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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, 2001
                          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.

AS OF OCTOBER 12, 2001, 8,973,156 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, 2001 and November 30, 2000 .................  3

                  Consolidated Statements of Income for
                  the Three and Nine Months Ended August
                  31, 2001 and 2000 .....................................  5

                  Consolidated Statements of Cash Flows for
                  the Nine Months Ended August 31, 2001 and 2000 ........  6

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

         Item 2.  Management's Discussion and Analysis of Financial
                  Condition and Results of Operations ................... 19



PART II. OTHER INFORMATION

         Item 3.  Legal Proceedings...................................... 28

         Item 6.  Exhibits and Reports on Form 8-K ...................... 28


SIGNATURES .............................................................. 29



EXHIBIT 11 - Statement Regarding Computation of Per Share Earnings














                                        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                                                                     2001             2000
------                                                                 ------------     ------------
                                                                        (Unaudited)
<S>                                                                    <C>              <C>
CURRENT ASSETS:
   Cash and cash equivalents .....................................     $     27,965     $    102,534
   Accounts receivable, less allowance for doubtful accounts
      of $1,100 at August 31, 2001 and $1,025 at November 30, 2000           24,476           40,691
   Refundable and deferred income taxes ..........................           11,801           12,401
   Inventories ...................................................           12,975           15,052
   Prepaid expenses and other current assets .....................            3,183              884
                                                                       ------------     ------------
      Total current assets .......................................           80,400          171,562
                                                                       ------------     ------------

PROPERTY, PLANT AND EQUIPMENT, NET ...............................           26,689           27,059
                                                                       ------------     ------------

OTHER NONCURRENT ASSETS:
   Patents, trademarks and other purchased product rights, net ...          186,819          191,980
   Debt issuance costs, net ......................................            7,937            8,829
   Other .........................................................            1,609            2,646
                                                                       ------------     ------------
      Total other noncurrent assets ..............................          196,365          203,455
                                                                       ------------     ------------

         TOTAL ASSETS ............................................     $    303,454     $    402,076
                                                                       ============     ============
</TABLE>
                     The accompanying notes are an integral
                part of these consolidated financial statements.












                                        3
<PAGE>
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
                                 (In thousands)


<TABLE><CAPTION>
                                                                        AUGUST 31,      NOVEMBER 30,
LIABILITIES AND SHAREHOLDERS' EQUITY                                       2001             2000
------------------------------------                                   ------------     ------------
                                                                        (Unaudited)
<S>                                                                    <C>              <C>
CURRENT LIABILITIES:
   Accounts payable ..............................................     $      4,806     $      8,790
   Payable to bank ...............................................             --              1,529
   Accrued liabilities ...........................................           27,336           35,214
                                                                       ------------     ------------
      Total current liabilities ..................................           32,142           45,533
                                                                       ------------     ------------

LONG-TERM DEBT ...................................................          204,748          304,077
                                                                       ------------     ------------

DEFERRED INCOME TAXES ............................................           12,919           12,919
                                                                       ------------     ------------

OTHER NONCURRENT LIABILITIES .....................................            1,765            1,894
                                                                       ------------     ------------

SHAREHOLDERS' EQUITY:
   Preferred shares, without par value, authorized 1,000, none issued           --               --
   Common shares, without par value, authorized 50,000, issued
      8,982 at August 31, 2001 and 8,861 at November 30, 2000 ....            1,870            1,845
   Paid-in surplus ...............................................           65,936           64,443
   Accumulated deficit ...........................................          (12,772)         (26,463)
                                                                       ------------     ------------
                                                                             55,034           39,825
   Unamortized value of restricted common shares issued ..........             (921)            --
   Cumulative other comprehensive income -
      foreign currency translation adjustment ....................           (2,233)          (2,172)
                                                                       ------------     ------------
      Total shareholders' equity .................................           51,880           37,653
                                                                       ------------     ------------

         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..............     $    303,454     $    402,076
                                                                       ============     ============
</TABLE>
                     The accompanying notes are an integral
                part of these consolidated financial statements.







                                        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,
                                                   ------------------------------      ------------------------------
                                                       2001              2000              2001              2000
                                                   ------------      ------------      ------------      ------------
<S>                                                <C>               <C>               <C>               <C>
NET SALES ....................................     $     49,641      $     73,253      $    153,603      $    215,260
                                                   ------------      ------------      ------------      ------------

COSTS AND EXPENSES:
   Cost of sales .............................           12,663            19,159            40,553            57,296
   Advertising and promotion .................           18,528            28,108            61,391            82,447
   Selling, general and administrative .......            9,348             8,539            25,670            24,197
                                                   ------------      ------------      ------------      ------------
      Total costs and expenses ...............           40,539            55,806           127,614           163,940
                                                   ------------      ------------      ------------      ------------

INCOME FROM OPERATIONS .......................            9,102            17,447            25,989            51,320
                                                   ------------      ------------      ------------      ------------

OTHER INCOME (EXPENSE):
   Interest expense ..........................           (4,959)           (9,139)          (17,024)          (27,329)
   Investment and other income, net ..........              289                 1             1,910               128
                                                   ------------      ------------      ------------      ------------
      Total other income (expense) ...........           (4,670)           (9,138)          (15,114)          (27,201)
                                                   ------------      ------------      ------------      ------------

INCOME BEFORE INCOME TAXES, EXTRAORDINARY GAIN
 (LOSS) AND CHANGE IN ACCOUNTING PRINCIPLE ...            4,432             8,309            10,875            24,119

PROVISION FOR INCOME TAXES ...................            1,684             3,158             4,132             9,141
                                                   ------------      ------------      ------------      ------------

INCOME BEFORE EXTRAORDINARY GAIN (LOSS) AND
 CHANGE IN ACCOUNTING PRINCIPLE ..............            2,748             5,151             6,743            14,978

EXTRAORDINARY GAIN (LOSS) ON EARLY
 EXTINGUISHMENT OF DEBT, NET OF INCOME TAXES..             (603)             --               6,948              (110)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
 PRINCIPLE, NET OF INCOME TAX BENEFIT ........             --                --                --                (542)
                                                   ------------      ------------      ------------      ------------

NET INCOME ...................................     $      2,145      $      5,151      $     13,691      $     14,326
                                                   ============      ============      ============      ============

NUMBER OF COMMON SHARES:
   Weighted average outstanding-basic ........            8,876             9,310             8,871             9,508
                                                   ============      ============      ============      ============
   Weighted average and potential dilutive
    outstanding ..............................            9,031             9,379             8,917             9,611
                                                   ============      ============      ============      ============

NET INCOME (LOSS) PER COMMON SHARE:
   Basic:
      Income before extraordinary gain (loss)
       and change in accounting principle ....     $        .31      $        .55      $        .76      $       1.58
      Extraordinary gain (loss) ..............             (.07)             --                 .78              (.01)
      Change in accounting principle .........             --                --                --                (.06)
                                                   ------------      ------------      ------------      ------------
         Total basic .........................     $        .24      $        .55      $       1.54      $       1.51
                                                   ============      ============      ============      ============

   Diluted:
      Income before extraordinary gain (loss)
       and change in accounting principle ....     $        .30      $        .55      $        .76      $       1.56
      Extraordinary gain (loss) ..............             (.06)             --                 .78              (.01)
      Change in accounting principle .........             --                --                --                (.06)
                                                   ------------      ------------      ------------      ------------
         Total diluted .......................     $        .24      $        .55      $       1.54      $       1.49
                                                   ============      ============      ============      ============
</TABLE>
                     The accompanying notes are an integral
                part of these consolidated financial statements.

                                        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,
                                                                       -----------------------------
                                                                           2001             2000
                                                                       ------------     ------------
<S>                                                                    <C>              <C>
OPERATING ACTIVITIES:
   Net income ....................................................     $     13,691     $     14,326
   Adjustments to reconcile net income to net cash provided by
    operating activities:
      Depreciation and amortization ..............................            7,627           11,403
      Gain on product divestiture ................................              (79)            --
      Extraordinary (gain) loss on early extinguishment of
       debt, net .................................................           (6,948)             110
      Cumulative effect of change in accounting principle, net ...             --                542
      Stock option charge ........................................              394              398
      Other, net .................................................              (59)              66
      Changes in operating assets and liabilities, net of product
       divestitures:
         Accounts receivable .....................................           16,215            1,916
         Refundable and deferred income taxes ....................              600             --
         Inventories .............................................            2,077            4,470
         Prepaid expenses and other current assets ...............           (2,309)             576
         Accounts payable and accrued liabilities ................          (16,331)          (7,478)
                                                                       ------------     ------------
            Net cash provided by operating activities ............           14,878           26,329
                                                                       ------------     ------------

INVESTING ACTIVITIES:
   Purchases of property, plant and equipment ....................           (1,512)          (5,293)
   Additions to trademarks and other product rights ..............             (277)            (241)
   Proceeds from product divestiture .............................            1,179             --
   Change in other assets, net ...................................              374           (1,148)
                                                                       ------------     ------------
            Net cash used in investing activities ................             (236)          (6,682)
                                                                       ------------     ------------

FINANCING ACTIVITIES:
   Repayment of long-term debt ...................................          (84,453)         (39,996)
   Payment of consent fees related to repayment of long-term debt.           (3,293)            --
   Proceeds from long-term debt ..................................             --             29,000
   Proceeds from exercise of stock options .......................               95              210
   Repurchase of common shares ...................................             --             (7,155)
   Change in payable to bank .....................................           (1,529)            (367)
   Debt issuance costs ...........................................             --               (317)
                                                                       ------------     ------------
            Net cash used in financing activities ................          (89,180)         (18,625)
                                                                       ------------     ------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS .....              (31)             (93)
                                                                       ------------     ------------

CASH AND CASH EQUIVALENTS:
   Increase (decrease) for the period ............................          (74,569)             929
   At beginning of period ........................................          102,534            2,308
                                                                       ------------     ------------
   At end of period ..............................................     $     27,965     $      3,237
                                                                       ============     ============

SCHEDULE OF NON-CASH INVESTING AND FINANCING  ACTIVITIES:
   Additions to trademarks and other product rights by assumption
    of certain liabilities .......................................     $       --       $        542
   Issuance of 100,000 shares of restricted common stock at an
    average value of $9.93 each ..................................     $        993     $       --


PAYMENTS FOR:
   Interest ......................................................     $     14,331     $     20,627
   Taxes .........................................................     $        266     $      7,580
</TABLE>
                     The accompanying notes are an integral
                part of these consolidated financial statements.


