERM medicated acne treatment products and skin cleansers;

         o  Dietary supplements including DEXATRIM and the SUNSOURCE line;

         o  SELSUN BLUE medicated dandruff shampoos; and

         o  Other OTC products such as PAMPRIN and PREMSYN PMS, menstrual
            analgesics; HERPECIN-L, a lip care product; and BENZODENT, a dental
            analgesic cream.

Our products typically target niche markets that are often outside the core
product areas of larger companies where we believe we can achieve and sustain
significant market penetration through strong advertising and promotion support.
Many of our products are among the U.S. market leaders in their respective
categories. For example, our portfolio of topical analgesic brands and our GOLD
BOND medicated body powders have the leading U.S. market share in these
categories. We sell our products nationally through mass merchandiser, drug and
food channels, principally utilizing our own sales force.

We will seek sales increases through a combination of acquisitions and internal
growth while seeking to maintain high operating income levels. As previously
high-growth brands mature, sales increases will become even more dependent on
acquisitions and development of successful line extensions. During the first
quarter of fiscal 2003, we introduced GOLD BOND Antifungal Foot Swabs, GOLD BOND
First Aid Quick Spray and GOLD BOND First Aid Wipes. In the third quarter of
2003, we began shipping GOLD BOND Ultimate Healing Skin Therapy Lotion and ICY
HOT Back Patch. Line extensions, product introductions and acquisitions require
a significant amount of introductory advertising and promotional support. For a
period of time, these products do not generate a commensurate amount of sales or
earnings. As a result, we may experience a short-term impact on our
profitability due to acquisitions and line extensions.

We have grown by actively acquiring new brands and expanding our existing
brands. Our strategy to achieve future growth is to acquire new brands, generate
profitable internal growth and expand our international business. On March 28,
2002, we acquired SELSUN BLUE from Abbott Laboratories for $75,000 plus
inventories of $1,380 and assumed liabilities of $1,178. We financed the
acquisition with a $45,000 term loan under our senior secured credit facility
(the "Credit Facility") and $31,380 of cash. We acquired worldwide rights
(except in India) to manufacture, sell and market SELSUN BLUE plus related
intellectual property and certain manufacturing equipment.

                                       25
<PAGE>

Abbott Laboratories, or manufacturers under contract to Abbott Laboratories,
manufactured the product for us domestically until June 2003, and
internationally will manufacture the product for us, except in North America,
until March 2004, or such earlier date as we enter into our own agreements with
contract manufacturers. All of our domestic SELSUN BLUE product lines are
presently being manufactured at our Chattanooga facilities. We generally pay
Abbott Laboratories ten percent over standard manufacturing costs until we
assume manufacturing or enter into third party agreements. Abbott Laboratories
is also marketing, selling and distributing SELSUN BLUE products for us in
certain foreign countries until we satisfy various foreign regulatory
requirements, new distributors are in place and any applicable marketing permits
are transferred. During the transition period, Abbott Laboratories pays us an
initial royalty equal to 28% of international sales of SELSUN BLUE in these
countries with the royalty reduced to 14% of international sales in certain
countries if foreign regulatory requirements are satisfied prior to our
assumption of sales and marketing responsibility in such countries. Abbott
Laboratories pays all costs and expenses related to the manufacture, marketing
and sales of SELSUN BLUE in these countries. As we assume responsibility for the
sales and marketing effort in a country, the royalty arrangement with respect to
such country terminates, and we record these international sales directly, as
well as the costs and expenses associated with these sales. We have completed
the transition for certain key markets and expect to complete the transition for
all other relevant foreign countries by March 2004.

In fiscal 2002, our international revenues were $21,042, or 9.4% of total
revenues. In 2001, SELSUN BLUE was sold in approximately 90 countries, with
aggregate international sales of $20,100, or approximately 50% of SELSUN BLUE'S
total net sales. We are focusing our efforts on expanding SELSUN BLUE'S
international presence in existing key markets, such as Canada, Mexico, Brazil,
the United Kingdom ("U.K.") and Australia. As we initially focus on existing key
markets, we are discontinuing the sale of SELSUN BLUE in certain smaller markets
and will thus experience what we believe will be a short term decrease in
international sales of SELSUN BLUE. We also intend to leverage SELSUN BLUE'S
international marketing and distribution network to launch other brands in
countries where they are not currently being sold. The timing of such launches
will be dependent on the local distributors' resources as well as any regulatory
requirements.

In connection with our acquisition of SELSUN BLUE on March 28, 2002, we obtained
a $60,000 Credit Facility from a syndicate of commercial banks led by Bank of
America, N.A., as agent. The Credit Facility included a $15,000 revolving credit
facility and a $45,000 term loan. The Credit Facility together with our
available cash was used to finance the acquisition of SELSUN BLUE. As of August
31, 2003, we owed $10,000 under the Credit Facility.

In March 2003, we acquired the FISODERM, FISOHEX and FISOAC product line in
Brazil and nearly all of the worldwide trademarks for PHISODERM, PHISOHEX and
other related trademarks from GlaxoSmithKline for an immaterial amount. This
purchase excludes trademarks in Taiwan, Australia, Papua/New Guinea and New
Zealand. In 2002, sales of the Brazilian product line were approximately $200.
These acquisitions, together with the PHISODERM trademark rights previously
acquired in 1994 for the United States, Canada and Puerto Rico, provide us with
the capability to expand our PHISODERM business in numerous markets
internationally.

Although we entered into a preliminary agreement to amend the Credit Facility on
May 23, 2003 to increase the revolving line of credit from $15,000 to $50,000
and modify certain other terms and conditions, we did not complete this
amendment. On August 22, 2003, the Credit Facility was amended to revise the
restrictions on the amount of capital expenditures allowed and the dollar amount
of our common stock we can purchase, redeem, acquire or retire.

We purchase raw materials and packaging materials from a number of third party
suppliers, primarily on a purchase order basis. Except for pamabrom and
pyrilamine maleate, active ingredients used in our PAMPRIN and PREMSYN PMS
products, we are not limited to a single source of supply for the ingredients
used in the manufacture of our products. PAMPRIN AND PREMSYN PMS products net
sales in fiscal 2002 represented 5.5% of our consolidated total revenues in that
year. We believe that our current sources of supply and potential alternative
sources will be adequate to meet future product demands.

During the nine months ended August 31, 2003, we repurchased and returned to
unissued 360 shares of our common stock for $5,351 in accordance with our
previously announced stock buyback program. In January 2003, our board of
directors increased the total authorization to repurchase stock under our stock
buyback program to $10,000. The remaining availability under the board
authorization is $4,649 at August 31, 2003.

                                       26
<PAGE>

EBITDA, earnings before interest, taxes, depreciation and amortization, is a key
non-GAAP financial measure used by us to measure operating performance but may
not be comparable to a similarly titled measure reported by other companies. The
most directly comparable GAAP financial measure is income before change in
accounting principle. EBITDA is used to supplement net income as an indicator of
operating performance and not as an alternative to measures defined and required
by accounting principles generally accepted in the United States. We consider
EBITDA an important indicator of our operational strength and performance,
including our ability to pay interest, service debt and fund capital
expenditures. EBITDA is also one measure used in the calculation of certain
ratios to determine our compliance with the terms of our existing Credit
Facility.

The income before change in accounting principle margin (income before change in
accounting principle/total revenues) increased in 2003 over 2002 from 10.0% and
8.4% to 11.6 % and 10.5 % for the three and nine months ended August 31, 2003,
respectively. The EBITDA margin (EBITDA/total revenues) increased from 25.9% and
24.3% of total revenues in the 2002 periods to 28.8% and 26.9 % in the three and
nine months ended August 31, 2003, respectively. A reconciliation of EBITDA to
income before change in accounting principle is presented in the following
table:

<TABLE><CAPTION>
                                     For the Three Months Ended August 31,              For the Nine Months Ended August 31,
                                 ---------------------------------------------      --------------------------------------------
                                                          Dollar     Percentage                              Dollar    Percentage
                                                         Increase     Increase                              Increase    Increase
                                   2003        2002     (Decrease)   (Decrease)       2003        2002     (Decrease)  (Decrease)
                                 --------    --------    --------     --------      --------    --------    --------    --------
<S>                              <C>         <C>         <C>               <C>      <C>         <C>         <C>             <C>
Income before change in
    accounting principle ....    $  6,837    $  6,417    $    420          6.5%     $ 18,947    $ 14,424    $  4,523        31.4%
Add:
  Provision for income
    taxes ...................       4,016       3,933          83          2.1%       11,128       8,840       2,288        25.9%
  Interest expense, net .....       5,025       5,295        (270)        (5.1%)      15,312      15,275          37          .2%
  Depreciation and
    amortization less amounts
    included in interest ....       1,153       1,046         107         10.2%        3,305       3,075         230         7.5%
                                 --------    --------    --------                   --------    --------    --------
EBITDA ......................    $ 17,031    $ 16,691    $    340          2.0%     $ 48,692    $ 41,614    $  7,078        17.0%
                                 ========    ========    ========                   ========    ========    ========
</TABLE>

Given the perceived safety concerns and the regulatory uncertainties relating to
ephedrine, we developed alternative formulations for DEXATRIM Natural and
DEXATRIM Results to exclude ephedrine. On September 20, 2002, we discontinued
the manufacturing and shipment of DEXATRIM Natural and DEXATRIM Results
containing ephedrine. Negative publicity relating to the possible harmful
effects of ephedrine and the possibility of further regulatory action to
restrict or prohibit the sale of products containing ephedrine has resulted in
returns of these products from retailers for which we provided a $750 allowance
in the first quarter of fiscal 2003. At this time, we believe the $750 allowance
recorded in the first quarter is adequate to cover any returns of DEXATRIM
product containing ephedrine that might be received. The unused portion of this
allowance at August 31, 2003 was $235.

As previously reported, Kemper Indemnity Insurance Company ("Kemper") has filed
a lawsuit against us in federal court in Chattanooga, Tennessee seeking to
rescind a $50,000 policy of excess insurance coverage for product liability
claims, including those relating to the existence of phenylpropanolamine ("PPA")
in DEXATRIM (the "Kemper Policy"). Coverage under the Kemper Policy is in excess
of $23,500 of product liability insurance coverage that is available to us from
two other insurance companies. In addition, we have $25,000 of insurance
coverage from a fourth insurance company that is in excess of the Kemper Policy.
In the lawsuit, Kemper is seeking to rescind the Kemper Policy based on
allegations that we failed to disclose material information regarding the Yale
Study (a study initiated in 1994 by the Consumer Healthcare Products Association
(formerly the Nonprescription Drug Manufacturers Association) in conjunction
with the Yale University School of Medicine to investigate a possible
association, if any, of stroke in women aged 18 to 49 using PPA) during the
submission process to renew the Kemper Policy for coverage for the December 21,
1999 to May 31, 2001 policy period. In the alternative, Kemper is seeking a
declaratory judgment on certain policy interpretation issues that if granted
would bar or limit coverage for PPA-related claims under the Kemper Policy.

We believe that the claims made by Kemper in its lawsuit are without merit. We
have filed an answer denying that Kemper is entitled to any of the relief sought
and asserting counterclaims against Kemper and affiliated parties including
Berkshire Hathaway Inc. alleging, among other things, a civil conspiracy to deny
coverage, tortious interference with our insurance contract with Kemper, bad
faith, violation of Tennessee's consumer protection law and fraud.

                                       27
<PAGE>

If the Kemper Policy is rescinded or its coverage limited, then we would have
significantly less insurance coverage with which to satisfy claims arising in
the DEXATRIM with PPA cases, which in turn would substantially increase the
likelihood that we would have to satisfy these claims from our assets. There can
be no assurances that we would have sufficient resources to satisfy these
claims.