                                        6
<PAGE>
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
                                   (UNAUDITED)

Note: All monetary amounts are expressed in thousands of dollars unless
      contrarily evident.


1.    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 the Chattem,
      Inc. (the "Company") Annual Report on Form 10-K for the year ended
      November 30, 2000. 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.    The Company incurs significant expenditures on television, radio and print
      advertising to support its nationally branded over-the-counter ("OTC")
      health care and toiletries and skin care products. Customers purchase
      products from the Company with the understanding that the brands will be
      supported by the Company's extensive media advertising. This advertising
      supports the retailers' sales effort and maintains the important brand
      franchise with the consuming public. Accordingly, the Company considers
      its advertising program to be clearly implicit in its sales arrangements
      with its customers. Therefore, the Company believes 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 Accounting Principles Board Opinion No. 28) and adjusting
      that accrual to the actual expenses incurred at the end of the year.


3.    Inventories consisted of the following at August 31, 2001 and November
      30, 2000:

                                                     2001          2000
                                                   --------      --------
      Raw materials and work in process.........   $  5,030      $  6,793
      Finished goods ...........................      9,933        10,247
      Excess of current cost over LIFO values ..     (1,988)       (1,988)
                                                   --------      --------
          Total inventories ....................   $ 12,975      $ 15,052
                                                   ========      ========


4.    Accrued liabilities consisted of the following at August 31, 2001 and
      November 30, 2000:

                                                     2001          2000
                                                   --------      --------
      Income and other taxes ...................   $  7,581      $     --
      Salaries, wages and commissions ..........      2,315         1,103
      Advertising and promotion ................      4,840         7,663
      Interest .................................      7,589         5,810
      Product acquisitions and divestitures ....      2,215        10,413
      Allowance for product returns.............      1,473         9,600
      Legal fees................................        500            --
      Other ....................................        823           625
                                                   --------      --------
          Total accrued liabilities ............   $ 27,336      $ 35,214
                                                   ========      ========


                                        7
<PAGE>
5.    Comprehensive income consisted of the following components for the three
      and nine months ended August 31, 2001 and 2000, respectively:

                                   For the Three Months    For the Nine Months
                                     Ended August 31,        Ended August 31,
                                   --------------------    --------------------
                                     2001        2000        2001        2000
                                   --------    --------    --------    --------
      Net income.................  $  2,145    $  5,151    $ 13,691    $ 14,326
      Other - foreign currency
        translation adjustment...       (20)       (209)        (61)       (475)
                                   --------    --------    --------    --------
          Total..................  $  2,125    $  4,942    $ 13,630    $ 13,851
                                   ========    ========    ========    ========

6.    Effective December 1, 1999 the Company adopted Statement of Position
      ("SOP") 98-5, "Reporting on the Costs of Start-up Activities"("SOP 98-5"),
      issued by the American Institute of Certified Public Accountants
      ("AICPA"). SOP 98-5 requires costs of start-up activities to be expensed
      as incurred. The initial adoption of SOP 98-5 was recorded as the
      cumulative effect of a change in accounting principle. The one-time
      charge, net of income tax benefit, was $542, or $0.06 per diluted share in
      the first quarter of fiscal 2000.

7.    In fiscal 1999 and 2000 the Company's board of directors authorized
      repurchases of the Company's common stock not to exceed an aggregate total
      of $20,000. Under these authorizations, 1,049,000 shares at a cost of
      $13,401 have been reacquired through August 31, 2001, leaving $6,599
      available for future repurchases. The Company, however, is limited in its
      ability to repurchase shares due to restrictions under the terms of the
      indenture with respect to which its senior subordinated notes were issued.
      The repurchased shares were retired and returned to unissued. No shares
      were repurchased in the first nine months of fiscal 2001.

8.    On September 15, 2000 the Company completed the sale of its Ban(R) product
      line ("Ban") to The Andrew Jergens Company, a wholly owned subsidiary of
      Kao Corporation. Under the terms of the sale agreement the Company
      received $160,000 cash at closing, plus the right to receive up to an
      additional $6,500 in future payments based upon sales levels of Ban in
      2001 and 2002. Concurrent with the closing of the sale of Ban, the Company
      used $52,194 of the net proceeds to retire all of the outstanding balances
      of the Company's revolving line of credit and term loans and accrued
      interest thereon, with the balance of the net proceeds being retained by
      the Company.

9.    On January 17, 2001 the Company completed the consent solicitation and
      tender offer pursuant to which it retired $70,462 principal amount of its
      8.875% senior subordinated notes due 2008 and $7,397 principal amount of
      its 12.75% senior subordinated notes due 2004. The consideration paid for
      the consent solicitation and tender offer was $64,937, which was provided
      by the proceeds of the Ban sale. An extraordinary gain on the early
      extinguishment of debt of $7,551, net of income taxes, was recognized in
      the first six months of fiscal 2001. On June 15, 2001 the Company retired
      all of the remaining outstanding principal balance of $21,748 of its
      12.75% senior subordinated notes due 2004 and accrued interest thereon. As
      a result of this transaction, the Company recognized a loss on the early
      extinguishment of debt of $603, net of income tax benefit, in the third
      quarter of fiscal 2001. This loss primarily consisted of the premium paid
      on the retirement of the notes and the write-off of the related
      unamortized deferred issuance and initial discount costs.

10.   The Company has been named as a defendant in a lawsuit brought by the
      Center for Environment Health ("CEH") contending that the Company violated
      the California Safe Drinking Water and Toxic Enforcement Act of 1998
      (Proposition 65) by selling to California consumers without a warning
      topical skin care products containing zinc oxide which in turn contains
      lead. The lawsuit contends that the purported failure to comply with
      Proposition 65 requirements also constitutes a violation of the California
      Business & Professions Code Section 1700 et seq. Violations of either

                                        8
<PAGE>
      Proposition 65 or Business & Profession Code 1700 et seq. render a
      defendant liable for civil penalties of up to $2.5 per day per violation.

      The Company has also been named as a defendant in a lawsuit filed in San
      Francisco Superior Court on December 29, 1999, JOHNSON, et al v.
      BRISTOL-MYERS SQUIBB CO., et al., Case No. 308872. This is a putative
      class action brought by two named plaintiffs on behalf of the general
      public in California, against the same entities that are defendants in the
      CEH lawsuit. As with the CEH lawsuit, the Johnson lawsuit alleges that the
      Company violated Proposition 65 by selling to California consumers without
      a warning topical skin care product containing zinc oxide which in turn
      contains lead. The lawsuit does not assert claims directly under
      Proposition 65, but asserts that the alleged failure to comply with
      Proposition 65 gives rise to claims under California's Business and
      Professions Code Sections 17200 et seq., 17500 et seq., and the Civil Code
      Section 1750 et seq. The lawsuit seeks injunctive and equitable relief,
      restitution, the disgorgement of allegedly wrongfully obtained revenues
      and damages.

      The plaintiffs in the two separate actions have filed a consolidated
      amended complaint that includes a claim based upon the allegation that
      zinc oxide allegedly also contains cadmium.

      The Company has been named as a defendant in over eighteen different
      lawsuits, most of which were filed in the months of April through
      September 2001. Each of the lawsuits alleges that the plaintiffs were
      injured as a result of ingestion of products containing
      phenylpropanolamine ("PPA"), which until November 2000 was the active
      ingredient in certain of the Company's DEXATRIM products. The lawsuits
      seek an unspecified amount of compensatory and exemplary damages. Other
      defendants to the lawsuits include Thompson Medical Company, Inc. and its
      successor-in-interest DELACO, which owned the DEXATRIM brand until it was
      acquired by the Company in December 1998, and certain other major consumer
      products companies that manufactured and sold cough/cold products
      containing PPA. Under the Company's purchase agreement for DEXATRIM,
      Thompson Medical Company, Inc. is responsible for indemnifying the Company
      for any liability arising from DEXATRIM products sold on or prior to the
      December 1998 closing, and the Company is responsible for indemnifying
      Thompson Medical Company, Inc. for any liability arising from DEXATRIM
      products sold after the closing. The Company maintains product liability
      insurance coverage for claims asserted in the lawsuits, although the
      insurance coverage is subject to the limitations described within the
      terms of the policies. The Company anticipates that additional lawsuits in
      which similar allegations are made could be filed.