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

The following table sets forth, for income before change in accounting principle
and for the periods indicated, certain items from our Consolidated Statements of
Income expressed as a percentage of total revenues:

<TABLE><CAPTION>
                                               FOR THE THREE MONTHS          FOR THE NINE MONTHS
                                                 ENDED AUGUST 31,              ENDED AUGUST 31,
                                             -----------------------       -----------------------
                                               2003           2002           2003           2002
                                             --------       --------       --------       --------
<S>                                             <C>            <C>            <C>            <C>
TOTAL REVENUES ......................           100.0%         100.0%         100.0%         100.0%
                                             --------       --------       --------       --------

COSTS AND EXPENSES:
  Cost of sales .....................            27.0           27.2           28.4           28.4
  Advertising and promotion .........            28.9           33.1           29.8           32.2
  Selling, general and administrative            17.3           15.4           16.8           16.9
                                             --------       --------       --------       --------
    Total costs and expenses ........            73.2           75.7           75.0           77.5
                                             --------       --------       --------       --------

INCOME FROM OPERATIONS ..............            26.8           24.3           25.0           22.5
                                             --------       --------       --------       --------

OTHER INCOME (EXPENSE):
  Interest expense ..................            (8.5)          (8.3)          (8.5)          (9.0)
  Investment and other income, net ..              .1             .1             .1             .1
                                             --------       --------       --------       --------
     Total other income (expense) ...            (8.4)          (8.2)          (8.4)          (8.9)
                                             --------       --------       --------       --------

INCOME BEFORE INCOME TAXES AND
  CHANGE IN ACCOUNTING PRINCIPLE ....            18.4           16.1           16.6           13.6

PROVISION FOR INCOME TAXES ..........             6.8            6.1            6.1            5.2
                                             --------       --------       --------       --------

INCOME BEFORE CHANGE IN
  ACCOUNTING PRINCIPLE ..............            11.6%          10.0%          10.5%           8.4%
                                             ========       ========       ========       ========
</TABLE>

CRITICAL ACCOUNTING POLICIES
----------------------------

The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to use estimates.
Several different estimates or methods can be used by management that might
yield different results. The following are the significant estimates used by
management in the preparation of the August 31, 2003 financial statements:

        Allowance For Doubtful Accounts
        -------------------------------

As of August 31, 2003, an estimate was made of the collectibility of the
outstanding accounts receivable balances. This estimate requires the utilization
of outside credit services, knowledge about the customer and the customer's
industry, new developments in the customer's industry and operating results of
the customer, as well as general economic conditions and historical trends. When
all these facts are compiled, a judgment as to the collectibility of the
individual account is made. As noted above, many factors can impact this
estimate. The adequacy of the estimated allowance may be impacted by the
deterioration in the financial condition of a large customer or weakness in the
economic environment resulting in a higher level of customer bankruptcy filings
or delinquencies. There have been no material changes in our estimate during the
quarter ended August 31, 2003.


                                       28
<PAGE>

        Product Return Allowances
        -------------------------

Revenue is recognized when our products are shipped to our customers. It is our
policy across all classes of customers that all sales are final. As is common in
the consumer products industry, customers return products for a variety of
reasons. Examples include products damaged in transit, discontinuance of a
particular size or form of product and shipping errors. As sales are recorded,
we accrue an estimated amount for product returns based upon our historical
experience and any known specific events that affect the accrual. We charge the
allowance account resulting from this accrual with any authorized product
returns upon receipt of the product or deduction from remittance by the
customer.

In accordance with industry practice, we allow our customers to return unsold
sun care products at the end of the sun care season. We record the sales at the
time the products are shipped and title transfers. At the time of shipment, we
also record a reduction in sales and an allowance on our balance sheet for
anticipated returns based upon an estimated return level. The level of returns
may fluctuate from our estimates due to several factors including weather
conditions, customer inventory levels and competitive conditions. Each
percentage point change in our return rate would impact our net sales by
approximately $100. There have been no material changes in this allowance during
the quarter ended August 31, 2003.

        Promotional Accrual
        -------------------

We routinely enter into agreements with our customers to participate in
promotional programs. These programs generally take the form of coupons,
temporary price reductions, scan downs, display activity and participations in
advertising vehicles produced by the customer. The ultimate cost of these
programs is often variable based on the number of units actually sold. Estimated
unit sales of a product under a promotional program are used to estimate the
total cost of the program. Actual results can differ from the original estimate.
We also consider customer delays in requesting promotional program payments when
evaluating the required accrual. Many customers audit programs significantly
after the date of performance to determine the actual amount due and make a
claim for reimbursement at that time. As a result, changes in the unit sales
trends under promotional programs as well as the timing of payments could result
in changes in the accrual.

For a summary of our significant accounting policies, see Note 2 of Notes to
Consolidated Financial Statements included in our Annual Report on Form 10-K for
the year ended November 30, 2002.

COMPARISON OF THREE MONTHS ENDED AUGUST 31, 2003 AND 2002
---------------------------------------------------------

To facilitate discussion of our operating results for the three months ended
August 31, 2003 and 2002, respectively, we have included the following income
statement data table:

<TABLE><CAPTION>
                                                          For the Three Months Ended August 31,
                                               -----------------------------------------------------------
                                                                                Dollar           Percentage
                                                                               Increase           Increase
                                                 2003            2002         (Decrease)         (Decrease)
                                               --------        --------        --------           --------
<S>                                            <C>             <C>             <C>                  <C>
Total revenues ........................        $ 59,182        $ 64,404        $ (5,222)            (8.1%)
Domestic sales ........................          53,736          57,444          (3,708)            (6.5%)
International sales ...................           5,446           6,960          (1,514)           (21.8%)
Cost of sales .........................          15,995          17,526          (1,531)            (8.7%)
Advertising and promotion .............          17,075          21,307          (4,232)           (19.9%)
Selling, general and administrative ...          10,234           9,926             308              3.1%
Interest expense ......................           5,057           5,374            (317)            (5.9%)
Investment and other income, net ......              32              79             (47)           (59.5%)
Net income ............................           6,837           6,417             420              6.5%
</TABLE>

For the third quarter of fiscal 2003, total revenues, comprised of domestic and
international sales, decreased $5,222 or 8.1% compared to the same quarter in
fiscal 2002.


                                       29
<PAGE>

DOMESTIC SALES
--------------

Domestic sales for the third quarter of fiscal 2003 decreased $3,708 or 6.5% as
compared to the same quarter in fiscal 2002. A comparison of domestic sales for
the categories of products included in our portfolio of OTC healthcare products
is as follows:

<TABLE><CAPTION>
                                                          For the Three Months Ended August 31,
                                               -----------------------------------------------------------
                                                                                Dollar         Percentage
                                                                               Increase         Increase
                                                 2003            2002         (Decrease)       (Decrease)
                                               --------        --------        --------         --------
<S>                                            <C>             <C>             <C>                  <C>
Topical analgesics ....................        $ 14,540        $ 16,224        $ (1,684)           (10.4%)
Medicated skin care products ..........          16,926          16,584             342              2.1%
Dietary supplements ...................           9,664           9,943            (279)            (2.8%)
Medicated dandruff shampoos ...........           6,116           5,429             687             12.7%
Other OTC products ....................           6,490           9,264          (2,774)           (29.9%)
                                               --------        --------        --------
  Total ...............................        $ 53,736        $ 57,444        $ (3,708)            (6.5%)
                                               ========        ========        ========
</TABLE>

Increases in the domestic sales of medicated dandruff shampoos and medicated
skin care products were more than offset by decreases in other product
categories. Domestic net sales of SELSUN BLUE medicated dandruff shampoo were up
12.7% in the third quarter of fiscal 2003 as compared to the same period in
fiscal 2002. Net sales growth in the medicated skin care products category was
led by a 18.3% increase in the GOLD BOND franchise. GOLD BOND sales growth came
primarily in the lotion and foot care lines as well as from product
introductions in the first quarter related to GOLD BOND Antifungal Foot Swabs,
GOLD BOND First Aid Quick Spray and GOLD BOND First Aid Wipes. This was
partially offset by a 31.7% decrease in PHISODERM net sales compared to a
year-ago period when the brand was relaunched and the PHISODERM Clear Confidence
Acne Body Wash, PHISODERM Clear Confidence Acne Facial Mask and PHISODERM Clear
Confidence Acne Clear Swab products were initially shipped to retailers.

Sales declines were recorded for our topical analgesic portfolio (ICY HOT,
FLEXALL, ASPERCREME, SPORTSCREME, CAPZASIN, and ARTHRITIS HOT) as the entire
category declined and competition from outside the category increased. Net sales
for the dietary supplement category declined primarily due to a 18.1% drop in
DEXATRIM sales from the comparable period last year. The decline in net sales of
DEXATRIM was partially offset by increased sales of GARLIQUE and NEW PHASE. The
decrease in net sales of other OTC products was due primarily to PAMPRIN and
PREMSYN PMS, which suffered sales declines due to intense competition.

INTERNATIONAL SALES
-------------------

For the third quarter of fiscal 2003, international sales, including royalties
from the sales of SELSUN BLUE, decreased $1,514 or 21.8% as compared to the
third quarter of fiscal 2002. Our Canadian subsidiary experienced a 9.4 % sales
decrease largely as a result of soft GOLD BOND sales in Canada. Sales at our
U.K. subsidiary decreased 46.4% primarily due to weak economic conditions in the
U.K. and decreased sales to distributors in Central Europe. Other international
sales increased 19.8% almost entirely as a result of the acquisition of SELSUN
BLUE in the second quarter of fiscal 2002.

With the exception of NEW PHASE, sales variances for domestic and international
operations were principally the result of unit sales volumes. NEW PHASE sales
increased partially due to a unit sales price increase.

COST OF SALES
-------------

Cost of sales as a percentage of total revenues was 27.0% for the third quarter
of fiscal 2003 as compared to 27.2% for the same quarter in fiscal 2002. The
reduction is primarily the result of reductions in cost of production associated
with moving the domestic production of SELSUN BLUE to our facility in
Chattanooga.


                                       30
<PAGE>

ADVERTISING AND PROMOTION
-------------------------

Advertising and promotion expenses decreased $4,232 or 19.9% as compared to the
same quarter of fiscal 2002 and were 28.9% of total revenues for the three
months ended August 31, 2003 compared to 33.1% for the comparable period of
fiscal 2002. Increases in advertising and promotion expenditures in the current
period were recorded for ICY HOT, FLEXALL, the recently introduced GOLD BOND
products and NEW PHASE. Decreases in advertising and promotion expenditures were
recognized for the balance of the topical analgesic brands, PHISODERM, DEXATRIM,
MUDD, PAMPRIN, BULLFROG, HERPECIN and the other GOLD BOND products.

SELLING, GENERAL AND ADMINISTRATIVE
-----------------------------------

Selling, general and administrative expenses increased $308 or 3.1% as compared
to the same quarter of fiscal 2002. Selling, general and administrative expenses
were 17.3% and 15.4% of total revenues for the third quarter of 2003 and 2002,
respectively. The increase in selling, general and administrative expenses was
largely a result of international severance costs and legal expense related to
the Kemper litigation.

INTEREST EXPENSE
----------------

Interest expense decreased $317 or 5.9% as compared to the same quarter of
fiscal 2002. The decrease was largely the result of lower outstanding balances
under our Credit Facility borrowed to partially fund the acquisition of the
SELSUN BLUE product line in March 2002. Until our indebtedness is reduced
substantially, interest expense will continue to represent a significant
percentage of our total revenues.

INVESTMENT AND OTHER INCOME
---------------------------

Investment and other income decreased $47 or 59.5% as compared to the same
quarter of fiscal 2002 primarily due to a decline in interest income. The use of
cash and cash equivalents to make principal payments on the Credit Facility and
lower interest rates on short-term investments contributed to the decrease in
interest income.

NET INCOME
----------

Net income increased $420 or 6.5% as compared to the same quarter of fiscal
2002. This increase primarily resulted from lower costs and expenses as a
percentage of revenues partially offset by decreased revenues.