      The Company intends to vigorously defend these claims. At this stage of
      the proceedings, it is not possible to determine the outcome of these
      matters or the effect of their resolution on the Company's financial
      position or operating results. Management believes that the Company's
      defenses will have merit; however, there can be no assurance that the
      Company will be successful in its defense or that these lawsuits will not
      have a material adverse effect on the Company's results of operations for
      some period or on the Company's financial position.

      Certain states and localities have enacted, or are considering enacting,
      restrictions on the sale of products that contain synthetic ephedrine or
      naturally-occurring sources of ephedrine. These restrictions include the
      prohibition of OTC sales, required warnings or labeling statements,
      recordkeeping 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. In such states or
      localities these restrictions could adversely affect the sale of DEXATRIM
      Natural, which contains naturally occurring sources of ephedrine. Failure
      to comply with these restrictions could also lead to regulatory
      enforcement action, including the seizure of violative products, product
      recalls, and civil or criminal fines or other penalties.

      The Company was notified in October, 2000 that the FDA denied a Citizen
      Petition submitted by Thompson Medical Company, Inc., the previous owner
      of SPORTSCREME and ASPERCREME, seeking a determination that 10% trolamine
      salicylate was clinically proven to be an effective active ingredient in

                                        9
<PAGE>
      external analgesic OTC drug products, and thus should be included in the
      FDA's yet-to-be finalized monograph for external analgesics. The Company
      has 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. Based on comments received from the FDA
      at the meeting, the Company will revise and resubmit the protocol. The
      Company cannot predict the timing or outcome of any FDA decision on the
      proposed protocol. After final comments from the FDA, the Company expects
      that it will take one to two years to produce the clinical data for FDA
      review. Although unlikely, the FDA could finalize the OTC external
      analgesic monograph before the protocol and clinical data results are
      finalized, which would place 10% trolamine salicylate in non-monograph
      status, thus requiring the submission of a new drug application to market
      and sell OTC products with 10% trolamine salicylate. The Company is
      working to develop alternate formulas for SPORTSCREME and ASPERCREME in
      the event that clinical data does not support the efficacy of trolamine
      salicylate.

11.   The results of operations for the periods presented are not necessarily
      indicative of the results to be expected for the respective full years.
      During recent fiscal years, the Company's first quarter net sales and
      gross profit have trailed the other fiscal quarters on average from 25% to
      35% because of slower sales of consumer products, the seasonality of
      BULLFROG and SUN-IN and lower levels of promotional campaigns during this
      quarter.

12.   The Company considers all short-term deposits and investments with
      original maturities of three months or less to be cash equivalents.

13.   The Company operates in two primary segments that are based on the
      different types of products offered. The OTC health care segment includes
      medicated skin care products, topical analgesics, internal analgesics, lip
      care, appetite suppressant and dietary supplement products. The toiletries
      and skin care segment includes antiperspirants and deodorants (sold in
      September 2000), facial cleaners and masques and seasonal products. The
      accounting policies of the segments are the same as those described in the
      summary of significant accounting policies contained in the Company's
      Annual Report on Form 10-K filed with the Securities and Exchange
      Commission for the year ended November 30, 2000. Certain assets, including
      the majority of property, plant and equipment and deferred tax assets are
      not allocated to the identifiable segments.

      In the table below the following items are included in the indicated
      captions:

      Variable contribution margin: net sales less variable cost of sales,
      advertising, promotion, market research, freight out, sales commissions,
      royalties, bad debts and inventory obsolescence. The Company evaluates the
      performance of its operating segments based on variable contribution
      margins.

      Depreciation and amortization: amortization of the cost of trademarks and
      other product rights with unallocated depreciation and other amortization
      expense being shown under the "Not Classified" caption.

      Identifiable/total assets: primarily identified unamortized cost of
      trademarks and other product rights and total domestic inventory cost with
      the remainder of total assets being shown under the "Not Classified"
      caption.                          10
<PAGE>
<TABLE><CAPTION>
                                                                             Product Classifications
                                                         ---------------------------------------------------------------
                                                                              OTC           Toiletries          Not
                                                            Total         Health Care      and Skin Care     Classified
                                                         ------------     ------------     ------------     ------------
      <S>                                                <C>              <C>              <C>              <C>
      For the three months ended August 31, 2001:
         Net sales .................................     $     49,641     $     41,328     $      8,035     $        278
         Variable contribution margin ..............           21,208           17,812            3,293              103
         Depreciation and amortization .............            2,579            1,291              180            1,108
         Identifiable assets/total assets (at August
            31, 2001) ..............................          303,454          182,448           24,848           96,158


      For the three months ended August 31, 2000:
         Net sales .................................     $     73,253     $     41,050     $     32,112     $         91
         Variable contribution margin ..............           28,830           18,413           10,573             (156)
         Depreciation and amortization .............            3,873            1,293            1,150            1,430
         Identifiable assets/total assets (at August
            31, 2000) ..............................          482,076          192,408          188,804          100,864


      For the nine months ended August 31, 2001:
         Net sales .................................     $    153,603     $    124,659     $     28,365     $        579
         Variable contribution margin ..............           60,335           50,968            9,181              186
         Depreciation and amortization .............            7,627            3,865              522            3,240
         Identifiable assets/total assets (at August
            31, 2001) ..............................          303,454          182,448           24,848           96,158


      For the nine months ended August 31, 2000:
         Net sales .................................     $    215,260     $    126,399     $     88,506     $        355
         Variable contribution margin ..............           84,731           55,868           28,944              (81)
         Depreciation and amortization .............           11,403            3,934            3,586            3,883
         Identifiable assets/total assets (at August
            31, 2000) ..............................          482,076          192,408          188,804          100,864
</TABLE>


















                                       11
<PAGE>
      The reconciliation of variable contribution margin, as shown above, to
      income before income taxes, extraordinary gain (loss) and change in
      accounting principle is as follows for the three and nine months ended
      August 31, 2001 and 2000, respectively:

<TABLE><CAPTION>
                                                     For the Three Months         For the Nine Months
                                                       Ended August 31,            Ended August 31,
                                                    ----------------------      ----------------------
                                                      2001          2000          2001          2000
                                                    --------      --------      --------      --------
      <S>                                           <C>           <C>           <C>           <C>
      Variable contribution margin ............     $ 21,208      $ 28,830      $ 60,335      $ 84,731
      Less divisional and corporate overhead
        not allocated to product groups .......       12,106        11,383        34,346        33,411
                                                    --------      --------      --------      --------
      Income from operations ..................        9,102        17,447        25,989        51,320
                                                    --------      --------      --------      --------
      Other income (expense):
        Interest expense ......................       (4,959)       (9,139)      (17,024)      (27,329)
        Investment and other income, net ......          289             1         1,910           128
                                                    --------      --------      --------      --------
           Total other income (expense) .......       (4,670)       (9,138)      (15,114)      (27,201)
                                                    --------      --------      --------      --------
      Income before income taxes, extraordinary
        gain (loss) and change in accounting
        principle .............................     $  4,432      $  8,309      $ 10,875      $ 24,119
                                                    ========      ========      ========      ========
</TABLE>

14.   The condensed consolidating financial statements, for the dates or periods
      indicated, of Chattem, Inc. ("Chattem"), Signal Investment & Management
      Co. ("Signal"), the guarantor of the long-term debt of Chattem, and the
      non-guarantor wholly-owned subsidiary companies of Chattem are presented
      below. Signal is a wholly-owned subsidiary of Chattem; the guarantee of
      Signal is full and unconditional and joint and several.



Ban(R) is the registered trademark of Kao Corporation.

















                                       12
<PAGE>
                                                                         Note 14
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                          CONSOLIDATING BALANCE SHEETS
                          ----------------------------
                                 AUGUST 31, 2001
                                 ---------------
                          (Unaudited and in thousands)

<TABLE><CAPTION>
                                                                                   NON-GUARANTOR
                                                                                    SUBSIDIARY    ELIMINATIONS
                                                       CHATTEM         SIGNAL       COMPANIES       DR. (CR.)    CONSOLIDATED
                                                     ------------   ------------   ------------   ------------   ------------
 <S>                                                 <C>            <C>            <C>            <C>            <C>

ASSETS
------
CURRENT ASSETS:
  Cash and cash equivalents .........................$     15,385   $      9,073   $      3,507   $       --     $     27,965
  Accounts receivable, less allowance for doubtful
    accounts of $1,100 ..............................      21,105           --            3,371           --           24,476
  Refundable and deferred income taxes ..............      11,801           --             --             --           11,801
  Inventories .......................................      10,859           --            2,116           --           12,975
  Prepaid expenses and other current assets .........       3,010           --              173           --            3,183
                                                     ------------   ------------   ------------   ------------   ------------
      Total current assets ..........................      62,160          9,073          9,167           --           80,400
                                                     ------------   ------------   ------------   ------------   ------------

PROPERTY, PLANT AND EQUIPMENT, NET ..................      26,427           --              262           --           26,689
                                                     ------------   ------------   ------------   ------------   ------------

OTHER NONCURRENT ASSETS:
  Patents, trademarks and other purchased product
    rights, net .....................................       4,039        182,780           --             --          186,819
  Debt issuance costs, net ..........................       7,937           --             --             --            7,937
  Investment in subsidiaries ........................       8,280           --             --           (8,280)          --
  Other .............................................       1,562           --               47           --            1,609
                                                     ------------   ------------   ------------   ------------   ------------
      Total other noncurrent assets .................      21,818        182,780             47         (8,280)       196,365
                                                     ------------   ------------   ------------   ------------   ------------

         TOTAL ASSETS ...............................$    110,405   $    191,853   $      9,476   $     (8,280)  $    303,454
                                                     ============   ============   ============   ============   ============

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
  Accounts payable ..................................$      4,314   $       --     $        492    $      --     $      4,806
  Accrued liabilities ...............................      26,468           --              868           --           27,336
                                                     ------------   ------------   ------------   ------------   ------------
      Total current liabilities .....................      30,782           --            1,360           --           32,142
                                                     ------------   ------------   ------------   ------------   ------------

LONG-TERM DEBT ......................................     204,748           --             --             --          204,748
                                                     ------------   ------------   ------------   ------------   ------------

DEFERRED INCOME TAXES ...............................       2,948         10,121           (150)          --           12,919
                                                     ------------   ------------   ------------   ------------   ------------

OTHER NONCURRENT LIABILITIES ........................       1,765           --             --             --            1,765
                                                     ------------   ------------   ------------   ------------   ------------

INTERCOMPANY ACCOUNTS ...............................    (183,121)       184,521         (1,400)          --             --
                                                     ------------   ------------   ------------   ------------   ------------

SHAREHOLDERS' EQUITY (DEFICIT):
  Preferred shares, without par value, authorized
    1,000, none issued ..............................        --             --             --             --             --
  Common shares, without par value, authorized
    50,000, issued 8,982 ............................       1,870              2          8,278          8,280          1,870
  Paid-in surplus ...................................      65,936           --             --             --           65,936
  Retained earnings (accumulated deficit) ...........     (13,115)        (2,791)         3,134           --          (12,772)
                                                     ------------   ------------   ------------   ------------   ------------
      Total .........................................      54,691         (2,789)        11,412          8,280         55,034
  Unamortized value of restricted common shares
    issued ..........................................        (921)          --             --             --             (921)
  Cumulative other comprehensive income -
    foreign currency translation adjustment .........        (487)          --           (1,746)          --           (2,233)
                                                     ------------   ------------   ------------   ------------   ------------
      Total shareholders' equity (deficit) ..........      53,283         (2,789)         9,666          8,280         51,880
                                                     ------------   ------------   ------------   ------------   ------------

         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..$    110,405   $    191,853   $      9,476   $      8,280   $    303,454
                                                     ============   ============   ============   ============   ============
</TABLE>


                                       13
<PAGE>
                                                                         Note 14
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                          CONSOLIDATING BALANCE SHEETS
                          ----------------------------
                                NOVEMBER 30, 2000
                                -----------------
                          (Unaudited and in thousands)
<TABLE><CAPTION>
                                                                                   NON-GUARANTOR
                                                                                    SUBSIDIARY    ELIMINATIONS
                                                        CHATTEM        SIGNAL        COMPANIES      DR. (CR.)    CONSOLIDATED
                                                     ------------   ------------   ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>            <C>            <C>
ASSETS
------
CURRENT ASSETS:
  Cash and cash equivalents......................... $      5,515   $     95,747   $      1,272   $         --   $    102,534
  Accounts receivable, less allowance for
    doubtful accounts of $1,025.....................       35,772          1,154          3,765             --         40,691
  Refundable and deferred income taxes..............       12,250             --            151             --         12,401
  Inventories.......................................       12,596             --          2,456             --         15,052
  Prepaid expenses and other current assets.........          711             --            173             --            884
                                                     ------------   ------------   ------------   ------------   ------------
      Total current assets..........................       66,844         96,901          7,817             --        171,562
                                                     ------------   ------------   ------------   ------------   ------------

PROPERTY, PLANT AND EQUIPMENT, NET..................       26,759             --            300             --         27,059
                                                     ------------   ------------   ------------   ------------   ------------

OTHER NONCURRENT ASSETS:
  Patents, trademarks and other purchased product
    rights, net.....................................        4,198        187,782             --             --        191,980
  Debt issuance costs, net..........................        8,829             --             --             --          8,829
  Investment in subsidiaries........................        8,280             --             --         (8,280)            --
  Other.............................................        2,646             --             --             --          2,646
                                                     ------------   ------------   ------------   ------------   ------------
      Total other noncurrent assets.................       23,953        187,782             --         (8,280)       203,455
                                                     ------------   ------------   ------------   ------------   ------------

         TOTAL ASSETS............................... $    117,556   $    284,683   $      8,117   $     (8,280)  $    402,076
                                                     ============   ============   ============   ============   ============

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
  Accounts payable.................................. $      8,426   $         --   $        364   $         --   $      8,790
  Payable to bank...................................        1,529             --             --             --          1,529
  Accrued liabilities...............................       33,898             --          1,316             --         35,214
                                                     ------------   ------------   ------------   ------------   ------------
      Total current liabilities.....................       43,853             --          1,680             --         45,533
                                                     ------------   ------------   ------------   ------------   ------------

LONG-TERM DEBT......................................      304,077             --             --             --        304,077
                                                     ------------   ------------   ------------   ------------   ------------

DEFERRED INCOME TAXES...............................        2,798         10,121             --             --         12,919
                                                     ------------   ------------   ------------   ------------   ------------

OTHER NONCURRENT LIABILITIES........................        1,894             --             --             --          1,894
                                                     ------------   ------------   ------------   ------------   ------------

INTERCOMPANY ACCOUNTS...............................     (275,101)       277,272         (2,171)            --             --
                                                     ------------   ------------   ------------   ------------   ------------

SHAREHOLDERS' EQUITY (DEFICIT):
  Preferred shares, without par value, authorized
    1,000, none issued..............................           --             --             --             --             --
  Common shares, without par value, authorized
    50,000, issued 8,861............................        1,845              2          8,278          8,280          1,845
  Paid-in surplus...................................       64,443             --             --             --         64,443
  Retained earnings (accumulated deficit)...........      (25,771)        (2,712)         2,020             --        (26,463)
                                                     ------------   ------------   ------------   ------------   ------------
      Total.........................................       40,517         (2,710)        10,298          8,280         39,825
  Cumulative other comprehensive income -
      foreign currency translation adjustment.......         (482)            --         (1,690)            --         (2,172)
                                                     ------------   ------------   ------------   ------------   ------------
      Total shareholders' equity (deficit)..........       40,035         (2,710)         8,608          8,280         37,653
                                                     ------------   ------------   ------------   ------------   ------------

         TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. $    117,556   $    284,683   $      8,117   $      8,280   $    402,076
                                                     ============   ============   ============   ============   ============
</TABLE>

                                       14
<PAGE>
                                                                         Note 14
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                       CONSOLIDATING STATEMENTS OF INCOME
                       ----------------------------------
                    FOR THE NINE MONTHS ENDED AUGUST 31, 2001
                    -----------------------------------------
                          (Unaudited and in thousands)

<TABLE><CAPTION>
                                                                                   NON-GUARANTOR
                                                                                    SUBSIDIARY    ELIMINATIONS
                                                        CHATTEM        SIGNAL        COMPANIES      DR. (CR.)    CONSOLIDATED
                                                     ------------   ------------   ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>            <C>            <C>

NET SALES .........................................  $    142,773   $       --     $     10,830   $       --     $    153,603
                                                     ------------   ------------   ------------   ------------   ------------

COSTS AND EXPENSES:
  Cost of sales ...................................        36,849           --            3,704           --           40,553
  Advertising and promotion .......................        53,721          4,179          3,491           --           61,391
  Selling, general and administrative .............        23,682             15          1,973           --           25,670
                                                     ------------   ------------   ------------   ------------   ------------
      Total costs and expenses ....................       114,252          4,194          9,168           --          127,614
                                                     ------------   ------------   ------------   ------------   ------------

INCOME FROM OPERATIONS ............................        28,521         (4,194)         1,662           --           25,989
                                                     ------------   ------------   ------------   ------------   ------------

OTHER INCOME (EXPENSE):
  Interest expense ................................       (17,024)          --             --             --          (17,024)
  Investment and other income, net ................           337          1,537             36           --            1,910
  Royalties .......................................        (6,895)         7,083           (188)          --             --
  Premium revenue .................................           (40)          --               40           --             --
  Corporate allocations ...........................            23           --              (23)          --             --
                                                     ------------   ------------   ------------   ------------   ------------
      Total other income (expense) ................       (23,599)         8,620           (135)          --          (15,114)
                                                     ------------   ------------   ------------   ------------   ------------

INCOME BEFORE INCOME TAXES AND EXTRAORDINARY GAIN..         4,922          4,426          1,527           --           10,875


PROVISION FOR INCOME TAXES ........................         2,292          1,505            335           --            4,132
                                                     ------------   ------------   ------------   ------------   ------------

INCOME BEFORE EXTRAORDINARY GAIN ..................         2,630          2,921          1,192           --            6,743

EXTRAORDINARY GAIN ON EARLY EXTINGUISHMENT OF DEBT,
  NET OF INCOME TAXES .............................         6,948           --             --             --            6,948
                                                     ------------   ------------   ------------   ------------   ------------

NET INCOME ........................................  $      9,578   $      2,921   $      1,192   $       --     $     13,691
                                                     ============   ============   ============   ============   ============
</TABLE>



                                       15
<PAGE>
                                                                         Note 14
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                       CONSOLIDATING STATEMENTS OF INCOME
                       ----------------------------------
                    FOR THE NINE MONTHS ENDED AUGUST 31, 2000
                    -----------------------------------------
                          (Unaudited and in thousands)