COMPARISON OF NINE MONTHS ENDED AUGUST 31, 2003 AND 2002
--------------------------------------------------------

To facilitate discussion of our operating results for the nine months ended
August 31, 2003 and 2002, respectively, we have included the following income
statement data table:

<TABLE><CAPTION>
                                                                    For the Nine Months Ended August 31,
                                                         --------------------------------------------------------
                                                                                          Dollar        Percentage
                                                                                         Increase        Increase
                                                           2003            2002         (Decrease)      (Decrease)
                                                         --------        --------        --------        --------
<S>                                                      <C>             <C>             <C>                  <C>
Total revenues ..................................        $181,240        $171,490        $  9,750             5.7%
Domestic sales ..................................         162,597         156,273           6,324             4.0%
International sales .............................          18,643          15,217           3,426            22.5%
Cost of sales ...................................          51,399          48,673           2,726             5.6%
Advertising and promotion .......................          54,009          55,276          (1,267)           (2.3%)
Selling, general and administrative .............          30,445          29,002           1,443             5.0%
Interest expense ................................          15,431          15,518             (87)           (0.6%)
Investment and other income, net ................             119             243            (124)          (51.0%)
Income before change in accounting principle ....          18,947          14,424           4,523            31.4%
Net income ......................................          18,947           5,547          13,400           241.6%
</TABLE>

                                       31
<PAGE>

For the nine months ended August 31, 2003, total revenues, comprised of domestic
and international sales, increased $9,750 or 5.7% compared to the same period in
fiscal 2002.

DOMESTIC SALES
--------------

Domestic sales for the nine months ended August 31, 2003 increased $6,324 or
4.0% as compared to the same period in fiscal 2002. A comparison of domestic
sales for the categories of products included in our portfolio of OTC healthcare
products is as follows:

<TABLE><CAPTION>
                                                         For the Nine Months Ended August 31,
                                               --------------------------------------------------------
                                                                                Dollar        Percentage
                                                                               Increase        Increase
                                                 2003            2002         (Decrease)      (Decrease)
                                               --------        --------        --------        --------
<S>                                            <C>             <C>             <C>                 <C>
Topical analgesics ....................        $ 42,738        $ 46,632        $ (3,894)           (8.4%)
Medicated skin care products ..........          44,988          40,526           4,462            11.0%
Dietary supplements ...................          30,232          31,861          (1,629)           (5.1%)
Medicated dandruff shampoos ...........          20,928           9,251          11,677           126.2%
Other OTC products ....................          23,711          28,003          (4,292)          (15.3%)
                                               --------        --------        --------
  Total ...............................        $162,597        $156,273        $  6,324             4.0%
                                               ========        ========        ========
</TABLE>

For domestic consumer products in the 2003 period, sales increases were
recognized for our medicated dandruff shampoo and medicated skin care
categories. SELSUN BLUE medicated dandruff shampoo (acquired in March 2002)
achieved a 126.2% domestic net sales increase in the first nine months of fiscal
2003 as compared to the same period of fiscal 2002. If sales under Abbott
Laboratories for the first quarter and the period March 1, 2002 to March 28,
2002 had been included, the sales increase would have been 20.7% compared to the
same period in fiscal 2002. The sales increase for the medicated skin care
category was due in part to a 16.3% increase in net sales of the GOLD BOND
product line in the current nine month period over the same period last year,
led by the introduction of GOLD BOND Antifungal Foot Swabs, GOLD BOND First Aid
Quick Spray and GOLD BOND First Aid Wipes. PHISODERM net sales decreased 3.1%
over the corresponding year-ago period largely as a result of the introduction
in fiscal 2002 of PHISODERM Clear Confidence Acne Body Wash, PHISODERM Clear
Confidence Acne Facial Masque and PHISODERM Clear Confidence Acne Clear Swab.

Sales declines were recorded for our topical analgesic portfolio (ICY HOT,
FLEXALL, ASPERCREME, SPORTSCREME, CAPZASIN and ARTHRITIS HOT). The sales decline
for our topical analgesics reflects the strong sales in this category in the
prior year period as a result of the introduction of the ICY HOT Patch and
increased competition in the current period. The sales decrease in the dietary
supplement category was due to a decrease in DEXATRIM sales. DEXATRIM sales
declined as a result of negative publicity surrounding the diet pill category
and the introduction of a product line extension, DEXATRIM Results, in the
comparable period last year. This was offset by strong sales of GARLIQUE whose
net sales rose 22.5% in the year-to-year comparison. Sales of the other
SUNSOURCE brands declined in the year-to-year comparison with the exception of
NEW PHASE, which registered a 148.3% sales gain. The sales decrease in the other
OTC products category was due primarily to the results of PAMPRIN and PREMSYN
PMS, which suffered sales declines due to intense competition.

INTERNATIONAL SALES
-------------------

For the nine months ended August 31, 2003, international sales, including
royalties from the sales of SELSUN BLUE, increased $3,426 or 22.5% as compared
to the same period in fiscal 2002. Our Canadian subsidiary produced a 24.6%
sales increase largely as a result of the acquisition of SELSUN BLUE in March
2002 and the continuing growth of GOLD BOND Medicated Lotion and PHISODERM sales
in Canada. Our U.K. subsidiary showed a 13.7% sales increase primarily due to
our acquisition of SELSUN BLUE and sales of our OTC products in Eastern Europe
and elsewhere. Other international sales increased 38.3% almost entirely as a
result of the acquisition of SELSUN BLUE in the second quarter of fiscal 2002.

With the exception of NEW PHASE, sales variances for domestic and international
operations were principally the result of unit sales volumes. NEW PHASE sales
increased partially due to a unit sales price increase.


                                       32
<PAGE>

COST OF SALES
-------------

Cost of sales as a percentage of total revenues was 28.4% for the nine months
ended August 31, 2003 and 2002, respectively. A $750 charge for the estimated
cost of returns of DEXATRIM containing ephedrine was included in cost of sales
for the nine months ended August 31, 2003.