<TABLE><CAPTION>
                                                                                   NON-GUARANTOR
                                                                                    SUBSIDIARY    ELIMINATIONS
                                                        CHATTEM        SIGNAL        COMPANIES      DR. (CR.)    CONSOLIDATED
                                                     ------------   ------------   ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>            <C>            <C>
NET SALES .......................................... $    202,733   $       --     $     12,527   $       --     $    215,260
                                                     ------------   ------------   ------------   ------------   ------------

COSTS AND EXPENSES:
  Cost of sales ....................................       53,042           --            4,254           --           57,296
  Advertising and promotion ........................       70,190          7,288          4,969           --           82,447
  Selling, general and administrative ..............       22,060             10          2,127           --           24,197
                                                     ------------   ------------   ------------   ------------   ------------
      Total costs and expenses .....................      145,292          7,298         11,350           --          163,940
                                                     ------------   ------------   ------------   ------------   ------------

INCOME FROM OPERATIONS .............................       57,441         (7,298)         1,177           --           51,320
                                                     ------------   ------------   ------------   ------------   ------------

OTHER INCOME (EXPENSE):
  Interest expense .................................      (27,329)          --             --             --          (27,329)
  Investment and other income, net .................           88              2             38           --              128
  Royalties ........................................       (9,654)         9,856           (202)          --             --
  Corporate allocations ............................           23           --              (23)          --             --
                                                     ------------   ------------   ------------   ------------   ------------
      Total other income (expense) .................      (36,872)         9,858           (187)          --          (27,201)
                                                     ------------   ------------   ------------   ------------   ------------

INCOME BEFORE INCOME TAXES, EXTRAORDINARY LOSS AND
  CHANGE IN ACCOUNTING PRINCIPLE ...................       20,569          2,560            990           --           24,119

PROVISION FOR INCOME TAXES .........................        8,271            870           --             --            9,141
                                                     ------------   ------------   ------------   ------------   ------------

INCOME BEFORE EXTRAORDINARY LOSS AND CHANGE IN
  ACCOUNTING PRINCIPLE .............................       12,298          1,690            990           --           14,978

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
  NET OF INCOME TAX BENEFIT ........................         (110)          --             --             --             (110)

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE,
  NET OF INCOME TAX BENEFIT ........................         (542)          --             --             --             (542)
                                                     ------------   ------------   ------------   ------------   ------------
NET INCOME ......................................... $     11,646   $      1,690   $        990   $       --     $     14,326
                                                     ============   ============   ============   ============   ============
</TABLE>


                                       16
<PAGE>
                                                                         Note 14
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                     --------------------------------------
                    FOR THE NINE MONTHS ENDED AUGUST 31, 2001
                    -----------------------------------------
                          (Unaudited and in thousands)

<TABLE><CAPTION>
                                                                                   NON-GUARANTOR
                                                                                    SUBSIDIARY    ELIMINATIONS
                                                        CHATTEM        SIGNAL        COMPANIES      DR. (CR.)    CONSOLIDATED
                                                     ------------   ------------   ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>            <C>            <C>

OPERATING ACTIVITIES:
  Net income ........................................$      9,578   $      2,921   $      1,192   $       --     $     13,691
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization .................       3,398          4,179             50           --            7,627
      Gain on product divestiture ...................        --              (79)          --             --              (79)
      Income tax provision ..........................      (1,505)         1,505           --             --             --
      Extraordinary gain on early extinguishment of
        debt, net ...................................      (6,948)          --             --             --           (6,948)
      Stock option charge ...........................         394           --             --             --              394
      Other, net ....................................         (59)          --             --             --              (59)
      Changes in operating assets and liabilities,
        net of product divestitures:
         Accounts receivable ........................      14,703          1,154            358           --           16,215
         Refundable and deferred income taxes .......         600           --             --             --              600
         Inventories ................................       1,760           --              317           --            2,077
         Prepaid expenses and other current assets ..      (2,261)          --              (48)          --           (2,309)
         Accounts payable and accrued liabilities ...     (15,986)          --             (345)          --          (16,331)
                                                     ------------   ------------   ------------   ------------   ------------
           Net cash provided by operating activities        3,674          9,680          1,524           --           14,878
                                                     ------------   ------------   ------------   ------------   ------------

INVESTING ACTIVITIES:
  Purchases of property, plant and equipment ........      (1,496)          --              (16)          --           (1,512)
  Additions to trademarks and other product rights ..        --             (277)          --             --             (277)
  Proceeds from product divestiture .................       1,179           --             --             --            1,179
  Decrease in other assets, net .....................         374           --             --             --              374
                                                     ------------   ------------   ------------   ------------   ------------
           Net cash provided by (used in)
           investing activities .....................          57           (277)           (16)          --             (236)
                                                     ------------   ------------   ------------   ------------   ------------

FINANCING ACTIVITIES:
  Repayment of long - term debt .....................     (84,453)          --             --             --          (84,453)
  Payment of consent fees related to repayment of
    long-term debt ..................................      (3,293)          --             --             --           (3,293)
  Proceeds from exercise of stock options ...........          95           --             --             --               95
  Change in payable to bank .........................      (1,529)          --             --             --           (1,529)
  Changes in intercompany accounts ..................      92,351        (93,077)           726           --             --
  Dividends paid ....................................       3,000         (3,000)          --             --             --
                                                     ------------   ------------   ------------   ------------   ------------
           Net cash provided by (used in)
           financing activities .....................       6,171        (96,077)           726           --          (89,180)
                                                     ------------   ------------   ------------   ------------   ------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS .........................................         (32)          --                1           --              (31)
                                                     ------------   ------------   ------------   ------------   ------------

CASH AND CASH EQUIVALENTS:
  Increase (decrease) for the period ................       9,870        (86,674)         2,235           --          (74,569)
  At beginning of period ............................       5,515         95,747          1,272           --          102,534
                                                     ------------   ------------   ------------   ------------   ------------
  At end of period ..................................$     15,385   $      9,073   $      3,507   $       --     $     27,965
                                                     ============   ============   ============   ============   ============
</TABLE>


                                       17
<PAGE>
                                                                        Note 14.
                         CHATTEM, INC. AND SUBSIDIARIES
                         ------------------------------
                     CONSOLIDATING STATEMENTS OF CASH FLOWS
                     --------------------------------------
                    FOR THE NINE MONTHS ENDED AUGUST 31, 2000
                    -----------------------------------------
                          (Unaudited and in thousands)

<TABLE><CAPTION>
                                                                                   NON-GUARANTOR
                                                                                    SUBSIDIARY    ELIMINATIONS
                                                        CHATTEM        SIGNAL        COMPANIES      DR. (CR.)    CONSOLIDATED
                                                     ------------   ------------   ------------   ------------   ------------
<S>                                                  <C>            <C>            <C>            <C>            <C>

OPERATING ACTIVITIES:
  Net income ........................................$     11,646   $      1,690   $        990   $       --     $     14,326
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization .................       4,041          7,288             74           --           11,403
      Extraordinary loss on early extinguishment of
        debt, net ...................................         110           --             --             --              110
      Cumulative effect of change in accounting
        principle, net ..............................         542           --             --             --              542
      Income tax provision ..........................        (870)           870           --             --             --
      Stock option charge ...........................         398           --             --             --              398
      Other, net ....................................          66           --             --             --               66
      Changes in operating assets and liabilities,
        net of acquisitions:
         Accounts receivable ........................       1,905           --               11           --            1,916
         Inventories ................................       4,631           --             (161)          --            4,470
         Prepaid and other current assets ...........         616           --              (40)          --              576
         Accounts payable and accrued liabilities ...      (7,004)          --             (474)          --           (7,478)
                                                     ------------   ------------   ------------   ------------   ------------
           Net cash provided by operating activities       16,081          9,848            400           --           26,329
                                                     ------------   ------------   ------------   ------------   ------------

INVESTING ACTIVITIES:
  Purchases of property, plant and equipment ........      (5,204)          --              (89)          --           (5,293)
  Additions to trademarks and other product rights ..        (241)          --             --             --             (241)
  Increase in other assets, net .....................      (1,148)          --             --             --           (1,148)
                                                     ------------   ------------   ------------   ------------   ------------
           Net cash used in investing activities ....      (6,593)          --              (89)          --           (6,682)
                                                     ------------   ------------   ------------   ------------   ------------

FINANCING ACTIVITIES:
  Repayment of long - term debt .....................     (39,996)          --             --             --          (39,996)
  Proceeds from long - term debt ....................      29,000           --             --             --           29,000
  Proceeds from exercise of stock options ...........         210           --             --             --              210
  Repurchase of common shares .......................      (7,155)          --             --             --           (7,155)
  Change in payable to bank .........................        (367)          --             --             --             (367)
  Debt issuance costs ...............................        (317)          --             --             --             (317)
  Changes in intercompany accounts ..................       5,612         (6,853)         1,241           --             --
  Dividends paid ....................................       3,000         (3,000)          --             --             --
                                                     ------------   ------------   ------------   ------------   ------------
           Net cash  provided by (used in) financing
           activities ...............................     (10,013)        (9,853)         1,241           --          (18,625)
                                                     ------------   ------------   ------------   ------------   ------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
  EQUIVALENTS .......................................         (14)          --              (79)          --              (93)
                                                     ------------   ------------   ------------   ------------   ------------

CASH AND CASH EQUIVALENTS:
  Increase (decrease) for the period ................        (539)            (5)         1,473           --              929
  At beginning of period ............................         550             16          1,742           --            2,308
                                                     ------------   ------------   ------------   ------------   ------------
  At end of period...................................$         11   $         11   $      3,215   $       --     $      3,237
                                                     ============   ============   ============   ============   ============
</TABLE>

                                       18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

Note:   All monetary amounts are expressed in thousands of dollars unless
        contrarily evident.