ADVERTISING AND PROMOTION
-------------------------

Advertising and promotion expenses decreased $1,267 or 2.3% as compared to the
same nine month period of fiscal 2002 and were 29.8% of total revenues compared
to 32.2% for the comparable period of fiscal 2002. Increases in advertising and
promotion expenditures in the first nine months of 2003 were recorded for SELSUN
BLUE, ICY HOT, FLEXALL, the recently introduced GOLD BOND products, BULLFROG,
and NEW PHASE. Decreases in advertising and promotion expenditures were
recognized for the balance of the topical analgesic brands, PHISODERM, DEXATRIM,
MUDD, PAMPRIN, the other GOLD BOND products and GARLIQUE.

SELLING, GENERAL AND ADMINISTRATIVE
-----------------------------------

Selling, general and administrative expenses increased $1,443 or 5.0% as
compared to the same period of fiscal 2002. Selling, general and administrative
expenses were 16.8% and 16.9% of total revenues for the nine months ended August
31, 2003 and 2002, respectively. The increase was largely a result of increased
compensation costs of $668 related to a restricted stock grant, as well as,
international severance costs, legal fees related to the Kemper litigation,
increased selling expenses due to increased sales and increases in
administrative costs.

INTEREST EXPENSE
----------------

Interest expense decreased $87 or 0.6% as compared to the same period in fiscal
2002. The decrease was the result of lower outstanding principal balances on our
Credit Facility as compared to the same period in 2002. Until our indebtedness
is reduced substantially, interest expense will continue to represent a
significant percentage of our total revenues.

INVESTMENT AND OTHER INCOME
---------------------------

Investment and other income decreased $124 or 51.0% as compared to the same
period of fiscal 2002 primarily due to a decline in interest income. The use of
cash and cash equivalents to make principal payments on the Credit Facility and
lower interest rates on short-term investments contributed to the decrease in
interest income.

INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE
--------------------------------------------

Income before change in accounting principle increased $4,523 or 31.4% as
compared to the same period of fiscal 2002. This increase primarily resulted
from increased revenues and lower costs and expenses as a percentage of
revenues.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
---------------------------------------------------

In the first quarter of fiscal 2002, we adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), which requires us to
perform certain fair value based tests of the carrying value of our indefinite
lived intangible assets annually and to discontinue amortization of our
indefinite lived intangible assets. Upon adoption of SFAS 142, we obtained
independent appraisals to determine the fair value of these assets as of
December 1, 2001 and recorded a write-down of $8,877, net of income tax benefit
of $5,440, as a cumulative effect of change in accounting principle and
discontinued the amortization of our indefinite lived intangible assets. The
write-down was primarily related to our SUNSOURCE product line, which
experienced a decline in sales volume since its initial purchase in 1997, and to
a lesser degree our DEXATRIM product line, which discontinued the marketing of
one of its products in November 2000.

                                       33
<PAGE>

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

We have historically financed our operations with a combination of internally
generated funds and borrowings. Our principal uses of cash are for operating
expenses, servicing long-term debt, acquisitions, working capital, repurchases
of our common stock, payment of income taxes and capital expenditures.

Cash of $23,747 and $36,006 was provided by operations for the nine months ended
August 31, 2003 and 2002, respectively. The decrease in cash flows from
operations over the prior year period was primarily the result of a decrease in
accounts payable and accrued liabilities, partially offset by an increase in net
income.

Investing activities used cash of $4,198 and $77,364 in the nine months ended
August 31, 2003 and 2002, respectively. The decrease in usage of cash in the
current period was primarily due to the absence of a significant product line
acquisition, such as the purchase of SELSUN BLUE in the comparable period of
last year.

Financing activities used cash of $13,870 in the first nine months of fiscal
2003, but provided cash of $40,425 in the same period of the prior year. The
decrease in cash provided in the current period was largely the result of the
absence of additional borrowings required to partially finance a significant
acquisition, such as SELSUN BLUE, which was acquired in the comparable period of
last year, an increase in cost of repurchases of our common shares and a
decrease in proceeds from the exercise of our stock options.

Total debt outstanding was $214,684 at August 31, 2003 compared to $224,708 at
November 30, 2002. We have repaid $10,000 of long-term debt during the nine
months ended August 31, 2003.

As of October 1, 2003 we are named as a defendant in approximately 300 lawsuits
involving claims by approximately 630 plaintiffs alleging that the plaintiffs
were injured as a result of ingestion of products containing PPA, which until
November 2000 was the active ingredient in certain of our DEXATRIM products. See
Note 15 of Notes to Consolidated Financial Statements for a discussion of these
lawsuits.

As of August 31, 2003, the remaining amount authorized by our board of directors
under our stock buyback program was $4,649; however, we are limited in our
ability to repurchase shares due to restrictions under the terms of the
indenture with respect to which our senior subordinated notes were issued and
under the terms of our current Credit Facility. Also, on December 21, 1998, we
filed a shelf registration statement with the Securities and Exchange Commission
for $250,000 of debt and equity securities of which $75,000 was utilized in the
sale of the 8.875% notes in May 1999.

We believe that cash provided by operating activities, our cash and cash
equivalents balance and funds available under the revolver portion of our Credit
Facility will be sufficient to fund our capital expenditures, debt service and
working capital requirements for the foreseeable future as our business is
currently conducted. It is likely that any acquisitions that we make in the
future will require us to obtain additional financing.

FOREIGN OPERATIONS
------------------

Historically, our primary foreign operations have been conducted through our
Canadian and United Kingdom subsidiaries. The currencies of these subsidiaries
are Canadian dollars and British pounds, respectively. Fluctuations in exchange
rates can impact operating results, including total revenues and expenses, when
translations of the subsidiary financial statements are made in accordance with
SFAS No. 52, "Foreign Currency Translation." For the nine months ended August
31, 2003 and 2002, these subsidiaries accounted for 8% and 7% of total revenues,
respectively, and 3% of total assets for both periods, respectively. It has not
been our practice to hedge our assets and liabilities in Canada and the United
Kingdom or our intercompany transactions due to the inherent risks associated
with foreign currency hedging transactions and the timing of payments between us
and our two foreign subsidiaries. Following our acquisition of SELSUN BLUE,
which was sold in approximately 90 foreign countries and had $20,100 of
international sales in 2001, our international business operations have expanded
significantly, which will increase our exposure to fluctuations in foreign
exchange rates. During the first nine months of fiscal 2003, a portion of these
foreign sales was reflected as royalties, which have been paid to us in U.S.
dollars, and Abbott Laboratories has continued to supply the international
product and bill us in U.S. dollars.