The following year to year comparisons of the results of operations were
materially affected by the sale of Ban in September 2000, including lower sales,
decreased advertising and promotion expense, higher selling, general and
administrative expense as a percentage of sales and reduced interest expense,
among other things. Consequently, certain aspects of the results of operations
are discussed on an actual and pro forma basis. The terms "pro forma" and "pro
forma basis" refer to the respective reported financial data for the three and
nine months ended August 31, 2000, respectively, after giving effect to the Ban
sale.

GENERAL
-------
On January 17, 2001 the Company completed the consent solicitation and tender
offer pursuant to which it retired $70,462 principal amount of its 8.875% senior
subordinated notes due 2008 and $7,397 principal amount of its 12.75% senior
subordinated notes due 2004. The consideration paid for the consent solicitation
and tender offer was $64,937, which was provided by the proceeds of the Ban
sale. An extraordinary gain on the early extinguishment of debt of $7,551, net
of income taxes, was recognized in the first six months of fiscal 2001. On June
15, 2001 the Company retired all of the remaining outstanding principal balance
of $21,748 of its 12.75% senior subordinated notes due 2004 and accrued interest
thereon. As a result of this transaction, the Company recognized a loss on the
early extinguishment of debt of $603, net of income tax benefit, in the third
quarter of fiscal 2001. This loss primarily consisted of the premium paid on the
retirement of the notes and the write-off of related unamortized deferred
issuance and initial discount costs.

For the three months ended August 31, 2001, the Company experienced a $23,612,
or 32.2%, decrease in sales to $49,641 from $73,253 in the third quarter of
fiscal 2000. Net sales for the current quarterly period decreased $2,152, or
4.2%, from pro forma net sales for the same period last year. Operating income
during the period likewise decreased $8,345, or 47.8%, to $9,102 from $17,447.
Income before extraordinary gain (loss) and change in accounting principle of
$2,748, or $.30 per diluted share, was recorded during the period compared to
$5,151, or $.55 per diluted share, during the same period last year.

For the first nine months of fiscal 2001, net sales decreased $61,657, or 28.6%,
to $153,603 from $215,260 for the comparable period last year. On a pro forma
basis, however, net sales for the current nine month period declined $3,342, or
2.1%, over comparable sales for the same period last year. Income from
operations for the current nine month period decreased $25,331, or 49.4%, to
$25,989 as compared to $51,320 for the same period of fiscal 2000. Income before
extraordinary gain (loss) and change in accounting principle declined $8,235, or
55.0%, to $6,743 from $14,978 in the related fiscal 2000 period.

Cash earnings (net income before extraordinary items plus non-cash amortization)
is one of the key standards used by the Company to measure operating
performance. Cash earnings and EBITDA, defined below, are used to supplement
operating income as an indicator of operating performance and not as an
alternative to measures defined and required by generally accepted accounting
principles. Cash earnings for the three months ended August 31, 2001 were
$3,741, or $.41 per share, as compared to $6,823, or $.73 per share, for the
comparable 2000 period. For the nine months ended August 31, 2001 cash earnings
were $9,690, or $1.09 per share, as compared to $19,969, or $2.08 per share for
the same period last year.

Earnings before interest, taxes, depreciation and amortization ("EBITDA") were
$11,347, or 22.9% of net sales, in the third quarter of fiscal 2001 compared to
$20,792, or 28.4% of net sales, in the same 2000 period. For the nine months
ended August 31, 2001 EBITDA was $32,654, or 21.3% of net sales, compared to
$61,144, or 28.4% of net sales, for the same period last year.

                                       19
<PAGE>
During the third quarter and first nine months of fiscal 2001, the Company
enjoyed favorable sales performances from its ICY HOT, CAPZASIN and BULLFROG
product lines. GOLD BOND sales responded favorably to strong advertising support
during the third quarter of 2001. While DEXATRIM sales declined from the same
periods of fiscal 2000, the sales performance of this brand was achieved in
spite of the discontinuance of DEXATRIM with PPA in November 2000.

During the fourth quarter of fiscal 2000 the Company recorded allowances for
estimated product returns of $5,600 and inventory write-offs of $2,788, for
DEXATRIM with PPA, which was discontinued in November 2000. During the nine
months ended August 31, 2001, the allowance for product returns was increased
$1,350, while $6,850 was charged against the allowance, leaving a balance of
$100 at August 31, 2001. Also, during this same period the allowance for
inventory write-offs recorded charges of $2,455, leaving a $333 balance at the
end of the nine month period.

The Company will continue to seek sales increases through a combination of
acquisitions and internal growth while maintaining high operating income levels.
As previously high-growth brands mature, sales increases will become even more
dependent on acquisitions and the development of successful line extensions.
During the first nine months of fiscal 2001 the Company introduced DEXATRIM
Natural Ephedrine Free, ICY HOT Patch, BULLFROG Fast Blast and BULLFROG
Sensitive Skin as line extensions. 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 and/or earnings. As a result, the Company may
experience a short-term impact on its profitability. Strategically, the Company
continually evaluates its products as part of its growth strategy and, in
instances where the Company's objectives are not realized, will dispose of
certain brands and redeploy the assets to acquire other brands or reduce
indebtedness.

RESULTS OF OPERATIONS
---------------------
The following table sets forth, for income before extraordinary gain (loss) and
change in accounting principle and for the periods indicated, certain items from
the Company's Consolidated Statements of Income expressed as a percentage of net
sales:
<TABLE><CAPTION>
                                         FOR THE THREE MONTHS      FOR THE NINE MONTHS
                                           ENDED AUGUST 31,          ENDED AUGUST 31,
                                        ---------------------     ---------------------
                                          2001         2000         2001         2000
                                        --------     --------     --------     --------
<S>                                     <C>          <C>          <C>          <C>
NET SALES ...........................      100.0%       100.0%       100.0%       100.0%
                                        --------     --------     --------     --------

COSTS AND EXPENSES:
  Cost of sales .....................       25.5         26.1         26.4         26.6
  Advertising and promotion .........       37.4         38.4         40.0         38.3
  Selling, general and administrative       18.8         11.7         16.7         11.3
                                        --------     --------     --------     --------
     Total costs and expenses .......       81.7         76.2         83.1         76.2
                                        --------     --------     --------     --------

INCOME FROM OPERATIONS ..............       18.3         23.8         16.9         23.8
                                        --------     --------     --------     --------

OTHER INCOME (EXPENSE):
  Interest expense ..................      (10.0)       (12.5)       (11.1)       (12.7)
  Investment and other income, net ..         .6         --            1.3           .1
                                        --------     --------     --------     --------
     Total other income (expense) ...       (9.4)       (12.5)        (9.8)       (12.6)
                                        --------     --------     --------     --------

INCOME BEFORE INCOME TAXES ..........        8.9         11.3          7.1         11.2

PROVISION FOR INCOME TAXES ..........        3.4          4.3          2.7          4.2
                                        --------     --------     --------     --------
INCOME BEFORE EXTRAORDINARY
  GAIN (LOSS) AND CHANGE IN
  ACCOUNTING PRINCIPLE ..............        5.5%         7.0%         4.4%         7.0%
                                        ========     ========     ========     ========
</TABLE>
                                       20
<PAGE>
COMPARISON OF THREE MONTHS ENDED AUGUST 31, 2001 AND 2000
---------------------------------------------------------
For the three months ended August 31, 2001, net sales decreased $23,612, or
32.2%, to $49,641 from $73,253 for the same period last year. The decrease was
largely the result of the sale of Ban in September 2000. Domestic consumer
products sales declined $22,443, or 33.0%, to $45,561 for the three months ended
August 31, 2001 from $68,004 for the comparable period of fiscal 2000. Net sales
of international consumer products also decreased $1,169, or 22.3%, to $4,080
for the three months ended August 31, 2001 from $5,249 in the comparable 2000
period. On a pro forma basis, net domestic consumer products sales for the three
months ended August 31, 2001 decreased $2,247, or 4.7%, but international sales
increased $95, or 2.4%, for a net decline of $2,152, or 4.2%.

For the three months ended August 31, 2001, sales of OTC health care products
increased $278, or .7%, to $41,328 from $41,050 in the same period last year,
and sales of toiletries and skin care brands decreased $24,077, or 75.0%, to
$8,035 for the three months ended August 31, 2001 from $32,112 in the comparable
fiscal 2000 period. On a pro forma basis, net sales of the toiletries and skin
care brands for the three months ended August 31, 2001 decreased $2,617, or
24.6%.

In the domestic OTC health care product segment, sales increases were recognized
for the ICY HOT, CAPZASIN and GOLD BOND product lines, while sales declines were
recorded for PAMPRIN, PREMSYN PMS, FLEXALL and DEXATRIM for the three months
ended August 31, 2001. In the domestic toiletries and skin care segment, sales
of all product lines declined, especially those of SUN-IN and PHISODERM. Sales
variances were largely the result of changes in the volume of unit sales of the
particular brands.