                                       34
<PAGE>

Historically, gains or losses from foreign currency transactions have not had a
material impact on our operating results. Gains (losses) of $52 and ($5) for the
three months ended and $227 and ($58) for the nine months ended August 31, 2003
and 2002, respectively, resulted from foreign currency transactions and are
included in selling, general and administration expenses in the Consolidated
Statements of Income.

RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). We adopted SFAS 143 on December 1, 2002.
SFAS 143 establishes accounting standards for the recognition and measurement of
an asset retirement obligation and its associated asset retirement cost. It also
provides accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. The adoption of SFAS 143 did not have
an impact on our financial position, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS 145"). We adopted SFAS 145 on December 1, 2002. SFAS 145 requires us to
classify gains and losses on extinguishments of debt as income or loss from
continuing operations rather than as extraordinary items as previously required
under SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt". We
are also required to reclassify any gain or loss on extinguishment of debt
previously classified as an extraordinary item in prior periods presented. SFAS
145 also provides accounting standards for certain lease modifications that have
economic effects similar to sale-leaseback transactions and various other
technical corrections. The adoption of SFAS 145 did not have an impact on our
financial position, results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). We adopted SFAS 146 on January
1, 2003. SFAS 146 supercedes Emerging Issues Task Force Issue No. 94-3. SFAS 146
requires that the liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, not at the date of an
entity's commitment to an exit or disposal plan. SFAS 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The adoption of SFAS 146 did not have an impact on our financial position,
results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 supercedes Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others," and provides
guidance on the recognition and disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees. The initial recognition and measurement provisions of FIN 45 are
effective for guarantees issued or modified after December 31, 2002, and are to
be applied prospectively. The disclosure requirements are effective for
financial statements for interim or annual periods ending after December 15,
2002. We had no instruments or guarantees that required additional or enhanced
disclosure under FIN 45 at August 31, 2003, and no guarantees issued or modified
after December 31, 2002 that required recognition and measurement in accordance
with the provisions of FIN 45, except as disclosed in Note 19 of Notes to the
Consolidated Financial Statements. The adoption of FIN 45 did not have an impact
on our financial position, results of operations or cash flows.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS No.
123, "Accounting for Stock-Based Compensation" to provide alternative methods of
transition for a voluntary change to the fair-value-based method of accounting
for stock-based employee compensation. SFAS 148 also amends Accounting
Principles Board Opinion No. 28, "Interim Financial Reporting", to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending December 31, 2002. We implemented the
interim disclosure provision in our first fiscal quarter of 2003. The adoption
of SFAS 148 did not have an impact on our financial position, results of
operations or cash flows.

In January 2003, the FASB issued Interpretation No. 46, " Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 requires a company to consolidate
a variable interest entity ("VIE"), as defined, when the company will

                                       35
<PAGE>

absorb a majority of the VIE's expected losses, receives a majority of the VIE's
expected residual returns, or both. FIN 46 also requires consolidation of
existing, non-controlled affiliates if the VIE is unable to finance its
operations without investor support, or where the other investors do not have
exposure to the significant risks and rewards of ownership. FIN 46 applies
immediately to a VIE created or acquired after January 31, 2003. For a VIE
created before February 1, 2003, FIN 46 applies in the first fiscal year or
interim period beginning after June 15, 2003. The adoption of FIN 46 did not
have an impact on our financial position, results of operations or cash flows.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
149 is generally effective for derivative instruments, including derivative
instruments embedded in certain contracts, entered into or modified after June
30, 2003, and for hedging relationships designated after June 30, 2003. The
adoption of SFAS 149 did not have an impact on our financial position, results
of operations or cash flows.

In July 2003, the Emerging Issues Task Force ("EITF") reached a consensus on
Issue No. 03-11, "Reporting Gains and Losses on Derivative Instruments and
Hedging Activities, and Not Held for Trading Purposes" ("EITF 03-11"). EITF
03-11 addresses when gains and losses on derivative contracts not held for
trading purposes should be reported on a net basis. The adoption of EITF 03-11
did not have an impact on our financial position, results of operations or cash
flows.

FORWARD LOOKING STATEMENTS
--------------------------

We may from time to time make written and oral forward-looking statements.
Written forward-looking statements may appear in documents filed with the
Securities and Exchange Commission, in press releases and in reports to
shareholders. The Private Securities Litigation Reform Act of 1995 contains a
safe harbor for forward-looking statements. We rely on this safe harbor in
making such disclosures. The forward-looking statements are based on
management's current beliefs and assumptions about expectations, estimates,
strategies and projections. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual outcomes and results may differ materially from
what is expressed or forecasted in such forward-looking statements. We undertake
no obligation to update publicly any forward-looking statements whether as a
result of new information, future events or otherwise. The risks, uncertainties
and assumptions of the forward-looking statements include, but are not limited
to existing and possible additional future product liability claims relating to
the prior existence of PPA in DEXATRIM; the availability of our $50 million
excess product liability coverage to be determined in the Kemper rescission and
declaratory judgment lawsuit; the lack of availability, limits of coverage and
expense related to product liability insurance including the outcome of the
rescission and declaration judgment action filed by Kemper; the reduction of
available insurance coverage as proceeds are used to fund any product liability
settlements or awards; the possibility of other product liability claims,
including claims relating to the prior existence of ephedrine in DEXATRIM
products; our ability to fund liabilities from product liability claims greater
than our insurance coverage or outside the scope of insurance coverage; the
possible effect of the negative public perception resulting from product
liability claims on sales of DEXATRIM products without PPA or ephedrine; the
impact of brand acquisitions and divestitures; the impact of gains or losses
resulting from product acquisitions or divestitures; product demand and market
acceptance risks; product development risks, such as delays or difficulties in
developing, producing and marketing new products or line extensions; the impact
of competitive products, pricing and advertising; our ability to sell and market
SELSUN BLUE internationally where we have only limited experience and
infrastructure; constraints resulting from our financial condition, including
the degree to which we are leveraged, debt service requirements and restrictions
under indentures and loan agreements; government regulations; risks of loss of
material customers; public perception regarding our products; dependence on
third party manufacturers; environmental matters; and other risks described in
our Securities and Exchange Commission filings.