The increase in sales of ICY HOT resulted from the introduction of the ICY HOT
Patch line extension in the first quarter of fiscal 2001 and an effective
marketing campaign, while increased sales of CAPZASIN were primarily attributed
to strong advertising support and distribution gains. GOLD BOND sales responded
favorably to increased advertising during the third quarter of fiscal 2001. The
decline in sales of PAMPRIN and PREMSYN PMS was largely due to the introduction
of a new competitive product in the menstrual category in the first quarter of
fiscal 2001, while FLEXALL sales were affected by reduced marketing support. The
less than expected sales decline of DEXATRIM reflected the continued growth of
the DEXATRIM Natural products, which offset much of the sales lost by the
discontinuance of the DEXATRIM with PPA in November 2000. The sales decline of
the SUN-IN and PHISODERM product lines was primarily associated with reduced
marketing support for these brands, and in the case of SUN-IN, the unfavorable
effect of the introduction of new competitive products during the second quarter
of fiscal 2001.

The decline in net sales of the international division for the three months
ended August 31, 2001 was almost entirely associated with the loss of sales of
Ban, which was sold in September 2000. In the third quarter of fiscal 2001 sales
declined 14.7% for the Canadian operation, 16.3% for the United Kingdom business
and 69.1% for the U.S. export segment as compared to the same period last year.
On a pro forma basis, net sales for the three months ended August 31, 2001
decreased 1.9% for the Canadian operation, increased 3.3% for the United Kingdom
business and increased 24.8% for the U.S. export segment. Sales variances were
largely the result of changes in volume of unit sales of the particular brands.

Cost of sales as a percentage of net sales was 25.5% for the three months ended
August 31, 2001 as compared to 26.1% for the same period last year. The
favorable comparison reflects a change in product mix to higher gross margin
product lines in the third quarter of fiscal 2001.

Advertising and promotion expenses decreased $9,580, or 34.1%, for the three
months ended August 31, 2001 and were 37.4% and 38.4% of net sales for the 2001
and 2000 periods, respectively. The decline in expenditures was primarily the
result of the Ban sale. Increases in advertising and promotional spending were
recorded for PAMPRIN, ICY HOT, ASPERCREME, DEXATRIM and GOLD BOND, while
spending for the FLEXALL, SPORTSCREME, SUN-IN, PHISODERM and SUNSOURCE product
lines decreased.

                                       21
<PAGE>
The increase of $809, or 9.5%, in selling, general and administrative expenses
in the third quarter of fiscal 2001 was largely associated with normal annual
increases in employee compensation and increases in the cost of legal services
and corporate insurance. The increase was offset in part by reduced freight,
shipping and general sales expenses, due primarily to decreased sales, along
with lower credit and human services costs. The selling, general and
administrative expenses were 18.8% of net sales in the three months ended August
31, 2001 as compared to 11.7% in the same period last year. The selling, general
and administrative expenses as a percentage of sales computation in the current
period was adversely affected by the absence of sales of Ban, which was sold in
September 2000.

Interest expense decreased $4,180, or 45.7%, in the third quarter of fiscal
2001, reflecting primarily the payment of all of the outstanding balances of the
revolving line of credit and term loans in September 2000 and $99,607 principal
amount of the Company's senior subordinated notes in the first nine months of
fiscal 2001.

Investment and other income for the three months ended August 31, 2001 increased
$288 due to interest income from temporary investments made from a portion of
the proceeds from the Ban sale in September 2000.

Income before extraordinary gain (loss) and change in accounting principle
decreased $2,403, or 46.7%, to $2,748 for the three months ended August 31, 2001
from $5,151 for the comparable period of the prior year. This decrease resulted
primarily from lower sales attributable to the sale of Ban in September 2000.

An extraordinary loss of $603, net of income tax benefit, on the early
extinguishment of debt was incurred in the current period. This loss primarily
consisted of the premium paid on the retirement of the remaining principal
balance of $21,748 of the Company's 12.75% senior subordinated notes due 2004
and the write-off of related unamortized deferred issuance and initial discount
costs.

COMPARISON OF NINE MONTHS ENDED AUGUST 31, 2001 AND 2000
--------------------------------------------------------
Net sales for the nine months ended August 31, 2001 decreased $61,657, or 28.6%,
to $153,603 from $215,260 for the same period last year. The decrease in sales
was largely the result of the sale of Ban in September 2000. Domestic consumer
products sales declined $58,032, or 29.1%, to $141,681 for the nine months ended
August 31, 2001 from $199,713 for the comparable period of fiscal 2000. Net
sales of international consumer products also decreased $3,625, or 23.3%, to
$11,922 in the nine months ended August 31, 2001 from $15,547 in the comparable
2000 period. On a pro forma basis, domestic consumer product net sales for the
nine months ended August 31, 2001 decreased $4,128, or 2.8%, but international
sales increased $786, or 7.1%, for a net decline of $3,342, or 2.1%.

For the nine months ended August 31, 2001 sales of OTC health care products
declined $1,740, or 1.4%, to $124,659 from $126,399 in the same period last
year. Sales of toiletries and skin care brands decreased $60,141, or 68.0%, to
$28,365 in the nine months ended August 31, 2001 from $88,506 in the comparable
fiscal 2000 period. On a pro forma basis, net sales of the toiletries and skin
care brands for the nine months ended August 31, 2001 decreased $1,826, or 6.0%.

In the domestic OTC health care product segment, sales increases were recognized
for ICY HOT, CAPZASIN and ARTHRITIS HOT in the nine months ended August 31,
2001, while sales declines were recorded for FLEXALL, PAMPRIN and GOLD BOND. In
the domestic toiletries and skin care segment, BULLFROG recorded increased
sales, SUN-IN, PHISODERM and ULTRASWIM experienced declines in sales and the
remaining brands showed modest sales decreases in the nine months ended August
31, 2001. Sales variances were largely the result of changes in the volume of
unit sales of the particular brands.

                                       22
<PAGE>
The increase in sales of ICY HOT largely resulted from the introduction of the
ICY HOT Patch line extension in the first quarter of fiscal 2001 and an
effective marketing campaign, while increased sales of CAPZASIN and ARTHRITIS
HOT were primarily attributed to strong advertising support and distribution
gains. The decline in sales of FLEXALL was principally due to reduced marketing
support, and the sales decrease of PAMPRIN was largely due to the introduction
of a new competitive product in the menstrual category during this period. The
GOLD BOND sales decrease was primarily the result of continuing competition,
which management countered to a great extent in the third quarter of fiscal 2001
with a strong media campaign. The less than expected sales decline of DEXATRIM
reflected the continued growth of DEXATRIM Natural products, which offset much
of the sales lost by the discontinuance of the DEXATRIM with PPA in November
2000. The sales increase of BULLFROG was largely due to strong retail sales of
the product line during the summer season of 2000 which required substantial
inventory restocking by customers for the 2001 season, and more effective
promotional campaigns. The reduced sales of SUN-IN were principally associated
with the introduction of new competitive products in the nine months ended
August 31, 2001 and decreased marketing support. The decrease in sales of the
PHISODERM product line was largely the result of reduced marketing support. The
sales decline for ULTRASWIM reflected the transition to new packaging for this
product line.

The decline in net sales of the international division in the nine months ended
August 31, 2001 was almost entirely associated with the loss of sales of Ban,
which was sold in September 2000. In the nine months ended August 31, 2001,
sales declined 11.8% for the Canadian operation, 15.0% for the United Kingdom
business and 63.9% for the U.S. export segment as compared to the same period
last year. On a pro forma basis, net sales for the nine months ended August 31,
2001 increased 2.1% for the Canadian operation, 6.7% for the United Kingdom
business and 39.2% for the U.S. export segment. Sales variances were largely the
result of changes in volume of unit sales of the particular brands.

Advertising and promotion expenses decreased $21,056, or 25.5%, for the nine
months ended August 31, 2001 and were 40.0% of net sales compared to 38.3% in
the corresponding 2000 period. The decline in expenditures was primarily the
result of the Ban sale. Increases in advertising and promotion spending were
recorded for PAMPRIN, ICY HOT, ASPERCREME, DEXATRIM and GOLD BOND, while
expenditures for the FLEXALL, SPORTSCREME, SUN-IN, PHISODERM and SUNSOURCE
product lines decreased.

The increase of $1,473, or 6.1%, in selling, general and administrative expenses
in the nine months ended August 31, 2001 was largely associated with normal
annual increases in employee compensation and increases in the cost of legal
services and corporate insurance. The increase was offset in part by reduced
freight, shipping and general sales expenses, associated with decreased sales,
along with lower credit and human services costs. Selling, general and
administrative expenses were 16.7% of net sales in the nine months ended August
31, 2001 as compared to 11.3% in the same period last year. The selling, general
and administrative expenses as a percentage of sales computation in the current
period was adversely affected by the absence of sales of Ban, which was sold in
September 2000.

Interest expense decreased $10,305, or 37.7%, in the 2001 period, reflecting
primarily the retirement of all of the outstanding balances of the revolving
line of credit and term loans in September 2000 and $99,607 principal amount of
the Company's senior subordinated notes in the first nine months of fiscal 2001.

Investment and other income for the nine months ended August 31, 2001 increased
$1,782, largely due to interest income from temporary investments made from a
portion of the proceeds from the Ban sale in September 2000, and the gain of $79
on the sale of the Norwich Aspirin brand during the 2001 period.

An extraordinary gain of $6,948, net of income taxes, on the early
extinguishment of debt was recognized in the 2001 period. The gain resulted from
the retirement of $99,607 principal amount of the Company's senior subordinated
notes. An extraordinary loss of $110, net of income tax benefit, on the early
extinguishment of debt was incurred in the prior year period.

                                       23
<PAGE>
Income before extraordinary gain (loss) and change in accounting principle
decreased $8,235, or 55.0%, to $6,743 for the nine months ended August 31, 2001
from $14,978 for the comparable period of the prior year. This decrease resulted
primarily from lower sales attributable to the sale of Ban in September 2000.