                                       36
<PAGE>

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
----------------------------------------------------------------------

We are exposed to market risks from changes in interest rates and foreign
currency exchange rates, which may adversely affect our results of operations
and financial condition. We seek to minimize the risks from these interest rates
and foreign currency exchange rate fluctuations through our regular operating
and financing activities.

Our exposure to interest rate risks currently consists of our 8.875% senior
subordinated notes and our Credit Facility. The aggregate balance outstanding
under the 8.875% senior subordinated notes as of August 31, 2003 was $204,684.
Should interest rates increase or decrease, the estimated fair value of these
notes would decrease or increase, respectively. Loans under our Credit Facility
bear interest at a rate equal to the higher of LIBOR or the federal funds rate
plus .05% plus percentages ranging from .75% to 1.5% depending on our leverage.
As of August 31, 2003, the variable rate on the term loan under our Credit
Facility was 3.36%. The balance outstanding under our term loan was $10,000 as
of August 31, 2003. The impact of a one-point rate change on the outstanding
balance of our term loan on our results of operations for the third quarter of
fiscal 2003 would be approximately $16, net of income tax benefit. As of August
31, 2003, no revolving credit loans or letters of credit were outstanding under
our Credit Facility.

We are subject to risk from changes in the foreign exchange rates relating to
our Canadian and United Kingdom subsidiaries. Assets and liabilities of these
subsidiaries are translated to United States dollars at year-end exchange rates.
Income and expense items are translated at average rates of exchange prevailing
during the year. Translation adjustments are accumulated as a separate component
of shareholders' equity. Gains and losses, which result from foreign currency
transactions, are included in the Consolidated Statements of Income. During
2003, pursuant to our supply agreement with Abbott Laboratories, we are billed
in U.S. dollars for purchases of SELSUN BLUE for foreign markets. In many cases
in the future, we will be billed in the respective foreign currency. The
potential loss resulting from a hypothetical 10.0% adverse change in the quoted
foreign currency exchange rate amounts to approximately $920 at August 31, 2003.

This market risk discussion contains forward-looking statements. Actual results
may differ materially from this discussion based upon general market conditions
and changes in financial markets.

ITEM 4.    CONTROLS AND PROCEDURES
----------------------------------

         (a) Evaluation of Disclosure Controls and Procedures. Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as such terms are defined in Rules
13(a)-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") as of August 31, 2003 of this Form 10-Q (the
"Evaluation Date")). Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, our disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating to
us (including our consolidated subsidiaries) required to be included in our
periodic filings under the Exchange Act.

         (b) Changes in Disclosure Controls & Procedures. Since the Evaluation
Date, there have not been any significant changes in our disclosure controls &
procedures or in other factors that could significantly affect such controls.




                                       37
<PAGE>

                           PART II. OTHER INFORMATION
                           --------------------------

ITEM 1.  LEGAL PROCEEDINGS
--------------------------
         See Note 15 of Notes to Consolidated Financial Statements included in
         Part 1, Item 1 of this Report.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
--------------------------------------------------
         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
----------------------------------------
         None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
         None.

ITEM 5.  OTHER INFORMATION
--------------------------
         None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------------
         (a) Exhibits:

             First Amendment to Credit Agreement, dated as of August 22, 2003,
             by and among Chattem, Inc., its domestic Subsidiaries, identified
             Lenders, and Bank of America, N.A., as Agent (Exhibit 10).

             Certification required by Rule 13a-14(a) under the Securities
             Exchange Act of 1934 (Exhibit 31).

             Certification required by Rule 13a-14(b) under the Securities
             Exchange Act of 1934 and 18 U.S.C. Section 1350 (Exhibit 32).

         (b) The following Form 8-K reports were filed with the Securities and
             Exchange Commission during the three months ended August 31, 2003:

             Form 8-K, filed August 13, 2003, regarding information relating to
             a lawsuit filed against the Company by Kemper Indemnity Insurance
             Company and announcing revised financial estimates for the third
             quarter of fiscal 2003.

             Form 8-K, filed July 23, 2003, regarding information relating to
             our DEXATRIM with PPA litigation.

             Form 8-K, filed June 19, 2003, containing a copy of our press
             release announcing our financial results for the second quarter
             ended May 31, 2003.



                                       38
<PAGE>

                                  CHATTEM, INC.
                                  -------------
                                   SIGNATURES
                                   ----------


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





                                                  CHATTEM, INC.
                                                  (Registrant)


Dated:    October 9, 2003            \s\ A.  Alexander Taylor II
        --------------------         -------------------------------------------
                                     A. Alexander Taylor II
                                     President and Director
                                     (Chief Operating Officer)



Dated:    October 9, 2003            \s\ Richard D.  Moss
        --------------------         -------------------------------------------
                                     Richard D.  Moss
                                     Vice President and Chief Financial Officer
                                     (Principal Financial Officer)


















                                       39
<PAGE>

                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                                  EXHIBIT INDEX
                                  -------------




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

        10             First Amendment to Credit Agreement, dated as of August
                       22, 2003, by and among Chattem, Inc., its domestic
                       Subsidiaries, identified Lenders, and Bank of America,
                       N.A., as Agent.

        31             Certification required by Rule 13a-14(a) under the
                       Securities Exchange Act of 1934.


        32             Certification required by Rule 13a-14(b) under the
                       Securities Exchange Act of 1934 and 18 U.S.C. Section
                       1350.























                                       40