Norwich(R)is the trademark of The Monticello Companies, Inc.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company has historically financed its operations with a combination of
internally generated funds and borrowings. The Company's principal uses of cash
are for operating expenses, interest and principal payments with respect to
long-term debt, acquisitions, working capital, repurchases of its common shares
and capital expenditures.

Cash provided by operations was $14,878 and $26,329 for the nine months ended
August 31, 2001 and 2000, respectively. The decrease in cash flows from
operations over the prior year period was primarily the result of decreases in
net income (after adjustment for the extraordinary net gain on the early
extinguishment of debt), reduced depreciation and amortization expense, largely
as a result of the sale of the Ban trademark on September 15, 2000, and
decreases in accounts payable and accrued liabilities.

Investing activities used cash of $236 and $6,682 in the nine months ended
August 31, 2001 and 2000, respectively. The decrease of $6,446 in the use of
cash in the nine months ended August 31, 2001 was largely the result of fewer
additions to property, plant and equipment and the proceeds of $1,179 from the
sale of the Norwich Aspirin brand.

Financing activities used cash of $89,180 and $18,625 in the first nine months
of fiscal 2001 and 2000, respectively. The increase of $70,555 reflected
primarily the funds required for the retirement of $99,607 principal amount of
the Company's senior subordinated notes, offset by the absence of repurchases of
the Company's common shares during the first nine months of fiscal 2001.

The following table presents working capital data at August 31, 2001 and
November 30, 2000 or for the respective years then ended:

<TABLE><CAPTION>
                        Item                                             2001          2000
                    ------------                                      ----------    ----------
   <S>                                                                <C>           <C>
   Working capital (current assets less current liabilities) ......   $   48,258    $  126,029
   Current ratio (current assets divided by current liabilities) ..         2.50          3.77
   Quick ratio (cash and cash equivalents and accounts receivable
      divided by current liabilities) .............................         1.63          3.15
   Average accounts receivable turnover ...........................         4.92          5.28
   Average inventory turnover .....................................         3.21          3.50
   Working capital as a percentage of total assets ................        15.90%        31.34%
</TABLE>

The change in the current and quick ratios at August 31, 2001 as compared to
November 30, 2000, reflected primarily the reduction in cash used for the
partial retirement of the Company's senior subordinated notes in the first nine
months of fiscal 2001.

Total long-term debt outstanding was $204,748 at August 31, 2001 compared to
$304,077 at November 30, 2000, a decrease of $99,329 during the first nine
months of 2001.

As of August 31, 2001, the remaining amount authorized by the Company's board of
directors under the stock buyback plan was $6,599; however, the Company is
limited in its ability to repurchase shares due to restrictions under the terms
of the indenture with respect to which its senior subordinated notes were
issued.

                                       24
<PAGE>
Management of the Company believes that projected cash flows generated by
operations along with its cash and cash equivalents position and a $10,000
revolving credit facility will be sufficient to fund the Company's current
commitments and proposed operations. Also, on December 21, 1998, the Company
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.

FOREIGN OPERATIONS
------------------
The Company's primary foreign operations are conducted through its Canadian and
U.K. subsidiaries. The functional 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
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation." For the nine months ended August 31, 2001 and 2000 these
subsidiaries accounted for 7% and 6% of total revenues, respectively, and 3% and
2% of total assets, respectively. It has not been the Company's practice to
hedge its assets and liabilities in Canada and the U.K. or its intercompany
transactions due to the inherent risks associated with foreign currency hedging
transactions and the timing of payments between the Company and its two foreign
subsidiaries. Historically, gains or losses from foreign currency transactions
have not had a material impact on the Company's operating results. Losses of $2
and $50 for the nine months ended August 31, 2001 and 2000, respectively,
resulted from foreign currency transactions.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company recorded the initial application of SOP 98-5 in December 1999 as the
cumulative effect of a change in accounting principle of approximately $542, net
of income tax benefit.

In September 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached a final consensus on Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10").
EITF 00-10 is effective the fourth quarter of 2001 and addresses the income
statement classification of amounts charged to customers for shipping and
handling, as well as costs incurred related to shipping and handling. The EITF
concluded that amounts billed to a customer in a sale transaction related to
shipping and handling should be classified as revenue. The EITF also concluded
that if costs incurred related to shipping and handling are significant and not
included in cost of sales, an entity should disclose both the amount of such
costs and the line item on the income statement that includes them. Costs
incurred related to shipping and handling included in revenues will be required
to be reclassified to cost of sales. The Company currently classifies shipping
and handling costs billed to the customer as revenues and costs related to
shipping and handling as a selling expense. The amount of shipping and handling
costs included in selling expense for the third quarter of fiscal 2001 and 2000
was $1,350 and $2,014, respectively, and for the first nine months of fiscal
2001 and 2000 was $4,060 and $5,215, respectively. The adoption in fiscal 2001
will not have an impact on the results of operations or the financial position
of the Company.

In November 2000, the EITF finalized Issue No. 00-14, "Accounting for Certain
Sales Incentives" ("EITF 00-14"). EITF 00-14 addresses the recognition,
measurement and income statement classification for sales incentives offered to
its customers. Sales incentives include discounts, coupons, rebates, "buy one
get one free" promotions and generally any other offers that entitle a customer
to receive a reduction in the price of a product or service by submitting a
claim for a refund or rebate. Under EITF 00-14, the reduction in or refund of
the selling price of the product or service resulting from any cash sales
incentives should be classified as a reduction of revenue. Currently, the

                                       25
<PAGE>
company recognizes all sales incentives as an advertising and promotion expense.
Although this pronouncement will not have any impact on the results of
operations or financial position of the Company, the presentation prescribed
will have an effect of reducing net sales and advertising and promotion expenses
in comparison to prior years. The Company must adopt EITF 00-14 for all periods
presented in the fourth quarter of fiscal 2001. The impact of adopting would
have decreased net sales and advertising and promotion expense by $1,310 and
$2,455 for the three months ended August 31, 2001 and 2000, respectively, and by
$3,731 and $8,598 for the first nine months of fiscal 2001 and 2000,
respectively.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). The provisions of SFAS 142 indicate that the Company will
no longer be required to amortize the cost of intangible assets resulting from
acquired brands for accounting purposes and requires certain fair value based
tests of the carrying value of intangible assets with an indefinite life. The
Company plans to early adopt the provisions of SFAS 142 effective December 1,
2001. The amount of amortization, net of income tax benefit, for these
intangible assets was $864 and $2,591 for the three and nine months ended August
31, 2001, respectively. For fiscal 2001, this expense is expected to be
approximately $3,500, net of income tax benefit, or $.39 per share.

In July 2001, the EITF finalized Issue No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products
("EITF 00-25"). EITF 00-25 requires the adoption of its provisions for all
periods beginning after December 15, 2001, but encourages earlier
implementation. Management of the Company has not yet determined the
applicability of the provisions of EITF 00-25 to the Company's operations. If
the provisions of EITF 00-25 are determined to be applicable to the Company, a
reclassification of certain marketing expenses to a reduction of net sales will
be required. The results of operations or the financial position of the Company,
therefore, will not be affected.

SEASONALITY
-----------
Seasonality is an important factor affecting the operations of the Company.
During recent fiscal years, the Company's first quarter's net sales and gross
profit have trailed the other fiscal quarters on average from 25% to 35% because
of slower sales of consumer products, the seasonality of BULLFROG and SUN-IN and
lower levels of promotional campaigns during this quarter.

RISK FACTORS
------------
The Company's business is subject to a number of risks, including the risks
described in the Company's Annual Report on Form 10-K for the fiscal year ended
November 30, 2000.

FORWARD-LOOKING STATEMENTS
--------------------------
The Company 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. The Company relies 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 for the Company. 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. The Company undertakes 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 regarding forward-looking
statements include, but are not limited to, the impact of brand acquisitions and
divestitures; the impact of extraordinary gains or losses resulting from product
acquisitions or divestitures, financings or debt repayments; the impact of the

                                       26
<PAGE>
possible loss of sales of DEXATRIM with ephedrine; the increased likelihood that
claims relating to the existence of PPA in DEXATRIM will be filed against the
Company; 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; constraints resulting from the financial condition of the Company,
including the degree to which the Company is leveraged; debt service
requirements and restrictions under indentures; government regulations; risks of
loss of material customers; public perception regarding the Company's products;
dependence on third party manufacturers; environmental matters; the
availability, cost and scope of coverage afforded by product liability insurance
and other risks described in the Company's Securities and Exchange Commission
filings.











































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<PAGE>


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



ITEM 3.  LEGAL PROCEEDINGS

         See Note 10 of Notes to Consolidated Financial Statements included in
Part 1, Item 1 of this Report.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a) Exhibits:

             Statement regarding computation of per share earnings (Exhibit 11).

         (b) No Form 8-K reports were filed with the Securities and Exchange
             Commission during the three months ended August 31, 2001.




































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<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 12, 2001                       \s\ A. Alexander Taylor II
        ----------------                       --------------------------
                                               A. Alexander Taylor II
                                               President and Director
                                               (Chief Operating Officer)



                                               \s\ Christopher S. Keller
                                               --------------------------
                                               Christopher S. Keller
                                               (Chief Financial Officer)



                                               \s\ Scott J. Sloat
                                               --------------------------
                                               Scott J. Sloat
                                               Controller
                                               (Chief Accounting Officer)


















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